REG-Capita PLC: H1 2020 Market Update

CapitaAnnouncement

25/06/2020 07:05

LEI no. CMIGEWPLHL4M7ZV0IZ88

CAPITA PLC

H1 2020 MARKET UPDATE

25 June 2020

Summary
* We have delivered a strong operational response to COVID-19 impact, working
with colleagues and clients to protect service delivery; 60% of our people are
working from home and 35%, who cannot work from home, are operating safely
from our offices and client sites that have remained open
* Revenue in H1 is expected to be around 10% lower than 2019, of which 5%
relates to COVID-19 * A small decline in trading was expected in the first
half due to contract losses reported in 2019; the first quarter was broadly in
line with expectations
* We have recorded contract wins, extensions and renewals such as Irish Water,
Teachers Pensions and Ministry of Justice Electronic Monitoring
* COVID-19 impact: * resilient performance in the majority of our operations
from long-term contracts with a stable government and blue-chip customer base;
* COVID-related DWP and NHS call centre work;
* partially offsetting the impact of weaknesses in transactional and
volume-related revenue, such as travel, face-to-face training, resourcing and
enforcement.


* Cost savings of at least £45m already delivered in the first half to
mitigate financial impact; significant further cost savings to be delivered in
H2  
* Improvement in cash generation, including around £120m benefit from
Government VAT deferral scheme, has provided support to liquidity facilities
of £602m
* We continue to expect to remain compliant with debt covenants at H1
* Simplifying the software portfolio and strengthening the balance sheet *
Focusing our software capability where aligned to existing consulting, digital
BPO services and vertical markets
* Sale of Eclipse Legal Services due to complete shortly
* Decision to commence process to dispose of Education Software Solutions
* Proceeds will significantly strengthen Capita’s balance sheet
Jon Lewis, Chief Executive Officer said

“Capita and its people have, like thousands of other businesses, faced
numerous challenges and uncertainties over the past three months.

“But, thanks to the hard work and professionalism of our colleagues, we have
delivered a strong operational response to the COVID-19 crisis. This has only
been possible due to the actions we have taken over the past two years to
simplify and strengthen the organisation – to rebuild trust with clients,
fix legacy issues, improve contract execution, invest in our people, improve
systems and controls, reduce risk and cut cost.

“It means we have been able to deliver a resilient first-half performance,
underpinned by a large number of long-term contracts delivering critical
services to government and to a blue-chip, private sector client base.

“We have implemented cost and cash preservation initiatives to mitigate the
financial impact of COVID-19, while liquidity remains strong, and cash
generation from operations has improved significantly compared with 2019.”

H1 trading and COVID-19 impact by division(1)

Software – We have seen resilience in the Education, Capita One and AMT
Sybex businesses but the payments business in particular has experienced a
steep fall in transactions in end markets. In March we secured a seven year
£19m healthcare decisions contract with a UK regional NHS service. We expect
revenue for the half year, including the impact of COVID-19, to be up by
around c£2m.

People Solutions – HR Solutions, Pensions Administration and Army
Recruitment have been stable but Learning and Resourcing have been hard hit.
There has been a small benefit from our work for NHS Returners and some
eLearning contracts. We are pleased to have renewed the Teachers’ Pension
Scheme for another four years, worth £60m. We expect revenue for the half
year, including the impact of COVID-19, to be down by around £30m.

Customer Management – We have managed to shift to remote working basis for
over 70% of the division and so maintain high service levels to our clients.
Challenges have occurred in specific client end-markets (e.g. retail and
gambling). Opportunities to support COVID-related projects have arisen in NHS
call centre and DWP support. We have won a major new piece of work from a UK
retail bank worth £33m over three years. We expect revenue for the half year,
including the impact of COVID-19, to be down by around £10m.

Government – Revenues have been resilient in many verticals: Health and
Welfare, Transport, Defence, Justice; but there has been an impact in Local
Government (parking, leisure centres, rates collection), Entrust (outdoor
education) and Fera (less testing from private companies). However, we have
also supported several COVID projects such as for the DWP and various NHS
schemes. We were pleased to have been awarded the Ministry of Justice
Electronic Monitoring scheme contract extension worth £114m over three years.
We expect revenue for the half year, including the impact of COVID-19, to be
down by around £60m.

Technology Solutions – Operations in the existing business have been broadly
stable but transactional revenue and new business have been affected. We have
seen increasing interest in automation as a result of COVID and the team was
responsible for Capita’s successful move to remote working for 35,000
colleagues. During the period we have won a £24m one-year contract to
implement the TfL Emergency Services Network infrastructure. We expect revenue
for the half year, including the impact of COVID-19, to be down by around
£35m.

Specialist Services – The division has been significantly impacted by
COVID-19, particularly in those businesses whose end markets have been
severely affected (Travel and Events, Enforcement, Real Estate and
Infrastructure) and 30% of our colleagues in this division are on furlough. We
expect revenue for the half year, including the impact of COVID-19, to be down
by around £40m.

Consulting – we have been getting good traction in certain verticals such as
cyber and justice and the business is expected to grow this year. However, we
are now working in the most challenging markets in recent memory. We have
refocused the business to reflect this new outlook onto a smaller range of
vertical markets and capabilities. We look forward to accelerating growth as
demand picks up again in the future.

