Earnings Call: H1 2018

Aug 1, 2018

Welcome to, everyone here in the room in London and to those who've joined us on the webcast, and thank you for your ongoing interest in CAPITA. On April 23 this year, we set out, our transformation plan for capita. Many of you were at that event. Today, we will share our progress against the commitments this plan defined and begin, I hope to earn a track record for doing what we said we would do when we said we would do it. This has been a challenging 1st 6 months. Indeed, we've had to address more issues than is normal over such a relatively short period of time, in fact, we joke about capital dog years. But while this is whilst there's still much to do, What I hope you take away from this morning is that we're making very good progress. The first half results are in line with expectations. And Nick will take you through the details in a moment. We're reiterating the profit guidance we gave for the full year 2018, updating it only for the disposals you'll already be aware of. We added 1,000,000 to our order book in the first half of the year, a combination of extensions and new contracts and had a number of very notable contract wins subsequent to the half year end. Including our strategies, some highlights of which are that we put in place a new organizational structure, that we first presented in April, We've completed the rights issue, which we did in May with proceeds of just over 700,000,000. Disposal proceeds have gone particularly well and ahead plan, we committed to 300,000,000. We've delivered 416,000,000. And we are on track to deliver the 70,000,000 cost out target for 2018 and the 1seven-five number for 2020. And in terms of our overall 2020 financials, we remain on track to deliver these. In April, we introduced the concept of simplify, strengthen and succeed, this being our transformation strategy framework. And over the next three years, we said we would simplify capital by reorganizing the business to focus on our most promising positions in long term secular growth markets. We also said we would do this with a much simpler organizational model, more disciplined processes and oversight and greater cost efficiency. And I'm pleased with the progress we are making against each of these. Since April, we've put in place our new organizational structure, comprised of 6 divisions supported by a common set of group capabilities, much stronger functions. We've also commenced work on the design new operating model, and we will say more about that in our full year results in March. We have sold 5 noncore businesses in the first half of the year, which helps us to strengthen the balance sheet, of course. And we've made very good progress on executing our cost competitive mission initiatives. I'll say more about that in a minute, but again, very much on track. We said we would strengthen CAPITA by improving our operational performance governance and oversight, we said we would invest up to 500,000,000 in differentiated capability, particularly, of course, in our growth platforms. That we would strengthen the balance sheet. And since April, we have completed, as I said, the rights issue. We've raised, 701,000,000 in gross proceeds We've instituted far greater discipline, and our governance setup is stronger with new investment contract review committees that Nick and I chair so that we ensure we win the right work and optimize our allocation of capital appropriately through our new investment committee. We have agreed a strategic partnership with Microsoft for the use of their cloud platform Azure to extend the scope and speed of our digital transformation solutions. Our plan is also focused on and a transformation of our recent financial performance. And here, the conclusion remains the same. Successfully delivering the transformation of capital will mean delivering at least 1000000 in sustainable free cash flow by 2020 and double digit margins. So before I say a little bit more about the business, let me hand over to Nick to give a brief run through Thank you, John, and good morning, everybody. Firstly, we took decisive action in the first half to support Capital's transformation by reducing our debt. This included the completion of a rights issue in May, raising GBP701,000,000 of gross proceeds, this brought our adjusted net debt to EBITDA ratio down from two point three times at the end of December 2017 1.5 times at the end of June 2018, the middle of our target range. We expect our leverage to reduce further in second half of twenty eighteen on the completion of our announced disposals. Secondly, the half year 18 results were in line with expectations, and I'll walk you through more detail on the figures in a moment. And finally, our underlying financial year 2018 guidance is unchanged before adjustment for our planned disposals, which were forecast to contribute of profit before tax in 2018. Turning now to our financial results, the underlying results for the 6 months to 30th June 2018 exclude the recently announced disposals of supplier assessment services and parking eye, which are disclosed as held for sale, the prior year comparatives here have not been restated. Capital's underlying revenue was GBP 1,980,000,000 for the half year, including an organic decline of 2.4% which I'll cover in greater detail on the next slide. Underlying operating profit before significant contracts and restructuring costs fell to GBP 157,000,000, giving an operating profit margin of 8%. This reflected the dropping out of 1 off benefits from 2017 and attrition across multiple divisions. Underlying interest charges fell from 1000000 to 1000000 reflecting the benefit from last year's disposal of the Capital Assets Services businesses. Underlying profit before tax was GBP 130,000,000, adding back the GBP 10,000,000 profit from supplier assessment services and parking eye, profit before tax would be GBP 140,000,000 consistent with our full year guidance. Finally, restructuring costs in the half year were 1,000,000, around 70% of which related to our cost out program, the remainder of professional fees on the transformation. This bridge shows the changes in revenue by division between 2017 2018, revenue declined as expected in the first half of twenty eighteen. We had limited benefit from new contracts across the group due to low levels of bid activity and wins in the prior year. As previously flagged, our customer management