Capita plc (CPI) Earnings Call Transcript & Summary

Good morning, everyone. Thanks very much for joining us. It's rather nice to be here in person and to see friends of Capita with us in physically for the first time in a couple of years. I think we're all a little bored of presenting results and trading updates virtually. I'm joined this morning by Tim, our CFO, as well as members of the executive committee of Capita, all of whom will be more than welcome to chat after our prepared remarks. If we can have the next slide, please. As usual, I refer you to our disclaimer. So after the significant impact of COVID in 2020, a lost year in which we focused all of our energy on protecting our colleagues, our clients and the business, 2021 was a year in which we got back to completing the transformation process we started in 2018. And we have now addressed a long-term concern regarding Capita. Capita is now a much simpler business to understand, 2 core divisions with strong leadership positions in attractive markets, clearly defined growth markets. The Public Service division has already turned the corner, delivering strong results in 2021. Importantly, we also expect the Experience division's performance to improve in 2022. Both divisions are now focused on providing clients integrated solutions as opposed to selling a disparate range of products and services. And on the back of order book growth in 2021, a strong pipeline for 2022, and improving win rates we expect to accelerate our growth into the year. Our new operating model also offers opportunities to leverage the simplicity of our new structure to do things more efficiently and to improve productivity. You will also be aware that we have exceeded our target of GBP 700 million in disposal proceeds, well ahead of schedule, some 12 months ahead of when we originally said we would deliver that. This has allowed us to meet our cash and debt obligations, which 12 months ago you'll remember, presented a significant hurdle. And I'm also very pleased from an accounting perspective our pension fund is now in surplus following GBP 300 million in deficit funding contributions over the last 4 years. As we continue to dispose of the businesses in the non-core portfolio division, we expect net debt to be materially lower at the end of the year. So having established that platform, revenue growth is now the key driver of Capita's ability to drive margins, cash conversion and cash flow. We grew in 2021 for the first time in 6 years. Yes, it was not by much, but it was an inflection point after years of persistent revenue decline, driven primarily of course by poor service delivery. The amount of contracted work won in year increased by 31%, pointing to our ability to offer our clients competitive and attractive solutions. As a result, we added GBP 260 million to our order book, delivering order book growth for the first time since 2017. Perhaps more importantly, it is also an order book of much higher quality contracts. Our book-to-bill ratio at 1.2x is the strongest it has been for several years and now reflects a business that is pivoting to growth. And we have a healthy pipeline of new opportunities this year. We've already agreed a GBP 456 million 5 year extension with the BBC, and we expect to announce some exciting new wins with new clients in the next few weeks and months. Year-to-date we have won almost GBP 700 million in contract value. And with the return to growth achieved in '21, we now expect to pivot to positive free cash flow in 2022. Now those of you who have been following our transformation will be very familiar with this slide. But this is the last time we will present it. Today we're announcing that our transformation has ended. We have the platform in place now to drive revenue growth and improve financial performance. Our transformation focused, you'll remember, on simplifying and strengthening the business, what was an overly complex failing under-invested and overburdened group. We had a poor reputation with clients, a huge amount of financial debt, significant organizational debt and a significant pension deficit. 4 years later, Capita is now simpler, more focused and more predictable. We have invested in leadership and governance, systems and processes and our go-to-market capabilities. And we have significantly reduced the financial and organizational debt in the business. And as a result, we are now starting to see the signs of success. Our focus on being a purpose-led business has been instrumental in creating a strong culture of doing the right thing for our people, our clients and their customers. And we are delivering on our contracts, which in turn is leading to high retention rates and growing scopes of new work from existing clients. Perhaps even more importantly, we're now starting to win more work from new clients. But perhaps most importantly are winning more of the right sort of work aligned to strategy, our purpose, on the right commercial terms and based on increasingly standardized scalable platforms. There's still a way to go. There's lots more to improve, but we now have a platform to deliver competitive financial returns. And while we have delivered for the majority of our stakeholders, we have not delivered of course for our shareholders. And with the transformation phase behind us, this now has our utmost focus. Now none of this would have been possible without the remarkable commitment, tenacity, and resilience of our colleagues, particularly as we navigated through the pandemic. Their support has candidly been humbling and I would like to publicly thank all of our Capita colleagues for the fundamental role they have played in getting us to where we now are. So what do I mean by having established a platform? Well, first, our legacy challenges are behind us. And we are now focused on growing our 2 core divisions, one focused on public services, the other on customer experience. We're the market leaders in the U.K. in both divisions, through our delivery of BPO and increasingly BPS solutions. Both divisions serve large markets that are growing at around 5% per annum, although segments are growing at multiples of that. Within these 2 markets, we're focused on a finite number of verticals, industry segments or parts of government where Capita has deep levels of expertise and understanding built up over years, if not decades. We now serve these verticals with dedicated client partners, senior Capita executives who have a deep understanding of the challenges and opportunities in our clients' businesses. And importantly also, well-established relationships with their clients in these markets. With their understanding of clients' needs, they work with colleagues in their division -- they work with colleagues in their division and our technology, software services organization to craft solutions that help our clients solve their business challenges through a powerful combination of our own IP together with that from third parties such as Microsoft or Amazon Web Services for cloud solutions, Salesforce for digital platforms or Raytheon for specialist training capabilities for the Royal Navy training contract. On the back of our re-established reputation for delivery, this structure provides a means to drive revenue growth, continuously improve efficiency and as the core business starts to generate more cash, inflect to positive free cash flow. All based on what is now a stable and de-risked capital structure. And on that note, I will pass you to Tim to talk you through the numbers. Tim?

