Earnings Call: H1 2021

Aug 6, 2021

Now have the pleasure of welcoming our host, John Lewis, CEO and Tim Wellert, CFO. John, over to you. Melissa, thank you, and good morning, everyone, and welcome to Capita's half year twenty twenty one financial results presentation. As usual, I draw your attention to the disclaimer on Slide 2. So I'm pleased to report We are making tangible progress on our transformation strategy and the priorities we set out at our full year results in March. In 2021, we are targeting our 1st year on year organic growth for 6 years. For the group as a whole, we maintained revenue in H1 With Q2 4.5 percent ahead of last year, and we have the order book and pipeline of opportunities to grow in the second half. New contract wins drove year on year growth in Government Services, People Solutions and Technology Solutions, these being offset By declines elsewhere, including the continued low levels of activity due to COVID in our travel and entertainment and enforcement business. The robust improvements in operating delivery we have seen over the last 2 years have also continued. These have combined Increased operating margins by 3 20 basis points year on year. And we have generated $536,000,000 from disposals year to date, Including ESS and Axolos, 75% of the targeted $700,000,000 we communicated in March. Further disposals are now underway and the remaining 25% of this disposal proceeds target will be delivered by the end of the first half twenty twenty two, 6 months earlier than previously planned. We have extended our RCF out to August 3 and have completed our triennial pension valuation. Liquidity remains strong and is more than sufficient to meet our debt repayment obligations In 2022, earlier this week, we transitioned to our new operating model. We now have 2 core divisions, Capital Experience And Capital Public Services and an expanded non core division, Capital Portfolio. The structure is both more client focused, Operationally efficient and cost effective and will support sustainable revenue growth and cash generation. We will cover off these points in more detail Later in the presentation. At this point, I would like to say thank you to all our 55,000 colleagues. The progress we have made It's only been possible through their continued hard work, professionalism and commitment, and I'm honored and proud to work alongside them. Let me now hand over to Tim Weller, our new CFO, who joined us in May and who will take you through the first half financial performance. Tim? Thanks, John, and good morning, everyone. It's great to be here. And as you'll recognize from John's introductory comments, this is a really good time to be joining Capita. The organizational simplicity and strategic logic of the new operational structure establishes a firm foundation As the business inflects to top line growth. John and the team have made huge progress in efficiency delivery, which is evident in our bottom line progression in the first half With more to come in the future. And finally, some very important steps have been taken in the last few weeks to strengthen the balance sheet, which I'll go into in more detail in the next few Slide. All this puts us firmly on track to deliver on our plans for 2021 and to generate sustainable free cash flow in 2022 and beyond. Now turning to Slide 5 for our financial highlights. As in previous presentations, we show our results on an adjusted basis, which Excludes the impact of businesses exited and the trading results of Axolos, which has been shown as held for sale at the period end. Despite the ongoing impact of COVID-nineteen, adjusted revenue was maintained in line with the first half of last year with PBT and EBITDA improvement Reflecting that revenue stability and ongoing efficiency delivery. Cash generated by operations reduced by 7% compared with the prior year, which As previously disclosed, we benefited from $77,000,000 of advanced receipts arising as a result of the COVID pandemic. Free cash flow increased by 12% as the reduction in adjusted cash generated operations was more than offset by lower capital expenditure, interest and tax paid. And we delivered a step reduction in net debt in the half principally reflecting the initial ESS disposal proceeds, partially offset by the expected one off Catch up increase in pension deficit contributions. Turning now to revenue on Slide 6. Puts and takes led to the in line revenue performance as shown in the chart. In period revenue impact from contract losses halved year on year, reflecting our sustained focus on retention and service delivery. The relatively small ongoing contract scope and volume reductions Reflects 2020 pandemic related work and other projects in customer management, which did not repeat in 2021. We've seen improvement in our transactional revenue, which in 2020 was particularly impacted by COVID-nineteen when the business experienced a negative impact of around 80,000,000 This half, we saw the biggest recovery in Technology Solutions and People Solutions. The first half benefited from a number of notable wins, Including the commencement of the Royal Navy training contract and the job entry targeted support contract, which commenced in February. And these were combined The annualized impact of the defense and rescue contract, the smaller wins within customer management and software. To provide a view of revenue trends over the half, the slide shows the period on period progression in Q1 and Q2. As you can see, Q1 this year was down 4% on Q1 2020, which was largely unaffected by COVID-nineteen, Q2 saw an inflection to growth with revenues up 4.5%. We're particularly encouraged by the performance in this quarter It drives mainly from the major contract wins I just outlined rather than a bounce back in our COVID impacted business volumes. Moving on to our profit before tax bridge as shown on Slide 7. There are a number of key drivers behind the substantial step up in profit In the first half, firstly, to ensure a like for like starting point, we've adjusted for the 2020 one off, totaling $12,000,000 Which included contract asset impairments recognized in customer management and an increase in contract provisions. The margin effect of revenue losses, Scope and volume, transactional changes and contract wins come to a net €4,000,000 negative with the ramp up made in Q2 from new wins Not yet offsetting the impact of contract losses. Our successful transformation program continued to deliver substantial savings in the first half of twenty twenty one For