Pre-close trading update

Pre-close trading update

Capita plc (“Capita”), the UK’s leading provider of technology enabled customer and business process management services and integrated professional services, announces its pre-close trading update covering the Group’s performance to date in 2017.

Trading in the year to date has been in line with our expectations. Capita continues to expect underlying pre-tax profits, before significant new contracts and restructuring costs, to rise modestly in the second half of this year in line with previous guidance.

Major sales

The market for major business process management contracts has remained subdued throughout 2017, particularly in the public sector. Capita has secured major contracts with an aggregate total value of £471m in the year to date. Since the half year, we have won a new seven-year contract with the Cabinet Office to administer the Royal Mail Statutory Pension Scheme (RMSPS) for its 400,000 deferred members and pension members and an extension of our customer management contract with British Gas to April 2019.

The value of our bid pipeline is currently £2.5bn*. We expect a number of bid decisions in the coming months. If successful, these bids are unlikely to be accretive to profits in 2018, due to the phasing of revenue and costs under IFRS 15, but are expected to create value for shareholders over their lifetime.

Divisional trading

Since the half year results, although market conditions have remained challenging, underlying trading across our divisions has been in line with our expectations.

For the full year, we expect good underlying profits growth in the Private Sector Partnerships division as a result of improvements in the performance of a number of major contracts and cost initiatives. However, we anticipate a higher level of contract and volume attrition which, subject to mitigating actions on sales conversion and costs, could impact upon the performance of the division in 2018.

Public Services Partnerships has made encouraging progress and profitability has improved, albeit including a forecast contribution of around £22m from the Defence Infrastructure Organisation contract which will not recur next year.

The performance of our IT Services division has also improved, due to cost actions, although we expect the profits of this division to be slightly lower in the second half compared to the first half of the year as a result of the non-recurrence of a £9m one-off supplier settlement.

The end of two major software licences in the second half of 2016 is expected to result in a decline of profits in the Digital & Software Solutions division.

Professional Services has made steady progress and traded in line with management expectations.    

Cost initiatives

We have continued to progress the short and long term cost initiatives announced in the 2016 restructuring programme, including reductions in overheads and rationalising our property estate. The cumulative benefit of these actions is still expected to be £57m by the end of 2018.

We are in the process of broadening the programme to transform the Group, including the identification of further opportunities to improve cost competitiveness. We currently expect to incur restructuring charges of around £18m this year, which will be disclosed as an operating loss under significant new contract wins and restructuring. This includes costs in relation to the broadened transformation programme, which will benefit the Group over the long term, and, separately, the restructuring of a small number of businesses.

Non-underlying items

We expect to record a number of non-underlying items in 2017, including a significant gain on the disposal of the Capita Asset Services businesses and costs in relation to the agreed full and final settlement with the Financial Conduct Authority regarding the Connaught Income Series 1 Fund.

As indicated at our half year results, we are still in discussion with a major life and pensions client, the outcome of which we now believe is likely to lead to an impairment in 2017 of the supporting assets relating to this contract.

Finally, as part of the year-end close process, we also expect to record a number of other tangible and intangible asset impairments in 2017, which will not affect future cash flow. These include the recognition of goodwill impairment charges, as a result of the annual impairment test, on a number of businesses which have experienced more difficult trading conditions since being acquired and the impairment of assets which, as a result of events during 2017, have ceased to be of value to the Group.

Financial position

Capita’s net debt to annualised EBITDA ratio at end June was 2.9 times. We expect leverage to fall to around the middle of our 2.0 to 2.5 times range at the end of 2017, including contingent obligations under bonds and guarantees. This reflects the receipt of proceeds from the disposal of our Capita Asset Services businesses, partially offset by the unwinding of an historic seasonally favourable working capital position at year end and some reduction in receivables financing.

Appointment of Jonathan Lewis as new CEO

Jonathan Lewis started as Chief Executive Officer (CEO) on 1 December 2017, at which point he also joined the Capita plc Board.

Outlook and next steps

We continue to expect underlying pre-tax profits, before significant new contracts and restructuring, to rise modestly in the second half of this year, compared to the first half of 2017.

Our final results are due on 1 March. Over the course of next year, we will communicate the new programme to broaden the transformation of Capita. This will include plans to focus the business and allocation of capital and resources on the markets which offer the best growth prospects; improve our cost competitiveness further; recharge our sales performance and, ultimately, demonstrate how we deliver value to all of our employees, customers and shareholders.

* Our bid pipeline of £2.5bn now consists of the total potential order book value of major sales bids under IFRS 15 of £2.3bn (H1 2017: £2.2bn) and frameworks of £0.2bn (H1 2017: £0.3bn), and excludes expected contract growth (H1 2017: £600m).

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This announcement contains inside information.

For further information:

Capita plc Tel: [phone] or 020 7654 0220

Andrew Ripper, Head of Investor Relations

Fiona O’Nolan, Director, Corporate Communications

[e-mail]

Media enquiries:

Shona Nichols, Executive Director, Corporate Communications

Powerscourt Tel: [phone]

Victoria Palmer-Moore, Peter Ogden and Andy Jones

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Capita is a leading UK provider of technology enabled customer and business process services and integrated professional support services. Operating at over 450 sites across the UK, Europe, India and South Africa, Capita uses its expertise, infrastructure and scale benefits to transform its clients' services, driving down costs and adding value. Capita is quoted on the London Stock Exchange (CPI.L). Further information on Capita can be found at: http://www.capita.com.
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