Capita plc (CPI) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining this Yellowstone Advisory webinar. Today's company presenting is Capita, and we're delighted to have with us Adolfo Hernandez, the CEO; and Stephanie Little, Deputy Director of Investor Relations. Before we start the presentation, I'd like to go through a few points of admin. Hopefully, you should all be able to see a poll on the screen, and I could ask you please to respond to that. And the format today is we'll have a presentation from Adolfo and Stephanie, and then we'll go on to Q&A. [Operator Instructions] We've had a few questions coming ahead of time, and we'll endeavor to cover as many questions as we can during the time we have available. I'm going to keep that poll up for a while, but it looks like we have about -- 80% of attendees today are holders of Capita and 20% nonholders. I think that's all the admin points covered. I'd now like to hand over to Stephanie Little to start today's presentation.

Good afternoon, everyone. Alex, can you just confirm that you can see my screen?

Yes, Stephanie, we can see you, and we can see your screen, too.

Thank you very much for the introduction. As Alex has just said, I'm Stephanie Little. I'm joined by Adolfo Hernandez, CEO of Capita. We last met with our retail shareholder population back in March when Adolfo was 7 weeks into the job. Since then, we've done a Capital Markets Day. We have announced the sale of Capita One and we've also done our half year results. So there's been a lot going on in that time. In today's presentation, we're going to cover the H1 results, the outlook for 2024 and our strategic priorities as we move forward. The way that we're going to split the presentation is we're going to do a short summary of, as I've said, the H1 results and our strategic priorities, and then we're dedicating quite a lot of time to Q&A. As Alex said, we've had quite a few questions through. So we want to make sure that we can get through as many of those as possible. I think it's fair to say, there is a lot going on. We are excited as we move into the latter stages of this year and into 2025. As usual, I'm just going to refer you to our usual disclaimer. And then I'm going to hand over to Adolfo, who will talk you through our strategic themes.

Thank you, Steph, and thank you, everyone, for finding the time today to go and listen to what we have to say. I know by the poll, many of you have been patient shareholders. So hopefully, this additional communication will help you understanding what is it that we're dealing with; what we're doing; most importantly, why are we doing it and how are we going to get it done to get the right results. From the Capital Markets Day and probably many of you might have listened to it back in June. But there was one slide that I found it would be powerful because it sort of said a lot of the message was this one, the better themes because this is what we're trying to do. We're trying to build a better Capita. Capita, as I have found in my 7.5 months in charge, as I've gone around meeting customers and meeting employees and seeing down on the ground, what is that we do day in and day out? We do a lot of good work. We really matter to society. We really support citizens, governments, telecom companies. We really enable a lot of the work that utilities, energy companies have been doing in difficult times, what we do in financial services supporting vulnerable customers. What we do really, really matters. However, we have fallen short when translating that great work into financial returns. And I keep saying to my team is my responsibility, is my obligation and it is my mandate to help Capita find that path where we can believe that, that financial return by building a better company. And so easier said than done, how we're going to do that through these 4 vectors. Number one, finding better efficiencies and more efficiencies. We can't possibly spend the amount of money we spend to generate the revenue that we generate. We have to find ways to automate, to just delay, to be much better at executing through automation, through the use of technology, through streamlining organizations, everything that we did. Technology into everything that we do. How we do it internally, how we run Capita, how we take advantage of technology to make us a leaner organization, a more agile organization, a more efficient organization, but also includes more technology in our value propositions because our customers are right now looking at outcomes that they need help for delivering, and most of those outcomes can be advanced by technology significantly. We also have to get better at delivery. We consistently deliver around 95%. And while that is very good, I think we have to do better. We have to do much better and get closer to 100%. You can't hardly get to 100% in a complex project business, but we have to up our game, and we have to raise our standards farther to make sure that we don't sign the wrong projects. And then when we sign the right projects, we actually deliver them on time, on budget and on quality. And then as a result of that, we will deliver a better company. It will be a better company for our colleagues to continue developing their careers. It will be a more attractive company for people to join. It will be a better company for our customers to do business with because they'll feel more reassured not only about the present, but also about the future. And also importantly, a better company for current and potential future shareholders in the future want to get a return on their investment. So that's the mandate. That's what we're trying to do. And what we try to do here is a shorter version of the last couple of updates to tell you where we're making progress and the type of progress we're making. But before we do that, where are we? What are we going to trying to get? But I think in an initial phase, I think about -- first of all, it's about efficiencies. We need to get efficiencies into the company. We have to reduce cost. We have to find space. And we have to create the space so that we can do all these great things in a better way. So that means getting smaller initially. And as a result, we will leverage those better efficiencies to improve our EBIT margin to 6% to 8%, and we've made good progress, but there's a lot more work to do. We have to improve our free cash flow. We have to become a positive free cash flow. But in the first step, we need to get better at converting profit into cash. So we believe over the medium term, we should be able to get it to 65% to 75%. And then once we've done all of those very foundational things which is just making sure that we are profitable and we get profit growth and that we are better at managing generating cash flows, then it will be about growth. And we should be able to get to low mid-single-digit growth sustainable in that final phase of the project. So where are we? So at the end of June, we delivered a 45% improvement in operating margin. I say it's a huge step in the right direction, but there is still a lot of work to do. You might remember when we talked -- we had announced back in July 2023 that we were going to do GBP 40 million. Then the company announced that we were going to do GBP 60 million. Then I joined a couple of months after that and said, no, we are going to do GBP 160 million. We reported that we already delivered GBP 100 million of those annualized GBP 160 million and that was as of June 30. We needed to reestablish the relationship with the hyperscalers. We needed to move from being good customers buying their technology to actually being partners and be able to launch solutions with them and co-create solutions for the market. We've been able to launch solutions in this space, particularly in the Generative AI space around the AgentSuite, but also CapitaContact. CapitaContact released in June, AgentSuite released in July. We kicked up a really aggressive culture transformation program. You can't get everything done that we want to do without changing and evolving the culture in Capita. There's some fantastic things in the culture. But there are also a number of things in the culture that we're getting in the way that are holding us down and we are working aggressively to transform. We also agreed to sell Capita One. Since then, we've completed that sale earlier in the month and we got net receipts of GBP 180 million. And I'll talk more about that manage for value bucket a little bit later. And we see that with the information we have at the moment and trading, we are on track to deliver the full year operating margin profit and free cash flow expectations. So, so far, just a good step in the first step in the right direction that we announced at the Capital Markets Day. So Steph, quickly run us through the financial highlights, and then I'll pick it up from there again.

