Interim Results
Capita Group PLC
24 July 2003
24 July 2003
THE CAPITA GROUP PLC
Interim results for the half year ended 30 June 2003
Financial Highlights
Six months ended Six months ended Change
30 June 2003 30 June 2002
Turnover £532m £391m + 36%
Profit before tax* £51.1m £40.2m + 27%
Earnings per share* 5.38p 4.30p + 25%
Total dividend per share 1.3p 1.0p + 30%
* Before amortising goodwill
Operating Highlights
• Strong operating cash flow of £61m (2002: £41m), representing operating profit
to cash conversion rate of 109%
• Pre-tax return on average capital employed over last 12 months of 18.8%
(12 months to 30 June 2002: 16.6%)
• £286m of new contracts won in first 7 months of 2003
• Current live bid pipeline of £2.8bn - the largest in the Group's history
• 2003 forecast revenues of £1,075m and high visibility of revenues for 2004
• Implemented the largest traffic management scheme in the world to specification,
on time and to budget.
Rod Aldridge, Executive Chairman of The Capita Group Plc, commented:
'Capita's business model is simple, consistent, sustainable and proven. Our market
place is substantial, active and capable of supporting long-term growth. Our desire
to create long-term value for our shareholders remains steadfast.
The Group's performance continues to display strong growth, increasing profits
and buoyant cash flow. We remain confident that turnover for the year as a whole
will exceed £1,075m and we already have high visibility of revenues for 2004.
We believe that shareholders will be pleased by Capita's results for 2003 and
opportunities for growth remain excellent.'
For further information:
The Capita Group Plc Tel 020 7799 1525
Rod Aldridge, Executive Chairman Press Office 0870 2400 488
Paul Pindar, Chief Executive
Shona Nichols, Group Marketing Director
Finsbury Tel 020 7251 3801
Morgan Bone
Mark Harris
CHAIRMAN'S STATEMENT
Results
The six months to 30 June 2003 has been a period of considerable achievement for
the Group. Our strong results reflect this progress, with Group turnover increased
by 36% to £532m (half year to 30 June 2002: £391m). Of this growth, 29% was organic
and 7% was by acquisition. Operating profits before goodwill amortisation rose
by 27% to £56.1m (2002: £44.3m) and net profits before taxation and goodwill
amortisation increased by 27% to £51.1m (2002: £40.2m). Earnings per share before
amortising goodwill grew by 25% to 5.38p (2002: 4.30p).
Four other financial measures merit comment. First, due to the one-off costs
incurred during the go-live phase of Transport for London's (TfL) Congestion
Charging Scheme coupled with the additional costs incurred in re-engineering
our insurance loss adjusting business, our operating margins have declined during
the period from 11.3% to 10.6%. For the year as a whole, we expect operating margins
to be ahead of the level achieved in 2002 of 12%, continuing the trend for margin
enhancement that we have established over the last decade.
Secondly, the fundamental strength of Capita's business is demonstrated by our
excellent cash flow, with £61m (2002: £41m) generated by our operations in the
period. This represents an operating profit to cash conversion rate of 109%.
Thirdly, as we forecast in our Results announcement in February, capital expenditure
for the period has fallen significantly to £16.6m (2002: £30.4m). The nature of the
opportunities for which we are currently bidding gives us continued confidence that
capital expenditure in 2003 is unlikely to exceed 4% of revenue.
Fourthly, our gross return on average capital employed (including debt) has increased
over the last 12 months to 18.8% (12 months to 30 June 2002: 16.6%). This is expected
to improve further for the year as a whole.
Dividend
The Board has declared an interim dividend of 1.3p net per ordinary share (2002: 1.0p),
a 30% increase. The dividend will be payable on 10 October 2003 to shareholders on
the register at the close of business on 12 September 2003. The dividend is covered
4.1 times by earnings per share before amortising goodwill.
