Capita Regulatory News (CPI)

Capita plc

Half Year Results 2023

Summary

• Acceleration in financial performance

• Good growth momentum; minimal impact from cyber incident

• Consistently strong delivery of operational KPIs

• Improved employee engagement; reduced employee attrition

• Funding position transformed with RCF extension, USPP and disposal programme close to completion

• Foundations for sustainable long term growth further strengthened

H1 2023 Financial results

• Adjusted revenue1 increased by 6% to £1,402.4m (H1 2022: £1,326.0m) with growth in underlying trading and one-off benefits in Experience from Virgin Media O2 contract transition and a commercial settlement

• Adjusted profit before tax1 increased by £8.4m to £33.1m (H1 2022: £24.7m)

• Reported loss before tax of £67.9m (H1 2022 profit: £0.1m) due to business exits, non-core Portfolio goodwill impairment and costs associated with the Group's cyber incident

• Free cash outflow excluding business exits2* of £53.4m (H1 2022 outflow: £16.5m) reflecting increased working capital, the cyber incident and increased digital investment

• Post-IFRS 16 net debt reduced by £165.8m to £544.6m (30 June 2022: £710.4m) driven by Portfolio disposal programme and continued rationalisation of leased property estate

Growth momentum

• Total contract value (TCV) won of £1,357m (H1 2022: £1,413m); book to bill maintained at 1.0x

• Secured £250m TCV on Disabled Students Allowance framework with Student Loans Company in July

• Preferred bidder on £565m TCV in Public Service for Functional Assessment Services with Department for Work and Pensions, expected to be signed in the second half of 2023

• TCV awarded at 31 July, £2.2bn; up 54%

• In year revenue increased 22% to £650m (H1 2022: £534m), strong performance in Experience

Transformed funding position

• RCF of £280m extended to 31 December 2026

• Issuance of £101.9m of USPP in July

• Continued progress on non-core business disposal programme

◦ Completion of People pillar disposal in H1 23

◦ Completion of Software and Business Solutions disposals in July, c.£45m net proceeds received

Outlook

• Full-year expectations remain unchanged

• On track to deliver acceleration in financial performance in 2023

• Target to double the Group EBIT margin over the medium term, underpinned by £40m cost savings by the end of 2024

Jon Lewis, Chief Executive Officer, said:

“I am pleased with the good progress we continued to make at Capita during the first half of the year as we accelerate our financial performance.

“Our strategy, focused on two core, growing markets is working. We have delivered increased adjusted revenue growth for the fourth successive reporting period, improving profitability, winning an increasing amount of work with new clients, and remain on track to deliver on our full-year expectations.

“We have seen an improvement in our employee net promoter score alongside reduced levels of attrition; and I would like to thank all our people for their continued hard work, commitment and professionalism.

“Our strong client relationships, long-term contracts, increasingly competitive and digitised solutions, engaged colleagues and reputation for delivery mean we have a resilient business, well positioned for further growth.”

1 Capita reports results on an adjusted basis to aid understanding of business performance.

2 Following feedback from investors, the Board has revised its definition of free cash flow and free cash flow excluding business exits alternative performance measures. Both these metrics are now presented after deducting the capital element of lease payments and receipts.

*  Adjusted cash generated from/(used by) operations and adjusted free cash flow adjusted results exclude the impact of business exits (refer to note 9).

Investor presentation

A presentation for institutional investors and analysts hosted by Jon Lewis, CEO and Tim Weller, CFO, will be held at 09:00am UK time, Friday 4 August 2023. This will be held at Capita offices at 65 Gresham Street, London EC2V 7NQ. A live webcast will also be available (www.capita.com/investors) and will subsequently be available on demand. The presentation slides will be published on our website at 07:00am and a full transcript will be available the next working day.

Webcast link:

https://webcast.openbriefing.com/capita0823

For further information:

LEI no. CMIGEWPLHL4M7ZV0IZ88.

Chief Executive Officer's review

H1 2023 Summary

At the start of 2023, following completion of the Group’s transformation and stabilisation phases, we announced that the platform was in place to allow the Group to accelerate its growth in the medium term.

In H1 2023, we have delivered accelerated growth, with adjusted revenues up 5.8%, after increases of 0.4% in H1 2022 and 4.4% in H2 2022. We saw an improvement in adjusted EBITDA and operating profit reflecting the early release of deferred income following the award of a new £366m contract with Virgin Media O2 and a commercial settlement in the Experience division. We have transformed the funding position of the Group with the extension of our revolving credit facility to 2026 in June and issuance of £101.9m of US private placement notes in July.

We have continued to focus on the priorities we laid out in 2022, driving a client-centric culture - acting as true partners to understand client needs and focusing on delivering our commitments to them. We are improving our effectiveness in conversion of growth opportunities and have a healthy sales/contract pipeline for the second half of the year and into 2024, particularly in Public Service.

In 2022, we also outlined the key deliverables for the Group as it moves into the acceleration phase. These were improving new client win rates, refining sales incentives and processes, reducing cost of attrition, driving further simplification, and investing in digital solutions. We’ve seen progress in each of these areas in H1 2023 and continue to simplify our operating model across both core divisions, which will improve margins in the medium term. When combined with our drive to reduce central overheads following completion of the Portfolio divestment programme, the operating model improvements are expected to yield efficiency savings of £40m on an annualised basis by the end of 2024.

We continue to live our purpose as a responsible business. Our colleagues are at the heart of everything Capita does and we are investing in our people and creating an environment that rewards, and allows colleagues to see the important part they play in the future success of the business. We have seen an improvement in employee net promoter score (eNPS) of +14 to an overall score of +6 and employee engagement improved 1% in the first half to 66%. I am particularly pleased we have made good progress in reducing annualised employee attrition by 3% to 28%, which was one of the key corporate priorities for 2023.

As a business, we are now stronger, simpler and more focused, and we remain on track to deliver our expectations for the full year. We expect revenue to grow and margins to improve. In the medium term, improving cash conversion and finalisation of our Portfolio disposal programme in 2023 will drive a further reduction in net debt.

The Group has a clear view of the organic investment requirements to deliver the mid-single digit growth opportunity. We have also made significant progress in reducing the pension deficit which will allow a material reduction in pension deficit contributions from 2024. We will maintain a prudent approach to our capital structure, with net financial debt to EBITDA at or below 1 times. Collectively, these lead us to expect sustainable positive free cash flow generation over the medium term. We therefore expect to reintroduce dividend payments in the next couple of years, with a modest initial pay-out.

Cyber incident

In March, the Group experienced a cyber incident which caused disruption to some client services. We worked closely and at speed with specialist advisers and forensic experts to investigate and resolve the incident.

Based on the forensic work performed, we have confirmed that some data was exfiltrated – but from less than 0.1% of the Group’s server estate. That data has been recovered and extensive steps have been taken to secure the data. Impacted customers, suppliers and employees have now been contacted and we are supporting those whose data was exfiltrated. Our investigation is now close to completion. There was minimal operational impact to the majority of our clients and their customers during the incident.

This event was a challenging experience for the Group, but we learnt a lot from the incident and are sharing our experience and learnings with our clients, suppliers and other companies.

We now expect net exceptional costs associated with the cyber incident of £20m to £25m reflecting the complexity of the forensic analysis of exfiltrated data. These costs comprise specialist professional fees, recovery and remediation costs, and investment to reinforce Capita’s cyber security environment, offset by anticipated insurance receipts.

The investment to reinforce our cyber security environment is not reflective of a particular weakness in the Group’s cyber security estate. We are accelerating our previously planned investment to improve our cyber security maturity. We intend that our maturity level will be audited with reference to the National Institute of Standards and Technology cyber security framework on an annual basis by one of the Big 4 accounting firms.

Digital transformation and artificial intelligence

The Group is taking a measured and ethical approach to artificial intelligence (AI) and we are working with clients to deliver bespoke solutions as the technology continues to evolve. We expect that AI will allow us to be more productive and offer our clients superior solutions with higher-tech competencies to allow efforts to be focused on complex client needs, but where a human touch is also required.

Capita is a technology aggregator and we are working with trusted hyper-scale partners, including Microsoft, AWS, Salesforce and ServiceNow, to build solutions more cost effectively, using our deep sector process knowledge.

