Good afternoon, and thank you for joining this Yellowstone Advisory webinar. Today's company presenting is Capita PLC, and we're delighted to have with us Helen Parris, the Director of Investor Relations, and Stephanie Little, the Investor Relations Manager. Before we start the presentation, I'd just like to go through a few points of administration. Hopefully, you should all be able to see. We'd appreciate it if you could respond to that poll. The format today is a presentation, and then we'll follow on to Q&A. During this time, you'll all be on listen-only mode. If you do want to ask a question, please type it into the Q&A box at the bottom of your screen, and we'll endeavor to cover as many questions as we can during the time we have available at the end.
I'd now like to hand over to Helen Parris, Director of Investor Relations at Capita, to start today's presentation.
Hello. Hello, afternoon. Good afternoon, everybody. Thank you, Alex. I'm Helen Parris, Director of Investor Relations. I joined in mid-December. I think some of you I may have spoken to already. I'm joined today by Stephanie Little, who's the Capita IR Manager. We're planning on talking probably about 15-20 minutes, very much, I guess, using the full year results presentation as the basis, but hopefully spending a bit more time talking about sort of the outlook, so the forward-looking piece of the presentation. As Alex said, we should have plenty of time for questions afterwards. If I start on the next slide. It's the usual disclaimer. I will let you use your time later to read that in more detail should you wish to.
The next slide, as I said, introduce ourselves. I joined mid-December. Previously was 13 years at G4S, prior to that was at BG Group, before that, both on the buy side and the sell side. Let's go straight into the presentation. Just very quickly, really wanted to sort of a quick introduction to Capita. I know many of you are very familiar with the group, I just really wanted to reiterate, you know, some of what we see as the core sort of investment sort of qualities about the group. We're a much simplified business now. We're two core divisions, Public Service and Experience.
Obviously, we have a very small number of businesses in portfolio, still to sell, but you know, fundamentally, we are a much simpler and more focused business than we were before. Within those businesses, we have market-leading positions. We, in our Public Service business, we're the number one supplier of software and IT supplier to the U.K. government. We're number one here in the customer experience market, and number five in Germany and in Europe. We have 50,000 employees who are obviously incredibly valuable to providing the customer service and operational delivery of the business. We have good positions in growing markets. Both our businesses should have the opportunity and the potential to grow at around 5% per annum.
As you saw in the second half of last year, we were making good progress on that. You know, that's something that we'll come on to. Part of what is driving the growth is really our move from being a business process outsourcer to a digital business process solution sort of supplier to customers and really helping their digital transformation of their own business. We can talk through some examples of that. One of the sort of the other big changes that we've made, particularly under Jon Lewis, our CEO, is that the business has gone from being very, very heavily indebted to really a minimal debt position.
At the end of 2022, we had net financial debt of just GBP 85 million and net debt to EBITDA of 0.5x . Clearly, in the sort of current uncertain economic environment, we feel in a very strong and resilient position going forward. On to the next slide. Again, I just thought I would highlight, you know, some of the great things that Capita does within the two businesses. Within our U.K. government business, we very much sort of specialize in niche areas where we really understand what the government department does and what we can really understand what they're, what they're trying to deliver to their end customers, which is, you know, generally sort of the U.K. public.
We, we focus on areas such as justice, central government and transport, things like managing the ULEZ scheme. Here, in London, where we are today, we recruit all the officers and soldiers for the British Army in our defense, fire, and safety business. Bit of a sore point maybe, but we collect over GBP 1.5 billion of council tax for 850,000 house, 850,000 households. We've done 1.5 million health assessments since 2012 under our PIP contract to support the NHS. We have our education and learning business, where we help 50,000 students in the Disabled Students Allowance business that we administer.
Really looking to deliver, you know, better experiences for citizens and do it in a cost-effective way, for the U.K. government. The next business, which is our customer experience business. Some of what we do is call center management and increasingly are using digital technology, AI, and so on to again make that as efficient as possible, both in terms of for our customer, but also for our end user to make sure that they have a seamless customer experience, but also make sure that our people are helping those most in need. We have our financial services business, so managing life and pensions, for example, mortgage applications.
Around a third of that business is our, I suppose, the remaining legacy issue with which the group has, which is our closed book life and pensions business. Should say it's around a third, so about GBP 150 million of revenue this year. It's something that we can come back to. It's clearly has been and will probably likely be still a bit of a drag on the margin for this business. We have other multi-industry sectors, particularly focusing on areas like energy, utilities and retail, where actually, you know, sadly in the current cost of living crisis, we're seeing, you know, pretty good demand for additional help for our customers, you know, clients in that in those areas. On to the next slide.