Of course. Thank you very much. As we said at the half year, our revenue declined by 9.3% as a result of previously announced contract hand-backs, losses and the nonrecurrence of one-offs last year that we had an experience, which we talked about at the time. As Adolfo just said, our operating margin improved 45% as we saw the benefits from the ongoing cost reduction program that we've talked to, which more than offset the H1 '23 one-off benefits that we had in the prior year. As expected, we saw a reduced level of DI releases in the period, which has improved our operating cash flow. And our free cash outflow was GBP 52 million, which again was in line with expectations, benefiting from the reduction in our pension deficit contributions and the lower cash cost from the cyber incident, which was then offset by the costs to deliver the cost reduction programs, which will improve our margin going forward. If I look at our sales pipeline, as we've talked to and as Adolfo talked to in terms of our priorities, we're focusing on ensuring that we are price competitive and that we are bidding all contracts at an appropriate margin. And as such, we saw a reduction in our TCV down to GBP 0.9 billion sold in the first half, down from GBP 1.3 billion in the prior year. You also have seen today that we've just announced the extension of the DCC renewal, which is worth about GBP 135 million over 2 years. Our renewal rate, as you can see from the slide, remains really, really good at 95% and was up slightly from the prior year. But there is clearly work to do in the new and expanded scope area, which will come as we become more price competitive, which will help us grow our revenue kind of as we move into the longer term. Our 2025 pipeline is looking really, really strong and is the highest it's been in the same period for many years. We've got some really good opportunity in there with Tfl, with the Home Affairs and with the Ministry of Defence, just to name a few. Then if I look at our full year outlook, as Adolfo said, we've reaffirmed our full year outlook, and we have a positive outlook for the full year. While we do anticipate that our overall revenue will reduce on a low to mid-single-digit percentage reduction, we are expecting to see a modest improvement in the operating margin as we see the continued benefits from the cost reduction program. As we've guided to in the past, we expect our free cash outflow to be between GBP 90 million to GBP 110 million, which I should point out includes GBP 50 million of costs related to the cost reduction program. And as I know, you have all seen at the start of this month, we completed on the Capita One disposal, which means we'll have net minimal financial debt at the end of the year. And in terms of our property lease portfolio, that's also clearly an area of focus, with IFRS 16 and the impact that has on our balance sheet. So we're expecting to see a continued reduction in our lease debt as we rationalize our property portfolio, which is an area of focus at the moment and will be kind of as we look going forward. I will hand over now to Adolfo to talk you through some more slides on the CMD.