the $79,000,000 period on period benefit. In last year's interim results, we outlined the impact The group's holiday pay accrual had on the first half of twenty twenty. The impact of this is significantly unwound in 2021 His colleagues stepped up the usage of their holiday entitlement. Despite this, we still expect the phasing of leave accrual recognition To result in a weighting operating profit for the second half. Final block on the slide Shows the period on period impact of the reinstatement of the employee bonus scheme this year, with $25,000,000 accrued at 30th June, Compared with the release of 2019, dollars 50,000,000 bonus accrual in the first half of twenty twenty. Moving into the second half, We expect to see the rewards for the hard work by the team on cost transformation over the last years with revenue growth and operating leverage driving the bottom line. Turning now to Slide 8, which reconciles our adjusted profit for tax measure with reported PBT. Business exits reflect the EFS and Irish Life and pensions disposals, which generated a $240,000,000 disposal profit And classification of tax losses held to fail at 30th June. Restructuring costs of around $30,000,000 was slightly lower than the comparative period. We expect strategic restructuring costs to increase in the second half with the implementation of the future capital structure was effective from August. Overall for the year, we're projecting restructuring costs of between $75,000,000 $90,000,000 in what will be our last year substantial below the line Investment. Litigation in claims include a $5,000,000 insurance receipt in respect to the previously recognized claim and a small move in Provisions in respect of specific historical claims. In summary, the adjusting items added $260,000,000 to our adjusted PBT, Bringing the overall year on year increase to €290,000,000 On Slide 9, We provide the divisional revenue and operating profit performance under the organization structure, which existed during the period. Today's announcement provides further detail on the financial performance and key achievements for each of the divisions operated in the first half. On Slide 10, we provide a pro form a analysis of first half revenues under the organization structure, which has just been put into effect. And later this year, we plan to provide full historical pro form a financials under the new divisional structure. As today's announcement makes clear, our 2 new client focused core divisions are at different stages in their transformation journeys And are facing into markets that are recovering at different rates. UK government market is strong, reflecting the 8.6% pro form a growth Shown in Capital Public Service, whereas the private sector is less strong and Capital Experience saw a 7.5% revenue decline in the first half. Nevertheless, as I noted earlier, overall, we expect the Group to return to revenue growth this year, despite the ongoing impact of COVID-nineteen. We remain on track to deliver cost savings of $50,000,000 in 2022 from the simplification inherent in the new group structure. Turning now to the cash flow and net debt movements as summarized in Slide 11. Operating cash flow conversion Has fallen from 176 percent to 121%, reflecting a reversal of the working capital benefit in the prior year of COVID-nineteen related advance receipts, Partially offset by advanced payments from a couple of our major customers this year. Whilst there's been a net cash flow benefit in the first half Working capital movements, we currently expect a material working capital outflow in the second half, reflecting the unwind of advanced customer payments I've just mentioned Across the balance of the year, together with the natural expansion in working capital as we transition to revenue growth. Overall, we're expecting operating cash flow conversion for the full year to be between 65% 75% in 2021 Before reverting to a more normalized 80% to 90% into 2022 and beyond. Capital investments fell period on period reflecting ongoing COVID-nineteen cash preservation measures and the completion in 2020 of a number of transformation projects. We expect a step up in capital spend in the second half to somewhere between $35,000,000 $45,000,000 as we move into the growth phase. There were a number of other cash flows during the first half of twenty twenty one, which impacted the overall movement in net debt. The largest obviously being the proceeds received on the disposal in February offset by the expected one off additional pension contributions. Additionally, we saw a small outflow in the first half From the reversal of the one off VAT phasing benefit received in 2020 and expect the bulk of the rest of the 2020 benefit to reverse in the second half. Overall, net debt reduced by $183,000,000 to $894,000,000 at the end of June. On Slide 12, we itemize the material cash flow headwinds the group is currently exposed to Show an estimate of how these are expected to develop in the second half of the year and twenty twenty two. On the largest outflows in 2021 Will be the repayment of deferred VAT under government's COVID-nineteen support measures, which as I just noted, would largely be repaid by the end of the year. As I explained earlier, there have been substantial catch up pension deficit contributions in the first half. Following the agreement reached in June with the pension trustees in respect of the triennial valuation, we expect to make a further regular deficit contribution of around 14,000,000 In the second half, dollars 30,000,000 in each of 20222023 and dollars 50,000,000 a year from 2024 to 2026. Notwithstanding the step up in restructuring costs expected in the second half of the year as we implement the new organization structure, Moving into 2022, we expect restructuring costs to be materially lower and are not planning to be calling restructuring costs out separately Adjusting items beyond the current financial year. Overall, the material reduction in cash flow headwinds expected as we move into 2022 It's one of the key factors which underpinned the transition to sustainable free cash flow from that year onwards. On Slide 13, we set out the Group's liquidity position and summarize some of the key steps taken recently to strengthen the Group's balance sheet. At that 30th June, we had substantial liquidity with net cash of $242,000,000 and a wholly undrawn revolver. Current $452,000,000 revolving credit facility expires on 31 August 2022. In June this year, we entered into a new RCF of €300,000,000 covering the