Creating organic growth
We have two complementary approaches to creating organic growth. First, our centrally
managed 'Big Ticket' team seeks to secure major contracts, typically with a value of
£10m or above, to deliver complex projects that require a wide range of the Group's
skills and which generate high quality recurring revenues. Secondly, each of our
businesses now employs sales teams focussed upon securing growth from both existing
and new customers. Across the Group, we have approaching 300 strategic partnerships
and more than 20,000 customers. Our retention of customers remains very high.
Organic growth: major contracts
In the year to date, we have enjoyed a steady flow of major contract wins. Today,
I am pleased to announce that we have been appointed to deliver all of the contractor
and temporary worker needs of a major aerospace organisation, in a 5 year arrangement
with an anticipated value of £40m. Capita will work with the organisation to enhance
both processes and people management through a period of significant change. Such
long-term managed services partnerships are increasingly seen as the most flexible
way to manage the constantly changing demands on an organisation's resource.
This success means that the total value of major contracts won in the first 7 months
of 2003 is £286m. We also now have no material contracts (defined as contracts
contributing more than 1% of annual revenues) due for renewal until January 2005.
We remain encouraged by the strength of our sales pipeline. The Group is currently
pursuing live major contract bids totalling £2.8bn with deal values ranging from £15m
to £500m plus. This is the largest pipeline in our history and we have recently enlarged
our 'Big Ticket' team to manage this activity. The business drivers to outsource across
the Public and Private Sectors remain strong. This is reflected not only in the current
bid pipeline, where bids are nearing conclusion, but also in the level of additional
emerging opportunities which will come to fruition in 2004 and 2005.
Organic growth: divisions
The period has seen significant organic growth created by the businesses, securing
substantial positions in a number of markets and services. In the Public Sector,
this has been enhanced by Capita's recent appointment as a pre-qualified contractor
to Government under the S-Cat framework, a catalogue based procurement system through
which Public Sector services worth an anticipated £400m a year will be let across a
range of service categories, including human resources, management and business consultancy,
and IT services.
Within our Professional Services division, our two software companies focussed on
Local Government and Education have grown revenues by 14% compared to the corresponding
period. The drive to meet e-Government targets is resulting in an increased level of
new business. Demand has been strong for our customer services portal and our multi-channel
integrated payment and income management systems. Contracts offering these solutions
have been secured recently with Rochford District Council, Blaenau Gwent County Borough
Council, Gosport Borough Council and the Borough of Macclesfield.
Our IT Services business is continuing to play a major role in the transformation and
support programmes in our core contracts, whilst further building their external client
base. In the period, the business has won extensions and additional work worth £21m
over the next 24 months. Mission Testing, acquired in August 2002, has been integrated
into the Group and has continued to build its portfolio of long-term relationships with
Private Sector organisations such as Barclays, Reuters and EDS to supply software testing
services and solutions under contracts worth £7m over the next 18 months.
Within our Integrated Services division, off-site delivery of both back office and
frontline services is expanding rapidly to meet growing customer expectations and
increasing budgetary pressures. Two years ago, Capita began the development of an
off-site service focussed on Housing Benefit and Revenue Collection. With the advantage
of a shared infrastructure and a stable expert workforce supporting multiple contracts,
the business is securing long-term off-site service delivery contracts and is growing
at 25% per annum.
In our Business Services division, Capita Registrars continues to flourish. Since
joining the Group in April 2000, it has grown revenues organically by 42%, having
radically re-engineered its operation and successfully expanded the range of services
offered to its client base. For example, Capita Share Plan Services has recently
secured its 100th Share Incentive Plan (SIP) customer and is market leader with 25%
of the SIP administration market. During the period, we were appointed registrar
for two of the largest floats, being Northumbrian Water and Benfield. The company
was also successful in securing the registration business for Alliance & Leicester,
the largest share register to have changed registrar in 10 years.
Also in this division, Veredus, our executive recruitment business with particular
strength in the Public Sector, has achieved a very strong performance and grown
revenues by 24% since joining the Group on 1 May 2002. Capita Education Resourcing
is also performing well and has increased its market share, particularly in London
where it has seen a 23% increase in school support days delivered, despite budgetary
pressures in schools having an adverse effect on the overall supply market.