Thanks, Jon. Good morning, everyone. As Jon said, we've made good progress on our priorities, and in particular, the strengthening of the balance sheet with delivery of our GBP 700 million disposal target ahead of schedule. So turning to Slide 7, for our financial highlights. As in previous presentations, we share our results on an adjusted basis, which excludes the impact of businesses exited and the trading of those business is shown as held for sale at the year-end. Of course, and over a like-for-like comparison, the 2020 numbers have been represented to exclude the 2021 business exits. Now despite the ongoing impact of COVID-19, adjusted revenue has shown marginal organic growth in the -- for the first time in 6 years. We've seen significant improvement in adjusted PBT and EBITDA, which reflects the benefit of stable revenue and cost savings. Cash generated from operations, reduced by 37% compared with the prior year, reflecting the unwinding in 2021 of accelerated public sector payment cycles and advance receipts, which we benefited from in 2020. Free cash flows decreased by 54% as a result of the reduction in cash generated by operations and higher tax payments, partly offset by lower capital expenditure and interest. We made good progress and strengthened our balance sheet by delivering a step reduction in our net debt, which principally reflects proceeds received from the disposal of ESS and AXELOS offset by pension, deficit contributions and reversal of deferred VAT payments. In summary, we delivered a solid performance in 2021 having turned the corner on revenues and delivered step changes up in profitability and down in net debt. Now turning to revenue on Slide 8. The puts and takes that led to the revenue growth in the year are shown in the chart. Contract losses halved year-on-year, reflecting sustained focus on retention and service delivery. The net reduction from scope and volume changes is primarily due to 2020 pandemic-related work and other projects in Capita Experience, which did not repeat in 2021. We've seen marginal improvements in our transactional revenue, which is primarily driven by experience and portfolio. Contractual one-offs include the impact of the early termination of our contracts with the Co-op Bank and Carphone Warehouse within Experience and an agreed reduction in scope on the electronic monitoring contract with the Ministry of Justice and Public Service. Wins in the year included the commencement of the Royal Navy training contract, the job entry targeted support contract and the annualized impact of the defense fire and rescue contract within public service. And there were some smaller wins in experience such as our contract with Irish Water. Moving on to the profit before tax bridges shown on Slide 9. Firstly, to ensure a like-to-like starting point, we've adjusted for the 2020 one-offs totaling GBP 24 million, which included an onerous contract provision, contract asset impairments and deferred income releases arising from the contract terminations in that year. The margin effect of revenue losses, scope and volume, transaction changes and contract wins was a net reduction of GBP 26 million. This however was a significant improvement over the prior year, which saw a net GBP 160 million reduction. We've also shown the GBP 12 million impact of contractual one-offs in 2021. This includes the release of deferred income and write-off of contract assets arising from contract terminations and settlements, including the mortgage services contract with the Co-op Bank and the electronic monitoring scope change I mentioned earlier. The transformation program continued to deliver substantial savings with GBP 123 million year-on-year benefit through continued focus on operational excellence, property footprint reduction and supply chain efficiency. We also started seeing the benefit of the move to the new divisional structure and the leaner corporate overhead, although the main benefit of these changes will fall into 2022. The transformational savings were partly offset by increases in other costs of GBP 11 million, reflecting higher general inflation as well as prior year one-off cost reduction initiatives not repeating. The final 2 blocks show the year-on-year impact of the reinstatement of the bonus scheme in 2021 with GBP 31 million expensed in the year compared with the GBP 17 million release of the 29 accrual in 2020. And this has been partly offset by the reduction in the holiday pay accrual as our colleagues have used their rolled-over holiday entitlement during the year. Overall the focus on driving efficiency in Capita's cost base over the last few years, coupled with the stability we are now seeing in the Group's revenues has underpinned the substantial growth in profit delivered in the year. Slide 10 summarizes the divisional financial performance. In Public, the strong revenue growth is underpinned by the major contract wins I've mentioned earlier. Public's profit increase reflects a step up from 2020, which included first year losses on the DFRP contract and contract-related provisions and impairments. More broadly there was significant overall improvement in operational and financial performance across Public's contract portfolio during the year. In Experience, the division's declining revenue and profit is driven by contract expiries and losses, including Tesco Bank and the Phoenix closed book life and pensions contract. The reduction in operating profit is amplified by prior year COVID-19 savings, which have not been repeated in 2021, partly offset by one-off benefits in the year. The division continues to achieve high contract renewal rates and we are particularly pleased to see the extension of our contract with the BBC, which was announced towards the end of February. In Portfolio, revenue has grown in several businesses, including areas such as resourcing, technology and enforcement. However, overall divisional revenue is broadly in line year-on-year, primarily reflecting the ongoing impact of COVID-19 on businesses such as Agiito, our travel and events operation. Portfolio's profit increased in 2021, driven by an improvement in margin mix and continued benefits from actions taken to right-size the division as the disposal program has progressed. Turning now to Slide 11, which reconciles our adjusted PBT measure with reported PBT. Business exits reflect the ESS and AXELOS disposals and classification of businesses held for sale. It's worth noting here that Trustmarque's results are included in adjusted results