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Year in

review 2017

Chairman's introduction | CEO review | CFO review | Divisional performance | Our new strategy | Downloads

CHAIRMAN'S INTRODUCTION

"2017 has been a difficult year of unprecedented change for Capita. Against a challenging backdrop in many of our markets, we began to address the underlying problems preventing Capita and its people from achieving their full potential."

SIR IAN POWELL

CHAIRMAN

We have strengthened our leadership and governance, undertaken a strategic review and have launched a fully underwritten Rights Issue to position Capita well for the future.

Capita is a key part of the UK corporate landscape, both in its own right and as the provider of essential services to businesses and public-sector institutions in every sector of the economy.

The multi-year transformation process being led by Jon and his team will lead to a more sustainable, focused business operating with strong values to deliver great services to our clients. The Board and I are fully committed to the Rights Issue and the new strategy underpinned by the multi-year transformation plan to strengthen and simplify the business and deliver future success for the company, our employees, shareholders and clients.

CEO REVIEW

"We have the building blocks to create a great business; one that consistently delights its clients, has operational discipline and generates sustainable free cash flow. We are now executing the plan to deliver this."

JON LEWIS

CEO

There is a lot to be excited about: talented people, a blue-chip client base, great technology and the ability to deliver value-adding services but the more I have observed and learnt, the more I have realised there is considerable work to be done to position Capita for future, sustainable success.

Capita will simplify its business by focusing on key growth markets, realigning its organisational structure to mirror these markets and to significantly reduce costs at the same time as improving operational efficiency.

Capita will strengthen its businesses and capabilities by making selected investments in order to drive improvements to both Capita’s expertise in digital, analytics and automation and its programme delivery and operational excellence. Capita will also ensure that it has the right leadership team and capital structure in place to support the delivery of the new strategy.

FINANCIAL HIGHLIGHTS

Underlying profits were in line with expectations. Reported profits in 2017 were impacted by significant non‑underlying items and cash flow was weaker in the second half of the year.

Reported revenue

£4,234.6m

2016: £4,368.6m

+

Reported revenue

Reported revenue decreased by 3% to £4,234.6m.

x

Reported loss before tax

£(513.1)m

2016: £(89.8)m

+

Reported loss before tax

Reported loss before tax of £(513.1)m includes a charge for specific items of £852.8m, arising from impairment of goodwill, intangible assets, other non-current assets & investment loans.

x

Reported free cash flow

£37.7m

2016: £367.3m

+

Reported free cash flow

Free cash flow from continuing operations after non-underlying expenses was £37.7m.

x

Underlying revenue

£4,167.9m

2016: £4,357.3m

+

Underlying revenue

Underlying revenue on a like-for-like basis, excluding results from businesses exited in both years, decreased by 0.6% including 1.5% organic decline and 0.9% growth from acquisitions.

x

Underlying profit before tax

£383.0m

2016: £268.5m

+

Underlying profit before tax

Underlying profit before tax increased by 43% to £383.0m and underlying profit before tax before significant new contracts and restructuring costs increased by 23% to £400.9m.

x

Underlying free cash flow

£38.0m

2016: £397.3m

+

Underlying free cash flow

Free cash flow from continuing operations before non-underlying expenses was £38.0m.

x

Reported loss per share

(80.1)p

2016: (14.3)p

+

Reported loss per share

Reported loss per share in 2017 was (80.1)p.

x

Underlying earnings per share

45.61p

2016: 31.68p

+

Underlying earnings per share

Underlying earnings per share1 increased by 44% to 45.61p in 2017.

x

UNDERLYING REVENUE SPLIT

The majority of our revenue is underpinned by contracts with customers.

2017

70% long term contractual 2 years or longer 
16% Short term contractual less than 2 years
14% transactional

ORDER BOOK

The order book represents the consideration to which the Group will be entitled to receive from customers when the Group satisfies the remaining performance obligations in its contracts.

2017

TOTAL CONTRACTED REVENUE

£2.1bn Less than 12 months
£4.8bn 1 to 5 years
£1.3bn 5 years +

CHIEF FINANCIAL OFFICER’S REVIEW

"Reported profits in 2017 were impacted by significant non‑underlying items and cash flow was weaker in the second half of the year."