period from August 2022 to August 2023, With a further extension to August 2024 contingent on a number of conditions as outlined in the half year results announcement. Last week, we received total proceeds of $227,000,000 in respect to the Axos transaction and the contingent consideration from the ESS sale. In aggregate, we have now received around 75% of the $700,000,000 target for disposal proceeds that we set out in March. And given the process is underway, we remain confident that the balance will be delivered across the remainder of 2021 and the first half of twenty twenty two. In July, we repaid $159,000,000 of the U. S. Private note, leaving some $280,000,000 of additional maturities between now And the end of 2022. The Group's current strong liquidity position provides the financial resources to address forthcoming maturities with headroom to spare even before the benefit of the expected further disposal proceeds I just talked about. We'll therefore be taking a measured approach to any potential refinancing and expect to be able to take our time to implement a longer term debt solution at the appropriate moment. So finally, as I said on Slide 14 and returning to the comments I made at the start about this being a really good time to join Capita, We've delivered an encouraging first half financial performance with strong bottom line progression in line with our expectations. The revenue trends we've seen in the first half and the new operational structure create a platform for revenue growth in the second half. As a result of the various moving parts in cash flows, we expect net debt to be broadly flat across the remainder of the year before the benefit of any further disposals. Given the material reduction, we expect in cash flow headwinds beyond this year. We are on track for sustainable free cash flow in 2022. And all of this is underpinned by the substantial progress made recently in strengthening the balance sheet with more to come from the ongoing disposal program. So with that, I hand back to John for the strategic update. Thanks, Tim. At the heart of our strategy is our commitment to being a purpose led responsible business working to create a sustainable future for all of our stakeholders. This represents our license to operate in the markets we serve and in particular ensures we are strongly aligned to the government's Social Value Act. Our purpose, creating better outcomes, has also been a key driver of the needed cultural change that was required within the organization. From September, all UK government suppliers with contracts with annual values in excess of $5,000,000 will have to commit to being net 0 by 2,050 a published carbon reduction plan. This is something we have been working on for well over a year and have well defined plans achieve 3 milestones on our road to net 0. We're committed to neutralizing our Scope 1 and 2 operational emissions by 2025, We'll add Scope 3 Business Travel by 2,030 and finally by 2,035 include our remaining Scope 3 emissions taking us to net 0. In February of this year, we achieved Science Based Targets initiative accreditation, which independently ensures our targets are robust and credible. We have continued to focus on the safety and well-being of our people through the pandemic and over 40,000 are currently working from home And many will continue to do so as we adopt our new ways of working hybrid model. And as I've stated previously, our purpose, we create better outcomes And what it stands for is a foundational element of Captur being a sustainably successful company. As Tim stated, this set of results record the first tangible benefits from the investment in people, systems, products and client service delivery made over the last 3 years. These feed into a virtuous circle of sustainable growth in revenue, margins And cash. Our net promoter score at +32 tells you that our investment in client service delivery is recognized, Something that is fundamental to renewing and growing our business with existing clients. With our clients today, trust and engagement have improved and we have clearer insights to their needs and the revenue opportunities these create. Our new much more client centric operating model will further improve that focus, enabling our client partners to bring more of Capita to their respective accounts. The impact of winning work on better commercial terms that create value for Capita and its shareholders is also now much more visible. The improved discipline on bids over the 3 years no longer serves to offset cash leakage on historic contracts, but is now beginning to drive margin growth. And finally, we are executing strongly on our new contracts, delivering on bid margins and creating further growth opportunities as a result. This is the virtuous circle we continue to perpetuate to create sustainable revenue and margin growth. I'm pleased with the first half sales performance. Previously, our priority had been to fix those contracts that had operational issues and unhappy clients. With that considerable effort and cost largely behind us, we're now able to bring more resources and energy to investing in our capabilities For long term sustainable growth. And as Tim showed, we inflected to growth in Q2 ahead of any material COVID bounce back from businesses such as Travel and Events and Enforcement. We won just shy of $2,600,000,000 of new business in the first half, 70% more than we did over the same period last year. Dollars 925,000,000 of this came from our Royal Navy training contract, But even excluding that, we still increased total contract value by 9% year on year. Our investment in the professionalization of our sales organizations means we're also better at winning business. We had a 76% win rate in the first half, A 14 point increase on the prior year. And our strength in sales performance is further evidenced by our strong in year revenue growth, Up 13% on last. And finally, we have further reduced revenue attrition associated with the loss of large scopes of work Such as that for local government last year or Prudential and Marsh the year before. Our contract renewal rate remains high at 89%, Itself an indicator of how well we are delivering for our clients today. These collectively are the building blocks from which we expect to grow revenue This year and into the future. As a result of the work we have won in the first half, the order book increased By a net €800,000,000 more than €2,000,000,000 of pipeline opportunities moved onto the order book over that period. And in