Earnings Call: H2 2018

Mar 14, 2019

Good morning. Apologies for running a little late as some of you probably experienced it took, some of us a little longer through security this morning that we had anticipated. For those of you on the call, my name is John Lewis, Chief Executive Officer and a very warm welcome to everyone here at the London Stock Exchange. And, as always, thank you for your interest in capital. Firstly, I'd like to draw your attention to the legal text on screen and incorporated in page 2 of your pack. You'll remember that on the 23rd April last year, we set out our transformation plan for CAPTCHA. And I am very pleased with the progress we have made as evidenced by the highlights on this slide. And I'll talk more about these later. Most importantly, we are precisely where we said we would be 1 year in. We have a clear plan to continue the transformation of capital in 2019. Including accelerating our cost competitiveness program, embedding our new 1 capital operating model the first time we have a single and consistent way of running this business and increasing investment to support long term sustainable growth. That's investment in the digital platforms, that will deliver long term sustainable growth. Very importantly, our 2020 financial targets, including at least 200,000,000 in free cash flow and double digit margins remain unchanged. Let me now hand over to Patrick Butcher, our new CFO to take us through the 2018 numbers. For those of you who have not yet met Patrick, he has 25 years experience in senior financial roles, in PLCs joined us in December of last year from the Go Ahead Group. It is great. I was CFO less for a period last year. It's great to have someone with Patrick's caliber on the team as we continue with our transformation and Patrick is already making his impact very positively felt. Patrick, Good morning. Thank you, John. It's always easy when your competition is CFO less because you can usually do better than that, at least in the beginning. I'm delighted to be with you today. It was good to meet some of you have a coffee. And I look forward to engaging with you as I settle in with Capita. Since I joined the board in January, I've spent time meeting clients shareholders, suppliers, and other stakeholders to gain a better understanding of our businesses. The sheer scale of what we do and the number of people that we help each week, 35,000,000 by some measures is just extraordinary. But what struck me most are two things: Firstly, is the importance to our clients and customers of what it is that we do. And secondly, the commitment of our people to creating better outcomes for our clients and customers. It is an exciting time, in all senses of the word, but an exciting time to join a nationally significant company However, you'll be pleased to know that I have spent some time getting to grips with our financial results. And in particular, I wanted to share some early thoughts with you on the drivers of our revenue. So capital is in the 2nd year of a major 3 year transformation. And we will increasingly focus as we move forward on building a platform for growth. However, there's some key dynamics going on in our market that, it I thought it was worth sharing with you. Firstly, there are some structural changes in existing markets. The most significant of which is the local authority market for large scale, long term, multi activity contracts which for the foreseeable future is in decline. In central government, there are some contracts that for reasons of risks reputational profitability, we have chosen not to bid for. And in addition, while Brexit may well present an opportunity for growth in the medium term, in the short term, it has slowed decision making. We've also decided that some markets are not going to be the focus of future investment. This has resulted this year in the sale of some businesses. And in parts of our life insurance business, there have been reductions and terminations to contracts. And as can be seen from these results, the revenue profits and cash flow impact of these terminations can be significant and introduce an element of volatility into the results. And it is possible that there will be more terminations or restructurings in the life insurance business in 2019. But in many sectors and markets, organizations are engaged in digital transformation. And they will be investing significant sums of money to stay relevant and competitive. And it is this activity that provides a significant growth opportunity for us. So how these factors played into our results and prospects? We've seen revenue declines in 2018 in Central And Level government and in the run off areas of our life insurance business, and those will continue into 2019. However, as I said before, we're starting to invest heavily in driving growth in the areas of opportunity created by the wave of digital transformation activity. Just before we get into the results, I just wanted a quick word on adjustments. I've had a couple of questions already this morning about the difference between underlying and adjusted profit. So the purpose of adjusting our reported financial results is to provide a clearer picture of the performance of the company. This is both important and difficult at capita in 2018. The company has a large and complex set of businesses, has recently implemented IFRS 15 and is soon to implement IFRS 16, and it is at the end of the 1st year of a major 3 year transformation program. Each of these factors create the potential for layered complexity in the reported results. And this slide just sets out in one place the adjustments that we have made in 2018 and the adjustments that we will make in 2019. Now let's turn to the results. This first slide highlights the key financial metrics of the group, and the first steps that we have taken to try and simplify the way that we report those metrics. The 2018 results were slightly ahead of our expectations although as expected and communicated, pretax profit is down just over 25%. The reduction in net debt and leverage reflects the action taken towards simplifying and strengthening our balance sheet. We disposed of some businesses that did not fit with our long term plans and have raised capital. The cash generated has been used to pay down debt and provide funds to support I will cover these in more detail during the presentation. Starting with revenue then. I spoke earlier about some of the changes going on in our markets. This year, there are 3 main factors that have influenced our revenues. Contracts that we have lost totaling an impact of 1,000,000, as you can see on the second bar, and these fell into 3 main categories. Either the contract came to an end, and we chose not to rebid it about 30,000,000. The contract ended and was won by somebody else, about 80,000,000 All the contract was terminated early and insourced by the clients, which is the remainder, about 1,000,000. The next part shows the million impact of changes to our clients' volumes and scope. About half of it relates to volumes particularly in the telecommunications, and that's where if our client has fewer customers, we get less revenue, and the other is where clients, mostly in local government varied scope of the contract for a variety of different reasons. And finally, about 1,000,000 of our revenue is not committed in contracts, and it just relies on transactional volumes. And we've seen reductions in a number of areas, but most significantly, our public sector resourcing business. And that is a total of 62,000,000 on the slide. If we look at that revenue from, different perspectives, you can see here by division, the changes in revenue. And as we flagged at the first half results and as I've hopefully laid the groundwork for, government services revenue fell quite significantly. This reflects the end of our home office escorting contract, which we did