02/03/2023 - Capita plc: Full year results 2022

Chief Executive Officer's review

Summary

Following the completion in 2021 of the Group's transformation, 2022 was an important year of stabilisation for Capita and we are pleased to report that the Group delivered an acceleration in adjusted revenue growth, an improvement from last year's adjusted loss before tax to a profit of £74m following cessation of restructuring spend, and positive free cash flow in line with expectations.

At the start of 2022, we set out our six corporate priorities: to live our purpose; invest in our colleagues; grow the business; deliver for our clients; deliver sustainable free cash flow; and reduce net debt. We made progress against each of these priorities which has provided a firm foundation for the success of the business moving forwards. Our strategy is delivering and we achieved a turnaround in our financial performance in 2022.

The Group's organisational structure now prioritises client needs alongside operational delivery, and we were pleased to have seen a six-point increase in customer net promoter score (cNPS) over the year to +35 points.

We are also creating a more compelling working environment for our colleagues, with an increase of 15 points in our employee net promoter score (eNPS). But there is still more to do in this area, and we have a comprehensive plan to deliver further progress in 2023.

We are on a path to sustainable free cash flow generation, having delivered positive free cash flow in 2022 and having continued to strengthen the balance sheet following the completion of further disposals of non-core businesses, achieving gross disposal proceeds of c.£485m, which has substantially reduced our net debt.

Market conditions and dynamics have changed significantly over the past year, for both businesses and consumers. But we believe Capita remains a resilient business, notwithstanding the challenging macroeconomic environment, as we use our know-how, digital tools and process expertise to deliver cost-effective solutions to clients and customers.

I would like to thank our colleagues throughout the organisation for their continued hard work, commitment and professionalism.

The foundation that Capita now has in place, following our transformation and stabilisation phases, will allow us to accelerate our growth further in 2023 and beyond.

Living our purpose

Creating better outcomes for all key stakeholders is Capita's purpose and is our licence to operate. It underpins everything we do as a business.

We align ourselves to the five principles of a purpose-driven business within the Blueprint for Better Business. These include being honest and fair with clients and suppliers, being a good citizen, being a responsible and responsive employer, being a guardian for future generations, and having a purpose which delivers long-term sustainable performance.

Globally, we have introduced purpose-related remuneration metrics and objectives, to embed further our purpose-driven behaviours across the Group; these are set by the new ESG Committee of the Board and approved by the Remuneration Committee prior to final Board approval.

Diversity was a key focus during 2022 and, as a Group, we have set multi-year targets for gender and ethnic equality, diversity and inclusion in senior leadership. The Group is ahead of these targets with 42% female senior leadership (globally) and 14% ethnic diversity in UK senior leadership, including 3% Black representation at the end of 2022.

In addition, our Board and Executive Committee are both currently 44% female and 22% ethnically diverse, well above the diversity levels of most UK boards and executive teams.

Employee engagement and investing in our colleagues was a corporate priority in 2022. We paid specific attention to better communication, investment in training, and development of the career path framework. We have a compelling employee value proposition and we saw a +15 point improvement in eNPS in 2022.

We are committed to remaining a virtual-first organisation. Our hybrid working model allows a large proportion of our colleagues to work remotely all or part of the time. This has helped improve employee recruitment, while unlocking career opportunities for the economically inactive and supporting the UK Government's Levelling Up agenda. In 2022, 85% of employees gave our hybrid working model as a reason to stay with Capita, and we have seen a positive effect on both productivity and absenteeism.

However, similar to our competitors in the outsourcing market, colleague attrition remains a key challenge for the Group. We are working to identify the drivers of attrition and take meaningful action to reduce it to a sustainable level. This year we introduced the career path framework to both help employees' development and shape their future progress, creating long and fulfilling careers at Capita. The rollout of the career path framework across the Group will be completed in 2023.

Attrition rates have improved in a number of areas such as within our Technology and Software Solutions (TSS) function and Public Service, but there are still some parts of Experience where they remain high. Addressing and reducing attrition across the Group represents a significant future cost-saving opportunity.

We are committed to helping our employees navigate the cost-of-living crisis, particularly our lower-earning colleagues. We have confirmed our commitment and retained our status as a real living wage accredited employer in the UK; and, through our 2023 annual salary review process, pay rises will be heavily weighted towards the lower earners in the organisation, with the highest earners being asked to forgo a basic pay increase.

For colleagues based outside the UK, we have a similar and fair approach, paying colleagues in line with our global pay principles. In order to support our colleagues further, we have also launched a number of financial wellbeing initiatives including direct financial support, such as salary advances, and the Level app which provides support for financial budgeting.