You know, really, hopefully what you took from the full year results was that the group, you know, is returned to growth. The focus is helping, you know, our strategy is delivering, and we're seeing improving momentum. We delivered 4% growth in the second half of the year. We think that's as a result of the focus. It's a result of the fact that we have competitive solutions, means that we are winning both in terms of new customers, but also even more importantly really, is we're winning more work with existing customers, as well as having very high customer retention. That high customer retention is because we have really transformed our reputation for delivering to clients. That's something that you can really see over the last few years. We have really absolutely done a massive turnaround.
We've also started to see an improvement in profitability, so we've basically swung from a loss to a profit, and that's as a result of returning to growth, the mix of work that we're doing, so in terms of more digital work and basically stickier contracts, and also as a result of the cost saving restructuring and transformation programs that we've put in over the last few years. As a result of really some of the actions that were taken a few years ago around the portfolio businesses, we have seen a significant strengthening the balance sheet. Not only have we significantly reduced our debt, we've also really sort of transformed our pension, our pension deficits and really are on a much stronger footing, you know, in the current financial situation.
We have an increasingly agile and flexible workforce, and that's something that as Stephanie will come onto, it's very important in the very current, you know, in the current very tight labor market, that basically our people are allowed to work generally where they want to, whether they want to work from home or from in the office, so they have a fully hybrid workforce policy. That's delivering. We saw a 15 point increase in our employee Net Promoter Score. One of the key opportunities really for us is to reduce employee attrition. It's one of the big sort of cost saving opportunities. To make people, you know, happier where they work is obviously a clear sort of indicator that we should be able to improve on that.
Really in the current sort of environment, we feel that we have a very resilient business. We've got good structural growth and where we have good market positions, where we have a clear strategy in terms of where we expect to grow going forward. Again, just really to, I suppose, to reiterate where the group has come from, you know, we very much the first few years under Jon's leadership was around transforming the business. Initially we were in 10 client-facing divisions. We're now down to two, and really has sort of been a case of sort of making sure that we were able to improve the contract take on. From my experience at G4S, that's really also very similar.
What Capita has done is make sure that we are absolutely clear about the sort of work that we should be bidding on, and that we have the right risk/reward type process and a much more disciplined approach than historically, Capita I think was very much driven by driving top-line growth. We've really transformed the, that whole risk process. As a result of that, we've not taken on any material, you know, loss-making contracts during that time. It is also as a result of that, we're able to deliver better and why our operational delivery, our performance, our customer retention, all of those things have improved. We really are in a position now where we feel that we can, you know, accelerate.
We have a number of years, we're just trying to stabilize, not lose business, and we really now feel we can go much more on the front foot. We have changed our incentive plans for our salespeople to be, again, much more looking at winning new business rather than just retaining existing business. We come on to looking at reducing cost of attrition, continuing to look at where we can take out costs, and also stepping up our investments in digital solutions for our customers. That will be a virtual circle in terms of driving growth, also. Before I hand over to Stephanie, who's going to go through areas in a little bit more detail, I do also want to emphasize our purpose, which is very much our license to operate.
I know that, you know, many companies talk about the good things that they do. This is absolutely fundamental to Capita. We do see this as the right thing to do. It is also something that is helping us to win business. We are very much seen as attracting people because they want to work for a purpose-led responsible business. Our social value commitments help us win bids. We have number of examples with that. The fact that we are a living wage payer, the fact that we have committed to net zero by 2035. We have a fair tax accreditation. We have, we are well ahead of the norm in terms of what we spend with SME companies and our suppliers, our modern slavery assessment.
These are all things that we think are making us a good company and will make us a sustainable business for the future. So now I'll hand over to Stephanie, who'll go through some of what we're trying to do in terms of reducing employee attrition. Yeah. Thank you.
Hi, I'm Stephanie. As Helen said, I've been with Capita for around three years now. Prior to that, I trained as a Big Four Audit Manager, kind of focused on PLC-listed groups, which was when I then made the move across to Capita. As Helen said, I'm just gonna spend a few minutes talking through employees. Obviously, we have 50,000 employees. You know, they're at the heart of our business as such a people-heavy firm. At the moment, we're in one of the tightest labor markets that we've seen for years. We've seen that in our attrition numbers. Attrition this year actually was flat at around 30%. Actually, it's a bit more of a nuanced story underneath that.