NICK GREATOREX

CHIEF FINANCIAL OFFICER

Underlying profits were in line with expectations, with improved profitability in the Private Sector Partnerships, Public Services Partnerships and IT Services divisions partially offset by lower profits in the Digital and Software Solutions division and higher central costs.

However, reported profits were impacted by a number of significant nonunderlying items, including goodwill and other asset impairments and the Asset Services settlement provision in relation to Connaught. There was a significant gain on the disposal of the Capita Asset Services businesses, which was treated as a discontinued operation.

Capita has early adopted IFRS 15, the new revenue recognition standard, and this report on our performance in 2017 against the comparative period in 2016 is under the new standard. 

CHANGE MAKERS

IN THE DRIVING SEAT

Putting ŠKODA customers in the driving seat without leaving their armchairs. 

CHANGE MAKERS

IN THE DRIVING SEAT

Putting ŠKODA customers in the driving seat without leaving their armchairs. 

DIVISIONAL PERFORMANCE

We are currently reporting our financial performance across five separate operating divisions.

PRIVATE SECTOR PARTNERSHIPS

Customer management, Capita Europe, life, pensions, insurance and employee solutions. 

OVERVIEW

  • The Private Sector Partnerships division includes our UK customer management business, Capita Europe (customer management in Germany and Switzerland), Insurance Services (life and pensions, insurance services and retail banking) and employee solutions (employee benefits and corporate pensions administration).
  • We help clients to better service their end customers in a multi-channel world, become more efficient in their core processes and increase their workforce’s engagement and productivity.
  • Clients often partner with us to run their services under multi-year contracts, which can include transforming the end-to-end service supported by new technologies.
  • Our differentiated approach is to deliver measurable business outcomes for clients including: guaranteed cost reduction, improvement in customer satisfaction and/or revenue generation.

HIGHLIGHTS AND OUTLOOK

  • New customer management contracts with mobilcom-debitel and Tesco Mobile
  • Improved profitability following The Co-operative Bank renegotiation and TV Licensing contract modification
  • Lower restructuring costs (£33m in 2016)
  • Remediation services down
  • Higher contract and volume attrition, including Prudential, expected in 2018
  • Increases in costs include adoption of General Data Protection Regulation and higher depreciation
Underlying revenue

£1,588m

Underlying operating profit

£137.5m

Underlying operating margin

8.7%

PUBLIC SECTOR PARTNERSHIPS

Central and local public services and contracts, real estate property and infrastructure

OVERVIEW

  • The Public Sector Partnerships division provides business process management services across the UK public sector and local government, and real estate, property and infrastructure services into local government and the commercial property sector.
  • It contains our largest contracts by revenue and most complex central and local government contracts, working with our public sector partners to modernise and improve the efficiency, quality and accessibility of services whilst providing value to UK taxpayers.

HIGHLIGHTS AND OUTLOOK

  • Revenue decline in central government services and real estate, partially offset by DWP PIP
  • Profitability on major contracts improved
  • Inflection point reached on TfL (£25m one-off costs in 2016) and good performances from DWP PIP and DCC Smart Metering
  • One-off benefit in DIO owing to contract reshaping
  • DIO £22m contract modification benefit drops out in 2018
  • NHS PCSE transformation costs to reduce over time
  • DWP PIP renewal in 2019
  • Brexit opportunities medium term
Underlying revenue

£1,087m

Underlying operating profit

£73.0m

Underlying operating margin

6.7%

PROFESSIONAL SERVICES

HR, corporate and specialist services and commercialised public sector assets and joint ventures

OVERVIEW

  • Our Professional Services division comprises a portfolio of businesses – our corporate and specialist services, including commercialised public sector assets and joint ventures.
  • The division provides a breadth of resourcing and HR managed services, employee engagement and branding, and learning services.
  • It also contains our travel and events business, Constructionline, ParkingEye, our Army Recruiting Partnering Project (RPP) contract and AXELOS and Fera, our government commercial partnerships.
  • Our strategy is focused on making clients’ internal organisations more efficient and growing government assets.