In our Commercial Services division, as previously announced, we have re-engineered
the loss adjusting activities of our Insurance Services business by introducing new
technology and a greater use of home working with a centralised support structure.
These changes will result in 22 offices being closed and 300 staff leaving the business,
but positions us well to meet future market requirements. Taking account of the costs
of achieving the transformation, this is anticipated to have a neutral impact upon
the year as a whole, but will enhance financial performance in 2004 and beyond.
Across our Claims Services and Specialist Services operations, extensions and new
business worth £15m over 2-3 years has been won with clients such as Royal & SunAlliance
and Beazley.
Capita Property Consultancy is performing well, benefiting from increased Government
spending programmes on roads, public transport, education, health and public order.
In August 2002, Capita created a new business in partnership with four local authorities
in South Wales. The business was underpinned by the four authorities contracting to
provide services worth an estimated £83m over 10 years. In less than 12 months, this
venture has grown its revenues by 32% and is now bidding for some major projects across
the United Kingdom. Similarly, through our regional business centres in Cumbria and
Blackburn, our property services operations have achieved similar success with 20%
and 25% year on year growth respectively.
Acquisitions
As previously indicated, our activity and expenditure on acquisitions has been lower
this year as we focus our resources on the many opportunities available to create
organic growth. During the period, we invested a total of £26m in acquisitions.
Of this sum, £18.5m was used to acquire the administration services division from
BWD Securities Plc, providing share registration, unit trust administration and
ancillary services to over 500 customers. Since the acquisition was completed in
March 2003, considerable progress has been made in integrating these businesses
into Capita Registrars and Capita Financial, with substantial financial and operational
synergies having been achieved. Going forward, we intend to continue to look for
acquisitions, but they are likely to be small in size and low in frequency.
Operational performance
Capita is committed to delivering service excellence to all of its clients. Our
track record in this regard is exceptional. In most of our contracts, we are measured
against detailed key performance indicators and the service levels achieved meet,
and often exceed, our contracted requirements on a highly frequent basis. Many of
the services we offer are at the leading edge of both management thinking and technological
capability. Some projects also attract a high media profile.
A prime example of this is Capita's successful implementation and launch of TfL's
Congestion Charging Scheme. This contract, which is worth £280m to Capita over a
5 year term, required an investment in IT and associated infrastructure of some £50m.
The go-live date of 17 February 2003 was never changed and during the implementation
phase, Capita achieved every milestone that was set by the client. The IT system,
involving 450 man-years of service development, was introduced to specification, on
time and to budget. The scheme, which is the largest traffic management scheme to
be implemented in the world, has reduced materially traffic volumes and congestion
in central London and the technology has proved to be effective and resilient.
There continues to be a high level of interest in the scheme by local authorities
in the UK and abroad.
The Criminal Records Bureau is now processing some 60,000 applications per week.
The key public service standards are 90% of Standard Disclosures issued within 2
weeks, 90% of Enhanced Disclosures within 4 weeks and 90% of calls answered within
20 seconds. These standards are consistently being met or exceeded. Over 2 million
Disclosures have been issued and we have handled 1.57 million telephone calls.
Contract renegotiations to reflect the revised shape of the service are proceeding
well and should be completed in the autumn. The performance improvements of the
Bureau mean that new checks on healthcare sector staff are now being introduced and
will be brought on stream from October this year.
Capita's 10 year contract to administer nearly 1 million life policies for Lincoln
Financial Group is performing superbly. Our initial re-engineering of business
processes is already resulting in increased productivity whilst we continue to meet
or exceed all our key performance indicators. This has resulted in an additional
£5m of work over the life of the contract being transferred to Capita. Lincoln
has been delighted with the benefits that outsourcing to Capita has delivered and
we are presently discussing detailed terms for extending the current contract beyond
the 10 years, transferring to an evergreen contract, worth in excess of £100m over
an estimated further 15 years. We continue to be very interested in this market
and believe that it offers considerable opportunities for the Group.