as it did not meet the held-for-sale threshold at 31st, December 2021. We saw a step up in restructuring costs during the second half as we implemented our new divisional structure. In addition, an impairment of GBP 54 million has been reflected in the year and accounts following the decision to cease the implementation of a replacement ERP system. As we said previously, 2021 will be the last year of below-the-line restructuring investment. As indicated in our pre-close trading update, we've recognized provisions and impairments of GBP 43 million for contracts in our closed book life and pensions business. We've highlighted previously the structural challenges associated with the contracts in this business. And reflected those challenges in the position we've taken for provisioning purposes at year-end. As you'll appreciate, the closed book life and pensions activities are one of the more significant drivers behind the ongoing suppressed operating cash conversion of the Group, given that the annual net cash cost of service delivery in 2021 amounted to just shy of GBP 20 million. Overall, we're now accounting provisions totaling GBP 55 million in respect to the closed book life and pensions contract portfolio. And we continue to look at opportunities to reduce the ongoing cash flow impact on the Group. For the year as a whole, we've seen a GBP 335 million swing from last year's losses to this year's GBP 286 million profit driven by the disposal program and the step change in underlying trading profits. Moving to Slide 12, which summarizes the Group's cash flow and net debt movements. Operating cash flow conversion fell to 63% in 2021, reflecting the shorter public sector payment cycles and advance receipts in 2020, which I mentioned earlier and which have unwound in 2021. Capital expenditure reduced reflecting transformation projects completed in 2020 such as our customer relationship management tool. There have been a number of other significant cash flow movements in the period, including the repayment of the majority of the VAT deferred in 2020. We made substantial payments to the Group's pension scheme totaling GBP 156 million in the year. We received GBP 483 million of net proceeds on disposals, including GBP 336 million on the sale of ESS and GBP 137 million on the sale of AXELOS. Overall net debt has fallen by around GBP 200 million to GBP 880 million at the end of the year. Turning to Slide 13, we show the impact of the cash flow headwinds that were identified at the half year. As you can see, the outturn for all 3 of the main headwinds were in line with the expectations provided previously. As mentioned on the last slide, we've paid off the majority of the VAT deferral, made significant pension deficit reduction payments and incurred restructuring costs related to the transformation plan, including the move to the new divisional organization structure. Overall the reduction in cash flow headwinds expected as we move into 2022 is one of the key factors, which underpins our expected transition to sustainable free cash flow. Now turning to Slide 14, where we set out the Group's liquidity position and summarize some of the key steps taken to strengthen the Group's balance sheet. Our existing RCF expires on 31st of August 2022. We've entered into a new RCF for GBP 300 million covering the period from 31st of August 2022 to 31st of August 2023. Disposal proceeds of GBP 483 million received in 2021 with respect to ESS and AXELOS and a further GBP 95 million received to date in 2022 from the disposal of AMT-Sybex and SSS. Further proceeds are expected over the next few weeks with GBP 115 million from the disposal of Trustmarque and additional proceeds with respect to the Speciality Insurance businesses. We, therefore, exceeded the GBP 700 million target of disposals that we set out in March last year ahead of schedule. We've also commenced the disposal process in respect to a number of other businesses in our Portfolio division. Before the benefit of the post year in disposals, we had liquidity of almost GBP 400 million, and as I just noticed -- noted we're no longer confronted with substantial restructuring, VAT, and pension-related cash drags. We, therefore, have ample headroom to address the debt maturities arising over the next 3 years. Now turning to Slide 15 and the outlook for 2022 and beyond. Our expectation for revenue growth in 2022 is built on strong contract performance in 2021 and a growing pipeline of new business, supported by a recovery in transactional business from COVID-19. In 2022, notwithstanding the margin benefit from revenue growth and the flow-through of cost benefits from the divisional restructure, we expect profit margins to decrease slightly. This reflects the full year impact of prior year contract losses and the structural decline in the closed book life and pensions business in Experience, operational changes in the army recruitment contract in Public Service as well as the cost of recruiting and training staff to support our growth. Overall given the phasing of contract revenues and the effective date of contractual indexation clauses in our core divisions and the timing of recovery of the COVID impacted businesses in portfolio, we anticipate that revenues and profits for the group as a whole will be significantly weighted towards the second half of the year. Please note also that our reported results will be materially impacted as we continue to execute the disposal program. At a group level, the rapid reduction in cash flow headwinds is expected to underpin our transition to being free cash flow positive in 2022. We anticipate a further substantial reduction in net debt as we push to complete the majority of the remaining portfolio disposals in the year. Looking into the medium-term, we will target revenue growth at least in line with the mid-single-digit range of our core markets. We are targeting for divisional EBITDA margins to increase to high single digits to low double digits, which translates to high single-digit EBITDA margins at a group level. We're targeting to increase cash conversion to between 70% and 80%. And as a result grow free cash flow. We'll also maintain a prudent approach to our capital structure and target a leverage ratio of net debt to EBITDA of around 1x on a pre-IFRS 16 basis. In summary, Capita's transformation has established the platform of strategic focus needed to drive the Group's revenue growth and improving financial performance into 2022 and beyond. And so, with that, I hand back to Jon.

