REG-Capita PLC: Pre-close trading update <Origin Href="QuoteRef">CPI.L</Origin>

CapitaAnnouncement

08/12/2016 07:20

8 December 2016

Pre-close trading update

Intention to sell the majority of Capita Asset Services

Capita plc (“Capita”) is today issuing a pre-close trading update for
2016. In addition, following a group-wide business review, we are announcing
the Board’s decision to dispose of the majority of the Capita Asset Services
division (“CAS businesses”) and a small number of other businesses which
no longer fit Capita’s core business strategy. These actions will
consolidate Capita’s position as the UK’s leading provider of customer and
business process management services, while underpinning the Company’s
balance sheet.

Capita Chief Executive, Andy Parker, said “We are committed to delivering
good returns to shareholders, supported by a strong capital structure and a
clear growth strategy. In recent months, we have reviewed our management
structure, operating model, business portfolio and our leverage to ensure we
are in the strongest position to support future profitable growth.

“In November, we announced changes to our management and business structure
and today we are announcing our intention to sell the majority of our Capita
Asset Services division and a small number of other businesses. We have also
commenced a programme of cost reduction and investments to position the
Company strongly for renewed future growth. Together, these actions will
create a leaner Capita, focused on its core strengths and with a much stronger
balance sheet.

“I am confident that the markets Capita addresses offer long-term structural
growth. We are however currently facing some near-term headwinds, which
continue to make 2016 a challenging year and will affect trading performance
in the first half of 2017. Our long-term contracts provide us with good
revenue visibility across the year and the structural and cost reduction
actions we are taking now will support progress in the second half of 2017 and
into 2018. We therefore currently expect a similar trading performance to 2016
in the full-year 2017.

“Our new divisions are now fully aligned to the markets in which they
operate and the divisional sales teams are working seamlessly with the central
major sales team to better address these markets and fuel greater organic
growth in 2018 and beyond.

“The decisive steps we have recently taken and those we are announcing today
make us a more resilient business, committed to generating organic growth,
maintaining and then growing our dividend and delivering sustained value for
shareholders.”

A simpler business, with a clear strategy and a continued focus on organic
growth

We remain focused on providing the expertise and capability to deliver
technology-enabled outsourced solutions and professional services that make
processes smarter, organisations more efficient and customer experiences
better.

Our three core objectives are:

*the development of market-leading proprietary solutions that make use of the
latest technical innovations and draw on our existing IT, digital and software
operations to create value for our clients

*a continued focus both on the UK market and a gradual extension of our
presence across selected growth markets overseas

*and, through the above, the delivery of earnings per share growth, strong
cash flow and return on capital, by generating profitable organic growth and
investing in incremental small to medium sized acquisitions, where they
support our core strategy and meet our strict returns criteria.

To ensure Capita is best positioned to deliver on this strategy, we recently
announced a wide-ranging restructure to simplify our business model and
provide greater management strength and depth across all of Capita’s
operations.

Reorganising our 11 divisions into six market-facing divisions (five post the
CAS disposal) will reduce complexity and increase oversight, providing better
accountability with a more streamlined management structure, reporting
directly to the Chief Executive. The divisions’ sales teams have been
aligned with the central major sales team to strengthen our sales efforts,
enhance our sales propositions, and better penetrate our markets. The new
divisional structure will be in place from the start of January 2017.

Business review and proposed disposals

The Board additionally undertook a review of all of Capita’s businesses with
the objective of further simplifying the Company and increasing our focus on
our core strengths.

For each business, the Board’s review considered the growth potential,
future market challenges, capital requirements and, above all, their fit
within Capita’s core business strategy. The business review identified and
concluded that several businesses are no longer core to the future strategic
direction of Capita, and consequently we now intend to dispose of the
following assets:

*a group of businesses within the Capita Asset Services division which deliver
shareholder, fund, debt and banking solutions and trust and corporate
services, and operate in a regulated environment. The UK retail banking and
mortgage services business process management operations, which currently sit
within this division, remain core to Capita’s strategy and will be
transferred to the new Private Sector Partnerships division

*a small number of other trading businesses which are not integral to
supporting our technology-enabled outsourced solutions.