IT And Networks And Government Services divisions declined as a result of contract and volume attrition. In the case of Government Services, This reflected the reshaping of our DIO contract, which benefited from the recognition of previously deferred income in the prior year. And weakness in local government, which John will come back to you later in the presentation. IT And Networks revenue declined as a consequence of a lower level of sales in our managed IT business. Specialty Services revenue increased, but this did include a 1 off benefit from the end of our contract with Marsh. As announced in January, the administration of Prudential's Life and pensions business is due to transfer to a new supply in the second half of this year. Looking forward, we expect that organic sales will decline at a higher rate in the second half, reflecting continued attrition. Moving on to the underlying profit bridge, profit before tax was in line with our full year guidance for the first half and walking across the slide from left to right, The main reasons behind the fall in our profits year on year were, firstly, a decline in the public sector resourcing margins on the transition to a new framework and weakness in the apprenticeship market, which impacted profits in the People Solutions division. Secondly, contract and volume attrition in our customer management IT And Networks And Government Services divisions. And thirdly, the dropping out of some one off benefits, which were recognized in the first half of twenty seventeen specifically GBP 60,000,000 of profit in the DIO and government services and GBP 9,000,000 of profit in supplier settlements in IT and networks. Finally, increases in some cost items, including GDPR and investments in capability, which have been group wide. Basically services performed well, but did include a 1,000,000 off benefit from the end of the Marsh contract. Turning to our order book, we were very pleased by the resilience of our customer base in the first half, given the challenges that we faced before the rights issue. As a reminder, the order book covers about half of capital's business. In the first half, we recognized £1,200,000,000 of order book as revenue, but our order intake was 1,000,000 with good wins and renewals across software, customer management and government. There was GBP 179,000,000 reduction from a loss of work in local government and the reduced scope of a 30 year FM contract, which we inherited with TASCO. We've won a number of new contracts in the second half, but there'll also be a reduction of GBP 200,000,000 in the order book from the termination of the Prudential contract. There was an underlying cash outflow in the first half of GBP 115,000,000 before restructuring costs. As expected, our cash flows were impacted by changes in our working capital profile. Firstly, there was the normalization of period end cash management, Secondly, there was a reduction of deferred income, reflecting the low levels of new business signed in 2017, which meant that we received less cash payments from clients to undertake work than revenue recognized in the period. And finally, we reduced our receivables financing facility from 1,000,000 the 1,000,000, and these items were responsible for the 1,000,000 working capital outflow Net capital expenditure was 1,000,000, reflecting the beginning of increased investments in infrastructure and systems and the first investment since the rights issue in our transformation. In April, we highlighted 1,000,000 of expected spend in full year 2018 on known commitments. We spent GBP158,000,000 of this in the first half, including GBP 61,000,000 on the Connell settlement 1,000,000 on the separation of capital assets services and 1,000,000 on restructuring. I'd like to provide you with a quick update on our pension. The IS 19 deficit reduced from 1,000,000 at the 31st December 2017 to 1,000,000 at the end of the 30th June 2018. We've completed the tri annual actuarial valuation of the scheme as at the 31st March 2017. The actuarial deficit of CAPITA's main DB scheme was GBP 185,000,000, significantly lower than the IAS 19 deficit. As previously stated, CAPITREN tends pay down the actuarial deficit in the scheme over the medium term, and we will provide a further update in due course once agreement to address the actuarial deficit has been reached with the trustees of the scheme. I'd like to finish by summarizing some areas of guidance for the year ended 2018. On cash flow, we continue to expect a number of known non underlying commitments and working capital items, which are summarized on this slide. There's been no change there. We've introduced 2 elements of additional guidance for the full year. Our net interest charge is expected to be around 1,000,000 and our leverage is expected to be towards the bottom end of our 1 to 2 times range, subjects to the completion of parking eye and the timing of adoption of IFRS 16. Our IFRS 16 project is ongoing, and we continue to make good progress to be ready for adoption. In principle, it would increase our debt for operating lease commitments and increase our EBITDA by the removal of rent charges. We expect capital's underlying pretax profits before significant contracts and restructuring costs to be between 1,000,000. This updated for disposals, which would have contributed 1,000,000 in the full year. This is therefore consistent with our previous guidance. Any one off benefit in the second half from the termination of the Prudential contract is not included in our to GBP 275,000,000 guidance range. And with that, I'll now hand you back to John to update on the execution of our strategy. Thank you, Nick. This is the first time we're reporting against our new organizational structure. And I also hope that you see in the financials we presented today a far greater degree of transparency in the we have done as a company historically. And Nick has played a key part in that. Thank you, Nick. I want to start with a reminder of what we said in April about what drives most of our financial turnarounds over the shorter term. It is taking cost out where we're making good progress. Delivering contract turnarounds, I'll come back to that in a minute. And reducing interest costs from a much stronger balance sheet. These are drivers, which are pretty much in our control. And in the next few slides, I want to provide an update on each of them. I'll then brief you