REG-Capita Plc: Trading and Operating Update

CapitaAnnouncement

17/12/2024 07:15

17 December 2024

Trading and operating update

Capita plc (“Capita”)  

Good margin progression in 2024. Further focus on operating model delivers
additional cost savings and underpins our Group medium-term targets

Summary:
* Outlook for adjusted operating profit unchanged for 2024, with adjusted
operating profit margin up c.50bps, largely driven by cost reduction
initiatives
* Adjusted revenue1 was c.8% lower in the eleven months ended 30 November
2024, owing to exiting lower margin service lines and the impact of prior year
headwinds. Good momentum on cost savings target of £160m, with £140m
annualised savings, now actioned
* Experience of live projects and data capture creates significant opportunity
to use more AI and generative AI in our service offerings, enabling cost
savings target to be raised to up to £250m by December 2025
* Increased employers’ National Insurance Contributions to have an annual
cost of c.£20m with cost savings expected to mitigate these costs over the
medium-term
* Expect a free cash outflow2 of £120m-£140m in 2024 as a result of lower
revenues and a more sustainable approach to working capital management.
Majority of the up to £50m additional cash restructuring costs to deliver
additional savings, expected to impact 1H25 free cash flow. We expect positive
and consistent free cash flow2 from the end of 2025
* Progress exiting managed for value businesses. Completion of Capita One
disposal in September 2024, c.£180m net proceeds received, providing funding
optionality. 2024 year-end net financial debt to adjusted EBITDA, pre IFRS 16,
expected to be <1.0x
* The Board is increasingly confident in delivering its 6-8% medium-term
operating margin target
Strategic priorities

As outlined at the Group’s Capital Markets Day in June, the first priority
of the ongoing transformation is improving the operating margin of the Group,
which in turn will deliver free cash flow2 and adjusted revenue growth as we
become more cost competitive.

Significant opportunities continue to be identified to fundamentally improve
our operating model and drive cost efficiencies throughout the organisation,
with the increasing use of AI and generative AI at the heart of this
transformation. Consequently, the accelerating momentum of the current cost
reduction programme has increased our confidence in the level of efficiencies
that can be delivered, enabling us to increase our cost reduction target from
£160m to up to £250m. Voluntary employee attrition of around 21% contributes
to these savings, reduces the need for redundancies and the Group can ensure
that it can rebalance new hires, incremental training of our colleagues and
investment in key growth areas, particularly within the Contact Centre
business. By combining people, processes and technology to develop repeatable
scalable products we can drive efficiencies for our clients and make us more
competitive. The progressive adoption of AI in the delivery of our client
solutions will enable us to continue to focus on efficiencies in the future on
a “business as usual” basis.

Increasing our operating cash conversion and a return to positive free cash
flow2 is our next priority. Though the total cash cost of delivering the cost
reduction targets will impact free cash flow by c.£50m in 2024 and up to
£50m further in 2025, the combination of improving profitability, and the
absence of pension deficit payments (from H2 2024 onwards) will contribute to
positive and consistent free cash flow2 from the end of 2025.

We are increasingly focused on leveraging our domain expertise with technology
solutions provided by our hyperscaler partners to deliver profitable revenue
growth in the medium-term. The use of AI is already enabling us to deliver
significant productivity and service quality improvements for our early
adopting Contact Centre and Local Government customers, where those early
clients have seen average handling time reductions of around 20%. We are also
seeing some encouraging early successes on winning new contracts due to our
enhanced service offering. Looking forward, we have opportunities which
deliver AI solutions with the hyperscalers worth more than £5bn within the
pipeline.

In 2024, we have accelerated the exit from lower margin activities, including
the sale of our Mortgages Asset Services business which we expect to complete
in Q2 2025 as detailed in yesterday’s news release. We will continue to exit
those activities that are either low margin or where we have a limited right
to win and as a result, we expect a broadly flat revenue performance in 2025.

Financial performance

Adjusted revenue1 was c.8% lower in the eleven months ended 30 November 2024.