Thank you, Tim. Next slide. Thank you. So when we set out to transform Capita, we unapologetically put our purpose, creating better outcomes at the very heart of everything we did. It was then and it's perhaps even more so now the right thing to do. And it's much more than just the mark of a progressive stakeholder focused business, it is our license to operate, which is why ESG metrics now constitute key non-financial metrics in our management bonus plan. We would not be doing business with government today unless we had a plan to get to net zero, in our case by 2035, and accredited by the science-based targets initiative. All elements of our purpose contribute to our social value score in government tenders where we continue to aspire to be the government's most progressive, purpose-led strategic supplier with the highest social value credentials. And as a direct result of our high social value scores, we have won work such as the Job Entry Targeted Support scheme in Scotland and the U.K.-wide Turing scheme over GBP 30 million of revenue where other bid selection criteria such as price did not differentiate us. We remain committed to being a real living wage supplier and became fully accredited for being so in 2021. We continue to encourage all our clients to recognize this important commitment. And I'm proud to where we have got to on gender and ethnic diversity, particularly with our Board and executive team. We are now redoubling efforts to improve our diversity and inclusion across middle management where we still have more work to do. We continue to achieve high NPS scores with our clients, albeit marginally down year-on-year and we're committed to paying our suppliers promptly. And saw a further 3% improvement in our performance against the Prompt Payment Code in 2021. However, following 2 years of significant improvement, we were disappointed with the significant reduction in our employee Net Promoter Score last year. While we were pleased to see our employees rate their managers, on average, 87% across our 10 manager commitments, which form a key part of our purpose values and behaviors, we did not anticipate the degree to which a second year of pandemic and the final year of our significant internal transformation program would impact overall employee engagement. As you would imagine, we're now undertaking a comprehensive program of measures to ensure we address the issues raised, including the incorporation of employee engagement as a score in our management bonus plan as a metric in the management bonus plan. We have now de-risked the business and established a strong platform for growth as I mentioned earlier. 2 years ago, I said it was costing more and taking longer than we expected. Candidly we underestimated in Q1 2018 the quantum of change and remediation required. And there have been significant additional challenges along the way of course, not least of which was COVID. When we started, we had over GBP 1.5 billion of debt and a significant pension deficit. Capita was failing its clients and failing its shareholders by bidding for contracts that it could never deliver at the price being committed to. The company was not investing in the management systems, the integration and the governance necessary to manage what was an increasingly complex portfolio of acquired businesses. We've now fixed this. We have repaid over GBP 1 billion of debt and contributed over GBP 300 million to the pension fund, which is now in surplus as I mentioned. And we have spent around GBP 0.5 billion fixing contracts, investing in people and appropriate management systems, as well as upgrading the resilience and competitiveness of our IT systems. And as a management team, we are now delighted to be at a point where we are no longer having to focus on preventing value destruction but can pivot to value creation. Operational delivery for our clients is now a core strength of Capita. As a fundamental part of the transformation, we focused on fixing failing contracts and re-establishing our clients trust as a prerequisite to renewing existing contracts and winning new scopes of work. Our service delivery as measured by our performance against client-defined contract Service Level Agreements is now consistently high and has earned us a much-improved reputation, one of the reasons why our client Net Promoter Score remains so high, at plus 29 points. It has also stemmed the drain of cash from those contracts where we were not delivering on our promises and where we were having to take very costly, remedial action. And we are renewing contracts often with improved commercial terms and winning significant scopes of new business from our client base. Our revenue momentum is improving and the sheer number of positive statistics on this page gives us confidence for the future. 2021 was an inflection year in which we demonstrated we can win large scopes of work with competitive, attractive solutions that meet our customers' needs. We won GBP 3.8 billion of work last year, an increase of 31% as I mentioned. Interestingly over 60% of this was from our key accounts, from whom we achieved a very high renewal rate and won material new scopes of work. And we have renewed a number of those contracts over the last 12 months with improved margins and reduced execution risk. 56% of the total contract value we won last year represented growth from new or existing clients. As a result our order book has grown for the first time since 2017 by GBP 260 million. And our book-to-bill as I mentioned is now 1.2x, again demonstrating a healthier platform for growth. We continued to maintain a very high level of discipline around our approach to bidding, ensuring opportunities are deliverable at the price bid and represent an appropriate balance between margin and execution risk. And again, the average net margin on major contracts since we started the transformation remains in low double digits. As a result, Capita has a higher quality portfolio of long-term contracts and is today therefore a better quality business. So what does this mean for revenue growth in 2022? On the back of our order book growth last year, our stable framework contracts i.e. work that does not for accounting definition purposes get added to our order book, but that we know we will realize, we have already secured around 65% of our expected revenue for the year. Our attrition rate has now also reduced to