not rebid the reshaping of the defense infrastructure organization contract with the MOD and losses in the local government market that I was describing of multi activity long term contracts. If we turn now to profit, This slide shows the year on year change in profit before tax, using the divisional breakdown here. The first impact on the slide is the reversal of 1,000,000 of 1 off benefits from 2017. Overall, across all the divisions, the revenue reduction is the biggest driver of the profit, offset some extent by the cost savings that John is going to describe a bit later, but in addition, profit in all divisions has been affected by the investment in professionalizing our corporate functions. Investments in financial systems, building up our people capability. The cost of GDPR an investment across most divisions in addressing service delivery challenges. John's going to talk later about the 3 most significant ones but they're at a lower level. There are a number of other contracts where we've been putting money in to make sure that we're meeting our client commitments. And finally, the other piece of investment is in building the capability to drive growth into the future. This slide, which is more in for reference. I won't talk too much. It just provides a breakdown of the results by division. What it does highlight is the widespread of profitability between divisions. So as we think about revenue changes, it's important to remember that a pound of revenue is not quite the same in each division. A pound of software is different than a pound of customer management or government services. Right. Another slightly complex slide on cash flow, and and it's more complex than I would like because it is really important that we have a good clear presentation of our cash flow because that is essential to a good understanding of our business. There are a few key points I want to bring out on this slide. Firstly, as part of our commitment to simplifying and strengthening our balance sheet, We've paid off the nonrecourse receivables financing of $110,000,000. We've normalized our year end cash management resulted in an outflow of 1,000,000. And these two items will not recur in 2019 and provide some confidence as we build towards 2020. The other main working capital outflow is the release of deferred income and that's worthy of a little bit of explanation. As part of the implementation of IFRS 15, a significant deferred income balance was created. This year, it fell from 1.6000000000to1.3000000000, reflecting the fact that a number of our contracts are moving towards steady state, A significant element of this remaining balance will be released over the next 2 years, but the timing and impact of that is going to be affected by the quantum timing and shape of any new business wins that we have, which of course will increase preferred income. Any changes in business models, for example, the rise of software as a service rather than selling software licenses or if there are early terminations and you saw the examples this year of the Prudential in Marsh. The positive movement of 83,000,000 in other working capital relates to a reduction in receivables some businesses have reduced in size. Cash interest costs have reduced down to $40,000,000 following the repayment of debt while CapEx continues to rise as we invest in the business. So turning to capital expenditure. Last year, net capital expenditure was 1,000,000. The major items of spend included progress in upgrading of our financial systems, to improve financial reporting processes and controls. The fit out of our new head office in Brenna Street, which provides a modern environment for client facing colleagues to work smarter and more collaboratively and allowed us to exit a number of other buildings across London We've also made a big investment in our data centers to improve resilience and customer experience. Looking forward, we still expect to invest up to 500,000,000 from 2018 to 2020. And we expect this year, we're going to drive more of that investment towards activities that will generate growth. And in this regard, there are 30 projects each with a value of more than 1,000,000 totally focused on growth already approved and in flat. Turning then to the other bit of the cash flow statement. This slide shows all the cash flows that are not in the adjusted free cash flow. These include some known and expected commitments such as the million investments in business restructuring, and the first of 3 significant payments under the pension deficit recovery plan on which I will say a bit more later. It also highlights the actions that we've taken this year to strengthen our balance sheet, namely the disposals and businesses, and the rights issue together with the consequent reduction in net debt, which brings us to gearing. This slide clearly highlights the scale and impact of the de gearing of the balance sheet that took place in 2018. A third of the private placement debt has been repaid and the business has more cash. Total liquidity of 1,000,000,000, including cash of 1000000 and the revolving credit facility of 600,000,000 provides the business with the financial resources it needs to support the next 2 years transformational change and investment. I said I would return to pensions. A common theme of this presentation has been the need to invest in addressing the challenges of the past, pensions is another area. The main defined benefit schemes were largely closed to future accrual in 2016. As this slide shows, there's been a reduction of nearly 1000000 in the year of the accounting deficit down to 1,000,000. And as you would expect from a responsible business, the company continues to invest in helping employees save for their retirement and in our defined benefit schemes. During the year, the actuarial valuation of the defined benefit schemes for March 2017 was completed. And it has been agreed that the company will contribute $176,000,000 to that deficit by 2021. And in late 2018, we made the first payment of some 1,000,000. It remains our long held joint objective with trustees to continue to lower the level of investment risk in the schemes, benefiting both the pension schemes, the pensioners and the company. And finally, a word on what all of this means for the coming year. The group is entering the 2nd year of a major transformation. The successful delivery of this program of change and in particular, the cost savings initiatives is critical to the future performance of the group. The 1st 2 months have been in line with our expectations. So what do we see happening over the year? Net finance costs, we expect decrease to around 1,000,000. Profit before tax, we expect to be within a range of 1000000 to 1000000 And as usual, the key variables in that range are the delivery of the cost savings and the timing and impact of any contract wins, restructurings or terminations. We expect our net debt to EBITDA ratio to remain within our target range But as a result of the pension deficit contribution, we're going to be near the top half of the range sorry, in the top half of the range. All of these exclude the impact of IFRS 16. There's an appendix in the slide pack, which details that, but Thank you very much for your time and attention. Thank you, Patrick. The key to our 3 year transformation to simplify strengthen succeed is to turn capital into more predictable, consistent business with better cash flow generation. We've been very consistent in that message. We've also been consistent in stating that this turnaround is largely driven by things we control, fixing the basics where we made great progress in 2018, being more competitive on cost, turning around 3 challenging contracts, which I'll come back to later on, reducing interest costs from a stronger balance sheet with less debt And additionally, of course, the billion raised in 2018, through the rights