HIGHLIGHTS AND OUTLOOK

  • Revenue down due to disposal of specialist recruitment and loss of part of Civil Service Learning contract
  • Growth in trading businesses
  • Profits impacted by dropping out of property commercialisation in second half
  • Improved performances in RPP army recruitment and Fera
  • Planned disposals of ParkingEye and Constructionline
  • Mixed performance from trading businesses and contracts
  • Defence Fire & Risk Project (DFRP) tender ongoing
Underlying revenue

£532.8m

Underlying operating profit

£104.9m

Underlying operating margin

19.7%

DIGITAL AND SOFTWARE SOLUTIONS

Application software and solutions across public sector, utilities and financial services

OVERVIEW

  • The Digital and Software Solutions division supplies application software and wider solutions across the public sector, utilities and financial services markets.
  • As a software products provider, our industry and functional specific IP supports critical public services and business processes.
  • We offer a broad range of services that include: local government and education software, digital transformation and development, secure software and technologies, mobile and big data solutions, geospatial solutions, business management software, travel management solutions, enterprise resource planning (ERP), workforce and resource management and business analytics.

HIGHLIGHTS AND OUTLOOK

  • Good growth in utilities, education flat & local government down
  • Revenue and profits impacted by end of licence with The Co-operative Bank
  • Higher amortisation and employee costs
  • Order intake expected to improve over course of FY18 but revenue from active licences will be spread over lifetime
  • International sales opportunities being targeted
  • Continued investment in developing software products
  • Increased offshoring to enhance capability and efficiency
Underlying revenue

£410.9m

Underlying operating profit

£113.9m

Underlying operating margin

27.7%

IT SERVICES

IT infrastructure, applications solutions and consulting services

OVERVIEW

  • The IT Services division delivers a broad portfolio of IT infrastructure and applications solutions and consulting services to organisations across the private and public sectors and across Capita. We operate across the UK and from our operations in India, supporting clients at a local and national level.
  • We have strategic partnerships with leading global IT vendors and have invested in our own portfolio of hosted platforms and operate our own UK-wide network and datacentres.

HIGHLIGHTS AND OUTLOOK

  • Full year benefit from the acquisition of Trustmarque
  • Good growth in networking solutions and managed print partially offset by declines in technology solutions and managed IT solutions (services)
  • Significant improvement in profitability due to restructuring and one-off supplier settlement
  • Contract and volume attrition expected in 2018
  • £9m supplier settlement drops out
Underlying revenue

£507.8m

Underlying operating profit

£78.1m

Underlying operating margin

15.4%

PRIVATE SECTOR PARTNERSHIPS

Customer management, Capita Europe, life, pensions, insurance and employee solutions. 

OVERVIEW

  • The Private Sector Partnerships division includes our UK customer management business, Capita Europe (customer management in Germany and Switzerland), Insurance Services (life and pensions, insurance services and retail banking) and employee solutions (employee benefits and corporate pensions administration).
  • We help clients to better service their end customers in a multi-channel world, become more efficient in their core processes and increase their workforce’s engagement and productivity.
  • Clients often partner with us to run their services under multi-year contracts, which can include transforming the end-to-end service supported by new technologies.
  • Our differentiated approach is to deliver measurable business outcomes for clients including: guaranteed cost reduction, improvement in customer satisfaction and/or revenue generation.

HIGHLIGHTS AND OUTLOOK

  • New customer management contracts with mobilcom-debitel and Tesco Mobile
  • Improved profitability following The Co-operative Bank renegotiation and TV Licensing contract modification
  • Lower restructuring costs (£33m in 2016)
  • Remediation services down
  • Higher contract and volume attrition, including Prudential, expected in 2018
  • Increases in costs include adoption of General Data Protection Regulation and higher depreciation
Underlying revenue

£1,588m

Underlying operating profit

£137.5m

Underlying operating margin

8.7%

PUBLIC SECTOR PARTNERSHIPS

Central and local public services and contracts, real estate property and infrastructure

OVERVIEW

  • The Public Sector Partnerships division provides business process management services across the UK public sector and local government, and real estate, property and infrastructure services into local government and the commercial property sector.
  • It contains our largest contracts by revenue and most complex central and local government contracts, working with our public sector partners to modernise and improve the efficiency, quality and accessibility of services whilst providing value to UK taxpayers.

