Investor presentation - Capita/media/Files/C/Capita-IR-V2/reports-and... · Capita plc October 2017 . Contents Overview of 2017 and investment proposition 3 –4 ... Southampton digital

Investor

presentation

Capita plc

October 2017

Contents

Overview of 2017 and investment

proposition3 – 4

An introduction to Capita 5 - 13

Business development 14 – 24

Financials 25 - 52

Summary and outlook 53 – 54

IFRS 15 appendix 55 - 65

2 | 2017 Investor presentation

Overview of 2017

Executed plans to reposition the Group

• New, market-facing simplified organisation structure implemented

• Disposals of Capita Asset Services and specialist recruitment

• Driving through benefits of restructuring programme – cost initiatives progressed

Early adopted IFRS 15 from 1 January 2017

H1 trading broadly in line with expectations

• Turnaround of IT Services better than expected

• Some businesses still underperforming

• BPM market remained subdued in the public sector but win rate improved

New CEO Jon Lewis starts 1 December

H2 outlook

• We expect underlying pre-tax profits to rise modestly in H2 2017 compared to H1 2017


Capita investment proposition: fundamental attractions

Capita is the leader in a large

addressable market expected

to grow at 3% per annum to

2019*

High visibility: 87% of revenue

is contracted

Cash generative, with good

margins and return on capital

employed

Our scale, unique breadth of

capabilities and track record of

delivery are competitive

advantages

4 | 2017 investor presentation *Source: Ovum 2016

An introduction to Capita


Capita at a glance

Business overview

• Capita is the UK’s leading provider of technology-enabled business process and customer management, IT,

software and professional services, with a growing presence in Northern Europe

• We generate revenue in three ways:

• Long term contracts ranging from 2 to 15 years duration: 71% of revenue

• Short term contracts less than 2 years: 16% of revenue

• Transactional businesses: 13% of revenue

• We sell into both the private (53%) and public (47%) sectors and are organised into 5 divisions which deliver

our services on a day-to-day basis

• 73,000 employees across the UK, Ireland, N. Europe, India and South Africa support our customers from a

mix of onshore, nearshore and offshore delivery centres

We operate in a large, growing addressable market

• UK addressable market £140bn per annum of which £13.9bn is outsourced*

• Market growth expected to be 3% to 2019*

• Structural drivers of growth include the transformation and modernisation of services, digitisation, fiscal

pressure and clients’ need to improve customer experience

Our scale, unique breadth of capabilities and track record of delivery are competitive advantages

* Source: Ovum6 | 2017 Investor presentation

External facingExternal & internal facing External & internal facing

Organisation structure

PRIVATE SECTOR PARTNERSHIPSBusiness process and customer management services for

corporates, primarily across telecoms, retail, automotive, travel

and insurance and retail banking sectors. Includes UK &

European operations and near and offshore centres

PUBLIC SERVICES PARTNERSHIPSBusiness process and customer management specialist services

for public sector organisations including defence, health and

welfare benefit administration and real estate and property

services

PROFESSIONAL SERVICESHigh growth commercial businesses and partnership models and

services to attract develop and retain workforces

ASSET SERVICESShareholder solutions, fund solutions, trust and corporate services

and debt and banking solutions

DIGITAL &

SOFTWARE

SOLUTIONSSector and task

specific software

and services,

digital data and

emerging

technology

solutions

IT SERVICESSpecialist

network

solutions, IT

management

and

infrastructure

services and IT

equipment

solutions

*

*Disposal in progress


Divisional structure

£m to Dec 2016

Revenue £1544m £1124m £717m £420m £532m

% of Group 35% 26% 16% 10% 12%

Operating Profit * £122m £9m £115m £136m £56m

% of Group 28% 2% 26% 31% 13%

Operating Margin 7.9% 0.8% 16.0% 32.4% 10.5%

Digital & Software

Solutions

Professional

Services

Public Services

Partnerships

Private Sector

PartnershipsIT Services

*Underlying operating profit before overheads and restructuring costs

Networking Solutions

Managed IT andEnterprise Services

Technology Solutions (reselling)

Managed Print Solutions

Education Software

Secure Software & Technology

Financial Software

Local Government Software

AMT-Sybex

Applications Support, Evolvi & digital businesses

Capita Resourcing

Learning Services

Security Watchdog

Communications

RPP Army Recruiting

Axelos

Business Travel

Fera (science)

Supplier Assessment

Parking Services

ElectronicMonitoring

DWP PIP

TfL Congestion Charging

DCC Smart Metering

NHS PCSE

DefenceInfrastructure Organisation

Central Government Services

Local Government Services

Real Estate & Infrastructure

Enforcement

Customer Management

Capita Europe

South Africa & India

Insurance Services

Employee Solutions (pensions &

employee benefits)

Retail Banking & Mortgage Solutions


Competitive position

Private Sector Public Sector Professional

ServicesDigital & Software IT Services

Market

position

UK BPM

Market leader

Share ~24%

Customer Management

(CM)