Our contract to administer TV Licensing also continues to meet or exceed the agreed
service standards and targets. Working with the BBC and our marketing partners, we
have increased the proportion of payments by direct debit from 49.9% to 52.5% and
increased the number of licensed addresses by more than 300,000. Enquiry Officer
efficiency has risen: a higher proportion of visits result in a licence being issued
and more evaders were convicted in the past year than in the previous year. The
evasion rate fell to 7.2% by the end of March. Contact centre customer surveys
report high customer satisfaction, with 93% of our customers satisfied or very
satisfied with the service.
Our contract to deliver the Connexions Card through a 7 year Public Private Partnership
with the Department for Education and Skills, to all 16-19 year olds in England,
has been systematically rolled out over the past 18 months. To date, 1,500 Learning
Centres have signed up to the service and there are over 320,000 cardholders. We
have recently extended the card's usage to support library and cashless catering
services in Learning Centres and have well developed plans to support transport
initiatives in a number of local authorities by the end of 2003.
A central part of Business Process Outsourcing (BPO) is the re-engineering of processes
and the introduction of alternative service delivery cost models. To this end,
we intend to establish a facility in India, focussed on delivering administration
services. We will build a significant off-shore BPO presence to provide a wider
range of cost efficient options to our existing and new clients in the UK. We
recognise that this route may not presently suit some clients' needs and objectives.
Equally, there are others, particularly in the financial services arena, which are
increasingly keen to embrace the combination of diligent service with sharply reduced
costs and we intend to establish a strong tailored, off-shore capability to meet their
requirements.
Market developments
Capita is the clear market leader in BPO in the UK, with a market share of 24% of
services currently outsourced (source: HI Europe, 2003). We are not dependent on
any specific market segment to achieve our growth targets and our business model
is flexible. We seek to target nine identifiable sectors, all within the UK, and
all of which are active and evolving. In many cases, the Group is leading and shaping
the development of these markets across both the Private and Public Sectors. Recently
in the Public Sector there have been a number of key developments that will further
drive the market.
In Local Government, the e-Government agenda and the Comprehensive Performance Assessment
(CPA) process being undertaken by the Audit Commission continue to be significant
drivers for authorities to consider major change in the way services are delivered
as do the new freedom powers for partnership working. The Government also announced
on 16 June that it will go ahead with the referenda as early as 2004 for Regional
Assemblies in the North East, Yorkshire and the Humber and the North West. The business
centre network that the Group has established and plans to extend provides a core
infrastructure to deliver services in any revised governance structure.
Within Central Government, as part of the Prime Minister's drive to raise standards
and productivity of public service, all Government departments are to be assessed
on their performance in a similar way to the CPA process introduced for Local Government.
This radical initiative, linked with the announcement in the Budget to review the
scope for relocating some civil service and public service jobs from London and the
South East, indicates a major rethink in the way back office services are delivered.
Our business centre structure and our experience of re-engineering services and
introducing new communication channels to improve customer access position us well
to assist with these initiatives.
In Transport, the Government announced on 9 July a £6bn plan designed to tackle
road congestion. This will include the widening of 150 miles of Britain's most
congested motorways and trunk roads and the introduction of some road charging.
The Government also confirmed that a scheme to charge lorries, by tracking their
use of roads by satellite, is due to be in place for 2006 and it intends to examine
whether this could be extended to the 26m cars in Britain. The combination of the
Group's experience of implementing the London Congestion Charging Scheme and our
Transportation and Infrastructure team's experience covering road, rail and air
means that we are well placed to bid for work in this area.
The Health Sector is also emerging as a market in which the Group can provide services.
There is strong affirmation of increased Government investment and reform, including
greater strategic and back office use of Private Sector providers. Our Property
Consultancy is partnering with a number of the leading providers in the National
Health Service (NHS) ProCure 21 framework, designed to promote better capital procurement
between the NHS and the Private Sector. Capital expenditure on ProCure 21 for the
next 6 years is estimated at £1.4bn per annum. In a similar way, Capita is a member
of one of the consortia bidding in the Government's NHS IT modernisation procurement
programme, which has been allocated £2.3bn over the next three years.