We've put in very clear engagement structures in place to try and improve our attrition. We really saw good results with that in public and our TSS division, which is our technology division. Actually now the final issue that we have really is within our Capita Experience business where, again, we are working on fixing that issue. One of the big things that will really help attrition in this business, to be honest, is our working from home model. As you can see on the slide, 85% of our home-based or hybrid employees say that their working arrangements are a reason they want to stay with Capita. Actually what we see is for those that are home-based or hybrid, we see much lower sickness and absenteeism.
It really is helping our ability to staff our work at the moment. Now if I move on just to our financial highlights very quickly. Helen, I know, has talked you through some of these on the summary slide, but I'll just talk you through in slightly more detail. As you can see, revenue was up 2.4% this year, with a strong performance in Public and portfolio and stabilization in Capita Experience. Capita Experience actually grew by just under 1% this year, which in 2021 they declined by 10%. We really have seen a stabilization of the revenue there. We saw a significant improvement in our operating profit, PBT and EBITDA, reflecting the revenue growth, the efficiency of delivery, and the completion of our restructuring program, which finished in 2021.
We also delivered positive free cash flow as expected. That is pre-lease payments, but it was a very important milestone for the group as a whole. As Helen's touched upon, we reduced our net debt by GBP 397 million this year as a result of the disposal program, which means we're well below actually our target, net financial debt to EBITDA ratio, which our target is 1, and we're at 0.5 times. As we've talked about, at the moment, we are working through a disposal program to dispose of non-core businesses. Really good businesses, but just not core to Capita's future business in Public and Experience. We have been selling those, which has also then helped our balance sheet.
Post results, we announced the sales of the People Pillar, which we've now ticked off in this presentation, which leaves us with about GBP 150 million of revenue to sell and about GBP 16 million of profit for the numbers that are on the right-hand side of this screen. We've launched all of the processes for the remaining pillars, and we're continuing to target sale by half year, depending on the market condition. I think the point to note here is that given where we are with our net debt number, there's no rush to sell these, so it's the balance of maximizing the proceeds but also making sure that we find the right owners for the business. If I move on to liquidity. We continue to have strong liquidity.
At year-end, we were undrawn on our RCF compared to GBP 40 million drawn at the prior year-end. Last year, we repaid nearly GBP 230 million of private placement loan notes, and this year already we've now paid another GBP 40 million. I think the graph on this slide really shows that we've broken the back of the liquidity challenge. Actually, we have a strong liquidity position going forwards. Now if I move you on to our guidance slide. Sorry, trying to multitask here. Too many things. Could you cue the clicker. If I move you on to the guidance. This guidance is for core Capita.
Just to confirm, core Capita is Capita Public and Experience with all of the overheads that we have, kind of excluding portfolio, given our plan to sell those businesses kind of by the half year. Revenue, we're targeting further growth from the 2.4% delivered this last year, with continuing momentum from the 4% that we saw in H2 of last year. As Helen said, the markets that we operate in are growing at around 5% per annum, so we're targeting mid-single digit revenue growth in line with those markets. Our EBITDA margin for the core group last year was 2.9%, and we're targeting to at least double that in the medium term. Our medium term is our forecasting period, which is three years. That's kind of the stretch that we're looking at there.
In terms of our cash generated by operations, we're looking at that will be a similar level in 2023 with an increase in CapEx from the increased spend in digital offerings that we're looking at in 2023. I should point out that the digital offerings are across both divisions. It's not just in one. We expect further low levels of net financial debt as we finish on our disposal program and continue to generate the free cash flow that we've talked about. Finally, our target remains that our net debt to adjusted EBITDA would be below 1 times. If I look at our enablers for growth, we've outlined at the year-end results that actually top-line growth is going to be a primary driver for improving the group's financial position.
That will be driven by winning new business, growth on our existing clients, and then renewals. You can see that we have a really high renewal rate within the group at the moment. In fact, last year, Capita Experience had a 99% renewal rate, which is pretty strong. Now we are looking at focusing on new clients and growth on account to grow the business that way, which will be driven by delivering really well for our existing clients to open up new growth opportunities and winning new work. As Helen said, our sales compensation has been changed ever so slightly this year so that we are really incentivizing those to be winning growth on account and new clients to drive that top-line growth.
If I bring you on to where our growth is for both of the divisions, I think this slide captures really, really well the fact that within Capita Public, we have a really healthy mix of renewals, growth on accounts, and then new clients. We've got a weighted pipeline of GBP 1.2 billion, which is up from last year. Part of that is due to the shenanigans in the government in Q3 of last year, which meant we saw quite a few material bids shifting from H2 of last year into H1 of this year. They've not been lost, it's just the timeline has moved into early this year rather than last year.
