Capita plc (CPI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Capita Full Year 2020 Results Presentation. My name is Ruby, and I'll be your moderator for today's call. [Operator Instructions] I will now hand over to your host, Jon Lewis, CEO; and Gordon Boyd, CFO, to begin.

Good morning, everyone, and welcome to Capita's 2020 Financial Year Results. I'm Jon Lewis, Capita CEO. And as a mentioned, I'm joined by Gordon, our interim CFO this morning. As is usual, before we start, I draw your attention, of course, to the disclaimer at the beginning of this presentation. Now first and foremost, I'd like to thank all of our colleagues, many of whom are on this call for their hard work and dedication in the past 12 months, both the tens of thousands who have managed to deliver for our clients and customers from their homes and the thousands who have continued to go into their workplace, often supporting frontline services such as the NHS or Department for Work and Pensions. The commitment and resilience you have shown in supporting our clients and their customers through the pandemic has been exceptional. Thank you. This has been a challenging year for Capita. It has been a challenging year for many companies. 2020, of course, should have been the pivotal year in the transformation plan we set out in 2018. But instead, we had to respond to the significant challenge of COVID. I'm very pleased that we were able to do so robustly and effectively, in many cases, relying on the investments we have already made in the transformation to become a more agile and operationally effective organization. In so doing, we've also delivered financial results that were in line with our expectations at the half year, particularly reflecting our focus on cash during the second half. Capita is a much better business than it was at the start of the transformation. We're now delivering operationally the service our clients expect from us. Our client sentiment towards us benchmarks favorably against leaders in our markets. And this has materially improved our prospects for future growth. Since we last reported, we have won a significant amount of business, including the long-term Royal Navy training contracts signed at the very beginning of 2021, a sign of confidence from a strategic client. And we've delivered over GBP 300 million of sustainable transformational cost savings in the last 3 years as well as another GBP 122 million of COVID savings in 2020. Aligned with our long-term strategic objective of simplifying the business, we're now moving into the next phase of our transformation, a more focused, client-centric operation with 2 core but distinct divisions, focused on serving government and our blue chip customer experience clients. We will also have an expanded noncore portfolio division, which we anticipate realizing significant proceeds as and when the time is right. We've already received GBP 299 million this year from the sale of ESS, with a target of GBP 200 million more from the disposals through this year and a further GBP 200 million thereafter. The new structure will allow us to take out further costs associated with managing the current business, and we expect this to drive an additional annualized cost benefit of GBP 50 million from 2022. We continue to be very focused on the balance sheet. And as we did in 2020, we will continue to manage our upcoming cash commitments through further disposals and extending our maturities as the core businesses build stronger cash generation. As a result, we expect to inflect to sustainable free cash flow in 2022. Since the start of the transformation, we have put our purpose and values right at the center of the process. This is important for the future of the business and has been strongly supported by both clients and colleagues as well as other stakeholders. In the markets we serve, it is a must do, not a nice to do, and it has positive business and commercial consequences. Being purpose-led has helped attract talent, and engaged employees means lower voluntary attrition and superior customer service. Better operations means greater trust and more work from our clients. In particular, as the U.K. government adds social value requirements to 10% of the bid assessment criteria, it is also a necessity. By example, we recently won a framework contract in Scotland, where we were not the lowest price bidder. We won because our bid was technically strong and because of the strength of our social impact statement. We also care about the well-being of all of our 55,000 colleagues. Treating our people right and listening to their concerns is having a positive impact on performance, too. I think we all know there is a strong correlation between increasing employee Net Promoter Scores, up 7 points this year, with good levels of engagement and delivery for our clients, with our client Net Promoter Score up a significant 17 points this year to plus 32. Both results are encouraging, but there is scope to do better. We're also committed to reducing our carbon footprint, and we'll launch our net zero targets, which we have already had approved by the science-based targets initiative formally later this year. As with most businesses, the impact of COVID has been significant financially. But here at Capita, it also tested the strength and effectiveness of our transformation actions to date. I'm pleased with how we responded. We took early and decisive actions, prioritizing a safe environment for our colleagues to ensure we could continue to deliver services for our clients. Clients saw a different Capita through the crisis and is testament to this response that in such a difficult year, our employee and customer Net Promoter Scores both increased so materially. We also won GBP 100 million of business to support the government in its response in key areas like the NHS and in social security. We targeted over GBP 100 million of savings through discretionary cost and cash actions and have delivered GBP 122 million, again, reinforcing our track record on cost. We expect some of this to be sustainable as we adapt our business model to a more flexible way of working in the future. We were able to protect the balance sheet, too. We met our covenants, increased liquidity and repaid GBP 220 million of maturing debt in the year. This included significant measures such as deferred VAT and pension payments, which we will now make this year. We also improved our cash management processes and expect around GBP 50 million of the improvement to be sustainable from here on. This worked to the extent that we ended 2020 with net debt materially lower than guidance and with more liquidity than we started the year with. Our transformation objectives remain the same: to simplify and strengthen Capita so that we can generate sustainable free cash flow to build, in other words, a better quality business. It is clear that some of the challenges inherited in 2018 have proven to be tougher and more expensive to fix than we originally thought. And as we said last year, this transformation is taking longer and costing more than we originally anticipated. But we've stuck at it and dealt effectively with a global pandemic. The progress we have made means we are now in a position to execute on the next phase of the transformation. We will focus on our strongest markets with our most competitive value propositions and with greater client centricity. This gives us the platform to further -- simplify further into 2 core divisions, each focused on their client-specific needs in what are distinct growth markets, where we know we are demonstrating the capacity to win contracts with the risk and margin characteristics that are acceptable to us. The reorganization will unite currently disparate but synergistic core capabilities into natural homes, integrating with our -- integrated growing consulting capability, to provide more compelling solutions to our clients. A third, in large, portfolio division will contain businesses that are valuable and successful that are just not core to our future strategy and will be managed for sale at the right time. Reducing organizational complexity also gives us more opportunity to take out cost. And we expect to be GBP 50 -- which we expect to be GBP 50 million per annum from 2022. This next slide sets out the future structure of the business: 2 core divisions with client-centric operating models and a third noncore division. All 3 are supported by a smaller head office, overheads and an efficient shared services organization. I will talk more about each of these later on in the presentation. I believe Capita is a significantly better business than 3 years ago, but I'm acutely aware that this is not clear enough just from reading our historic financial results. However, many of the changes we have made are foundational to us being sustainably successful. As we have stated throughout the transformation, sustainable success is predicated on fixed and contract delivery issues, rebuilding client trust and improving the competitiveness of our market offerings. And we made very encouraging progress on these in the last year. Operationally, even in an unusually disruptive year, we delivered for our clients and maintained a high level of service KPIs. And service credits associated with poor service delivery also decreased significantly and for the third year in a row, down 80% over the last 3 years. Our customers have recognized this with the 17 point improvement in Net Promoter Score to plus 32 year-on-year, again, putting us on par or ahead of most of our key peers. 2 years ago, we were significantly behind them, of course. We're also almost there with the 3 legacy problem contracts we highlighted previously. Mobilcom and RPP are now profitable and cash-positive. PCSC saw some delays due to COVID, but we are still delivering a major uplift in financial performance this year and expect to complete the work very shortly. Collectively, these achievements have reestablished a reputation for reliable contract delivery, a far cry from where we were 3 years ago, further supporting us winning new work. Now as well as fixing legacy contracts, we have had a very strong track delivery of -- on contracts awarded since the start of the transformation. One of the biggest, Defence Fire and Rescue, is a case example of this. Since we took responsibility for this work in April last year, all major operational KPIs have remained on target as a result of which we have been awarded work for 6 more MOD sites, growing the revenue base on the contract in the process. We're also delivering, I hasten to add, our bid margins. I also talked last year about how the first phase of the ultra-low emission zone implementation for transport for London was delivering on time and on budget. We're now progressing well on the extension work won last year and are on track to go live in October [ this ]. And we continue to benefit from the discipline of our contract review committees and from the investment in project management tools and resources. We are winning work with the right margins, low double digits and the appropriate risk profile. As we perform better for our clients, our sales performance is also improving. We're also seeing the benefits of our investment in sales systems, processes and competency with better visibility and confidence in our revenue outlook. We won GBP 3.1 billion in total contract value, TCV, in 2020, an 8% increase on 2019. And we are on track to do materially better than this in 2021. I am also encouraged by the amount of work that we won and executed in-year, particularly tough