UK market leader

German top 3

Swiss market leader

UK BPM

Market leader

Share ~41%

Niche strengths in

workplace services,

business travel, best

practice, science and

supply chain

UK Software

Top 5

UK IT Services

Top 10

Market size(Per annum)

UK BPM & CM

£10bn

German CM

EUR3bn

UK BPM

£3.9bn

UK Enterprise software

£10bn

UK IT Services

£27bn

Competitors

TCS

Teleperformance, Webhelp,

Arvato

Aon Hewitt, Mercer

Atos, Cap Gemini, TCS,

DXC, Big 4, Serco,

Agilisys, BT, CGI

Accenture, Randstad,

Impellam, Hays, HRG

Northgate, Steria, RM,

Civica

DXC, Cap Gemini, BT,

Verizon, SCC, Kelway,

Computacenter

Credentials

Strong track record of transforming and managing major

contracts, utilising technology, process re-engineering and wider

capabilities

100m multi-channel customer contacts per annum

21m life policies and 550 occupational pension schemes, with

4m members, administered

Employee benefits solution used by 0.5m client employees

Southampton digital transformation programme won ‘Digital &

Technology Project of the Year’ at 2017 MCA awards

Top 5 multi-disciplinary property consultancy

36m payslips processed per

annum

3m accommodation nights

booked per annum

FERA analyses over 90,000

samples a year

IT and Project Management

methodologies used in >150

countries

Leading supplier of software, digital & IT solutions

More than 22,000 schools use SIMS, our management

information software

155 local authorities use our revenues and benefits

software

Leading provider of control room, case management and

mobile solutions to justice/emergency services

ICT support to >6,500 schools

*Source: Ovum and Nelson Hall9 | 2017 Investor presentation

BPM & CM market growth

13

13.713.9

14.2

14.6

15.1

11.5

12

12.5

13

13.5

14

14.5

15

15.5

2014 2015 2016 2017 2018 2019

£b

n

CAGR: 3.0%

UK BPM & CM annual outsourced

market

23.8 24.726

27.428.8

0

5

10

15

20

25

30

35

2014 2015 2016 2017 2018 2019

€b

n

CAGR: 4.9%

Germany & Switzerland BPS & CM annual outsourced

market

• UK business process and customer management

addressable market worth £140bn*

• Outsourced market £13.9bn* in 2016

• Capita market leader, with 29%* share

• German business process and customer management

outsourced market worth €23.8bn* in 2015

• Capita 3rd largest in German customer management and

market leader in Switzerland

*Source: Ovum and Nelson Hall10 | 2017 Investor presentation

Revenue mix by market

• Diversified mix of public and private sector clients

• Top 40 contracts account for slightly less than 40% of revenue

9%

16%

7%

6%

5%4%11%

9%

11%

5%

17% 8%

17%

7%

6%

6%5%12%

6%

11%

5%

17%

Central Government

Local Government

Education

Health

Justice & Emergency Services

Defence

Insurance, Life & Pensions

Financial Services

Utilities & Telecoms

Retail, Travel & Transport

Other Private

FY 2016 excluding

Asset ServicesFY 2016

Private sector 53%

Public sector 47%Private sector 51%

Public sector 49%


Global multi-service delivery infrastructure

On /near-shore platform N. Europe platform Offshore platform Capita Group

• Back office admin

• Customer services

• Life & pensions

• IT, software & data

centre

• Document processing

• Resourcing & training

• Share registration

• Property consultancy

• Claims & policy

administration

• HR administration

Service

offering

• Customer Services

• Life & pension

administration

• Financial services

• Corporate registrars

• Loan administration

• Fund administration

• Data validation & entry

• Claims & policy

administration

• Fund management

administration

• F&A processing

• Payroll processing and

HR

• Property consultancy

• IT services

• Knowledge services

• Customer services

Number of

Business

centres

Location

Number of

employees

• 94 centres worldwide• 80 centres in UK, Ireland

and Channel Islands

• 7 centres in Northern

Europe (Poland, Germany,

Switzerland and Austria)

plus contact centres in

Germany

• 5 centres in India

• 1 centre in South Africa

• 1 centre in Dubai

Global presence

100%

73,000

78%

11%

11%

✓Complex and bespoke

service offering

✓Majority of staff are

professional / semi-

professional (‘white-

collar’)

✓Evidenced by very

limited exposure to /

impact from increasing

minimum wage in the

UK and Germany

56,500 8,250 8,250


Technology capabilities


• Technology capabilities

• IT & software 37% of profits in H1

2017

• Major contracts include

technology which we have

delivered and/or support

• Portals and software platforms

underpin businesses such as

pensions and employee benefits

• Deploying digital in local

government to improve customer

outcomes

• Automation

• Opportunities with existing and

new clients such as O2

• Working with best in breed niche

software providers – Blue Prism,

Fusion, Automation Anywhere

Business

development


Our structure to match current buying behaviour

Group Business Development

• Team, evolved, increased, agile

• Closely aligned to and feeding market facing

divisions

• Directing and supporting divisional sales teams

DIVISIONS

Additional Campaigns

• High value, replicable solutions

• Work alongside model

• Applies to new and existing

clients

DIGITAL &

SOFTWARE

SOLUTIONS

Business Sales

Teams

IT

SERVICES

Business

Sales Teams

PRIVATE SECTOR PARTNERSHIPS

Business Sales Teams

PUBLIC SERVICES PARTNERSHIPS


PROFESSIONAL SERVICES


Major Outsourcing Deals

• Technology enabled

partnerships

• JV or transfer to Capita

• Public and Private sectors


Buying behaviour: major deals and campaigns

Division Sector Major deals:

propensity to

buy (Mar

2017)