As you can see, we've got some really great opportunities with the Department for Work and Pensions that we won last year, continuing to expand on TfL, where we continue to deliver really well. This year we've got some really good opportunities with the Educational Authority, the Student Loans Company, and Integrated Care. We have a really similar picture for Capita Experience. You know, we've got a really diverse portfolio in that business, and a weighted pipeline this year of GBP 1 billion, with a big chunk of that being in renewals for this year. Last year, at the start of the year, you may remember we announced the extension of our BBC TV licensing contract, towards the end of the year, we announced the renewal of the Mobilcom- Freenet contract.
This year, again, we've got some really great opportunities and in fact, Commerzbank, which was on this slide, we have now won. We've got further growth on account opportunities with Scottish Power, which you may remember was a new win last year. Another factor in increasing the margin other than growth is moving some of our contracts from more of a BPO model to a digital BPS, which can often drive a higher margin. We're capitalizing on the shift from digital. One example that we saw last year was on our Barnet contract, where we actually handed back some of the more BPO elements, and what we've actually kept and retained on that contract was the more digital BPS elements, which can drive a higher margin as they're more digitally enabled. If I move on to the next slide.
Another driver of margins will be cost savings within the group. We've listed on this slide some of the examples of where we're seeing cost savings, and that's from, you know, improved execution. We no longer have the four problem contracts that we'd talked to previously, and that we still are doing that business, but they are no longer the drain on the business that they were as they're all profitable, and we're seeing kind of sensible margins come through on those. We have continuous improvement programs where we are investing in our delivery centers, and we're starting to see teams using more standard tools and processes rather than every single solution being completely contract-specific and built on a 1-by-1 basis. We're really sharing more across the group. Another benefit from our virtual first model is reducing our property footprint.
For example, in London, we used to have four offices, now we just have the one that Helen and I sat in. We're also reducing our U.K. footprint to move to a more hub and spoke model. We still have plenty of offices around the U.K., but we no longer have the full call centers where people are choosing to .work from home more. We've listed here some opportunities for 2023. One of the big ones that we've spoken about is reducing attrition. You know, if we can get the 30% attrition down, that will have a big impact, particularly on Capita Experience's margin achievements.
There's further efficiencies that we can get from reducing and having a lean corporate overhead where we match the corporate overhead to the size of the group we are now compared to what we were kind of 18 months ago. If I move on to the summary, I'll pass back on to Helen before we have Q&A.
Yeah. Just a few sort of closing remarks before we go to Q&A. You know, we really feel that we have good, you know, strong operational momentum and really have the right platform in place to deliver improved financial performance. We saw a turnaround in our financial performance in 2022. We mentioned again, we're strongly positioned in growth markets. We expect to at least double our core Capita EBIT margin over the medium term. We've outlined the reasons, you know, the ways that we expect to get there. I think what you can see is there are sort of multiple levers that we expect to pull on to be able to do that.
Our balance sheet has been materially strengthened, and we expect to see improving cash conversion as the business grows, but also because we have resolved many of the legacy issues of the past, we don't have the same sort of drain on cash and should see improving cash conversion going forward. And with that, Alex, I think I hand back to you to start with the Q&A. Thank you.
Yes. Thank you, Helen. Thank you, Stephanie, for that presentation. Glad to see that the hard work over the last few years is paying off. We are now going to take your questions. Just as a reminder, if you would like to ask a question, please type it into the Q&A box at the bottom of your screen, and we'll try and cover as many questions as we can in the time available. I'm gonna start with a couple that have come in on margins. They're similar questions. One is, "Capita Experience margins have recovered well, but are still quite low. What could margins get to in this division?" "You have a target to at least double the 2.9% EBIT margin in the medium term.
What does the medium term mean? I think you did clarify that in the presentation, but if you could just respond to that'd be great.
Yeah, that's right. As, as discussed, our planning cycle is three years. Medium-term for us is basically by 2025 in terms of the sort of reported numbers, at that, in that, in that year is when we would expect to get there. You're, you're right. The Experience margin is lower than we would want it to be and where we expect it to be in the future. It is really that business is, I guess, almost sort of 18 months, two years behind the Capita Public business in terms of the reorganization, the focus, the management team and so on. On the Public side, it's much more embedded, and you can see that it's on a, you know, it's on a really good growth trajectory.
Experience is improving, it's still a bit of a step behind. Experience margin, they're looking at, you know, number of ways. Again, looking to improve the growth. Very much focusing on core sectors where they see the ability to be sort of competitive in terms of understanding the customer. In terms of how we deliver to the customer, so whether it's onshore, offshore, a hybrid of that, looking at really making sure that we have a very sort of flexible cost model and again, the sort of hybrid working, all of those things feed into that.