issue and the proceeds from disposals, allows us now to be very thoughtfully to thoughtfully increase investment in 2 broad areas, our management systems, which is absolutely core to creating a more predictable business. And secondly, the market propositions that seed growth that Patrick has already talked about. I too will touch on those later. So as I've stated, the world is only going to be spending more on the digitally on digitally enabled transformations of business processes and for years to come. The majority of our business, about 70% by revenue is already delivering digitally enabled services today, not just in our digital BPO business, but in the software space as well, of course. As the second half of this graphic illustrates. These markets have attractive margins and good long term secular growth trends. Our domain knowledge in segments such as telco, Financial Services, Education And Utilities means that we're actually very well placed to help clients with their digital transformation journeys. We have deep understanding of many of the business processes in these segments. So by way of example, We have just transformed the end customer experience for a large Financial Services business by reducing the processing times for insurance claims for more than 35 days to under 3, and very importantly, for the client also improved their customer satisfaction score by nearly 40 points. So their customer is getting a better service, And of course, it also represents a material productivity gain for our client. We're able to do this because we do 3 things. Firstly, we understand client and their existing business processes. Secondly, our colleagues know how to apply concepts such as lean to drive productivity and efficiency gains And thirdly, we know how to combine 3rd party and our own proprietary technology platforms to digitalize these processes and increasingly apply robotic process automation or automation more generally to those business processes. Supported by ongoing investment, our digitally enabled services businesses is increasingly focused on implementing these types of value propositions. We generate value in doing so by improving productivity, reducing risk, providing data insight through our data analytics capabilities, and delivering improved experience for our clients' customers. This essentially is capital's USB. Now when I joined CAPITA in December of 2017, I found a business facing some significant challenges, but you'll also remember that I also stated I found a business with huge potential. I talked about the smart of our colleagues in particular and the quality of the client base we have, not just here in the UK, but into Europe as well. Our transformation plan is focused on simplifying and strengthening capital to build on these capabilities and generate a sustainable free cash flow and generate sustainable free cash flow growth. These are grouped into a number of work streams as shown on this slide, along with a description of starting point on the left and what success looks like on the right. This is a summary representation of a much more detailed plan that our Chief Transformation Officer manages that measures and tracks progress against each of these work streams. Now the slide now shows after the 1st year. Again, I want to emphasize that we are precisely where we felt we would be at this stage of the transformation. We have a defined strategy Our financial leverage has reduced significantly. From place today to a year ago. We're making informed investment decisions on how to better run the business and seed growth. And we have delivered on the 1st year cost competitiveness target of 1,000,000. The team have achieved a considerable amount for which I want to thank them. It has been, for all of us, I think, a very demanding year. Now while there is still some fixing to do, I do feel we have broken the back of this, and we are now focused much focusing much more energy on creating the platforms sustainable long term growth. By the end of 2019, we expect to have made further strong progress, as represented on the slide currently. And I will spend the majority of the remainder of this presentation taking you through the initiatives already underway to deliver these. I hope it goes without saying that While we have delivered on these, I believe capital will be in a much better shape and well positioned to deliver on long term sustainable growth in our chosen markets. I will start with governance. Patrick's already talked about the balance sheet. Now in January 2019, we launched Capita's new purpose. We create better outcomes. This is not a purpose statement defined by myself or the leadership team, but across section of colleagues from across the organization. That's important because we wanted our colleagues to own it. I like it because speaks to all our stakeholders and defines unambiguously what it is we do. It defines why capital exists. Alongside my leadership team, we have spent a significant amount of time since the early part of this year, engaging with over 11,000 of our creditor colleagues globally in more than 50 locations. Engaging with colleagues was a first for CAPITR at this scale, and I'm very encouraged by the very very positive reaction it has engendered given cultural change is such an important part of our transformation. Our purpose, allied tour set of values and behaviors and a new code of conduct, defines how we act as a responsible business. Our purpose shapes all that we do. It is our north star. And I'm determined that over my tenure as CEO, our brand becomes synonymous with creating better outcomes. Embedding this across all 63,000 employees will take time. But I am confident that when we do so, we will have a highly engaged colleague base who consistently delight customers and clients alike, and deliver value for all our stakeholders. Again, cultural change is core to the transformation of this business. Now we also launched in January of this year, a new and comprehensive operating model. This is the blueprint for how we now run the business, for the first time defining accountabilities for business lines and functions, decisions decision processes and decision forums, a contract review committee, for example, and delegations of authority. Most importantly, it removes the ambiguity of old. We now operate capital one way and one way only. During 2018 and as part of our operating model planning, we also significantly strengthened the executive team. Blending the existing talent with 7 externally sourced executives with proven track records in their respective areas. We've also made changes at the CO-two level. The board and I are very pleased with the evolution of the leadership team, and it is a team that has the capabilities and competencies to execute on our transformation plan. Our new operating model is also driving improvements in oversight to ensure that across our operations, we only take on work that, A, fully aligns with our strategic goals, B has an acceptable balance between risk and reward C is able to meet clients' expectations and therefore D consistently delivers appropriate returns. We are not chasing revenue. We are fundamentally improving the contract portfolio transformation lever we're implementing, don't think of it as a rulebook. It is an antidote to capital's legacy complexity and is core to becoming a disciplined, predictable and responsible business. It also enables us to better leverage our existing strengths and scale and deliver one capital to our blue chip client base. Let me now turn it to people. We are a people centric business, and highly engaged purpose led colleagues are fundamental to our long term success. In 2018, under the direction of our first ever Chief People Officer, we made a substantive start on capital's people strategy, 1 focused on ensuring we continue to be able to attract, engage reward meritocratic, develop