on the first investments we've made to get the company back onto an organic growth trajectory. This is obviously using the proceeds of the rights issue. And then finally, I will cover off market trends as I run through each of the divisions in turn. We're now 6 months into executing a bottoms up methodical and very disciplined plan to get cost out and improve our price competitiveness. This is not just about removing unnecessary cost. It is about making us more efficient and productive I'm very pleased, as I've said already, with the progress we're being that's being made here. We've delivered 1,000,000 in savings in the first half, we remain on track to hit our 2018 2020 targets with regard to cost competitiveness. Since April, we've commenced programs such as the consolidation of more than 10 IT help desks, the integration of our 4 historically separate IT and networks businesses into a single operation, and the offshoring of an additional 600 plus roles to India and South Africa for both operational activities and functional shared services with more likely to come. Additional cost opportunities are currently being addressed. I'll give you some examples of these. We've more than 360 separate properties. Across the UK today. So obviously, a significant potential to rationalize our property footprint. Very scope to drive savings from better management of our party software assets, we can centralize more of our procurement to leverage our significant buying power, and we can be more comprehensive in the adoption of automation solutions, particularly robotic process of automation, where we're setting up a call central team to drive this across all divisions. I'll reiterate our confidence that we can take out 175,000,000 by 2020. I think more importantly, as you've heard me said previously, We will develop cost competitiveness as a core competency at CAPITA. 1, we can be proud of. We will do this to ensure, of course, we're not just price competitive, that we're delivering appropriate margins. We lost more than 1,000,000 in 2017 on a small number of particularly challenging contracts, some of which continue to weigh heavily on our 2018 numbers. And while there is still much to do on these contracts, I'm encouraged by the progress being made to improve their performance. We've also established a contract remediation committee, which I chair which brings to that forum any contract where we might have a challenging engagement with the client. In other words, we're getting engaged on any problematic contracts, much earlier in the process than perhaps we might have done historically. We've established a strong partnership with NHS England, on the PCSC contract. Operational delivery is improving, improving. And there are further benefits to come from such things as digitizing ophthalmic payment processing. Our forecast is and remains to be breakeven on this contract by 2020. We're not yet meeting contractual targets for the army recruitment contract. However, the new recruiting software, DRS is now working. It's in place. And we have seen an encouraging response to recent recruitment campaigns. And I can share with you that the regular soldier application is now at a 5 year seasonal high. We have set we have reset, sorry, our partnership with the Army at a very senior level, and both parties remain committed for making a success of the contract. For example, the army is proactively reviewing, selected entry policies in order to increase the potential pool of candidates we can attract And whilst we're currently making a small profit on this contract, we are not generating the kind of return we should, and we'll not do so until we are delivering against the recruitment targets. We failed to deliver against the original transformation timetable on our contract with MobileCom Bebitel in Germany and had to replan this at the start of the year. I'm pleased to say we have now delivered on our first major milestone, a new Genesis contact center digital platform, still much to do on this contract, but we're aiming to breakeven again on this contract by the end of 2020. As Nick said, we took decisive action to strengthen the balance sheet very early on in the year. And in May, we had particularly strong shareholder support for our rights. At 97.3 percent take up, raising, as we said, 701,000,000 in gross proceeds. We've also announced 5 noncore disposals with total proceeds of GBP416,000,000, well ahead of the commitment we made in April to deliver GBP 300,000,000. This includes GBP 160,000,000 for prior assessment services, including construction line, which we completed in July, 2 35,000,000 for parking eye, which is expected to fleet later this year and 21,000,000 for 3 smaller businesses we also sold in the first half of the year. Over that period, we used $157,000,000 from the rights issued to prepay a tranche of U. S. Private placement notes and repaid a further GBP 150,000,000, which was due to mature in September. We expect to use a further GBP 200,000,000 from the proceeds of disposals to make accelerated pay downs across our U S and private placement and Euro sorry, private placement notes in the second half subject to the completion of the private eye transaction, including all the proceeds from disposals, leverage at year end is now expected to be at the lower end of our target range of 1 to 2 times net debt to EBITDA. And from this much improved base, we will continue to review the structure of our balance sheet further, to improve its efficient and flexibility, something we will continue to look at over the next couple of years. This is a slide we shared in April, when we stated we would invest up to 500,000,000 in 3 areas. We said we invest in organizational capability. Services and products and IT systems and infrastructure. As already mentioned, we've set up a new investment committee that I share together with Nick to optimize the allocation of this capital and much of the initial spend has been used to, catch up on prior under investment, particularly in our services and products technology. Over the next two slides, I'd like to give you a little bit of an update on where we are in terms of that investment. We are, of course, a people based business, one in which our success is predicated and skills of our employees. And under the direction of our new chief people officer, we have therefore commenced work on capital's first ever people strategy. This