6. Strong financial discipline

Transcription

1 40 Capita plc Strong leadership and robust processes 6. Strong financial discipline Capita is a financially focused business. We have strong financial controls and effective governance across the Group and we monitor performance against our clear aims and s, see page 3. We delivered strong financial results in 03 with 5% underlying revenue growth, underlying profit before tax (PBT) up 4% to 475.0m and underlying earnings per share (EPS) up 4% to 59.4 p. As a result, we have recommended a final dividend of 6.5p, up 3% year-on-year. Revenue Aim: achieve disciplined, sustainable, profitable growth. In the full year 03, underlying revenue on an ongoing basis, increased by 5% to 3,85m (0: 3,35m). This comprised 8% organic growth (net of attrition), 8% from acquisitions, completed in 0 (3%) and 03 (5%), and -% arising from business disposals. Revenue ( m) 5 year compound growth 0%,44,687,744,930 3,35 3,85 Operating profit and margin Aim: maintain steady underlying operating margins. Underlying operating profit rose by % in 03 to 56.9m (0: 466.7m). We closely manage operating costs to ensure that the business is growing profitably, leveraging our scale (in particular our extensive shared service infrastructure) and maintaining effective procurement processes and a lean corporate structure. Our valuable client propositions and our ability to be very selective about the opportunities we pursue allow the Group to generate healthy underlying operating margins. We are confident that underlying Group operating margins will be maintained in the range of.5% to 3.5% for the foreseeable future. In 03, our operating margin was 3.4% (0: 3.9%) which is at the upper end of our anticipated range of.5% 3.5%, even though 03 was a busy year for new contract implementations. The major contract implementations undertaken during the year, including the two largest in Capita s history with Staffordshire County Council and Telefónica UK (O), are progressing well. On an ongoing basis, 03 numbers excluding the partial business closure, see note 4 on page numbers have not been restated on this basis. Adjusted for new pension standard IAS9 (R). Excludes non-underlying items detailed in note 5 administrative expenses on page 05.

2 Capita plc 4 As previously disclosed, in H 03, we completed the disposal of some of our Insurance Distribution operations and announced the planned closure of our SIP (Self Invested Pensions) administration business based in Salisbury. This followed a detailed review which concluded that the route to recovery for these businesses would take a long time and we therefore acted swiftly to resolve this. In 03, these operations generated 45m of Group revenue and made a combined operating loss of 4.4m. The combined non-trading cash cost, net of tax, from the sale and planned closure is 38.5m. The loss on disposal was 8.m including 6.4m from impairment of goodwill and intangible assets. Underlying operating profit ( m) 5 year compound growth % Earnings per share (EPS) Aim: achieve long term, steady growth in EPS. Long term growth in EPS is a fundamental driver to increasing shareholder value. Basic EPS is calculated by dividing net profit for the year attributable to ordinary equity holders by the weighted number of ordinary shares in issue during the year. Board directors long term incentive remuneration includes EPS targets, and from January 04, will also include ROCE targets, to align their interests with those of our shareholders. see page 78 In 03, underlying earnings per share grew by 4% to 59.4p (0: 5.p) (see note on page 0). Underlying earnings per share (p) 5 year compound growth 3% Strategic report Governance Accounts Underlying operating margin (%) On an ongoing basis, 03 numbers excluding the partial business closure, see note 4 on page numbers have not been restated on this basis. Adjusted for new pension standard, IAS9 (R). Excludes non-underlying items, see note 5 on page 05.

