8 December
2016
Pre-close trading
update
Intention to sell
the majority of Capita Asset Services
Capita plc (“Capita”) is today issuing a pre-close trading
update for 2016. In addition, following a group-wide business
review, we are announcing the Board’s decision to dispose of the
majority of the Capita Asset Services division (“CAS businesses”)
and a small number of other businesses which no longer fit Capita’s
core business strategy. These actions will consolidate Capita’s
position as the UK’s leading provider of customer and business
process management services, while underpinning the Company’s
balance sheet.
Capita Chief Executive, Andy
Parker, said “We are committed to delivering good
returns to shareholders, supported by a strong capital structure
and a clear growth strategy. In recent months, we have reviewed our
management structure, operating model, business portfolio and our
leverage to ensure we are in the strongest position to support
future profitable growth.
“In November, we announced changes to our management and
business structure and today we are announcing our intention to
sell the majority of our Capita Asset Services division and a small
number of other businesses. We have also commenced a programme of
cost reduction and investments to position the Company strongly for
renewed future growth. Together, these actions will create a leaner
Capita, focused on its core strengths and with a much stronger
balance sheet.
“I am confident that the markets Capita addresses offer
long-term structural growth. We are however currently facing some
near-term headwinds, which continue to make 2016 a challenging year
and will affect trading performance in the first half of 2017. Our
long-term contracts provide us with good revenue visibility across
the year and the structural and cost reduction actions we are
taking now will support progress in the second half of 2017 and
into 2018. We therefore currently expect a similar trading
performance to 2016 in the full-year 2017.
“Our new divisions are now fully aligned to the markets in which
they operate and the divisional sales teams are working seamlessly
with the central major sales team to better address these markets
and fuel greater organic growth in 2018 and beyond.
“The decisive steps we have recently taken and those we are
announcing today make us a more resilient business, committed to
generating organic growth, maintaining and then growing our
dividend and delivering sustained value for shareholders.”
A simpler business, with a clear
strategy and a continued focus on organic growth
We remain focused on providing the expertise and capability to
deliver technology-enabled outsourced solutions and professional
services that make processes smarter, organisations more efficient
and customer experiences better.
Our three core objectives are:
*the development of market-leading proprietary solutions that
make use of the latest technical innovations and draw on our
existing IT, digital and software operations to create value for
our clients
*a continued focus both on the UK market and a gradual extension
of our presence across selected growth markets overseas
*and, through the above, the delivery of earnings per share
growth, strong cash flow and return on capital, by generating
profitable organic growth and investing in incremental small to
medium sized acquisitions, where they support our core strategy and
meet our strict returns criteria.
To ensure Capita is best positioned to deliver on this strategy,
we recently announced a wide-ranging restructure to simplify our
business model and provide greater management strength and depth
across all of Capita’s operations.
Reorganising our 11 divisions into six market-facing divisions
(five post the CAS disposal) will reduce complexity and increase
oversight, providing better accountability with a more streamlined
management structure, reporting directly to the Chief Executive.
The divisions’ sales teams have been aligned with the central major
sales team to strengthen our sales efforts, enhance our sales
propositions, and better penetrate our markets. The new divisional
structure will be in place from the start of January 2017.
Business review and proposed
disposals
The Board additionally undertook a review of all of Capita’s
businesses with the objective of further simplifying the Company
and increasing our focus on our core strengths.
For each business, the Board’s review considered the growth
potential, future market challenges, capital requirements and,
above all, their fit within Capita’s core business strategy. The
business review identified and concluded that several businesses
are no longer core to the future strategic direction of Capita, and
consequently we now intend to dispose of the following assets:
*a group of businesses within the Capita Asset Services division
which deliver shareholder, fund, debt and banking solutions and
trust and corporate services, and operate in a regulated
environment. The UK retail banking and mortgage services business
process management operations, which currently sit within this
division, remain core to Capita’s strategy and will be transferred
to the new Private Sector Partnerships division
*a small number of other trading businesses which are not
integral to supporting our technology-enabled outsourced
solutions.
