Capita : FY 2021 press release

Capita plc

Capita plc

Full Year Results 2021

Summary

A year of significant change with the transformation of Capita now complete: we have established a platform to drive sustainable improving financial performance whilst continuing to strengthen the balance sheet

New, simpler structure

Delivering benefits from simplicity, focus and efficiency

• Two core divisions focused on public and private sector digital business process services
• More client-focused to drive revenue; new operating model to drive efficiency
• Third division of non-core businesses that will be mainly disposed of in 2022

Growth

• Continuing to see the benefits of strong operational delivery and improved reputation
• • Won £3.8bn of total contract value in 2021, a 31% increase vs 2020 (£2.9bn)
  • Renewal rate of 93%, including contracts with Ministry of Justice, two European telecoms clients and major UK financial services institution
  • Order book increase for the first time since 2017; book to bill at 1.2x (2020: 0.9x)
  • Secured £312m through extensions and incremental scopes of work with Transport for London, Defence Fire and Rescue, Department for Work and Pensions
• Strong unweighted pipeline of £9.4bn in 2022; year-to-date we have won almost £700m TCV
• Good start to 2022 in Experience with £456m five-year BBC TV licensing extension announced in February

Strengthening the balance sheet and reducing financial obligations

• Disposals programme has exceeded its £700m target, ahead of schedule
• Structurally lower debt: pre-IFRS 16 net debt £431m (2020: £569m); pre-IFRS 16 net debt: adjusted EBITDA
  1.7x (2020: 2.4x)
• Planned material further reduction in debt in 2022

Financial results

• Delivered adjusted revenue1 growth for the first time in six years. Revenue increased 0.4% to £3bn
• • Public Service division had a strong year and grew by 10.8%, Experience declined by 9.4% reflecting previous contract losses, Portfolio declined by 0.3%
  • Major contract wins and extensions in both core divisions: Royal Navy, Job Entry Targeted Support scheme, RSPCA
• £88m increase in adjusted profit before tax1 from stable revenue and benefit of cost savings, offsetting contract losses and general cost increases
• Reported profit before tax of £286m (2020: loss of £49m) as profits on disposal offset systems write down and onerous contract provision
• Adjusted free cash flow1 of £78m (2020: £170m); final year of major below-the-line cash commitments including £328m related deferred VAT, pension deficit contributions and restructuring costs
• £197m reduction in net debt to £880m (2020: £1,077m) funded by operating cash flow and disposals

Year ended 31 December 2021

Financial highlights - continuing	Reported 2021	Reported 2020	Reported	1	1	Adjusted1
operations	YOY change	Adjusted 2021	Adjusted 2020	YOY change
Revenue	£3,182.5m	£3,324.8m	(4.3%)	£3,008.5m	£2,995.5m	0.4%
Operating profit/(loss)	(£86.6m)	(£32.0m)	171%	£139.1m	£51.1m	172%
Profit/(loss) before tax	£285.6m	(£49.4m)	678%	£93.5m	£5.4m	1,631%
EBITDA	£222.3m	£225.6m	(1%)	£295.1m	£228.4m	29%
Cash generated from operations	(£121.3m)	£434.2m	(128%)	£185.4m	£295.2m	(37%)
Earnings/(loss) per share	13.33p	(0.41)p	3,351%	1.61p	2.41p	(33%)
Free cash flow	(£237.1m)	£303.8m	(178%)	£78.1m	£170.3m	(54%)
Net debt	(£879.8m)	(£1,077.1m)	£197.3m	(£879.8m)	(£1,077.1m)	£197.3m

Outlook

• In 2022 we expect revenue growth built on strong contract performance in 2021, a growing pipeline of new business in both Public Service and Experience and recovery in transactional businesses from Covid-19
• Profit margins expected to reduce slightly in 2022 reflecting impact of prior year contract losses and closed book Life & Pensions in Experience, evolution of Army recruitment contract in Public Service and investment in recruitment and training offset by profit from revenue growth and cost savings from the new structure
• Improving cash conversion, reduced one-off payments and recovery in transactional businesses to drive positive free cash flow; disposals continuing to strengthen the balance sheet and materially reduce net debt
• Medium term outlook for the core Group of mid-single digit revenue growth, high single digit EBITDA margins with cash conversion of 70% to 80% to drive positive sustainable free cash flow; strong balance sheet

Jon Lewis, Chief Executive Officer said:

"It was a year of significant change at Capita as we completed our transformation by establishing a platform for growth, while continuing to strengthen the balance sheet.

