Capita H2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 5, 2025

There are 6 speakers on the call.

Operator

Good morning. I'm Adolfo Hernandez. I'm the group chief executive at Capita BLC. Thank you very much for making it to this busy room today, but also thank you very much to those of you who are listening or watching remotely as we present the 2024 financial results. These are my sort of first full set of results as such.

Operator

I joined the company an eternity ago, it seems, certainly the January. So besides sort of doing the normal reporting, I'm still hoping to share some more of my learnings and recommendations and things that we're doing over this past year. Also in the room, we're going to have Pablo, our new CFO, who took over from Team Weller in the summer. He's had a very busy six months of induction into the company. And just really excited to get going with this.

Operator

But before we do that, I'd like to sort of draw your attention to the disclaimer slide and start with a little recap of the Better Capital slide because I think it's a good framework to remember. So I said when I joined back in January, I went into it was a very ambitious onboarding plan and I travel extensively to meet our colleagues, our customers, our operations, our call centers. I really wanted to get under the skin of what we did at Capita and how we did it and why we did it and how much money we made or not as the case might be. And I really wanted to understand where we were winning and why and how often and why we were not winning and why and why we were making money and where were we delighting customers. And we did a true three sixty degree analysis of the company.

Operator

We formulated as an executive team and the board a strategy that we signed off at the May. And then we came out with a capital markets update back in June, where we just sort of presented what we wanted to do with Capita. And for many of you who might be new to the Capita story and you might have not been there, let me just quickly recap that part of my wow on the onboarding was to see the strength of the relationships and the customers and the understanding of the business processes that our colleagues had. That was a really solid foundation. It was something I was hoping to find, but there's never certainty until you really get there.

Operator

That was a really strong foundation. But the disappointment was, at the time, we hadn't managed to translate that value, that great work we did into financials. The financial performance was very disappointing. So when we said we wanted to build a better capital, it was about building on the strong foundations the company had, really just make sure that we get a more operationally focused capital, more tech enabled capital, a leaner, nimbler capital, building a better company for and with our colleagues, and one that was able to produce financial results that were commensurate with the great work we did. So that was the strategic agenda that we embarked upon.

Operator

We've been super busy. 2024 has been, I think you can call it, a deep root and branch transformation of Capita. It's been a pivotal year, very foundational year. I'm really looking forward to sharing with you now everything that we've done in this sort of four pillars, the technology, the efficiencies, the delivery and the better company. But before we do that, I think it would be more appropriate if we let Pablo introduce himself, run us through the numbers, and then I'll come back and do the rest of the session.

Operator

So bear with me a second, and Pablo will take us through the numbers.

Speaker 1

So thank you very much, Adolfo. And good morning to everyone and to those of you in the room. Actually, thank you for making your way across to Paddington. Starting by introducing myself, Pablo Andres, joined Capita in July 2024 and born in Spain, as you can see, but I've been in finance roles in The U. K.

Speaker 1

Since for twenty years already. The most relevant and recently are G4S. Throughout my career, I've enjoyed working in exciting transformational roles where I can apply my energy and transparency to drive shareholders value. And when I looked at Capita from the outside, what attracted me was a company that was close to finishing its restructuring with a new CEO with the right strategy and the experience to transform it and the opportunity to be a key member of the team delivering that strategy and delivering the value I know this business is capable of. Now that I'm in the inside, well, actually what I have observed even with more clarity is that the ability that Capita has to deliver this transformational strategy is huge.

Speaker 1

It has a high caliber and hardworking team willing to succeed together. And I believe we can help this business to achieve its potential. The first thing I have done is expand the segmental reporting. I thought that the increased transparency would allow stakeholders to better understand the performance of each business and the intrinsic value of each business. I'm also seeking to provide further clarity on other areas, such as key changes in operating profit by segment and working capital by segment, separating deferred income and CFA to show cash backed profits.

Speaker 1

I trust that by starting with the actions above, the market will better understand our business and will be able to measure our progress as we deliver our strategy. So now moving into the financial highlights. The group revenue declined by 8%, reflecting the impact of prior year contract losses and delayed mobilizations, the exit of low margin contracts together with the progress we have made exiting Transbuhlacom pensions and the reduction of volumes in the contact center telecoms vertical. Operating profit increased by 5.5%, reflecting in year savings of $90,000,000 from our cost efficiency program, offset by the revenue reductions I have described and the non repeat of positive prior year one offs of around $34,000,000 This delivered 50 basis points operating margin improvement in 2024. Free cash flow was an outflow of $122,000,000 similar to $2,023,000,000 dollars However, it reflects the end of the pension deficit payments and cost associated with the cyber incident.

Speaker 1

Costs of 45,000,000 in delivering our cost efficiency program and a more sustainable approach to working capital management. We have delivered ahead of schedule annualized cost savings of 140,000,000. Our net financial debt gearing has reduced to 0.5 times EBITDA. And our lease debt including sublet lease receivables is around $250,000,000. So now moving on to the profit reconciliation.

Speaker 1

As you can see, the key items between our adjusted profit and reported profit are the 171,000,000 gain on the disposal of Fera and Capital One, the investment in our cost reduction program of $28,000,000 following $54,000,000 of P and L costs in the prior year and goodwill impairment of $75,000,000 Goodwill impairment relates to a contact center business and is mostly driven by the lower revenue base for the projections made in 2024, including lower volumes in our telecoms vertical, which are expected to remain subdued in 2025. Now before we dive into the detail segment by segment, I thought it would be helpful to show the overall picture of the group with the most material items in each division. The table shown on this slide shows adjusted performance for each of the divisions and summary of the key movements within each division. I am not intending to cover financial performance here in this slide. I will provide the details in the following slide.

Speaker 1

However, in here what you can see is firstly, public service, which had a significant top line and profit headwinds during 2024, but has made overall good progress on margin, supported by cost saving initiatives. This business delivered an EBITDA of 126,000,000 with a 73% cash conversion. The contact center business has had a more difficult year with the impact of prior year contract losses and one offs and the reduction of volumes related to the telecoms vertical during the year. All of this together have eliminated the benefit of the cost savings with results showing a net loss of $6,000,000 On an underlying basis, through the benefit of our further efficiencies and strategy, this business should be able to deliver market comparable margins as we execute our strategy set out in the Capital Markets Day. Our pensions business is an attractive growing business.