as transactional work was more difficult to secure as a result of the pandemic. That also gives us more confidence in the future, and we are seeing encouraging trends in in-year revenue year-to-date. In a year when customers were looking to delay or cut back on spending, I'm also pleased that our book-to-bill ratio reached close to 1, even before the GBP 1 billion training contract from the Royal Navy, which was officially signed in early 2021. Our book-to-bill ratio stands today at 1.3. Our order book is down year-on-year, partly due to the timing of contract tenders and renewals, but it is flat when you include the Navy training award. In summary, we are now seeing in our sales data tangible benefits from the investments we have made in improving our contract delivery credentials and the trust this has built with our clients, and we are planning to grow organic revenue in 2021 for the first time in 6 years. This point is further evidenced by the 8% increase in total unweighted pipeline year-on-year as we build on improving client trust, understand better what our clients need through our consulting-led engagements and evolve our client value propositions. Analysis of our client NPS data shows that among those who increased their score, we saw a 40% increase in pipeline year-on-year. Consulting-led sales are fundamental to our future and an integral part of how we plan for our new core divisions to go to market. Most importantly, it is helping to change the way senior client executives perceive us. As we engage on higher-value business process services solutions, our consulting engagements also create future pull-through revenue opportunities. And our recent experience of being able to increase charge-out rates for our consultants materially on some engagements is a sign of the value our consultants are delivering. Despite this being one of the worst years ever to launch a consulting practice, we have still managed to grow consulting revenue year-on-year and won total contract value of GBP 30 million. Whilst the pandemic means that we have narrowed the scope of our focus, our specialisms in cloud, transformation and data and AI have won work for clients such as HSBC Wealth Management, Lambeth Council and Police Scotland. A great example of this is our work for the Financial Services Compensation Scheme, where we designed and executed a data-driven solution to an urgent client need. We're using AI to process 1 million pieces of evidence and 700,000 voice calls. Its CEO has publicly stated that this has saved them 2 years and halved what it would otherwise cost. Our transformation cost savings underpin our work to make Capita a more efficient organization as well as offsetting some of the impact of revenue losses as we wound down legacy contracts. This year, we delivered another GBP 145 million of transformational savings, taking the total to over GBP 300 million in the last 3 years. This is against an original target of GBP 175 million. This is also on top of the COVID cost action of GBP 122 million we secured this past year. But we have yet to see the bottom line impact of this as, at the same time, we have been investing in improving governance, systems, functional competencies, a simpler structure and more resilient information technology systems. We plan to complete our implementation of S/4HANA once we finalize the new operating, which of itself will drive further efficiency in how we manage our finances. For 2021 onwards, we expect to start to properly leverage the benefits of these investments and are targeting further significant transformational savings this and next year. This will include the benefits we can draw from the experiences we have gained from working remotely this past year, and we -- we are currently in the process of redefining who will be permanently office space from now on and who will not, part of our broader new ways of working strategy. This will result in a significant reduction in our office footprint. Whilst overall, we will reduce this by at least 25% across 2020 and '21, we have, in fact, targeted the most expensive part of our estate first. And our London footprint will reduce by over 60%, including, of course, the closure last year of our head office in the West End. Now that we have the foundations of a better culture, better governance, better client trust and better sales performance, it is time to move to the next phase of our transformation. We're in the process of evolving our operating model into 2 core divisions, focused on serving the specific client needs in their distinct markets with an expanded set of synergistic capabilities. Revenue growth will be enhanced, first, as we make our clients more central to our operating model; and second, as we bring together capabilities into a more focused and competitive set of offerings under one divisional umbrella. And this is in digital transformation markets that are growing faster than some of our existing traditional areas. This leaves a bigger noncore division, comprising of great businesses, but businesses not aligned to either of these. We will continue to ensure they prosper, but we'll be selling them when the time is right. A new structure also brings organizational benefits, a slimmer, leaner group structure appropriately sized to our revenue and fewer legal entities with associated intercompany cross-charging. Shared services that continue to strengthen -- we will have -- sorry, shared services that continue to strengthen, but can be deployed with greater efficiency. We have already seen this in the areas of finance and HR, both of which are very effectively leveraging our talented colleagues in India. Complexity has been a drag on agility and margins, and this next operating model is targeting that. Collectively, we expect these to deliver cost savings of GBP 50 million on an annualized basis next year. Now we've spent a lot of time over the last 3 years to better understand our market offerings, their competitiveness and the potential synergies between them. And in the tables on the right are, at last, a simple answer to the question, what does Capita actually do? 80% of the work won in 2020 comes from what we call 20 client value propositions, a language we use to describe our main market offerings. And of those 20 CVPs last year, 13 fall into our 2 proposed core divisions, 11 exclusively to one or the other. This analysis, understanding what we do and who we sell it to, is why the organizational structure makes so much sense. And the graphic on the bottom is a simple illustration of its potential. We have aligned the divisions, the CVPs and their clients. Capita is already one of the government's largest strategic suppliers and is particularly strong in the BPS and IT markets with almost double the share of any other supplier. Over the last couple of years, we've built a reputation for helping governments apply digital technologies to improve productivity, public services and a reputation that was enhanced as we helped the government respond to COVID. We're already well positioned within this attractive market. However, today, these services are bid and provided across multiple parts of Capita, which is inefficient for Capita and for our clients. With this new structure, we will be aligning these capabilities in a much more coherent way. For example, Capita ONE, which currently sits in Capita Software, has more local government clients than our local government business and Government Services. By focusing on our 6 governmental vertical markets, we will derive a better understanding of our clients' needs, enabling faster product development. And a great example of this is our new grant distribution product, Grantis. And as we further develop our consulting offerings, we will be less reliant on reactive bidding and more proactive in policy-driven decisions, such as the leveling up agenda or the focus on quality and value for money. As a result, we expect Capita Public Services can deliver attractive top and bottom line growth, as reflected in our current pipeline of opportunities. With a pro forma revenue of around GBP 1.1 billion, focused on a market where our services will support strong long-term growth, we anticipate this making returns at least in line with industry levels. Our expanded private sector BPO business will be called Capita Customer Experience. This division supports our clients in the delivery of front-line and back office customer and member interactions, both in regulated and nonregulated environments, leveraging, again, our strong digital capabilities. We're a leading provider of customer experience services in the U.K. with strong positions also in Ireland, Germany and Switzerland, and with pro forma revenue of around GBP 1.3 billion. Within those geographies, our strengths and the reason why we have such a high-quality client base is our deep domain expertise in telecoms, retail, utilities and financial services, these being the very primary industry verticals we will focus upon. in financial services, our strong onshore capabilities are proving to be a competitive advantage currently. In the near term, the priority will be to drive the bottom line by continuing to focus on our cost structure, investing in digital solutions and through our consult, transform, deliver client engagement methodology. Over the medium term, we expect to return to sustainable revenue growth as the market for these services continues to expand, both in Europe and globally. As mentioned, we expect to realize efficiency and cost benefits associated with our new operating model. We will have a simpler client-facing organizational structure with fewer legal entities and reduced organizational capacity. There will be greater clarity around P&L accountabilities, which will be aligned to clients and industry verticals. We will have a more efficient management structure through reduced spends and layers. And we will be bringing all of our IT services together to be managed in one organization, giving clarity of management and a more efficient use of resource. And we continue to consolidate our software development resource from divisions -- from across the divisions under the umbrella of our digital delivery center, which is based both in the U.K. and India, which, by the way, recently achieved CMMI accreditation. We anticipate the role of the group to be corporate strategy, governance and controls, capital allocation and external reporting. It will be slimmer than it is today, now that we have successfully implemented the standards and controls that the business so needed. We will be more streamlined, more effective, more efficient, delivering annual cost savings of GBP 50 million from 2022. Our new structure leaves an expanded portfolio of excellent businesses, which are no longer core to our future. Some of these have been announced previously, notably the Specialist Services and commercial off-the-shelf software businesses. In these areas, a significant amount of preparation for sale has already taken place and disposal processes are well underway. Therefore, in addition to the GBP 300 million already realized this year from the sale of ESS, we are targeting a further GBP 200 million in proceeds this year and GBP 200 million in 2022. This will then leave a small number of businesses for sale in 2023. Unfortunately, some of these assets, specifically our corporate travel and events and resourcing businesses, have been hard hit by COVID and will likely take some time to recover before we would wish to dispose of them. Let me now pass you to Gordon for an overview of our 2020 financials.