All right. Yes. This is what I call the 6 months projected into one slide. So let me see if I can do this slide justice because I think it's a really important slide. There was a project that we started just before I joined where we asked a strategy consulting company, OC&C Strategy Consultants, to help us look and understand Capita -- not Capita out, but to understand Capita from the market in, where I really wanted to get a view from current past customers who have [ defected ] us, colleagues, competitors, really trying to understand market players, analysts, where was the company? And then walk our way in into, what are we hearing? What is it that they're saying and then finding out what capabilities did we have in the company? Which capabilities were good? And then to double click and [ workshop ] every single one of the capabilities and look at where do we win? Where do we win often? Where do we win well? Where do we deliver well? Once we've won them, when do we have a strong differentiation that is going to be sustainable? What is the market doing in that space? What's the margin profile associated with those? All of these things, and it's quite a complex analysis, north of 50 service lines and capabilities we have to announce, and then we just bucketize them, right, [indiscernible] said, "Okay, let's just put one bucket, which is circa 45% of our last year's revenue, the [ staff ] positions." Those places are where we do well, right? You see Capita at its best? And financially, we delivered good financial value, and we delivered good customer value, and we're known for doing it well. So there is a question of just doing more of that. And some example is some of the work we did for the Royal Navy, for example, on training modernization. We've got the lower emission work that we do in London. You might have been seeing quite a lot of news recently in the news around the fire prevention and response and some of the really big innovations we do in that space or the great work we do in pension administration and a number of others. So that was a good bucket. So just do more of it because we're doing it well. Then there was a medium bucket, which was transformation potential, right? So roughly 1/3 of what we do. It could be good propositions. It could be good propositions for us, but we're not doing them as well as we should. Either we didn't invest enough or we didn't differentiate enough or we didn't put enough technology or the right technology or we missed something over the last few years. And that's led to okay-ish position. But we do believe there is a very good opportunity for them. They are in the right space for us. And one example of that would be potentially what we do in contact center. Right? It's a good market to be in. If anything, the whole market around customer service is of an increasingly important as brands look to differentiate. Citizen service is a critical area of interest for governments. But how we've been doing has led us to lose a number of contracts and not being able to compete in the way we should have. So there we've got a transformative agenda, largely around hyperscalers, where we believe we should be able to get through automation, through tech enablement and through more repeatability of offerings, a more competitive offering and be easier to sell and better to deliver. So very hopeful that we should be able to start moving some of that for the transformation of it to start over the next period. And then we have a final bucket, manage for value, roughly 1/4 of our last year's revenue. It's a little bit of a mixed bag where we have to do some transformational stuff. And in many areas, it's transformational because it's just not the right thing for us to be in. Like, for example, Capita One was. A good business, but it's a horizontal software business that -- so there are a little bit of [Technical Difficulty] offset with our services capability. It doesn't build on hyperscalers. It was just in the wrong place. But that was a little bit of an exception. The rest are propositions that have to be present in the Capita value proposition that maybe we can deliver them differently. Maybe we need to optimize delivery radically, maybe we need to partner with somebody. And so some of them need radical transformation or renegotiations. And that's -- those, we're working on. Some of them you know. This has been standing there for a while, like the closed book, like on pension type work. And we talked about stand-alone software. You can read there, Capita One. But it helps management, and it helps us tremendously, hopefully, as we do these dialogues with you to sort of, a, understand what is it that we do daily, how we're doing it daily and really look at the world through the lens of these and making sure that things are getting the right level of attention and focus on where we are. So as I said earlier, efficiencies was going to be a very important part of the first phase. I'd like to describe this transformation as a multi-step transformation. May I like to say the first step is finding the way to create the space to do all the good stuff. So quick wins to fund the journey. And that's the phase where we're in today, not exclusively, but a lot of what we do is about reducing and keep reducing that overhead, reducing the cost base so that we can have this space to, a, be in the right place financially, but also to invest so that we can fix the basics. Because these basics was what's going to give us these capabilities, was going to give us the sustainable differentiation and then to also invest into building the future. And I've been very clear that I don't want to say 2024 is the year of costing out; 2025, the year of fixing the basics; and 2026, the year of building the future and that would be wrong. For example, the July GenAI offerings are very much about building the future, and we're doing them in July 2024. But as a large, we do more of funding the journey in 2024. So what are we doing with that respect? So we said we're up from 40 to 60 to 160. We believe we're already 100 as of June. Obviously, we've made progress since. And a lot of that has come from organization simplification, delayering, just sort of streamlining things. We still need to make the company more agile. We need to make the company faster. We need to make sure that we are more effective. So that work continues and we continue through the second half of the year or the remaining Q4 and into the first half. We're not going to let go because the opportunity is big and it needs to be addressed. On fix up the basics, I think about just really looking at end-to-end processes, looking at offshoring, nearshoring, right shoring, deploying technology, improving management information dashboards, access to information, things that will enable us to make better business decisions quicker and get into better businesses and more often because we have an agile and well-informed business. And then processes and data flows that allow us to prevent [ RET ] projects or delivery issues and go back to one of the priorities of better deliveries. That will come through that basics. And then building the future is about being able to intercept the growth vectors that are very technology reach and where we should play and really monetize and intercept those faster-growing