We have a dedicated working group focused on developing solutions with our trusted partners and we have integrated AI solutions into a large range of contracts, with further AI development to be completed over the coming months across both divisions.

For example, within the Public Service division, we're accelerating our use of AI and generative AI technology adoption across a suite of contracts:

• on our Recruiting Partnering Project (RPP) with the British Army, where we are analysing all feedback from social media campaigns to identify trends in propensity to join the army, to enable more targeted campaigns;

• for the Royal Navy contract, we are utilising a new Metaverse virtual reality for Submarine Qualification training. This provides a modernised solution which improves the training experience and enables better trained submariners to be on the front line faster;

• within Local Public Service the need to create a more sustainable public estate has driven up the use of smart building technology. This technology allows customers to manage their estates efficiently and effectively by collecting data to help clients measure, understand and improve performance of building assets; and

• we continue to explore opportunities in each market vertical, including virtual wards within Health, Welfare & Education and on our Transport for London contract in areas such as claim reviews.

Within the Experience division, AI and generative AI will drive change, but having a personalised customer service which delivers a better outcome remains the priority for the division. Building solutions with AI will be led by clients’ wishes and will enable us to augment our agents, enabling our people to be more competent and capable of delighting our clients, and their customers.

AI has been implemented in the division across a number of contracts in four key capability areas:

• chatbot/conversational AI – providing unattended, intelligent contact capability enabling reductions in agent call-volume requirements;

• conversation analytics – enabling real-time and post-call conversation analytics to improve quality while detecting change in the tone and sentiment analysis of conversation;

• data observatory and analytics – providing advanced data to identify actionable trends, model customer behaviours and drive operational improvements; and

• correspondence digitisation – replacing highly manual processes to make these more efficient.

We have seen a number of successes where AI is already being used; for example on one retail client, where it was implemented within just four weeks. In this instance, conversational AI resulted in a 30% reduction in human contact required while maintaining quality scores. For another retail client, the Capita conversational AI solution resulted in a third more queries being completed compared to the existing solution.

Our vision within Experience is that AI and generative AI will enable customer contact to focus agents on value-add activities, where a human empathetic touch is essential. AI capability will be utilised where it provides real benefit and positively impacts the customer journey.

Growth

Our growth momentum has continued from that seen in 2022 and, so far this year, the Group has secured the highest value of in-year revenue (IYR) in a six-month period in recent years.

Total contract value (TCV) won was £1,357m down 4% from £1,413m in the first half of 2022. Material contracts awarded in H1 2023 included the five year Virgin Media O2 renewal (TCV: £366m) and a further two year renewal of the Recruiting Partnering Project with the British Army (TCV: £172m). The Group also secured further expansions with Transport for London, and new scopes with the City of London Police for the Action Fraud Contact Centre which will be delivered across both Public Service and Experience. There were new logo wins with Santander and Commerzbank in Experience.

We continue to perform well on smaller deals, which typically have a shorter sales cycle, with more than 8,500 deals won with a TCV of less than £1m, in aggregate generating £238m of TCV. Book to bill (defined as the total contract value signed in the period/external revenue) has remained at 1.0x, with the Public Service division at 1.0x and Experience at 0.9x.

The in-year revenue (IYR) generated from these wins in H1 was £650m, up 22% from the same point in 2022 underpinning our confidence in our second half revenue performance.

In the first half of the year, the Public Service division was selected as the winning bidder on the Functional Assessment Services contract with the Department for Work and Pensions which replaces the Personal Independence Payments contract. In July the division also secured £250m TCV on the Disabled Students Allowance framework with the Students Loans Company. These deals have a combined TCV of more than £800m. The TCV won including these contracts was above £2bn giving a year-to-date book to bill ratio above 1.5x.

Our focus this year, alongside renewals, has been securing new logo wins and expanding our scopes for existing clients. The win rate for new logos in the first half of the year was 46% and our win rate on expanding scopes was 61%. The renewal rate for the Group reduced to 69% reflecting the loss of the Teachers' Pension contract within Financial Services in the Experience division. The renewal rate for Public Service was 100%.

The order book at 30 June 2023 was £5.6bn (31 December 2022: £5.8bn) with £1.1bn recognised in the first half, £1.0bn won in order book qualifying revenue and contract terminations of £0.1bn.

The pipeline for 2024 continues to build, particularly in Public Service and there are over £3.5bn opportunities currently within the pipeline for the second half of 2023. Key deals within the second half include renewals with the Ministry of Justice and the Health and Safety Executive, in Public Service; and a large European telco in Experience. There are also new logo opportunities within our Retail and Financial Services verticals in Experience.

Operational delivery and efficiency

We are continuing to deliver operationally for our clients. Both divisions have maintained consistency of KPI performance, with delivery remaining above 90% in the first half. On the small number of clients where performance is not being met, we have detailed remediation plans in place to improve performance.

Key operational highlights so far this year include:  

• Within Public Service, on our Royal Navy training contract, we met our latest service commencement date and assumed responsibility for engineering and maintenance support for 34 different training systems and simulators. This is the latest step in delivering better trained sailors and Royal Marines to the frontline faster;

• On the Defence, Fire and Rescue contract we delivered further modernisation and transformation of the firefighting fleet, with the commissioning of the final 138 new vehicles under the contract. This investment provides a modern, more environmentally friendly level of capability alongside a safer operating environment;

• Within the Experience division, on our Virgin Media O2 contract, we significantly increased the size of our offshore delivery team, with 1,000 full-time employees added to the team in the first half, providing additional optionality to the client to service customers with digital enablement.

At a Group level, in the medium term we are targeting to double the Core Capita EBIT margin from the 2.9% achieved in 2022. This will be delivered via revenue growth, consistent operational delivery, cost efficiency and overhead reduction. As noted above, through divisional operating model improvements coupled with our drive to reduce central overheads following completion of the portfolio divestment programme, we expect to deliver efficiency savings of £40m on an annualised basis by the end of 2024.

The reduction in the Group’s property footprint continues to generate cost savings; since 2020 the Group’s property lease cost has reduced by more than a third.

We remain focused on resolving the structural challenges on the closed book Life & Pensions contracts within the Experience division and are exploring options for these to be moved outside the Group. In the first half of the year, we agreed a commercial settlement and exit on two contracts within the business unit. We deliver operationally for these clients, but the current commercial terms of the contracts are such that the business unit is forecast to be loss-making and cash-consumptive for the foreseeable future.

Our people

Improving employee attrition has been a key focus for the Group, particularly within the Experience business which, across 2022, had particularly elevated levels of attrition, partly reflecting the tightness of the labour market. Over the past year we have achieved a consistent reduction in attrition each month, with overall levels of attrition down around 3% at a Group level to an annualised 28%. Within Experience annualised attrition is improved at 33% and 19% in Public Service.

We have implemented specific measures to reduce attrition to sustainable levels, with both Group and local initiatives. We have introduced Capita-wide inductions to improve the employee onboarding process and inclusion throughout the hiring process. We also built on our fit-to-role recruitment, which has reduced attrition within the first three months of employment. We are continuing to attract talented people to deliver our growth programme, enabling us to resource growth as required.

Our career path framework (CPF) rollout has continued, and we’ve seen a positive response in the areas where this has been introduced as colleagues successfully map their careers throughout the organisation. The rollout of the CPF will be completed by the end of this year. Following the introduction of the CPF, we’ve seen an increase in the number of roles being filled via internal candidates, up from 11% in 2022 to 20% in the first half of 2023.

We have focused on ensuring employees are paid fairly for the work they do, particularly as our colleagues navigate the cost-of-living crisis. Within our annual salary review, we weighted pay increases to our lowest earners, with the highest earners asked to forgo an annual pay rise. Our half-year people survey saw a 7% increase in the number of employees who believe they are paid fairly for the work they do.

Within our half-year people survey, our eNPS has improved +14 points from the year-end position and is now +6 at the Group level which is the first time the metric has been positive since we started measuring it. We also saw a 1% improvement in employee engagement to 66%.

Our #bebrilliantbeyou recruitment campaign is yielding positive results, encouraging colleagues to build a more open and inclusive working environment; 82% of our employees feel that they can be themselves at work, higher than the UK and global benchmark.

Our people priorities for the second half of the year are finalisation of the career path framework and continuing to focus on a consistently high-quality global employee experience. We are building pride in Capita and our people through the delivery of our employee value proposition and #bebrilliantbeyou campaign.

