Interserve warns of significant drop in H2 profits
Source - SMW
Interserve has warned that operating profit would be around 50% lower than a year ago and that it might breach banking covenants.
The international support services and construction group said trading in the third quarter had seen a slowdown from that reported in the first half.
In UK support services, this was driven by the continued employment cost pressures in the business, the cost of contract mobilisations, margin deterioration driven by a cost base which has not been flexible enough and contract performance in the justice business.
It added: 'Our UK construction business has seen further deterioration in operating profit as challenging market conditions and cost pressures as well as operational delivery issues have continued to impact performance.
'Our equipment services business is performing well and as anticipated, the international support services business has started to improve versus the first half performance and in international construction we have maintained a stable performance.'
The group said further progress had been made on the Energy from Waste contracts in the quarter, but it had seen a slippage in the anticipated completion date for some of the contracts and it now anticipated, in addition to the £160m provided in 2016, an additional £35m provision was required and significant uncertainty remained on the timing of commissioning.
It said: 'Based on this provision, our additional net cash outflow for the rest of the programme is expected to be £35m.
'The attached schedule provides more clarity on the scope of our exited Energy from Waste business.
'Taking all of these factors into account, we now believe there is a realistic prospect that we will not meet the net debt to EBITDA test contained in our financial covenants for 31st December 2017.
'As previously announced, we are engaged in constructive and ongoing discussions with our lenders.
'We have engaged a financial adviser to assist us in these discussions, as well as looking at options to maximise the short and medium term cash generation from the business.'
The company said it was launching a group wide performance improvement plan, Fit for Growth, aimed at improving margin performance to industry norms.
It said: 'As part of this, we have initiated a series of work streams to address our operating model and the cost base of our operations, as well as ensuring that we are operating in market segments which are both profitable and offer opportunity for growth.
'We have also initiated a comprehensive contract review across both the support services and construction businesses.'
Chief executive Debbie White said: 'Despite our challenges, Interserve has a strong client base and many strengths as an organisation and I believe there is considerable potential for business improvement across the company.
'My team will focus on improving our margin performance in UK support services and ensuring good contract selection in UK construction, while reducing our cost base across the company.'