3 4 Capita plc Strong leadership and robust processes Dividends The Group dividend strategy is to return surplus cash to shareholders through a combination of progressive dividends and, when appropriate, capital returns. The Board is recommending a final dividend of 7.8p per ordinary share (0: 5.6p), making a total of 6.5p for the year (0: 3.5p) representing an increase for the year of 3%. The final dividend will be payable on 8 May 04 to shareholders on the register at the close of business on April 04. Including the proposed final dividend, Capita s total dividend will have grown at a compound annual rate of 3% over the five years to 3 December 03. Dividend cover is. times for 03. Total dividend per share (p) 5 year compound growth 3% Cash flow Aim: maintain a high level of operating and free cash flow. In 03, 546m (0: 55m) of cash flow was generated by operations representing an operating profit to cash conversion ratio (defined as underlying cash generated from operations divided by underlying operating profit for the year) of 06% (0: 0%). This reflects the Group s focus on cash generation and the success of the measures introduced across the business in 0 which are now firmly embedded in our financial and operating reporting structure. We believe that we can achieve an annual cash conversion ratio at or around 00% for the foreseeable future. Free cash flow (defined as operating cash flow, less net capital expenditure, interest and taxation for the year) was 3m excluding business disposal and planned closure (0: 307m), despite the higher capital expenditure on new contract implementations. Free cash flow (m) Capital expenditure (capex) Aim: contain capex at or below 4% of revenue. This helps us to focus investment on the opportunities that generate greatest shareholder value and avoid tying up too much capital in long term projects. We aim to contain net capital expenditure at or below 4% of revenue. In 03, we met this objective, with net capex at 3.7% of annual revenue (0:.9%). The higher level of capex is the consequence of a record level of new contract implementations in the year. There are currently no indications of significant capex requirements in our business forecasts or bid pipeline that would take us over our 4% threshold Capex as % of turnover On an ongoing basis, 03 numbers excluding the partial business closure, see note 4 of the accounts. 0 numbers have not been restated on this basis. Adjusted for new pension standard IAS9 (R). Excludes non-underlying items detailed in note 5 on page Exceptional additional pension contribution 0m (008), 40m (009). 4 Before one-off settlements of 7.9m for Arch cru and 0.0m pension contribution for transfer back to Cumbria County Council pension scheme.

4 Capita plc 43 Return on capital employed (ROCE) Aim: achieve healthy ROCE which exceeds our cost of capital. This reflects the margin between the cost of our capital and the returns we generate by investing it and ensures that we add shareholder value over the long term. ROCE is calculated as underlying operating profit divided by average capital employed. Capital employed (CE) is the total of equity shareholders funds, net debt, pension deficit and equity impact from accumulated non-underlying items. Average capital employed is the weighted average acquisition spend during the year plus the average of opening CE plus closing CE excluding acquisition spend during the year. In the chart below the post-tax weighted average cost of capital (WACC) indicates the return that could be expected from the capital invested in the business. It is calculated by weighting the cost of our debt and equity financing in line with the amounts of debt and equity that we use to finance our activities. We have calculated our post-tax WACC assuming a risk-free rate of.8%, a market risk premium of 7.6% and a Beta of 0.8. We focus on driving a healthy return on capital. During 03, our post-tax return on average capital employed was 5.5% (0: 5.8%). This compares to our estimated post-tax WACC which is 7.7%. In 04, subject to shareholder approval at the Annual General Meeting, Board Directors incentive schemes additionally have ROCE targets, alongside EPS targets, to align further their interests with those of our shareholders. see page 78 Gearing Aim: maintain a conservative and efficient capital structure, with an appropriate level of gearing. It is important to our clients that we are a low risk, stable partner, particularly where we are delivering large scale operations on their behalf. Our aim continues to be to keep the ratio of net debt to EBITDA in the range of.0 to.5 over the long term and we would be unlikely to incur borrowings which would reduce interest cover below seven times. As at 3 December 03, we have,34m of private placement bond debt of which only m matures in 04 with the remainder gradually maturing to 0. In addition, we have 00m of bank debt under a two-year term loan facility maturing in July 05, offset by 58m of cash held on deposit. At 3 December 03, our annualised net debt to EBITDA ratio was.0 (0:.9) with annualised interest cover at.3 times (0: 9.4 times). Balance sheet gearing 03 0 Net debt Bond debt ( m),34,48 Net bank facilities drawn ( m) Cash in bank ( m) (58) (307) Term debt ( m) Other 7 3 Total underlying net,03,030 debt ( m) Interest cover.3x 9.4x Net debt to EBITDA.0.9 Underlying net debt after impact of currency and interest swaps. Bond debt maturity profile as at 3 December m Total,34.7 Strategic report Governance Accounts Net return on capital (%) On an ongoing basis, 03 numbers excluding the partial business closure, see note 4 of the accounts. 0 numbers have not been restated on this basis. Adjusted for new pension standard IAS9 (R). Excludes non-underlying items detailed in note 5 on page 05.