the last 12 months, we have increased our 2022 pipeline by over $2,000,000,000 Our sales data also shows that we are starting to realize the change of work associated with our consult, transform, deliver engagement model. We're winning more strategically valuable and higher margin consulting And transformational work, engagements where we can monetize our depth of understanding of clients' needs and the solutions to them. This change in mix is one of the core pillars of our margin enhancement strategy and in future we will share the percentages of WorkONE in each category. Examples in Capital Public would be our consulting and transformational work for Network Rail or our work for the Joint Information Systems Committee. Capital Experience is continuing to expand Scopes beyond traditional call center delivery to more transformational work, collaborating with clients to implement digital solutions That drives superior customer outcomes, while also of course reducing cost to serve. We're currently working with a major financial services client And a transportation sector client on bids that offer transformational services as well as just lower cost to deliver. Our focus on the professionalization of our sales function is also generating insights on who our highest growth potential clients are And the types of solutions we're most likely to sell to them. 98% of the total contract value sold in the first half was with our top 10 key clients. And importantly, dollars 1,600,000,000 of that, more than 60% was from solutions we had not previously sold to them. In other words, we're doing a better job of increasing our share of spend and growing revenues from our top clients. Over $2,000,000,000 of work was in 10 market offerings. These scalable repeatable solutions include complex transformation as with the Department of Education, Access to skills as with NHS, digital connectivity with Transport for London and customer experience transformation and digital services for European Telco as well as Tesco Mobile. And those same 10 market offerings, which have demonstrable market competitiveness Form 70% of the weighted pipeline for the rest of the year. Now as determined as we are to grow the top line, we will only do so on pipeline That have the right risk and margin profile. Our well established government processes, including our contract review committees, Ensure that we comprehend execution risk and bid appropriate margins for the work in our pipeline. As a result, Average bid margin is now 11% since the start of the transformation, reflecting this disciplined approach. And on renewals, our average margin uplift on recent significant negotiations has been 6 percentage points higher than their historic performance. Our disciplined approach is further evidenced by the fact that we ultimately chose not to bid on almost $400,000,000 of pipeline opportunities in the first half As we didn't consider the risk reward profile to be appropriate. The operational performance of our contract portfolio was again strong In the first half with contract delivery KPIs up a further 1% on H1 2020. Our contract delivery performance is now consistently in line However, we're a long way from being complacent and we have a number of areas, for example, our pensions administration business Where we can better serve customers and do so more efficiently. We're also delivering well on our major new contracts, in particular, Defense Fire and Rescue The MoD and training for the Royal Navy with operational and financial KPIs in line with expectations. Delivering against the original bid plan is another foundational success factor. First, it speaks to a more mature, disciplined and lower risk execution capability. And second, delighted clients generate incremental growth opportunities. We have already won over $80,000,000 of incremental TCV On the Royal Navy training and defense fire and rescue contracts since their start with further opportunities in the pipeline of over 300,000,000 And we look forward to building on this trend. Now we have updated you at every set of results since 2018 on our problematic legacy contracts. These are costing us our reputation, client relationships, our time and most of all our cash. This year, we will complete The resolution of the final two, electronic monitoring and PCSE. Along with Army Recruitment and Molcom Debitel, These four contracts have to date cost to capital CAD230 1,000,000 in lifetime cash. This compares to the planned $80,000,000 of cash contribution capital expected at the time these contracts were signed between 20122015. This gap encapsulates why we have put such emphasis on bid discipline and contract execution. We're now 98% of the way through digesting the cost of these contracts and will be finished by the end of this year. And from next year, we expect that cash contribution To be positive. In the case of Army recruitment and PCSE, we have now also won extensions with superior commercial terms. If we look at the 4 largest contracts won since the start of the transformation, representing €1,900,000,000 of TCV Through our more disciplined bidding and stronger operational control, our forecast for cash generation is slightly ahead of that expected when they were bid. We have made consistent progress on removing costs from the business over multiple years and have delivered $79,000,000 in savings year to date. Historically, this has not been sufficient to protect margins after the impact of historic revenue decline. I see it as another important milestone for the transformation that in H1, The impact of these sustainable cost savings is positively impacting the bottom line. Day to day cost competitiveness will remain An evergreen part of our culture and there remains more we can do. And through the remainder of 2021 and into 2022, we will see the next wave of efficiency benefits Simplifying our organization and we remain on track to deliver $50,000,000 per annum in cost savings next year. Now earlier this week, we switched to our new operating model with its 2 core divisions. Capital Public Service is focused On serving the UK public sector, WealthCapture Experience is focused on customer experience solutions for the UK, Irish, German and Swiss markets. Our core divisions have demonstrably competitive market offerings and are strong players in their respective markets. And while both operate the same consult, transform and deliver business model. They will address their respective markets and client needs separately. Our 3rd division, capital portfolio, Houses are non core operations and we will exit these businesses over the next couple of years. The new structure will have several benefits Over the previous one. 1st, having industry verticals and their associated clients as the primary axis of our operating model will drive greater client focus And support improved revenue performance and accountability. 