Earnings Call: H2 2019

Mar 5, 2020

Well, good morning, everyone. I'd like to offer a warm welcome to people here in the room at Cabator's head office in London and also to everyone watching via the webcast. Thank you for your interest in capita and in our 2019 full year results. Some housekeeping, in the highly unlikely event that we have a fire alarm going off, I ask that you follow those who work with capital to the staircases, down at the far end of the lifts, the elevators, please. Okay. Before I start, naturally, I have to draw your attention to the legal text on this slide. Next slide, please, Stuart. So we have made good progress in 2019, even if we've not had it all our own way. I'm in no doubt that capital is in a much stronger position today than it was though we have much more work to do. And we have certainly laid the foundations for growth in 2020, something I'll come back to in a minute. And we've done that by improving dramatically our employee engagement. We've repaired customer service levels and client confidence in us. We now are effectively pivoting to markets with higher growth potential. We're channeling investment to software products and in demand transformational capabilities, and we've launched our consulting business. I will cover all of these in more detail in my broader section later on in the presentation. We had to work hard through some tough markets, but 2019 headlines are as expected, with profit in Livent guidance we gave a year ago. 2 years ago, we set out targets for 2020, including a goal of 200,000,000 in free cash flow and double digit margins. Naturally, I and the leadership team are disappointing. We are updating guidance on this today. The whole leadership team are resolved to deliver the transformation plan, while doing the right thing for the long term health of the business. This is reflected in our new and to deliver at least GBP 160,000,000 in free cash flow. My confidence in the long term of this business remains the same, and I am convinced that our plan remains one that is right to create a more focused, more sustainable, more predictable business generating growing free cash flow. Now this next slide is familiar to many of you and serves as a quick reminder of the overall transformation plan, which is underpinned by 3 imperatives to simplify, to strengthen, to succeed. We're focusing our business on those markets with attractive margins and strong long term secular growth trends where we have distinctive capabilities as a consulting, digitally enabled services and software business, and we have made good progress against all three of these imperatives, which is presented on the next slide. This presents an update on the key transformational work streams, and it is a slide, of course, we've shared with you before. The lighter dots represent where we are now. And the darker dots are the progress we expect to make in 2020. As we enter the 3rd year of our multi year transformation, we can look back on significant progress across a range of issues There is more to do, but we have made the necessary progress such that my top priority and the leadership's top priority this year is to deliver organic growth, and that will be the delivery of growth in this business, of course, for the first time in 5 years. Now let me hand over to Patrick to go through 2019 in detail. Patrick? Thank you, John Good morning to you all. I'm delighted to be with you after just over 1 year in post. 2019 was the 2nd year, in capital's multi year transformation and a lot has been achieved. There are many signs of progress on our journey towards becoming as simpler, stronger, more successful company generating free cash flow in a sustainable and predictable manner. However, as these results show, progress has been harder and more expensive than we had hoped, partly because we have chosen to invest for the long term and partly because some of the challenges could not have been fully scoped in early 2018. There is a lot to cover, so I'll start with an overall summary. Revenue and profits are in line with expectations with cost reductions offsetting investments, lost revenue, and lower margins on some contract renewals. Some of the benefits of the transformation work such as profit improvements on the 3 challenging contracts are reflected in the results. While our core growth businesses had largely shown growth in the second half, that growth has been, however, slower than we had hoped. As in 2018, the results have benefited from some one off items. As is to be expected in a complex group in transition. The cost and cash management controls and programs implemented over the last 2 years give us a better base and will continue to provide positive returns in 2020. Interest is reduced following the deleveraging in 2018. The balance sheet was significantly strengthened in 2018, but the headline net debt leverage ratio is at the top end of our range. As a result of lower conversion of EBITDA to cash and more investment being required The group has the liquidity it needs to continue the transformation journey. We expect this liquidity to further improve following the introduction of new funds to replace the current debt that matures over the next 18 months and as part of our drive for simplification, we decided recently to seek to dispose of a number of core noncore businesses, the proceeds from which will be recycled to strengthen the group. However, as we said at the half year, securing returns on our investments in the form of positive revenue growth and free cash flow generation are the priorities for 2020. So turning to revenue. As expected, revenue reduced year on year by around 4% This slide details the key drivers of this movement, many of which had been communicated previously. Firstly, the one off gains of $48,000,000 in 2018 on the termination of the Prudential and Marsh contracts, and then $105,000,000 of flow through from contracts lost in 2018, such as Prudential Marsh and the Defense Infrastructure Organization and then a further $109,000,000 of contract losses in 2019, including, as we have discussed, in local governments and then spread across other divisions. Delays in local authorities taking back work meant that the impact of these losses were lower than expected in 2019, but the majority of these have now come to an end. This should, of course, be set against strong retention rates on contract renewals, such as over 80% in customer management. Scope and volume change revenue has decreased due to high competition and market pressures in technology solutions and lower volumes in our life and pension contracts, and real estate and infrastructure business. Our transactional business has declined a little bit, particularly in specialist services. Contract wins of 107,000,000 is made up of 67 from the annualized impact of wins in the prior year, such as Transport for London, Zurich and the Financial Services compensation scheme, and 40,000,000 of new contract wins in 2019. Various call center and back office contracts and product sales and software. This, however, was not as much as expected, particularly in the second half of the year, which explains the emphasis we arising from termination