and retain the talent we need to ensure successful execution, not just of purpose, but of strategy as well. It's very clear from the quality of talent that has joined us this past year that we have an improving employee value proposition. This is supported for example, by ongoing improvements in such things as our Glassdoor ratings, but also our employee Net Promoter Score. Now given the importance of our people's strategy, We track the effectiveness of this through, such things as the employee Net Promoter Score, and this is also an important metric in long term incentive plans for senior leaders. We're also placing more emphasis on diversity and all its forms and addressing our gender pay gap And I'm very proud that our ranking in the Hampton Alexander Diversity University Bureau has improved by more than 100 places in the last year, though still much to do, we should be for our business model top quarter. And we're currently interviewing a shortlist of candidates from the over 400 applications received from across our global operations for our first two employee board directors. We will be the 1st British FTSE 250 company to put employee directors on the board in 3 decades, and on the basis of my experience on other boards where I've experienced employee directors, and the ideas and thoughts articulated in our own employees applications, I am confident that our employee directors will make a substantive contribution not just to board discussions, but the overall success of the business. Let me now turn to the 3 challenging contracts we've spoken of previously. I, these have driven significant operational, reputational and financial challenges to us in the last few years. We are therefore extremely focused on getting these right, and we are making encouraging progress. Firstly, army recruitment, If you live in the UK, you will almost certainly have read about this contract, and it's why I met with the head of the British Army, a full month ahead of joining as CEO in 2017. I wanted to be clear that under my watch, we would deliver against our obligations on this contract, but I also wanted to convey that we needed to fundamentally reset the relationship we had with the British Army. It needs to be a true partnership, one in which both parties were committed to delivering their respective parts of the solution. The National Audit Office reported report released late last year, by its very nature, of course, looks backwards, and is largely based on evidence prior to the reset of the partnership. I'm pleased to report that we are now starting to see very significant signs of improvement in the metrics on this contract. We've filled Sandhurst for 6 intakes running, On the back of our Your Army advertising campaign, we had 1,500,000 hits to the Army Recruitment page in January alone, applications to join the army recently hit a 5 year high, we've significantly reduced the amount of time between application and job offer And it looks like the most recent 3 months data will be the best for recruitment since the contract started in 2012, with an expected increase of over 1000 soldiers. That's 2 battalions compared to the first quarter of 2018. We are turning a corner on this contract. This is echoed by the Ministry of Defense who have made public statements to this end, in fact, Generalson Ekarta, the Chief of Defense Staff, I recently told the Defense Select Committee, the Cavators, quote, partnership is a model for how you can get the two sides of the relationship public private. To work together in a strategic way. And I feel as instrumental also in influencing the cabinet offices new outsourcing playbook. Now the second challenging engagement was Primary Care Support England, better known as PCSE, in Q4 last year, we took decisive action over poor execution on one aspect, one important aspect of that contract. We also instigated a root and branch independent review of our operations. This was completed the very early part of this year, and we are now implementing the recommendations from that review. There remains much to do, but I am confident that we will continue to turn that contract to a profit at the end of 20 20, as previously stated. The 3rd contract was Mobicom Debitel. I'm pleased to say that we have now delivered on the transformation milestones, including the launch of the iOS and Android mobile customer service apps and a new digital telephony platform. Again, as previously stated, we expect this contract to reach breakeven at the end of 2020. Now as this chart shows, we have already seen improvement in the financial performance of these contracts year on year. And again, we expect to a further reduction in losses in 2019 becoming profitable in 2020. Now before I leave this slide, I would also like make a few broader remarks about, government contracting. I am very encouraged by the cabinet office's recent publication on guidance on contracting the outsourcing playbook, as it's called, We proactively contributed to and support this undertaking. It makes clear that government understands the need to work in partnership with the private sector and that needs to be a better balance between risk and reward. It also, of course, commits to a higher responsible set of higher responsible business standards, an area where we have already demonstrated strong credentials. And the example I will cite is our supplier payment performance where we are exceeding the requirements today two quarters in a row of the prompt payment code and are one of the most prompt payers contracted with government today. Let me now turn to cost competitiveness. In April, we laid out a bottom up plan to improve our cost competitiveness to make us more efficient and productive and to realize more than $175,000,000 in cumulative savings by 2020. In 2018, we made a strong start on executing against these, delivering in year savings 70,000,000, and these include, for example, more than a 500,000 square foot reduction in our property footprint, organizational delayering associated with of our new operating model, the offshoring of a number of rows to India and South Africa, both for operations and shared services and driving value from the in excess of 1,000,000,000 we spend with suppliers today. As a result of the learnings we gained in 2018, we are now today accelerating our original cost competitiveness plan and now expect $175,000,000 of benefits by the end of 2019, significantly ahead of the schedule we shared last year. I should emphasize that the overall cost to deliver this aspect of our transformation remains 150,000,000. This new phasing reflects our increased confidence 1 year in. We've learned a lot the past year and will be made possible through increased adoption of automation, further offshoring and being more efficient in our technology spend. Our automation ambition in particular continues to evolve, especially the adoption of robotic process solutions, and I will be in a position to talk more about that later in the year. As we have stated consistently through our transformation, we intend to invest some of these savings in building capabilities to drive sustainable growth, which is where I'd like to take us next. In 2018, the majority of our CapEx and OpEx investment was in fixing the basics and professionalizing the way we run this business. And on the next three slides, I want to give you more color on what we are doing to increase investment in catalysts for growth, namely what we're doing around our professional capabilities, what we're doing with respect to, software products and digitally enabled services, and what we're doing by way of investment in our growth function, our sales and marketing capability. In the past, capital software development was undertaken in product company and almost entirely in the UK. One of the most strategic investments in capability this past year has been the establishment