is to ensure we attract, engage, develop and retain the talent we need to be successful in our execution of our strategy. We will track the effectiveness of this strategy using a number of metrics, including such things as employee Net Promoter Score surveys And, I'll reiterate again that the incentive scheme for our top 150 executives and managers will be linked amongst other things for improving this score. Since April, we have made further progress on staffing our Executive Committee, we have appointed a Chief General Counsel and we are close to announcing the appointment of a Chief Growth Offer ahead of sales and marketing. And we are close to, making good progress, sorry, on the appointment for a Chief Digital Officer. I'm delighted that we continue to attract an excellent caliber of candidates to these roles and our focus on functional excellence, something that has many of you have heard me say previously was less well developed at CAPITR is already paying off. As you know, Nick Graterx has informed the service to step down as CFO, a search for his successor is underway, and we will make a further announcement in due course. On a very personal note, I would like to thank Nick for his invaluable support. He has given me, since I came to capita on the 1st December of last year. Thank you, Nick. Earlier this summer, we launched a project to develop a new operating model. This will introduce a more disciplined standardized and efficient way of working. We will say more about this, as I've said, in our full year results in March. The board and I feel strongly that capital must be a company which people want to work for, work with and invest in. Actions, of course, speak louder than words in this regard, and therefore, you will see a series of changes in such things as the culture of capital and how it engages with all of its stakeholders, over the coming months and years. For example, we're placing a lot more emphasis on diversity in all of its forms and on addressing our gender pay gap, and we are strengthening our relationships with suppliers through the development of a supplier charter. With particular focus upon our approach to on payment terms with SMEs, who are a strategically important part of our supply chain. I'm also particularly pleased to announce today that we have also agreed to appoint up to 2 employees as directors in response to the recommendations of the new UK corporate governance owed. This, you should interpret as another key message from CAPITA with regard to driving the kind of social credentials that are appropriate for a company that derives 45 percent of its revenues from the public sector. We're also investing more in digital Technologies, the digital technologies that power our client offerings specifically our software products business. And of course, the digital platforms we use to deliver our customer management, our government services and our people solutions offerings. This is key to ensuring we have the sustainable competitive offerings that'll ultimately drive organic growth. Since April, we've kicked off a number of investments, some examples, a new smartphone version of our educational software for emerging markets called Sims Like, a next generation version of the orbit benefits platform and our knowledge pool learning booking system and finally, a new customer management, digital contact platform in customer management. We're also increasing the use of technology partnerships to extend the scope and speed of our digital transformation capability, indeed defining and building out this ecosystem, again, as we presented in April is of establishing this ecosystem of strategic partners is core to our long term strategy. The first tangible example of this is our recently agreed 5 year partnership with Microsoft, for the use of their Azure cloud platform. This will not only support the rollout of cloud services, particularly in the software and customer management business, but it'll also facilitate the rollout of our next version of Sims and make it easier to internationalize our software offerings as services. We're also very close to agreeing a partnership with McKinsey Digital accelerate our analytics, our data analytics and digital transformation capabilities. More partnerships will follow. Our chosen markets are growing, but currently we are not. Addressing this is my single highest priority. It'll also be the single highest priority, of course, for our, recently contracted but yet to be announced chief growth officer. We will be announcing his appointment very shortly. Organic top line growth is fundamental and a building block to achieving our long term value creation plans. But as I have stated before, this will take time. We're having to retool, retrain and augment our sales organization, building on undoubted strengths, a tender response, the honing skills in consultative selling and opportunity origination. We also need more focus on the development of competitive, scalable, and repeatable solutions. This takes us back, of course, to my comments about investing in technology. With the rights issue completed and the leadership team coming together, I'm very pleased with the progress we've made on the latter. I'm now able to spend much more of my time with clients. And I would add that our access is just great. And with our sales leads, something I personally enjoy, but that is also giving me a lot more insight to the market opportunities we have as a company. My many engagements in the last few months with the senior leadership of our clients across the business, convinces me that the opportunities are there. We need to be getting after At the same time, I also want to reiterate that we're not going to repeat the mistakes of the past and say Categorically, very strongly, we are not going to prioritize revenue over margins. We are not going to prioritize revenue over cash generation. Our new contract review committee provides central oversight to ensure this, to ensure we don't take on unacceptable risk and that we realize appropriate returns on the contracts we bid on or originate. This committee also ensures that the deals we are bidding on fully align with our operational strategic and financial goals. So to reiterate, organic growth will take some time to realize we're still committed to delivering organic growth in 2020. We're putting the building blocks in place to achieve To back to what we're