payments and deferred income releases associated with contract terminations and changes. We've talked previously about 2 businesses, The closed book life and pensions contracts and multiyear, multi service, local authority contracts, as being structurally challenged or in run off. This is a more granular version of a slide that we have shown before. The light blue relates to the 2 business areas mentioned as structurally challenged, and the dark blue is the rest of capital. The data is presented on an adjusted half year basis. And this clearly highlights two important points: Firstly, as previously reported, the vast majority, some 85% of the revenue decline over the period, is concentrated in just those two areas. And secondly, the remainder of the group taken as a whole has seen revenues stabilize and in the second half, and modest return to growth in most divisions. In 2020, we expect further declines in the structurally challenged business to be more than offset by shows the data for the dark blue box analyzed by division. So this is not our total revenue, just that that isn't structurally challenged. And this slide shows that after excluding the structurally challenged runoff businesses, all divisions, except government services, for reasons explained on the slide, grew in the second half. Turning to a familiar topic, which is our cost out program. This has been one of the most financially successful aspects of our transformation so far. Capital had been run prior to 2018 as a collection of autonomous business units with limited collaboration or central direction. A disciplined, highly structured program with weekly challenge meetings across the business has delivered cumulative savings of 1,000,000, including an expected flow through of 1,000,000 into 2020. Some examples of that are the consolidation of 26 service desks in software into 1. We've closed another 32 properties and reduced our overall property footprint savings 7,700,000 in 2019, integration of business units in Technology Solutions, saving 8,000,000 and smarter travel using technology saving 1,800,000. In addition to these year on year savings, there have been in year and 1 off benefits. And as we leverage investments, for example, of over 10,000,000 that we have made in robotic process automation, and our existing offshore capabilities, there is more to come. However, as the following slide shows, there is more to the result than just revenue growth and cost out initiatives. This slide breaks up the revenue and cost impacts on profit. The margin from contract wins and the benefits from improved performance on 3 challenging contracts, which have been highlighted separately, are offset by the combined impact of contract losses The cost savings have been offset by cost inflation, mainly inflationary pay increases focused on lower paid colleagues, and investments in strengthening functions such as growth. A range of other group wide actions, such as a lower bonus accrual resulted in the final profit before tax number, which is in line with the range that I communicated at the start of the year. While I appreciate that this slide is busy, It does highlight the number of moving parts in a business that is not yet as simple as we would like. Looking at from a divisional perspective, Margins across the divisions grew from 11% to 12.2%, driven by cost out initiatives and supported in some divisions such as government services and specialist services by the one off benefits referred to earlier. This was offset by an increase in group costs, resulting in a small overall decline in margins. The increase in group costs reflects investments in technology, growth and our new consulting business which are targeted at the delivery of future revenue growth. Investments have also been made in other functions to strengthen governance and controls. We now, for example, have much improved controls over the risks accepted in new contracts, which will result in a more stable and predictable business which John will talk about later. These investments provide the resource and control we need to support the business as it grows. In 2020, we will, as part of the cost reduction work, look for further overhead efficiencies in some of the larger functions included in group costs. As you know, we are just profit to take account of items that we believe are not reflective of current trading. In 2018, the net effect of these items was less than 10,000,000. However, in 2019, it has been higher, which is why we exclude these items from adjusted results. There was a reduction in the amortization impairment of acquired intangibles because firstly, the previously acquired intangible rundown each year. And secondly, we haven't made material acquisitions in recent years. And finally, in 2018, there was a one off write down of some 62,000,000. Restructuring increased as the transformation program expanded in the year. The impact of business exits was reflected the in year trading losses of those businesses are $17,000,000 and write offs of $52,000,000 associated with 2 businesses being exited at year end. And of course, IFRS 16 was adopted in the year, but its impact is excluded to aid comparison with 2018. As expected, capital expenditure increased in 2019, in line with the transformation objectives as the investment in property and IT infrastructure continued. 2019 also saw a ramp up in expenditure on technology and growth. Looking forward, the level of capital expenditure will fall materially as the mix of work changes. For example, as clients move out of on premise and data center solutions, to cloud based architecture, CapEx reduces, and OpEx spend with cloud providers increases. Turning to cash flow. The first component of total cash flow is adjusted free cash flow. Which is one of the key metrics established at the time of the rights issue in 2018. On this slide, we have analyzed working capital to separate out the effect of contract driven movements, such as deferred income, accrued income, and contract fulfillment assets. This plus EBITDA gives cash from trading operations, which I think is a more helpful way to think about these movements rather than describing them as working capital outflows and provides a more stable and consistent view of the operating cash flows being generated by the business. This change has allowed us to focus in on the management of real working capital. We remain committed to paying all suppliers in line with the prompt payment code However, through improving and standardizing processes and controls, we are looking to improve our performance in our management of debtors and creditors in 2020. As described earlier, CapEx has increased. The tax line shows the impact of the tax refund received in 2018, following the implementation of IFRS 15. And finally, in 2018, the impact of the $110,000,000 to clear the receivables financing. However, that's not the whole cash flow story. As in 2018, there are a range of other cash flows that impact net debt. We continue to pay down our pension deficits in line with the plan agreed in 2018. This combined with the cash flow associated with the restructuring spend earlier, contributed to an increase in net debt of around 