factors from '26 onwards. So you're going to see spaces like digital, virtual awards to support for health care. Or you're going to see more automated call centers born in the cloud or you're going to see more IT solutions management built in the cloud on the back of automated platforms for the like of ServiceNow Or building Customer 360 views, as many councils are starting to do many utilities, many telco companies are starting to do on the back of leading CRM vendors like Salesforce. So there is that capability that we are going to be redirecting. The slide should say we invest up to GBP 50 million in the business, and it should say also only when we have taken the GBP 160 million out. So we're just earmarking that investment capability for the future, but it's not something that we're going to do until we have significantly reduced our cost base. On the technology front, without wanting to sort of get to question why is this good for us? I get this question asked a lot. Are you sure you want to do this? I think it's really important because it creates value for customers in a way that they couldn't get on their own from a pure-play services company like Capita or a pure-play technology company like a hyperscaler. What customers need is a solution to their problem. They need an outcome being delivered. And that outcome being delivered is a collection of the best technology, is a collection of some integration. But it's also a combination of a good understanding of the business processes, good understanding of how to manage the people that go into this, how to onboard them -- or recruit them, onboard them, train them, manage them, how to deliver the outcome, how to use their technology, which technology to use, how to ensure that the trust that customers have on us delivering the business process can be extended into the tech. We couldn't do it on our own, and I think you just have to look at the last few years to see why that it didn't work. And most of the hyperscalers have great technology, but they lack that final mile and this is really where we come together. If you're bringing together, it's going to help us improve the offerings. We're going to improve our win rate. We're going to be taking cost out of our offerings. So it's just going to make us more competitive. And because we are moving to a world that is on the cloud where you pay per use, there is no upfront capital expenditure to effectively start paying when you use it, and you're using it because the customer is using it. Hence, the revenue is already in. So you align the cost, which by the way, it's not CapEx, it's more variable cost. And the variable cost is very well aligned to revenue. And overall, it's just going to give us an ability to give efficiencies on our solutions. And some of the value will be shared with the customers. Some of the value will be with us, which is great. This is a market that is moving at a pace. It's growing, and the investment these hyperscalers are making is huge, whether it's in data center, infrastructure, whether it's in GPUs, whether it's in GenAI, whether it's in LLM models. I mean collectively, they are in close sort of GBP 1 trillion. I don't want to be there. I'd rather ask to be at the very top, bring our capabilities on top of what they're doing, bring that sort of Capita veneer that sits on top and integrate it and deliver a managed process, as we normally do it. Products operational. That didn't exist until a few months ago. You have Capita Accelerate. This is something that we have deployed for the Army. It's natural language processing that helps process and understand very quickly complex medical records of potential recruits. Capita Contract is something that we developed with Amazon and AWS on top of the Connect platform, which is our call center on the cloud, managed by Capita. Capita Digital Pensions, this is an extension of our well-known platform for pensions administration being codeveloped with Microsoft on the back of this dynamic CRM platform. And the Capita Agent Suite, again, is built on a number of technologies. First versions built on AWS, but it's platform-agnostic and one that we can deploy to get efficiency and productivity into our agents and also into management. So if this is what we've been able to do in a few months, think about the amount of things we will be able to bring to market in the next year and how many of these capabilities will be discussed and sold and in production with our customers. So very, very excited about, based on having found a good place for us to be in this value chain to participate in the technology race without having to be a technology company. We are going to be just adding that veneer of process expertise, which is something that people know we have on top of the technology innovations that these great companies are building. So I'm quite excited about the prospects here. In terms of case studies, so I won't get into the details there, as you can read them. But I think the one to see there is to see the benefits. Whether it's how you reduce from 7 to 10 days onboard and take complex queries to 2 to 3 days, how we deploy GenAI on the Agent Suite, we can reduce the average handling time by more than 20%. So those are meaningful numbers. So the meaningful numbers for one person, for one agent, for one adviser. Very meaningful when you do it for 1,000 agents for our customer. Very, very meaningful when you get to do it for 20,000 agents all over the world. So we have ambitious plans to be rolling this out in second half and accelerating into the totality of our customers in 2025. So excited and already at work in some of our customers. So just as a very quick fly-over of what we're doing and why we're doing it in some of the financials. But I think the investment case, besides the medium-term targets that you have at the bottom, which you would really covered, back to what I said at the beginning. This is a company that has strong foundation, strong foundation with customers. What we do matters to our customers. We are making the difference. Our colleagues know what we're doing and their values by our customers. We have that expertise. That's a really strong set of foundations. We just need to translate that into the economic value. And this is what we talk about, is self-sufficient strategy through our big focus on efficiency. We're looking at the profit expansion and cash generation. And the 3-bucket approach that I described earlier, the more targeted approach to start positions, fixing and transform the middle and then addressing the management for value, will create the capacity to allow us to be more consistent in our go-to-market, leverage the partnerships with the hyperscalers, and then overall, be a company out there that is able to bring outcomes based on the latest technologies and make it life a lot easier for customers. There is a lot of work to do, as I keep saying to everybody. This is not -- there is not one single bullet. There's a lot of bullets in terms of operational efficiencies, in terms of redefining the value propositions, in terms of the hyperscalers that can cost out. But we know what we need to do. We've done this before. And we're just getting started, but I think the first half was a good positive first step. Thank you. So with that, I think we go to Q&A.