Thank you, Jon, and good morning, everyone. I'd like to turn to Slide 24. As in previous presentations, we present our results on an adjusted basis, and therefore, the impact of business exited or in the process of being exited are excluded. We started 2020 with a strong focus on the balance sheet. However, the onset of COVID interrupted the pace of our ongoing transformation, planned disposals and also our refinancing plans. COVID resulted in a us setting increased focus on short-term cash preservation measures to address the financial impact on a number of our transactional businesses, whilst ensuring we're able to maintain business as usual and other businesses to ensure our clients were able to continue to operate throughout the pandemic. Revenue was 9% lower on a like-for-like basis due to previously announced contract losses, scope and volume reductions and the effects of COVID. And as a result of the revenue reduction, profit was lower. The impact of higher-margin revenue losses could not be fully mitigated by cost savings from the ongoing transformation program and the additional measures we've put in place in response to COVID. Nevertheless, cash from trading operations increased by almost 12% due to a significantly lower outflow on contractual working capital, which more than offset the reduction in profit. Free cash flow increased significantly due to improvements in other working capital, which we saw across all divisions, and lower capital expenditure as we work to preserve cash. Just to note that the adjusted free cash flow excludes the benefit of GBP 119 million of that deferral and GBP 14 million of nonrecourse receivables financing. Net debt was significantly lower and benefited from our continued focus on improving working capital, the government's VAT deferral scheme, lower restructuring costs and lower pension deficit payments compared to 2019. Liquidity increased, and included is GBP 452 million of committed revolving credit facilities and GBP 150 million backstop liquidity facility, which expired on completion of the ESS disposal. And neither of the facilities were drawn at year-end. As noted earlier, businesses exited or in the process of being excited are included from the group's adjusted results. In 2020, the largest business, which was excluded was Education Software Solutions, or ESS, which, in 2020, reported GBP 50 million of profit before tax. Adjusted profit, including ESS, is included in the table at the bottom of the slide and shows what the group's results would have been in 2020 if the ESS business has not been presented as a business exit. And that would have resulted in profit before tax of GBP 117 million in 2020, i.e., in line with consensus, albeit at the bottom end. Now turning to Slide 25 on revenue. As noted a few moments ago, revenue was 9% lower year-on-year. 4% of this reduction was due to previously announced contract losses due to a number of local government hand backs, revenue reductions in Specialist Services, where we chose not to rebid for some contracts and scope and volume reductions, mainly within customer management. In addition, we estimated -- we estimate that we suffered a net 5% reduction in revenues as a result of COVID. And this adversely affected scope in volumes, including volume-based framework contracts and transactional revenue, mainly in businesses such as travel and events, enforcement, government services and people solutions. These losses were partially offset by COVID wins to assist with the U.K.'s pandemic response, including contracts the W -- with DWP and various NHS schemes, with some of these continuing into 2021. Previously, we had expected to see revenue growth in H2, but instead, we saw that contract bid time lines were delayed or paused as a result of COVID. We did, however, have a number of notable successes. Notable new wins included the first full year on the Ministry of Defence's Fire and Rescue Service, or DFRC contract, a project in customer management and a number of smaller wins across divisions. We continue to see resilient revenue performance in the majority of our operations for long-term contracts with a stable government and blue chip customer base. As in previous years, there were one-off benefits arising from deferred income reduced on contact [indiscernible]. So if we move on now to cost on Slide 26. Our transformation program continues to deliver significant cost savings with new recurring revenue savings of GBP 145 million delivered in 2020, bringing the total sales since inception to over GBP 300 million. 2020 and 2019 one-off plan savings were at a similar level, and therefore, had no year-on-year impact. We took immediate action to conserve cash when COVID struck, including reductions in discretionary spend, management pay cuts and recruitment freezes. We saved an estimated GBP 122 million, although much of this is not sustainable and around half of those costs will roll back in 2021. We're targeting a further GBP 124 million year-on-year cost savings in 2021, which will partially offset the rollback of one-off corporate savings, inflation and the reintroduction of the management bonus scheme. Finally, as a result of our planned simplification of the business, described earlier by Jon, we expect to generate future annual cost savings from 2021 onwards and which are expected to reach GBP 50 million by 2022 and all of which are expected to flow down to the bottom line with the cost to achieve being met from our existing transformation program. We'll move on now to PBT on Slide 27. Slide 27 summarizes the key drivers behind the year-on-year profit reduction and highlights the action taken to mitigate the impact of lost revenue. Due to the level of management adjustment required, we've not been able to separate the impact of COVID in its profit bridge, as we did on the revenue bridge. The margin generated from contract wins is not yet offsetting the margin from losses. However, contract wins include the impact of first year losses and contracts such as DFRP, which results in the application of IFRS 15 and which equated to GBP 15 million in 2020. In 2021, these contracts are expected to generate positive margins, and ignoring the GBP 15 million IFRS 15 effect on the DFRP contract wins, we would actually have been -- wins would slightly have exceeded losses this year. In 2020, scope and volume reductions and the impact of cost increases, including wage inflation and the introduction of the real living wage, were offset by savings from the ongoing transformation program. However, these savings are not related to the specific actions we took in 2020 in response to COVID could not mitigate the reduction in the margin generated by our transactional businesses, much of which will have been due to COVID. The transactional businesses typically have a high fixed cost base, and therefore, the margin erosion from loss on revenue is more severe than in other areas of the group despite the cash preservation measures put in place, including furloughing staff. As we leave lockdown, these transaction businesses are expected to recover with the timing of recovery varying between businesses. As in previous years, 2020 saw a number of unplanned contractual one-offs and which adversely affected profit before tax by GBP 24 million. This included an onerous contract provision and contract asset impairments, partly offset by a net gain from the release of deferred income and write-off of contract assets arising from a contract termination. Turning now to Slide 28 and a high-level summary of group income on both an adjusted and reported basis. Adjusted operating profit of GBP 111 million in 2020 was before interest of GBP 47 million, which was some