1,000,000. Other cash flows include the payment of dividends to joint venture partners. At the time of Over the last two years, through a mix of operating costs, restructuring and capital expenditure, we've invested some 650,000,000 spread across the increasing proportion of the investment is in operating costs and restructuring. The restructuring spend will continue into 2020, although at a lower level, And as I have said earlier, CapEx will also reduce in 2020 as the business mix changes. Overall, This will result in investment near 1,000,000, excluding the impact of 2020 OpEx investment. We will also make the final A few words on headline net debt. Last year, the business had 1,000,000 worth of cash. $200,000,000 of this was used to pay down debt that matured in 2019. The business cash outflow of $350,000,000 was a bit higher than expected, reflecting movements already described, resulting in headline net debt being at the top of the guidance range. But as we have said, while we remain focused on cost and cash management, it is taking longer than we had thought and requiring more investment. The chart in the bottom left shows that our net debt is lower over the last 2 years and much more stable as we managed period ends differently. For 2020, we expect headline net debt to be in line with current consensus, sorry, For 2020, we expect headline net debt to increase modestly and going forward to then decline as we reach the end of the restructuring changes and complete the final payment in the 3 year pension deficit reduction plan. A few words on outlook. In the light of the investment that has been made in building platforms for growth, we expect that revenue growth in our core businesses will translate into modest organic revenue growth for the group as a whole in 2020. Contractual working capital outflows will reduce by more than known contract movements, and our planned focus on the management of debtors and creditors will generate further benefits. Capital expenditure, as discussed earlier, will reduce significantly in 2020, and so adjusted free cash flow is expected to be at least 160,000,000 As a result of planned restructuring in the last of 3 agreed payments towards our pension deficit, net debt will rise modestly. All of these items are before taking accounts of the impact of potential disposals and the impact of IFRS 16. I'll now hand you back to John. Thank you, Patrick. As I said in my opening remarks, we have made significant progress over the last 2 years, and we are clearly in much better shape than we were in early 2018, and we have now set the foundations for growth. In this section of my presentation, I will provide more details of this progress, starting with an update on our initial focus on fixing what we inherited. We have done a lot of the heavy lifting on this, and thereby have substantially derisked our overall transformation plan. This creates the stable platform we need as a precursor to delivering long term sustainable revenue growth and growth in free cash flow. As it is my top priority this year, the second part of my deck will then go on to talk in more detail about how we plan to achieve this. Next slide. As a services company, we are only as good as the ability of our colleagues on any day to delight our clients' customers. And I would like to take this opportunity to thank all of our colleagues, for their hard work in 2019, which was another demanding year. We aspire to become a truly progressive, purpose led, responsible business, and our blueprint sets out 4 principles shown on this graphic, in support of our purpose, which you will remember, is we create better outcomes. This defines our desire to serve society and to drive value for all of our stakeholders. ESG strategy. And this has unquestionably helped us attract talent and change perceptions of capital in the last 2 years. One important government stakeholder told us, and I quote, capital's commitment to be at the forefront of social responsibility is recognized and welcomed by government. We need to invest in our people if we are to delight our clients, and we therefore took the decision to guarantee the real living wage, for our UK staff effective the 1st April this year. This improves the salaries of circa 6000 people, 6000 of our colleagues here at CAPITA. Together with improved parental pay and life insurance packages, we estimate the cost in 2020 will be circa 10,000,000 more than we planned when we put our transformation plan together in 2018. However, the long term benefit will be seen in further improvements in employee engagement, something I'll come back to, lower levels of voluntary departures, and therefore, lower recruitment costs and reduced cost of poor quality. 2 data points support this progress. I'm delighted that we have seen a 14 point improvement in this year's net employee Net Promoter Score and 72% of our colleagues are now proud to work for capita, which is a huge improvement in the just over 50% who would make that statement 2 years ago. The benefits of having an engaged and motivated team of colleagues can be seen all in the marked decrease in voluntary attrition over that same period and our improved customer net promoter score, something I will also come back to. For the first time in many years in Q3, our 3rd party defined reputational measure, amongst external stakeholders, became positive I want to emphasize that this is not about corporate ego, but is an important proxy for the improved operational performance that underpins Capital's transformation progress to date, and we are now much better perceived by broader, particularly influential stakeholders. In summary, this is a key foundational element to our much improved license to operate, a theme that will run through the rest of my presentation. Next slide. In 2018, many of you will remember we established the contract review committee to make sure that there is a consistent form of governance over any contract and scope of work we sign up to. Major improvements have been made to ensure that we derisk the scopes of work we commit to going forward. We have now embedded a more disciplined approach to what we choose to bid, and the risks and financial returns we seek from those bids. For example, much more detailed contract execution plans are defined prior to bid to flush out potential problems, rather than simply focusing on PBT. Cash returns over the lifetime of the contract also pay a significant part. This means we decided not to bid on a number of contract opportunities in 2019, This included Highways Agency contract where the opportunity cost was too high and an enforcement services contract where the scope terms and pricing opportunity did not match the risk profile we are willing to accept. Strategy also plays a key role here, of course. The Executive Committee also now also regularly reviews early stage operational performance on contracts to ensure that implementation is going to plan There is also a tie in here to investment we have made in our skilled program managers and in the evolve proprietary program management tool we have been using the last 18 months. And we have now also put in place a continuous process for feeding lessons learned