HIGHLIGHTS AND OUTLOOK

  • Revenue decline in central government services and real estate, partially offset by DWP PIP
  • Profitability on major contracts improved
  • Inflection point reached on TfL (£25m one-off costs in 2016) and good performances from DWP PIP and DCC Smart Metering
  • One-off benefit in DIO owing to contract reshaping
  • DIO £22m contract modification benefit drops out in 2018
  • NHS PCSE transformation costs to reduce over time
  • DWP PIP renewal in 2019
  • Brexit opportunities medium term
Underlying revenue

£1,087m

Underlying operating profit

£73.0m

Underlying operating margin

6.7%

PROFESSIONAL SERVICES

HR, corporate and specialist services and commercialised public sector assets and joint ventures

OVERVIEW

  • Our Professional Services division comprises a portfolio of businesses – our corporate and specialist services, including commercialised public sector assets and joint ventures.
  • The division provides a breadth of resourcing and HR managed services, employee engagement and branding, and learning services.
  • It also contains our travel and events business, Constructionline, ParkingEye, our Army Recruiting Partnering Project (RPP) contract and AXELOS and Fera, our government commercial partnerships.
  • Our strategy is focused on making clients’ internal organisations more efficient and growing government assets.

HIGHLIGHTS AND OUTLOOK

  • Revenue down due to disposal of specialist recruitment and loss of part of Civil Service Learning contract
  • Growth in trading businesses
  • Profits impacted by dropping out of property commercialisation in second half
  • Improved performances in RPP army recruitment and Fera
  • Planned disposals of ParkingEye and Constructionline
  • Mixed performance from trading businesses and contracts
  • Defence Fire & Risk Project (DFRP) tender ongoing
Underlying revenue

£532.8m

Underlying operating profit

£104.9m

Underlying operating margin

19.7%

DIGITAL AND SOFTWARE SOLUTIONS

Application software and solutions across public sector, utilities and financial services

OVERVIEW

  • The Digital and Software Solutions division supplies application software and wider solutions across the public sector, utilities and financial services markets.
  • As a software products provider, our industry and functional specific IP supports critical public services and business processes.
  • We offer a broad range of services that include: local government and education software, digital transformation and development, secure software and technologies, mobile and big data solutions, geospatial solutions, business management software, travel management solutions, enterprise resource planning (ERP), workforce and resource management and business analytics.

HIGHLIGHTS AND OUTLOOK

  • Good growth in utilities, education flat & local government down
  • Revenue and profits impacted by end of licence with The Co-operative Bank
  • Higher amortisation and employee costs
  • Order intake expected to improve over course of FY18 but revenue from active licences will be spread over lifetime
  • International sales opportunities being targeted
  • Continued investment in developing software products
  • Increased offshoring to enhance capability and efficiency
Underlying revenue

£410.9m

Underlying operating profit

£113.9m

Underlying operating margin

27.7%

IT SERVICES

IT infrastructure, applications solutions and consulting services

OVERVIEW

  • The IT Services division delivers a broad portfolio of IT infrastructure and applications solutions and consulting services to organisations across the private and public sectors and across Capita. We operate across the UK and from our operations in India, supporting clients at a local and national level.
  • We have strategic partnerships with leading global IT vendors and have invested in our own portfolio of hosted platforms and operate our own UK-wide network and datacentres.

HIGHLIGHTS AND OUTLOOK

  • Full year benefit from the acquisition of Trustmarque
  • Good growth in networking solutions and managed print partially offset by declines in technology solutions and managed IT solutions (services)
  • Significant improvement in profitability due to restructuring and one-off supplier settlement
  • Contract and volume attrition expected in 2018
  • £9m supplier settlement drops out
Underlying revenue

£507.8m

Underlying operating profit

£78.1m

Underlying operating margin

15.4%

CHANGE MAKERS

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CHANGE MAKERS

DRIVING VALUE

How we use mountains of data to help a UK retailer reach new heights.

OUR NEW STRATEGY

Following the arrival of our new CEO in December 2017, a comprehensive strategy review was undertaken.

OVERVIEW OF NEW STRATEGY

SIMPLIFY

  • Focus on strong positions with growth potential
  • Align organisation around growth markets
  • Use common, scalable capabilities
  • Cost base

STRENGTHEN

  • Leadership and governance
  • Up to £500m investment in asset base, technology and people
  • Win more of the right work
  • Balance sheet

SUCCEED

  • More predictable, lower risk
  • At least £200m of sustainable free cash flow in 2020

SIMPLIFY: FOCUS ON GROWTH MARKETS

Organisation diagram

STRENGTHEN: OUR BUSINESSES AND CAPABILITIES

A key aim of our new strategy is to strengthen our businesses and capabilities by making selected investments in order to drive improvements in both Capita’s expertise in digital, analytics and automation and its programme delivery and operational excellence. We will also seek to ensure that we have the right leadership team and capital structure in place to support the delivery of its new strategy.

