17th Dec 2024 13:18
(Alliance News) - Capita PLC shares were down on Tuesday as it said it expects as much as GBP140 million in cash outflow in 2024 due to lower revenue, but it will look for further cost savings from artificial intelligence.
The London-based outsourcing and professional services company in a trading update said it expects free cash outflow of between GBP120 million and GBP140 million in 2024 due to a fall in revenue and "a more sustainable approach to working capital management".
It also expects cash flow to be hurt by GBP50 million in additional restructuring costs in the first half of 2025, with "positive and consistent" free cash flow expected from the end of 2025. Free cash outflow in 2023 was GBP115.5 million, before the impact of business exits.
Shares in Capita PLC were down 11% to 15.44 pence in London on Tuesday afternoon. The stock is down 29% over the past 12 months.
The company said its outlook for 2024 adjusted operating profit was unchanged from GBP106.5 million, matching last year's results. It said it sees adjusted operating profit margin up 50 basis points to 4.5% from 4.0% last year due to cost savings.
Capita said it expects around an 8% drop in adjusted revenue in the eleven months to the end of November on the impact of headwinds from the previous year and exiting lower margin service lines.
The company also expects a "broadly flat revenue performance" in 2025, compared to 2024, as it continues to exit low margin activities.
Capita said it was "increasingly confident" of delivering its 6% to 8% medium-term operating margin target.
It said it had "good momentum" on its cost savings target of GBP160 million, with GBP140 million annualised savings now actioned. It also raised its target to up to GBP250 million by December 2025 due to the opportunities from using more artificial intelligence in its services.
AI has been used to speed up certain tasks, with its use in contact centres and local government customers reducing average handling time by around a fifth, Capita said.
The technology also had helped it to win new customer contracts.
Capita said voluntary employee attrition of around 21% will contribute to the savings target and reduce redundancies.
It also said the UK's national insurance increase will cost an extra GBP20 million per year, but it expects cost savings to mitigate these costs over the medium-term.
Capita said its priority is improving its operating margin, which it says "will deliver free cash flow and adjusted revenue growth as we become more cost competitive".
Chief Executive Officer Adolfo Hernandez said: "As we head towards the end of my first year as CEO of Capita, I am very encouraged by the progress we have made against our strategic priorities, despite the impact of prior year headwinds being larger than originally expected. Our focus is on becoming a better business, 'getting smaller to get stronger and fitter to then grow' and being more selective in not pursuing and exiting existing lower margin contracts."
"Consequently, revenue is expected to be high single-digits lower in 2024. However, we are encouraged by the customer reaction to our suite of AI solutions developed with the hyperscalers which will help to drive profitable revenue momentum from 2025 onwards," he said.
Revenue in 2023 was GBP2.81 billion.
By Michael Hennessey, Alliance News reporter
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