There is strategic and financial logic for the proposed sale of
the identified Capita Asset Services businesses and the other
assets. The Board also believes these businesses will prosper under
different ownership and has therefore commenced a process of
divestment.
The identified CAS businesses are expected to contribute
approximately EBITDA of £70m and operating profit of £60m in 2016.
The other trading businesses and assets in aggregate are expected
to contribute operating profit of up to £10m in 2016.
A stronger balance sheet
In line with Capita’s strategy to maintain a sustainable balance
sheet with a prudent level of financial gearing, the potential
proceeds generated from these disposals will be used to reduce
gearing and strengthen the balance sheet.
Capita’s net debt to annualised EBITDA ratio at end June 2016 was 2.5 times. Whilst net debt at the
end of December 2016 is expected to
be similar to net debt at the end of June
2016, with lower earnings this year, net debt to EBITDA is
expected to be in the region of 2.9 times at year-end.
Post successful completion of the sale of the CAS businesses,
the Board would expect the Group’s leverage to be around the bottom
end of our 2.0 to 2.5 long term net debt to EBITDA target range. We
expect to continue to invest in incremental small and medium sized
acquisitions where they support our core strategy and meet our
strict returns criteria, but the rate of investment will be lower
in 2017 and 2018 than in previous years, as we continue to focus on
maintaining a lower level of leverage.
The sale of the identified CAS businesses is anticipated to
complete during the second half of 2017, subject to a number of
regulatory clearances. At this stage, there is no certainty that
any of the proposed disposals will ultimately be completed.
Trading update
Major new sales: Capita recently announced its first
transformational contract in Europe, having been selected as strategic
partner to deliver customer services for mobilcom-debitel, with a
seven-year contract expected to be valued at €230m (£197m). This
marks the successful introduction by Capita of a new longer-term
outsourced customer management operating model into Continental
Europe. The partnership, key to supporting mobilcom-debitel’s
digital lifestyle strategy and continued growth, is due to commence
on 1 March 2017. Mobilcom-debitel is
one of Germany’s largest mobile and internet services and telecoms
products providers, with a growing customer base.
Capita has announced £1.2bn major contract wins and extensions
in 2016 to date and, following recent decisions, the bid pipeline
currently stands at £3.8bn (July
2016: £5.1bn). Within our sphere of interest, the number of
major contracts coming to market this year has been slightly lower
than usual and some contract decisions have been delayed, resulting
in a lower than expected contribution from new major contracts in
2016. As the long-term drivers for outsourcing remaining
compelling, we anticipate that the customer and business process
management markets will become more active again. The potential for
growth in these markets in the UK and Europe continues to be strong.
Divisional trading: Since Capita last updated the market
in September trading has remained challenging across some of our
divisional businesses. Specifically, performance in our IT
Enterprise Services division has weakened further. We have made
extensive management and structural changes across this division
and expect to make progress on improving its performance over the
course of 2017. Additionally, as a result of some clients’ own cost
saving measures, we have recently experienced lower volumes of
discretionary spend in a number of the Company’s other trading
businesses.
Cost actions and investment: To address these current
trading challenges, we are taking actions to reduce the cost base
across the Company. We expect restructuring costs of around £50m to
be charged to the profit and loss account in 2016, the cash spend
against which will be around a quarter incurred this year and
three-quarters in 2017. We expect a commensurate benefit from these
actions to be realised over the course of 2017 and 2018 and to be
ongoing thereafter.
Some of the benefit of these actions will be re-invested in
capability and initiatives to support the future growth of our
business. Specifically, we have started two additional programmes
that will drive longer term sustainable efficiencies and strengthen
Capita’s competitive position. The first programme is to move some
of our IT applications support offshore to our operation in
India. The second programme is an
investment in a proprietary robotic solution to achieve scale
automation across some of our operations and, more significantly,
to deliver benefits to new clients. We expect the benefits of these
two programmes to flow through into 2018.