Campaigns:

propensity to

buy (Mar

2017)

Public sector

partnerships

Local

government

Public sector

partnerships

Health

Public sector

partnerships

Central

government

Public sector

partnerships

Defence

Private sector

partnerships

Telco and

media

Private sector

partnerships

Financial

services

Private sector

partnerships

Germany

Professional

Services

Science

• Strong propensity to buy major deals in private

sector

• Central government remains quiet

• Significant opportunities for campaigns in local

government


Buying behaviours remain largely the same but with some

improvements

Division Sector Major deals:

propensity to

buy

Campaigns:

propensity to

buy (Mar

2017)

Campaigns:

propensity to

buy (Sept

2017)

Public sector

partnerships

Local

government

Public sector

partnershipsHealth

Public sector

partnerships

Central

government

Public sector

partnershipsDefence

Private sector

partnerships

Telco and

media

Private sector

partnerships

Financial

services

Private sector

partnershipsGermany

Professional

ServicesScience

Central government

• Total spend through Crown Commercial

Service (CCS) frameworks was £6.0bn in

Central Government in 2016/17– up £1.1bn

from the previous year

• Already represented on >20 CCS frameworks

– plus >100 other public sector frameworks

• Success in bidding a number of new key

frameworks

Customer management - Telco and media

• Of 55 deals included in NelsonHall’s BPS

Market Development Contract Database over

the last 2 years, 38 deals were <£25m

Science

• Since the creation of our joint venture with

Defra, by recognising the market desire for

repeatable solutions, we have increased

commercial revenues by 47%

Source: CCS Annual Report and Accounts 2016/17

Source: Capita analysis of data from NelsonHall BPS Market Development Contract Database (August 2017) & Ovum IT Services Contracts Analytics

Database (August 2017)

March 2017 September

2017


Campaign progress: local government

£45m wins YTD; £206m new opportunities

*Campaigns have a conversion rate of >50%

Digital & software Regeneration

People

development &

support

Procurement


Campaign progress: local government criteria for success

3. Multiple clients

within the market

1. Deep understanding of

clients’ challenges

2. Trusted to deliver

tangible results

Key success

criteria


Customer management: market and approach

Market growing by 4%

Source: NelsonHall Global BPS Market Forecast: 2017 – 2021, Customer Management Services Market Forecast by Region: 2017 – 2021

Source: NelsonHall Global BPS Market Forecast: 2017 – 2021, Estimated Customer Management Services Market Shares U.K. & Ireland: 2016

2017

(forecast)

2021

(forecast)

Split by service type, £m CAGR 017-21, %

3,751

4,4294%

2%

5%

10%

3%Order fulfilment support

Technical support

Customer care

13%

8%4%

3%

3%

3%

2%

2%

2%2%

Capita Teleperformance

Concentrix Webhelp

Sitel Convergys

Tech Mahindra Firstsource

Teletech Arvato Bertelsmann

UK Market Share - Top 10

Customer care

Technical support

Revenue generationRevenue generation

Order fulfilment support


Customer management: market and approach

0

50

100

150

200

250

300

350

£m

£25m

16 deals

£1,418m

38 deals

£329m

Overall deal flow in the UK (Sep 2015 - Aug 2017)

Source: Capita analysis of data from NelsonHall BPS Market Development Contract Database (August 2017) & Ovum IT Services Contracts

Analytics Database (August 2017)

Te

sco

Mo

bile

Deb

en

ha

ms

Th

ree

Vo

lksw

ag

en

Th

e P

en

sio

ns

Reg

ula

tor

RS

CP

A

Fir

st R

ail

Th

am

es W

ate

r

Rosse

nd

ale

Bo

rou

gh

Cou

ncil

Wins to date £116m

Decisions in next 6

months£500m

Pipeline (>£25m) £1,062m

Prospects £995m


Using technology to deliver customer excellence


£3.8bn (26 deals) in >£25m

deals

£3.1bn (28 deals) in >£25m

deals

Average term: 7 yrs Average term: 5.5 yrs

Annualised value: £550m Annualised value: £550m

2016 win rate 1 in 3 (by value)2017 YTD win rate 1 in 2 (by

value)

78% new

22% rebids/extensions

79% new

21% rebids/extensions

61% private

39% public

52% private

48% public

What does this mean for our pipeline?