Financial results - revenue and profit

Adjusted revenue1 grew by 5.8% year on year at £1,402.4m (H1 2022: £1,326.0m). Public Service grew by 2.4% to £731.0m, reflecting growth on the Royal Navy training contract and additional volumes in our Personal Independence Payments contract offset by contract hand-backs within Local Public Service and a step down in revenues in Northern Ireland from 2022 which benefitted from the teachers’ laptop provision contract.

Revenue in Experience grew 9% to £617.6m, benefiting from the early release of deferred income following the award of a new contract from Virgin Media O2 and a commercial settlement in the Life & Pensions business.

The Portfolio businesses continue to perform well as the remaining pillars saw volumes continue to increase as business volumes recovered following suppressed trading at the start of 2022 due to Covid-19.

Adjusted profit before tax1 for the half year improved by 34% to £33.1m (H1 2022: £24.7m) reflecting the revenue trends noted above and, in particular, the deferred income release and commercial settlement in the Experience division.

Reported loss before tax was £67.9m (H1 2022 profit: £0.1m) as a result of the impact of business exits, goodwill impairment of £42.2m recognised in the Portfolio business and costs associated with the Group’s cyber incident.

Financial results - free cash flow and net debt

Free cash outflow excluding business exits1 increased to £53.4m from an outflow in 2022 of £16.5m. This reflected an increased working capital outflow which resulted from the non-cash nature of the deferred income release and commercial settlement in the Experience division coupled with repayment of the 2021 furlough-related income which we have announced previously, the cash cost of the cyber incident and increased capital expenditure on digitalisation and technology, as expected.

We have made further progress on our Portfolio disposal programme in the first half, announcing the disposal of the Software pillar, and the Page One and Enforcement businesses. These disposals completed in July, realising further gross proceeds of £67.4m. We completed the disposal of our People pillar in the first half of the year, realising gross proceeds of £18.3m.

Pre-IFRS 16 net financial debt1 was £166.2m (31 December 2022: £84.9m) reflecting the free cash outflow and additional pension deficit payments of £15.6m triggered by prior-year Portfolio disposals.

Post-IFRS 16 net debt was £544.6m (31 December 2022: £482.4m), reflecting the free cash outflow in the first half offset by further reduction in the Group's lease liabilities as we continue to optimise our property footprint.

We materially improved our funding position through the recently announced extension of the revolving credit facility to 2026 and issuance of £101.9m equivalent of US private placement notes.

Full-year outlook

Our full-year expectations remain unchanged. We are on track to deliver an acceleration in financial performance in 2023, despite the continued macroeconomic uncertainty.

We expect to deliver an accelerated rate of revenue growth this year compared with that achieved in the prior year, alongside an improvement in EBIT margin, in line with our target to double the Group EBIT margin over the medium term.

We continue to expect low levels of net financial debt as we complete the remaining Portfolio disposals.

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1 Refer to alternative performance measures in the appendix

Divisional performance review

The following divisional financial performance is presented on an adjusted revenue1 and adjusted operating profit1 basis. Reported profit is not included, because the Board assesses divisional performance on adjusted results. The basis of preparation of the adjusted figures and KPIs is set out in the Alternative Performance Measures (APMs) summary in the appendix to this statement.

Public Service

Capita Public Service is the number one2 strategic supplier of Software and IT Services (SITS) and business process services (BPS) to the UK Government. The division is structured around four focused market verticals: Local Public Service & Schools; Health, Welfare & Education; Justice, Central Government & Transport; and Defence, Learning, Fire & Security.

Our current core addressable market is c.£13.9bn, growing at 5% per annum. Digital BPS is a fast-growing area, while business process outsourcing (BPO) is currently shrinking, reflecting the Government’s focus on digitally enabled transformation, as it looks to deliver to citizens in a cost-effective manner.

Operational delivery and margin improvement

The division's operational delivery continues to be extremely strong, with KPI performance of 94%. During the first half, we simplified the divisional operating model, further refining client delivery processes, while maintaining operational excellence.

Operational highlights delivered in the first half of the year include:

• Delivery of the latest Service Commencement Date on the Royal Navy training contract;

• On the Job Entry Targeted Support contract in Scotland, the contract completed more than 200% of the targeted number of job starts across the contract period;

• Within our Transport for London contract, we supported major events in the city, including the King’s coronation, the London Marathon and London Pride;

• In our Education business, we met key metrics for the Standards and Testing Agency, including the core KPI to deliver more than 99.9% of exam scripts marked.

We continue to focus on and harness digital ways of working and accelerate our digital transformation, leveraging AI alongside the skills and capabilities of our people for value-added work. We’re working with trusted partners to develop solutions focused on clients’ needs and are progressing a number of digital proof of concepts within the division where we’ve aligned digital transformation to future growth opportunities.

We’re exploring AI opportunities within our delivery methods such as Virtual Wards and generative AI within medical screening and claims handling within Health, Welfare & Education and have introduced ‘smart building’ technology within the Local Public Service & Schools vertical.

More broadly, the division is on a margin improvement journey, with a plan in place to improve pricing, including renewing on favourable terms, reducing overheads, and transitioning to a richer margin mix of work, with increased delivery of digital BPS alongside traditional BPO.

To further improve margins, the division is transforming its own capabilities through increasingly standardised, repeatable and scalable propositions; which will underpin reductions in the cost of poor quality such as service credits as our operational delivery improves.

Growth

To date in 2023, Public Service has successfully won 6,900 opportunities with TCV won of £758m, up 33%, and IYR of £312m, unchanged from the same period last year. The book-to-bill for the division in H1 was 1.0x.

Significant wins in the first half included, a two year extension on the Recruiting Partnering Project with the British Army (TCV £172m), a new contract with the City of London Police on the Action Fraud Contact Centre (TCV £70m), and further expansions on our contract with Transport for London.

In the first half, we were selected as preferred bidder by the Department for Work and Pensions on the Functional Assessment Services contract, with a TCV of £565m which is an expanded scope on our current Personal Independence Payments contract. In July, the division secured £250m of TCV on the Disabled Students Allowance (DSA) contract with the Department for Education. Including these contracts the TCV won this year for the division was over £1.5bn.

We are consistently renewing on favourable commercial terms, alongside expanding existing scopes with clients while improving win rates on new scopes.

The unweighted pipeline for the division is £7,465m, down from £7,858m at the end of the year, reflecting the strong TCV performance so far in 2023. The divisional order book stands at £3,116m, an increase of £131m from £2,985m at year end.

Adjusted revenue1 grew 2.4% to £731.0m, reflecting further growth on the Royal Navy training contract, additional volumes on the Personal Independence Payments contract and the benefit from indexation across the contract portfolio. This offset the non-repeat of the prior year IT device refresh contract with the Northern Ireland Education Authority and completion of the Job Entry Targeted Support Scheme contract in the first half. As expected, there have been continued revenue declines within the Local Public Service sector.

Adjusted operating profit1 decreased 15.6% to £39.5m, impacted by increased IT spend on certain contracts as well as property relocation costs in our Capita Intelligent Communication business. This was offset by the increased volumes from the Royal Navy training and Personal Independence Payments contracts.

Operating cash flow excluding business exits1 reduced by 9.0% to £52.9m. Adjusted operating cash conversion remained broadly in line with the prior period at 87%.

Outlook

We expect accelerated revenue growth in the second half, driven by new wins such as DSA and growth within the Health, Welfare & Education and Defence, Learning, Fire & Security verticals. Margin improvements are expected to be delivered across the year underpinned by revenue growth and cost efficiencies.

Experience

Capita Experience is one of Europe’s leading customer experience businesses. It is the market leader3 in the UK and ranks fifth in Germany and Europe.

The division is structured around four chosen market sectors: Financial Services; Telecoms, Media & Technology; Energy & Utilities; and Retail. We have strong industry expertise and presence, with clients in the UK, Ireland, Germany and Switzerland, and services delivered across these geographies and in India, South Africa, Poland and Bulgaria. We operate in markets where we have a strong track record and where we see potential for growth.

The global customer experience market is worth £277bn a year and the outsourced element, currently around 28% of the market, is expected to grow at c.5% per annum.