back into the bidding process. We can already see the benefits of this far more disciplined approach, contract signed since 2018 have experienced far fewer operational issues than the legacy portfolio we inherited. And I'm pleased to say that the average net margin on contracts signed since 2018 exceeds 10%. The CRC then is another core building block of our transformation that makes capital a higher quality, lower risk business now and in the future. Now failing to deliver on our commitments to too many clients, including some very high profile contracts on some very high profile contracts, has been a drain on our resources for many years. Many of you are very familiar with these. And we have spoken regularly of fixing 3 key contracts. We remain on track to break even on each of these this year, and we are perhaps more importantly now embedding many of the lessons we've learned across our entire contract portfolio. I've worked in other industries where cost of poor quality, COPQ, metrics are well established, ultimately forming part of the routine performance management and pay for managers. We've created a new policy and methodology tool to begin to do the same at capita, and you will expect me to to update you, you can expect me to update you on this regularly. In 2019, I'm pleased to report that we saw a mark improvement in contract delivery performance. We are now hitting 92% of our key performance indicators on our entire portfolio of contracts, and while not, while not directly, comparable, we have also seen a 70% decline in the penalty payments to clients as you can see from the graph on the right. We are doing a far better job today than we were 2 years ago of delivering against our client, commitments. This has come at an additional short term cost as we rebuild our client's trust in our ability to deliver a fundamental and necessary precursor to us growing the business. Now the benefits of an ever more client centric approach and the investment to fixing poorly performing contracts can be seen in our improving client net promoter score, which is in positive territory for all of our divisions for the first time. This was a major contributing factor I'm particularly proud of the swing of 35 points in 1 year in our government services division, no small achievement, and the improvement speaks to a strong, to strong key stakeholder management, investments we have made to improve our service delivery an alignment of our values and sense of purpose with what government in particular now expects of its strategic suppliers. This is an essential element of our ability to win future government work, and it is another indicator, sorry, another indicator of client satisfaction is our contract renewal rates also showing a healthy improvement in here. Excluding people's solutions, we, where we've more work to do, the renewal rate in 2019 was 91%. Now our recruitment contract with the British Army, a contract to digitize and improve the process of recruitment has also made very significant progress. This contract is in fact a great example of the impact the investment we have talked about, can have. In 2017, 5 years into this contract, the contract was failing and the relationship between ourselves the army and the MOD was broken, in fact, recruitment into the army was a national issue. In 2018, we successfully reset the partnership with the army at very senior levels, and both parties agreed to dramatically better performance for the client and are currently within a few recruits of the regular soldier recruitment target of 94 4 or 9404 for the 12 months ending March 2020. I am very confident that we'll get there in the next 3 weeks, which will be the first time we have hit the target since the contract began. We have also improved other aspects of this contract as part of our broader digital transformation on that engagement. For instance, our candidate conversion rate is now 1 in 8, materially better than other complex public sector programs, such as the police. Now in 2019, we continue to review our business portfolio in line with our ambition to simplify capital. And focus on becoming a consulting, digitally enabled services and software technology business. To date, the portfolio simplification is focused on our Specialist Services division. This was put together, you'll remember, in 2018, and included several stand alone businesses that did not naturally including our government JVs, Ferra and Axalos would benefit from closer alignment with our core growth platforms, the regulated businesses, life and pensions and mortgage services and the Irish based customer services business are moving to customer management where they will benefit from shared best practice. Some of the other businesses and specialist services are likely to benefit from the focus of new owners, and we are progressing disposal options as we speak. Clearly not appropriate to give any more details at this stage, as you will understand, but we will keep you updated as and when we can. As Patrick has mentioned, the benefits of this simplification will be used to strengthen the core business. Now the second part of my presentation focuses on our plan to deliver revenue growth. Since 2018, we've learned a great deal about capital. Looking back, we now realized we underestimated the amount of effort it would take to fix all the issues we inherited. However, this is today we talked about the role emerging growth opportunities would play in our overall transformation. It is well known that capital hasn't grown organically for many years and yet the markets we serve are benefiting from long term secular growth trajectories. And there are two questions I ask myself and my team. One would be, why haven't we been growing? The second would be, and why do we believe we can grow in 2020? Taking these in turn, why haven't we been growing? First, we have been far too reliant historically on simply responding to tenders. And then essentially winning on price alone rather than using our deep expertise to truly understand client's needs and collaborate on solution design and sharing in more of but that reduced our ability to reuse, reuse components successfully and didn't always mean we cherished our client relationships as we should have. Thirdly, instead of investing in innovation or products, we prioritized diversification through acquisition, And finally, we had to deal with the extra pressure from the slowdown in contracting as a result of austerity and political uncertainty here in the UK. And why we, why am I now confident in our ability to grow this year? Well, firstly, the market opportunity is large, growing, and the client need clear. Although this is assuming no major market dislocation associated with coronavirus. Conventional analysis on capital usually focuses on the relatively low growth, government outsourcing or private sector BPO markets, where we have, of course, significant presence and ongoing opportunities. But that does not capture all of the more dynamic consulting, digitally enabled services, or soft wet markets, which we are also exposed to. I'm sure you are familiar with how advances in AI, robotics, IoT, 5G, cloud and cyber are throwing up