Capita Public Service adjusted revenue1 reduced 0.9%, in the eleven months to
30 November 2024, driven by the continued impact of previously announced
contract losses in 2023, the cessation of some lower margin services, and
delayed mobilisations of two contracts in 2023 which impacted current year
revenue and profit and will benefit 2025. These factors offset additional
volumes in our contract with Transport for London and the benefit from
indexation. Looking ahead, we have strong alignment with the UK Government’s
priorities as outlined in the recent budget, particularly in areas such as
Healthcare and Defence.

Capita Experience adjusted revenue1 reduced 16.3% in the eleven months to 30
November 2024.  The Contact Centre3 business declined 18.5% reflecting the
one-off benefit from the Virgin Media O2 contract transition in the prior
year, the impact of prior year contract losses with the Co-operative Bank in
2023 and lower volumes on a Telecommunications contract, which we expect to
remain subdued in 2025.

Pension Solutions3 grew 6.7% reflecting volume growth across a number of
clients, including PIC and Rothesay and the benefit from indexation.

Regulated Services3, including closed book Life & Pensions, saw revenues
decline 25.8% as expected reflecting the one-off benefit from the prior year
commercial settlement, the impact of contract exits and volume reductions as
we resolve legacy issues and look to exit this business segment.

Financial guidance

For 2024, we expect to deliver a high-single digit adjusted revenue decline,
after adjusting for disposals including Capita One, with improved margins
driving an unchanged operating profit outlook. In 2025, we expect additional
savings to offset the £16m of in-year incremental employers’ National
Insurance Contributions costs (£20m on an annualised basis), and to deliver
further margin improvement and modest profit growth.  The up to £50m
additional cash restructuring costs to deliver the up to £250m upgraded cost
savings target are expected to mainly impact 1H25 free cash flow.

Adolfo Hernandez, Chief Executive Officer, said: “As we head towards the end
of my first year as CEO of Capita, I am very encouraged by the progress we
have made against our strategic priorities, despite the impact of prior year
headwinds being larger than originally expected.  Our focus is on becoming a
better business, “getting smaller to get stronger and fitter to then grow”
and being more selective in not pursuing and exiting existing lower margin
contracts. Consequently, revenue is expected to be high single-digits lower in
2024. However, we are encouraged by the customer reaction to our suite of AI
solutions developed with the hyperscalers which will help to drive profitable
revenue momentum from 2025 onwards.

We have implemented a significant proportion of our efficiency programme, and
today have outlined further savings which will result in further improvement
to operating profit margins. We have made good progress with the managed for
value businesses including the sale of Capita One in September and we look
forward to 2025 with expectations of continued progress with positive and
consistent free cash flow2 from the end of 2025.

 

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

Notes:
1. Adjusted revenue = revenue on a like-for-like basis, as outlined in the
Group’s alternative performance measures note.
2. Free cash flow, before the impact of business exits.
3. Following a review of the Group’s offerings, moving forwards, Capita
Experience will be reported as three segments – reflecting the different
market sectors and end product offerings. These are, Contact Centre, Pension
Solutions and Regulated Services which includes closed book Life & Pensions.
We will provide full comparative 2023 data ahead of the Group’s year end
results.
 

For more information, please contact:

Investor enquiries
Helen Parris, Director of Investor Relations
Tel: 07720 169 269
Email: IRteam@capita.co.uk

Stephanie Little, Deputy Head of Investor Relations 
Tel: 07541 622 838
Email: IRteam@capita.co.uk

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

About Capita

Capita is a leading provider of business process services, driven by data,
technology and people. Capita is a modern outsourcer, helping clients across
the public and private sectors run complex business processes more
efficiently, creating better consumer experiences. Operating across 8
countries, Capita's 41,000 colleagues support primarily UK and European
clients with people-based services underpinned by market-leading technology.
We play an integral role in society - our work matters to the lives of the
millions of people who rely on us every day. Capita is quoted on the London
Stock Exchange (CPI.L). Further information can be found at:
http://www.capita.com

 



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