There is an ongoing trend towards self-service and automation in customer services, with clients looking to utilise omni-channel offerings with increased multilingual capabilities and capacity, and agents working remotely from our global delivery locations.

Operational delivery and margin improvement

The division’s operational KPI performance has been consistently strong across the first half at 93%.

Specific achievements include a number of cases of successful AI utilisation; including, for one retail client, where it was implemented within just four weeks. In this instance, conversational AI resulted in a 30% reduction in human contact required, while maintaining quality scores. A second instance involved the implementation of the Capita conversational AI solution for another retail client, resulting in one third more queries being completed compared with the existing solution.

We’re working on optimising our global delivery network with multi location capability options for all clients to provide optionality. The division’s India shared service centre team won two awards at the UBS Forums Shared Services Summit, showing the high quality delivery in this area.

We’ve continued to grow our offshoring capability, particularly in India. On the Virgin Media O2 contract we have hired more than 1,000 additional full-time employees who have been trained to ramp up services with the required skill set, in turn offering the client a high-quality, cost-effective solution. In Europe, we’re expanding capabilities in Poland and Bulgaria, as we look to build on our existing multi-lingual capability.

A key objective and opportunity to improve the margin within the Experience business exists in reducing attrition. There have been improvements this year and in the first half the division introduced a five-point plan to stem attrition and retain talent, including our leadership academy and tailored advisor development journey plan.

Growth

To date in 2023, Experience has secured deals with TCV won of £559m and IYR has increased 50% year on year.

Key wins for the division include a five year renewal with Virgin Media O2 (TCV: £366m), a new win with Santander (TCV: £27m) and a number of renewals within the Energy & Utilities vertical. The book-to-bill for the division in H1 was 0.9x.

The unweighted pipeline for the division is £3,027m, down from £3,961m at year end, reflecting the strong TCV performance so far in 2023 and the loss of the Teachers Pension contract.

By acquiring new clients and retaining our existing clients, we will build long-term sustainable growth. Key deals lined up for the second half include major renewals in Germany and opportunities within the Retail vertical.

The divisional order book stands at £2,210m, a decrease of £317m from £2,527m at year-end. The reduction reflects the higher proportion of contracts on framework agreements, including the material Virgin Media O2 contract renewal, all of which do not qualify as order book under IFRS 15.

Adjusted revenue1 increased by 9.1% to £617.6m. Revenue benefitted from wins such as Scottish Power, higher volumes across the International business, and indexation, which offset further volume attrition and contract losses within the Financial Services vertical. The division also benefitted from the previously anticipated deferred income release associated with a renewal of the Virgin Media O2 contract and a commercial settlement within the closed book Life & Pensions business.

Adjusted operating profit1 increased by 173.8% to £39.7m benefiting from the deferred income release following the award of the Virgin Media O2 contract and commercial settlement within the closed book Life & Pensions business.

Operating cash flow excluding business exits1 increased by 19.3% to £24.7m. Adjusted operating cash conversion was 35% with the reduction from 43% in the prior period reflecting the non-cash nature of the deferred income release and commercial settlement.

Outlook

We expect a lower rate of revenue growth in H2, driven by the non-repeat of contractual one-offs in H1 and continued volume attrition within the closed book Life & Pensions business unit.

We remain focused on resolving the structural challenges on the closed book Life & Pensions contracts within the Experience division.

Portfolio

Capita Portfolio comprises non-core businesses that are intended for disposal.

At the start of 2023, the division was organised into pillars comprising businesses of similar characteristics: Business Solutions, People, Software, Travel, and the FERA joint venture.

This year we have completed the disposal of the People pillar, in two separate transactions, realising gross proceeds in the first half of £18.3m.

We also announced the exchange of the Software and Business Solutions pillars. These disposals subsequently completed in July, realising gross proceeds from the deals announced of £67.4m and will be used to further strengthen the Group’s balance sheet and materially reduce debt.

Adjusted revenue1 from the businesses not yet sold (primarily the Travel pillar and the FERA joint venture) at half year increased by 16.5% to £53.8m.

Adjusted operating profit1 increased to £0.4m from a loss of £6.4m in H1 2022 reflecting the revenue growth and cost savings associated with the ongoing disposal programme.

Operating cash flow excluding business exits1 was flat with an outflow of £7.7m.

Outlook

We are targeting completion of the remaining disposals over the coming months, with the majority of related proceeds expected to be received over the next few months.

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1 Refer to alternative performance measures in the appendix

2 TechMarketView

3 Everest

Chief Financial Officer's review

Overview

Adjusted revenue1 growth of 6% reflected underlying growth as well as two specific factors in the Experience division, being the beneficial impact of the early termination of our old contract and commencement of our new contract with Virgin Media O2 and a commercial settlement in the closed book Life & Pensions business.

Public Service revenue growth was underpinned by scope increases on the Royal Navy Training contract and increased volumes on the Personal Independence Payments contract, offset by contract hand-backs in Local Public Services and a step down in revenues in Northern Ireland which benefitted from the teachers' laptop contract in the first half of 2022. Experience revenue growth was driven by the accelerated deferred income release and new contract revenue following the award of the new contract with Virgin Media O2, and a commercial settlement in the closed book Life & Pensions business.

Growth in our transactional business was mainly driven by Portfolio, including the Travel business, which continued its recovery following Covid-related constraints.

The step-up in adjusted profit before tax1 reflected the revenue trends noted above and, in particular, the Virgin Media O2 contract transition and the commercial settlement in the Experience division.

Adjusted earnings per share1 reduced as the increase in adjusted profit before tax1 was offset by a lower adjusted income tax credit of £22.3m (2022: £42.4m). The higher adjusted tax credit in the prior period reflected a deferred tax release following the significant increase in the defined benefit pension scheme surplus at 30 June 2022.

The decrease in reported profit before tax reflects exceptional costs incurred in resolving the cyber incident and lower gains on the sale of businesses, partially offset by the increase in adjusted profit before tax1 and a lower impairment of goodwill.

The reduction from reported earnings per share to a reported loss per share reflects the reduction in reported profit before tax noted above, compounded by the swing from a reported income tax credit to an income tax charge. The reported tax credit in 2022 was impacted by the increase in the pension surplus noted above, with further variation year-on-year due to the impact of disposals on the estimate of deferred tax assets.

Cash generated from operations excluding business exits1 decreased, as expected, by 49% to £21.1m, driven by the non-cash nature of deferred income releases and commercial settlement in Experience, the previously announced furlough repayment and the cash costs of the cyber incident.

Free cash flow excluding business exits1 in the six months ended 30 June 2023 was an outflow of £53.4m (2022: outflow £16.5m). This reflects the reduction in cash generated from operations and increased capital expenditure in digitalisation and technology in both Public Services and Experience.

The decrease in reported free cash flow reflects the above reduction in free cash flow excluding business exits1, a cash outflow from business exits, and an increase in pension deficit contributions triggered by disposals.

As part of our drive for simplification of the business, and strengthening the balance sheet, we continue to seek to dispose of a number of non-core businesses. During the first half of 2023 we completed the disposal of the Resourcing and Security Watchdog businesses realising total proceeds net of disposal costs of £8.2m (including settlement of intercompany balances on completion) with net cash proceeds of £4.5m reflecting the cash held in the disposed entities on completion.

During June 2023, we agreed the sale of our Software, PageOne and Enforcement businesses. All three of these sales completed on 31 July 2023 realising total gross proceeds of £67.4m.

These disposals form part of the Board-approved disposal programme. The sale processes have been launched for all remaining pillars in the Portfolio division. The Group expects to use the proceeds from this disposal programme to repay debt, to make further deficit reduction contributions to the Group’s defined benefit pension scheme and to invest in driving growth in the remaining core businesses. In the first half of 2023, we repaid £40.5m of private placement loan notes and made pension deficit contributions of £30.6m (£15.0m regular contributions and £15.6m acceleration of agreed contributions triggered by disposals).

We expect to incur exceptional costs of approximately £20m to £25m associated with the cyber incident detailed in the Chief Executive Officer’s Review. These costs comprise specialist professional fees, recovery and remediation costs and acceleration of investment to reinforce Capita’s cyber security environment, offset by anticipated insurance receipts. A charge of £21.8m has been recognised in the period ended 30 June 2023 and has been excluded from adjusted profit. This excludes any potential insurance receipt as this had not yet met the criteria for recognition at the half year. The cash outflow in respect of the cyber incident in the period was £9.2m which is included within free cash flow excluding business exits and cash generated from operations excluding business exits.

