Good afternoon, everyone. Alex, can you just confirm that you can see our screen?
Yes, Stephanie, we can see you, and we can see your screen, too.
Perfect.
Thank you.
Okay. Thank you very much for the introduction. As Alex has just said, I'm Stephanie Little, and I'm joined here by Adolfo Hernandez, CEO of Capita. We last met with our retail shareholder population back in March, when we were six weeks-
Almost seven weeks.
... into the job.
Indeed.
Since then, we've done a Capital Markets Day. We have announced the disposal of Capita One, and we've also done our half-year results, so there's been a lot going on in that time. In today's presentation, we're going to cover the H1 results, the outlook for 2024, and our strategic priorities as we move forward. The way that we're gonna split the presentation is we're going to do a short summary of, as I've said, the H1 results and our strategic priorities, and then we're dedicating quite a lot of time to Q&A. As Alex said, we've had quite a few questions through, so we want to make sure that we can get through as many of those as possible.
I think it's fair to say there is a lot going on. We are excited as we move into the latter stages of this year and into twenty twenty-five. As usual, I'm just gonna refer you to our usual disclaimer, and then I'm gonna hand over to Adolfo, who will talk you through our strategic themes.
Thank you, Stephanie. And thank you everyone for finding the time today to come and listen to what we have to say. I know by the poll many of you have been patient shareholders, so hopefully this additional communication will help you understanding what is it that we're dealing with, what are we doing, most importantly, why are we doing it, and how are we gonna get it done to get the right results? From the Capital Markets Day, and I probably many of you might have listened to it back in June, but there was one slide that I found to be powerful because it sort of said a lot of the message was this one, the better themes.
Because this is what we're trying to do. We're trying to build a better Capita. Capita, as I have found in my seven and a half months in charge, as I've gone around meeting customers and meeting employees and seeing down on the ground, what is it that we do day in and day out? We do a lot of good work. We really matter to society. We really support citizens, governments, telecoms companies. We've really enabled a lot of the work that utilities, energy companies have been doing in difficult times. What we do in financial services, supporting vulnerable customers. What we do really, really matters.
However, we have fallen short when translating that great work into financial returns, and I keep saying to my team, it's my responsibility, it's my obligation, and it is my mandate to help Capita find that path where we can deliver that financial return by building a better company, and so easier said than done. How are we going to do that? Through these four vectors. Number one, finding better efficiencies and more efficiencies. We can't possibly spend the amount of money we spend to generate the revenue that we generate. We've had to find ways to automate, to just delayer, to be back much better at executing through automation, through the use of technology, through streamlining organizations, everything that we do. Technology into every organizations, everything that we do.
Technology into everything that we do, how we do it internally, how we run Capita, how we take advantage of technology to make this a leaner organization, a more agile organization, a more efficient organization, but also include more technology in our value propositions because our customers are right now looking at outcomes that they need help delivering, and most of those outcomes can be advanced by technology significantly. We also have to get better at delivery. We consistently deliver around 95%. And while that is very good, I think we have to do better. We have to do much better and get closer to 100%.
We can't hardly get to a hundred percent in a complex project business, but we have to up our game, and we have to raise our standards farther to make sure that we don't sign the wrong projects, and then when we sign the right projects, we actually deliver them on time, on budget, and on quality. And then as a result of that, we will deliver a better company. It will be a better company for our colleagues to continue developing their careers. It will be a more attractive company for people to join.
It will be a better company for our customers to do business with because they'll feel more reassured not only about the present, but also about the future, and also, importantly, a better company for current and potential future shareholders in the future who want to get a return on their investment. So that's the mandate, that's what we're trying to do, and what we're gonna try to do here is a shorter version of the last couple of updates to tell you where we're making progress and the type of progress we're making. But before we do that, where are we—what are we gonna try and get?
I think in an initial phase, I think about first of all, it's about efficiencies. We need to get efficiencies into the company. We have to reduce cost, we have to find the space, and we have to create the space so that we can do all these great things in a better way. So that means getting smaller initially, and as a result, we will leverage those better efficiencies to improve our EBIT margin to 6%-8%, and we've made good progress, but there is a lot more work to do. We have to improve our free cash flow. We have to become a positive free cash flow, but in the first step, we need to get better at converting profit into cash. So we believe over the medium term, we should be able to get in profit into cash.