Yes. Thank you, Stephanie, and thank you, Adolfo, for that presentation and bringing us up to date with progress. We are now going to go to Q&A. [Operator Instructions] We will try and cover as many questions as we can in the time available. Let me start off with a couple that came in ahead of time. Could you talk about the bidding process? What's the minimum margin you would accept on new contracts? And where are you having the most success?

So it's an excellent question. I wish I could give you like a sort of blanket answer. And it will be very difficult mechanically because every business is very, very different. So for example, some of the contracts that we have with the government, they are what I call cost-plus contracts. Sorry, we have to do an open book, and we have to agree what's deemed to be a good margin, an acceptable margin. Obviously, the risk on the cost-plus margin contract is fairly reduced. So there, obviously, flexibility is less. Then we've other the contracts where a lot of what we do is technology-based. Maybe not the most modern technology, but it's got technology base. So there, we tend to command higher gross margins. And then obviously, we make more profits, and you would expect us to be pushing the envelope more there and to say, "Okay, why 10%? Why not 15%, why not 20% or 25%?" So there, we push a lot more. But I think the overall question is when we look at these big deals or any deal really of a certain size, we ask ourselves the question is, how is this deal going to help us with our medium-term ambition of getting to that 6% to 8% EBIT margin. And then we have to look at, "Okay, what is obviously, the price? What is the level of overhead of that division? What is the level of overhead that we have to absorb in the group? What's our ability to take cost out? What do we have planned for that particular area of the business?" And we do analyze case by case because the cases, as I've illustrated in 2 very different cases, are very different. So we look at them. And if we don't see a path for it to be contributed and accretive to that 6% to 8% margin, we either will not beat or we will beat at a price that we believe is what it takes. I mean, we tell the customer, we are not pricing to win. We are pricing to deliver. If you want to go for a cheaper option and take the risk, please do that. But this is what we believe is a sustainable pricing and margin. And sometimes, we lose it, but we've just been honest. And I think here, we're playing the long game. I've been in sales for the best part of 30 years. It's very easy to have 5 minutes of glory and 5 minutes of tears. I'd just rather just lose a few initially, get the house in order, price right and just make sure that we got a pipeline of deals and deals in delivery that are going to go there. Obviously, there's a process internally with these things get reviewed. As you would imagine, smaller deals get reviewed lower in the organization. The biggest deals will come to the CFO and to myself. And then there is a level beyond which as well we need to involve the Board. So it's appropriate level of oversight and approval to give all of these considerations that I just described.

Linked question here on contracts. I know you announced a contract win today, but what contract wins have there been in the last 3 months? And have there been any contract wins that you have had that you haven't announced?

Yes. So obviously, we have the DCC announcement this morning. Another one that we had at the start of July was the Royal Mail Pension, which is a really good one to have in. We've got a really strong pipeline at the moment with a number of opportunities due to close in the second half of this year. There's not been any kind of material ones that we've lost in the last few months other than those that we previously announced during the half year results.

And there have been some that we have no -- maybe I guess they were not RNS material. There were strategic good contracts to win. So there will be one, I would not name them, but it was a U.K.-based telecommunications company where we had a problematic contract that we exited. But just applying this logic that we talked about, we exited it end of last year because it wasn't the right thing for us. So the customer went out to tender again. They sent us the opportunity to retender. So we did retender, but we did retender differently, very differently, using a lot of this technology, using offshoring resources. We just built a more modern offer. And even though we have exited, which sort of creates always a few [indiscernible], right, with the customer, we've ended up winning it. Again, but now we won it in terms -- it's actually is better for the customer than what they had and is a better deal for us, probably not RNS material, but is definitely -- for me, actually very, very pleased with that because it tells us a lot about what's changing inside Capita.