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During 2022, we continued to develop and embed our health, safety and wellbeing policies and standards for all our colleagues within the divisions and business units. We are driving assurance programmes around our requirements, growing the wellbeing and health components of our new occupational health services and increasing the digital transformation of the tools we use to care for our employees. In 2022 our annual employee wellbeing index improved by 4%, we also introduced SafetyNet providing guidance and support to teams dealing with complex issues related to wellbeing, safeguarding or vulnerability.

Elsewhere within the Group, we launched Project Compass to provide ex-offenders with meaningful employment upon leaving prison. We also joined forces with a social impact firm to assist military veterans with finding jobs to help fill the UK's digital skills gaps on their return to civilian life. We were pleased to retain our status as a gold award employer under the Armed Forces Covenant.

Outside the UK, we made a donation at the start of the Ukraine war to the Red Cross, while our colleagues in Poland have supported refugees with donations and hosted refugee families. In South Africa we funded a learners programme to help underprivileged groups to tackle digital exclusion.

More widely, across our contract bids, we have seen our clients placing a greater emphasis on ESG in their tender appraisal processes. This is an area where we typically score well, reflecting our success in transforming Capita into a truly purpose-driven, responsible business.

We previously outlined our plans to take our carbon footprint to net zero by 2035, ahead of the UK Government's target of 2050. Our three-phased approach aims to see us reach Scope 1 net zero by 2025 and Scope 2 and 3 net zero by 2030. During the year, the Science Based Targets initiative verified the Group's 2035 net zero target as compliant with the highest standards of target-setting methodology and Capita was awarded a climate change A list award by the Carbon Disclosure Project (CDP).

We reduced our Scope 1 and 2 emissions by 45% compared with our 2019 base line. We are pleased to be certified as ESG low risk by Sustainalytics, a leading independent ESG and corporate governance research, ratings and analytics firm. Our newly created ESG Committee provides additional strategic oversight, accountability and guidance to ensure we maintain our high standards.

Our performance on supplier metrics has been maintained; for example, 99% of all suppliers were paid within UK Government guidelines of 60 days, a one percentage point increase from 2021. We were also slightly ahead of our 33% target spend with SME suppliers.

Markets and clients

We are a leading provider of business process services, driven by data, technology and people. Both our Public Service and Experience divisions have strong positions in their markets - as the UK Government's largest IT outsourcing supplier2 and as the UK's leading customer services provider3.

Both markets are growing at around 5%2+3 per annum. Some sub-sectors within the markets are growing at much higher rates, as both the public and private sectors invest in digital transformation to drive efficiency, amid economic uncertainty and fiscal strain, and deliver better citizen and customer service. Our overall value proposition remains strong in the current macroeconomic climate where we can drive efficiency and productivity for the benefit of customers and citizens.

Our deep sector process knowledge and market vertical divisional structure, combined with the breadth and depth of the Group's client base, provide stability and resilience. The divisions, led by our dedicated client partners, are also generating a better-quality pipeline, enabling us to accelerate revenue growth.

We are taking a proactive approach to mitigating the pressures of rising inflation and in 2022, we believe this resulted in no material profit impact from inflation on the Group. To provide future protection, we have focused efforts on ensuring we have robust contractual protection in place against inflation. Where protection does not currently exist, we have seen success from commercial dialogue with clients to ensure we are being fairly remunerated in changing market conditions. We also have embedded cost-reduction programmes across the Group to help offset inflationary pressures.

Digital transformation

There is a major market opportunity across both core divisions to be more cost effective and win more business, as we improve our digital capabilities.

Both core divisions are highly ranked by TechMarketView and Information Services Group for their client delivery. We remain on a journey in which we are transitioning from providing traditional business process outsourcing (BPO) to business process services (BPS), where services and process delivery are digitally enabled.

In 2022, the UK Government published its roadmap for digital and data, outlining its intention to spend up to an additional £8bn by 2025 on digital, data and technology transformation. As our mix of work shifts from traditional BPO to digital BPS, we see incremental margin opportunity from processes becoming standardised and repeatable, with greater contract stickiness. Previous investments are starting to yield benefits with the UK Government, for the first time, regarding us as a digital service provider alongside delivering complex outsourcing scopes of work.

To support our digital offerings, we continue to embed our TSS capability. With 4,200 employees, TSS brings a single resource pool to deliver secure, resilient and predictable digital solutions for Capita's businesses and clients. We view this as the digital heart of Capita.

We have aligned TSS partners with divisional Service Delivery Managers to ensure greater insight into our clients' requirements, while ensuring we have a pan-Capita digital roadmap with broader capabilities across the Group. Our TSS capabilities contributed to client satisfaction improvements across Capita Public Service and Experience in 2022. The new shared-service structure has also seen a strong improvement in TSS employee engagement in 2022, with attrition rates halving.

Operationally, the creation of a shared service technology delivery function facilitated a significant step-up in new daily software releases, delivering 33% more releases compared with 2021, and helped reduce the cost of service-credits across the contract portfolio.