We believe over the medium term, we should be able to get it to six. We do very foundational things, which is just making sure that we are profitable and we get profit growth, and that we are better at managing, generating cash flows. Then it will be about growth, and we should be able to get to low mid-single digit growth, sustainable in that final phase of the project. So where are we? At the end of June, we delivered a 45% improvement in operating margin. It's a good step in the right direction, but there is still a lot of work to do.
You might remember when we talked. We, you know, had announced back in July 2023 that we were going to do GBP 40 million. Then the company announced that we were going to do GBP 60 million. Then I joined a couple of months after that and said, "No, we are gonna do GBP 160 million." We reported that we already delivered GBP 100 million of those annualized GBP 160 million, GBP 160 million as of June 30th. We needed to reestablish the relationship with the hyperscalers. We needed to move from being good customers, buying their technology, to actually being partners and be able to launch solutions with them and co-create solutions for the market. We've been able to launch solutions in this space, particularly in the generative AI.
Launch solutions in the space, particularly in the Generative AI space around the Agent Suite, but also Capita Contact. Capita Contact released in June, Agent Suite released in July. We kicked off a really aggressive culture transformation program. You know, you can't get everything done that we want to do without changing and evolving the culture in Capita. There's some fantastic things in the culture, but there are also a number of things in the culture that were getting in the way, that are holding us down, and that we are working aggressively to transform. We also using offshoring resources. We just built a more modern offer, and even though we had exited, which sort of creates always a few niches, right, with the customer, we've ended up winning it again.
Now we won it in terms that it's actually better for the customer than what they had, and it's a better deal for us. Probably not RNS material, but it's definitely, for me, actually very, very pleased with that, 'cause it tells us a lot about-
Okay, thank you.
What's changing in Capita?
That does sound encouraging. You have split the business into three service lines. Within Manage for Value, do you anticipate further disposals, and what businesses are you most likely to exit?
I wouldn't quite say there's three service lines. We do have two divisions, and then within each division we have three areas. So that would be sort of how it works organizationally. But what I have defined is, like, the three buckets where we look strategically as to what management does with some of these capabilities and some of these contracts and the third bucket is the Manage for Value that I just referred to. So let me sort of cut to the punchline right away. There isn't another Capita One sitting there, right? This was unique.
Arguably, you know, and I know Jon, my predecessor, looked at it as, is this something that goes into portfolio back in the day? But it was deemed at the time that let's try it for a little bit longer. And the reason why it's sort of still there is 'cause, I mean, we tried it, it didn't work, it didn't make sense, so that's why it landed there. That's unique. Look at Manage for Value as a bucket of service lines and contracts or components of contracts that we do today that are costing us headaches, money, and overhead.
So, I think a good way to think about that going forward is, okay, the day we address all of this, we're just gonna stop problems rather than make money and get significant proceeds for the rest of the portfolio in that matter.
Okay, thank you. Could you give us an estimated date to achieve free cash flow positive, and also a date for resumption of dividends? And what criteria will you use to determine when Capita returns to the dividend list?
Yes. So we have said that we will be free cash flow positive from twenty twenty-five. In terms of an estimated date for dividend resumption, we've not commented on that, as you might expect. At the Capital Markets Day, what we outlined was our capital allocation policy, where we effectively split out the hierarchy in terms of what things need to be in place and what we need to have done to resume dividend payments. We've said that as a hierarchy, investment will come first, so that's the reinvestment of up to GBP 50 million once we've delivered the GBP 160 million of cost savings, and then also ensuring that our leverage is the most optimized position.
At that point, we will then look at reintroducing dividend payments. And I realize it may seem a very distant thought, but after that, we would then look at further capital returns above a kind of annual or usual dividend stream.
Thank you. Next question here, again, on cash flow. I'm struggling to understand why your cash conversion is so low. Are you doing anything to improve this? And with the businesses you have left going forward, what should we expect in terms of the cash conversion rate to be?