Speaker 1

It's managing defined benefit schemes and pension consultancy services. It is winning new mandates and improving margins. And it's delivering solid cash conversion with an EBITDA of 34,000,000 Finally, regulated services. It is made up of businesses we identified in the Capital Markets Day as managed for value. It includes our closed book life and pensions business that we have signaled our intention to exit.

Speaker 1

We made good progress during the year with one remaining customer to agree exit terms and we're working hard to agree a resolution. As previously disclosed, we expect overall cash outflows of $20,000,000 per annum until we exit this segment. And finally, we have the cost of running the PLC separately reported with its working capital showing the reduction of usage in the factoring facility this year. So now moving into the details for each segment and starting with Capital Public Service. Revenue saw a reduction of 0.9%.

Speaker 1

As we saw the impact of contract losses in previous years, we exited some low margin contracts and we had a more disciplined approach to bidding at appropriate margins. We also faced the impact on the revenue line from the delayed mobilization of two contracts won in 2023 and these were mostly offset by new wins and indexation. Operating profit increased by almost million or 28 and this was mainly driven by the results of our cost reduction program partially offset by the previously announced contract losses and the impact of million that we had in the Smart DCC business. The year on year impact into the Smart DCC was mostly driven by project work that concluded in 2023 and the twenty twenty three-twenty twenty four Ofgem price determination that delivered significant cost disallowances. During the year, we have tightened our commercial and operating controls in the Smart ECC business, ensuring a more robust evidence trail is kept supporting the efficiency of all costs as well as meticulously documenting all activities undertaken at the request of our client.

Speaker 1

Cash conversion during the period reduced to 73%, mainly reflecting the overspend on the contracts that had a delayed mobilization and a more sustainable approach to working capital management. Onto the contact centers. Before I dive into 2024 performance though, you will recall that at the Capital Markets Day, we gave indicative margin for contact centers in 2023 at 0.7% positive, reflecting significant opportunity versus our peers. You will see in the slide that margin for 2023 has been restated to a negative 0.5%. This has been updated following a more detailed calculation of overhead allocations.

Speaker 1

But most importantly, this does not change the key message. We have lots of work to do and there is a significant opportunity in this business to to get margins in line with peers. Going back to the top then, revenue in 2024 saw a decline of 18%, reflecting previously mentioned one of benefit of our BMO2 contract, prior year contract losses and lower volumes within our telecoms vertical that are expected to remain subdued in 2025. Operating losses were $6,000,000 compared to $4,000,000 losses in the prior year, As prior year losses of $4,000,000 benefited from the exit of the previous VMO2 contract that delivered a one off accelerated DI release of $10,000,000 and a further DI of 8,000,000 Without this, the business would have made losses of 22,000,000 in 2023. So during the year, we delivered material cost savings by significantly reducing our footprint in property and increasing our nearshore and offshore activities through the opening of the new global delivery centers in Bulgaria and South Africa.

Speaker 1

However, these savings were partly offset with the reduction of volumes, the continued investment on new technology products with our hyperscaler partners and on a year on year basis, the non repeat of the twenty twenty three one offs. Operating cash flow was close to nil during the year, reducing from 20,000,000 in the prior year that benefited from timing of payments with VMO2. Moving on to our pensions business in capital experience, during 2024, revenue increased by 5.1%, volume increases so we saw volume increases with clients like PIK together with some benefit of indexation. Operating profit improved by 8.5%, supported by the savings from our cost reduction program and operational leverage from growth. Cash conversion also improved to 98% as we worked hard to improve our billing cycles to drive what should be a more appropriate level of cash conversion for this business.

Speaker 1

Turning the page to our largest remaining managed for value business. Regulated services is mostly our closed book life and pensions business, where we have made significant progress agreeing to exit contracts during 2024, including the agreement to exit a client signed last month and we will deliver these exits over the coming years. Exits are now agreed with all but one customer with whom we remain in active dialogue. As a result of these exits, as expected, we saw a decline in revenue and profit in 2024. Additionally, you remember that 2023 included a $24,000,000 1 off commercial settlement and a cash one off from a contract termination.

Speaker 1

Cash consumption of this business during 2024 was $14,000,000 reflecting payments from customers as we exit them. And we continue to expect cash cost of around million per annum. As you well know, this is one of our highest priority areas to resolve. We have made huge progress during 2024 and the beginning of '20 '20 '5. And we have good engagements in discussions to exit our last customer.

Speaker 1

We will provide an update when we get to our resolution. Moving on now to cash flow on the next slide. Our EBITDA was 186,000,000, 10 million lower than the previous year. And this was mainly driven by lower depreciation and amortization due to the continued progress in our property rationalization program. We then see the net of deferred income and CFA 2024 showing a more normalized level of around $50,000,000 compared to $100,000,000 in previous years.

Speaker 1

Other working capital shows a $53,000,000 negative outflow, reflecting a more sustainable working capital management approach in 2024 and the non repeat of payment phasing on the VMO2 contract in 2023. Non cash and other adjustments include mainly movement from provisions that get us to operating cash flow of EUR 72,000,000 in 2024. Operating cash conversion in the round mostly reflects the reduction of TI and CFA to a more normalized level and the adjustments to a more sustainable working capital in 2024. I expect cash conversion in 2025 to be around 55% to 65%. We then have the end of the pension deficit contributions, remaining costs associated with the cyber incident and the cost to achieve our cost reduction program that delivered $140,000,000 of annualized savings in 2024, well ahead of schedule.

Speaker 1

All of this left us with $16,000,000 of cash generating from operations, excluding business exits. So now turning to the remaining parts of the cash flow and net debt. We start at the top of left it in the previous slide with a 16,000,000 cash generated from operations. We then invested 50,000,000 in CapEx, in contract delivery, cyber and new technology GE solutions. We paid our interest and taxes for $41,000,000 and we saw the steady reduction of lease payments at $48,000,000 as we continue our property rationalization program.