"We grew our revenue in 2021, reversing six years of declines, and expect this trend to continue to improve, while we also expect to deliver positive sustainable free cash flow in 2022.

"Capita now has the foundations in place to deliver sustainable improving financial performance; our new simplified divisional structure will deliver significant benefits.

"We also continue to prioritise being a purpose-led, responsible business. We have made good progress with diversity, will continue to focus on driving investment in our people, and have committed to a net zero emissions plan.

"None of this would have been possible without our people, whom I would like to thank for all their hard work, commitment and professionalism."

• Refer to alternative performance measures (APMs) in the Appendix.

Investor presentation

A presentation for institutional investors and analysts hosted by Jon Lewis, CEO and Tim Weller, CFO, will be held at 65 Gresham Street, London EC2V 7NQ at 09:00am UK time, 10 March 2022. There will also be a live audio webcast (link below) which will subsequently be available on demand. The presentation slides will be published on our website at 07:00am and a full transcript will be available the following day.

Participant webcast: https://webcast.openbriefing.com/capita-march22/

For further information:

Capita

Stuart Morgan, Investor Relations Director	T [phone]
Capita press office	T [phone]
LEI no. CMIGEWPLHL4M7ZV0IZ8

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Chief Executive Officer's review

Summary

2021 was a year of significant change at Capita as we completed our transformation and established the platform for long- term success. We now have a foundation in place to deliver sustainable improving financial performance and look forward to delivering this as we move into 2022 and beyond.

At the same time, we will continue to prioritise being a purpose-led, responsible business; this is our licence to operate. We are pleased to have maintained a high customer net promoter score (NPS). However, our employee NPS was disappointing, reflecting the degree of change in the business and continued impact of the pandemic, and we have a comprehensive plan in place to address this. We have also made good progress with diversity and we have committed to a net zero plan.

In August, we established our new, simplified divisional structure which will deliver significant benefits in the future: two core divisions that focus on public and private sector digital transformation and technology outsourcing services; clarity of focus on our markets and clients; benefits expected from greater operational efficiency; and a third division of non-core businesses that will be disposed of. The proceeds from these disposals will be used to continue to strengthen our balance sheet.

Our contract delivery, which is the foundation for the turnaround and revenue growth, has remained strong. We fixed the last of our legacy problem contracts, resolving both Primary Care Support England (PCSE) and Electronic Monitoring transformation issues in the year. Client trust in us is far better than when we started the transformation, and we are winning new scopes of work as a result.

Our ability to deliver sustainable revenue growth is fundamental to our long-term success. We delivered modest revenue growth in 2021, reversing six years of declines, and expect this trend to continue to improve. We have high retention rates, are winning incremental scopes of work with our existing clients and are starting to win business with new clients. Our weighted pipeline of opportunities for 2022 is substantial and broad based.

During 2021, we took action to reduce operating and administrative costs by a further £123m and, over the transformation, the total amount of cost savings has been more than £425m. The main areas have been in operational excellence - "doing things better, doing things once" - as well as in more efficient management structures, property and Group IT and procurement savings. There is more to come as we focus on the benefits of standardisation and efficiency in each division and in a lean Group overhead structure.

We continued to strengthen the balance sheet and successfully completed a number of key disposals exceeding our target of £700m of proceeds which has enabled us to address our funding commitments in 2021 and 2022. We will continue to strengthen the balance sheet with further disposals, as well as improving the pension fund position.

The transformation is now finished. We have a simpler and more focused structure in place, strong positions in growing markets and a structurally lower cost base. We are continuing to strengthen the balance sheet. The platform is in place to grow revenue, increase margins and cash conversion and to drive positive free cash flow.