GBP 10 million lower than 2019 due to scheduled debt repayments made in the year of GBP 218 million. This resulted in adjusted PBT of GBP 65 million. As of the previous year, there were a number of adjusting items between adjusted and reported PBT. Adjusting items of GBP 150 million are substantially lower than the GBP 260 million in 2019, reflecting a gain on the sale of Eclipse, lower restructuring charges and no goodwill impairments in 2020. Our reported result for 2020 showed a GBP 13 million improvement over 2019, mainly as a result of the reduction in adjusting items and interest more than offsetting the reduction in adjusted operating profit. At the bottom of the slide, we provide a breakdown of what is included within group support services. Group shared services accounts for the majority of the costs and, at GBP 103 million, was slightly lower in 2020 than in 2019. Group support services also include the increase in investment in our new consulting business and group head office costs. Group head office costs were almost GBP 10 million lower at GBP 19 million, largely due to cash preservation measures, which included cancellation bonuses and release of prior year bonus. Turning to Slide 29, and a summary of performance by division. The appendix includes slides for each of the divisions under the existing structure. And I don't intend to spend any time through the contribution of each of the divisions to the 2020 outturn at any detail. Nevertheless, this summary slide clearly shows the impact of COVID on Specialist Services, which holds our travel and events business, where we saw GBP 100 million drop in revenue and a corresponding fall in margin from 15% to minus 2.2%, as we were unable to cut costs fast enough to match foreign revenue. In addition, one can clearly see the reduction in margin in government services, largely as a result of local government pointed hand-backs, contract bid costs, asset impairments and first year IFRS 15 losses of GBP 15 million on the DFRP contract and which will show a positive margin in 2021. Turning now to group cash flow and net debt, summarized in Slide 30. The reduction in EBITDA from GBP 439 million to GBP 293 million reflects the lower operating profit. However, cash from trading operations improved as a result of contractual working capital improvements, more than offsetting the reduction in EBITDA. The improvement in contractual working capital reflects lower deferred income outflows in 2020, largely from advanced receipts and increased activity or new projects, such as DFRP, where cash was received in 2020 in respect to transformation expenditure. This compares to the overall outflow in 2019, which included the impact from a number of local government contract terminations. In addition, 2020 benefited from higher accrued income inflows due to invoice facing and technology solutions and lower volumes across people solutions and software. This was partly offset by a small net outflow on contractual fixed assets. Overall, the net reduction in contractual working capital outflows supported improvement in cash conversion to 83% in 2020 compared to 51% in 2019. Capital expenditure was significantly lower in 2020 as we drove more focused investments and looked to preserve cash as part of a corporate response. In addition, 2019 CapEx was high as it included significant investment in large functional IT programs, such as Workday, Salesforce, and SAP 4/Hana in particular, and also spend on property rationalization. Typically, we'd expect CapEx to be in the GBP 80 million to GBP 100 million range. Other and working capital inflows were generated by shorter public sector payment cycles as part of the government's COVID response revenue reduction efforts in working capital and improvements in working capital management across the group. Adjusted free cash flow was GBP 239 million in 2020, but before taking account of a number of excluded items, most notably, GBP 119 million from the VAT deferral scheme, most of which will be repaid in 2021; GBP 64 million of restructuring costs; and pension deficit repair payments of GBP 30 million. In addition to the adjustments, a further GBP 57 million of pension deficit repair payments were deferred until January 2021 and which have since been settled. Combined with the improvement in adjusted free cash flow, the net effect was to reduce net debt by GBP 276 million, resulting in a closing net debt position of under GBP 1.1 billion or GBP 569 million pre-IFRS 16. The net debt position obviously benefited from the government VAT deferral scheme and a GBP 57 million deferral pension fund deficit payment, both of which will unwind in 2021. Moving to Slide 31. We were compliant with all debt covenants as of the December 31, 2020 with the improvement in net debt from improved adjusted free cash flow, that deferral, lower restructuring cash flows and the adjusted pension deficit payment all contributing to the results. Headline net debt to adjusted EBITDA for pre- and post-IFRS 16 exceeded the target being set by the Board of 1.0 to 2.0x pre-IFRS 16 over the medium term, and which is broadly equivalent to 1.7x to 2.7x post-IFRS 16. This was, in part, due to the impact of COVID, and although the outturn is higher than target, we were comfortably below our financial covenants. Moving on to liquidity and debt maturities. Throughout 2020, we continue to focus on working capital management and worked to conserve cash to offset the impact of COVID. Actions taken, combined with the disposal proceeds and the VAT deferral scheme, improved liquidity by GBP 214 million to GBP 709 million at the year-end. We ended the year with GBP 107 million of unrestricted cash and no drawings under our RCF facilities. Liquidity included GBP 150 million backstop facility, which has subsequently fallen away as a result of receiving the sales proceeds from the ESS disposal at the beginning of February. Of the GBP 299 million cash proceeds received on the disposal of ESS, GBP 50 million was paid into the pension fund in respect of intellectual property owned by the fund. During 2020, we matured GBP 218 million of scheduled debt repayments, and we have further debt maturities in 2021 and 2022 of GBP 440 million. In addition, our GBP 452 million RCF expires in August '22 with an option to extend by year, subject to lender consent. So if we turn now to Slide 33. We're addressing upcoming debt maturities and August '22 expiry of our RCF through a number of measures: first of all, extending our RCF through existing banking groups. And I can confirm that discussions are ready underway with formal launch time to coincide with the release of these annual results. We have targeted GBP 700 million of disposal proceeds over the next few years, GBP 300 million of which was received in February; GBP 200 million of which relates to disposals currently underway and a balance from our expanded non-core portfolio. We also expect most of our spend in transformation to have come to an end over the next 12 months or so, which will significantly reduce below the line commitments -- cash commitments in 2022 and which has been a feature of Capita's financial performance in recent years. We also expect to generate sustainable cash savings of GBP 50 million by 2022 as a result of the further simplification of our business, outlined by Jon earlier, and all of which are expected to flow down to our bottom line. This, of course, is in addition to the GBP 124 million year-on-year target for the current year and which will offset the rollback of one-off COVID savings, restoration of the bonus scheme and inflation. And finally, we aim to issue long-term debt. With that, I'd like to hand over -- back over to Jon.