Speaker 1

All of this resulted in free cash flows excluding business exits of 122,000,000 outflows. And we expect this number to become positive from the end of twenty twenty five through the delivery of our strategy and cost savings. We now continue below free cash flow excluding business exits. We generated $258,000,000 from trading and proceeds on the disposal of Fera and Capital One. And other cash flows and non cash movements reflect our new leases of the London headquarters and the Global Delivery Center in South Africa.

Speaker 1

Our closing net debt was million that includes million of financial debt, $349,000,000 of IFRS 16 lease debt. But let's not forget that the headline net debt excludes 96,000,000 of souplet lease receivables shown in the balance sheet. Liquidity and net debt is on our next slide. As you can see, the year end position shows almost $400,000,000 of total liquidity, including $250,000,000 of the RCF available for use. Considering the maturities in 2025 and 2026, including those repaid in January, we have announced this morning the issuance of a US94 million dollars private placement, which strengthens our maturity profile to deliver our strategy and transformation at a cost below that of our RCF currently.

Speaker 1

We expect net debt to EBITDA to remain below one times at the end of twenty twenty five. So now turning to our summary for 2025 outlook. You will see we are providing quite a bit of granularity on this slide. In terms of revenue, we expect the group to be as a whole broadly flat with low to mid single digit growth in public service, mid single digit growth in pensions, offset by high single digit reductions in contact centers, driven by the volume reductions described previously and the continued conscious reduction in our closed book life and pensions. We expect operating margin of the group to show modest improvement in 2025 with progress both in public and contact centers through the delivery of the cost efficiencies, stable margin in pensions and a significant deterioration in regulated services as we make progress on agreed exits and continue our negotiations with our last customers with closer alignment with profit and cash flows than in previous years.

Speaker 1

In terms of free cash flows, we are pushing hard in H1 with our efficiency program to ensure we deliver the committed annualized savings of $250,000,000 from the end of twenty twenty five. For 2025, we expect cash conversion of around 55% to 65%, delivering a free cash outflow before business exits of 45,000,000 to 65,000,000. And this number already includes 55,000,000 associated with the investment on delivering the efficiency program this year. That means that we will be turning into a positive free cash flow from the end of this year. We have also continued with housekeeping activities this year and subject to relevant approvals, we will be completing a 15 for one share consolidation and a share premium reduction.

Speaker 1

So summarizing based on everything I have seen since joining Capita, We remain confident on delivering the medium term targets and as set out in the Capital Markets Day. With this, I will hand over to Adolfo. All right. Thank you.

Operator

Thank you, Pablo. Yes, very thorough. Certainly welcome the additional sort of transparency, housekeeping and definitely the focus on the different business units, I think it's good to see everything and see everything with the right numbers, so that everybody can see what is it that we're trying to drive and where. And I think it does highlight both the progress that we've made in 2024, but very importantly, what I said at the top, the mandate we have to do better. I think there's still a significant opportunity to get to, first of all, to that medium term guidance and then go from there.

Operator

So in terms of plan and again, sort of for those of you who have just sort of joined Capita story, We see we are one of the largest business process services providers in U. K, Ireland and Central Europe. And what we do is deliver extremely complex outcomes for our customers, right? If it's complex and it requires business process understanding and excellence, if it requires the best possible technology and if it requires the best possible humans in the loop, that combination is what we do to deliver those outcomes in the countries where we operate. And we will do that whether it's delivering to the citizens of local government or whether it's providing services in partnership with central government departments or helping across national preparedness defense space or addressing hundreds of millions of queries from end users and consumers in telecommunications, utilities, financial services, or dealing with vulnerable citizens across the board.

Operator

We're extremely proud of what we do. And what we do is an integral part of the social fabric of the countries where we operate. And we aim to continue doing just that, but doing better and getting a better financial return for it. A year ago, I stood here and one of the things I was saying with you is when I'm joining from the tech industry, I've got a very much of a tech career. In my last assignment before coming here, I was at Amazon Web Services.

Operator

And as you said, I was sharing to everybody like what I had seen in the tech world led me to believe that technology was going to fundamentally transform this market. And that if there was one market where we're going to see a significant reconstitution of components and value creation was this market. As you probably said, a year ago, I think nobody now would doubt that. I think a year later, it is very, very clear that that's the way this industry is going. I am very pleased that we made that call a year ago and that we really went and doubled in into that approach because that's just there.

Operator

We have seen probably more change in this in the makeup, the strategic makeup of the BPS market in twelve months than we have probably seen in the last twelve years put together. This is definitely happening now. As we have embarked upon this transformation, we're taking advantage of saying, okay, what do we know about our business processes from our customers? And let's try to map those business processes into tech opportunities, whether it's use of registration to use new services, whether it's processing of medical records, whether it's getting automation of debt collection, whether it's driving efficiencies and supporting better calls and better experience in our call centers. There is a lot that we know about our business processes.

Operator

Let's just map that into tech, into AI, into augmentation. The second thing that we needed to do is not just do it for the sake of a PowerPoint and not for the sake of just ticking a box, but deploying it at scale so that it matters. It's still early days, but what you're going to see later, right, by the end of this year, over half of the revenue of our call center will be supported and augmented by AI. So we're doing this not just to prove that it works, but to really have a material impact in our operations. The other thing that I said a year ago was I didn't believe we could, we should, we wouldn't build all of these technologies ourselves.

Operator

Coming from the world of tech, understanding what hyperscale a technology partner can do, understanding this sort of the wagon of innovation, the click and the fast innovation that they do, the amount of very general purpose innovation that they bring, it didn't make sense to build it. What we needed to do was to partner, select and orchestrate the best experience based on them. And I think you're going to see a lot of what we've done in terms of Hybexcella partnering and repurposing our tech efforts and organizations and talent to sort of add that orchestration level and bringing in the our capital special source on top of the partnering solutions. It was really important to start shifting from service as FTE to service as software. Right?

Operator

This industry been serviced as FTE and it's been about labor out of the trash for way too long. So now as we have embedded into recruitment and we've been looking at high volume recruitment as an opportunity, I I mean, last year alone, we hired 10,000 people, right? So we do a lot of high volume recruitment. And a lot of our customers do high volume recruitment. Instead of going about it in the traditional way, we have gone with AI agent tick and we have created a software capability from the back of Agent Force to create that type of innovation.

