REG-Capita PLC: Update on Capita's transformation and outlook <Origin Href="QuoteRef">CPI.L</Origin>

CapitaAnnouncement

31/01/2018 07:05

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF
EU REGULATION 596/2014.

THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS RESTRICTED AND IS
NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN WHOLE
OR IN PART, IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA, JAPAN OR ANY
OTHER JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO DO SO. PLEASE SEE THE
IMPORTANT NOTICE AT THE END OF THIS ANNOUNCEMENT.

 

Update on Capita’s transformation, capital structure, funding and trading
outlook

Capita plc (“Capita”) today provides an update on the outlook for trading,
dividend policy, funding and actions being taken to improve the performance of
the Group over the medium-to-long term.

Key points

-    Capita has commenced a multi-year transformation programme and is
committed to delivering a strategic review of the Group during 2018 - building
blocks exist to create a great business.

-    Substantial opportunity to improve cost competitiveness over the
medium term.

-    Decision taken to strengthen the balance sheet, targeting a leverage
ratio of 1-2x net debt to EBITDA.

-    Non-core disposal programme over next two years.

-    Dividend suspended until Company generating sustainable free cash
flow.

-    Rights issue planned in 2018. Precise quantum to be determined as part
of the transformation programme. Standby underwriting in place for up to
£700m.

-    2017 trading in line with our expectations. 2018 underlying pre-tax
profits, before significant new contracts and restructuring costs, expected to
be between £270m and £300m.

Jonathan Lewis, Chief Executive Officer of Capita, said:

“In my first two months I have begun a thorough review of Capita – its
structure, its leadership, its contracts and its financial position. There is
a lot to be excited about: talented people, a blue-chip customer base, great
technology and the ability to deliver value adding services.

We have completed the budgeting process for 2018 from which we have set a
prudent plan. Since our December update, we have also decided to invest in
people, sales and our transformation programme for the long-term benefit of
the Group.

However, significant change is required for Capita’s next stage of
development. We are now too widely spread across multiple markets and
services, making it more challenging to maintain a competitive advantage in
every business and to deliver world class services to our clients every time.

Capita has underinvested in the business and there has been too much emphasis
on acquisitions to drive growth. As our markets have evolved, the Group has
not responded consistently to new customer demands. Since December, we have
continued to experience delays in decision making and weakness in new sales.

Today, Capita is too complex, it is driven by a short-term focus and lacks
operational discipline and financial flexibility.

Capita needs to change its approach. I have initiated a transformation
programme, appointed a Chief Transformation Officer and formed a new executive
committee to drive this change. I believe that this transformation programme
can significantly improve the performance of Capita.

An immediate priority is to strengthen the balance sheet through a combination
of cost savings, non-core disposals and new equity. My initial review of our
cost base highlights that over the next few years there is significant scope
for cost efficiencies across a number of areas but also the need to spend more
where there has been underinvestment. We have identified a small number of
quality businesses that do not fit with our core skills for which there will
be better owners and a process to maximise value will commence shortly.

Cost savings and non-core disposals alone will not be enough. We have also
taken the significant decision to suspend the dividend and seek equity.

We have the building blocks to create a great business; one that consistently
delights its customers, has operational discipline and generates sustainable
cash flow. My team and I are now working hard putting in place the plan to
deliver it.”

Capita transformation programme and strategy
Subsequent to Jonathan Lewis’ appointment, we have initiated a
transformation programme, encompassing strategy, cost competitiveness, sales,
IT and our capital structure, to improve the performance of Capita over the
medium-to-long term.

As part of the programme we are developing a multi-year strategy, the outcome
of which is expected to be announced later in the year. Early findings include
that Capita has many strengths which can be built on, such as strong market
positions in the UK, long term relationships with blue chip customers, good
technology capabilities which can be leveraged to take advantage of the
secular growth in digital solutions and talented committed people.

However, Capita also has a number of weaknesses that we need to address. It is
too complex, placed too great an emphasis upon short term performance,
underinvested in infrastructure, over-relied upon acquisitions for growth and
has limited financial flexibility, which has constrained its ability to invest
for the long term benefit of the business. We need to address these challenges
in order to move forward.

Cost competitiveness and re-engineering sales
We have identified significant multi-year opportunities to reduce costs and
improve operational efficiency. These include reductions in general and
administrative expenses, which are higher than our peers, centralising more
procurement, standardising and investing in our processes and systems and
increasing the use of offshoring and automation. We will provide more detail
on these cost savings during the course of this year. Over the medium term, we
intend to use some of the benefit from any further efficiency savings to
improve our competitiveness and capability.