Pipeline (As announced March 2017)

Today’s pipeline Pipeline and prospects

0 3,000 6,000

DSS

IT Services

ProfessionalServices

Public ServicesPartnership

Private SectorPartnerships

9 deals won in 2017 YTD with total value of £403m

IFRS 15 pipeline treatment:

• Order book: £2.2bn

• Frameworks: £300m

• Expected growth: £600m


Driving Capita’s future growth

Adapting to buying behaviours of our markets

Investing in markets where we are strong

Driving additional growth through campaigns

Continuing to build on major deal

success

Focusing on win rate

70,000 people contributing to the development and growth of Capita24 | 2017 Investor presentation

H1 2017 financial

results


Underlying income statement

• Underlying revenue decreased by 3.1%

• Underlying profit before tax of £195m

• Interim dividend 11.10p, in line with 2016

• Excludes Capita Asset Services – a discontinued

operation

£m

6 months

to 30 June

2017*

£m

6 months

to 30 June

2016**

Change

Revenue 2,066 2,131 (3.1%)

Operating profit 228 166 37.6%

Operating profit

margin11.1% 7.8% 3.3%

Interest (33) (32) 3.4%

Profit before tax 195 134 45.8%

Profit attributable to

shareholders153 107 42.7%

Basic eps (pence) 22.92p 16.12p 42.2%

Interim dividend

(pence)11.10p 11.10p -

*Excludes non-underlying items which include: intangible amortisation, impairments, net contingent consideration movements, other non-recurring items,

non-cash mark to market finance costs

**The 2016 comparatives include the results from businesses disposed in H2 2016 and H1 2017, and exclude the results from a justice business which

was held for sale in 2015 and moved back into underlying in H2 2016 following an incomplete sale process


Revenue

• 1.0% like for like growth from continuing

underlying activities

• 0.5% underlying organic decrease

• Excludes Capita Asset Services – a discontinued

operation

£m

6 months

to 30 June

2017

£m

6 months

to 30 June

2016

Change

Total reported revenue 2,127 2,156 (1.3)%

2016 disposals (8)

2017 disposals (61) (102)

Like for like revenue

from continuing

underlying activities

2,066 2,046 1.0%

2016 acquisitions (24) - (1.2)%

2017 acquisitions (7) - (0.3)%

Organic revenue on

continuing basis2,035 2,046 (0.5)%


Overall Group underlying revenue split*

• Revenue split – based on IFRS 15 definitions:

• 71% long term contractual – 2 years or longer

• 16% short term contractual – less than 2 years

• 13% transactional

• Considerable variation by division

• Reduction in transactional share following specialist

recruitment disposal

17%

16%

67%

H1 2016

Transactional

Contractual < 2 years

Contractual > 2 years

13%

16%

71%

H1 2017

Transactional

Contractual < 2 years

Contractual > 2 years

*Excludes Capita Asset Services, a discontinued operation33 | 2017 Investor presentation

Revenue from continuing underlying activities H1 16 to H1

17

H1 16 2,046

H1 172,066

13 10 1319

14

14 8 31

(20)(20)

(26)(18)

(8) (10)

1,500

1,600

1,700

1,800

1,900

2,000

2,100

2,200

HY

201

6 r

evenue

BB

C T

VL

DW

P P

IP

Co-o

p

Civ

il S

erv

ice

Lea

rnin

g

Centr

al gov c

ontr

acts

Netw

ork

Solu

tion

s

Oth

er

ITS

Real E

sta

te &

Infr

ast

Rem

edia

tio

n S

erv

ices

Em

plo

yee S

olu

tions

Tesco M

obile

mo

bilc

om

-debitel

Oth

er

Acquir

ed

revenue

HY

201

7 r

evenue


Underlying operating profit H1 16 to H1 17

H1 16166

H1 17228

29 7

2014

15

1615

15

3

(4)

(6) (7)(4)

(9)(6) (3) (5)

(15)(10)

(3)

0

50

100

150

200

250

300

BB

C T

VL

DW

P P

IP

Co

-op

TfL

PC

SE

DIO

Ce

ntr

al G

ov c

ontr

acts

Ne

twork

So

lutio

ns

Oth

er

ITS

Re

al E

sta

te &

Infr

a

Re

med

iation

Serv

ice

s

Em

plo

yee

So

lution

s

DS

S

Specia

list

Rec. (e

xited)

mo

bilc

om

-debitel

IAS

19 p

ensio

ns c

harg

e

Bonu

s a

ccru

al

Pro

fessio

nal fe

es

Oth

er

Acq

uire

d

H1

20

17

Un

der

lyin

go

per

atin

g p

rofi

t

H1

20

16

Un

der

lyin

go

per

atin

g p

rofi

t


Underlying operating profit bridge to reported operating

profit

228

63

(53)

(11)(37)

(64)

(1)