Operator

When we're doing now bid generation, we're doing bid generation on the back of AI. When we're looking at providing user registration services for new services that are going live, for example, in Transport for London, we're doing that now. Instead of just throwing hundreds and hundreds of people in there, we're just doing it with tech and lesser people that are more equipped. So that's part of our implementation. And human in the loop AI, I believe this is sort of attempt that was going by MIT and I believe it describes really, really well the future of this industry.

Operator

Because even though the press would love to arbitrate that there are startups, that there are capabilities that are going to be agents, that are going to take over the world, the reality is that it's always going to require to have a human in the loop. Let's let technology do what technology does best, fast processing of information, high volume information, automation, repetitive tasks. Let's just make sure that we got the right humans with the expertise, the empathy and getting the two of them working for one another to deliver that. And I think in Capita, we've got a big advantage there. And then we've got to build this at scale, right?

Operator

These things can't be examples. They have to be the menu. And you've heard me talking about the menu, and the menu is growing. And Sameer Vuiro, our Chief AI and Product Officer, is on the back. And we're going to be talking about him and the mission he's taking on.

Operator

We're going to be building this at scale. This is going to be the full menu. So this is happening to us. It's happening to all of our industries, probably happening more to those that have a high content on professional services than is happening to others. And I'm really, really excited because this is going to recreate the value chain.

Operator

And I believe that by doubling down early on and doing it with purpose and intention, we're going to be really well positioned. So the next sections are going to show you some early fruits, some early green shoots, some early validations of what we're doing. Obviously, this will take time. We can't expect to see twelve years of change materializing into the financials, so twelve years of the old walls materializing into the financials in one year. But I am confident that we're starting to see now that as we start looking at the business over a compounding three year view, we're going to start seeing that evolution there.

Operator

The other thing that's happened in the market, particularly in our largest and most important market, which is The U. K. Public sector, just over the last couple of months, we've seen certainly from the Prime Minister down everywhere in government an absolute drive to not just distrust AI as it probably was until recently by looking at AI as a key enabler to solve some of the challenges that we've got to deliver citizen service, to deliver the services that the civil service is trying to do and to do that within the new realities of the budget situation in the government. And I think the playbook, the AI playbook is an ambitious, still, it's safe to up to play for. It needs to be mapped into particular legislation and projects and this work to do in contracting.

Operator

But it's certainly a fantastic start and I think one that should help us move the country forward and one where I believe that as a national trusted partner, a sovereign trusted partner for the government, we're in a better position to leverage going forward. So quickly back on the four betters. I mentioned Sameer, side on the back. Sameer joined us from Amazon in November. And he has inherited and he's putting together a new organization whose job is to deliver this AI as a service to our organization and do that at scale.

Operator

He's inherited the best of the people that we already had in Capita and we did have a lot of people that were just buried into contracts, they were buried into different organizations, they were somewhat hindered back by our sort of broken approach in the past to go about these things. He's also bringing in successful entrepreneurs, bringing people from Amazon, people from Salesforce into the organization to really just go and orchestrate people who are cloud native, people who are digitally native and people who've been working on AI already and are able to orchestrate all of these solutions, working in a very agile form, somewhat different from the rest of Capita, living closer to the customer, a lot more faster cycles, less bureaucracy, a lot more faster innovation and always thinking back from what is the customer value and walking backwards from what is the customer value. And I think he's got, which has got a big job, but he's got the easiest job in the planet because all he has to do is to choose from the best of the sort of $1,000,000,000,000 investment innovation that hyperscares are putting out there and figuring out what is relevant to each of our customers business process, when and how and why.

Operator

So we're hoping that we will be able to derisk a lot of what we do in there. And as a good example of the derisking and acceleration of AI, when I mentioned an announcement we made last week of the Capita AI Catalysts as a process where Samir's and Samir's team will go into customers initially and will do for free exploration, pilots on where AI can have a transformational effect and start running those. And then if they are successful, then we can go and transform into projects. So really excited about what we're doing there. Obviously, we didn't wait for Sameer to arrive.

Operator

We did a lot of work since the beginning of the year. I've mentioned the privilege has been to be one of the first companies in Europe working with Salesforce on the agent force implementation. But we said we've not stopped there. We've launched the Capita contact solution on top of Amazon Connect. We've done the catalyst with many of them.

Operator

We've launched AgentSuite, which we presented in July. And Corinne, who's also at the back of the pack, is busy deploying across all the call centers. It's something that we built with Amazon as well on top of the Bedrock platform. We are deploying aggressively co pilot internally, 1,500 people growing up to 5,000. We've created some sort of internal tech venture with groups and operations teams can come and pitch on how they think they're going to use Copilot internally, what benefit are they going to get, what is the return on investment.

Operator

And based on that return on investment, we will fund them the project, we will give them the technology. And we're really just making sure that this innovation, this fever sort of happens not only top down, but it's also happening bottoms up. And we're really quite encouraged for what we're seeing there. And then very importantly, in the area of IT managed services, a lot of our customers have big complex, heterogeneous and sometimes out of date IT stacks. So IT managed services is very important.

Operator

Very pleased to report that not only we've now moved our internal IT operations onto ServiceSource, but we're now in a position as well to take the market leading platform to market to do managed ITMS for our customers on top of ServiceNow. So this is just a few examples and just you've got a quote there from Zara and so that's just to show you that this is happening. But some of you might be saying, well, where do I see these other operations? Well, if Corinne was here, as as in here versus the back of the room, she will be quickly telling you, well, I'm really, really busy deploying all of these in contact centers, right? Because whether it's my support staff that are already using this, her plan to have by the second half over 5,000 agents already been augmented in the day interactions with customers by GenAI through the use of the agent suite and having that at play across 20 campaigns.

Operator

And I referred to in excess of $350,000,000 of revenue of call centers already been augmented to do that by the end of the year. So this is a really important thing. And we're seeing value already as you can see from customers, customer scientists, our customers scientists see that it really works. Very importantly for us is also our colleagues is starting to see the value. They can see how the quality of their engagement, the day to day is improving, how they are just doing more high value work.