We have reallocated our previously centralised business development capability
to the divisions, bringing it closer to the markets we serve. This reduces
complexity and increases accountability, in relation to the bidding,
implementation and management of contracts, as we seek to improve sales
performance.

Disposals
As part of the transformation programme, we intend to simplify Capita and
increase the focus of our resources on a smaller number of markets with the
best prospects and where the Group has the capability and potential to create
value. We have already identified a small number of businesses that are
considered non-core to the Group, including ParkingEye and Constructionline,
and a disposal programme for these businesses will commence shortly. The Group
intends to use the proceeds from disposals to reduce indebtedness in the short
term and to invest in the remaining core areas of the Group over time. The
impact of the disposals, both in value and forgone EBITDA, has not been
included in any 2018 pre-tax profit forecasts.

Capital structure, dividend and proposed future raising of equity
Capita’s transformation programme includes an assessment of the appropriate
financial leverage for the Group over the medium term, to ensure that we have
a sustainable capital base to support our customers and operations, increase
investment in the business and deliver our future strategy. Whilst the outcome
of the programme has yet to be finalised, the Board’s preliminary view is
that the appropriate leverage for Capita over the medium term should be
between 1.0 and 2.0 times net debt to EBITDA and that the Group should target
an investment grade credit rating.

Given the short term outlook and level of indebtedness, the Board has decided
upon a number of actions. Firstly, we are pursuing “self-help” options,
including the aforementioned cost actions and non-core disposals. Secondly,
the Board is not recommending the payment of a final dividend. Finally, the
Board is planning to raise equity by way of a rights issue during this year.
The precise quantum has yet to be determined and the Company has entered into
a standby underwriting agreement for up to £700m with Citi Global Markets
Limited and Goldman Sachs International.

Trading in line with expectations in 2017
Although market conditions remained challenging, underlying trading across our
divisions in the second half of 2017 was in line with our expectations.

2018 outlook
We have now completed the budgeting process for 2018 from which we have set a
prudent plan. Since our December update, we have also decided to invest in
people, sales and our transformation programme for the long-term benefit of
the Group.

Following that update, when we highlighted a higher level of attrition than
expected, we have continued to experience delays in decision making and
weakness in new sales. The divisional plans indicate that there is likely to
be a significant negative impact upon profits from contract and volume
attrition, the dropping out of one-off items including contract and
supplier-related profits which were reported in 2017 and increases in some
cost items, including depreciation and adoption of the General Data Protection
Regulation. These headwinds are particularly expected to impact upon the
financial performance of the Private Sector Partnerships, in both Insurance
Services and Customer Management, Public Services Partnerships and IT Services
divisions.

We do not expect to offset the above headwinds through the full year benefit
of last year’s cost actions and new business. A more fundamental approach to
cost competitiveness is required. As a result, we expect the Group’s
underlying pre-tax profits, before significant new contracts and restructuring
costs, to be between £270m and £300m in the full year to December 2018.

Leverage
We expect net debt at the 2017 year-end to be in the region of £1.15bn and
leverage (including contingent obligations under bonds and guarantees) to be
around 2.25 times, after the receipt of proceeds from the disposal of our
Capita Asset Services businesses, partial normalisation of seasonal cash
management and a reduction of deferred income in the second half of the year.
We expect our receivables financing balance to be £110m at 31 December 2017.

Looking forward, we expect a free cash outflow this year, which will be
impacted by a number of known non-underlying payments and working capital
items. We expect around £215m spend in relation to known commitments,
including £66m cash costs on the Connaught settlement, around £50m in
relation to the separation of Capita Asset Services (including a pension
contribution), contingent considerations, historic litigation and
restructuring costs. In addition, we expect a £130m cash outflow from the
final normalisation of seasonal cash management, and a £130m cash outflow on
continued reduction in deferred income, reflecting the ongoing low level of
new business.

Pensions
We are currently undertaking a triennial review of the pension scheme. Our
current expectation is that the actuarial deficit after this review will be
significantly below the last disclosed IAS19 deficit of £381m at 30 June
2017. In addition to our annual contribution, we are committed to an
additional contribution of £21m in 2018. We will seek to reduce the remaining
deficit as a priority.

- End –

This announcement contains inside information for the purposes of article 7 of
EU Regulation 596/2014.

Analyst & investor conference call:

Jonathan Lewis, CEO and Nick Greatorex CFO will host a conference call at
07:45 UK time today.

Date and time: 7.45-08.30AM, 31 January 2018

Participant dial in details

Tel: +44 (0) 20 3003 2666/0808 109 0700

Password: Capita

Participant names and company names will be collected as they dial in.