0

100

200

300

Underlying operatingprofit

Capita Asset Servicesseparation and exit

costs

Other business exitcosts

Capita Asset Servicesprovision

Amortisation Acquisitions Reported operatingprofit

Recurring items

Exceptional items

£m


Restructuring costs summary

• Cost initiatives remain on track to deliver

cumulative benefit of £57m by end 2018

• Provision expected to be near 100% utilised

by end 2017, with spend concentrated in H2

• Phasing of benefits more weighted to 2018

• Restructuring table shown before re-

investment in and benefit of automation and

offshoring

As at H1 2017* 2016 Q4 H1 2017 H2 2017 2018-19

£m

P&L charge 57.2 - - -

Cash (9.6) (13.7) (33.2) (0.7)

Profile spend 17% 24% 58% 1%

Closing provision 47.6 33.9 0.7 -

Incremental

benefit2.0 5.8 22.7 26.7

Cumulative

benefit2.0 7.8 30.5 57.2

*Based on continuing underlying activities37 | 2017 Investor presentation

Underlying operating margin

Focus on improving operating margin through:

New wins

Robust sales process

Offshoring and investment

Cost efficiency through strategic relocation of operations

Finance transformation

Long-term transformation programme in place

Procurement

New system development to maximise opportunities for centralised function

Property

Long-term consolidation plan progressing


Revised segmental reporting format*

Central costs no longer allocated across divisions and now reported separately

Revenue Operating Profit Operating Margin

H1 2017

(£m)

H1 2016

(£m) Change

H1 2017

(£m)

H1 2016

(£m) Change H1 2017 H1 2016 Change

Private Sector Partnerships 791 739 7.0% 82 47 74.5% 10.3% 6.3% 4.0%

Public Services Partnerships 539 586 (8.1)% 46 4 940.9% 8.5% 0.8% 7.7%

Professional Services 251 261 (3.9)% 51 41 25.5% 20.4% 15.6% 4.8%

Digital & Software Solutions 207 209 (0.9)% 59 67 (13.1)% 28.3% 32.3% (4.0)%

IT Services 274 241 13.6% 46 15 202.0% 16.9% 6.3% 10.6%

Group trading & central

functions5 10 (55) (14)

Total 2,066 2,046 1.0% 228 160 42.5% 11.1% 7.8% 3.3%

*H1 17 & H1 16 comparatives based on continuing underlying activities39 | 2017 Investor presentation

Private Sector Partnerships

HY17 HY16 Movement

Revenue £791m £739m 7.0%

Profit £82m £47m 74.5%

Margin 10.3% 6.3% 4.0%

4%

20%

76%

Revenue split

Transactional

Contracts < 2 years

Contracts > 2 years

• Commencement of mobilcom-debitel and Tesco

Mobile contracts

• Increase in BBC TV Licence revenue and profit

after contract modification in 2016

• Improved profitability following Co-op

negotiations in 2016

Outlook

• Customer management divisional pipeline remains

strong, with some delays around client decisions

• Employee solutions pipeline is strong, however,

trading is yet to improve

• Discussions continue regarding strategic review being

performed a major life and pensions client

H1 17 & H1 16 comparatives based on continuing underlying activities40 | 2017 Investor presentation

Public Services Partnerships

HY17 HY16 Movement

Revenue £539m £586m (8.1)%

Profit £46m £4m 940.9%

Margin 8.5% 0.8% 7.7%

13%

16%

71%

Revenue split

Transactional

Contracts < 2 years

Contracts > 2 years

• Revenue fall due to central government contracts

and lower trading in real estate, partially offset by

DWP PIP

• One-off benefit in DIO owing to contract

modification

• PCSE transformation spend lower in 2017

• Inflection point reached on TfL contract in 2017

Outlook

• PCSE is improving, with investment in the

transformation of the service to continue

• Challenges remain with the recovery in real estate

• Local government is forecast to improve

• Not expected to recognise the benefit of any DIO gain

share relating to the period up to the re-shaping of the

contract


Professional Services

HY17 HY16 Movement

Revenue £251m £261m (3.9)%

Profit £51m £41m 25.5%

Margin 20.4% 15.6% 4.8%

38%

18%

44%

Revenue split

Transactional

Contracts < 2 years

Contracts > 2 years

• Loss of part of Civil Service Learning contract

• Improved performance in RPP and FERA

Outlook

• One-off property commercialisation in H2 2016 will

not repeat

• Improved performance, including FERA, anticipated

to continue

• Mixed performance of trading businesses expected


Digital & Software Solutions

HY17 HY16 Movement

Revenue £207m £209m (0.9)%

Profit £59m £67m (13.1)%

Margin 28.3% 32.3% (4.0)%

2%8%

90%

Revenue split

Transactional

Contracts < 2 years

Contracts > 2 years

• Profit lower as a result of two major long-term

active software licences ending in H2 2016

• Increased go-lives on AMT-Sybex and secure

software active licence implementations

Outlook

• International sales opportunities being targeted

• Increased offshoring to enhance capability and

efficiency

• Continued investment in developing software

products in target vertical markets broadly in line with

2017 investments


IT Services

HY17 HY16 Movement

Revenue £274m £241m 13.6%

Profit £46m £15m 202.0%

Margin 16.9% 6.3% 10.6%

26%

12%62%

Revenue split

Transactional

Contracts < 2 years

Contracts > 2 years

• Acutest and Trustmarque acquisitions

• Higher level of project completion in network

solutions

• Significant improvement in performance due to

restructuring of management team and operating

model

Outlook

• Trading broadly in line with H2 2016 having put

restructuring in place in 2016

• Second half performance partially reliant on further

project completion of network implementations


ROCE bridge

12.9%

15.2%

2.0%

0.2% 0.2%(0.1)%

FY 2016 Organic profit Working capital Capex less depreciation Acquisitions & disposals H1 2017