We also, as I mentioned, we have this sort of the last albatross, as it were, which is the closed book Life and Pension business, which would have had revenue of about GBP 170 million in 2022. That business, in effect, is loss-making. We make a provision each year, but it's basically a drag on the profitability and just the margin of that business. That business, because of it being a closed book, as it were, is declining probably somewhere between 10%-20% per annum. It becomes, over time, less of a drag than it has been. It becomes a reducing proportion of that business. Our other Pension and Life business is a very good business.
Again, I say sort of multiple levers on which to which to pull on, but where we definitely see the opportunity to improve margins. You'll probably have realized that that really Capita Experience is the big sort of swing factor on getting the group margin to double because the Capita Public Service is close to that already, really. Again, I guess that business growing well, more opportunity also for higher margin digital-enabled contracts, that also helps the mix also. As I say, we're not we don't have to have one big silver bullet to deliver on this. We've got multiple different areas as well as we mentioned, some of the things like the overheads and so on that should be appropriate for a group, you know, that has shrunk.
You know, it has. You know, sometimes I think it's misreported, you know, that our revenues have gone down and so on. Well, it has because we sold businesses on a reported basis. It would have done. From an underlying point of view, we can see that the group is growing again.
Brilliant. Thank you, Helen. Good segue onto a question coming in here about disposals. Could you provide some more color on the disposals and how they're tracking? There was a comment referenced from Tim Weller on the FY 2022 results conference call. Do you still see Capita having financial pre-IFRS net debt below zero by the end of half one 2023?
Yeah. I think one of the analysts used the word awash with cash, half year. We continue to make really good progress on the disposals. It was really good to see the People business sale soon after our results. I think if you look at the revenue left to sell, where we've had GBP 250 million, now GBP 150 million of revenue, I think we would be a little bit disappointed if you didn't see that reduced to nil or just below, based on what we have achieved to date. You know, as we said, the focus is on maximizing the proceeds. We're not selling these because we need the cash in desperately. We're selling them because it's the right thing to do for the long-term strategy of the businesses.
Like I said, there are some really good businesses in there. You know, part of the reason that maybe they're some of the latter ones to sell is, the travel business, for example, was really heavily impacted by COVID and the pandemic. I think a lot of buyers are waiting to see what a post-COVID world looks like for that business and that we also want to see that, in the sales. Yeah.
Timing is important as well. Clearly we don't need to sell them, but we want to because it makes you know, strategic sense to. Yeah, we should be, as I say, hopefully in a small, cash positive position on a pre-IFRS 16 basis. Yeah.
Okay, brilliant. As you would expect, we've had a lot of questions, that have come in. We had a couple of questions ahead of time and quite a few have come in on this webinar regarding, the cyber, leak or the cyber incident. One of the questions is, could you explain sort of what happened? That might be a useful-
Yeah
Starting point to explain to people what happened. Then, you know, if I group some of the other questions, they seem to be around and, you know, what's the likely cost? Can you tell us a bit more about how this incident is being resolved? Shall we start with that?
Yeah, sure. I mean, I have to sort of apologize ahead of time to say I'm going to be very restricted in what I can say, obviously, based on. It's very much going to be reiterating probably what we said before in our RNS of the 20th of April. As you'll be aware, the group was subject to a cyber incident. We now know that there was unauthorized access into our IT systems, I think it was around the 22nd of March.
We discovered that, basically interrupted it on the March 31st, which seems like quite a long time, but from what I understand, that's a very, very short time compared to often how these incidents can evolve, can be many months that you have threat actors within your systems. The fact that we were able to interrupt the access, I think very much limited the impact. From the April 20th release, we said that we believed that a small proportion of the data that was on basically 4% of our servers, had potentially been accessed. That's basically where really all I can sort of say on that. Our forensic investigations continue. As and when we have more information, we will obviously update the market as appropriate.
I would say that we have reconnected to all our customers. The fact that, as I say, we were able to, you know, we were able to sort of interrupt the access quite quickly in this case, means that we think that we very much limited the impact on the business. There's only a very small proportion of our customers that were impacted. For the vast majority, it was business as usual, and so that has been the case obviously since then. It is an ongoing, I say, investigation, and I'm sure in time we will be able to share more information about sort of what's happened.
I think from the initial understanding is that it was human error. Although that you can do all the things in terms of investment and education and all of these things which are really important, and I know when I did my onboarding, I had to do all of this stuff when I joined Capita, unfortunately, you know, you cannot 100% prevent these incidents from happening. Unfortunately, they are quite common in the current corporate environment. I think that, you know, by no means was this a positive event for us, but I think that it was limited in terms of what the, say, the access that, that they had.
