Interim Results

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

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