Financial results

Adjusted revenue1 at Capita has grown for the first time in six years, albeit modestly, to £3,008.5m (2020: £2,995.5m). This was underpinned by some major contract wins, in particular the Royal Navy training contract and in the Public Service division as a whole. These offset the impact of contract losses, mainly from 2020, in the Experience division, as well as the net revenue loss of Covid contracts won in 2020. We also expected further benefits from a recovery in our Covid-affected businesses, such as Agiito (our travel & events business), but lockdowns and slow market recovery affected this significantly.

Adjusted profit before tax1 increased by £88.1m this year to £93.5m (2020: £5.4m). This principally reflected the benefit of transformation cost savings, new revenue and the unwind of the prior year holiday accrual, offsetting revenue losses and the reinstatement of the employee bonus scheme. Reported profit of £285.6m (2020 loss: £49.4m) benefited significantly from profits on disposal of Education Software Solutions (ESS) and AXELOS in particular, offsetting the write down of our historical finance systems asset as well as onerous contract provisions in our closed book Life & Pensions business.

Cash generation is a key metric for the business. Our adjusted free cash flow1 was £78.1m (2020: £170.3m) but we also had to fund £328.2m of additional cash commitments, including £104.1m of VAT deferred from last year, pension payments of £155.5m and our final year of below the line restructuring payments of £68.6m. Reported free cash outflow in 2021 of £237.1m (2020 inflow: £303.8m) reflects these additional payments.

We continued to strengthen the balance sheet during the year, with net debt reducing to £879.8m (2020: £1,077.1m) funded mainly through our disposal programme. In early 2022 we reached our total of £700m of target proceeds, ahead of schedule, enabling us to meet £440m of debt maturities in 2021 and 2022. More broadly we are also targeting a reduction in our other financial obligations, including further pension deficit contributions and reducing our lease commitments through our property footprint reduction.

Purpose

Our purpose - to create better outcomes - is our licence to operate in our markets and therefore a fundamental part of our strategy, with customer NPS and employee NPS scores linked to remuneration, as well as being a driver of revenue through the social value and net zero components of government contracting.

The customer NPS remains high at +29 points, albeit slightly down on last year (+32), which we believe is more a reflection of the exceptional work done in 2020 to support our clients through the early days of Covid and moving to remote working. We continue to strive to delight our clients.

Our employee NPS declined this year by 22 points. While we expected some decline as a result of the scale of the transformation activity in the year, this was more pronounced than we had anticipated and, in an already challenging labour market, represents a key challenge in engagement and retention. While employees felt positive in their immediate surroundings and activities, there were strong views that we needed to focus more on the longer-term opportunities at

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Capita. We are addressing this through plans for better communication and engagement, clearer investment in training and development and implementing a more attractive employee value proposition. This will be a significant area of focus in 2022.

Our plans to increase the diversity of our people recognises the need to represent the communities that we work in, our desire to attract and retain high quality talent, and to broaden the range of thinking and innovation in the business. Our Board has increased its diversity, particularly with the appointments of Neelam Dhawan and Nneka Abulokwe, and 44% of the Executive Committee is now female, with 22% Black, Asian and minority ethnic representation. But there is still more to be done throughout the organisation.

In 2021 we set out an ambitious plan to take us to net zero by 2035 ahead of the UK Government's target of 2050. Underpinned by science-based targets, our three-phased approach aims to see us reach operational net zero by 2025 and operational and business travel net zero by 2030. This will involve reducing business travel emissions and transitioning our fleet to electric vehicles by 2032. We will work closely with our suppliers and over 50% of our supply chain has now signed up to science-based targets. We reduced our Scope 1 and 2 Emissions by 42% in 2021 compared with our 2019 base line, largely due to the impact of Covid.

Looking at other stakeholders, our supplier metrics have also improved, with 98% of all suppliers being paid within government guidelines of 60 days, a three percentage point increase from last year.

Winning business and growing revenue

Our markets

We operate in the outsourced digital transformation, business process services and technology markets, in the public and private sectors, which are large and growing. The markets that we address are growing at around 5% per annum, with niches growing at more than double that rate.

Both core divisions, Public Service and Experience, have strong positions in their markets, as the UK Government's largest IT outsourcing supplier and as the UK's leading customer service provider respectively. Our ability to win work at scale and our insight into our clients' systems, processes and end-customers after many years of experience is what drives our leading positions in those markets. We collaborate with some of the world's leading providers of technology, such as Microsoft, Salesforce and Amazon Web Services (AWS), as well as developing our own software and solutions which enable us to deliver the best customer service outcomes.