Thank you, Gordon. So to summarize, 2020 was a challenging year, but we responded well to the COVID crisis and continued to focus on making Capita a better quality business. Despite the national lockdown through Q1 this year, we're targeting our first year of organic revenue growth for 6 years based on an encouraging sales performance in 2020 in what was, of course, a very difficult environment, and a good start to 2021 from the winning of the GBP 1 billion Navy training contract. Through our transformation actions, we also have now established a solid foundation from which we can develop a structure that we believe really works for Capita: 2 core client and market-focused divisions to drive growth and cash flow and a portfolio from which we can realize substantial proceeds. We're also very focused on the balance sheet. And as Gordon highlighted, we have a clear plan to address this. We are targeting over GBP 500 million of disposal of proceeds this year and have already received GBP 300 million from the ESS disposal, with 3 more processes now well underway. Further disposals will come. And today, we are launching a process for the extension on the RCF. Finally, we continue to plan to raise long-term debt later this year, subject to market conditions. Following additional cost actions and a return to organic revenue growth this year, we expect to deliver sustainable cash generation from '22 onwards. And in the longer term, we continue to build a more focused, client-centric and streamlined business, delivering improved return to investors. And with that, I think we will open up to Q&A.

[Operator Instructions] Our first question is from Robert Plant of Panmure Gordon.