seeing right now, as Nick and I have already mentioned, order intake in the first half was GBP 920 1,000,000. I would suggest a strong voter confidence in CAPITA as a business partner. Clearly, this was a period of some uncertainty, for the sector post carillion and capital specifically and a number of contract decisions therefore took longer than anticipated. Low levels of tender and subsequent bid activity in 2017 also impacted our order book over that period. Collectively, these factors resulted in a 6 with Southern Water And BA and government services contracts with, for example, the Department of Education Standards And Testing Agency. And as most of you will be aware we were the winning tender on the defense fire and rescue contract with the Ministry of Defense. Again, as we presented in April, each division now has, for the first time at CAPITA, a clearly defined 5 year strategy, a clearly defined set of executable actions, what we call our strategic imperatives to ensure execution on these strategies, and agreed delivery time frames and associated performance metrics. The focus is now very much on execution. And over the next two slides, I'd like to update you on where we are division by division. In Cabitas Software, we have a top UK software business, with high margins and good cash flow. We develop a specialist enterprise software for markets such as education, emergency services and local government. And we also sell products, which serve similar needs horizontally across industries such as workplace management, our retained product, and payments are Pay360 product. Happened to software is a strong software technology platform and one we have every intention of growing. There were a number of important milestones in the half year for the software. Firstly, as mentioned previously, we made investments in the SIM suite. We piloted the next version of this product and launched a finance module, both of which are now cloud based solutions. We also started development of a smartphone enabled version for emerging maps, as I mentioned previously, our Sims light product. Secondly, we set up a sales and marketing operation in the U S. This is to roll out selected products in that geography, including AMT CyBEX in the utility sector, our payments product, Pay360, and our resource management software retain. Thirdly, we won a number of important clients, including the Sims contract for the actually the world's largest school, in Lucknow, India, with over 56,000 employees and 2 relatively large Secure Solutions contracts with the West Midlands Police, and the Ministry of Justice in the UK. In the Human Resources market, we have GBP 500,000,000 of annual revenues and market leading platforms such as orbit, and HeartLink And Benefits Administration. Our addressable market, which covers now the entire hire to retire spectrum, is growing at mid single digit at a mid single digit CAGR. In the half year, we brought our operations together under a single leadership team for the first time And here, we will drive benefits from the unified structure by realizing cost savings of costs, but perhaps more importantly creating and leveraging a single sales engine that sells the entire portfolio of solutions. And I'll remind the audience that less than 4% of our clients in this division have more than one contract with us because of the highly high load nature in which this business was previously managed. We commenced our accelerated investments in our next generation Orbit platform, onto which a number of our clients are migrating. We upgraded our learning booking system and also the candidate portal of our pre employment screening system in security watchdog. We also took some cost actions, which will show through in the second half of the year. And we won several small contracts in the first half, including work for RWE Energy and a training consulting contract with Vodafone. Customer management is the market leading provider of multichannel customer contact services in the UK, and the number 2 player in Germany and Switzerland with a strong presence in telecommunications, utilities and the retail sector The opportunity in these markets is for us the growth opportunity in this market is expected to be a CAGR of between 4% 5% between now 2021. However, the UK sector is challenging and we are currently experiencing some attrition in that segment. We serve our customers from a mix of onshore, near shore and far shore locations in Europe, South Africa, where we have distinctive capability and in India. We have invested in market leading technologies such as Octell and our multi channel customer management platform have a proven track record of delivering not just strong customer service for our clients, but demonstrating to them how we can help them grow their revenues. In the half year, we commenced a training program to reskill 8000 of our people. We commenced a refresh of our IT and telephony infrastructure, And after a difficult start, as I've already mentioned, we delivered the 1st major milestone on our contract with MobileCom Debitel in Germany. And year to date, we have won a number of important contracts, including British Airways, served from our operation in South Africa, and expanded contracts with Southern Water, the financial services compensation scheme, N Power And Marks And Spencer's expenses. Government services remains a key segment for us. With many long term contracts, strong relationships and cash generation, it is as I've described previously, the annuity in the portfolio. Government is no different to the private sector and its need to embrace digital transformation. As a means of addressing budgetary pressures and improving how it serves its citizens. We serve 2 very different markets central government and local government. The pipeline of opportunities in central government, we talked about a pipeline there of 5 years in April, a market, a customer for whom we are a strategic supplier, remains very much intact I am also encouraged by the dialogue taking place with the cabinet office and more broadly with government around government's approach to strategic sourcing. We have a number of services that we offer to the local government service both in software, HRO and business process outsourcing. The latter of these is changing very quickly and is proving to be challenging. Large strategic partnerships are no longer being sought and some