That sounds encouraging. You have split the business into 3 service lines. Within manage for value, do you anticipate further disposals? And what businesses are you most likely to exit?

So I wouldn't quite say the 3 service lines. We do have 2 divisions, and then within each division, we have 3 areas. So that would be how it works organizationally. But what I have defined sort of 3 buckets where we look strategically as to what management does with some of these capabilities and some of these contracts. And the third bucket is the manage for value that I just referred to. So let me sort of go to the punch line right away. There isn't another Capita One sitting there, right? This was unique. And arguably, I know John, my predecessor looked at it. Is it something that goes into portfolio back in the day, but it was deemed at the time that let's try it for a little bit longer. And the reason why it sort of still there is because, I think, we tried it. It didn't work. It didn't make sense. That's why it landed there. That's unique. Looking at manage for value as a bucket of service lines and contracts or components of contracts that we do today that are costing us headaches, money and overhead. So I think a good way to think about that going forward is, okay, the day we address all of this, which is going to stop problems rather than make money and get significant proceeds for the rest of the portfolio in that matter.

Could you give us an estimated date to achieve free cash flow positive and also a date for resumption of dividends? And what criteria will you use to determine when Capita returns to the dividend list?

Yes. So we have said that we will be free cash flow positive from 2025. In terms of an estimated date for dividend resumption, we've not commented on that, as you really expect. At the Capital Markets Day, what we outlined was our capital allocation policy, where we effectively split out the hierarchy in terms of what things need to be in place and what we need to have done to resume dividend payments? We've said that as a hierarchy, investment will come first. So that's the reinvestment of up to GBP 50 million once we've delivered the GBP 160 million of cost savings and then also ensuring that our leverage is the most optimized position. At that point, we will then look at reintroducing dividend payments and realized it may seem a very distant thought. But after that, we would then look at further capital returns above a kind of annual or usual dividend stream.

Next question here, again, on cash flow. I'm struggling to understand why your cash conversion is so low. Are you doing anything to improve this? And with the businesses you have left going forward, what should we expect in terms of the cash conversion rate to be?

Yes. So we've outlined our medium-term target, as you can see from this slide, is an operating cash conversion of 65% to 75%, which obviously is a big improvement from where we are at the moment. In terms of things that we improved, that's partly improving the operating margin from the business. But also, as Adolfo has talked to, we are reducing kind of the transformation and upfront spend that we have in a lot of our contracts where we're using the hyperscalers and technologies that already exist rather than bespoke building everything ourselves, which what we would see in the past is we'd see a lot of upfront cash costs to deliver a contract to start with and then you recognize your revenue effectively on a straight line over that period. So you've had a really lumpy cash flow over the life. What you will see with our contracts going forward more frequently is that you won't have the big upfront transformation spend because we're using, as I said, technologies that already exist, which will help smooth the cash flow and give you a more consistent cash flow profile going forward.

With the break on government spending, do you expect any changes in your operating environment? Are you seeing any of that already happening?

Well, obviously, a period of elections and new government, new ministers always comes with a disruption, to sort of, I guess, stating the obvious. We've also got a budget coming in soon. So we got to just wait and see where all the chips fall when all of this is done. But if I wish to comment on what we know and the conversations we've had with the government and with different people supporting the government and we look at the manifesto. If you look at the areas, that at least strategically, are going to be receiving policy support/funding. I think there are areas that are going to be good for us, right? So obviously, there's a focus in defense, right? So this is a strategic defense review. I think we do well, I think, in the defense space. I think we add a lot of value to the forces. And I think we are a trusted partner to them and whether it's on recruitment, development, training. And operational readiness of the forces appears to be continuing to be an important priority. Now we have to see the output of that review. But assuming that continues to be a priority, I think that that's a good thing for us. If I look at the NHS and sort of the big commentary in the last few weeks around the NHS needing to transform to really deliver, it's not a question of just more money. I think if you look at sort of the digital transformation and some of the work we're already doing there with primary care or some of the ideas we've got on the table around virtual awards as a way to expand the reach of hospital staff into people's homes so that we can extend caring in modern ways, the kind of work that can be done with the full digitization of medical records. So we're really doing part of it. So I think these are areas that would be supportive. Similarly if we're really going to go and build homes, a lot of the councils do not have that planning capability to deal with that, and we do provide planning services. So a lot of the components of delivering on those policies are things that we're already doing today and many of these things are actually in our star positions. So I am excited on that. But we still see the policy, still see the funding. So there is a transition where I think over this parliament, I think this will work well. We just need now to see the strategic review is completed, policy announced and enacted ASAP.