of our digital delivery center, what we call our DDC in India. We have grown our capability from less than 100 to nearly 1200 developers in the past 12 months or so, and Puna is now capital's main center for software development globally, not just for the software product business, but very importantly for the development of our proprietary software platforms we use in our digital services business. The latter I should emphasize was historically, often written by third parties, but is now being brought in house. I should also emphasize that we continue to have over 300 developers in the UK continuing to support our clients here locally. Now as we demonstrated to many of you, at the Software Division event, the IR event earlier this year, we have also standardized our development best practices and tools. We're speeding up proof of concepts and reducing development cycles and we're making our hackathons or pocathons, as we call them, an integral aspect of how we innovate around client defined use cases, leveraging our scale. We are now much better placed to develop innovative ideas quickly and cost effectively, reusing code we already have, as well as taking advantage of open source tools and building on partner cloud platforms. Such as Microsoft Azure with whom we have a strategic relationship. Now since April last year, we have kicked off a number of new growth seeding investments, all of which are digital in nature. In software, a new payments facilitation solution for Pay360 a parental engagement app, for our SIEMs product suite, giving teachers and parents a communication channel for aspects of their children's academic performance, timetables, and attendance, a cloud based public safety platform for our emergency services products, and the replatforming of our retained resource management software to Software as a Service. In our People Solutions division and next generation automated version of our pre employment screening system, which is being developed in collaboration with a strategic partner McKinsey Digital and will reduce candidate assessment times from 3 weeks to under 2 days. Also, the development of a digital product to improve a new employer's experience when they first joined an organization, which is an adjacent market solution. We have several that complements our broader, higher to retire suite of services and products. And in customer management and new messaging and artificial intelligence platform, which allows consumers a choice of channel, reducing capital and our clients' cost to serve and also the creation of a scalable customer experience consulting practice where we are helping clients improve how they deliver superior customer experience. And then, and finally, in government services, a data analytics and machine learning solution to help our local government clients identify and prosecute rural landmark. So Patrick talked earlier about our investment in digital. That's a smattering of the investments in digital solutions that we undertook in 2018. You will recall from the transformation scorecard I showed earlier that reigniting growth is an area where we to make significant progress in 2019. And we're doing this on the back of 3 actions. Firstly, we're transforming the capital sales organization into a more consultive consultative client engagement model, we're providing better client advocacy through the implementation of a classic account. Management structure, and we're ensuring we have the right competencies more broadly across our growth function, including marketing. This is a crucially important aspect of how we will pivot this business to growth, and it's worth me elaborating on these points a little further. Firstly, we need to pivot from being almost wholly dependent on competitive tenders 5% of our revenue base today to adopting a consultative selling approach in which a much higher percent of our revenues is won through non competitive processes. This as I've said, represents a very small percentage of revenue. In fact, it is an order of magnitude less than that which other competitor tech services companies achieve. Such a consultative selling approach is the norm across large professional services firms, which is why under our new Chief Growth Officer, we are putting in place a team of individuals with such backgrounds and a proven track record of doing just this. This team with its industry segment and technology expertise will leverage the assets we already have at capita, together with our technology partners, platforms, to deliver differentiated solutions to our client base. The second major change we're making is around account management. Given our existing contract portfolio, we have truly privileged access to an impressive array of blue chip companies. This is one of the very positive observations I've had in my 1st year, we have no issue with access. We also have deep knowledge of their businesses and their customers, but in the past, have not really applied this insight to proactively proposing innovative solutions to create new opportunities for CAPTURE. We're therefore, in the process of implementing an account management structure initially for our most strategic clients, these are led by experienced partner level individuals, who are engaging with our clients on a much more strategic basis, and who understand their challenges and needs. This will build stronger, deeper relationship, which relationships, which combined with consistent operational delivery, that is key, will be the basis of our long term sustainable growth. And I want to give an example of that and probably the best one in the past year's transport for London, which, frankly underpinned by outstanding operational performance, running the congestion charge, has enabled us to expand our business there to include IT Networks, which we won last year and the new ultra low emission zone levy. We're also investigating how we can export potentially in partnership with transport for London. The capabilities developed through congestion and emission services here in London to other clean air zones, both in the UK and overseas. And then thirdly, we are in trading to assure we have the right talent necessary to execute on our sales recognition plans. To help our clients through their own digital transformation journeys, our sales talent need, to be curious. They need to be content rich, have relevant industry skills and be able to partner with our clients in understanding their problems and co developing solutions. Now as outlined by Patrick, the decline in our order book in 2018 was primarily driven by 2 things: life insurance, much of which is closed book run off and includes the loss of Pru. And secondly, a reduction in scope of a number of local government contracts where clients are no longer buying long term multi service activities. These operations are, of course, less cash generative than the rest of capital and are represented in the pale blue part of this chart. In contrast, The order book for our digitally enabled services and software was stable. In some segments, software, customer management, it grew last year. This portfolio comprises the higher value, added services around digital services, and this is where we are investing going forward to grow. Order intake was 1,800,000,000 of vote of confidence in capital during a period of course, of some uncertainty and particular highlights would include the 1,000,000 extension and expansion of our contract with Germany's largest telco provider on which capital displaced and incumbent, winning new automation work, RPA work too, and we were also recognized by the same client as their transformation partner of the year competing against world class tech service providers for that accolade. We also won 109,000,000 contract with the Department for Education Standards And Testing Agency to administer, curriculum assessment tests. Our