Operator

And when you talk to them, they absolutely love it. And those who still don't have it are now just lobbying internally to also get their own AI assistant, which is a fundamental change for some of this sort of fear and stuff that you read on the press. So really impressed about what we're doing. Similarly in our public sector business, Richard Saltz have been like really busy. And we've been talking about how we've been using AI and simulation, some of the great work we do for the Royal Navy.

Operator

We've been talking about some of the work we're doing for number plate recognition and some of the work that we do for user registration for transfer for London. Probably less known some of the great new work that we've been doing with local public authorities where we have created an APM based automation that allows you to effectively have a very efficient workflow to enable a local authority to go after that very unpopular task called H Debt and give us that responsibilities. An outcome based service fully delivered by Capita on the back of this technology, which is we're quite hopeful for. And then similar, when you're dealing with something as critical as medical records in this particular case in the context of recruitment, how you're able to remove going from twenty nine to twelve days, really removing a lot of elapsed time and cost and inefficiency out of the system by deploying digitally trusted, and I'm going to underline the word trusted, because but not everybody everybody could do the technology, but can you do it trusted and verified extraction of medical records and getting sort of digital consent, so your information can securely move from the source normally to your GP practice to the target in this particular case, army recruitment safely, securely and efficiently.

Operator

But it's also happening in pensions, right? Because pensions is another market that is changing, it's moving. And as we said, it's we see there is more potential opportunity if the government brings some additional legislation there. But already the move to digital is there, it's very real. We've got now over 1,000,000 people who are engaging on the online portal.

Operator

We've got, say, 137% increase in online engagement as a whole. Most importantly, we've created a new tool called Digital Mover. This actually allows over 6,000,000 people to stay in touch with their address and their pension and sort of avoid a number of problems that have been associated with sort of discontinuity. But going forward, we are building now a very digital pension front end on the top of Microsoft Dynamics platform that is going to give us the ability to bring everything in. That's it from the Dynamics platform.

Operator

We're going to be able to do profiling. We're going to be able to do a lot of AI out of the box, Copilot, a number of things, mobility, mobility apps to really make sure that we bring a really good experience not only for the digital trustees, but also for the end members. We're very excited about the work that we're doing here. We see a lot of acceleration. By the way, a lot of the Capita digital pension platforms are now also going to be built on Amazon Connect for telephony.

Operator

So again, we're bringing in the best of the different hyperscalers to get that benefit. I was with a customer recently a couple of weeks ago and they were just telling me how in awe they were, how the efficiency was of running now this platform on top of Amazon Connect, the amount of information that they had, how much the customer service productivity have gone up and the insights that we're getting. So really excited about this. And all of these things that I'm talking about are already making it into our go to market. They are standard practice and a standard component of our value proposition as we engage new customers.

Operator

So a lot happening in AI, a lot happening to take advantage of once in a generation opportunity and a lot happening in the time where this BPS segment is changing. But this will look like it wasn't anything by the time we're done with twenty twenty five. We have a really aggressive agenda, really disrupting agenda here for 2025. And it's an area that I'm spending a lot of my time on because I believe it's going to unlock a lot of the old locked away value in capital. But to do that, we also need to create space, right?

Operator

We were already spending too much money. I think I stood here a year ago and I said we were spending billion in cost to generate billion in revenue and that doesn't add up. Certainly, when you then need to create the space to do this thing. So we increased the million target to million and then the million we've increased it to $250,000,000 We were going to do the $160,000,000 by June year. We ended up doing $140,000,000 by December, as you heard from Pablo.Netnet, we are ahead of time and we are ahead of quantum.

Operator

And we're doing it because it's the right thing to do. And we're doing it because as we're doing it, we're learning that there are opportunities to be nimble, period. There are opportunities to just reorganize. There are opportunities to look at things differently. And we are looking everywhere, everywhere.

Operator

From applications, where do they see it? What is the model of the applications? What's on the cloud? What's not from the cloud? What's the organization level?

Operator

What is the management ratio? We're looking at absolutely everything. And this is one area where we're not going to let go because I think our customers are demanding us continuous improvement in our pricing. We need to be more competitive every year and this is not something that is just us talking, this is our customers asking us. So we have to become a lean organization.

Operator

As you become leaner, and this is something that I learned in Amazon, frugality makes you creative, right? It will force us to think about things in a way that we haven't done that before. It will force us and it's already making us question some of the sacred cows because we just simply don't have the time or the money to waste. And we're going to be very, very driven on that. On this one, I'd just say the new employee count at the end of the period is 34,500 and that just include a number of moves as you see in the FERA disposal, just in the Capital One disposal.

Operator

We had 2,000 people left the business and their terminations. We hired close to 10,000 people this year as well, and we've had about 9,000 people attrition. So there's a lot of movement in people. Net net, we're getting smaller to get fitter to build the capabilities that we will need in the future. So but it's not everything about cost cutting.

Operator

It's a significant part. I think as we go to deliver that growth in profit and cash back profits, there is a lot of things that are in the mix. So I just wanted to sort of highlight a number of things that we're doing. So the sales pipeline is getting a lot of attention by our divisional CEOs, Corinne and Richard. We have now pipeline of approximately billion of which and this is an important number of which billion have a technology or AI or a hyperscaler underpinned.

Operator

That's a significant number. It's not and the focus now is to focus on the right ones. I think capital has had somewhat of unscattered approach in the past that is expensive and is highly inefficient and it just doesn't yield the right number. So we've been more focused on where we're going after because we got the opportunity to really increase a number of what I call important win rates. In the mid size deals in public sector, right, we've only winning like one in two.

Operator

We're going to do better than that. So Richard's got the mandate and the plan working with his team to improve the win rate on these mid size deals, which are important for the profile of our business. Similarly, Corinne has the mandate to improve the win rate in the areas of call centers. I think it's important as well to just think that you need to do that, but at the same time, we need to deliver well. We talked about the 2023 projects that became part of 2024.

Operator

It just doesn't help. When you don't deliver, when you mobilize late, when you have issues, we've had north of 20,000,000 headwind for bad projects from 2020, '20 '20, '20 '20 '4. So we have to say really focus because I think as you win more and better and you win more and more margin discipline, as you make less mistakes and if you win in the right places, obviously, we've got the opportunity to combine that with less cost and more innovation, higher differentiation that yields an improved margin. And obviously, it's sort of real margin, real profit backed by cash. And I actually, as I look at this, I look at that and I am confident, right?