Capital allocation

Investment grade credit rating

Reduced

leverage

post-Asset

Services

disposal

Disciplined

capital

allocation

Working capital

Capital expenditure

Acquisitions

Dividends

Future investment flexibility


Underlying cash flow statement

Cash Flow£m 6 months to

30 June 2017

£m 6 months to

30 June 2016

Operating profit* 228 166**

Depreciation 43 44

Movements in underlying provisions (32) -

Movements in working capital (6) 147

Other 9 (2)

Cash flow from continuing underlying

operations242 355

Net interest paid (29) (29)

Taxation 16 (32)

Capital expenditure (50) (80)

Underlying free cash flow 179 214

Non-underlying expenses 3 (15)

Free cash 182 199

Net acquisition of subsidiary undertakings

and businesses4 (60)

Equity dividends paid - (145)

Other 7 (9)

Cash flow before financing 193 (15)

Financed by£m 6 months to

30 June 2017

£m 6 months to

30 June 2016

Repayment of bonds/fixed rate swaps 118 70

Repayment of/(proceeds from) term loan 30 (500)

Movement in cash and cash equivalents 36 406

Other 9 9

Movement in net debt 193 (15)

*Excludes non-underlying items which include: intangible amortisation, impairments, net contingent consideration movements, other non-

recurring items, non-cash mark to market finance costs

**The 2016 comparatives include the results from businesses disposed in H2 2016 and H1 2017, and exclude the results from a justice business

which was held for sale in 2015 and moved back into underlying in H2 2016 following an incomplete sale process

• Capital expenditure reduced by £30m to £50m

• Underlying free cash flow of £179m

• Net debt decreased by £193m


Working capital extract*

June 2017 December 2016

Accrued

Income

(£m)

Deferred

Income

(£m)

Contract

Fulfilment

Assets (£m)

Total

(£m)

Accrued

Income

(£m)

Deferred

Income

(£m)

Contract

Fulfilment

Assets (£m)

Total

(£m)

Private Sector Partnerships 56 (767) 126 (585) 60 (762) 129 (573)

Public Services

Partnerships51 (404) 37 (316) 56 (359) 26 (277)

Professional Services 16 (108) 7 (85) 11 (105) 7 (87)

Digital & Software

Solutions10 (279) 74 (195) 6 (228) 69 (153)

IT Services 28 (141) 63 (50) 28 (137) 62 (47)

Total 161 (1,699) 307 (1,231) 161 (1,591) 293 (1,137)

*H1 17 & FY 16 comparatives based on continuing underlying activities excluding consolidation adjustments and Group trading and

central functions48 | 2017 Investor presentation

Capital expenditure

Disciplined approach to capital expenditure

• Contain and refocus on value for money

• Must meet Group investment hurdle criteria

• Continued focus on software products

• Discretionary spend in 2017 major programmes:

• SIMS 8

• Orbit

• Insurance process improvements

• PoliceWorks

2431

25

80

2316

11

50

Discretionary Contractual Maintenance Total

H1 2016

H1 2017

£m

30% 31%39%46% 32% 22%


Contract fulfilment assets - additions

34

6

40

30

7

37

Contracts Software Total

H1 2016

H1 2017

£m

19%

85% 81%

• New asset category created by IFRS 15

• Software CFA represents the spend on live

implementations as the progress towards go-live.

• Contract CFA represents spend on

transformations projects currently ongoing. Key

projects include:

• PCSE

• ENNI extension

• mobilcom-debitel15% 19%


Disposals and acquisitions

• Capita Asset Services disposed for £888m gross of £72m transaction expenses, expected to

complete in Q4

• Specialist recruitment disposal completed

• Two small bolt-on acquisitions in software testing and travel


Balance sheet gearing

• £193m net debt cash reduction

• Net debt 2.9 times EBITDA

• Bond debt maturity

• £90m in October 2017

• £25m in July 2018

• £128m in September 2018

• Remainder 2019 – 2027

• Bank debt maturity

• £520m September 2018

• £100m May 2019

At 31 Dec

2016

Cash

movement

s

Non-cash

movement

s

At 30 Jun

2017

Net debt £m £m £m £m

Bond debt* 1,596 (35) 7 1,568

Cash in bank (566) (36) 3 (599)

Bank loans 650 (30) - 620

Finance leases 2 (1) - 1

Deferred consideration 11 (6) - 5

Fixed rate swaps 85 (85) - -

Total net debt 1,779 (193) 10 1,596

Net debt/EBITDA** 2.9 2.9

*Underlying net debt after impact of currency and interest rate swaps, excluding fixed rate swaps