Outlook and dividend
2016 and 2017 outlook: As a result of the trading
challenges outlined above, Capita expects revenue to be around
£4.8bn and underlying profit before tax to be at least £515m,
excluding the cost of restructuring, for the full-year to
December 2016. We expect interest to
be around £66m in 2016. Our outlook for 2016 and 2017 excludes the
potential impact from actions in relation to the planned disposal
of the CAS businesses and the other assets outlined above.
The headwinds we have faced in the second half of 2016 will
affect trading performance in the first half of 2017. Our long-term
contracts provide us with good revenue visibility across the year
and the structural and cost reduction actions we are taking now
will support progress in the second half of 2017 and into 2018. We
therefore currently expect a similar trading performance to 2016 in
the full-year 2017. Our average cost of debt in 2017 will continue
to rise as a result of the rolling off of our interest rate
swaps.
We remain confident that the markets Capita addresses offer
long-term structural growth. Our new divisions are now fully
aligned to the markets in which they operate and the divisional
sales teams are working seamlessly with the central major sales
team to better address these markets and fuel greater organic
growth in 2018 and beyond.
The successful conclusion of the potential disposal of the CAS
businesses and the other assets, alongside Capita’s new simplified
organisational and management structure, will position Capita
robustly to continue funding its business strategy and growth
aspirations in the short and long term.
Dividend: The Board expects to recommend a final dividend
for 2016 of 20.6p which, together with the interim dividend of
11.1p, makes a total dividend of 31.7p, unchanged on 2015. The
Board expects to maintain the dividend in 2017, rebuild dividend
cover in the medium term and return to steady dividend growth more
reflective of the organic growth of the Company thereafter.
Future updates and Capital Markets Day: At the full-year,
we will update investors more fully on the progress of cost
reductions, the benefits of the new divisional structure and the
prospects for profitable growth. We intend to hold a capital
markets day for investors in mid-2017 to ensure a fuller
understanding of each of our new divisions and showcase the unique
properties of the Company, including its long-term partnerships and
software and technology platforms.
-Ends-
This announcement contains inside
information.
Analyst conference call, presentation,
and replay:
Capita’s Chief Executive, Andy
Parker, and Group Finance Director, Nick Greatorex, will be hosting a conference
call for analysts to dial into from 08:00 to 08:45 this morning
alongside an online WebEx presentation. Please access the call and
WebEx in time to allow for registration.
Please see details below:
Conference call:
Standard International Access: +44 (0) 20 3003 2666
Password: Capita0812
WebEx presentation:
To view the presentation slides, please go to:
https://capitaevent.webex.com/capitaevent/onstage/g.php?MTID=e275548be800e60654e522519cdf23e04
Password: Capita1
Replay:
Following the event, a replay of the call will be made available
for 21 days after the call.
Dial-in: +44 (0) 20 8196 1998
Access code: 9532156#
_________________________________________________________________________
For further information:
Capita plc
Tel: 020 7799 1525
Andy Parker, Chief Executive
Officer
Shona Nichols, Executive Director,
Communications
Andrew Ripper, Head of Investor
Relations
Media enquiries
Powerscourt
Victoria Palmer-Moore, Peter Ogden, Andy
Jones
Tel: + 44 (0) 20 7250 1446
Capita@powerscourt-group.com
Goldman Sachs are advising Capita on the disposal of the CAS
businesses
Goldman Sachs International, which is authorised by the
Prudential Regulation Authority and regulated by the Financial
Conduct Authority and the Prudential Regulation Authority in the
UK, is acting for Capita and no one else in connection with the
potential sale of the Capita Asset Services division and will not
be responsible to anyone other than Capita for providing the
protections afforded to its clients, or for giving advice in
connection with the potential sale of the Capita Asset Services
division.
Capita is a leading UK provider of technology-enabled
customer and business process services and integrated professional
support services. With 75,000 people at over 500 sites, including
94 business centres 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), and is a constituent
of the FTSE 100 with 2015 revenue of £4.7 billion. Further
information on Capita can be found at: www.capita.com.