As I say, we will be certainly, you know, hoping to update at some point and really draw, you know, a line under this, hopefully soon.
Okay. Brilliant. There's just one follow-up question to that. It may be too early for you to answer this, but has the cyber incident affected the customer's pipeline and win rates?
Not that we are aware of at all. We are aware of a number of contracts that we were bidding for renewals, new work that are continuing with that process. I'm sure there probably was a short pause with some of them for the IT people and so on to understand what had happened. Our IT people have been very busy dealing with other customers' IT departments to give them comfort, basically. That's why we have reconnected to all of our customers. No, I think there's general sort of awareness that it's unfortunate part of the modern world that we live in that these incidents happen.
We don't see any impact in terms of the pipeline or the work that we are doing.
Okay. Thank you. I'm gonna move to another topic here. That's one that you mentioned a couple of times, which is the attrition rates.
Yeah
I wondered if you could give us the main reason for attrition. You know, what do people cite in their exit interviews? Then going on to how are your attrition rates trending in 2023 so far? There's a follow-up to that, but I'll let you answer those two first before coming on to the follow-up.
Yeah. Yeah. No, that's fine. I think one thing I would point out is actually our Capita Experience business, you would expect to have a elevated attrition rate due to the nature of the business. There's a lot of seasonal workers that we get in that business. For example, university students who are in between terms that want to come and earn some money for kind of a few, a few months at a time. The attrition rate will always be inflated in that business. I think one of the key reasons that people are leaving is actually it's quite a difficult job. I've sat in some of our call centers, and I've actually. The number of screens and multitasking that the people in the call centers have to do is.
It is a really difficult job. It's a taxing role. We are a real living wage payer. Actually, when you also have real living wage payers, with the likes in the retail sector, for example, which is perceived as a slightly easier job, people are moving around as a result of that. You know, last year, Amazon, for example, offered a GBP 1,000 sign-on bonus, if you stayed for three months. We'd never compete with that. We saw high attrition around the time that Amazon were offering bonuses like that. As I said, you know, our employee value proposition are now starting to really see Capita and that division as a really meaningful employment and career path. We are starting to see the green shoots.
One thing, actually to note on that is really in Capita Experience, it was four contracts where we were seeing the really high elevated levels of attrition. The good news is, first of all, management now are incentivized around improving attrition, which really does show the focus that we have on that on a business. The good news also is that in 2023 so far, we have seen that attrition start to come down. It's still higher than where we would like it to be, but we're starting to see progress certainly in the right direction.
Okay.
If we look at sort of all the costs involved in terms of recruitment, training, downtime, 'cause obviously somebody is being trained, they have to be, you know, they're not necessarily providing a lot of service for a number of weeks. It's a GBP tens of millions cost to the business. You know, this is a big prize potentially that we can go after. The tight labor market and the things that Steph has emphasized means that, you know, it is quite challenging to try and reduce attrition. One of the reasons that we basically focused the annual salary review was at the lower end earners within the group was because we recognized that that's where there was the biggest opportunity.
Basically people earning over GBP 120,000 were asked to forfeit salary increase for 2023, whereas those in the lower end but still real living wage would have got, I think it was over 10%-11% salary increase. We recognize that there's real benefit in trying to keep those people on the front line delivery.
Okay. Thank you. The follow-up question is that with the upcoming U.S. recession, are you seeing that assist with your attrition story at Capita? I guess linked to that, moving on from attrition is that, if there is a U.S. recession, how do you see that contraction impacting your business?
Just to clarify, you're saying U.S., not U.K.?
I guess the question is about the upcoming U.S. recession, and the impact that might have, I guess then on recession slowdown.
On the rest of the world. Yeah.
Yeah.
Yeah. I mean, I'll start. If you want. I mean, I think that the main issue for us is that we have this ridiculously tight labor market. You know, although, you know, we've got inflation and cost of living crisis, it's actually just hard to get people to work. Now, into work. We're in a much stronger position than we were, I think 18 months ago, when we actually found it hard to resource and grow with some contracts. That's not a problem. We are being able to attract people. It's just now we've got to put in an extra effort to keep them because of the same tightness, the labor market. You know, the salary increases, the hybrid working.
It also means hybrid working means that we are able to attract people to work for us that probably wouldn't be able to work otherwise because they've got the ability to work from home. Whether it's they have other care responsibilities or whether because they themselves have some physical disabilities or challenges. I would say in terms of if we went into a global recession, what would it mean in terms of the impact on the labor market? Any sort of freeing up in the labor market is potentially a positive. You have to think about the very defensive nature of our U.K. government business. You know, everybody's still gonna carry on, you know, doing all the other things.