opportunities and some threats to businesses and governments. Either way, they are looking to us, as well as others for help. Our clients have told us They want us to be far more proactive than we have been historically not reactive to tenders. They want us to offer their more transformational services and to innovate and lead them through the next phase of their business change. In PWC's global CEO survey last year, 81% of CEOs agreed that technological progress, Read Digital Transformation, will fundamentally change their organizations. This comes together in a UK digital transformation market estimated to be worth 1,000,000,000 annually and growing at 12% per annum, with the UK being right at the forefront of this dynamic trend. Using very importantly, our practitioner mindset, developed from being responsible for executing today, many of the business processes that need digitally transforming. We have already begun to build a track record applying these solutions to our clients, but there is more we can do. The graphic on the right of this slide captures how our business model has evolved to address this. Consulting is the front end, working with clients to design solutions, which are implemented in the change or transform phase, which then moves into the operational process at the half year has 4 distinct parts to it. First, we have refreshed the capital brand. By which I don't just mean the new imagery, we have engaged with our clients and conducting an advertising campaign to help people understand what capital now stands for, a modern purpose led, innovative differentiated business. Next, and for the first time at CAPITA, we have defined all of the products and services we sell and our first cut of the day to showed we had more than 180. From this long list, we were able to identify clusters of capabilities and products that best aligned to our clients' needs, which are scalable and repeatable, and these now inform our investment decisions. 3rd, we have addressed our lack of sales productivity by promoting a consultative sales process, launched CAPITAL Consulting. I'll come back to that. And restructured sales incentives. Finally, we have recognized parts of our account management approach. We've adopted a single instance of CRM, Salesforce, across capital, and we are rolling out dedicated expert client partners who are responsible for understanding their clients' needs and bringing all the relevant parts of capital to them. Let me now go into each of these in a bit more detail. At the beginning of 2019, we commissioned a comprehensive third party study into what our clients thought of us and wanted from us. This gave us clear insight that our clients thought that capital was a strong and resilient brand in the B2B and B2G spaces in stark contrast to how we're often portrayed in the media in the more familiar B2C space. As the chart on this slide shows, and perhaps this comes as a surprise to some of you, the capital brand holds its own in the international tech enabled professional services peer group, and we are significantly ahead of traditional outsources. Our clients trust us to know their sector and their business needs inside out, often better than they do themselves, and to be able to deliver complex transformation projects. And in the market today, we are displacing more established incumbents as you can see from some of this year's wins against the so called top 3 on this slide. More than half of our investments in the past 2 years have been in our software products where we have leveraged the benefits of the 1200 people who now work at our digital development center in Pune in India, They're focused on optimizing product management, driving standardization, and reducing development life cycles. We used to have a slow waterfall or monolithic development process that was subscale fragmented and can take anything up to 18 months to deliver new product. We now have an agile 13 week target development cycle that has dramatically increased our ability to deliver innovative client solutions more quickly. In 2019, we delivered cloud enabled versions of SIMs, retain, and our one platforms as well as SaaS Software as a Service enabling core enterprise products to enter new markets, particularly in mid tier markets such as our Flow Product solution for the Utility Challenger Brands. We're expanding our core platforms to increase our client offerings. For example, our Sims Education Ecosystem now offers new applications, such as Sims Pay And Sims Finance, as well as new analytics dashboards, such as Curriculum led financial planning. We are also exploring new adjacent opportunities, such as literacy fee 60 into the reading assessment space. Returns from these investments made over the last couple of years underpin our target to grow software revenues by mid to high single digits in 2020. Now as mentioned a few moments ago, during 2019, we went through a major exercise to define our market offerings, and we now foundational or transformational capabilities, which capture a significant proportion of the opportunity in our addressable market. And we are not newcomers to this party. We already do a lot of work in these areas, but we were rarely joined up, so historically investment was inefficient and uncoordinated, and we lacked scale and where we were and we were unable to capitalize on growing market demand as we might. As a first step, we have now pointed leads to each of the 6 capabilities. They are responsible for coordinating capital's capabilities in the space, and implementing superior go to market or commercialization approaches to develop and win new work. You can expect regular updates from me on how we are progressing across all six, and I will kick off with more details in a moment on automation and IoT, the internet of things. But before I do that, a very brief introduction to the other 4. Customer experience is about designing processes and a range of digital technologies to deliver a seamless service for the end user, our client's customer It is a measure of how intuitive and relevant the customer journey is as well as how reliable and cost effectively it can be delivered for our client. We are combining existing resources with additional hires and investments in technology such as Dragonfly with our intimate knowledge of client's operations and needs to enhance our customer experience offerings. The Dragonfly team are here today, along with MoneyPop, 2 of our investments in technology startups, through capital scaling partners. Please do go and talk to them and see a demo of their, I have to say, rather cool products after the formal presentation has finished. Data and insight at its core is about using information to make better decisions. The possibilities here are growing every day, of course. An interesting example of this is our work with law enforcement agencies using a range of sources, including social media, to speed up their ability to identify potential or real emergencies. Using the cloud brings quicker, cheaper, scalable, and more agile services to clients. We're working with a major major company here in London to advise them on their cloud migration strategy more than and more than 20% of