Simplifying the portfolio and strengthening the balance sheet

Following a strategic review of our Software division over the past year, we
made a decision to focus on a portfolio of core software capabilities which
are better aligned with and support our consulting, transformation and digital
BPO services, and the vertical markets of the rest of the Group.

We will retain our software assets that are catalysts for growing our other
services and plan to dispose of the standalone software products that have
little overlap or cross-sell with the rest of Capita.

As a result, we initiated the disposal of Eclipse Legal Systems
(“Eclipse”), a standalone legal process software product in January. Last
Friday we announced we had agreed to sell Eclipse to Access UK Limited for
£56.5m and this transaction is due to complete shortly.

We have also announced our intention to dispose of Education Software Services
(“ESS”) during 2020. ESS is a standalone provider of management
information system (MIS) software for the education sector.

Proceeds from both of these disposals will be used to strengthen the company
balance sheet by reducing net debt and pension liabilities. Further disposals
will be considered in due course.

Outlook

Precise forecasting is challenging in these uncertain times.

We expect trading over the rest of the year to remain resilient, given the
client base and the long-term nature of our contracts.

Before the benefit from Government VAT deferral scheme, we still expect cash
generation to improve compared to last year as cash from trading operations
improves and capital expenditure reduces. In addition, restructuring spend
also reduces.

The disposal of the Eclipse business and the planned disposal of Education
Software Services will strengthen the balance sheet and we are committed to
creating a more focused and sustainable Capita for the future.

Liquidity remains good. Liquidity at 23 June was £832million, made up of
£402m representing the undrawn part of credit facilities and £430m of cash
net of overdrafts(2). We will be repaying £165m of private placement notes
when they mature on 30 June. We estimate that liquidity at 30 June will be
more than £640m when we take into account the effect of this debt maturity,
further operating cash inflows and the reduction in the backstop liquidity
facility as a result of the receipt of the Eclipse disposal proceeds.

The Board believes that, based on a wide range of scenarios reviewed by
management, our existing financing arrangements and mitigating actions taken
and planned provide sufficient liquidity and enable Capita to comply with its
banking covenants at the full year, and operate through these unprecedented
times.

Notes

1 Restated 2019 divisional revenue is disclosed in the table below

The tables below show the 2019 divisional adjusted revenue represented for
reorganisations during the first half of 2020. Neither have been represented
for business exits arising in 2020 or IFRS 16 Leases

 £m                        Adjusted revenue    
                               HY19       FY19 
 Software                     177.9      359.9 
 People Solutions             271.6      542.5 
 Customer Management          585.1    1,181.7 
 Government Services          424.4      793.4 
 Technology Solutions         224.2      449.8 
 Specialist Services          143.2      295.7 
 Group Support Services        12.1       24.4 
 Total                       1838.5    3,647.4 

   

 £m                                 Software  People Solutions  Customer Management  Government Services  Technology Solutions  Specialist Services  Group Support Services  Total Group  
 2019 Adjusted revenue              375.4     500.5             802.4                777.9                429.3                 744.5                17.4                    3,647.4      
 Axelos                             -         47.6              -                    -                    -                     (47.6)               -                       -            
 Capita Intelligent Communications  -         -                 -                    -                    20.5                  (20.5)                                                    
 FERA                               -         -                 -                    36.2                 -                     (36.2)               -                       -            
 Irish BPO                          -         -                 36.3                 -                    -                     (36.3)               -                       -            
 Life & Pensions                    -         -                 265.2                -                    -                     (265.2)              -                       -            
 Mortgage Services                  -         -                 74.7                 -                    -                     (74.7)               -                       -            
 PageOne                            (10.2)    -                 -                    -                    -                     10.2                 -                       -            
 Tascor                             -         -                 -                    (26.0)               -                     26.0                 -                       -            
 Other                              (5.3)     (5.6)             3.0                  5.3                  -                     (4.5)                7.1                     -            
 Restated as per 2020 structure     359.9     542.5             1,181.7              793.4                449.8                 295.7                24.4                    3,647.4      

2 “Cash net of overdrafts” excludes cash required to be maintained for
regulatory purposes and cash held in joint venture companies

Notes to editor:

ESS is the largest management information system (MIS) provider in the market;
it provides ‘back office’ software and services for schools, as well as
universities and further education colleges.

SIMS – a proprietary, off-the-shelf MIS for managing pupil, staff and parent
data – is used in 21,000 schools in England, Wales and Northern Ireland, as
well as over 700 independent schools in the UK and worldwide.

Other ESS products include Unit-E (used by 130 FE colleges) and Agilit-E (30
universities in the UK and Ireland), as well as Reading Cloud (a library
management system used by 15,000 schools).

In 2019 ESS’s revenue was £95m and adjusted EBITDA was £49m.

Conference call

There will be a conference call for analysts and investors at 0830 on Thursday
25(th) June.

Pre-registration link for participants:

https://www.incommglobalevents.com/registration/client/4403/agm-market-update/

Participant dial-in details:

United Kingdom 0800 640 6441 

United Kingdom (Local) 020 3936 2999 

All other locations +44 20 3936 2999

Access code 795493

For more information please contact:

Investor enquiries
Stuart Morgan
Tel: 07989 665484
Email: IRteam@capita.co.uk

Media enquiries
Capita external communications
Tel: 0207 654 2399
Email: media@capita.co.uk



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