They're gonna have to carry on paying their council tax, got to pay their TV license or whatever it is. We do have, I think, quite a defensive business. On the customer experience business, as I've mentioned in areas like utilities, retail, we've seen a growth because of the cost of living crisis that, you know, our customers are saying, "You know, we've got more people with more questions about, you know, about their, their electricity accounts or whatever." We are, I wouldn't say we are in any way recession-proof, but we would probably be more defensive than some other sectors.
Okay. Thank you. One final sort of attrition question. Where do you think attrition could get to for Capita? What do you think it could come down to?
I think probably for the business as a whole, although bearing in mind Experience will always have slightly elevated, I think you'd be looking at kind of low twenties, would be kind of a steady-state good level of attrition. As Helen said, that's a tens of millions of pounds worth price to the group if we can get there.
Okay. Thank you. Moving on to revenues and profits. Could you advise what the normal half one, half two split is likely to be for both revenues and half operating profit?
I think from a revenue perspective, we talked to seeing 4% momentum or growth in H2 of last year. I think you'd expect that to be ever so slightly higher in H1 of this year, and then maybe slightly lower in H2, actually, which is slightly different to the tracking that we had last year. This year, expecting actually to see slightly more in H1 compared to H2. From a profit perspective, one thing that actually impacts our profit is the holiday pay accrual, which impacts our business quite a lot as a very people-heavy business.
What we see generally is most employees will take most of their leave in the second half of the year, and that creates for the group a liability, which under the accounting rules you effectively book because you pay everyone a consistent wage every single day. If they've not taken half their holiday, then technically you have underpaid them for that period. That kind of creates a bit of, about GBP 20 million delta between our H1 and H2 numbers every year. This year we are expecting profits to be slightly H1 weighted, which is a bit different to last year where they were H2 weighted. Cash flow we expect to be H2 weighted compared to H1.
Okay. Thank you. We've got a couple of questions around dividends.
Okay.
One, when do you anticipate returning to paying a dividend? The other one is what conditions need to be in place for dividends to be restarted?
Thank you. yes. I guess we're sort of moving to a point where we're becoming a more normal company now, and the idea of being able to pay a dividend or go back on the dividend list is more realistic. I think that, as, Tim said in March, that once we've completed the disposal program, which we expect to have done, you know, materially, by the half year or certainly have, made a lot of progress on that we would give an update in terms of our sort of clarity on our capital allocation policy.
I don't want to preempt anything that the board may say then, but I think you'll get an indication then of what we're thinking in terms of, you know, what the investment needs of the business are versus what we can basically sort of, you know, share back with our shareholders. We are very conscious of the fact that really, in the last few years it's the bond holders, the debt holders and the pensioners that have had the benefit of the cash from the disposals and so on. That really, you know, our very patient shareholders are there to also be sort of rewarded for their loyalty.
I think that based on the profile of what we're investing in this year in terms of our, you know, step up of some digital investment for, for our, you know, our product facing digital services, that we are probably looking at whether we would return to paying a dividend in 2024. In terms of the meetings that we've had with, you know, larger shareholders and so on, those are sort of the discussions in terms of being in a position where we can see line of sight in terms of having good sustainable cash flow. That would basically be, you know, you just say what is it, what are the catalysts?
It's net free cash flow that we would then be able to have a dividend that is therefore, you know, growing and sustainable. I think the board will be looking at a number of options, looking at dividends, looking at buybacks. I would imagine that a buyback is something that is usually where you have a lot of excess cash from an M&A situation or something like that. I would imagine that it's something that we will look at more from a dividend perspective. As I say, that's something that the board will be considering in the coming months ahead of the half year, where it's now, you know, an obvious time for them to give a clarity around that capital allocation policy for the group.
Okay, brilliant. Thank you for that. A question here, any chance of a rebranding? The questioner has offered a name, Social X. Has a rebranding of the company been considered?
We rebranded, I'm trying to think, just before I joined three and a bit years ago. I've not heard any murmurings since then. It might be good because actually the navy blue that we print in is really quite annoying to print from the printers. If you get rid of some of the navy blue. I don't think so. I actually think that particularly within the public sector, Capita has a really, really strong brand now. You know, our clients really respect the work that we do. We've got some really long relationships there. As much as, you know, some may think a branding would be a good idea, I actually think that in the markets we operate in, the brand that we have is a really strong brand to have.
Okay. Thank you.