Yeah. So we've outlined that our medium-term target, as you can see from the slide, is an operating cash conversion of 65%-75%. Which obviously is a big improvement from where we are at the moment. In terms of things that will improve that, that's partly improving the operating margin from the business, but also, as Adolfo talked to, we are reducing kind of the transformation and upfront spend that we have on a lot of our contracts, where we're using the hyperscalers and, you know, technologies that already exist, rather than bespoke building everything ourselves. Which what we would see in the past is we'd see a lot of upfront cash costs to deliver a contract to start with, and then you recognize your revenue effectively on a straight line over that period.
You had a really lumpy cash flow over the life. What you will see with our contracts going forward more frequently is that you won't have the big upfront transformation spend because we're using, as I said, technologies that already exist, which will help smooth the cash flow and give you a more consistent cash flow profile going forwards.
Thank you. With the break on government spending-
Does it have big impact for us?
Do you expect any changes in your operating environment? Are you seeing any of that already happening?
Obviously, a period of elections and new government ministers and ... always comes with a disruption. You know, it's just sort of, I guess, stating the obvious. We've also got a budget, you know, coming in soon, so we're gonna just wait and see where all the chips fall, when all of this is done. If I was to comment on what we know and the conversations we've had with the government and with different people supporting the government, and we look at the manifesto, if you look at the areas that at least strategically are going to be receiving policy support / funding, I think there are areas that are going to be good for us, right? Obviously, there is a focus in defence, right? This is Strategic Defence Review .
I think, you know, we do well, I think, in the defence space. I think we add a lot of value to the forces. I think in the defence space, we add a lot of value to the forces. I think we are a trusted partner to them, and whether it's recruitment, development, training, and operational readiness of the forces appears to be continuing to be an important priority. Now, we have to see the output of that review. But assuming that continues to be a priority, I think that's a good thing for us. If I look at the NHS and sort of the big commentary the last few weeks around the NHS needing to transform to really deliver, it's not a question of just more money.
I think if you look at sort of the digital transformation and some of the work we're already doing there with primary care, some of the ideas we've got on the table around virtual wards as a way to expand the reach of hospital staff into people's homes, so that we can extend care in modern ways. The kind of work that can be done with the, you know, full digitization of medical records. So we're already doing part of it. So I think these are areas that would be supportive. Similarly, you know, if we're really gonna go and build homes, a lot of the councils do not have that planning capability to deal with that, and we do provide planning services.
A lot of the components of delivering on those policies are things that we're already doing today, and many of these things are actually in our start positions. I am excited on that. But we still see the policy, still see the funding today, and many of these, so there is a transition where I think of this Parliament. I think this will work well. We just need now to see the strategic reviews completed, policy announced, and enacted ASAP.
Okay, thank you. Next question here: Are you seeing any green shoots yet in the experience division, or is this, in your assessment, more of a 2025 story once rate cuts take hold?
I am seeing green shoots that will have an impact in 2025. I think I'll just sort of say it's not either/or, it's both. You know, just one of the examples, we talked about Agent Suite, deployed in a particular customer. You know, I have seen how impactful it was on week one, and then I saw how easy it was to make it more impactful for week two. And then I've seen how easy it's been to make it even more impactful for month two. So as I see this, obviously still small, but I can see as we accelerate this deployment across more of the CE customer base, you start putting all of these incremental improvements, and they actually start adding to a lot. But that's more something to start seeing in 2025.
But the green shoots and the proof points for us operationally are here, but operational improvement always precedes financial improvements, unfortunately.
Okay, thank you. Can you give an update on the data breach and Barings' recent class action?
Let me just sort of give you a two-part answer. So on the data breach, there's nothing to report as such. This was. You know, we've been going through all the motions, and I mean I think first of all was getting to the bottom of what happened. And the third one was working with the affected entities, you know, people, companies, and just put all the support that was required. That was something that was done last year. The company had already embarked on a cyber readiness improvement plan, like any other company. Obviously, cyber has just been something that's been on the agenda for a while, and Capita had started before. Cyber and Capita had already started on that journey before I arrived.