customers are going to take services back in house for a re for a variety of different reasons. This trend will affect our revenue and order book in the coming years, and it encourages us to accelerate the rebooting of our offering to local government. We have success in a number of areas with, scalable, repeatable digital solutions today for around revs and benefits, we need to be making more offerings of designing and delivering more offerings of that nature to this market. In the half year, we've commenced a program to drive operational excellence and put in place continuous improvement plans across the division. And as previously mentioned, we've significantly improved the operating performance on the NHS England PCSC contract. We expanded our contract with Transport for London to include the new ultra low emissions zone, a strategic client for us. And more recently, we were selected by the Department of Education's standards and testing agency to manage the administration, the processing and support for all primary school tests across England. This is a contract worth 109,000,000 over the next 6 years. And as already mentioned, we've been selected by the MOD as the winning tender for the defense fire and rescue contract. These last two contracts I should highlight are the largest strategic sourcing decisions made by central government this year, and again, represent a vote of confidence on the part of central government in capital. We are a top 10 player in UK IT services, providing end to end enterprise services to not just other parts of capital, but to third party customers as well. Overall, This is a market that is mature, but we still see upside, and particularly from our network outsourcing business. In the half year, we commenced the 1 ITS program to consolidate our business into a single country wide IT services businesses, includes the introduction of shared service centers with common processes and an increase in the use of offshoring, which is expected to realize significant cost savings over time. We're also commenced we also commenced, sorry, a program to invest in, simplify and consolidate our data centers, and we have won a number of contracts in network services with sample, the Ministry of Defense, Metropolitan Police And Kent County Council. And then lastly, Specialist Services. This as you will remember includes our financial services and regulated operations, our government and specialist commercial partnerships and any other stand alone businesses that are not core to our 5 growth platforms, such as travel, print and property. It includes as we've described previously, a mix of cash generative growth and challenged businesses. And we're managing this business as a portfolio to embrace their different business models, and to provide more oversight and discipline. The team are currently doing more work to define the best way to maximize value from this portfolio And you should not expect, given the success we've had with disposals year to date, further disposals from this portfolio for the time being. Recent wins in this segment include, being the preferred bidder on an enforcement contract with the Ministry of Justice, And our business services business has won contracts with both the Department of International Trade And Rolls Royce. So in summary, we are at the start of a multiyear transformation, and we are on track with respect to the plan we outlined in April. I'm pleased with the progress we're making. PBT guidance for 2018 remains unchanged. Order intake was 9.21 for the first half of the year, encouraging given the journey we were on at that point in time. We're on track to deliver 1,000,000 in cost savings in 2018 and at least 1,000,000 by 2020. We will deliver $416,000,000 in proceeds from disposals this year, well ahead of our commitment of 300 We will invest up to 500,000,000 in CapEx over the next 3 years and have begun to make these first disciplined capital investments. Our leverage target of 1 to 2 times net debt to EBITDA remains on track. We were in the middle of this range in the end of June, And with the disposal proceeds from parking are still to come, we will be at the lower end of that spectrum by the end of the year. Our strategy also continues to focus on delivering a more predictable our commitment to delivering double digit margins and at least 1,000,000 free cash flow by 2020. With that, I thank you for attention. And Nick and I, of course, would now be delighted Thank you. Good morning. Suhastening from Goldman Sachs. Just one question, please. 7 months back, 6 months back when we met, you did mention that the UK MOD was probably not the best place for capital to be. And since then, you have probably participated and won quite a lot of contracts. Can you talk about how the relationship with the UK government has changed and what makes you more optimistic here? Thank you. Firstly, let me deal with the MOD. I think the DIO contract, which we executed ourselves from in 2017, was not necessarily a contract that we were best suited to deliver against. I'm not sure we made that statement about the defense fire and rescue contract. That if you look at the contracts we engage with with central government, what they all have in common is a focus on, people's smarts, productivity efficiency, and the use of technology. And the defense fire and rescue contract is no different. That technology manifests itself in the form of the equipment, we're sourcing largely from the U S, to deliver the service, but also software technology, the capital is using to execute on the service. That includes our retrain, resource allocation software as well as our control works. Blue light software, which we sell to 3rd parties as well. So it's in line and is of the margin performance 6% to 8% that we recognize we can derive from delivering contracts to central government. Now to your broader question about central government, I am encouraged by what I'm hearing from the cabinet office. I think as painful as events of the latter part of last year and the early part of this were for other players in the space. I think that has caused not just the cabinet officer civil service, but politicians to take a much closer look at the efficacy of government procurement, the transfer of risk, the terms and conditions, we should be doing much more, as I mentioned, at the Public Accounts Committee a month or so ago to co create, to collaborate, and