Operator

We have to make the space and we are making the space. We have to fix the basics and we're fixing the basics. But at the same time, you have to build the future. So these are the sort of the three waves of any successful transformation. And I think hopefully from this narrative and some of these proof points, you see we are doing all three things at the same time.

Operator

And we talked about the importance of customers and delivering to customers and winning. And I will let you read that at your leisure, but I'm going to highlight one number, which I think is for me extremely important. It's probably the one thing I'm the most proud about and I think our team is feeling like good about, which is the improvement on the customer Net Promoter Score, right? At times of change, at times of uncertainty, at times of people reductions, at times of news in the media, when you are introducing a new value proposition and you get a new team, it's really important that one learns how to protect the customer franchise. That one really gets closer, really customer sense that there is intensity, customer sees that there is innovation, customer sees there is value, there is good hand holding.

Operator

And I'm really pleased to see that we nearly doubled our customer Net Promoter Score in arguably really difficult situations. So I'm really hopeful that we will continue to do that as we go forward. We talked about the importance of some of the poor win rates that we need to do there. We started well with a number of deals already won early in the year. So a lot to play out for and certainly encouraged by the focus that our divisional CEOs have on the winning space by winning the right things.

Operator

And to that example, I thought I would just share two examples of two what would have been bad stories that we turn into good stories. The one on the left is in the public sector, the one on the right is in the call centers just to sort of give you a flavor, right? So the one on the left is a project that isn't going too well, where we weren't successful. We had an opportunity to retender for a variety of reasons. We retender introducing the new value proposition of Capita.

Operator

We introduced a lot more into automation capabilities and workflows in the back end. We introduced some hyperscaler, some sort of consumer tech into the front end. We put up a valid more cost competitive, and we won the retender as we were hoping. Really, really, really well done by the team, really proud of them. Similarly, Client B in the call center business, a loss making contract, one that we couldn't just get it to work under the wrong, the old way of doing this contract.

Operator

We found a way to terminate the contract and walk away. So as the customer came out to market, we reengaged, but we reengaged with them now on the basis, okay, now that there is no contract, this is how we would do it. This is how you would do it in 2024. We engage with them with more innovation, automation, gamification, offshoring, putting in the right blend of ingredients that you would do today, and we want it. So might be examples, might just be two, but I think it's just indicative that while it's still very early days, it's starting to work.

Operator

Manage for value, I think, Paolo, you covered it really well. I just sort of want to sort of put it there graphically in the bucket. So we've done the disposals that we talked about Capital One and mortgage already signed but not completed. We talked about the very important reduction of these eight evergreen contracts that we had just two years ago down to just one now. So eight to one, we need to work and get them unresolved.

Operator

And both on network managed services and on IT managed services. So we're doing some work transformational work at the core still just to figure out what is the best partnering opportunity. The bottom one, actually the partnering is with ServiceNow and we're still defining who we're going to do that in networks. But as important as everything is around technology, efficiencies, delivery and customers, none of this would be possible without our colleagues. We have a really unique blend of skills in the company, multiple countries, multiple locations, multiple processes, a lot of very different job families.

Operator

And this is really important that they sort of come together and they feel they want to go and fight every single day for this change, for this strategy and, above all, for their customer. And I think you got there a number of metrics. The ones that I'm sort of calling out in a difficult times, geopolitically, is diversity. I think diversity and inclusion is something that stands out for us that we believe in. And I think the numbers show that we are a good employer and that we are fostering and driving diversity and inclusion practices and something that we're really proud of across the board.

Operator

And then it's learning. I think the great work that we're doing in terms of learning and opening and creating data academies and AI academies and the work that we're doing with apprenticeships, open to a lot of people, now we're going to have 1,500 people enrolled, management academies. It is important for everyone in the workplace to learn. It is critical for everyone in Capita to develop their career towards this new one. And we're putting a lot of investment into this and definitely to see that.

Operator

There are a couple of other numbers there. Obviously, net promoter score has gone down, which I do understand, in a time of changes, in times of layoffs, in times of discontinuity, at times of difficult decisions with regards to salary increases and all of these things, it's hard to recommend your best friend to come and join you. But when you look at engagement, and engagement is the one that really matters to me in this part of the transformation is holding high. And I think ultimately, our attrition has gone down from being in the 30s to then go down to 30 to then in the mid-20s and is now in the early 20s. So it's definitely going in the right direction.

Operator

There's a lot of more work to do. We owe a lot to our colleagues, but I think they're starting to understand that it needs to be balanced. I actually quite like also the internal mobility, 20% up. It's important that there are job opportunities inside the company. So as you can see, this has been a busy year.

Operator

I don't know how it comes across, but it's just been a lot going on. It's been a really pivotal year of one where we're putting a lot of the foundational work upon which we're going to be building this new capital that is going to take advantage of what the future is bringing to this segment. And as I said, this deep root and branch transformation, we are looking into everything, every single business process, every single area. There is no area that we are not inspecting because I think it's important. And I think we've made a lot of progress across technology, efficiencies, delivery and building a better company.

Operator

But there is still a lot more to do. This is year one and it's not going to just be immediate. So you'll be asking, what about 2025? What What are you going to be doing? Well, Malin, you've got it up here.

Operator

These are the six key priorities that the executive team is working with the senior leadership team and across the company on. We got obviously our cost transformation and efficiencies. That's that's there to stay. We've got sales effectiveness as we talked about in terms of how do we generate the right deals, the right wins out of the existing opportunities. The product and innovation engine that has to be accelerated.

Operator

Then the underlying technology foundations everywhere else in the company that underpin our delivery and our day to day provision of services to our customers. The operating model that I've just described of how do we deliver to that strategy and how do we change both the front office, the tech office and the back office. And then as we ramp up, how do we transform more and further the culture, so the culture becomes a high performance culture driving the business forward. So I think with all of these and all the things that we've built in, we believe that we're in a good path to reiterate our medium terms objectives and guidance of 6% to 8% on operating margin, the free cash flow conversion and the revenue, the low to mid single digits on the later period. So a summary, I would just say, remember, the BPS market, BPO market are changing.