Our people
Capita's success as a public company has been achieved through the quality, commitment
and team spirit of its people. We have fostered a culture which promotes a 'can do'
attitude which benefits both our customers and the company. The Board offers its
sincere thanks to everyone who has contributed to the Group's continued success.
We believe strongly in continuing to invest in the talents of our existing people
so that wherever possible, we can fill senior positions from within the company.
To sustain this strategy, we have run a further two senior management development
programmes over the last 12 months with over 350 staff participating. We continue
to supplement this talent through external recruitment and a further 39 senior personnel
were recruited during the period. This fact, coupled with a staff turnover rate of less
than 4% per annum among our top 300 managers, provides significant headroom for growth
and considerable managerial stability.
We would like to welcome all the employees from our newly acquired businesses into
Capita, along with those who have joined us through contract wins and direct recruitment.
More than 1,000 people have joined the Group in the last 6 months.
Prospects
Capita's business model is simple, consistent, sustainable and proven. Our market
place is substantial, active and capable of supporting long-term growth. Our desire
to create long-term value for our shareholders remains steadfast.
The Group's performance continues to display strong growth, increasing profits and
buoyant cash flow. We remain confident that turnover for the year as a whole will
exceed £1,075m and we already have high visibility of revenues for 2004. We believe
that shareholders will be pleased by Capita's results for 2003 and opportunities for
growth remain excellent.
Rodney M. Aldridge, OBE
Executive Chairman
SUMMARY INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2003
Six Six
months months
to 30 to 30
June June
2003 2002
Before Goodwill Total Before Goodwill Total
goodwill amortisation goodwill amortisation
Notes £'000's £'000's £'000's £'000's £'000's £'000's
Turnover 1 531,553 - 531,553 391,222 - 391,222
Group
operating
profit 1 56,142 (13,696) 42,446 44,291 (11,201) 33,090
Net interest
payable (5,082) - (5,082) (4,047) - (4,047)
Profit before
taxation 51,060 (13,696) 37,364 40,244 (11,201) 29,043
Taxation 15,011 - 15,011 11,711 - 11,711
Profit after
taxation 36,049 (13,696) 22,353 28,533 (11,201) 17,332
Minority
interest 148 - 148 22 - 22
Profit for the
period 35,901 (13,696) 22,205 28,511 (11,201) 17,310
Dividends 8,657 - 8,657 6,656 - 6,656
Retained profit for the
period 27,244 (13,696) 13,548 21,855 (11,201) 10,654
Earnings per share 3 5.38p (2.06)p 3.32p 4.30p (1.69)p 2.61p
Diluted earnings
per share 3 5.07p (1.94)p 3.13p 4.11p (1.61)p 2.50p
Dividend per share 4 1.30p 1.00p
SUMMARY BALANCE SHEET AS AT 30 JUNE 2003
30 June 30 June
2003 2002
£'000's £'000's
Fixed assets
Intangible assets 462,182 440,383
Tangible assets 103,382 83,516
565,564 523,899
Current assets
Trade investments 5,460 5,838
Debtors 220,877 200,823
Cash at bank - 16,225
226,337 222,886
Creditors: Amounts falling due
within one year 294,334 280,558
Net current liabilities (67,997) (57,672)
Total assets less current liabilities 497,567 466,227
Creditors: Amounts falling due
after more than one year 157,068 148,652
Provision for charges and liabilities 16,782 18,190
323,717 299,385
Shareholders' funds
Called up share capital - Ordinary 13,316 13,311
Share premium and other reserves 310,298 285,470
Minority interests 103 604
323,717 299,385
SUMMARY GROUP CASH FLOW
FOR THE SIX MONTHS ENDED 30 JUNE 2003
Six Six
months months
to 30 to 30
June June
2003 2002
Notes £'000's £'000's