a lower normalized rate of around 3% with the Public Service exits behind us and Experience losses mostly annualized. If you exclude the Royal Navy contract, which was effectively won in 2020, we have grown our unweighted pipeline 7% year-on-year to GBP 9.4 billion. We are getting better at opportunity origination. We have a number of large high-quality pipeline opportunities, some with existing clients, for example, the DWP and NHS England in Capita Public Services and some with new clients, for example, the utilities and financial services sector in Capita Experience. And through our sales incentivization plans, we're now targeting more new client work, which along with new scopes with existing clients represent 68% of our '22 pipeline. Winning new scopes and not just renewals is of course fundamental to sustaining revenue growth. And we are also originating opportunities with new clients in what are new key growth markets for us. Last year the Experience division won a strategically important contract to support a European fintech business and Experience are in the final stages of awards with 2 new clients in the tech and utility sectors, displacing competitors, I hasten to add, in both instances. With a material contribution from the recent GBP 456 million BBC contract renewal, we have now secured just shy of GBP 700 million in contract awards year-to-date. Now throughout the transformation, we have delivered substantial cost savings and have a very strong track record of doing same, which in 2021, as Tim mentioned, helped to drive the significant increase in profit. Cumulative savings to date have been over GBP 425 million and focused on delivering services more efficiently, more effectively, reducing the cost of poor quality, reducing spans and layers in management as well as reducing structural overhead costs such as the 25% reduction in property footprint over the last 2 years. One particularly interesting stat is that our property cost per FTE full-time equivalent is now down 39% year-on-year as we've moved our expense implications in the Southeast. However, we continue to focus on both variable and fixed costs. Our new structure provides further opportunities for margin expansion. The consolidation of our delivery capabilities in each division into a single organization lends itself to greater standardization, delivering both cost and efficiency benefits that will make us more competitive. This will be further enhanced of course by the increased adoption of digital solutions. The flexibility provided by our hybrid home working environment is also expected to yield further gains. And with our new operating model now in place, we can significantly reduce the costs associated with the previous complexity of the group in particular taking out legal entities and eliminating a cottage industry of inter-company transactions and charges. And ultimately having a leaner group structure. This will take a year or 2 to be fully embedded, but it is a key driver of further improvement in margins and cash generation in the medium-term. Now in our December trading update, we talked about the prospective inflationary pressures we expected from the macro environment and the challenging labor market. I will come on to our investment in people shortly, but first I think it is important to stress that we are well-protected against general cost inflation, as you would expect from a long-term contracting business. Around 2/3 of our contracts have indexation clauses as a cost-plus escalator built in. Another 22% are fixed price with indexation assumptions built into the contract terms and we have just over 12% of our revenue that is transactional, where we are naturally hedged. In the limited number of cases where specific contracts lack an ability to recover wage increases, for example, or they're not reflective of the current rates of inflation, we are engaging directly with those clients to discuss the implications for service quality. As a result, we currently expect the impact of inflation on Capita to be minimal this year. As a business, we're only ever as good as the people who deliver our services, and an engaged and motivated workforce delivers higher quality services. This has been core to the transformation the last 4 plus years. And I mentioned in my introduction that we were disappointed with our overall employee engagement score in 2022 and have executed on a comprehensive program to ensure we address the issues raised. At the heart of this, must be a compelling employee value proposition, one that provides training and development, career progression, flexible working wherever possible, as well as competitive rewards of course. And while there are challenges around certain competencies, we are still, however, a very attractive place to work. We hired 20,000 people last year globally. That said, our single biggest risk currently given the nature of the labor market is our ability to attract and retain the talent required to execute on our strategy. And of course, there is a cost to this, primarily around hiring and training, which is one of the reasons why we are not seeing the improvement in margins in '22 we would wish for. I'll now spend a few minutes on each of the core divisions, highlighting their potential and our strategy to generate significant more value from them. Capita Public Services is the #1 strategic supplier of business process services and technology solutions to the U.K. government. With around 10% share of a market that's worth around GBP 12.5 billion and is growing at around 5% per annum. It's a market that is shifting away from people-centric, lower-tech BPO solutions towards faster-growing digitally and data-enabled services. We're well-positioned to capitalize on this through a combination of our deep understanding of complex government processes and the technology capabilities we can bring to bear from our technology and software services organization and partners. As a result, we won GBP 2.4 billion of new work last year, delivering an order book at the end of year of GBP 3.3 billion. We were also successful last year in winning places on significantly more frameworks. We're now on 40 in total, giving us access to GBP 25 billion of spend over the next 5 years. The division's 2022 weighted pipeline is worth GBP 1.3 billion and we expect healthy growth in 2022 with some particularly interesting opportunities in the