the pipeline of opportunities in our Technology Solutions division today speaks to cloud enablement. Cybersecurity is particularly relevant in our long standing client base across government, utilities, and financial services for whom we have a strong track record of delivering networks and technology infrastructure, cyber is a natural extension of this capability. Let me now turn to automation and IoT. Well designed and correctly implemented automation drives efficiencies, greater reliability, accuracy and speed. And capital's experience working on automation projects goes back many years. For example, we have been running several 100 bots for 2 since very early on, on that contract term. We've now coordinated our previously separate teams and ramped up this capacity over the last 2 years initially to apply automation internally to existing and new contracts, as the UK's largest outsourcer we are ideally we are an ideal test bed for such technology, something we have absolutely leveraged. Today, capital is one of the largest debt has one of the largest dedicated robotic process automation teams in the UK, and now the priority is to take this experience and know how we have gained to market. I think it's too early to know how far automation will go. The ONS, for example, has predicted that 1,500,000 roles in this country could be automated in the future. But whether this is right or not, we are now superbly positioned to take advantage of this. A good case study in our application of RPA, is to the peak period GPN GP pension submissions in our NHS PCSC contract, which has delivered major improvements to all stakeholders. We've halved the time it takes for submissions to be processed. We've significantly improved accuracy And perhaps more importantly, we have freed up advisors to spend more time helping doctors with more complex challenges. Now in IoT, capital is already a leader in designing and managing a number of very large and structurally complex contracts This again is a natural evolution of our work in networks and infrastructure, contracts such as the Scottish wide area network, and the work we've done for transport for London around congesting charging and the ultra low emission zone, solution. We help our clients to gather and unlock large amounts of data in a secure and reliable way to make customer experience better and create efficiency in their operations. Capital subsidiary, the data communication company or DCC was set up to support government policy to design and roll out smart meters in the UK energy system. The scale of the DCC network is already impressive It sent more than 500,000,000 encrypted messages in 2019 alone, so far it has connected 4,000,000 second generation meters and is migrating more than 14,000,000 first generation meters onto the network. In time, the network will connect 30,000,000 homes and businesses across the UK, some 99% of all premises. It will then, at that point, be the largest IoT solution in the country, designed, implemented, and run by CAPITURE. As a secure network, its data and connectivity applications have significant potential as an IoT platform the long term, bringing with it potential for many further opportunities. And in ever more connected world, our IoT expertise will increasingly be valued. Now one of the most significant events in 2019 for me was the launch launch of Capital Consulting. It's a new brand, reflecting a more practitioner approach, but we're not starting from scratch. Capital has owned a number of small consultancies for some time, but they were sub scale and not designed or particularly effective at driving pull through revenue for the rest of the business. They also tended to focus on internal to capita versus external client opportunities. In the second half of twenty nineteen, we brought these businesses together This included our data science teams at Barrick and our customer experience, customer digital experience teams at Orange Burs. And we have now brought a further 30 client partners and industry experts together with that, sourcing from both our existing talent pool and new hires from the big 4 and digital service providers. I have been particularly encouraged by the caliber of talent we have been able to attract to our consulting business. We have now over 40 partner level individuals, running that business. A strong consulting front end in which we proactively work with clients early on in the sales process to co create solutions will reduce over time our reliance on the timing and tenders of timing of client tenders. It also leverages 1 of our core assets, our position as the UK's largest outsourcer, but simply we know more about our client's business processes, and their technology needs than almost anyone else who better than to trust to safely design and deliver a change to a current business process than the entity who does that work for you today? This practitioner led model is a major differentiator in the market when clients compare us to our digital transformation peers. We understand them in ways others don't. In 2020, from a base of GBP 12,000,000 in revenue expect to grow this business to close it to 50,000,000. More importantly, we are targeting the rest of capital to benefit in the region of around 250,000,000 of total pull through contracts. That's TCV. We will not see all of the benefit of that revenue in 2020. Now we can't talk about all of the clients for whom we've already engaged with through our consulting business, but I'm very pleased with the traction we are gaining in the market today, as indicated by the logos on this slide. We launched this in December, I'm very pleased with the velocity at which opportunities are developing. Now experience with TFL neatly summarizes everything we have talked about today and what happens when we deliver on one scope, of work and in so doing create a platform for additional capital offerings. Indeed, our business with TFL is a microcosm of what we wish to achieve across many of capital's clients and evidences the rationale for our strategy. We have transformed our position with TFL from performing badly a few years ago on one contract in one division to delighting the client across 4 divisions today, daily for TFL, Customer management provides front office multi channel services to over 5000 of their customers. Capital Software's Pay 360 platform, collects over 16,000 payments. Capital's technology solution manages the infrastructure to capture 1,400,000 vehicle movements, and 13,000 physical documents are managed by Capital Specialist Services. And the result for our client is that TFL has delivered a 35% reduction in nitrous NO2 emissions in the 1st 6 months, the equivalent of around 200 tons. And as of March 14th, CAPITAL Technology services will have completed the infrastructure or the implementation of mobile telephony, the mobile telephony infrastructure for the Jubilee line. Over the past 2 years, our TFL revenues have almost quadrupled with a healthy pipeline of new opportunities to go after. Again, It is a microcosm of what we wish to achieve across many of our larger clients and evidences the rationale for our strategy. As a reminder, pivoted towards growth