Operational delivery supporting contract retention and new business

That our improvement in operational performance is once again a core strength of the business has been a fundamental part of the transformation, establishing our clients' trust and winning new revenue. We now have a reputation for strong delivery with key growth clients, such as Transport for London (TfL) for whom we delivered a significant cloud migration and additional scale of existing platforms.

Our operational KPIs have remained high across the business. Our day-to-day service level KPIs stayed at c.99% through the year and our IT infrastructure is now significantly more reliable, with critical incidents down by 88% since January 2018 and our average resolution time 29% quicker than the industry benchmark.

We have now finished fixing failing legacy contracts from when we started the transformation, with PCSE and Electronic Monitoring resolved in the year as planned.

The return on this investment, apart from the improvement in cash flow and profit, is that we have won new scopes of work with many of our clients where we historically had delivery issues: the extension of the British Army Recruitment (RPP) contract; the Ultra-Low Emission Zone with TfL; the award of the Turing scheme administration with the Department for Education; and further work with the Ministry of Justice.

Our win rate on contract renewals remains high at 93%, reflected in the high customer NPS scores, and we have seen the annual revenue attrition on our contract base now reach a more normal 3% per annum, compared with almost double that in recent years. Overall, we have a more solid revenue foundation on which to build growth opportunities.

Winning revenue

We are now starting to deliver the contract wins that will underpin that revenue growth, as we leverage scale and client insight, alongside our re-established operational reliability. The focus of the core divisions into market verticals means that we can now bring a range of products and capabilities together to focus on specific client needs, which is a significant change for us. The benefit of this approach is already evident in the recent successes at the Ministry of Defence, and within our Financial Services and Telecoms verticals.

In 2021 we won £3.8bn of total contract value (TCV), an increase of 31% on 2020's £2.9bn. This included a small number of large contracts (Royal Navy, two European telecoms contracts and two financial services clients) but just under 60% of the TCV was won in contracts valued under £50m. The bulk of the TCV was won in the Public Service division which saw TCV growth of 54% year on year, while the Experience division was broadly flat. The Portfolio division grew strongly with an increase of 12% in TCV to £572m (2020: £512m). The in-year benefit of the total contract wins was £1,208m, 10% higher than 2020 with a comparative decline in Experience due to the one-off Covid work secured in 2020 offsetting new work in Public Service. Within the divisions, the Public Service book to bill was 1.7x (2020 1.3x) reflecting the balance of business won, while Experience was 0.7x (2020 0.7x) partly reflecting the delay of some major contracts like the BBC.

In the second half we won some important renewals in both divisions, including Personal Independence Payments (PIP) for the Department for Work and Pensions (DWP), an extension to the Standards and Testing Agency (STA) contract with the Department for Education, and contracts with the RSPCA, Thames Water and a global FMCG client. We also secured new scopes of business with existing clients such as in the Defence Fire and Rescue (DFRP) contract, surface transportation for TfL and an extension to our successful Job Entry Targeted Support (JETS) programme in Scotland. Our focus on new clients started to produce promising results towards the end of the year, with a recent contract award from the Fintech company, Trade Republic, with more in the pipeline for 2022. Since the year-end we have also won a £456m TV licensing contract extension with the BBC.

Our order book grew to £6.1bn (2020: £5.9bn). Group book to bill at the year-end was 1.2x, slightly less than we expected after the BBC extension moved into 2022, but still indicating a strong base for future revenue growth.

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Building a pipeline for future revenue growth

Looking forward, we are now better structured to continue to grow revenue, bringing together our strong market positions, new client-facing structure and improving client offerings. As we drive greater efficiency from our new divisional and Group structure, we will also become more competitive. Finally, we will continue to leverage the 'consult, transform and deliver' model that is expected to secure more opportunities for the Group, as well as improving the margin mix of the business we execute.