2nd, the simplified operating structure increases efficiency and presents Further cost out opportunities through a reduction in spans and layers. It also simplifies our P and L accountability. 3rd, lead overhead supports sustainable cash generation. While the heavy lifting of the transformation period is now largely behind us, We're now able to maintain governance and oversight with a more normalized central cost base and more efficient shared services. Ahead of the full year results in early 2022, we will report in the new structure for the first time and we will also provide you with the full comparative financial information On a pro form a basis. Before then, let me give you some additional insight into each division starting with Public Service. Capital Public Service is the market leader in providing business process services to the UK government across key white wall departments In the regions and to hundreds of local authorities. Through our public sector, we're proud and privileged to serve millions of UK citizens, Including many of society's most vulnerable and recognize the responsibility this brings. The legacy issues in some of our contracts, as I've already said, are Very much largely behind us and we have a reputation for delivery. And this is a growing market around 7 per annum according to the latest industry statistics as government strives to deliver superior citizen services for less cost, Increasingly leveraging digital technology to achieve this. We grew at 8.6% pro form a in the first half of this year. This is a direct result of our investment in fixing contracts, improving operational delivery and efficiency, standardizing core digital technology platforms And building an improved understanding of specific client needs. In particular, we're starting to see the benefit of being on many more government frameworks. And since 2020, we have won positions on 24 frameworks, giving us access to $23,000,000,000 of governmental spend. And so far this year, we have won positions on framework contracts with the Department of Education, the Department of Work and Pensions and the Crown Commercial Service. And a further $13,000,000,000 of frameworks remains in our pipeline to bid. From seeing declines in its revenue, Order book and margins over many years, the outlook for public service is now robust and we expect revenue and margins to continue their improved trajectory. A good example of where Capital Public Service can succeed is the Royal Navy training contract, where our approach Has always been one of collaboration both with the client and with our partners to bring together the competencies and technology to deliver a modernized, Technologically advanced and efficient training capability. Indeed, we have already won praise and recognition from the client for the seamless transition of service From the prior provider and the improved quality of service we are providing. Cavitec experience brings together a number of our scalable solutions Customer Management, People Solutions and Software. We are a significant player in the UK, Ireland, Germany and Switzerland, Focusing on serving our clients' customers across 5 main areas of expertise financial services, telcos, Transport, Utilities and Retail. With the increasing move to customer self-service, this too is a growing market And our digital omni channel platform, very importantly, our sector expertise and our efficient resource base means we can offer attractive transformation However, as Tim has already stated, capital experience is earlier in its transformation journey than our public service division. Revenue declined in the first half and we expect that trend to persist for at least the rest of this year as the impact of recent losses with the likes of Debenhams and FirstGroup take Effect. However, we have a solid pipeline of opportunities and some notable recent wins for TESSCO Mobile and a major European telco announced earlier this year, And we remain confident in our ability to grow this business. There's also a clear plan in place to improve profit and cash generation Through our new operating model and through our reduced overheads in property. A good example of where we bring all this together is in our work for Southern Water. Domestic and Business Southern Water customers engage with Capita for all aspects of their service from the reporting of leaks to build printing and mailing to revenue collections. Such broad scopes of work create significant opportunity for our full range of customer experience solutions, giving us the scope for greater transformational efficiency And customer service improvement. By partnering with the clients to establish agreed outcomes and providing our colleagues with the right digital and data support tools, We have been able to deliver significant improvements in operations and customer satisfaction as evidenced on this slide. Those businesses that did not fit into either capital experience or public service for strategic reasons have, of course, been put into capital portfolio, including the remaining assets of the Specialist Service division and one off the shelf software assets. This division also includes the most COVID impacted parts of Capita, specifically our enforcement business and our corporate travel and events agency, recently rebranded as Agito. We are executing on a plan to dispose all of these businesses over the next couple of years and to simplify Both the day to day management and the sales processes, we have organized them into 7 logical bundles as outlined on this slide. In 2020, the assets now in the division recorded revenue of around 550,000,000 In additions to the disposals we announced in March, which are ongoing, we're currently preparing further assets for disposal later this year or early next. The combined 2020 revenue for all the disposals currently underway was around $200,000,000 We have already received 70 5% of the $700,000,000 of disposal processes we targeted in March. And as we mentioned earlier, we expect to meet this target In the first half of twenty twenty two. Thereafter, with timing to some extent depending on COVID recovery rate, we still have more than 