markets, channeled investment to software products and in demand transformational capabilities, and launched CAPITA Consulting. But simply, we've already done a lot of the heavy lifting, which has substantially derisked the transformation since 2018. Now the priority is to deliver growth. The prize remains the same to deliver sustainable and growing cash flows for the long term. Thank you. Thanks. It's Rob Long from Hammier Gordon. You've clearly set out that in consulting and digital and IT, you're not keeping up with the market. I just wonder if you have a will that on your businesses good enough? I just am concerned that capital is too small, you're too diverse. Your balance sheet is fairly stretched. To compete against big international IT and tech firms and you're just going to keep losing market share. Look, as I indicated on the material we've shared, we compete with many of those segmentities today, and we are able to win against them. I think what differentiates us is our deep domain expertise. I was at pains to point out our practitioner understanding and experience in that section. We are the UK's largest outsourcer. We are managing back office processes for more entities, more FTSE companies, and sections of government than anyone else. And one thing I learned many years ago in the application of technology is that it is an understanding of those business processes and your ability to leverage your understanding of those business processes to effectively and successfully implement technology platforms that is if you like the secret sauce. I did that for 10 years in software in the States when I worked in oil and gas. That that practitioner understanding is what differentiates us and why we believe we can be an effective competitor in this space. And those are growing opportunities for us today. Great. Thank you. It's Paul Sullivan from Barclays. Just a few on costs, the positive P and L contributions this year, what was the expectation when you set targets at the beginning of 2019? And what do you envisage the movements in 2020 then just following on from that, the GBP 41,000,000 of one off cost positives, that seems very high, a little bit of sort of color there. Can you provide some sort of color on the group central costs for 2020? And then when you think about sort of the picture, your 10% margin target for 2020 that you set originally, that does feel like it was plucked out of thin air, Could you give us any comment? Because it seems to have been dropped. I'll let Patrick talk about the initial financial questions, and I'll come back to the margin comment. Okay. So that's the the key slide on on costs is the, sorry, is the the $105,000,000 that is in the year to year bridge, from 'eighteen to 'nineteen, where you can see on the page that we are page 11, We're expecting 40,000,000 of that to flow through into 2020. We've got costs and cost programs that will deliver, further savings into 2020. As I described earlier, the as we look into 2020, we've got, some revenue headwinds on the local government work, which left towards the very end of 2019, so that's a headwind in. And I've talked about lower margins on contract renewals, while we're still hitting, as John said, through our governance process, double digit margins, cash margins over the life for those contracts, the capital is a mix of high margin and low margin activities. In the second half, we had a number of quite high margin contracts that we renewed So we'll continue to focus into 2020. On the, group costs and support services, it's difficult to overstate what wasn't here a couple of years ago. And so we had to make a lot of investment in what you would regard as in, in a large business like this, basic control So the commercial controls we've talked about implementing the new sales system that John talked about, we're implementing a new HR system. We've made investments in financial systems and controls, yeah, strengthen the legal department, strengthen HR. So that's driving that. Plus, obviously, the investment in the consulting division and all of the client account managers and the growth activity that Jonas talked about And so that, yeah, that sort of level of investment is going to continue into 2020. So Paul, you know me well enough to know that I would not have plucked the number out of the sky. A great deal of diligence went into modeling the commitments we made for 2020. At that point in time, we didn't appreciate the amount of investment, the sheer amount of investment we would have to make in the business. We didn't appreciate the degree to which we would see the level of revenue attrition we have and we also didn't appreciate the switch between CapEx and OpEx. We are spending less on CapEx because of the nature of the business today. We are spending more on all of which, of course, impacts PBIT, and that is why we have come off that number. We are 2 years into a multiyear transformation. As an investor in the business, and I am a substantial investor in the business, I want to see that we are growing the top line and that we are growing cash generation. That we believe, those we believe are the 2 fundamental measures that really determine, success in executing the transformation. And That is why we are focusing on those 2 metrics. Suhanda, I have a question here. Hi, good morning. Sohasni from Goldman Sachs. A couple from me, please. You mentioned that, you had originally planned for $720,000,000 of investment. Restructuring and transformation costs, and that's moving to $800,000,000, excluding additional OpEx investments in 2020. Can you give a little bit of a breakdown on this additional $80,000,000 spend and maybe quantify the OpEx spend for 2020, please? So the OpEx spend is going to be at about the same. If you look on Slide 18, you can see that in FY19, we're calling out 70 6,900,000 of operating costs as investment, that will broadly continue into 2020. In terms of the restructuring spend in 2020, it is more of the same. There's no there's no fundamental change. We've got more to do to continue, restructuring the central functions that about half of it will go on cost to achieve the savings that that we're looking to get in 2020 We've still, while we've made really good progress on a number of our contracts, we've got a number of businesses where we're still reorganizing and restructuring them, and that requires additional resource as they go through that transition. A good example of that would be our pensions administration business, where It's absolutely core to capital in the long term. It's it's, yeah, process business processing. But what we've typically done is as we've taken on, this is in our People Solutions division, as we've taken on, contracts, we've sort of designed the process for each contract, so we've got literally hundreds of contracts, all of them working individually. And so there's a big investment which we call Project Fortify, which is to, yeah, restructure, redesign the processes standardize where we can. It's a great opportunity to implement, robotic process automation. So there's there's a, yeah, that's just an example. One is on your revenue growth for 2020. I think for software, you mentioned that you