**Net debt/EBITDA based on defined debt covenants calculation52 | 2017 Investor presentation

Interest and debt profile

• Net debt benefitting from free cash flow

• Higher coupon fixed rate interest rate swaps

terminated in H1 2017 leading to lower H1 2017

interest cost

• 2017 interest cost expectation (including £9m

pension cost) is £65m-£70m, dependent on

timing of receipt of disposal proceeds

• Undrawn £600m revolving credit facility

maturing 2020/21

• June 2017 liquidity headroom of £1.2bn,

composed of £598.6m cash and £600m

revolving credit facility

2015 2016 H1 2017

Interest rate % 2.9 3.3 2.7

US$ PPN 1,312 1,340 1,300

€ PPN 217 257 268

Term debt 300 650 620

Other (incl. cash) 10 (468) (592)

Total net debt 1,839 1,779 1,596


Revenue booked in 2017

• 0.9% growth from acquisitions

• Attrition on major contracts (2.1%)

• Attrition offset by 4.6% growth from contracts

won

• Net organic growth 2.5%

• Still facing headwinds in some trading

businesses

FY (£m) %

Acquisitions

2016 24 0.6%

2017 14 0.3%

Acquired total 38 0.9%

Organic – large contracts

Attrition (89) (2.1)%

Growth pre-2017 153 3.6%

Growth 2017 42 1.0%

Organic total 106 2.5%

Total 144 3.4%


IFRS 16 - Leases

• Adoption from 1 January 2019

• Ongoing detailed review of lease contracts

• Expect significant lease liabilities and right of use lease assets to be recognised on the balance sheet

• Expect the profile of income and recognition in relation to these leases to change

• There is no impact on cash flow (except for presentation purposes)

• Reasonable estimate of the impact of IFRS 16 to be provided once detailed reviews completed


Pension liability

• Scheme liability of £1.5bn

• Deficit moved from £345m at December 2016 to £381m owing to discount rate moving from 2.8% to 2.6%

• Half year income statement charge increase of £6m, with full year 2017 expected to increase by £12m

• The latest valuation commenced in April 2017, with expected increases in cash contributions from June

2018

• Completed consultation on closure of most of remaining deferred benefit scheme to future accrual

• A one-off £17m contribution agreed as part of the Capita Asset Services disposal


2017 financial guidance

RevenueNet long term contract growth booked 2.5%

Headwinds in a number of trading businesses

Trading performance

H2 pre-tax profit expected to increase modestly compared to H1

Cumulative benefits of performance improvement initiatives

Partially offset by some trading businesses

Net interest Expected to be in range of £65m to £70m

Tax rate Underlying rate expected to be around 19%

Cash flowOverall cash flow lower than 2016

Capital expenditure slightly lower than 2016

Leverage

Around the bottom of our 2.0-2.5 target range, prior to the impact of IFRS 15 and

the potential unwind of receivables financing, which would result in leverage

being around the middle of our range

Pension (IAS 19) £12m increase in pension charges, including £2m finance costs


Summary and outlook


Summary and outlook

2017 actions completed or in progress

• New organisation structure implemented

• Rebuilding confidence and trust

• Disposals announced. CAS to complete in H2

• Cost and performance improvement initiatives

• Early adoption of IFRS 15

• Deleveraging

• New CEO appointed

Capita repositioned

• A simpler business, with a clear strategy

focussed on BPM

• Large growing addressable market

• 87% revenue contract backed

• Strong competitive position

• Cash generative, with good margins and return

on capital

Outlook

• We expect underlying pre-tax profits to modestly rise in H2 2017 compared to H1 2017

• Well positioned for the future under new leadership


IFRS 15 appendix

60 | 2017 Investor

presentation

IFRS 15 re-cap – early adoption of IFRS 15

• Adoption in line with our strategy of simplifying the business and improving transparency in a consistent,

prudent and sustainable way

• Significant, complex and far-reaching accounting standard with impact on long-term contracts and

software licences

• More closely aligns our revenue recognition with commercial substance of contracts

• Immediately provides a consistent basis for investors to evaluate our business going forwards

• Will drive even greater focus on performance across Capita

• Consulted widely with advisors, supported by EY and KPMG and their technical teams

• Profitable long-term contract portfolio continues to drive value for the Group


IFRS 15 re-cap – key points

No impact on:

Lifetime profitability of contracts

Cash flow of contracts

Majority of transactional businesses

Key impacts:

Revenue more evenly distributed over the life of

contracts and active software licences – timing

of profits re-profiled

Potentially lower profits or losses in early years

on contracts where there are significant upfront

restructuring costs or higher operating costs

prior to transformation – compensating increase

in profits in later years

Balance sheet includes

• New contract fulfilment assets created in the

process of transforming services

• Deferred income in relation to contracts where

payments have been received from clients to

undertake transformation in advance of

delivering planned outcomes


Illustrative example - Capita’s outsourcing proposition

Background:

• Saturn’s in-house function cost = £65m p.a.