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Our strengthened balance sheet underpins our ability to increase investment in digital solutions. This year we invested in a new pensions platform in our Financial Services vertical to facilitate wider user self service. Within Public Service, our digital technology stack will be an area of continued investment in 2023 and beyond, positioning us for improved opportunities going forwards.

To underpin the Group's increase in digital BPS in 2023 we will be investing in a number of areas, including consolidation of our networks, improving our automation tools, and growing our cloud and hosting capabilities, data analytics and software engineering. This will enable us to meet the demands of clients, help deliver user-centric solutions and accelerate benefit delivery.

The Group continues to strengthen digital capability within our client offerings, as we invest in our technology stack and capabilities. We have partnered with world-leading technology providers such as Amazon Web Services (AWS), Salesforce and Microsoft to support the build of standardised scalable platforms, improving our ability to deploy automation, AI and analytics, and, in turn, delivering better customer service outcomes.

Growing our business

In 2022, the Group won contracts with a total contract value (TCV) of £2,853m (2021: £3,420m) the reduction reflecting the scale and lumpy nature of timing of contract award phasing in Public Service, partially offset by a strong performance in Experience.

Experience had a particularly strong year, with a 71% increase in TCV sold, reflecting very high levels of contract retention and growth with existing clients. The book to bill ratio for the division was 1.2x, the highest it has been for a number of years. New contract wins included broad customer experience support provision for ScottishPower for five years, which uses AI conversational technology and data analytics to deliver better outcomes and efficiencies.

Renewed contracts included a five-year renewal with the BBC (providing TV licensing collection, management and administration), a seven-year contract extension with freenet AG (providing customer services support for the German telecommunications and digital services company), and multiple contracts within the financial services industry, reflecting our strength in that area. The renewal rate in the division remains extremely high at 99% of all renewals bid for.

Public Service saw a 50% reduction in TCV sold, compared with the prior year, following the £925m win of the Royal Navy training contract in 2021. Our client renewal rate remains very high at 91% across renewals bid for. There was success in the year in each vertical, including renewals with NHS England, Barnet Council and with the Department for Work and Pensions. We also secured growth with existing clients, including TfL Road User Charging and the Royal Navy on the Submarine Training Centre. The book to bill for the division for the year was 0.8x.

Wider market conditions across 2022, including changes within the UK Government, resulted in a number of significant contract tender processes seeing timeline slippage, particularly in areas of new business. Across the year, more than £3bn of TCV opportunities saw their closing date move from 2022 to 2023. Our 2023 unweighted pipeline is £7.5bn, with 70% of this reflecting new clients and new business. The weighted pipeline for 2023 is £2.2bn, split broadly 50:50 between Experience and Public Service.

The remaining businesses within Portfolio contributed £264m of TCV, which was a slight increase from that signed in 2021 on a like-for-like basis. The book to bill for the division remains above 1.0x.

At 31 December 2022, the Group's order book stood at £5,805m, reducing £310m from 31 December 2021 with £2,110m order book additions, indexation and scope changes, £2,132m revenue recognised and £288m from business disposals and contract terminations.

Delivery for our clients and cost efficiency

Consistently delivering for our clients is the cornerstone of our success. Effective, efficient client delivery and getting it right first time, reduces excess cost and allows us to grow revenue.

Our cNPS improved in 2022 by six points, with the overall score now at +35 points. We saw improvements in all divisions, reflecting our efforts to deliver for our clients and their customers throughout the business. In a few cases where KPI performance was not met consistently we actively engaged in remediation actions. This has helped improve our overall external stakeholder reputational scores, where we saw the highest annual score the Group has achieved since tracking began three years ago.

To allow more consistent delivery across both core divisions, we have established a flexible and agile workforce, which can be scaled up and down. We have created a single delivery organisation in each division, with common technology stacks and processes with a high level of agility. We are applying the same digital technology to our clients and ourselves to drive cost reduction and consistency of service delivery.

We had a strong and predictable operational performance in 2022, hitting customer KPIs consistently across the year. There were a number of notable achievements across the contract portfolio, including:

• Maintaining our 100% success delivery record for both time and cost on the Royal Navy training contract. The strength of this partnership has allowed us to bid for additional scopes of work such as the Submarine Training Centre.
• A smooth start to our work on the new ScottishPower contract in June, transferring 400 people to Capita from the previous service provider with no impact on operational performance.
• Flexible scaling of service delivery teams in our Experience division around client peak demand periods for retail sales across the year.

The challenging market conditions, and higher levels of employee attrition in some areas, increased cost pressure for the Group over the year but, developing a more agile workforce has enabled us to increase our ability to meet resource demands, and we have seen an improvement in our eNPS.

We are experiencing one of the tightest labour markets of all time, but managed to recruit a significant number of people in 2022 to meet market demand. We now have the appropriate resources to grow and maximise revenue opportunities.

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