Next question here. Are you seeing any green shoots yet in the Experience division? Or is this, in your assessment, more of a 2025 story once rate cuts take hold?

I am seeing green shoots that will have an impact in 2025. I think I just sort of -- it's not either or it's both. One of the examples we talked about Agent Suite deployed in a particular customer. I have seen how impactful it was on week 1. And then I saw how easy it was to make it more impactful for week 2. And then I've seen how easy it's been to make it even more impactful for month 2. So as I see this, obviously, it's still small. But I can see as we accelerate this deployment across more of the CE customer base, you start putting all of these incremental improvements, and they actually start adding to a lot. But that's more something to start seeing in 2025. I think green shoots and the proof points for us operationally are here, but operational improvement always precedes financial improvements unfortunately.

Can you give an update on the data breach and Barings recent class action?

Let me just sort of give you 2-part answer. So on the data breach, there's nothing to report. As such, this was -- we've been going through all the motions. First of all, it was getting to the bottom of what happened. The third one was working with the affected entities, people, companies and just put all the support that was required. That was something that was done last year. The company had already embarked on a cyber readiness improvement plan, like any other company. Obviously, cyber had just been -- something that's been on the agenda for a while. And Capita have started before -- cyber and Capita have already started on that journey before I arrived. But it's true that we have accelerated it. It is true that we have continued to raise the bar. And that has sort of continued, and we're working with the authorities. And yes, just nothing else to report. On the Barings, obviously, as you can imagine, there's obviously there's a little bit of noise there. But it would be inappropriate for me to sort of comment on any open cases, potential cases. There isn't anything at the moment is worth commenting on.

We've had a couple of questions on the Capita One disposal. I think this one probably sums it up. Looking at, are the high interest rate U.S. private placement notes callable early? And if yes, and assuming cash generation hits your target of 65% to 75% run rate, could some of the cash from the Capita One sale proceeds be put to use to redeem some of that high-cost debt early?

Yes. So what we said is that the Capita One disposal proceeds clearly provide us optionality. Very true that the PPMs that we took on last year were at a higher interest rate. So we're looking at all options on the table to improve kind of the leverage position and the interest cost going forward. Clearly, bringing that down and improving our free cash flow in '25 is the priority going forward.

Let me bring the next question up here. Could you comment on the number of buildings and staff you now have and the near-term estimates?

Is that buildings? Sorry.

Buildings, yes.

I don't know the number off the top of my head.

No, neither do I. I know we are -- sorry, we sort of don't own as such. The vast majority is leases. We work down the number significantly. We can provide the exact number of what we've got, and we've got plan to either exit leases or transform leases as in down negotiate. One thing that I think is important. Unlike other companies, we are going to continue on our virtual first policy. Those merits for all sorts of approaches. But we are discovering and talking to our colleagues and also talking to our customers that are a mix where virtual first is the norm. It's not everywhere, but it's the norm, it's the average. It's working the best. It's giving us a good ability to balance work-life balance with our colleagues, tools that we have now in place make sure that we can track productivity. It doesn't matter what people are, because it's a matter of cost perform, and we got a pretty good sight of that. It is allowing us to level up as well, and we're able to hire in multiple parts of the country and optimize on multiple levels. We're still having a good footprint, so people can come together and come together regularly when it's required for projects, when it's required for customer interactions, where it's required for case resolutions. But these virtual first has been highly appreciated. We're hearing from customers that it works well when they are concerned so that we see that we need to sort of do more physical stuff. We also do office, and we got fully fledged call centers with people in there. But it's for a vast part of the Capita population that is not required, and we believe that's going to be a very attractive value proposition for our employees, which is also going to be financially positive for us.

A question here on the sales pipeline. Can you comment on the unweighted sales pipeline increase in 2025? Are the new product offerings addressing a larger market?

Yes, they are. Obviously, you always have also some large projects. But those large projects are being built on a significant level of technology components. So some of these solutions are discussed before opening up new markets, new opportunities. And what they're also doing is they're allowing us to see opportunities earlier that we wouldn't normally see. You would normally only see some of these opportunities where it got to the services end. Whereas now, we can sort of look at the opportunity in exception. And then the other thing we're doing now through the work with the hyperscalers, we're actually now sharing pipeline, sharing opportunities, and that has increased our visibility as to what's in the market because they do have a lot more feet on the street than assets. Certainly, technology has played a role.

So related question to this, are you at an advanced stage of securing any new big deal business wins or contract extensions that you anticipate being able to call over the next 3 to 4 months?

Well, we call them today. So -- but yes, I would expect us to be able to say about others.

Excellent. A couple of questions here, asking the same question really. Please, can you comment on any other planned divestments?