350,000,000 So in summary, we have made tangible progress on our strategy and the priorities we set out in March. We can see the first signs of revenue growth and the benefits of operating leverage that follow ahead of any COVID bounce back. We have made material progress on the balance sheet through the significant disposal proceeds received and by extending the RCF. This means we already have the liquidity in place to meet upcoming debt maturities, whilst pressing ahead with an accelerated disposal program. We will therefore take, as Tim has said, a measured approach to any potential refinancing to ensure that the longer term balance sheet solution is one that is best for the company. And with a simpler, more efficient, more client focused operating model now in place, we look forward to driving sustainable growth and cash generation for the long term. Thank you. And for that, Melissa, we will open it up. With that, we will open it up for questions. And when preparing to ask your question, please ensure your phone is unmuted locally. You have a couple of questions that have come in. Our first question comes from Paul Sullivan of Barclays. Paul, please go ahead. Yes. Good morning, everyone. Firstly, on people, John, I mean, can you talk about how you are retaining and motivating the Strategic hires you made at the very beginning of the process. And what do you think is sort of working and what's sort of still not working from a big picture perspective? Secondly, just looking at sort of the profit expectations for next year, it looks like the market has taken So this year's profit expectations and just sort of thrown in the €50,000,000,000 equating to Your additional savings. Is that still the right way to look at it in your view as it doesn't seem to give you much credit for underlying improvement At this core business. And then finally on free cash flow, I think you've refined the definition there a little bit. But in terms of the bottom line, Yes. When we think of cash and net debt reduction before disposals, should we be looking at net debt reduction or should we be seeing net debt reduction Before M and A in 2022? Thank you. Paul, good morning. Thanks for those questions. I'll let Tim address 'twenty two pivot of free cash flow definition. Let me start with people. Look, as I think you know, when we hired the leadership team To execute on this transformation, we were very, very transparent with regard to what that would entail and what it would take. And We put particular emphasis not just on ensuring we had people that had the competency to perform the work, but that they would have the resilience And long term commitment to stick with what we knew would be a multiyear transformation. And that is very much proven to be the case. We have an excellent Executive leadership team in place today, who are very committed to seeing the transformation of Capitec. And obviously, Results such as those which we have presented today give all of us faith and encouragement in our ability to do that. If we look more broadly across the organization, we are seeing some uptick in voluntary attrition, but I don't think that's unique to us. We're seeing an increase in attrition in some of our IT sectors in particular, and that's broadly reflective of what's happening in the market Overall, I think to your second question about what's working. I mean, 1st and foremost, we have to drive cultural change, as We said right at the outset. And our commitment to being purpose led has arguably been the single biggest positive lever of change there. The culture at Capita has changed really quite dramatically over the course of the last three years. But I think also I would suggest that our focus on delivering for our clients, being there for our clients, fixing problematic contracts, Renewing reputations has been instrumental in creating a foundation for growth. And the fact that We have seen renewal rates on contracts improve to the extent that they have. And the fact That we have seen a further market reduction in the level of revenue attrition this year, I think speaks to how well we are now serving our clients. With the move to the new operating model, we sort of put that on steroids, Having an industry vertical focus, having a client centric focus, I think we give ourselves an opportunity to be even more focused on Delighting our clients, which is an expression used regularly and ultimately as a result of that realizing further growth opportunities. Tim? Yes. On the 2022 progression, the market may well be just factoring in the Flow through the cost savings. And as you rightly say, we identified $50,000,000 of additional cost savings coming from the future capital structure. But I guess in terms of our strategic developments, clearly, we are looking for Revenue growth and in particular margin expansion from the richer mix of products and services we provide to our customers. And therefore, we would have an aspiration that this is a profit progression driven by more than just The cost reduction program. And then in terms of free cash flow, To be clear, we haven't changed the definition of free cash flow. That remains the same. But what we are saying For 2022, is we should be measured by reported cash flow as opposed to Adjusted cash flow. And the big adjustments that have been made in moving between reported and adjusted There's been the reversal of pension deficit contributions and restructuring costs. So essentially, historically, Adjusted free cash flow has always been better than reported free cash flow in respect to those two elements. So if you like, by moving from adjusted to reported and saying that that is the number in 2022, that We'll move into positive territory. We are giving ourselves a higher bar to cross. It is a more stretching target Because of the add back of the pension contributions and restructuring costs that have been made to date Emerging from reported to adjusted. The target is going to be based on our reported results. And so that points to net debt reduction next year before any more disposal proceeds. Is that the objective? That would be logical because essentially the number I'm talking about is the cash flow available to repay debt. Yes, great. Okay, that's very clear. Yes, got it. Thank you. Thanks, Paul. Our next question comes from David Brockton of Numis. David, your line is now open. Good morning all. Can I ask 3 as well please? Firstly, in respect of capital experience, How far away do you think we are before growth ex for that division? And to what extent