  • Strengthened leadership team, culture and incentives and formed a new Executive Committee
  • Focus on winning the work we can execute well, and which has an acceptable risk and financial profile
  • Making targeted investments to address historic underinvestment and to allow growth to follow
  • Re-invigorating sales across the organisation, increasing emphasis on account management

SUCCEED: FINANCIAL TRANSFORMATION

We have built a detailed, multi-year transformation plan in order to execute the new strategy, encompassing strategy implementation, cost competitiveness, capital structure, targeted investment, organisational alignment and re-igniting sales.
We believe that the near-term parts of this transformation are driven mostly by elements in our control and that there is a great amount of value to be extracted just from doing the basics better. The strategy has been designed to win the business which Capita can execute well, which will help make Capita’s business more predictable and lower risk. The investments made into the business are expected to provide a stable and strong platform for growth which in turn can provide sustainable free cash flow in the medium term.

The financial impact of our strategy will be significant:

  • We are initially targeting annualised initial cost savings of £175m by the end of 2020. This includes £70m which is expected to be realised in the year ending 31 December 2018 which is reflected in our profit guidance below.
  • The cost to achieve these savings is expected to be £40m for the year ending 31 December 2018 and £110m in total in the following two years.
  • We are also targeting double digit EBIT margins within three years.
  • We plan to invest a total of up to £500m over the next three years, upgrading key infrastructure and investing in differentiated capability in order to drive future growth
  • We expect to generate at least £200m of sustainable annual post-tax free cash flow by 2020, before exceptional and restructuring charges and additional voluntary pension contributions.

OVERVIEW OF NEW STRATEGY

SIMPLIFY

  • Focus on strong positions with growth potential
  • Align organisation around growth markets
  • Use common, scalable capabilities
  • Cost base

STRENGTHEN

  • Leadership and governance
  • Up to £500m investment in asset base, technology and people
  • Win more of the right work
  • Balance sheet

SUCCEED

  • More predictable, lower risk
  • At least £200m of sustainable free cash flow in 2020

SIMPLIFY: FOCUS ON GROWTH MARKETS

Organisation diagram

STRENGTHEN: OUR BUSINESSES AND CAPABILITIES

A key aim of our new strategy is to strengthen our businesses and capabilities by making selected investments in order to drive improvements in both Capita’s expertise in digital, analytics and automation and its programme delivery and operational excellence. We will also seek to ensure that we have the right leadership team and capital structure in place to support the delivery of its new strategy.

  • Strengthened leadership team, culture and incentives and formed a new Executive Committee
  • Focus on winning the work we can execute well, and which has an acceptable risk and financial profile
  • Making targeted investments to address historic underinvestment and to allow growth to follow
  • Re-invigorating sales across the organisation, increasing emphasis on account management

SUCCEED: FINANCIAL TRANSFORMATION

We have built a detailed, multi-year transformation plan in order to execute the new strategy, encompassing strategy implementation, cost competitiveness, capital structure, targeted investment, organisational alignment and re-igniting sales.
We believe that the near-term parts of this transformation are driven mostly by elements in our control and that there is a great amount of value to be extracted just from doing the basics better. The strategy has been designed to win the business which Capita can execute well, which will help make Capita’s business more predictable and lower risk. The investments made into the business are expected to provide a stable and strong platform for growth which in turn can provide sustainable free cash flow in the medium term.

The financial impact of our strategy will be significant:

  • We are initially targeting annualised initial cost savings of £175m by the end of 2020. This includes £70m which is expected to be realised in the year ending 31 December 2018 which is reflected in our profit guidance below.
  • The cost to achieve these savings is expected to be £40m for the year ending 31 December 2018 and £110m in total in the following two years.
  • We are also targeting double digit EBIT margins within three years.
  • We plan to invest a total of up to £500m over the next three years, upgrading key infrastructure and investing in differentiated capability in order to drive future growth
  • We expect to generate at least £200m of sustainable annual post-tax free cash flow by 2020, before exceptional and restructuring charges and additional voluntary pension contributions.

DOWNLOADS

The full 2017 Annual Report and key sections are available to download below.

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