health and welfare vertical. Now as I outlined earlier, our divisions are now focused on those vertical markets where we are growing and where we can leverage our specialist market knowledge and insights. Public Service is structured around 5 such vertical markets, justice, central government and transport, defense fire and security, local public services, health and welfare, and education and learning. This slide summarizes some of our offerings across each vertical as well as the revenues we derive from each. Having now resolved legacy contract challenge -- challenges and on the back of consistently strong service delivery, we have earned the respect of our clients and continue to win new scopes of work. An example of where we have done this, of course, is the Transport for London -- is with Transport for London. During 2021, we expanded TfL's Ultra-Low Emission Zone significantly and delivered one of the U.K. public sector's largest and most complex cloud migrations ever, on budget, on time and to spec. We're now providing the ongoing monitoring, alerting, security, service and system support for TfL under steady-state operations. As previously outlined, Capita Experience is behind Public Service in its turnaround, but nevertheless now has the platform in place from which to return to growth, improve margins and cash conversion. As the #1 U.K. player and in the top 3 in EMEA, the business has a strong blue-chip client pace -- client base in particular in the financial services and TMT verticals, as well as utilities, travel and retail. The global customer experience market is worth around GBP 244 billion globally and growing at around 5% per annum, although sub-sectors again are growing significantly faster than that. There is also a market in which only around 1/3 of activities are outsourced. So there is plenty of additional opportunities as companies increasingly recognize how specialized the customer experience space is becoming. Our propositions are competitive and attractive. We would not be winning work if they were not. Perhaps more interestingly both Everest and ISG independent sector analysts position Capita in the highest segment of customer experience digital operations, what they term the leaders category, placing us of course in very good company. Overall Capita Experience won GBP 842 million of work last year. And our 97% renewal rate speaks to the high levels of trust and belief our clients place in us. We renewed contracts with 2 of our largest telecoms clients and won increasing scopes of work in financial services. And Experience has got off to a new start -- a good start this year of course with the renewal of BBC TVL. And as I mentioned earlier on new client contracts well advanced in the utilities and tech sectors. Capita Experience's Consult, Transform, and Deliver client engagement model is strategically important and fundamental to the division's growth in revenue and margin. The insight we derive from the consulting phase of client engagement enables us to deliver superior, more value-added outcomes. For example, the consulting engagement at FSCS led us to embed an artificial intelligence solution into their customer response processes, which drove a 68% reduction in call times, a material cost benefit to the client and a 13% improvement in overall response accuracy. Of course, we are now able to leverage this platform with other clients. The strength of our capabilities in the transform and deliver phases have a similar track record of outcome-based value creation as evidenced on this slide. Having now consolidated all delivery capabilities under single leadership, there is a significant price associated with the standardization of an increasingly multi-lingual and digital capability, delivering improved customer experiences with a lower cost base. It may take another 12 months or so to properly embed the changes we're making in Capita Experience, but we are confident that there is significant upside to the current financial performance. Capita Portfolio comprises the non-core businesses that we plan to dispose of, with the majority to be completed by the end of this year. We started the program last year and exceeded as I mentioned, our target of GBP 700 million ahead of schedule. We received GBP 535 million of proceeds last year and we received another GBP 80 million or so this year, with another GBP 130 million expected imminently particularly given [ basis ] decision yesterday on Trustmarque. And the multiples achieved were an average 6x EBITDA, which we believe was a good price collectively for these assets. With Trustmarque now agreed, we have remaining around GBP 340 million of revenue and GBP 27 million of profit to sell with some recovery also expected in our COVID impacted businesses through the year. So bringing this all together, the transformation is now done. Capita is a simpler business to manage and to understand. It is also a better quality business and a re-established -- with a re-established reputation for delivery. We have addressed the financial, operational and organizational debt that was endemic in Capita 4 years ago, and we now have a competitive platform with which to take the business forward. We have strong market positions in large and attractive markets, with opportunities to access faster-growing parts of those markets. Our expertise in the focused verticals in which we operate is helping us deliver the client-centric solutions that will drive revenue growth at least in line with the growth rates in the markets we serve. Medium-term, our operating model offers the increased efficiency and leverage with which to target growing EBITDA margins. And as we finalize the disposal of the Portfolio division, our debt will decrease further and materially so enabling us to time a refinancing when terms are optimum. Growing profits and cash conversion as well as the elimination of our remaining few cash commitments, as Tim mentioned, will deliver increasing reported free cash flow. There is still plenty to do, particularly as the financial improvements lag the operational achievements. And as I stated earlier, we are now keenly focused on delivering for the stakeholder group that is yet to benefit from the transformation, our shareholders. And on that note, Tim and I will be delighted to take questions from the audience and then from those listening online. Thank you for your attention.