We have continued to build our pipeline of new opportunities. The 2022 unweighted pipeline is £9.4bn, a 7% increase on 2021 when adjusted for the Royal Navy training contract, which was signed on 11th January 2021. The 2022 weighted TCV pipeline for the year is £2,501m, 42% higher than at the same point in 2021 (2020: £1,758m) excluding the Royal Navy training contract. This is split broadly equally between Experience (£1,320m) and Public Service (£1,130m), showing that significant opportunities exist in both divisions and, based on our conversion rate last year, gives us an encouraging outlook for 2022.

Post year-end we have closed a number of contracts that we had expected in 2021, including the BBC TV licensing extension. Other significant bids expected in the first half of 2022 are for a financial services company, NHS England and the DWP.

Operational excellence, efficiency and scale to drive margins

Reducing cost

Over the course of the transformation, we have made cost savings of more than £425m to bring the cost base in line with a smaller, more efficient and more focused business. Savings in 2021 totalled £123m, which were again focused on operational excellence, taking out spans and layers of management as we integrated businesses and operations, and savings in the overhead and Group functions. These cost savings were a major driver of our profit improvement in 2021.

Our operational excellence programme is focused on process and productivity improvement and will be enhanced by benefits derived from our new structure, including standardisation and best practice experience from around the Group, as well as deployment of digital services and robotic process automation.

We made procurement and IT savings of £28m through consolidation and benchmarking suppliers, negotiating improved terms, leveraging scale benefits and using more data-drivendecision-making.

Reducing the size of our property portfolio continues to be a major driver of cost savings in the business. During the year, we realised £26m of cost savings as we closed 55 properties, on top of the 49 that were closed in 2020, reducing the associated lease obligations by £49m. Capita has now reduced its property footprint by 25% over the two years.

Completing the transformation and implementing our new leaner structure allowed for savings in the Group overhead and functions to be delivered in 2021. Ongoing savings are planned through increased productivity and reducing internal structural inefficiencies, for example through further property rationalisations and materially reducing the number of legal entities in the Group.

Managing inflation

As for most other businesses in the UK, inflationary pressures increased in 2021, alongside increasing levels of staff attrition. This was experienced across all our businesses but in particular for IT professionals in India, consultants and for our call centre staff in the UK.

Our first priority has been to invest in our people. A fully staffed, engaged workforce delivers better service quality, additional revenue opportunities and lower staff turnover. This means investment in recruiting, training and development as well as better employee engagement and wage increases.

As a contracting business we are used to dealing with inflation and two thirds of our client contracts include terms that allow us to pass on inflationary costs. Taking into account transactional revenue (c.12% of our group revenue, 66% of which will be disposed through the Portfolio division), as well as contracts that will end or be renegotiated in the next 18 months, the unhedged exposure to inflation remains relatively small.

As a result, we are confident that the profit impact of inflation can be mitigated over time, with no material impact to profit expected in 2022.

Longer term, we see employee wage pressures at our clients as a potential driver for further outsourcing and use of digital technology.

Strengthening our balance sheet and delivering positive free cash flow

Reducing debt

One of the biggest priorities in the transformation was to reduce our financial obligations to a more sustainable level.

In the past four years we have reduced gross debt by £1.1bn, made over £300m in pension deficit funding contributions and addressed our organisational deficit, including expenditure on IT equipment and structure, fixing legacy contracts, and investing in systems.

Last year we announced a business disposal programme targeting to raise £700m to meet the significant additional cash commitments in 2021 of deferred VAT, restructuring and pension deficit payments, and to ensure sufficient liquidity to pay debt maturities in 2021 and 2022. That target has now been achieved ahead of schedule with the agreed sale of Trustmarque, within the Technology pillar, on 28 January 2022 meaning we have realised total disposal programme proceeds of around £750m.

We will continue our plan to reduce debt through the disposal of the non-core Portfolio division. Excluding the Technology pillar, the division now has around £338m of revenue, £27m of profit, before Group overhead allocation, and £30m of operating cash flow on a 2021 proforma basis. This includes the Agiito business that in 2021 was still loss-making and cash-negative as a result of the impact of Covid.

Since the beginning of 2022 we have launched processes to dispose of two further pillars within the Portfolio division, representing around £188m of revenue and £20m of profit, before Group overhead allocation on a 2021 proforma basis.

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