There isn't anything planned.

Do you believe Capita can ever achieve net profits of over GBP 200 million, as they used to do a few years ago?

So we -- I think we're going to get first started with where we are, right? I think we got adjusted to get to '24-'25. We're going to get to free cash flow positive. Hopefully, everybody would agree that once we get there, it's a different Capita. It doesn't mean that we don't have anything else to do. But that will give us the foundation to then go and say, okay, what's next? And then at that point, we'll come back with ideas and some commitments. I think it will be premature to say yes or no at this stage.

A question here on cash flows. The company has given pretty good guidance for operating margins and cost savings, but fairly limited guidance or explanation on cash flows. Can Adolfo please talk us through the main dynamics that impact operating cash flow, in particular, working capital dynamics, including deferred income?

We do have -- so that one might just kill half the audience. I have been sat through many of these discussions at the Board and the Executive Committee. There is a significant -- we have to go back in, I think, maybe 7 years to start looking at the deferred income that was created with the introduction of the new accounting standard, IFRS 15, created a massive lump of deferred income that is finding its way through the P&L every year, and that, we've been reducing. If somebody wants to see the sort of more detailed version on the presentation that we did on the first half, team had a really good -- I think it was a reasonably detailed summary slides and we can just make it available to people who have participated here with the voice over. I think that's the most we've ever said about it, and the most that we can say because it's a rather complex set of moving parts.

Okay. You may give a simple answer to this question, but it's related to the last one. Can you explain whether GBP 0.5 billion of deferred income on the balance sheet has been deployed?

In terms of where that's being deployed?

Yes, that is the question.

Yes. So there's a few contracts that it's on. They're split across both divisions. They're largely older legacy contracts that, I would say. So I wouldn't want to name them exactly where they sit, but they're some of our longer-standing bigger contracts that had a lot more transformation towards the beginning. Alex, not to deviate from your question. But in terms of building numbers, we have about 140, down from nearly 300 at the start of 2020 [indiscernible].

That's very efficient. Here, we have a next question. Will the relationships with hyperscalers help Capita win significant international business?

Yes. Yes, you will. That's, in fact, I'm on my way out tomorrow to Germany for exactly one big opportunity that we have there that includes hyperscalers. And these players play globally. They have the advantage of have what they call regions, sovereign regions, in many jurisdictions. While operating globally, they can serve locally and they can provide pretty good solutions in terms of data residency. And yes, obviously, what we built with them here is totally relevant in other countries where we operate. So yes.

Where do you see the remaining GBP 60 million of costs coming from? Will the majority still be organizational simplification? Or will there be other cost tracks do more of the heavy lifting?

It's going to be a mix. I think organization is still playing a role. I think we work in 3 different projects. Some of it has been sort of low hanging fruit, as you're saying. But we've got opportunity, for example, on the back office. I think there is right-shoring opportunities there. We've got opportunities on end-to-end processes in support functions, making sure that we get more automation and there is less people hand carrying manual staff from one another, which will also give us quality and agility improvements. So there's still going to be opportunities there. I think, still in terms of management layers, there's still work to do there. So I think it's going to be a little bit harder. We're going to have to sort of speak more determined, but I think there is no way back and do these changes in the organization and in the processes to deliver the GBP 60 million or whatever we need to deliver beyond that.

I'm conscious of time. I think we've got time for one last question. So apologies if we haven't been able to ask all the questions. We try to get through as many as we possibly can. Can you comment on the existing customer uptake of the new digital offering since they've been deployed? And do you have any comments on the new contracts with these customers?

Yes, it's a good question. If I just sort of go at the AgentSuite of products, which are full GenAI, every customer that we have shown it to and demonstrate today, every single one of them wants to use it. It's as clear as that. Now there is a question of, "Okay, how do we go about this? There is a data protection? Is the data privacy? How do we do this?" But when they see it, they say, "I want that." And again, we only announced that 5 weeks ago. So very early days, but the support, the reception has been superb.

Brilliant, thank you. We are coming to the end of this webinar this afternoon. As you exit, you'll be asked to complete an exit survey. So I would really appreciate it if you could spend a couple of moments on completing that. And just before you go, I'm going to hand back to Adolfo, just to say a couple of concluding remarks before we go.

What could I say beyond thank you. Thank you for the support of these very tough few months and years that I know this has been very frustrating. Thank you for the time today, and thank you for the trust and the support to deliver this transformation. So thank you.

Thank you.

Thank you very much. Yes, thank you, Stephanie. Thank you, Adolfo, and thanks for attending. And as I said, as you leave today, if you could please just spend a couple of moments completing the exit survey, that will be brilliant. Thank you now.