Liquidity as at 30 June 2023 was £283.6m, made up of £243.0m of our undrawn committed revolving credit facility (RCF) and £40.6m of unrestricted cash and cash equivalents net of overdrafts. In June 2023, we extended the RCF to 31 December 2026 at £284m, reducing to £250m by 1 January 2025 as a consequence of specified transactions.

In July we issued £101.9m equivalent of new US private placement loan notes across three tranches: £50m maturing 25 July 2026, USD45m maturing 25 July 2026 and USD23m maturing 25 July 2028. We expect to early settle £30.3m of Euro private placement loan notes in the second half of 2023 which were originally due in 2027.

The RCF extension and private placement loan note issuance are a demonstration of debt providers' confidence in Capita and have enabled us to extend materially the average maturity of our debt funding.

Financial review

Adjusted results

Capita reports results on an adjusted basis to aid understanding of business performance. The Board has adopted a policy of disclosing separately those items that it considers are outside the underlying operating results for the particular period under review and against which the Group’s performance is assessed internally. In the Board's judgement, these items need to be disclosed separately by virtue of their nature, size and/or incidence for users of the financial statements to obtain an understanding of the financial information and the underlying in-period performance of the business.

Following feedback from investors the Board has revised its definition of free cash flow and free cash flow excluding business exits1 alternative performance measures. From 1 January 2023, both these metrics have been presented after deducting the capital element of lease payments and receipts, as this provides a more relevant and comparable measure of the cash generated by the Group’s operations and available to fund operations, capital expenditure, non-lease debt obligations, and dividends. Comparative amounts have been re-presented.

In accordance with the above policy, the trading results of business exits, along with the non-trading expenses and gain or loss on disposals, have been excluded from adjusted results. To enable a like-for-like comparison of adjusted results, the 2022 comparatives have been re-presented to exclude business exits in the second half of 2022 and the first six months of 2023. As at 30 June 2023, the following businesses met this threshold and were classified as business exits and therefore excluded from adjusted results in both 2023 and 2022: Resourcing, Security Watchdog, PageOne, Software and Enforcement businesses.

Reconciliations between adjusted and reported operating profit, profit before tax and free cash flow excluding business exits are provided on the following pages and in the notes to the financial statements.

Adjusted revenue

Adjusted revenue1 growth of 6% was in line with expectations. The adjusted1 revenue was impacted by the following:

• Public Service (2.4% growth): growth underpinned by scope increases on the Royal Navy Training contract and increased volumes on the Personal Independence Payments contract, offset by contract hand-backs in Local Public Services and a step down in revenues in Northern Ireland which benefitted from the teachers’ laptop contract in the first half of 2022;

• Experience (9.1% growth): growth was primarily driven by the accelerated release of deferred income and new contract revenue following the award of a new contract from Virgin Media O2, and a commercial settlement in the Life & Pensions business; and

• Portfolio (16.5% growth): growth in transactional revenue mainly from Travel which continued its recovery following Covid-related constraints.

Order book

The Group’s consolidated order book was £5,590.2m at 30 June 2023 (31 December 2022: £5,805.2m). Additions from contract wins and extensions in 2023 (£817.7m), including Santander within Capita Experience and Army Recruiting Partnering Project, City of London Police and TfL Road User Charging within Capita Public Service and scope changes and indexation (£148.6m), were offset by the reduction from revenue recognised in the period (£1,070.8m), contract terminations (£89.8m) and business disposals (£20.7m).

Adjusted profit before tax

Adjusted profit before tax1 increased in 2023. The adjusted profit before tax1 bridge was driven by the following:

• Public Service: the beneficial impact of the revenue growth from the Royal Navy Training and Personal Independence Payments contracts discussed above, offset by increased IT spend on certain contracts as well as incremental property costs within our Capita Intelligent Communications business as we transitioned operating locations;

• Experience: reflects the Virgin Media O2 contract transition, the closed book Life & Pensions settlement, offset by flow through of prior year contract losses including Carphone Warehouse, The Co-operative Bank and continued attrition in the remaining Life & Pensions business;

• Portfolio: benefits from post Covid-19 recovery in transactional businesses, mainly Travel, and cost savings from a smaller overhead following the sale of the majority of the division; and

• Capita plc: impacted by R&D tax credits and property rate rebates in the prior year.

Cash generated from operations and free cash flow

Adjusted EBITDA1 increased by 10% reflecting the improvement in adjusted profit1 explained above and the reduction in depreciation, amortisation and impairment of property, plant and equipment, right of use assets and intangible assets. This latter reduction reflects the lower level of capital investment in prior periods, and the reduction in the property portfolio which impacts on the right of use asset depreciation charge.

Cash generated from operations excluding business exits1 reflects the non-cash nature of the deferred income and commercial settlement in the Experience division, hand-backs in Local Public Services, the direct cash flow impact of the cyber incident (£9.2m), and, the repayment of the 2021 furlough-related income which we have announced previously.

The reduction in non-cash and other adjustments reflects spend on a customer contract in the prior year.

The £15.0m of pension deficit contributions are in line with the schedule previously agreed with the scheme trustees as part of the 2021 triennial valuation.

Free cash flow excluding business exits1 in the six months ended 30 June 2023 was an outflow of £53.4m (2022: outflow £16.5m). This reflects the reduction in cash generated from operations and increased capital expenditure in digitalisation and technology in both Public Services and Experience, partially offset by the reduction in net capital lease payments reflecting the ongoing property rationalisation process.

Operating cash conversion decreased to 39% (30 June 2022: 54%). The reduction primarily reflects the non-cash nature of the deferred income release and commercial settlement in the Experience division and the repayment of the 2021 furlough income.

Reported results

Adjusted to reported profit

As noted above, to aid understanding of our underlying performance, adjusted operating profit1 and adjusted profit before tax1 exclude a number of specific items, including the amortisation and impairment of acquired intangibles and goodwill, the impact of business exits, and in 2023, the impact of the cyber incident.

Impairment of goodwill

In preparing these condensed consolidated financial statements, the Group undertook a review to identify indicators of goodwill impairment. Consideration was given to performance against forecasts used in the year end impairment testing and where this gave rise to an indicator of potential impairment, an impairment test was performed.

At 30 June 2023, a goodwill impairment of £42.2m was recognised. This comprised:

• £35.3m: in respect of CGUs in the Group's Portfolio division where the disposal processes of the businesses aligned to these CGUs were sufficiently advanced that the Board's judgement was that for impairment testing purposes the value in use of these CGUs should be determined based on the future cash flows of the CGUs from continuing use, up to the estimated date of disposal, plus an estimate of the sale proceeds less cost of disposal. The impairments arose primarily due to the expectation of acquirers factoring in additional investment and costs required to run the businesses outside of the Group, and general macroeconomic conditions; and

• £6.9m: in respect of a business in the Business Solutions group of CGUs in Capita Portfolio. The impairment arose primarily due to a negotiated exit of an end customer, which has negatively impacted the forecast financial performance of the business.

Business exits

Business exits include the effects of businesses that have been sold or exited during the period and the results of businesses held-for-sale at the reporting date.

In addition, business exits include the exit costs, including professional fees, salary costs and separation planning costs, relating to further planned disposals for which the held-for-sale and business exit criteria were not met at 30 June 2023.

In accordance with our policy, the trading results of these businesses, along with the non-trading expenses and gain on disposal, were included in business exits and therefore excluded from adjusted results. To enable a like-for-like comparison of adjusted results, the 2022 comparatives have been re-presented to exclude businesses classified as business exits from 1 July 2022 to 30 June 2023.

At 30 June 2023 business exits comprised:

Further businesses are planned for disposal as part of the Group's simplification strategy. However, given the status of the relevant disposal processes, the businesses were not classified as assets held-for-sale at 30 June 2023 and, accordingly their trading results are included within adjusted results.

Cyber incident

Capita expects to incur exceptional costs of approximately £20m to £25m associated with the cyber incident, reflecting the complexity of the forensic analysis of exfiltrated data. These costs comprise specialist professional fees, recovery and remediation costs and investment to reinforce Capita’s cyber security environment, offset by anticipated insurance receipts. A charge of £21.8m has been recognised in the period ended 30 June 2023. This excludes any potential insurance receipt as this had not yet met the criteria for recognition at the half year.