is there still excess attrition That could play a part. One question is on the transactional business and the recovery that you Haven't seen so far this year. To what extent are you expecting some of the GBP 80,000,000 to recover over the near term? Or is the message today one that sort of the wins you've had and the progress you've made elsewhere are sort of supporting that and actually Further COVID recovery could be more upside. And then the final question just related to that question around staff attrition. Just keen to understand to what extent you've seen any inflationary pressure to date through the business and how you're responding to it? Thanks. David, good morning and thanks for the question. So let's start with Capital Experience. Yes. That is a business that we're still in the progress of improving the competitiveness of, Both in terms of the solutions we're able to take to market and our cost competitiveness. So we have A very clear set of plans we're executing upon to get that business onto a growth trajectory in the same way that we executed, of course, On our Capital and Public Service business. I don't want to be drawn on a timeframe within which we will inflect To growth again, but I am nevertheless encouraged by the pipeline of opportunities we have. Apologies for that. Our landlord, C. Magee, wanted to randomly have a fire test this morning. So let's come back, David, to your questions. We were talking about Aperture experience. So I don't want to be drawn on a timeframe, but we have a healthy pipeline of opportunities there, as I mentioned. We're demonstrably competitive. We're winning work in each of the geographies in which we operate. But there's more work yet to do on our overall And I think what also gives us encouragement there is this secular trend to customer self serve as more of us move to the web For purchasing decisions, clearly that creates more demand for the sorts of services we offer. I'll let Tim come back to the COVID businesses later on and in terms of the financial impact. But I would simply say that we are not betting Either in the second half of this year or initially in our plans for the first half of next that our COVID impacted businesses will come back So the revenue and PBIT performance that they delivered in 2019, some might very well Experience as a result of COVID structural change, those markets may experience structural change, of course, and I'm thinking about travel and events business in particular. In terms of staff attrition, I actually think I answered the question earlier on. We're not seeing attrition levels that are out with that the industry, Particularly in tech is seeing in general. And with your the question with regards to salary inflation, you. We budgeted 3% for salary cost inflation this year, which we have implemented. But we also in the majority of our contracts have indexation for salary inflation built in. So it is a pass on cost To our clients in many of the contracts we have. So we're less exposed to that than perhaps some are. Tim? Yes. On the COVID impacted businesses, in the first half, we've certainly seen a what I characterize as a small Net negative. So there is some recovery in some of the more directly impacted businesses just in transactional volumes. But In terms of the kind of one off work we saw in 2020, that has really disappeared. And therefore, we are still net negative. And that's still the case in Q2, as well clearly as Q1. Moving into the Second half of the year, there are some, if you like, green shoots that we're seeing in terms of volume increases in July, But it will be pretty optimistic to expect us to be getting back to 2019 levels in terms of those transactional volumes across the remainder of the year, so in terms of our own thinking, We are still expecting us to be trading at a level much lower than historically as a result of the ongoing impact of COVID. And David, just to be very clear, our belief in our ability to grow through the second half is driven much more By the contract wins we already have on the order book and our in year revenue performance Year to date and of course the pipeline of opportunities we see. So we're not banking on COVID recovery To deliver the lion's share of the revenue growth in the second half of the year. Thank you very much. That's very clear. Whilst we wait for any further questions to come in, we do have a webcast question I'm going to read out. This is from Andrew Brook So Tim, can you talk about CapEx plans, low spend in H1, ESP versus depreciation? What do you see as sustainable level. Yes. The CapEx in Page 1 was only $22,000,000 And as I mentioned, when talking through the slides, there was a significant high level of CapEx in the first half of last year. And the step down Between the 2 years was driven primarily by a number of transformation projects in 2020, Including, for example, our CRM, customer management system investment coming to an end. So to a degree, a lot of the transformation investment has stepped down. What I did point to In the second half of the year is an increase in CapEx and suggested that CapEx in H2 would be Between £35,000,000 £45,000,000 on top of the £22,000,000 spent in H1. And that reflects CapEx associated with the growth aspirations we've got in the business. Probably for trying to model a sustainable CapEx number into the future, I certainly wouldn't want to double the first half CapEx number. I'd probably be inclined to double the second half CapEx number, in other words, we're expecting to revert to a more normalized level of CapEx in the second half of the year At between €35,000,000 €45,000,000 or the half. We do have a couple of questions have come in on the phone line. Our first question comes from Christopher Bambury of Peel Hunt. Christopher, the line is yours. Hi, good morning. Could you please elaborate on some of the large opportunities in the pipeline and rebids for contracts coming up over the next 6 to 12 months? Thank you. Christopher, good morning. We'd be happy to do that. So let's take them division by Division, starting with the Habitat Public Service. So we have a healthy pipeline of opportunities There, I mentioned earlier on in our prepared remarks, the framework opportunities that we will be bidding Upon over the next year or so, totaling about $13,000,000,000 of governmental spend. But some of the other key ones would be A €200,000,000 GCV opportunity we have with the Department of Social Protection. We have a €35,000,000 With the Department for Education, we're