Cash flow from operating activities 5 61,311 41,023
Returns on investment and
servicing of finance (5,082) (4,095)
Taxation paid (8,530) (3,804)
Capital expenditure and
financial investment (16,575) (30,414)
Acquisitions and disposals (26,238) (36,518)
Equity dividends paid (13,380) (9,922)
Net cash flow before financing (8,494) (43,730)
Financing - Share Buyback (9,328) -
- Other Financing (1,666) 69,402
(Decrease) / Increase in cash in the period (19,488) 25,672
GROUP STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE SIX MONTHS ENDED 30 JUNE 2003
Six Six
months months
to 30 to 30
June June
2003 2002
£'000's £'000's
Profit attributable to the members of the
parent undertaking 22,205 17,310
Total recognised gains and losses 22,205 17,310
NOTES TO THE FINANCIAL STATEMENTS
1. Analysis of turnover by division Six Six
months months
to 30 to 30
June June
2003 2002
£'000's £'000's
Continuing
Activities
Business Services 151,154 138,360
Commercial Services 146,783 110,820
Integrated Services 97,948 64,039
Professional Services 135,668 78,003
531,553 391,222
Analysis of operating profit before goodwill amortisation:
Continuing
Activities Business Services 19,404 17,444
Commercial Services 9,059 10,084
Integrated Services 12,490 8,315
Professional Services 15,189 8,448
Operating profit before goodwill amortisation 56,142 44,291
2. The interim financial statements have been prepared on the basis of the accounting
policies set out in the Group's 2002 statutory accounts. The statements were approved
by a duly appointed and authorised committee of the Board of Directors on 23 July 2003.
The full year accounts, on which the auditors gave an unqualified report, have been
filed with the Registrar of Companies. The figures for the six months to 30 June 2002
and 2003 are unaudited.
3. Earnings per share have been calculated on an average number of shares in issue during
the period of 667,880,000 (30 June 2002: 662,847,000). The diluted earnings per share
have been calculated on the diluted profit for the period of £35,901,000 (30 June 2002 :
£28,535,000) and an average diluted number of shares of 708,317,000 (30 June 2002: 693,514,000).
As at 24 July 2003, there were 665,890,000 shares in issue.
4. The interim dividend of 1.30p per share will be payable on 10 October 2003 to Ordinary
shareholders on the register at the close of business on 12 September 2003.
5. Reconciliation of operating profit to net cash inflow from operating activities
Six Six
months months
to 30 to 30
June June
2003 2002
£'000's £'000's
Operating profit 42,446 33,090
Depreciation charge 11,811 8,745
Amortisation of goodwill 13,696 11,201
Utilisation of provisions (765) (347)
Increase in debtors (22,833) (41,803)
Increase in creditors 16,956 30,137
61,311 41,023
6. Reconciliation of net cash flow to movement in net debt
Net debt at Acquisitions Cash flow Non-cash flow Net debt at
1 January in 2003 movements movements 30 June
2003 (exc.cash) 2003
£'000's £'000's £'000's £'000's £'000's
Overdrafts (1,000) - (19,488) - (20,488)
(1,000) - (19,488) - (20,488)
Loan notes (34,110) (911) 1,662 - (33,359)
Bonds (124,501) - - (31) (124,532)
Finance leases (863) - 529 (369) (703)
(160,474) (911) (17,297) (400) (179,082)
Net debt at Acquisitions Cash flow Non-cash flow Net debt at
1 January in 2003 movements movements 30 June
2002 (exc.cash) 2002
£'000's £'000's £'000's £'000's £'000's
Cash at bank - - 16,225 - 16,225
Overdrafts (9,447) - 9,447 - -
(9,447) - 25,672 - 16,225
Long-term loans (50,000) - 50,000 - -
Loan notes (50,183) (7,019) 5,930 - (51,272)
Bonds - - (124,960) - (124,960)
Finance leases (1,553) - 521 (124) (1,156)
(111,183) (7,019) (42,837) (124) (161,163)
This information is provided by RNS
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