This call will be available on a seven day replay: Tel: 0208 196 1998 PIN:
5808520#

For further information:

Capita plc Tel: 020 7654 0220 or 020 7654 2281
Andrew Ripper, Head of Investor Relations
Fiona O’Nolan, Director, Corporate Communications
IRTeam@capita.co.uk

Media enquiries:

Powerscourt Tel: 020 7250 1446
capita@powerscourt-group.com
Victoria Palmer-Moore, Peter Ogden and Andy Jones
 

Capita is a leading UK provider of technology enabled customer and business
process services and integrated professional support services. Operating
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). Further information on Capita can be found at: http://www.capita.com.
LEI no. CMIGEWPLHL4M7ZV0IZ88.

Forthcoming events
The date for Capita’s final results is to be confirmed.

Cautionary statements

The information contained in this announcement is for background purposes only
and does not purport to be full or complete. No reliance may be placed for any
purpose on the information contained in this announcement or its accuracy or
completeness. The information in this announcement is subject to change.
Nothing in this announcement should be interpreted as a term or condition of
the Rights Issue.

This announcement contains unaudited information based on management accounts
and forward-looking statements that are based on current expectations or
beliefs, as well as assumptions about future events. These forward-looking
statements can be identified by the fact that they do not relate only to
historical or current facts. Forward-looking statements often use words such
as such as “target”, “believe”, “expect”, “aim”, “intend”,
“may”, “anticipate”, “estimate”, “plan”, “project”,
“will”, “can have”, “likely”, “should”, “would”,
“could” and any other words and terms of similar meaning or the negative
thereof. Undue reliance should not be placed on any such statements because
they speak only as at the date of this announcement and, by their very nature,
they are subject to known and unknown risks and uncertainties and can be
affected by other factors that could cause actual results, and Capita’s
plans and objectives, to differ materially from those expressed or implied in
the forward-looking statements.

There are a number of factors which could cause actual results to differ
materially from those expressed or implied in forward-looking statements.
Among the factors that could cause actual results to differ materially from
those described in the forward-looking statements are: increased competition;
the loss of or damage to one or more key customer relationships; changes in
the economies, political situations and markets in which Capita operates;
currency fluctuations; changes in interest and tax rates; changes in laws,
regulations or regulatory policies; the failure to retain key management; or
the key timing and success of future opportunities or major investment
projects.

Capita undertakes no obligation to revise or update any forward-looking
statement contained within this announcement, regardless of whether those
statements are affected as a result of new information, future events or
otherwise, save as required by law and regulations.

Goldman Sachs International ("Goldman") and Citigroup Global Markets Limited
("Citi"), which are both authorised in the United Kingdom by the Prudential
Regulation Authority and regulated by the Financial Conduct Authority and the
Prudential Regulation Authority, and their respective directors, officers,
employees, agents, affiliates, advisors and agents, are acting for Capita and
no one else in connection with the Rights Issue referred to in this
announcement or any other transaction, arrangement or matter referred to in
this announcement and will not regard any other person (whether or not a
recipient of this announcement) as a client and will not be responsible to
anyone other than Capita for providing the protections afforded to their
respective clients or for providing advice in connection with the Rights Issue
referred to in this announcement or any other transaction, arrangement or
matter referred to in this announcement.

This announcement has been issued by Capita and is the sole responsibility of
Capita. No representation or warranty, express or implied, is or will be made
as to, or in relation to, and no responsibility or liability is or will be
accepted by either Goldman or Citi, or by any of their affiliates or agents as
to, or in relation to, the accuracy or completeness of this announcement or
any other written or oral information made available to any interested party
or its advisers, and any liability therefore is expressly disclaimed.

 Important notice

This announcement and the information contained herein do not constitute or
form part of, and should not be construed as, any offer, invitation or
recommendation to purchase, sell or subscribe for any securities in any
jurisdiction and neither the issue of the information nor anything contained
herein shall form the basis of or be relied upon in connection with, or act as
an inducement to enter into, any investment activity.

This announcement and the information contained herein do not constitute an
offer of securities in the United States. The securities referred to in this
announcement have not been and will not be registered under the U.S.
Securities Act of 1933 (the “Securities Act”), and may not be offered or
sold in the United States absent registration under the Securities Act or
pursuant to an exemption from, or in a transaction not subject to, such
registration requirements. There will be no public offering of any securities
in the United States.

The information in this announcement may not be forwarded or distributed to
any other person and may not be reproduced in any manner whatsoever. Any
forwarding, distribution, reproduction, or disclosure of this information in
whole or in part is unauthorised. Failure to comply with this directive may
result in a violation of the Securities Act or the applicable laws of other
jurisdictions.

-  End  -



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