It can be a very expensive exercise. I can't see our CFO going for that at all. I think that we have transformed the operational delivery to our clients. You know, I'm aware of some of the other names that the group has been called, and we really feel that that is just not the case. We see that through the feedback that we get from customers, the very strong retention rate from the customer Net Promoter Score, are, you know, fantastic. I don't, I don't think, as Jess says, we wouldn't feel the need to spend money on rebranding.
Okay. Thank you. Question here, what do you think are the drivers of the suppressed share price, and what can management do about this?
I would say that, you know, clearly the, the business was very challenged. You had onerous contracts, you had significant financial debt, you had a large pension deficit. We then had, you know, we had COVID and all of these things. As I think that it's really around, we've just got to have a period of stability, delivery, execution, show that all the things that we said that we expect, that we deliver on. And I think that that's very much, you know, where, where we are focused. You know, clearly the cyber incident is a bit of a blip. I think, you know, the fundamentals remain, and so where we would expect to see, you know, continued progress for this year, next year.
Yeah, I'm sure that there would be some people that will have, you know, had their fingers burnt, and we just need to show them that the business is a very different business, managed in a very different way than how it was previously. I think it's all around delivery and execution, which it is often with, you know, these sorts of businesses. Again, from my thinking of my experience of G4S, it would be very similar.
Brilliant. We've got two more questions again. I think we've got time to do both, so I'm going to ask them. We know about the pipeline. We know from FY 2022 results that some of the public sector sales pipelines slipped into 2023. How are these opportunities, such as the DWP extension, tracking?
Yeah. They're tracking well. I guess our outlook on those hasn't changed at all. Although on some of the bigger deals that we have, you do frustratingly see the sales cycle get longer and longer. Like I said, the outlook hasn't changed on those. It's purely just the timing of when we actually expect to be announcing anything around them.
I guess the thing to say as well is that some of those would have limited impact and benefit on 2023. Just because of the timing of, you know, even when you win, you've got a long lead time in terms of the work starting. They're not so important in terms of in-year revenue. You know, sometimes we don't have absolute control over, you know, the timing of when those contracts are awarded. I think what happens in the meantime is that, you know, we're often doing the existing work in maybe in a different structure, and the contract just gets extended. You know, and again, I think, you know, an obvious question is you've got potentially an election year next year, what happens then?
Again, you go into a period of sort of bit of sort of not a lot happening, so our existing contracts just roll over and just get extended. We've started to see some of that in some of the work that we're doing. You know, when you've had, say, quite a lot of change within government, it can just mean that some of these things get delayed and delayed. When we are already the incumbent, the impact is more limited.
Okay. Thank you. I've got a final question here. It's very difficult for private investors to get access to analyst research. Would you consider.
Yeah.
Making some analyst research available to private investors?
Thank you. I have a lot of sympathy. I think that I'm not really sure who benefited from it. It certainly wasn't private investors. We're just not allowed to basically under the, under the banks, we're not allowed to forward the research. We're even very restricted in terms of what we can do with it internally. We're allowed to sort of basically just share it between ourselves, CEO, CFO, and we're not even sharing it with executive committee members and so on, because this is paid for research in effect. We are aware that there are, you know, other, there are other research houses where we could pay for research to be written on Capita. You know, there are a number of providers that do that.
I guess, you know, say I'm relatively new to Capita, one of the things that we're thinking about is, you know, where we have our own IR budget for the retail investors, where do we focus that? Obviously we're doing an event like this with Yellowstone. You know, but that's something that I think we will be looking at, is how do we best spend our money, and in terms of where is the best benefit for retail investors. We're trying to be more active on things like the LSE platform. We are, you know, we would neither of us think our IR site is great on the website, so there's any ways that we can improve that. We're looking at things like the private client broker market. Yes, if any of your...
any of the people, you know, who are listening today would have a view on what they find most useful, we're very much, you know, open to any suggestions. I've had other brokers say, "Oh, don't waste your money on paid research." It's, you know, we're open-minded at the moment.
Okay. Well, I can speak as a private investor too. I think it would be great to have something available. There are, as you say, a number of providers of that private research, or private investor research. Anyway, that brings us to the end of today's webinar with Capita. Helen and Stephanie, thank you very much for presenting, and thank you very much for answering all those questions very clearly. As people leave today, there is a feedback form that we ask you to complete. It will only take a few moments of your time. Please, if you could complete that feedback, we'd most appreciate that. Finally, just to flag up, there are a couple of webinars coming up.
We've got Sainsbury's coming up in a joint presentation with ShareSoc on the May 22nd. On the June 6th, we have Hercules Site Services, and on the June 19th, Castings PLC. Thank you again everyone for attending, and we hope to see you soon. Thank you.
Thank you very much.
Thank you.
Thank you.