There is strategic and financial logic for the proposed sale of the identified
Capita Asset Services businesses and the other assets. The Board also believes
these businesses will prosper under different ownership and has therefore
commenced a process of divestment.

The identified CAS businesses are expected to contribute approximately EBITDA
of £70m and operating profit of £60m in 2016. The other trading businesses
and assets in aggregate are expected to contribute operating profit of up to
£10m in 2016.

A stronger balance sheet

In line with Capita’s strategy to maintain a sustainable balance sheet with
a prudent level of financial gearing, the potential proceeds generated from
these disposals will be used to reduce gearing and strengthen the balance
sheet.

Capita’s net debt to annualised EBITDA ratio at end June 2016 was 2.5 times.
Whilst net debt at the end of December 2016 is expected to be similar to net
debt at the end of June 2016, with lower earnings this year, net debt to
EBITDA is expected to be in the region of 2.9 times at year-end.

Post successful completion of the sale of the CAS businesses, the Board would
expect the Group’s leverage to be around the bottom end of our 2.0 to 2.5
long term net debt to EBITDA target range. We expect to continue to invest in
incremental small and medium sized acquisitions where they support our core
strategy and meet our strict returns criteria, but the rate of investment will
be lower in 2017 and 2018 than in previous years, as we continue to focus on
maintaining a lower level of leverage.

The sale of the identified CAS businesses is anticipated to complete during
the second half of 2017, subject to a number of regulatory clearances. At this
stage, there is no certainty that any of the proposed disposals will
ultimately be completed.

Trading update

Major new sales: Capita recently announced its first transformational contract
in Europe, having been selected as strategic partner to deliver customer
services for mobilcom-debitel, with a seven-year contract expected to be
valued at €230m (£197m). This marks the successful introduction by Capita
of a new longer-term outsourced customer management operating model into
Continental Europe. The partnership, key to supporting mobilcom-debitel’s
digital lifestyle strategy and continued growth, is due to commence on 1 March
2017. Mobilcom-debitel is one of Germany’s largest mobile and internet
services and telecoms products providers, with a growing customer base. 

Capita has announced £1.2bn major contract wins and extensions in 2016 to
date and, following recent decisions, the bid pipeline currently stands at
£3.8bn (July 2016: £5.1bn). Within our sphere of interest, the number of
major contracts coming to market this year has been slightly lower than usual
and some contract decisions have been delayed, resulting in a lower than
expected contribution from new major contracts in 2016. As the long-term
drivers for outsourcing remaining compelling, we anticipate that the customer
and business process management markets will become more active again. The
potential for growth in these markets in the UK and Europe continues to be
strong.

Divisional trading: Since Capita last updated the market in September trading
has remained challenging across some of our divisional businesses.
Specifically, performance in our IT Enterprise Services division has weakened
further. We have made extensive management and structural changes across this
division and expect to make progress on improving its performance over the
course of 2017. Additionally, as a result of some clients’ own cost saving
measures, we have recently experienced lower volumes of discretionary spend in
a number of the Company’s other trading businesses.

Cost actions and investment: To address these current trading challenges, we
are taking actions to reduce the cost base across the Company. We expect
restructuring costs of around £50m to be charged to the profit and loss
account in 2016, the cash spend against which will be around a quarter
incurred this year and three-quarters in 2017. We expect a commensurate
benefit from these actions to be realised over the course of 2017 and 2018 and
to be ongoing thereafter.  

Some of the benefit of these actions will be re-invested in capability and
initiatives to support the future growth of our business. Specifically, we
have started two additional programmes that will drive longer term sustainable
efficiencies and strengthen Capita’s competitive position. The first
programme is to move some of our IT applications support offshore to our
operation in India. The second programme is an investment in a proprietary
robotic solution to achieve scale automation across some of our operations
and, more significantly, to deliver benefits to new clients. We expect the
benefits of these two programmes to flow through into 2018.