Jon and Gordon, the statement in the cash section mentions ongoing significant restructuring charges. Do you have the figures for what those restructuring charges will be in '21, '22, '23? And/or how they compare to what you thought they might be this time last year?

Sure. In terms of 2021, they're broadly around GBP 110 million, which is not that similar from 2020. '22, '23 onwards, it's pretty de minimis. We expect most of the transformation programs have been completed by then.

Our next question is from Paul Sullivan of Barclays.

Yes. Three for me to kick off with. I -- Jon, I can see the positives of simplification. But what about the risks in terms of execution? And how can we judge that you aren't sort of cutting too far? That's the first question. Secondly, can you quantify the net COVID impact on profits last year? I mean, the drop-through we know is very high, but I wonder if you can just quantify that. And how quickly do you see that coming back? And then on M&A, GBP 400 million of sort of new proceeds from -- out of -- with GBP 700 million of revenues. It seems rather unambitious. But could you give us some color on profits associated with the assets earmarked for disposal, maybe breaking it out between the 2 -- the GBP 200 million buckets?

Paul, thanks very much for the questions. I'll let Gordon address the second and third, but let me address the first one. Look, this has been a process of transformation, organizational change, fixing contracts, bringing in talent, taking cost out, that I would suggest this leadership team has had at a pretty strong track record of the last 3 years. And frankly, what to embark upon is more of the same. We did this back in 2018 when we defined Capita's first operating model. We called it the Blue Book. This is the next iteration of that document. We have a leadership team, several members of which are very experienced at doing this. We understand the risks. And obviously, we're taking action to mitigate those. But I think fundamentally, this is the right client-centric operating model that we should now be migrating to. When we put the operating model in place 2 years ago, it had different objectives. It was about getting a grip on the business. It was about putting controls in place. It was about fixing contracts. It was about putting the right talent into functions and driving competencies. We've done that, ticked. We now need to inflect to accelerating growth, and that is why we're making the change.

Paul, in terms of the profit impacts of COVID on divisional -- sorry, on the business, we have explicitly not tried to allocate impacts of COVID due to the amount of transfer pricing within the group. However, we did draw attention to the fact that we believe that in revenue, which is much easier to estimate, the effect was about 5% in terms of 5% loss revenue. I would, however, draw your attention to the summary financial performance slides for the divisions, where you can clearly see the impact on Specialist Services and Government Services. Those would be the areas most badly hit. So you can probably come to a reasonable view. But we didn't feel comfortable getting like an authoritative number on that. And I'm sorry, the third question on proceeds, could you repeat that one, please?