5 44 Capita plc Strong leadership and robust processes Economic profit Aim: achieve steadily increasing economic profit. We are focused on delivering value for our shareholders. An effective way of measuring this is to assess whether our after tax returns are sufficient to cover the returns required from all our capital providers (WACC). Economic profit allows us to assess whether the return generated on the average capital base is sufficient to meet the base return requirements of our investors (debt and equity). Positive economic profit, therefore, means that we have created value above this base level. Group economic profit ( m) 5 year compound growth 9% Taxation Capita has an open and positive working relationship with HMRC, a designated HMRC customer relationship manager and is committed to prompt disclosure and transparency in all tax matters with HMRC. Capita has received a low risk rating from HMRC, recognising our strong corporate governance, control process, and attitude to compliance. Due to our clients requirements, Capita has operations in a number of countries outside of the UK, allowing us to provide the best possible service to our clients and their customers. All Capita operations in overseas tax jurisdictions are trading operations and pay the appropriate local taxes for these activities. Capita s contribution of 43.5m through UK corporation tax paid in 03 (0: 55.7m) is only part of our total tax contribution. Capita is a significant contributor to the UK Exchequer, paying and collecting a wide range of taxes on behalf of the UK Government. Each year, Capita contributes to The Hundred Group survey quantifying the total tax contribution of the FTSE 00 companies. During 03, 84.4m (0: 66.8m) of other UK taxes were borne by the Group including business rates, import duties, irrecoverable VAT, employers NIC, and environmental taxes. In addition, Capita collected and remitted to the UK Government 344.8m (0: 87.m) of VAT and 347.3m (0: 94.m) of PAYE and employee NIC. Delivering shareholder value Over the 0-year period to 3 December 03, Capita has delivered.4bn (net of 74m equity raising in April 0) to shareholders through dividends, share buybacks and special dividend. Capita s total shareholder return over the same period is 45% compared to 5% for the FTSE 00. After investing in the business, to maintain our growth and sustainability, we use surplus cash to deliver further shareholder value in three main ways: Distribution to shareholders through dividends: a key element in the creation of shareholder value is a progressive dividend policy. see page 4 Funding acquisitions to add value: securing small to medium-sized acquisitions is integral to Capita s future growth. see page 4 Share buybacks: opportunistic share buybacks help us to maintain an efficient capital structure and minimise our long term cost of capital. We did not complete any share buybacks in 03, however, we will continue to evaluate any attractive opportunities as they arise. Shareholders renewed the Group s authority to purchase up to 0% of issued share capital at our 03 Annual General Meeting. Creating economic profit Underlying operating profit ( m) Average capital ( m),70,348,976,49,7,55 Tax (%) Post-tax WACC (estimated %) Capital charge ( m) (08) (64) (48) (5) (00) (95) Tax ( m) (98) (96) (98) (95) (94) (84) Economic profit ( m) On an ongoing basis, 03 numbers excluding the partial business closure, see note 4 of the accounts. 0 numbers have not been restated on this basis. Adjusted for new pension standard IAS9 (R). Excludes non-underlying items detailed in note 5 on page 05.

6 Capita plc 45 Performance summary Dividend per share Interim dividend (p) Final dividend (p) Total ordinary dividend (p) Total dividend (p) Dividend cover.4x.6x.7x.5x.3x.3x Totals Interim dividend ( m) Final dividend ( m) Total ordinary dividend ( m) Total dividend paid ( m) Share buybacks % of share capital authorised to repurchase % of share capital repurchased.5.7 Issued share capital at year-end (m) No. of shares repurchased (m) Average price (p) Total cost ( m) 6 68 Shareholder returns Total return to shareholders ( m) Strategic report Governance Accounts