Outlook and dividend

2016 and 2017 outlook: As a result of the trading challenges outlined above,
Capita expects revenue to be around £4.8bn and underlying profit before tax
to be at least £515m, excluding the cost of restructuring, for the full-year
to December 2016. We expect interest to be around £66m in 2016. Our outlook
for 2016 and 2017 excludes the potential impact from actions in relation to
the planned disposal of the CAS businesses and the other assets outlined
above.

The headwinds we have faced in the second half of 2016 will affect trading
performance in the first half of 2017. Our long-term contracts provide us with
good revenue visibility across the year and the structural and cost reduction
actions we are taking now will support progress in the second half of 2017 and
into 2018. We therefore currently expect a similar trading performance to 2016
in the full-year 2017. Our average cost of debt in 2017 will continue to rise
as a result of the rolling off of our interest rate swaps.

We remain confident that the markets Capita addresses offer long-term
structural growth. Our new divisions are now fully aligned to the markets in
which they operate and the divisional sales teams are working seamlessly with
the central major sales team to better address these markets and fuel greater
organic growth in 2018 and beyond.

The successful conclusion of the potential disposal of the CAS businesses and
the other assets, alongside Capita’s new simplified organisational and
management structure, will position Capita robustly to continue funding its
business strategy and growth aspirations in the short and long term.

Dividend: The Board expects to recommend a final dividend for 2016 of 20.6p
which, together with the interim dividend of 11.1p, makes a total dividend of
31.7p, unchanged on 2015. The Board expects to maintain the dividend in 2017,
rebuild dividend cover in the medium term and return to steady dividend growth
more reflective of the organic growth of the Company thereafter.

Future updates and Capital Markets Day: At the full-year, we will update
investors more fully on the progress of cost reductions, the benefits of the
new divisional structure and the prospects for profitable growth. We intend to
hold a capital markets day for investors in mid-2017 to ensure a fuller
understanding of each of our new divisions and showcase the unique properties
of the Company, including its long-term partnerships and software and
technology platforms.

-Ends-

This announcement contains inside information.

Analyst conference call, presentation, and replay:

Capita’s Chief Executive, Andy Parker, and Group Finance Director, Nick
Greatorex, will be hosting a conference call for analysts to dial into from
08:00 to 08:45 this morning alongside an online WebEx presentation. Please
access the call and WebEx in time to allow for registration.

Please see details below:

Conference call:

Standard International Access: +44 (0) 20 3003 2666

Password: Capita0812

WebEx presentation:

To view the presentation slides, please go to:

https://capitaevent.webex.com/capitaevent/onstage/g.php?MTID=e275548be800e60654e522519cdf23e04

Password: Capita1

Replay:

Following the event, a replay of the call will be made available for 21 days
after the call.

Dial-in: +44 (0) 20 8196 1998

Access code: 9532156#

_________________________________________________________________________

For further information:

Capita plc
Tel: 020 7799 1525
Andy Parker, Chief Executive Officer
Shona Nichols, Executive Director, Communications
Andrew Ripper, Head of Investor Relations

Media enquiries

Powerscourt
Victoria Palmer-Moore, Peter Ogden, Andy Jones
Tel: + 44 (0) 20 7250 1446
Capita@powerscourt-group.com

Goldman Sachs are advising Capita on the disposal of the CAS businesses

Goldman Sachs International, which is authorised by the Prudential Regulation
Authority and regulated by the Financial Conduct Authority and the Prudential
Regulation Authority in the UK, is acting for Capita and no one else in
connection with the potential sale of the Capita Asset Services division and
will not be responsible to anyone other than Capita for providing the
protections afforded to its clients, or for giving advice in connection with
the potential sale of the Capita Asset Services division.

Capita is a leading UK provider of technology-enabled customer and business
process services and integrated professional support services. With 75,000
people at over 500 sites, including 94 business centres across the UK, Europe,
India and South Africa, Capita uses its expertise, infrastructure, and scale
benefits to transform its clients' services, driving down costs and adding
value. Capita is quoted on the London Stock Exchange (CPI.L), and is a
constituent of the FTSE 100 with 2015 revenue of £4.7 billion. Further
information on Capita can be found at: www.capita.com.



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