Yes. I mean, you're targeting GBP 400 million of new proceeds with a revenue base of GBP 700 million. And it doesn't seem -- it seems rather unambitious. I mean, what does it imply in terms of the profits coming out of those assets? Just maybe split between the 2 buckets that you've talked about, the GBP 200 million going in this year and GBP 200 million sort of next year and beyond.

Sure. As you can imagine, it's always -- and giving an estimate of sales proceeds is always fraught with difficulty in a public forum. And I think, historically, Capita has actually done better than expected in proceeds. I think it's fair to say the market was disappointed when we sold ESS for less than what the market has been anticipating. So I think if you could argue -- so it's possible to argue that we are -- we have learned a lesson from that. And there are a number of desperate businesses there. And end of day, several are already underway and we're probably better informed on those ones. And others will be dependent, to a certain extent, on recovery. So I'll say we're being reasonably cautious.

And can you quantify the profits generated by these assets?

No. That's not something we have disclosed.

Our next question is from Thomas Beevers of Stockviews.

Just one question on shared services. On the face of it, it looks relatively fixed at GBP 130 million. What confidence do you have that as you dispose of the noncore businesses, that you could manage that down in line with the lost -- with the lost profit from those disposals? And then just a second question on restructuring costs of GBP 110 million, as mentioned. That -- yes, I understand that, that continues out into FY '21. What gives you -- I just wonder, if you could give a bit more color on what that actually consists of now and why you have the confidence to say that, that drops off in FY '23?

So Thomas, let me address the first question, and then Gordon will address the second. Look, I think our track record in getting cost out of this business, and I gave the numbers in my prepared remarks, is pretty strong. And as we scale the business to the 2 core divisions. We will take appropriate actions to ensure we have the right cost structure in place. The other thing one has to remember, of course, is that a good many of those shared services might very well be required for the acquiring entity as well. So some of them might very well go with the businesses we're disposing of.

In terms of the cost savings, some of that like has already been achieved, and it's flowing through from the current year. So it's a year-on-year. So some of the savings that we've identified for FY '22, 2 part -- I beg your pardon, for FY '21, the actions took place during 2020, and therefore, the full year impact of those are still have yet to feed through. And we made that chart on one of the slides in the presentation. The balance of things will come from continued operational excellence and improvement, i.e., doing things better. Structural optimization and simplification, i.e. efficiency and overhead savings. So for example, property costs, we are addressing portfolio as you can imagine. We've made really good progress there and continue to do so. We are beginning to reap the benefits of the investment we're making in technology, whether it be Salesforce, whether it be Workday. And we continue to address group and overhead costs as well, particularly in areas such as procurement, where we are -- I think it's fair to say, we are increasingly having a more joined up approach, but there's still some more room to grow. So those are the sort of the main areas. But we are pretty confident that we can achieve -- so -- and part of that -- a part of all of those running through that is just the consistently overall complexity of the group and looking at spans and layers of the organization. We still have -- although we've made fantastic progress over the last 2 years, there's probably still more that can be done in reducing the number of layers and indeed increasing the span of control.

Our next question is from Christopher Bamberry of Peel Hunt.

A couple of areas for me. You've said, obviously, you're planning to return to organic growth this year. What gives you the confidence to make this statement? I guess, behind that, what are the key building blocks in terms of the unwind from the impacts of COVID, contracts already won and contracts to be won? And do you expect to deliver organic growth in H1? And secondly, what level of margin would you expect the 2 new core divisions to deliver over the medium term?

I'll let Gordon address the second, Chris. Let me address the first. Look, we've been investing very heavily, as we said in the prepared remarks, in rebuilding trust with our clients while delivering on the scopes of work we currently had with them. And that of itself has now created far more opportunities for us going forward than we had historically. And that manifests itself in the numbers. Let me just run through for you our book-to-bill ratio from '19 to forecast '21. Our book-to-bill ratio in '19 was 0.79. At the back end of last year, it was 0.94. This year, we're forecasting to close the year with a book-to-bill ratio of 1.32. So a very consistent trend there in that key metric. We talked earlier on about the GBP 3.1 billion in TCV we closed last year. If I look at our performance on total contract value year-to-date and forecast for the first quarter this year and in in-year revenue, we're seeing healthy trends. And let's just take Government Services in our current organizational structure. We closed about GBP 850 million in TCV in Government Services last year. We're on track this year to do more than double that. So yes, we fixed relationships. We're now delivering for our clients. We're more specific with regard to our client value propositions. We're more aligned to the specific needs of our clients and the markets we serve. And we're now starting to see that reflected in order book, our book-to-bill ratio, our in-year revenue and our TCV. Now offsetting that, of course, this year, will be the speed with which our transactional businesses recover from COVID. We were anticipating that to be a Q1 effect. It's probably likely to be a Q1 and Q2 effect. But we do not believe that will be sufficiently great to prevent us from delivering, for the first time in 6 years, at least, organic growth in '21.

And in terms of margin, I think could only -- I think the guidance we would give is in line with peers.