proprietary digital solution will provide around 16,000 schools and 4000 test markers with a new digital portal allowing them to review tests, obtain results, and update records efficiently. And then lastly, a new contract with British Airways to deliver customer services where our team in South Africa is already consistently delivering superior customer experience metrics to the incumbent, to the incumbent, that we replaced. In summary, we expect the areas However, our plan for organic top line growth by 2020 remains. And as this chart on the right shows, it is our more cash generative and higher value digitally enabled services and software, which operate in structurally growing markets that will drive this growth. Now as we presented in April, each of our divisions has a very clearly defined strategy, a clearly defined set of actions strategic imperatives, as we call them, and agreed delivery timeframes and associated performance management. Our focus is now on execution. The divisions are at different stages of development in terms of their transformation and transition to growth, and there is a lot of detail on this slide reflecting the level of on positioned to grow this year, demonstrated by improved order intake and recent wins such as the Luxon payments contract. People Solutions has made an encouraging good start, in bringing together its separately managed business into 1 division, and is now positioning to go to market with its suite of hire to retire human resource products and digital services. In customer management, we're shifting the business model to being much more outcome based, customer experience contracts. We're also working to help our clients serve their customers better through our consulting capability, incorporating more differentiated proprietary digital platforms into our offerings. In government services, we have already mentioned the structural changes in the local government market and Brexit has slowed down decision making across central government. But we continue to see opportunities post Brexit and for an improved partnership, as described, and as already mentioned, in the Cabinet Office' new outsourcing playbook. We're also very pleased for the first time to be named a strategic supplier to both the Department of Education And the Ministry of Defense further evidencing the importance of our relationship and contribution to central government and the evolving relationship between those parties. IT And Network Services continues to make good progress consolidating into a strong and consistent service provider with a clear defined set of market propositions, that support both parts of capital's execution against its strategy and, of course, 3rd party clients. And then finally, we continue to run the Specialist Services division as a portfolio of is to maximize our individual potential and value. So let me recap. I'm very pleased with where we are at the end of our 1st year of a 3 year transformation journey. We're transforming capital into a more predictable lower risk growth business. I'll I'll emphasize again, this is a 3 year program. I am very pleased with where we are at the end of year 1. We've delivered on our commitments for 2018, and we have a clear plan for 2018, 2019. We remain on track to deliver our 2020 targets, including at least questions. Good morning. It's Julian Kater from Numis. I've got, 3 interrelated questions, please. John, you talked about the acceleration in, the cost cutting initiatives. And you characterize that as because your level of confidence has gone up, but I wonder whether it's also partly because the revenue attrition you're seeing in some of your markets has been more extreme than you perhaps anticipated if we back 6 months ago. The second question is, is whether you can sort of help us quantify what the known revenue attrition is at this stage of the year from those particular markets. And then my third question is, given the additional million of cost savings you'll get this year? I mean, it looks like a sort of delta on the problem contracts of about sort of 1,000,000. I just wonder whether any more detail you can help us with in terms of the profits bridge year on year in terms of the cost buckets of going back into the business. Because otherwise, it looks like the drop through margin on the lost revenues is at a very high level. I'll let Patrick deal with the second 2. Let me deal with the first. Our focus on cost competitiveness is to ensure we have a sustainable long term business with the appropriate investment in digital solutions to create, offerings that mean we are sustainably successful. So As I said in our prepared remarks, and as I think, Julian, we've said very consistently through this journey, we are not going to pass all of the cost savings down spend. That's investment in our growth function and the sorts of things we're doing in business development, sales and marketing I talked about earlier on. It's investment in some of the digital solutions, its investment in broader capability across the organization. That will position us for long term sustainable growth and the Patrick? Okay. So, as we've said, you know, attrition is one of those words that sort of sounds like you're on a battlefield. And sometimes it feels like that, but it isn't attrition in the sense that it's lots and lots of attrition across a very wide front. What we what we've tried to show in John's slides is that there are 2 key bits, and those are the bits that are declining definitely. Clearly, there are moving parts across everything else. If you look at revenue consensus for next year, consensus is the revenue will drop by a couple of 100,000,000. That's probably about the RAC level of decline. So then you, that takes me on the second part of your question, what are the moving parts to get you from, to profit being broadly flat within a range? Revenue drops by 200, costs come out. Now that, of course, the cost savings initiatives are partly standalone from contract losses, but partly in response to, anticipated contract losses. So there's a bit of overlap. And then the 3rd moving part is the reinvestment that, John has talked about. I'd add one other thing, Julian. I don't worry about having a slightly smaller business with lower revenues with a which is based on a business with a far superior portfolio of contracts and high margins than doing what capital did of old, which was Chase revenue. We are being very disciplined in terms of the contracts we do or do not bid on relative to their risk profile, are they aligned to strategy? Can we delight the client are they going to deliver the returns we want? And we are halfway through that transition. It's very important to context this against the 3 year transformation. Thank you very much. Gentlemen behind. Good morning. Chris Burberry Peel Hunt. A couple of areas, if I may. With regard to the outsourcing playbook, how confident are you actually followed through on the ground by departments? And do you have any examples of contracts that actually reflect the principles within that? And secondly, looking for a bit of a help with the cash flow bridge for this year, some of the big key items like deferred income and what your thoughts are on CapEx cash tax this year. Thank you. So a nice by Partlet division will allow Patrick talk to financial. Let me talk about the outsourcing play I think there's a couple of things I'd say there. Firstly, we've been right in the middle of defining that. I have sat on the advisory board within the cabinet office, helping shape it, we seconded a very senior member of our staff to work full time with the cabinet office on it. It is, I think, and this is telling of itself, the first time that the tablet office has collaborated to that degree the formulation of how it wishes to work with the private sector going forward. So that'd be my first point. The second point