Following the cyber incident, Capita has been working closely with all appropriate regulatory authorities and with customers, suppliers and colleagues to notify those affected and take any remaining necessary steps to address the incident. At the date of approval of these condensed consolidated financial statements, the Group has received no material claims in relation to the cyber incident. At this stage, it is not possible to reliably estimate the value of any potential or future claim or fine/penalty against the Group and no provision has been recorded.

Further detail of the specific items charged in arriving at reported operating profit and profit before tax for 2023 is provided in note 4 to the condensed consolidated financial statements.

Free cash flow to free cash flow excluding business exits1

Free cash flow was lower than free cash flow excluding business exits1 reflecting free cash flows generated by business exits, and pension deficit contributions triggered by the disposal of Pay360 and Capita Translation and Interpreting in the second half of 2022.

Movements in net debt

Net debt at 30 June 2023 was £544.6m (31 December 2022: £482.4m). The increase in net debt over the six months ended 30 June 2023 reflects the free cash outflow noted above offset by the continued reduction in our leased property estate.

Net financial debt (pre-IFRS 16) increased by £81.3m to £166.2m at 30 June 2023, resulting in a net financial debt to adjusted EBITDA (both pre-IFRS 16) ratio of 1.0x. Over the medium term, following the completion of our Portfolio divestment programme, we will be targeting a net financial debt to adjusted EBITDA1 (both pre-IFRS 16) ratio for Capita of ≤1.0x.

The Group was compliant with all debt covenants at 30 June 2023.

Capital and financial risk management

Liquidity remains a key area of focus for the Group. Financial instruments used to fund operations and to manage liquidity comprise US private placement loan notes, Euro fixed-rate bearer notes, revolving credit facility (RCF), leases and overdrafts.

*Restricted cash includes cash required to be held under FCA regulations and cash held in foreign bank accounts.

The Group’s RCF provides flexible liquidity available to fund operations and was £41.0m drawn at 30 June 2023 (31 December 2022: undrawn).

In June 2023, the Group extended the RCF to 31 December 2026 at £284m, reducing to £250m by 1 January 2025. The extended facility is subject to covenants, which are the same as in the existing RCF and incorporates provisions such that it will partially reduce in quantum to £250m as a consequence of specified transactions.

In addition, the Group has in place a non-recourse invoice discounting facility, utilisation of which has become economically more favourable than drawing under the RCF as prevailing interest rates have increased. As such the Group has continued its use of the facility, with the value of invoices sold under the facility at 30 June 2023 of £40.3m (31 December 2022: £44.4m).

At 30 June 2023, the Group had £94.9m of cash and cash equivalents net of overdrafts, and £230.5m of private placement loan notes and fixed-rate bearer notes. These debt instruments mature over the period to 2027.

In July the Group issued £101.9m equivalent of US private placement loan notes across three tranches: £50m maturing 25 July 2026, USD45m maturing 25 July 2026 and USD23m maturing 25 July 2028.

In the second half of 2023, the Group will repay £41.8m of private placement loan notes as scheduled, and expects to early settle £30.3m of Euro private placement loan notes which were originally due in 2027, following which the next debt maturity is January 2025.

Going concern

The Board closely monitors the Group’s funding position throughout the year, including compliance with covenants and available facilities to ensure it has sufficient headroom to fund operations. In addition, to support the going concern assumption the Board conducts a robust assessment of the projections, considering also the committed facilities available to the Group.

The Group continues to adopt the going concern basis in preparing these condensed consolidated financial statements as set out in note 1 to the condensed consolidated financial statements.

Pensions

Contributions during the period to the Capita Pension and Life Assurance Scheme (the Scheme) have been in line with the contribution schedule agreed with the Trustee of the Scheme following the 31 March 2020 triennial actuarial valuation. This includes the acceleration of deficit reduction contributions (£15.6m) triggered by the disposal of certain businesses in the second half of 2022.

The net defined benefit pension asset for accounting purposes increased from £39.6m at 31 December 2022 to £50.6m at 30 June 2023. The main reasons for this movement were the £30.6m of deficit funding contributions paid into the Scheme (plus a £0.4m deficit funding contribution in respect of other schemes), partially offset by the impact of actual inflation over the period being greater than expected.

The valuation of the Scheme liabilities (and assumptions used) for funding purposes (the actuarial valuation) are specific to the circumstances of the Scheme. It differs from the valuation and assumptions used for accounting purposes, which are set out in IAS 19 and shown in these financial statements. The main difference is in assumption principles being used based in the different regulatory requirements of the valuations. Management estimates that at 30 June 2023 the net asset of the Scheme on a funding basis (ie the funding assumption principles adopted for the full actuarial valuation at 31 March 2020 updated for market conditions at 30 June 2023) was approximately £57m (31 December 2022: net asset £40.0m) on a technical provisions basis. The Trustee of the Scheme has also agreed a secondary more prudent funding target to enable it to reduce the reliance the Scheme has on the covenant of the Group. On this basis, at 30 June 2023, the funding level was around 98% (or a net liability of £25m). The deficit of £25m is expected to be met by a mixture of the remaining deficit contributions and asset outperformance.

The Scheme is undergoing its 31 March 2023 triennial actuarial valuation process which is expected to be finalised well within the regulatory timescale of 30 June 2024.

Balance sheet

Consolidated net assets were £246.6m at 30 June 2023 (31 December 2022: net assets £352.7m).

The movement is predominantly driven by the increase in net debt set out above.

_____________________________________

1 Refer to alternative performance measures in the appendix

Forward looking statements

This half year results statement is prepared for and addressed only to the Company's shareholders as a whole and to no other person. The Company, its Directors, employees, agents and advisors accept and assume no liability to any person in respect of this trading update except as would arise under English law. Statements contained in this trading update are based on the knowledge and information available to Capita’s Directors at the date it was prepared and therefore facts stated and views expressed may change after that date.

This document and any materials distributed in connection with it may include forward-looking statements, beliefs, opinions or statements concerning risks and uncertainties, including statements with respect to Capita’s business, financial condition and results of operations. Those statements and statements which contain the words "anticipate", "believe", "intend", "estimate", "expect" and words of similar meaning, reflect Capita’s Directors' beliefs and expectations and involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future and which may cause results and developments to differ materially from those expressed or implied by those statements and forecasts.

No representation is made that any of those statements or forecasts will come to pass or that any forecast results will be achieved. You are cautioned not to place any reliance on such statements or forecasts. Those forward-looking and other statements speak only as at the date of this trading update. Capita undertakes no obligation to release any update of, or revisions to, any forward-looking statements, opinions (which are subject to change without notice) or any other information or statement contained in this trading update. Furthermore, past performance cannot be relied on as a guide to future performance.

No statement in this document is intended as a profit forecast or a profit estimate and no statement in this document should be interpreted to mean that earnings per Capita share for the current or future financial years would necessarily match or exceed the historical published earnings per Capita share.

Nothing in this document is intended to constitute an invitation or inducement to engage in investment activity. This document does not constitute or form part of any offer for sale or subscription of, or any solicitation of any offer to purchase or subscribe for, any securities nor shall it or any part of it nor the fact of its distribution form the basis of, or be relied on in connection with, any contract, commitment or investment decision in relation thereto. This document does not constitute a recommendation regarding any securities.

Principal risks and uncertainties

The principal risks and uncertainties faced by the Group and its approach to internal control and risk management are set out on pages 54 to 63 of the 2022 Annual Report which is available on the Group’s website at www.capita.com/investors/results-reports-and-presentations.

The Executive Risk and Ethics Committee (EREC) have considered the principal risks and uncertainties of the Group and have determined that those reported in the 2022 Annual Report and Accounts remain materially the same for the remaining half of the financial year.

Statement of Directors’ responsibilities

The Board of directors confirms, to the best of its knowledge, that these condensed consolidated financial statements have been prepared in accordance with IAS 34 as adopted for use in the UK and that the Half Year Management Report includes a fair review of the information required by Rules 4.2.7 and 4.2.8 of the Disclosure Guidance and Transparency Rules of the United Kingdom Financial Conduct Authority.