It is true that we have accelerated it. It is true that we have continued to raise the bar, and that has sort of continued, and we're working with the authorities, and yeah, just nothing else to report. On the Barings, so obviously, as you can imagine, so obviously there's a little bit of noise there, but it would be inappropriate for me to sort of comment on any open cases, potential cases. There isn't anything at the moment that is worth commenting on.
Okay, thank you. We've had a couple of questions on the Capita One disposal. I think this one probably sums it up. Looking at, are the high interest rate U.S. private placement notes callable early? And if yes, and assuming cash generation hits your target of 65%-75% run rate, could some of the cash from the Capita One sale proceeds be put to use to redeem some of that high-cost debt early?
Yeah. So what we said is that the Capita One disposal proceeds clearly provide us optionality. You know, very true that the PPNs that we took on last year were at a higher interest rate. So we're looking at all options on the table to improve kind of the leverage position and the interest cost going forward. Clearly, bringing that down and improving our free cash flow in 2025 is the priority going forwards.
Thank you. Let me bring the next question up here. Could you comment on the number of buildings and staff you now have, and the near-term estimates?
Was that buildings? Sorry.
Buildings, yeah.
I don't know the number off the top of my head.
No, and neither do I. I know. Sorry, we sort of don't own as such. Most, the vast majority is leases. We worked down the number significantly. We can provide the exact number of what we've got, and we've got plan to either exit leases or transform leases as in downsizing or negotiating. One thing that I think is important, unlike other companies, we are going to continue on a Virtual First policy. There's merits for all sorts of approaches, but we are discovering and talking to our colleagues and also talking to our customers that a mix where Virtual First is the norm, it's not everywhere, but is the norm, is the average. It's working the best.
It's giving us a good ability to balance work-life balance with our colleagues. Tools that we have now in place make sure that we can track productivity. It doesn't matter where people are, this is a matter of tasks performed, and we got a pretty good sight of that. It's allowing us to level up as well, and we're able to hire in multiple parts of the country and optimize on multiple levels, while still having a good footprint, so people can come together regularly when it's required. For projects where it's required for customer interactions, where it's required for case resolutions. But this Virtual First has been highly appreciated. We hear from customers.
We hear from customers that it works well when there are concerns, so that we see that we need to sort of do more physical stuff. We also do office, and we've got fully fledged call centers with people in there. But it's for a vast part of the Capita population that is not required, and we believe that's going to be a very attractive value proposition for our employees, which is also going to be financially positive for us.
Thank you. Got a question here on the sales pipeline. Can you comment on the unweighted sales pipeline increase in 2025? Are the new product offerings addressing a larger market?
Yes. Yeah, yes, they are. Obviously, you always have also some large projects. But those large projects are being built on a significant level of technology components. So some of the solutions I discussed before open up new markets, new opportunities. And what they're also doing is they're allowing us to see opportunities earlier that we wouldn't normally see. You would normally only see some of these opportunities when it got to the services end. Whereas now we can sort of look at the opportunity in its inception. And then the other thing is now through the work with the hyperscalers, we're actually now sharing pipeline, sharing opportunities, and that has increased our visibility as to what's in the market, cause they do have a lot more feet on the street than us. So certainly, technology has played a role.
Thank you. So a related question to this: Are you at an advanced stage of securing any new big deal business wins or contract extensions that you anticipate being able to call over the next three to four months?
Well, we got one today. So ... But yes, I would expect us to be able to say about others.
Excellent. Couple of questions here. They're asking the same question, really. Please, can you comment on any other planned divestments?
There isn't anything planned.
Thank you. Do you believe Capita can ever achieve net profits of over GBP 200 million, as they used to do a few years ago?
Shall we get first started with where we are, right? I think we got a yardstick to get to 2024-2025. We've gotta get to free cash flow positive. Hopefully, everybody would agree that once we get there, it's a different Capita. It doesn't mean that we don't have anything else to do, but that will give us the foundation to then go and say, "Okay, what's next?" And then at that point, we'll come back with ideas and some commitments. I think it would be premature to say yes or no at this stage.
Okay, thank you. Got a question here on cash flows. The company's given pretty good guidance re operating margins and cost savings, but fairly limited guidance or explanation on cash flows. Can Adolfo please talk us through the main dynamics that impact operating cash flow, in particular, working capital dynamics, including deferred income?