would be that This is being driven by David Liddington on Oliver Dowden, and John Manzo, neither head of the cabinet office. And one of the things I have done as I go around government partners, either Santiago is now defined as the outsourcing playbook. Every one of them knew about it, every one of them talked about it being fundamental to the future of so called outsourcing and the nature of the working relationships between government and the private sector. I am very encouraged by what I am act. We're having conversations that we didn't have historically. People are talking much more about value and quality and not just price. When I first came on board, there was only one conversation. It was about price. Now proof is in the heating, it's early days we'll see, but I'm certainly encouraged by the trajectory, based on the conversations I'm having. Talking of trajectories. So what we what we tried to do with the guidance that we've given for next year is essentially put 2 sticks in the ground. Yeah. Our net debt to EBITDA ratio is going to be somewhere in the top half, and profit is going to be within but to try and help you get to the right number. A couple of thoughts. Firstly, we've got the pension deficit payments of 1,000,000, which is going to go out year. We've got another £100,000,000 or so of cash that's going to go out on restructuring. What we said about CapEx, we're going to spend 500,000,000 over 3 years. We spent $140,000,000 in the 1st year. We've got $360,000,000 to go over the next 2 years. As John described, most of those are projects that we really want to do, they deliver value. So we're going to get on with that as quickly as we can. So we're going to spend at least half, if not, if not more in the coming year. And then there's a further unwind on the deferred income, which is quite a wide range because as we, as you've seen this year, it can be volatile, so somewhere between $100,000,000 $150,000,000. And then, of course, in terms of a bridge, you you then don't have the receivables unwind. Working capital, we've done, we think the normalization, but depending on contracts, there may be some more. The other point was just mentioning in case you don't get to it is tax. We're achieved this year. It's been a cash inflow. It's going to be a cash outflow next year, so that's another swing. I think the gentleman to side of you had a question as well. Yes, gentleman here. Tom Sykes from Deutsche Bank. Just on the shape of 2019, sorry, could you just help, are you expecting the first half to be a bit lower than the second half in terms of the direction of your PBTA? And then just going into 2020, I mean, obviously, this year, you've you've taken out the 1,000,000, your EBIT margin is going to be flat to slightly down and your growth is declining. So when we're thinking about then the bridge into 2020 and getting, to double digit margin, is that chart that you put up where you put structurally declining line down and the growth number up, is that should we think about, therefore, then another decline of revenue in 2020 but you're feeling that that base then is stable, but you're on a double digit margin then. What is the uplift in margin you think going to come from growth and cost out in 2020? Well, I'll let Patrick give a little bit more color and detail around that, but it's a combination of both in 2020. We've been very consistent in stating that we are planning to get the business back onto a growth trajectory by the back end of 2020. And the actions that I talked about in the presentation on what we're doing with regard to proposition solutions offerings and our sales and business development capability are very much aimed at achieving that. Patrick, you might want to add some financial color. Yes. That was a long question covering almost as many as I could think of, but simplistically, if you go from 'nineteen to 'twenty, on profit, it's about fifty-fifty between revenue and cost as it's sort of flows through. This year in terms of half 1 and half 2, it is definitely the case that a lot of the cost reduction benefits, which are key to the delivery, are weighted to the second half. So last year, we were doing things you could see this year, it's we've got to build, build plans. And we're yes, let's remember what we're trying to do is accelerate things that we were going to do in 2020 into 2019. So they're going to come through in in the second half of twenty nineteen, not the first half. Okay. And then just specifically on the software business, your revenue was marginally down half on half in software, then yet your EBIT was up about 1,000,000. I wasn't aware that there were a lot of cost coming out of the software business. So why would sequentially the EBIT be up by so much in software, please? We moved 1200 people to India. Okay. So we're comfortable that that base, therefore, the EBITA Thank you. Gentlemen, actually, let's go to Paul. Paul's had his hand up for a long time and then we'll come back to the Great. Thank you. It's Paul Sullivan from Barclays. Just coming back to your light blue, dark blue slide with the structural declining part of the business. I don't know if you can sort of give a bit more color on that in terms of the overall margin or the cash contribution of that business? And how should we think about the pace of decline going into 'nineteen and 'twenty for those businesses? And how easy is it for you to contain the sort of the, that decline going forward? And then secondly, on disposals, obviously some recent speculation about travel and events. How should we think about disposals going forward? And what's the implication of disposals on your targets? Yes. I'll let Patrick talk about the first part. On disposals, we have been Again, I think quite consistent in stating that we have, about 18 businesses in Capital Specialist Services, that we are managing for value. We don't have the need for the capital tied up in the valuations of those businesses today, but as we do, as we accelerate our investment in the future. And as we realize opportunity for healthy valuations of those businesses Will we look at potentially disposing of some of those businesses? Yes. And will we respond to unsolicited approaches? Yes, we will. That's probably all I want to say at this stage. But other than to say that over time, you can imagine that we will recycle the capital from that segment into the core business and to affect an acceleration of the growth of our digital platforms. I think I understood your questions. I'll I will have a go at answering it, but if I've missed it, do do just clarify. What we're trying to show on, on that likely DocuSign is that the revenue that's declining is in those two markets that we've described, that decline is largely what drives the decline in 2019, and there's a bit more of it into 2020, but by 2020, the rest of the business is beginning to grow. And what we know about that we're going to lose is built into our profit guidance for 2019. Terms of the profit contribution from those businesses, presumably it's very low. Are they generating any cash on an adjusted basis for the group? Not the slightly, they're all a bit different, so that the life insurance business is generally not making a lot of profit or cash, the local authority businesses are rich and varied in their contributions. And it looks like it's going to halve in about 2 years. Can you, with the restructuring that you've currently got underway, can you manage that pace of revenue attrition in those two areas? When you say manage, what I'm not seeing, without seeing profits deteriorate further or we're going to loss or what? I'd sort of put it the other way. The reason the profits aren't one of the reasons that profits aren't going is because we're responding to that, yeah, that decline. And some of you, with the local, sorry, with all of those businesses, there is quite a lot of cost