Operator

It's not and it's not incremental change. It's a structural change. And technology is going to be the biggest accelerator. It's going to be the biggest disruptor, and we're doubling down on it. And we started doubling down on it heavily a year ago.

Operator

However, as important as technology it is, it's the human in the loop that is going to drive the difference. So you need to get both things right. And because I think the human and the expertise in the business process, it was really differentiated technology. Technology on their own won't be enough and it won't be trusted. And I believe that we can orchestrate that value proposition really, really well.

Operator

We have the trusted relationships with our customers and they were hoping for more innovation and now they're starting to get that innovation. So early days, modest financial progress in year one, but I think we're well underway to build stronger foundations for a better business and a better capital. So with that said, we would just open to Q and A.

Speaker 2

Hi, there. It's James Rose from Barclays here. I've got two, if I may, and if I can do one at a time. The first is on the pipeline. You have 5,000,000,000 related with AI related projects in there.

Speaker 2

Is FY '25 still a year of sort of preparation and internal focus? Or are you now at the point where you can go to market with the right cost base, the right offerings? And do you expect much higher win rates and conversion of that pipeline?

Operator

I think it's both. I think we still have to do some work to prepare in some areas. But in some other areas, we're ready and we're already engaging. I mean, we already have a more competitive cost base than we had a year ago, but not as competitive as we will have it in a year's time, right, as a function of what we announced. From a technology perspective, we've built a number of areas, right, and where we're ready in a number of areas.

Operator

But I know that come summertime, we will have a lot more AI agents available that we're building as we speak that we will be able to take to market just then. So we are in a much better place for certain segments today where we do really well, and I think we are well equipped. But for others, we're still is work in progress, and this is where Sameer and the team are working hard to get to.

Speaker 2

Okay. And secondly, it's on the contact centers. And I appreciate the additional disclosure you've given there. It's a question around the long term commitments you've got to the business and the long term opportunities you see there. Volumes have been struggling for a while.

Speaker 2

It doesn't really generate that much cash. It's competitive. Is it worth taking up so much of your time and your cost savings? Or are there potentially other ways to realize

Operator

value from that business? Yeah. So if you look at the contact center market, it's a market where people are making money, right? We just didn't. And we didn't for what we discussed, I think Karim presented in Capital Markets Day, we didn't do the right things at the time.

Operator

We missed the boat on getting the right offshoring, near shoring in country balance. We missed the boat on automation. We missed the boat on MI. We missed the boat in a number of somewhat foundational things, right? Now that market, it's been transformed the fastest, right?

Operator

So a lot of the dynamics in that market are now about call avoidance, customer intimacy, apps and a number of things. So it proves an opportunity for us to play in the new market at the right time. So right now, I don't have to sort of this is not a pie in the sky that I believe I can make money. What it is is I believe we can at least catch up with our competitors. And for the time being, all we're doing there is optimizing, injecting in these capabilities, injecting in these new ways of working, changing how we go about it to market.

Operator

And right now, we've turned around, I think, you probably did a really good bridge, right? Something that it was adjusted was losing money significant in 'twenty three. Something that is just on the cusp in 2024. And I believe we can still have a platform to make more money there.

Speaker 2

Great. Thank

Speaker 1

you.

Speaker 3

Good morning. Chris Bambry, Peel Hunt. Three questions. Hi, James. Can take them in turn.

Speaker 3

Thank you. First of all, looking at the free cash flow, you came in towards the bottom end of the range of the $1.20 to $1.40. What determined that? And how does that flow into your guidance for this year? I mean, I guess thinking about things like you went to more sustaining work working capital position.

Speaker 3

Have you got there? And your thoughts on deferred income for this year as well would be great.

Speaker 1

So thank you, Chris. So I want to say something which is not correct. But actually, landing free cash flow in this company is like a lottery. In that in the last it's a company with a very small free cash flow number or a very small profit number. But actually, we have $2,500,000,000 revenue and expenses.

Speaker 1

In the last five days or the last four days, I think we collected $50,000,000 So landing exactly a number of free cash flow, it's a matter of a lot of planning, a lot of working hard with our clients, but also on how the last days of the month end up panning out in a period like Christmas. So we landed in the place where I like where I expected to, to be honest. We I ended up comfortable. But when I was saying in four days fifty million of receipts where you don't have control, it could very easily have shrunk into a different direction and made the headlines without actually being a fundamental issue in the business. So from that perspective, what I think we've been is taking a more conservative approach, not wanting to go hard in cash flow management.

Speaker 1

And I think that that leaves us exactly where we wanted to be when providing the guidance, which is from now on, it's business as usual. And I think we've got the right platform to just continue through 2025. In terms of DI and CFA, that's another complex one. In the round over time, again, every contract that you win, every contract you lose, every change in contract can affect DI and CFA. It is true that we had a structural deficit of lack of CFA with a lot of DI and that structural deficit is reducing from the 100,000,000 to 80,000,000 last year to 50,000,000 this year, which I consider that with lots of ups and downs inside is broadly where it should be for 2024, '20 '20 '5, perhaps 2026 to after that continue reducing.

Speaker 1

But yet again, it depends on the country you're managing. It's a live beast. And in the round, it's exact by chance again in a way, it's where it where I believe it is structurally in the right place, subject to movements, but at the right new level.

Speaker 3

And second question, what's the major rebates you have this year? And how confident are you in retaining them?

Operator

The major

Speaker 3

Rebates this year.

Operator

A lot of the major rebates happened last year. We're dealing now with a number of extensions, some significant extensions, which I am very comfortable with the extensions. There was a number I didn't mention, I think, but you probably saw it there, the north of 90% renewal rate. And I think, when I say the best attack is a good defense, the first thing you have to do is just make sure that you rebates your base, you retain it really well because they know you and then you got the value proposition. And then from there, you can go on to win new business.

Operator

So I'm fairly confident about the deals that we got on the rebate. But a lot of the rebidding area, particularly in Corrine's world in contact center, happened last year.

Speaker 3

And final question, of the EUR $260,000,000 of gross cost savings, how much do you actually have to expect to have delivered in year by the end of this year?