We do have... So that one might just kill half the audience. Having sat through many of these discussions at the board and at the executive committee, there is a significant... We have to go back in, I think, maybe seven years, to start looking at the deferred income that was created with the introduction of the new accounting standard, IFRS .
15
15 it created a massive lump of deferred income that is finding its way through the P&L every year, and that we've been reducing. But if somebody wants to see the sort of more detailed version on the presentation that we did on the first half, the team had a really good, I think it was reasonably detailed summary slides. And or we can just make it available to the people who have participated here with the voiceover. I think that's the most we've ever said about it, and the most that we can say, because it's a rather complex set of moving parts.
Okay. You may give a similar-
What's-
... answer to this question, but it's related to the last one. Can you explain whether GBP 0.5 billion of deferred income on the balance sheet has been deployed?
In terms of where that's been deployed?
Yes, that is the question.
Yeah. So there's a few contracts that it's on. There are they're split across both divisions. They're largely older legacy contracts that I would say. So I wouldn't want to name them exactly where they sit, but they're some of our longer-standing, bigger contracts that had a lot more transformation towards the beginning. Alex, not to deviate from your question, but in terms of building numbers, we have about 140, down from nearly 300 at the start of 2020.
Brilliant.
Half the price.
Thank you, Stephanie.
Thank you.
Thank you for that.
Well, well, well.
That's very efficient. Here we have our next question: Will the relationships with hyperscalers help Capita win significant international business?
Yes. Yes, it will. Matter of fact, I'm on my way tomorrow to Germany for exactly one big opportunity that we have there that includes hyperscalers. And these players play globally. They have the advantage of have what they call regions, sovereign regions in many jurisdictions. While operate globally, they can serve locally, and they can provide pretty good solutions in terms of data residency. And yes, obviously, what we built with them here is totally relevant in other countries where we operate. So, yes.
Thank you. Where do you see the remaining GBP 60 million of costs coming from? Will the majority still be organizational simplification, or will there be other cost tracks do more of the heavy lifting?
It's gonna be a mix. I think organization still playing a role. I think we're working through different projects. Some of it has been sort of low-hanging fruit, as you're saying. But we've got opportunity, for example, on the back office. I think there is right-shoring opportunities there. We've got opportunities on end-to-end processes in support functions, making sure that we get more automation, and there is less people hand-carrying manual stuff from one another, which will also give us quality and agility improvements. So, there's still gonna be opportunities there. I think still in terms of management layers, there's still work to do there. So, I think it's gonna be a little bit harder. We're gonna have to sort of just be more determined.
But I think there is no way back, and do these changes in the organization and in the processes to deliver the GBP 60 million or whatever we need to deliver beyond that.
Thank you. I'm conscious of time. I think we've got time for one last question. So apologies if we haven't been able to ask all the questions. We've tried to get through as many as we possibly can. Can you comment on the existing customer uptake of the new digital offering since they've been deployed, and do you have any comments on the new contracts with these customers?
Yeah, that's a good question. If I just sort of go at the Agent Suite of products, which are full GenAI, every customer that we have shown it to and demonstrated it, every single one of them wants to use it. It's as clear as that. Now, there's the question of, okay, how do we go about this? There is a data protection. There's the data privacy. How do we do this? But when they see it, they say, "I want that." And again, we only announced that five weeks ago, so very early days, but the support, the reception.
Brilliant. Thank you.
Superb.
We are coming to the end of this webinar this afternoon. As you exit, you'll be asked to complete an exit survey, so we'd really appreciate it if you could spend a couple of moments completing that. And just before you go, I'm gonna hand back to Adolfo just to say a couple of concluding remarks before we go.
What could I say beyond thank you? Thank you for the support over this very tough few months and years, that I know this has been, like, very frustrating. Thank you for the time today, and thank you for the trust and the support to deliver this transformation. So just thank you.
Brilliant.
Thank you.
Thank you very much. Yeah. Thank you, Stephanie. Thank you, Adolfo, and thanks for attending, and as I said, as you leave today, if you could please just spend a couple of moments completing the exit survey, that would be brilliant. Thank you now.