It's Rob Plant from Panmure. There was a newspaper story in January saying there have been quite a few senior departures recently, the Head of Corporate Affairs, Corporate Development, Chief Transformation Officer. Was that correct?

Yes. And some of that is a direct result of where we are in the transformation process. When you've completed the transformation, you don't need a Chief Transformation Officer.

It's Suhasini from Goldman Sachs. Just a couple from me, please. If we think about the growth outlook for '22, can you please discuss the inflation assumptions that you've baked into your guidance specifically for the Public Service sector where you are expecting growth to normalize to the mid-single-digit levels and that's in line with the market growth. Given that majority of your contracts actually have some protection from inflation and given that inflation is in the U.K., we would have thought the number should be higher? And then, second one is on the EBITDA margin guidance, in Experience, for the medium-term. It's high single digits to low double digits. Is that more of a base case scenario because the peers in the market are obviously at much higher margins.

One for you, I think.

Okay. Yes, just in terms of inflation, you're right, if we're looking at most of the contract portfolio for our indexation clauses that will be based around CPI, RPI, clearly CPI and RPI are running higher than mid-single-digits depending on how you round to mid-single-digits at the moment. To be clear, when we're talking about mid-single-digit, we're very much guiding over the medium-term. That's what we expect in the long run across our divisions in the round, the 2 main core divisions. In the short term, we reasonably assume that you could see for those contracts that we do have indexation, a higher level of revenue increase arising from those indexation clauses. Of course, they cut in at different times of the year. There's quite a peak in terms of the timing in April and May, reflecting public sector year-ends. But there is some spread out. I think if you'd asked me that question 6 months ago, I would have said that mid-single-digit seems perfectly reasonable. Sitting where we're sitting at the moment, you might argue it's looking a little bit prudent. Wouldn't disagree. EBITDA margin guidance, we're talking about the divisions as in Public and Experience, you can see from the reported results that actually Experience's EBITDA margin is slightly higher than Public's already. And will be reasonable to assume that actually in terms of that high single-digit, low double-digit guidance that actually Experience will probably be outperforming Public on a kind of enduring basis, particularly as it moves to enter into contracts with a greater technology content. Still means that at a Group level, post the Group overhead costs, that we expect to deliver high single-digit EBITDA margins for the Group as a whole.

I think the only thing I'd add is that our assumptions on growth that we talk to today do not have the indexation built into them.

It's David Brockton from Numis. Can I ask 2 and they are slightly related to the 2 questions that have already happened? So apologies for that. Given that you recruited 20,000 people in the year that would imply a relatively high attrition rate. Can you just talk about that attrition rate and how it breaks down between sort of longevity within the business, so to speak, just to give some reassurance there and the measures you're taking to improve? I guess the employee Net Promoter Score, sorry that's quite a few in the first question. And then the second question just relates to that EBITDA margin guidance. You've just delivered 9.8%. So should one view that as the best that Capita can do or is that a medium-term aspiration that you hope to improve on?

I'll let Tim do the second one, I'll do the first one. I think as everyone in the company hopefully appreciates, I found the employee Net Promoter Score results last year deeply personally worrying and disappointing. I think we underestimated the impact of working from home and the fourth year of significant change in the company and the impact that that was having on people. So we have taken a number of very significant measures to address that. They're all wrapped up in what we call our employee value proposition. But it's completely different levels of engagement. I sit down with a group of 5 to 6 people, 3x a week, coffee with Jon, just to get the pulse of the organization. That is one example of many different forms of engagement we now have with the organization. We're offering pay awards. We are spending more money on training and development, materially more so than the company has done historically, I hasten to add. So we've put together a set of actions to directly address the employee Net Promoter Score. In terms of attrition, you have to remember that high attrition is a common feature of customer management business. We have a lot of people who are working, students who may be working with us over the summer or people who are between jobs. So typically that runs at a 30%, 35%, 40% even when there isn't the tightness of the labor market we have today. And therefore as you might expect that 20,000 people hiring, by far the bulk of that was in the customer experience business. We're not seeing the same levels of attrition in other parts of the business. That does not say, I'm not worried about attrition, or I'm not worried about the attraction and retention of talent. I think I made that point quite clearly in the prepared remarks. We have the tightest labor market in this country since records began. And that is going to be a challenge going forward. Good news is of course we can pass on the inflation pressures to the majority of our clients as it relates to salary. But there will be a cost impact as it relates to recruitment and training.

On the is 9.8% the best we ever can deliver? You'll appreciate the guidance we gave here over the medium-term has to kind of cater for what the group is going to become as opposed to what it currently is. EBITDA in the portfolio of businesses in 2022 -- 2021 was 13.5%. That compares with 10.5% in Public Service and 11.9% in Experience. So that medium-term guidance, you've got to reflect that there'll be a dilution once we've exited the high margin portfolio businesses. And therefore the kind of -- there's a sore tooth here of getting back up towards high single-digit EBITDA over time in the 2 core divisions plus the group center.

Can I just follow up? Just when you say you're winning work in 10% of net margin, is that in operating margin or gross profit [indiscernible] or EBITDA margin?

It's in operating margin.

It's Paul Sullivan from Barclays. Just coming -- just talking about COVID recovery, I mean, your profits were really hard hit by COVID from memory. And it doesn't feel like a lot of that's come back. So what is recoverable in your view? And then just talking about CX, do you think or do you -- how much confidence do you have the margin will bottom this year and can you remind us of the revenue within CX that is not backed by cash. And how we think about that going forward?

So I'll Tim deal with the second again. I'll deal with the first. Paul, as you know, the 2 key businesses that got pretty hammered by COVID were our enforcement business in portfolio and Agiito our travel and events business. And because of the fact that we were jumping in and out of lockdown last year, they never really recovered. We saw better recovery enforcement than we did in travel and events, but certainly not back to 2019 levels. This year we're seeing more encouraging recovery, particularly in travel and events. Travel and events had a much stronger February than we were anticipating. And so long as we don't have any resurgence in the pandemic, then we do anticipate that those businesses will continue to improve through the course of the year. Now whether they get back to '19 levels of performance in travel and events, in particular, is really dependent upon how society, how companies wish to travel, how businesses wish to operate. So there's a question mark over that. But we will certainly see stronger performance from that business with another pandemic, another phase of the pandemic than we saw last year or the year before.