to innovate. And government procurement in its current form is quite frankly too restrictive, in terms of our ability to innovate to create value, I would also suggest that the transfer of risk is unreasonable. Those are factors which are being embraced and understood by central government today, we are proactively involved in discussions through a number of vehicles in helping shape central government thinking around strategic sourcing, and I'm encouraged by some of the decisions that are being made. Yes. Good morning. It's Julian Kater from Numis. A couple of questions, please. The first is, in respect of the problem contracts, I wonder whether you could just say what the the year on year profits delta was from the 3 contracts that you drew out there? The second question is, in terms of the contract review committee John that you now share, how rapidly are you seeing changes in the behavior of people within the organization, bringing potential contracts to you and the rest of the committee. And my third question is in respect of your comments on local government. Can you just remind us within your the government division what proportion of that is local government? And when you talk about an expectation of a 4% CAGR, is that 7% in central government and minus 2% in local government or how do you see that developing, please? Sorry, that was more than 2. Yes. So let me start with the last one first. A lot of questions there, Julian. About 17% of our revenue today is from local government. It is a subset of that, which is in the local government BPO space. We do not anticipate the local government BPO business to grow going forward. That is not a model, that local government feels is appropriate, going forward. Our opportunity is to deliver more of the Scalable solutions, as I mentioned, that we are very successfully delivering through a number of councils across the UK today. We have, we have some of those solutions today in the form of Revison Benefits. We have other solutions that we're developing. I would also emphasize that we have a very healthy software business with local government, which is not declining. In terms of your first question, I'm afraid we're not going to go of granularity, I would simply say that I am pleased with the pace at which we are improving the operational performance of those 3 problematic contracts that we covered today. Indeed, I would say that progress on those is probably progressing a little better than I would have anticipated at the beginning of the year. And Julian, I'm afraid your second question was. Second question is more a cultural point in terms of the contract review committee. I would say, yes, capitors had a culture historically where things were optional. This is no longer optional. If people are going to bid, they have to come to the divisional contract review committee Firstly, and if it is of a certain value or has certain risk, financial risk or reputational risk, criteria, it comes to the group level contract review committee. The papers are distributed well in advance of the of the meeting. They are gone through in some detail. Each contract we review over a period of roughly an hour And I think it's fair to say with the support of the commercial function in the organization, which own the process all the way down through the hierarchy, people are getting it. This is the way we're now going to assess, very early on in a tender process or actually when we actually submit the bid, This is the way we're going to assess whether this is something we want to be doing or not based on the risk profile, based on our strategy, etcetera. Good morning. It's Kim Mann from Jefferies. I have 3 as well. Apologies. First of all, Nick, I wonder if you can give us a bit more detail on the million of other working capital. That you mentioned in your slide, I guess, just conceptually, why have you got negative organic revenue growth that it's still absorbing cash in the working capital line? Secondly, could you give us a bit of background please on the 1,000,000 put option cancellation that's in the notes and whether there's a mechanism maybe to change the formula for the other put options, that the company has. And then thirdly, just from an analyst perspective, your guidance obviously excludes a number of factors, but we would need to include them, particularly when we're putting cash flow statements together. So could you help us think about maybe the initial losses on the defermo contract potentially that could be generated this year and next year, and also the, I think the cancellation fee that you mentioned, regarding the Prudential contract as well. Right. So that the 52 hurricane, the 52,000,000 working capital movement was made principally of 3 things. So the, unwind of the receivables financing facility obviously had a partial contribution to that we had some suppliers in the first half who tightened some of their payment terms, not surprisingly as a result of some of the events that we went through. We're expecting by the full year that that will have reversed again. And then we also had some rent payments that were held over from the end of, last year, which we've normalized. There was, sorry, there was a 4th item as well. We have one large customer that historically had paid us quite year in advance and that we've reduced the amount of that advance payment. So there's a combination of things in there. Your second question around the put option, I'm afraid people file than me do the calculation around how we discount that. What I do know is as the date that that comes closer to fruition, the discount rates and the discount calculation changes, I think that what you're seeing, but we might want to follow-up later on that one. Deferment loss, we won't be specific on that at this stage and not least because of the position at the moment. And your last question on Prudential, so there will be a accelerated than one of the deferred income on the financial contract, which will be released in the second half. As I said earlier, we're not including that within our guidance. One of the things that we will have quantifies any asset write downs that will offset that. So for example, if we're carrying any CFAs or tangible assets in relation to that contract, they'll also offset that number So we'll disclose that in full in the second half, but as I said, it's not, included within our guidance. So if there's a