expect to grow mid to high single digits Can you give some color on some of the other divisions, please? Yes. I think the first thing I would say about growth is that we have spent the last 2 years putting in place, improved offerings, understanding the markets we wish to focus upon. We spent the second half of last year investing in what we call our client value propositions, and those are specific to each of the divisions. We have dramatically improved the competency of our salespeople, the quality of sales insight and market insight we have is far superior through what we're doing with Salesforce than we've had historically. We've upped the competency and capability of our sales, individuals. And of course, we have capital consulting, which as we talked about in the presentation, we believe we'll create pull through opportunities. Each of the growth platforms Therefore, we anticipate delivering modest revenue growth in 2020. Morning. Tom Sachs from Deutsche Bank. I wondered if you could just help us bridge to the million of or at least 1,000,000 of free cash flow. Obviously, particularly kind of combined deferred income, ai, etcetera, working capital, and CapEx Because if you're having quite a significant swing in working capital, how can you convince us that the rest of the group is actually generating much cash in order to get to that $160,000,000. Okay. So the best slide to look at, as I answered this question is slide 16, which is the adjusted free cash flow. As I mentioned in, in my remarks, the the movements in deferred income, so for example, if you get to the end of the contract or you terminate or restructure a contract early, you then release the deferred income on the balance sheet. That shows up as revenue and profit and then shows up in the working capital statement as an outflow. And that, to me, isn't the best way to look at it. So what I've done is put together the contractual working capital movements, the deferred income, contract performance assets, and accrued income. And then if you take that with EBITDA, you get this metric that I'm calling cash from trading operations, And I think expect as we move into 2020 that that one that our conversion of, EBITDA to cash is going to go from roughly 42% as it is here to about 72% next year because we can see upfront what's going to happen to defer to those balances because they're on long term contracts. So that, contractual working capital of minus 228 is going to be significantly lower. We're calling out about 120,000,000 lower. That then gives you more cash from operations. Then if you go down to CapEx, we we've described the change of our business model. We've done quite a lot investments in IT infrastructure property. So CapEx will come down to below 100,000,000 for next year. And then as I mentioned, now that we've got a much clearer view on our sort of real working capital, the traditional debtors and creditors you're all familiar with, we've set up a specific program to focus on that and that will, result in in the sort of real working capital being an inflow and then the combination of those numbers gets you to, the 160 Sorry, what's approximately the level of working capital inflow you would expect if you hit consensus? It's going to be 30,000,000 to 40,000,000 30 to 40. Okay. And then if you don't dispose of any companies, what's the rough leverage that you would expect to get to if you're at 160,000,000 because So if you do the maths, we're guiding that net debt is going to go up and we're guiding that cash from trading operations is going to go up, but a chunk of that is working capital. So EBITDA is going to come down. So net debt is going to rise. We're comfortable that Over the medium term, the right metric is in pre IFRS language because of course it will change. Is between 1 and 2 times, but it will be above 2 for, 2020. And in terms of this year's EBITDA, what's the level of noncash backed profit. Your That booking is that just if I answered it the other way, it's that 42% to 72% Okay. And then finally for me, just when you look at some of the larger businesses in the group, so software, in particular, Sims, Axalos, how are you, and the high margin business of a social housing software as well. What's the budget for them? So sims and social housing, are you expecting those to actually grow? We're not going to reveal budget by product family, but But you haven't really, it's unfair. You haven't really discussed the profit movements by division, they're in the appendix rather than in your presentation. So we're just trying to get some granularity on what's happening in parts. What we did say, of course, is that the line share of our CapEx investment has gone into the software business, over the course of the last 2 years. Right. So the ROIC on that business is, has come down. Then? Isn't that what I mean? Well, that is another business where we have had to, we had to take 29 separate software businesses did in the development center in Pune to improve the output, from that division we're starting to see that now in terms of order book. And if you looked at what happened to the order book in software in 2019 increased, in fact, our book to bill ratio was 106%. We didn't see that reflected in the revenue because a lot of that is migrating to SAS, and we're seeing that revenue realized over a longer period of time. But if you were to ask, are we starting to see the impact and benefits of the 3 years, some of this predates this leadership team, 3 years of work that's being done to integrate, rationalize, streamline, and focus on those core markets where we believe we have long term growth opportunities Yes, we're starting to see the benefits of that. Sorry, it's a final follow-up on that. It's just on the shift to cloud and the changes that that does to your revenue recognition and the profitability, is that going to have a significant effect at all on on the operating profits as you would see them. I mean, how much of Sims, for instance, is cloud based or is still largely installed. So it's kind of incremental sales. Okay. So if you take the conversation to the group level there are, there is a change in mix, which is less CapEx, more OpEx, but over the, yes, once you've kind of gone through the change, you get back to where we want to be, in software specifically, if you why did the margins come down in 2019? There was some increased costs we incurred as we went into, we sought to go into the U. S. Market. We've reduced that. We've, you know, market entry. There's a bit of change there. And then there was, some specific change revenue that you normally get every year as government rebases benefits and then we make the changes and then we charge local authorities for the changes and rate high margin work that wasn't there. And then as we've talked about, we're transitioning to this digital delivery center. And so that means you're building up Cape in India and there's a little bit of double running cost and that will start to come out. So we would see software margins normalizing it around where they were last year. We'll do one more question. I think there's a gentleman. Yeah. In that case, thanks very much everyone for your interest in capital.