And on Experience in 2022, as we've called out in the announcement, as I mentioned in the script to the slides, there's a couple of contractual effects that are actually driving down margin between '21 and '22 in Experience in particular from the closed book life and pensions business and some of the contract losses where the impact in the income statement follows in subsequent years. Those aren't cash effects. So they're effectively P&L debits without a big hit in cash flow. Out of the total group working capital drag in 2021 of GBP 125 million odd, GBP 85 million was in Experience. So that's where there is a big differential between the EBITDA and the operating cash generated. Over time as some of those income statement impacts flow-through and in particular as we complete contracts that had big transformation programs a number of years ago where we're recognizing profits where cash flows were received in previous years, we would expect the cash drag in working capital in Experience to reduce. So I said it was GBP 85 million in 2021, we'd expect that to significantly reduce over time. Or put another way, Experience's cash-backed profits will increase over time. And that is one of the key factors behind the expectation we've got of improving positive free cash flow over the next 3 years.

Chris Bamberry, Peel Hunt. On the cash flow front, and you're talking about a target 70% to 80% in the future, what are the assumptions behind that with regard to things like the cash backing in Experience, maybe CapEx against depreciation? And are we assuming deferred income is kind of flattened out by that point to say, some of those moving parts will be helpful.

Yes, tucked away, it is the very last slide in the entire pack, Slide 37. We've tried to -- well, they're called modeling assumptions. A bit directive, but we tried to kind of spell out some of the things that you might also want to build into your model over the next 2 to 3 years. Moving up towards 70% to 80% from the, what is it, 63% we delivered in terms of cash conversion in 2021, once again that 70% to 80% will be future Capita after having sold the more cash generative portfolio businesses. There is a degree to which it will go down before going back up again. But implicitly, it is assuming a reduction in the working capital drag or an increase in cash-backed profits. At the moment and we kind of quantified it in the past, effectively about GBP 100 million a year of structural negative working capital from those old transformational contracts. Over time that will reduce and more than halve over the next 2 to 3 years. There is still a job to be done though by management in respect of the closed book life and pensions business, which as I said in 2021 had a negative cash flow impact of GBP 20 million. And we need to resolve that issue to get beyond that 70% to 80%.

We've got some online questions. So going forwards, when the portfolio has been disposed of, what's Capita's capital allocation policy? Is there any financial impact from the Ukraine? And finally, is Capita growing or shrinking its offshore delivery?

You want to talk capital allocation. I'll take Ukraine. Let me deal with the Ukraine question first. Obviously immediately after events of a couple of weeks ago, we did a thorough review of our presence in Russia, Ukraine and Belarus. We have de minimis exposure. We have a few individuals who -- for whom we pay pensions that have now been resolved. I think more importantly, we made a material donation to the Red Cross, appeal for Ukraine, and also supporting our management in Poland, which is where the bulk of the refugees are coming in, of course, with humanitarian support, including, I hasten to add, where Ukrainians are coming in with competencies that we require given everything I said about the tightness of the job market a few moments ago. Offering these people free accommodation for a period of time and offering them jobs within Capita.

And on capital allocation or capital investment, the guidance we've given tucked away at the back of the pack is for CapEx in 2022 to be between GBP 65 million and GBP 75 million. So a couple of percent of revenue. Quite naturally as we exit the portfolio of businesses, we are assuming, we will continue to invest at that level in absolute terms. And therefore de facto, we will be putting more money into the remaining core businesses than has been the case over the past couple of years. That is a step up from the CapEx that we saw in 2021. And we believe will enable us to perform in line with the expectations we've got. There was a sort of third question around the international footprint, and the potential for that to expand or otherwise. Really what we're looking at in terms of international is much more on the delivery side of things, making sure that we are optimizing where we have delivery resources using an international footprint and an international thought process to make sure that we are as cost effective as we can be.

Yes, I'll just build on that last point. We're expanding in some geographies. We've had a very successful franchise and capability out of our Cape Town operations in South Africa. We've just opened an office in Durban, because we are seeing as a function, actually it was the tail end of COVID, but also the tightness of the labor market we are seeing greater propensity on the part of our U.K. clients to shift work to those geographies. We have had a substantial position in India for many years. We will continue to maintain that. And I suspect for the same reasons that could well grow over time as well. And India is both in our technology and software services as well as our customer experience capability. And then lastly because of tightness of the European market, we are looking at other European countries where we can establish bilingual -- multilingual sorry, not bilingual, multilingual capability. And we have been looking very closely at Bulgaria as one geography where we will do that. So I think you can expect our international footprint to become, actually a growing part of our delivery capability over the next several years. I'm being gesticulated out by our Head of IR to say, we're done. Thank you very much for attending. It's great to see you all in person. Look forward to catch-up conversation subsequently. Thank you.