Speaker 1

We are working through it. I'm not going to commit to add any single number right now. I'm confident that we will deliver the full EUR $250,000,000 absolutely. But it is work through. It's not as easy as the first phases of a transformation.

Speaker 1

It requires redesign of processes, redesign of IT, injecting Gen AI into our processes. And that is where I'm it's not as easy and if I don't want to commit to a number.

Speaker 3

Thank you.

Speaker 4

Thanks. It's David Broxton from Deutsche Numis. Just one question area, please. In respect of the reinvestment of some of those cost savings, you're still earmarking 50,000,000

Operator

Yeah.

Speaker 4

Reinvestment. Do you now know and have you identified where that 50,000,000 will go? Can you give any more insight into it? And also as you deploy that, how do you make sure it doesn't become 75, 1 hundred or more?

Operator

Well, the second part of the answer is really easy. It's management discipline, right. It will not become more than it needs to become. So matter of fact, we will not invest, reinvest the 50 unless we're 100% sure that we're going to get the right return. A lot of investment or the reinvestment is going to go into building those AI agent capabilities, because that is what enables a better service delivery, more competitiveness and then additional cost savings in the organization.

Operator

That's going to be a significant part in there to be able to get that scale. Then there is going to be deployment of those innovations or whatever we will do to go and then deploy across call centers, operations, customers. So it's what I would call last mile deployment of innovation. And then there is going to be some commercial investment. There might be opportunities where we see that they might not just be ideally if we come with it, but we know we need to win them.

Operator

And because we have a good opportunity to be strategic about them, we can see how we can transform the cost base, we can see how we can inject. And I want to have that ability also in the P and L. So all three things together would sort of amount to a maximum of 50, provided everything has a positive return. I mean, we have talked about the co pilot investment we made that has a positive return. So in a perverse way, most of the reinvestment is actually coming out with a positive at the other end as well, which is really good.

Operator

So question in the back?

Speaker 5

Hi. It's Helen. I've got some questions online, if I can forward them on. So the first one is from Andy Brook at RBC, who's asking, how much of a headwind is the army recruitment contract in terms of revenue and margin perspective when it drops out in 2027?

Operator

Well, it's so first of all, let me just put this out there. We obviously we're the only outsourced government, outsourced government contractor who knows how to do this because we're the only ones doing it today for someone in the case of the army. So when we beat for that contract and this was like in my first few weeks in the role, we had to make the decision very quickly. We made a decision to just beat for quality, not beat to win. There's too much at stake here.

Operator

There's national preparedness. This is too important to the forces and too important to security. And it's too much risk for a company to just sort of go and beat to just win and then figure it out. This was not the contract where you just take a commercial risk. So we price to deliver based on our knowledge and obviously that obviously disqualified us and somebody else.

Operator

That said, we're still working with the army on army recruitment really joined really closely. In theory, the transition should go in 2027. And I just have to say in theory, because this is a major undertaking as you know, right? So far, the Royal Air Force and the Royal Navy are doing this themselves. So there is a significant amount of normalizing, figuring out, transitioning plan that needs to happen with them too, with us, with the forces.

Operator

So if it happens in 2027, that will be when it happens, but it's still to be seen when it will happen. It's a it goes up and down based on scopes of work and additional pieces of things that we do. It could be anything between million and million from 2027, '20 '20 '8, whatever happens.

Speaker 5

Okay. Thank you. As you know, we have a number of retail shareholders. So I think I'll just put this in one question, which is, could you reinstate really what our dividend policy is and when dividends could be restored?

Speaker 1

Yes. Our dividend policy was set out very clearly in the Capital Markets Day and it hasn't changed. So first, we want to deleverage the company, then we need to invest in the business. And only after those are done, we will consider dividends and capital returns.

Speaker 5

Thank you. Then the final one from online is, could you update us on the international sales effort, which I think is probably a contact center related question?

Operator

Yes. Well, we are there is so let me just there's two sides to it. So from a public sector perspective, there is also an international corporation work that we are starting and where we're working with the forces who are sort of facilitating, enabling some engagement with friendly nations where they want to participate in some of the work that we do for them in The United Kingdom. Some of our offerings are already offered internationally like we look at our Fire Service College. A lot of the service we provide out of our service college in the Cotswolds is for international firefighters as well there.

Operator

So there is that angle, there is an emerging angle. And then in internationally, when it goes to Ireland. We're seeing a better progress in Ireland than we have seen in Germany. We've had a good time. We have a successful campaigns in Switzerland.

Operator

But yes, it's sort of varied. There is an international just sort of summary, it just depends. But some areas are going well and others are still challenged. Germany is still challenged. Switzerland is doing well and Ireland is doing well.

Speaker 5

So I've got a very detailed question here for you, Pablo, from Michael Brown. You said at the December RNS, I believe that the incremental 90,000,000 of cost savings will be H1 weighted. Is this still the case? That's the first part.

Speaker 1

We're working hard to be able to deliver the full 90,000,000. We really the more you action in the first half, the higher chances you get to deliver the $250,000,000 in total exit run rate. And therefore, yes, we're working hard in finding the solutions and putting them into implementation, ensuring that at least by June, we do have line of sight of how that builds month by month to deliver the year savings.

Speaker 5

Thank you. Then secondly, how much of the 140,000,000 cost savings identified in 2024 will annualize in full year 2025?

Speaker 1

The full of them.

Speaker 5

The full of them. Perfect. Finally, is it likely that full year '25 will see the full exposure of the 50,000,000 reinvestment? Or is it likely that this will be annualized number that falls into full year 2026?

Speaker 1

So right now, the way the business models have been winned, have been built, is that they are assuming that this is flowing into the baseline for the next few years. It's It's something that we're figuring out as we speak depending on where we choose to invest. So if we invested on commercial terms in a contract that we think is the right thing to do, it will flow through. We are not taking an aggressive stand in our models or in our expectations trying to say that we're going to bank it as a one off. We will work through it and deliver what's right for the company.

Speaker 5

Thank you. No further questions. Thank you.

Operator

Okay. Well, that's the case. Thank you very much for your interest. Thank you very much for the support. And I look forward to seeing you at the next event.

Operator

Thank you. This concludes the webcast.

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Earnings Conference Call
Capita H2 2024
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