positive contribution, it will mean profits will be in excess of that guidance. Is that cash or bookkeeping? Sorry? Is that cash? There will be some cash on terminates but the the deferred income, no, it's a it's purely an accounting adjustment. Nice. The only do we want to take some online? We have a question on the line from Tom. The polycomic polycomputing app first, the business communication app business, the rollout seems to be taking a little bit longer than expected. Could you maybe just run it through? Hey, I'm afraid we're finding it really hard to hear you. If you're on a speaker phone, could you possibly pick up the handset? Yeah. They're not on speaker phone. That's better. Keep going. Okay. So on the Sims business, you are rolling out the Next, can you give us an update on profitability, please? So I think your question I think your question was on the profitability of Simms. Was that correct? That's right. Yes. We don't break down, our financials at that level of granularity. I mean, what I will say by Sims is about Sims is, it's a very successful product. We have 80% of market share in the UK. We're now starting to get traction in 1 or 2 selected international markets. We're expanding the modules for the Sims product. We announced and rolled out the finance module in the first half year. And frankly, is one of the jewels in what is, a very strong portfolio of software assets. So a very successful product but I'm afraid we're not going to break down the profits on that business specifically. Okay. If that's the case, what's happening to the rest of the software businesses and where is profitability declining there, please? And then just on the cost savings, could you just say whether that is a million impact in the half year? Or is that a run rate by the end of the half year? And maybe just finally a view on revenue attrition that you expect for Yes. Hi, Tom. So just to go back on your SIM's question, so on the adoption of IFRS 15, the recognition of revenue on the SIMs product became more akin to a SAS based platform. So as we move to the cloud, with Sims. The likelihood is there won't be a significant impact, and that's one of the advantages of that early adoption meant that they would much a much smoother effect on revenue as Sims moves to the cloud. There has been some profit decline in some of the software businesses, probably the most notable was AMT CyBex, but as John said, we're piloting a rollout of that product in the U. S. Historically, we enjoyed some quite significant profits on sale of licenses, which under the new accounting and now spread into the future, So that business is getting used to the new accounting standard and the effect that that has on its sales strategy. And one of the reasons why we've been pushing those products into the U. S. Do you want to talk about cost savings for H1? 30,000,000 in year first half impact? Yes. So, the cost savings, yes, it is impacting the first half results. And Nick, I'm not sure whether the other part of the question, whether it was, run rate for the remainder of the year, yes, it will be. For revenue attrition in H2, yes? No, the cost savings? Yes, we've not, we've talked about $70,000,000 for the full year. Okay. And then on revenue attrition, look, Tom, we've not given guidance on revenue attrition. I don't plan to do that today. What we have committed to doing since I've come on board is delivering organic revenue growth by 2020 and we're on track to do that. What we can say, Tom, is that consensus houses down about 3.5% for the, for the full year. Eony, any other questions online? Our next question today comes from Hennessy from Stocks. Please go ahead. Hello. Yes. I had a question on the 49,100,000 of contracts and restructuring charges. I understand that 70% of that relates to the cost out program from what you said. I'm just trying to square that with the guidance 40,000,000 cost to achieve that you're, that you still have, in your guidance for 2018, Yes. Perfect. Could you help me to understand that? About 1 third of that 49 is associated with professional services fees that we incurred in the definition of the strategy, the cost out work, and the operational model operating model activity we're doing. There's also some professional service fees there, associated with our preparation for the rights issue. The other 2 thirds is directly associated with costs, that relate to taking cost out of the business and the transformation overall. Nick, is there anything you would add to that? No. And I think just to reiterate that we expect to spend around about 4 £40,000,000, taking GBP 70,000,000 out of the business. There are some other programs that were ongoing as we entered the year, so we have spent money on things like the Smart the finance program as well, which is, which is, delivering some good results for us. Any last Just so I understand that. So 2 thirds of that 49,000,000 would relate to the cost to achieve, which equates to about 1,000,000. So does that mean it's very heavily weighted to the first half versus the second half? Yes. So the $33,000,000 or approximately $33,000,000 also includes some cost we've incurred in relation to other programs that were already underway, but the costs delivered the GBP 70,000,000 we think will be about GBP 40,000,000, although we have spent a lot of that money in the first half which will then have a full, run rate effect in the second half. I see. I see. And just a second question on special terms since you said not to expect any any additional disposals in the, in, I think you said, for the time being, which is fair enough. Are you still actively pursuing disposals, however, for parts of that business? No, we're not. We have shut down any further disposals for the time being. That's not to say that we might not revisit that in the future, but right now, I'm delighted with the proceeds we received from the businesses where we've already sold. Those that remain in Cabo Specialty Services, as I've said, are very generated by and large. They're growing. We have 1 or 2 we need to fix. This is not the right time to sell those. We want to maximize the value from them. And to do that, should not be sending them at this point in time. Okay. Thank you. Good. We'll take one more question if there is one from the audience and then we'll shut it down. Good. Thanks very much, everyone, for attending today and your interest in capital. Thank you.