looking at an opportunity around medical record Digitalization with NHS England with a value of around €105,000,000 A further extension to BTSE of €91,000,000 and then the Department of Finance in Northern Ireland has an opportunity that we're progressing with a value of around Thank you, Ian. That's in the remainder of this year. And Chris, if we look out to 2022, We have the renewal of the Department of Works and Pensions opportunity at $750,000,000 Transport for London, dollars 300,000,000 Department for Works and Pensions, contract center opportunity of $200,000,000 and we hope to make the announcement shortly On our position on the framework for contract centers, something we've not been on for a number of years, I hate to add. And then we've got an With GFL for GBP 200,000,000 and the Ministry of Defense for GBP 170,000,000. So an encouraging set of opportunities there. If we turn to experience, The big one in the remainder of this year is renewal of BBC TV licensing. That's at EUR 400,000,000. We have a number of other opportunities with Royal London, Board Guys, Scottish Power, which are around the €40,000,000 €50,000,000 €60,000,000 range. Going into 2022, one of the most significant opportunities is with Deutsche Banking Group, with their Connect partnership for £65,000,000 we've got another opportunity with them of an equivalent value. The renewal of Telefonica, British Airways around £100,000,000 VICI Group around Sankey. So those are examples of some of the more significant opportunities, combination there of renewals, of course, And new scopes of work. Thank you. We have I could add, Christopher, that if we look at the unweighted pipeline of opportunities and the pipeline coverage, we have More than 100% weighted pipeline coverage for our targeted revenue in the second half of the year. And if we look at the unweighted pipeline in the 2 divisions, we have in Capital Public Services, unweighted Around €9,800,000,000 of opportunities and in capital experience about €5,100,000,000 in unweighted opportunities. You. Our last question comes from Sussini Varanasi of Goldman Sachs. Sussini, your line is now open. Hi, good morning everyone. Just one for me please. And from the medium term, I appreciate there's a lot Uncertainty for the near term, but it's very helpful to see the market growth rates that you've given for the 2 different divisions there. How do you think about the growth Opportunities for you, the growth rate on average in the medium term that you expect to achieve, it should be in line with the market growth because of your position at the UK, can you maybe from the market, is that what you're targeting? And then on the profitability as well, how should we think about the profitability of those two divisions? Appreciate it's very early days, But anything on the target for the medium term would be helpful. Thank you. So, Seni, good morning. So let's talk to growth first and Tim will probably say something about profitability. Any self respecting Tim's CEO is going to want to grow their business at least at the rate at which the markets we're serving are growing and that's absolutely Our ambition and we outlined this morning 3rd party estimates of what we believe both the Capital Public Service market And the capital experience market will be growing at. And in fact, as you will have noticed in the first half of this year, we actually outgrew The market in public service, it's growing at about 6% to 7% and we grew at 8.6% year on year. So that is very much our objective and it's great to have The very substantial market share positions we do in the 2 divisional areas, we can build on that strong market share position To ensure with the solutions we have that we can sustain our growth over the long term. I'll let Tim say something about profit, but It is absolutely our intention at the Capital Markets Day, the timing of which we will announce subsequently to get into a lot more detail On the market opportunities by division, their growth rates and our propensity to achieve those. I suppose the question around profitability probably goes back to Paul's question around the progression from 2021 to 2022 in terms of, I think margins. And going beyond 'twenty two, you've got a couple of effects around margin. Number 1, quite naturally is operating leverage. So as revenue grows and we continue to operate with the efficient Support functions that are being created through the future capital reorganization, you're naturally going to get operating leverage driving Bottom line progression and therefore margin improvement. Of course, the other point goes back to The richer mix of service offerings we're creating for our clients, and all of which should expand Operating margins in the 2 client facing ongoing businesses. So both of those effects Well, should lead us to a higher level of margin than the business is currently delivering. Just a follow-up, if I may. I suppose What the market would be interested in understanding is, obviously, in public, in the garment services work, you're probably bidding on contracts If they offer high single digit or low double digit margins and understand that experienced businesses haven't inflected to growth yet, But we do have market data from other peers who are probably doing high single digits, double digit margins. So should we think about in the medium term that both these divisions can ultimately reach double digit EBIT margin level, is that the way to think about it, of course? Well, I mean, I think some of our competitors in that space In that space, we clearly benefit from global scale. The teleperformances of this world in particular, of course, we just do not have their Scale. And I think it's fair to say that they were well positioned because they were on the right framework contracts To leverage that scale from COVID in particular. But whilst we might not be able to achieve their margins, We should be able to get very close to them once we have executed on what we talked about earlier on, which is the further improvement Of our cost base and the further improvement of the digital offerings we offer the markets to grow that business. It's back. So it's a combination of cost base and the value we deliver for the client that ultimately then creates The margin enhancement trajectory that we're aspiring to deliver. Thank you very much. As we don't have any further questions, I'm just going to hand back to John and Tim for any closing remarks. I'd just like to thank everyone this morning for their interest in Capita.