• Post-transformation, Capita’s Target Operating Model (TOM) cost = £40m p.a.

• Cost to reach TOM = £100m:

• £10m - restructuring

• £40m - transformation/technology/transition (including £10m capital expenditure)

• £50m - operating costs above the TOM prior to the TOM being reached

Capita’s offer to Saturn - 10 year deal:

• Saturn’s cost to keep function in house = £650m

• Capita’s cost £400m + £10m + £40m + £50m = £500m

• Capita will run the function if Saturn pays Capita £550m

• Saturn saving = £100m Capita profit = £50m

Cash:

• The profile of the cash received from Saturn matches the profile of Capita’s spend


Contract Saturn - pre-IFRS 15

Operating costs

Transformation £30m

Restructuring

£10m

Transformation phase BAU phase

Va

lue

Time

Contract lifetime profit £50m

Pre-IFRS 15 revenue £550m

Cash received

Op

era

tin

g m

od

el a

t se

rvic

e

com

mencem

ent £65m

pa

Ta

rge

t o

pe

ratin

g

mo

de

l £

40

m

Accrued

income


Contract Saturn - IFRS 15

Operating costs

Op

era

tin

g m

od

el a

t se

rvic

e

co

mm

en

ce

me

nt £

65

m p

a

Ta

rge

t o

pe

ratin

g m

od

el

£4

0m

Va

lue

Time

Transformation phase BAU phase

Deferred income

Fixed asset depreciation and contract fulfillment asset utilisation £40m

Initial loss

Restructuring £10m

Contract lifetime profit £50m

IFRS 15 revenue £550m

Cash received


Contract Saturn - IFRS 15 (cont.)

• IFRS 15 revenue more evenly spread following the IFRS 15 series guidance and output method of recognition with a single performance obligation (green line)

• Operating costs unchanged (dark blue)

• Fixed asset depreciation and contract fulfilment cost utilisation spread over the contract lifetime (red)

• Restructuring costs expensed with no related revenues (light purple)

• Total profit unchanged, but profile over the contract lifetime different (yellow)

• Results in lower profits or losses (orange) in early stage of long term contracts

• Cash received unchanged (blue line)

• Increased deferred income as cumulative cash receipts greater than cumulative revenue recognised


Software - contract level analysis

Contract endContract inception Contract endContract inception

Maintenance revenue

Maintenance cost

(expensed in-period)

Licence revenue

Installation revenue

Installation cost


Maintenance revenue

Maintenance cost


Licence revenue

Installation revenue

Installation cost


Cash Cash

} Gross profit

} Cost

Typical Software

contract – Pre-IFRS

15 accounting

Typical Software

contract - IFRS 15

accounting

Go-live dateGo-live date


Underlying income statement

Pre-IFRS 15 IFRS 15

£m

Six months

ended June

2016*

£m

Six months

ended December

2016*

£m

Year ended

December 2016*

£m

Six months

ended June

2016*

£m

Six months

ended December

2016*

£m

Year ended

December 2016*

Revenue 2,258 2,324 4,582 2,131 2,226 4,357

Operating profit 290 191 481 166 169 335

Interest (32) (34) (66) (32) (34) (66)

Profit before tax 257 158 415 134 135 269

Profit attributable to

shareholders204 122 326 107 104 211

Basic eps (pence) 30.70 18.36 49.06 16.12 15.56 31.68

*Excludes specific items which include: intangible amortisation, impairments, net contingent consideration movements, other non-recurring items, non-cash mark to market finance costs

All Pre-IFRS 15 are based on discontinued operations


Underlying PBT bridge FY 2016

415

269

(9) (1)

(31)(49)

(31) (59)(19)

14

39

-

50

100

150

200

250

300

350

400

450

2016 FY Pre-IFRS 15 PBT

Active Licences- DSS*

Networks PoC -PiT*

Accrued Incomereduction as not

"highlyprobable"*

Pricesmoothing*

Transformationcosts

expensed*

Contractmodification*

Other* 2016 FY PBTrestated

Restructuring

provisions

Accrued

income

write back

*These movements taken together are as a result of the impact on revenue of the application of IFRS 15


Balance sheet 2016

• Contract fulfilment assets created

• Deferred income significantly increased

• Deferred tax asset increase

• Net liabilities on the consolidated Group balance sheet

• Capita plc company balance sheet unchanged

£m

Year ended

December 2016

Pre-IFRS 15

£m

Year ended

December 2016

IFRS 15

Contract fulfilment assets

non-currentN/A 241

Contract fulfilment assets

currentN/A 42

Accrued income – Current 364 189

Accrued income – Non

current80 -

Deferred income – Current (321) (1,375)

Deferred income – Non-

current(14) (217)

Net deferred tax 10 193

Net assets/(liabilities) 483 (553)


Documents

Investor presentation - Capita/media/Files/C/Capita-IR-V2/reports-and... · Capita plc October 2017 . Contents Overview of 2017 and investment proposition 3 –4 ... Southampton digital