The names and functions of the Board of directors of Capita plc are listed on the Group website at www.capita.com/our-company/about-capita/about-board.

By order of the Board

J Lewis T Weller

Chief Executive Officer Chief Financial Officer

3 August 2023 3 August 2023

Condensed consolidated income statement

For the six months ended 30 June 2023

Condensed consolidated statement of comprehensive income

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed consolidated balance sheet

At 30 June 2023

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed consolidated statement of changes in equity

For the six months ended 30 June 2023

1.The Group initially applied the amendments to IAS 37 at 1 January 2022 and the cumulative effect of applying the amendments was recognised as an opening balance adjustment to retained earnings.

The accompanying notes are an integral part of these condensed consolidated financial statements.

Condensed consolidated cash flow statement

For the six months ended 30 June 2023

The accompanying notes are an integral part of these condensed consolidated financial statements.

Notes to the condensed consolidated financial statements

For the six months ended 30 June 2023

1.1 Corporate information

Capita plc (the 'Company' or the 'Parent Company') is a public limited liability company incorporated in England and Wales whose shares are publicly traded.

These condensed consolidated financial statements as at and for the six months ended 30 June 2023 comprise the Company and its subsidiaries (together referred to as 'the Group').

These condensed consolidated financial statements were authorised for issue by the Board of directors on 3 August 2023.

These condensed consolidated financial statements are presented in British pounds sterling and all values are rounded to the nearest tenth of a million (£m) except where otherwise indicated.

1.2 Basis of preparation, judgements and estimates, and going concern

(a) Basis of preparation

These condensed consolidated financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the UK's Financial Conduct Authority, and with IAS 34 Interim Financial Reporting under UK-adopted International Financial Reporting Standards (IFRS).

These condensed consolidated financial statements have been prepared by applying the accounting policies and presentation that were applied in the preparation of the Company’s published consolidated financial statements for the year ended 31 December 2022.

The Group has considered the impact of new, and amendments to, reporting standards which are effective from 1 January 2023 and concluded that they were either not applicable, or not material, to these condensed consolidated financial statements.

The Group is in the early stages of its assessment for all other standards, amendments and interpretations that have been issued by the IASB but are not yet effective.

These condensed consolidated financial statements do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2022 have been delivered to the Registrar of Companies. The auditor has reported on those accounts and their opinion was (i) unqualified, (ii) did not include any matters to which the auditor drew attention by way of emphasis of matter without modifying their opinion, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

These condensed consolidated financial statements have been reviewed by the Group's auditors pursuant to the Auditing Practices Board guidance on the Review of Interim Financial Information.

(b) Adjusted results

IAS 1 permits an entity to present additional information for specific items to enable users to better assess the entity’s financial performance.

The Board has adopted a policy to separately disclose those items that it considers are outside the underlying operating results for the particular period under review and against which the Group’s performance is assessed. In the Board’s judgement, these need to be disclosed separately by virtue of their nature, size and/or incidence for users of the financial statements to obtain a proper understanding of the financial information and the underlying in-period performance of the business. Those items which relate to the ordinary course of the Group’s operating activities remain within adjusted profit.

The Board has limited the items excluded from the adjusted results to: business exits, amortisation and impairment of acquired intangibles, impairment of goodwill, certain net finance expense/income, and the costs associated with the cyber incident in March 2023, because these metrics provide a more representative measure of the underlying performance of the business.

The Board considers free cash flow, and cash generated from operations excluding business exits, to be alternative performance measures because these metrics provide a more representative measure of the sustainable cash flow of the Group.

Following feedback from investors the Board has revised its definition of the free cash flow and free cash flow excluding business exits1 alternative performance measures. From 1 January 2023, both these metrics have been presented after deducting the capital element of lease payments and receipts, because this provides a more relevant and comparable measure of the cash generated by the Group’s operations and available to fund operations, capital expenditure, non-lease debt obligations, and dividends. Comparative amounts have been re-presented.

While the Board believes the alternative performance measures (APMs) used provide a meaningful basis upon which to analyse the Group’s financial performance and position, which is helpful to the reader, it notes that APMs have certain limitations, and may not be directly comparable with similarly titled measures presented by other companies.

A reconciliation between reported and adjusted operating profit and profit before tax is provided in note 4, and a reconciliation between reported and free cash flow excluding business exits and cash generated from operations is provided in note 9.

(c) Judgements and estimates

These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles which require the Board of directors to make judgements and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported income and expense during the presented periods. Although these judgements and assumptions are based on the Board’s best knowledge of the amounts, events or actions, actual results may differ.

The significant judgements and assumptions made by the Board in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements for the year ended 31 December 2022.

The key sources of uncertainty that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are summarised below and set out in more detail in the related note:

• Contract accounting (note 2): impairment of contract fulfilment assets, and customer and onerous contract provisions

• Deferred tax asset recognition (note 6)

• Measurement of defined benefit pension obligations (note 14)

The key areas where significant accounting judgements have been made are summarised below and set out in more detail in the related note where included in the these condensed consolidated financial statements:

• Capitalisation of contract fulfilment assets (note 2)

• Measurement of goodwill (note 10)

• Identification, measurement, and disclosure of actual and potential costs related to the cyber incident (notes 4, 9 and 16)

(d) Going concern

In determining the appropriate basis of preparation of these condensed consolidated financial statements for the six month period ended 30 June 2023, the Board is required to consider whether the Group can continue in operational existence for the foreseeable future. The Board has concluded that it is appropriate to adopt the going concern basis, having undertaken a rigorous assessment of the financial forecasts, key uncertainties, sensitivities and mitigations, as set out below.

Accounting standards require that ‘the foreseeable future’ for going concern assessment covers a period of at least twelve months from the date of approval of these condensed consolidated financial statements, although those standards do not specify how far beyond twelve months a Board should consider. In its going concern assessment, the Board has considered the period from the date of approval of these condensed consolidated financial statements to 31 December 2024, which is just less than seventeen months from the date of approval of these condensed consolidated financial statements ('the going concern period') and aligns with a year end for the Group.

The base case financial forecasts used in the going concern assessment are derived from financial projections for 2023-2024 as approved by the Board in July 2023.

The going concern assessment considers the Group’s sources and uses of liquidity and covenant compliance throughout the period under review. The value of the Group’s existing committed revolving credit facility (RCF) was £284.0m at 30 June 2023 having been extended to 31 December 2026. The original terms of the RCF are substantially unchanged and incorporates provisions such that it will partially reduce in quantum to £250m as a consequence of specified transactions.

In July the Group issued £101.9m equivalent of new US private placement loan notes across three tranches: £50m maturing 25 July 2026, USD45m maturing 25 July 2026 and USD23m maturing 25 July 2028, with an average interest rate of 9.45%. The notes rank pari passu with the existing indebtedness of the group and include financial covenants at the same level as those under the RCF. The Group expects to early settle £30.3m of Euro private placement loan notes in the second half of 2023 which were originally due in 2027.

In February 2023, the Group executed a committed bridge facility with three of its relationship banks providing additional liquidity from 1 January 2024. At 30 June 2023, the value of the committed bridge facility was £49.5m. This was cancelled in July 2023.

Financial position at 30 June 2023

As detailed further in the Chief Financial Officer's review, as at 30 June 2023 the Group had net debt of £544.6m (31 December 2022: £482.4m), net financial debt (pre-IFRS 16) of £166.2m (31 December 2022: £84.9m), liquidity of £283.6m (31 December 2022: £405.2m) and was in compliance with all debt covenants.

Board assessment

Base case scenario

Under the base case scenario, completion of the Group’s transformation programme has simplified and strengthened the business and facilitates further efficiency savings enabling sustainable growth in revenue, profit and cash flow over the medium term. When combined with the proceeds from the Board approved disposal programme and available committed facilities this allows the Group to manage scheduled debt repayments. The most material sensitivity to the base case is the risk of not delivering the planned revenue growth.

As previously announced, the Board’s plan is to establish an optimal capital structure to support the execution of the Group’s strategy and to dispose of businesses that do not align with that strategy. The completion of the disposal programme requires agreement from third parties, and major disposals may be subject to shareholder and lender approval. Such agreements and approvals, are outside the direct control of the Company and as such, the inclusion of the effect of any potential future disposals in the Group’s projections is inappropriate for going concern assessment purposes in accordance with IAS 1 Presentation of Financial Statements.