that just moves with because the activity doesn't stop. Yeah. So if people are administering life insurance contracts or are digging graves and managing libraries. Those activities continue. So the direct, there's an element of direct cost that just goes. You've then got that the, supporting overhead costs that is what the cost savings initiatives are partly there to deal with. They're not adding to value creation. Is why we're not focused on those segments, why we're not investing in that area, we're investing. And when I say local government, I need to be very specific its large scale multi service strategic relationships. Local government of itself remains an important segment to us and one we serve through a number of the different divisions. It's just the large scale contracts. Yes, gentleman here. Good morning. It's Rory McKenzie from UBS. Within the new sales structure that you've put in place, can you talk a bit about the incentive schemes that are in there and how you're going to balance the desire for growth with a concept that you're happy to be a business of kind of smaller revenue but higher quality as you manage that, maybe risk transfer a bit differently? And then secondly, on the balance sheet side, Could you talk more about the decision to pay off all of the receivables financing in this year? And also then what your kind of seasonal net debt profile now looks like? What's the gap now between the year end and average, if that makes sense? Okay. So I'll take the second 1 first. Okay. So we're trying to simplify the balance sheet we have the cash. We sold the businesses that we sold for a bit more than we expected, so that the right thing to do was to simplify our debt structure. And the first thing to go was the non recourse that we dealt with that. I don't think I've got a great answer to your the second half of your question, it should be a lot closer than it has been in the past. There are embedded within some of our much longer term contracts. There are still revenue that is sort of structured towards the back end. So we've got more revenue in December than, in an average month sorry, more cash rather than more revenue But we're, as far as possible, we're working towards having a, stable balance sheet and working capital position through the year. On sales incentives, and I say this as someone who spent 5 years of his life as a commission software sales executive, I also spent another 5 years of my life as partner level manager of a very large account. So I know the different comp models and I know the kinds of behaviors they drive. We are putting in place and have put in place the right incentive plans to drive the right behaviors at the right level in the organization. Our head of growth, our Chief Growth Officer, is compensated in the same way as any other executive officer in the business is incentivized. If you're a frontline software sales guy, you are going to or Gal, you're going to have a quota and your incentive plan will pay out depending on whether or not you hit your OTE and there'll be various flavors in between. At the partner level, it very much needs to be focused around doing what's best for the client, and that doesn't necessarily just mean driving revenue. It's how is value being delivered to that client. Gentlemen, right at the back. And I think we probably need to make this than the last one, right, because we've got media at the half hour. Do we want to do one online, Andrew? Yes. Hi, it's Ed Steele from Citi. Just a couple, please. First of all, obviously, very help for you to give us those 2 actually challenged markets that you've split out. Obviously, we knew at the half year stage about South Antoinette, before that, we knew about Marsh and Pru. It doesn't seem like you've lost any more contracts since then in the last 6, 7, 8 months, are you building additional losses of contracts into your guidance and are you actively trying to shed life and pensions revenue at the moment, please? And then second question, if you look at the software division, obviously, great to the order book up 3% year on year. You've got a few contracts in your slide, attached to that. Are those contract wins already evidence of some of the investments you put in, or are they, sort of legacy wins and, what's momentum like in the first quarter this year? So sorry, Ed, I couldn't see you in the darkness of the back of the facility here. Look, we're not going to get into that level of detail on contracts, and I absolutely have no idea whether the, what the revenue stream for the particular wins we referenced and what their contribution is to this year. What I would say about software is the following. It is by far the most advanced in terms of any of the divisions in its evolution from the capture of old to the capture of the future. We've consolidated the product lines They're operating as 1 division. There are significant synergies that have been achieved. The order book grew last year, and that division is projecting to get back onto a growth trajectory in 2019. What I would also say about that division is because it is about a year ahead, doing all the things we're doing for the other divisions, It obviously gives us some encouragement that the actions we're taking are actually going to result in the pivot point in revenue in the other divisions as well. Customer management, for example, is close behind software in terms of each, trajectory as well as its tipping point as well. Thanks. And my first question, please, which was about, there don't seem to be any incremental losses in the last 6 months in those 2 structurally challenged markets. So what have you built into your assumptions for that chart, please, about future losses? I think I was reasonably clear that we're expecting revenue to decline by a couple of 100,000,000 and the majority of that is in those 2 markets. So that's additional loss on top of the Well, some of it's the flow through because we lost the contract partway through the year. Yeah. So if you lose it halfway through the year, you've got the second half of the loss in the next year, and some of it is, contracts that we are expecting to reduce in scale or lose. Okay. I'll take it offline because I think it's more detail attached to it. Thank you. Thanks, Ed. Andrew, let's do one online, and then we probably need to wrap. Yes, of course, we've got one question on the phone lines from Thomas Beavers of Stock Fuse. Thomas, your line is now open. Hello. Yes. Just one question on Government Services, please. I see the margin on Government Services has fallen to about 5%. Can that can that division So is that kind of indicative of of what you might see going forward or, can that actually increase more in line with your double digit aspiration for target for 20 20. Just trying to understand if that, that you see that as always structurally being a little bit lower than the rest of the the business? Thank you. The central government has been very clear with regard to its margin ex expectations associated with government contracting. It is consistently said that those margins should be between 6% 8%. Now I will tell you we have contracts that are doing less than that. We actually have a number of contracts that are doing materially more than that. That is not a reason to not be serving that market, however, in the context of our double digit margin, goals or targets What I like about government is its annuity like. They're long term contracts. They pay on the nail, and they have scale. And in particular, as you go into periods of economic uncertainty, uncertainty. So having that annuity like capability, I think, is important to creating a more predictable and stable and consistent financial model, which is obviously what we're trying to achieve Good. Thanks very much, everyone, for your interest in capita. I'm sure we'll catch up with many of you over the next few days.