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:
- Adjusted
revenue = revenue on a like-for-like basis, as outlined in the
Group’s alternative performance measures note.
- Free cash
flow, before the impact of business exits.
-
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