The base case projections used for going concern assessment purposes reflect business disposals completed up to the date of approval of these financial statements but do not reflect the benefit of any further disposals that are in the pipeline. The liquidity headroom assessment in the base case projections reflects the Group’s existing committed financing facilities and debt redemptions. The base case financial forecasts demonstrate liquidity headroom and compliance with all debt covenant measures throughout the going concern period to 31 December 2024.

Severe but plausible downside

In considering severe but plausible downside scenarios, the Board has taken account of the potential adverse financial impacts resulting from the following risks:

• revenue growth falling materially short of plan;

• operating profit margin expansion not being achieved;

• additional inflationary cost impacts which cannot be passed on to customers;

• unforeseen operational issues leading to contract losses and cash outflows;

• increased interest rates;

• reduction in deferred cash consideration in respect of completed disposals;

• non-availability of the Group’s non-recourse receivables financing facility; and

• unexpected financial costs linked to incidents such as data breaches and/or cyber-attacks.

The likelihood of simultaneous crystallisation of the above risks is considered by the directors to be relatively low. Nevertheless in the event that simultaneous crystallisation were to occur, the Group would need to take action to mitigate the risk of insufficient liquidity and covenant headroom. In its assessment of going concern, the Board has considered the mitigations, under the direct control of the Group, that could be implemented including reductions in capital investment, substantially reducing (or removing in full) bonus and incentive payments and significantly reducing discretionary spend. Taking these mitigations into account, the Group’s financial forecasts, in a severe but plausible downside scenario, demonstrate sufficient liquidity headroom and compliance with all debt covenant measures throughout the going concern period to 31 December 2024.

Adoption of going concern basis

Reflecting the continued benefits from the transformation programme completed in 2021 coupled with the Board's ability to implement appropriate mitigations should the severe but plausible downside materialise, the Group continues to adopt the going concern basis in preparing these condensed consolidated financial statements. The Board has concluded that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to 31 December 2024.

2 Contract accounting

At 30 June 2023, the Group had the following results and balance sheet items relating to long-term contracts:

Background

The majority of the Group’s revenue is from contracts greater than two years in duration (long-term contractual), representing 78.7% of Group adjusted revenue for the six months ended 30 June 2023 (30 June 2022: 80.0%).

Recoverability of contract fulfilment assets and completeness of onerous contract provisions

Management first assesses whether the contract assets are impaired and then further considers whether an onerous contract exists. For half and full year reporting, the Audit and Risk Committee specifically reviews the material judgements and estimates, and the overall approach in respect of the Group’s major contracts, including comparison against previous forecasts. Major contracts include those that are material in size or risk to the Group’s results. An assessment of which contracts are major contracts is performed twice a year, and to enable comparability, the prior period balances below are re-presented to reflect the same scope as the current period. Other contracts are reported to the Audit and Risk Committee as appropriate. These contracts are collectively referred to as 'major contracts' in the remainder of this note.

The major contracts contributed £0.6 billion at 30 June 2023 (30 June 2022: £0.6 billion) or 46% (30 June 2022: 43%) of the Group's adjusted revenue. Contract fulfilment assets (non-current) as at 30 June 2023 were £262.8m, of which £120.6m (31 December 2022: £109.7m) related to major contracts with on-going transformational activities. The remainder relates to contracts post transformation and includes non-major contracts.

The major contracts, both pre and post-transformation, are rated according to their financial risk profile, which is linked to the level of uncertainty over future assumptions. For those that are in the high and medium rated risk categories the associated contract fulfilment assets (non-current) in aggregate were £50.2m at 30 June 2023 (31 December 2022: £42.2m). The recoverability of these assets is dependent on no significant adverse change in the key contract assumptions arising in the next financial year. The balance of deferred income associated with these contracts was £163.6m at 30 June 2023 (31 December 2022: £118.5m) and is forecast to be recognised as performance obligations continue to be delivered over the life of the respective contracts. Onerous contract provisions associated with these contracts were £35.4m at 30 June 2023 (31 December 2022: £42.5m).

Following these reviews, and reviews of smaller contracts across the business, no contract fulfilment asset (non-current) impairments were identified (30 June 2022: £0.1m recognised within adjusted cost of sales of which none related to contract fulfilment assets (non-current) added during the period), and net onerous contract provisions of £1.7m (30 June 2022: £1.0m) were identified and recognised in adjusted cost of sales.

Given the quantum of the relevant contract assets and liabilities, and the nature of the estimates noted above, management has concluded that it is reasonably possible that outcomes in the next financial year may be different from management’s current assumptions and could require a material adjustment to the carrying amounts of contract assets and onerous contract provisions. As noted above, £120.6m of contract fulfilment assets (non-current) relate to major contracts with on-going transformational activities; and, £50.2m of contract fulfilment assets (non-current) and £35.4m of onerous contract provisions relate to the high and medium rated risk categories. Given the level of uncertainty, combination of variables and timing across numerous contracts, it is not practical to provide a quantitative analysis of the aggregated judgements that are applied. Management does not believe that disclosing a potential range of outcomes on a consolidated basis would provide meaningful information to a user of these condensed consolidated financial statements. Due to commercial sensitivities, the Group does not disclose amounts involved in any individual contract.

3 Revenue and segmental information

The Group’s operations are managed separately according to the nature of the services provided, with each segment representing a strategic business division offering a different package of client outcomes across the markets the Group serves. Capita plc is a reconciling item and not an operating segment.

The tables below present revenue and segmental profit for the Group’s business segments as reported to the Chief Operating Decision Maker. The Group comprises two core trading divisions, Capita Public Service and Capita Experience, and a third division, Capita Portfolio which comprises non-core businesses that the Group intends to exit in due course. Comparative information has been re-presented to reflect businesses exited during the second half of 2022 and in the first half of 2023.

Revenue

Adjusted revenue, excluding results from businesses exited in both periods (adjusting items), was £1,402.4m (30 June 2022: £1,326.0m), an increase of 5.8% (30 June 2022: an increase of 0.4%).

1. The 2022 comparative figures have been re-presented to reflect the recategorisation of certain contracts between contract types (long-term contractual, short-term contractual and transactional (point-in-time) following a review in the second half of 2022.

Order book

The tables below show the order book for each division, categorised into long-term contractual (contracts with length greater than two years) and short-term contractual (contracts with length less than two years). The length of the contract is calculated from the start of the service commencement date. The figures present the aggregate amount of the currently contracted transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied. Revenue expected to be recognised upon satisfaction of these performance obligations is as follows:

The table below shows the expected timing of revenue to be recognised from long-term contractual orders at 30 June 2023:

Prior year comparative information is not presented for the expected timing of revenue recognition because it is a forward looking disclosure and management does not believe that such disclosure provides meaningful information to a user of these condensed consolidated financial statements.

The order book represents the consideration which the Group will be entitled to receive from customers when the Group satisfies the remaining performance obligations in the contracts. However, the total revenue that will be earned by the Group will also include non-contracted volumetric revenue, new wins, scope changes and anticipated contract extensions. These elements have been excluded from the figures in the tables above because they are not contracted. In addition, revenue from contract extensions is also excluded from the order book unless the extensions are pre-priced whereby the Group has a legally binding obligation to deliver the performance obligations during the extension period. The total revenue related to pre-priced extensions included in the tables above amounted to £462.9m (31 December 2022: £577.0m). The amounts presented do not include orders for which neither party has performed, and each party has the unilateral right to terminate a wholly unperformed contract without compensating the other party.

Of the £5.2 billion (31 December 2022: £5.6 billion) revenue to be earned from long-term contractual orders, £4.0 billion (31 December 2022: £4.2 billion) relates to major contracts. This amount excludes revenue that will be derived from frameworks (transactional, ie point-in-time, contracts), non-contracted volumetric revenue, non-contracted scope changes and future unforeseen volume changes from these major contracts, which together are expected to contribute an additional £0.6 billion (31 December 2022: £0.7 billion) of revenue to the Group over the life of these contracts.

Deferred income

The Group’s deferred income balances solely relate to revenue from contracts with customers. Revenue recognised in the reporting period that was included in the deferred income balance at the beginning of the period was £504.5m (30 June 2022: £594.7m; 31 December 2022: £744.2m).