And Chris, remember, we've been very consistent throughout this transformation that we are targeting low double-digit margins. We're migrating up the value chain into more BPS, BPAP services to achieve that. We've been extraordinarily disciplined in terms of the scopes of work we've bid upon over the last 3 years and the margins that they can generate. And I'll remind the audience that the average bid margin over the last 3 years has remained around 10%. So all of the new work that has been won since we started the transformation is in the margin ballpark that we're gunning for. It's dragged down today, of course, by ongoing fixing of legacy contracts and investments we've had to make to deal with historic legacy issues.

Our next question is from Suhasini Varanasi of Goldman Sachs.

Just two for me, please. It's clear that the big pipeline has seen good strength. Can you give some color on the key opportunities that you see coming up over the next 12 to 18 months? The second one is on the consulting-led sales approach. I think you've given some color in the presentation. But over the medium term, can you discuss how you see this changing in the revenue mix, and importantly, adding to margins as well? Because from what I understand, this is much higher-margin business compared to even the 10% big work that you have achieved so far.

So in terms of -- Suhasini, good to hear from you. In terms of contract opportunities, I think the most significant ones that we're bidding on currently are in Government Services. We were -- and I didn't talk about this in the prepared remarks actually, quite successful last year in terms of getting ourselves on to government framework contracts, the key one of which was the [ Caherst ] framework in the Department of Work and Pensions. We've already won the scope of work on that in Scotland, the JETS contract, which we're now executing well upon. And we have, literally, in the last few days, submitted bids on several hundred million pounds worth of opportunity on the Restart contract within that division as well. There are other significant opportunities coming down the pipe within Government Services beyond that as well as growth in existing contracted work. So for example, we fully anticipate that on the back of strong delivery on Selborne, which is the Royal Navy training contract, that we will see additional revenue opportunities over the course of that particular contract. In our customer experience business, we have opportunities with Lloyd's. We have opportunities with NatWest. We have the renewal of the Aviva scope of work. We have opportunity with British Airways. A much healthier pipeline, as we mentioned earlier on, than we've had at any stage in the transformation. And I'll remind you of the figure we cited, which is that our unweighted pipeline is up GBP 7.5 billion year-on-year. Suhasini, I think you had a second question as well. You need to remind us of that, please.

Yes. But it's on the consulting-led sales approach. From what I understand, this business has done really -- has done -- has been resilient in 2020. How do you see this adding to growth medium-term, and importantly, also adding to margins? Because from what I understand, this is much higher-margin business compared to your core revenue?

Well, its impact on the overall business is going to be small over the course of the next couple of years. I mean, it is strategically important in that it changes the kinds of conversations we have with our clients. And it creates opportunity for bigger contract pull-through. But the revenue numbers, I mean, last year, we closed around GBP 30 million in TCV and consulting. It's a relatively small number in the context of Capita as a whole. But it's strategically important because of the conversations and the pull-through. On margins, 2020 was an investment year for our consulting business. This year, we expect that business to turn a profit for a number of reasons, not least of which is the fact that we have been able to go in and negotiate, renegotiate the rates when some of the scopes of work, again, on the back of the value that we are delivering for a number of our clients.

We have a follow-up from Christopher Bamberry of Peel Hunt.

Given AXELOS is 49% owned by the Cabinet Office, does this complicate the disposal process? And secondly, the interims you talked about, washing out legacy contracts that Capita doesn't want to participate in, what's the flow-through from 2020 to '21? And is there a potential impact from additional washouts?

The delightful second question, I'll turn to Gordon, but that's not an easy question to answer. The first part, as always, we have an extremely strong partnerial and collaborative relationship with the Cabinet Office, not just in our conventional scopes of work, but that extends to the partnership we are enacting for the sale of AXELOS. So no additional complication there whatsoever.

What a challenging question you've asked for the last one. Too bad, I can't answer that. What I can say is numbers are reducing significantly. And on those contracts where we previously have had poor margins, we have been renegotiating on improved terms. That's probably the side I can comment on.

Yes. I mean, the only thing I would add is we have material in the deck which shows the significant reduction in what we call cost of book quality or service credits. As we've improved our execution on our challenging countries, it's down 80% over the last 3 years, such that those -- 3 of those contracts will not be loss-making in -- at a P&L level in the course of 2021, and that's mobilcom-debitel, that's our RPP contract as well as PPSC.

We have a follow-up from Thomas Beevers of Stockviews.

Thomas, you may be on mute.

Yes. Sorry about that. Just one point of clarification on the GBP 400 million of further disposals. Does that assume that everything that we see in the noncore portfolio business is disposed of? And then a second question, that GBP 200 million, I think, you've earmarked for this year. The additional GBP 200 million, is that expected in 2023? Or might that take longer?

So your first question, no, it does not include all of the businesses in Capita portfolio. There will be additional businesses we will dispose of in addition to the numbers that we cited, and I'll review those numbers again in a minute, Christopher. You'll remember that things like our travel and events business, our enforcement business have been very significantly impacted by COVID. And we're naturally going to want to wait until those businesses recover before we dispose of them. And that may be a late '22 time frame. We may dispose of them then. We may dispose of them in the first half of 2023. In terms of proceeds, it's GBP 700 million in total. We've already realized GBP 300 million of that from the disposal of ESS, cash received in January. We will dispose of an incremental GBP 200 million this year, and we have 3 processes that are well underway in that regard, and then an incremental GBP 200 million in '22.

We have no further telephone questions. And as we believe the online questions have been addressed, I will hand back to our host.

It just remains for me to thank everyone for their interest in Capita this morning. And I look forward -- Gordon and I look forward to catching up with many of you over the course of the next several days. Thanks very much.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your line.