Mitie Group plc (MTO) Earnings Call Transcript & Summary

Okay. Good morning, ladies and gentlemen, and welcome again to our half year interim presentation. You'll be pleased to know we now have a sign on the door, so no one is going to be bringing coffee in today. But thank you for joining us. Another live broadcast from our headquarters here in The Shard. And again, I'm joined by suitably socially distanced Andrew Peeler, our CFO. In a now familiar Zoom format, we will talk for approximately 20 minutes and then we'll turn it over to Q&As. And we'll start it with Andrew and the financial review. And then I'll follow-up with a short strategic update, recognizing that it was only a couple of weeks ago that we presented the revised terms of the Interserve deal and our vision for the future. But before handing it over to Andrew, let me just say that these results have been delivered throughout COVID, the biggest challenge of all our lives. It has affected every one of us in some way, I'm sure. And we all know some people who've had COVID-19, including Jason Towse, our Head of Business Services, who would normally have been here today, but he's with his mom and dad in hospital -- with his mom and dad in a hole right now with COVID. So good luck, Mr. and Ms. Towse. And Jason, our thoughts are with you. Some of us will have also known people among the 50,000 who've died across Britain from COVID. So this really has been a challenge to all of humanity. And talking of humanity and whilst we've all worked from home, many with kids to educate and feed, there have been 37,000 Mitie colleagues, moms and dads, sisters and brothers, who've gone to work every day during the lockdown; putting themselves at risk, keeping vital infrastructure open, to [ allocate ] to centers, power stations, nuclear facilities, supporting hospitals and schools, stations and airports, food retailers, essential pharmaceutical manufacturing. I'm so proud and give all 37,000 of them my most humblest of thanks and of those thanks of our clients, many who have written to me throughout this crisis. We thank you, our Mitie frontline heroes. They've been integral in the fight against COVID and have literally kept Britain running. You really are the exceptional every day. So okay, Andrew, over to you on the financials and then I'll pick up on the strategic update later.

Thank you very much, Phil, and good morning, everybody. Two weeks ago, we took you through the Mitie trading update where we shared revenue performance, trading trends and balance sheet strength. I can now provide you with more color and bring you up to speed with our profit and cash performance over the half. So starting with the highlights. I am pleased to say that Mitie performance has been resilient in the face of a full 6 months of a COVID-19 impacted period. Revenue was GBP 972 million, a decline of 9.8%. This is better than we had expected in June when we were tracking 12% down. Understandably, this reflects the impact of COVID-19, particularly on projects and variable works in Technical Services, mitigated by strong performance in Business Services with COVID-19 related revenue gains. Operating profit of GBP 21.5 million is better than expected as the drop-through impact was mitigated by cost savings and a range of management self-help actions. Our win and renewal rates are higher than we might have expected 6 months ago, and there's only a small reduction in our order book to GBP 4 billion. And our financial strength improved with positive free cash flow and an average daily net debt of GBP 69 million versus GBP 351 million for the first half last year. And whilst we had beneficial impacts in the period from the time to pay scheme with HMRC and the [indiscernible], the business continue to make improvements in working capital management, which I'll cover off in more detail shortly. In summary, the business responded well to a full 6-month COVID impacted period and proved more [indiscernible] as expected. Turning to [indiscernible]. Overall revenue decline in the half was 9.8%, but the decline was 6%, excluding the loss of the MOJ contract and reduced scope of the contract with NHS properties. And as we flagged at the year-end, the main impact on revenue has been in Technical Services and on their projects and variable works. And we see this impact with customers such as Rolls-Royce and Heathrow, who have reduced their discretionary spend and reduced all activities at offices and locations. Encouragingly, we did see [indiscernible] quarter-on-quarter, and there was an underlying increase in [indiscernible] in the half. There was good performance from Business Services, which increased 2% in the half and 5% in the second quarter. Security benefited [indiscernible] public service [indiscernible] DHSC and NHS and increased demand, particularly from sectors such as [indiscernible]. In addition, the cleaning business offset COVID-19 related building and office closures, with increased demand for deep cleans and launch of our Citrox Protect product. COVID-19 reduced activity and therefore revenues, particularly for our Waste and Care & Custody businesses, and Care & Custody revenue was also impacted by the closure of the Campsfield IRC location. In the period, we won GBP 500 million worth of new business renewals for both fixed and project works with a renewal rate of over 95%. So now moving on to profit and margin. The Technical Services loss margin variable and project work, and the loss of the MOJ contract and reduced scope for NHS properties drives the decline in Technical Services profit to GBP 8.9 million [indiscernible] decline to down 2.4%, as you can [indiscernible]. Business Services had a very pleasing [indiscernible] an additional [indiscernible]. Business Services also had benefits from restructuring and [indiscernible] initiated and running over the past year. Specialist Services profit decline is primarily impacted by a reduction in revenues, and Corporate Center costs are marginally down year-on-year, reflecting benefit of some COVID-19 related management actions. The net result is an [indiscernible] expected profit drop-through of 10.9%, with the impact from Technical Services, offset by upside in Business Services and good overall cost discipline across the group. I'll now cover these in a little bit more detail on the next slide, which covers profit bridge year-on-year. The operating profit decline overall is GBP 11.5 million. The first chart you can see is the impact of the contract losses related to the higher-margin MOJ and NHS properties contracts. The contract wins, the mobilization of the GSK and BMW [indiscernible] at the year-end. The net COVID impact in totality in the middle of the chart is GBP 13 million. Those COVID-19 wins of GBP 3 million were the [indiscernible] primarily in Technical Services. We took immediate action in the half to drive far [indiscernible] saving range help measures, including salary cuts for the majority of the management population with [indiscernible] reductions at senior levels. We also adopted a range of [indiscernible] controls to protect both profit and cash. [indiscernible] we had some 7,000 employees and now only 25% remain on furlough. And then finally, we had permanent savings of GBP 7 million rising from [indiscernible] efficiency program [indiscernible] division and Corporate Center [indiscernible]. Now let me now turn to the transformational change in our financial strength, and I'll take you through [indiscernible] cash flow. First, reconciliation between the GBP 21.5 million operating profit from [indiscernible] operating cash flow, which is the left-hand side of GBP [ 33.8 million ] [indiscernible] items, [indiscernible] acquisitions with the balance [indiscernible] and please refer to the [ RNS ] for more details. [indiscernible] page, we can [indiscernible] cash [indiscernible] a closing net cash [indiscernible] of GBP [ 89.7 million ], as you can see at the chart on the top side. Let me then walk through the cash flow. There is a positive working capital movement of GBP 58 million. This includes the benefit, HMRC [indiscernible] in more detail. [indiscernible] better than last year. CapEx was lower by GBP 3 million as we paused in [indiscernible] during the COVID-19 period. And the interest line benefited from a [indiscernible] fund in the half compared to tax payments in the prior year. There's no final dividend payment for the full year '19-'20, as communicated at the year-end. And given the uncertainty of COVID-19, the Board has decided preservation of CapEx is a key priority [indiscernible] not declared an interim dividend for the current year. And then finally, we've cash of [ GBP 190 million ] [indiscernible] at the end of July. Now moving to the next slide, [indiscernible] capital movement. [indiscernible] GBP 58 million improvement in working capital. And I do recognize that there are a number of moving pieces here. So let me walk you carefully through these. Firstly, the business benefited by GBP 97 million from the HMRC [indiscernible] deferrals. Our expectation is that this deferral will be cleared by the year-end. We then had a GBP 21 million cash outflow in relation to other COVID related items, including timing of furlough receipts and contract renewal after some of the new contract. Importantly, we continue to reduce our period-end management cash actions by GBP 34 million. These relate mainly to reductions in the customer's [indiscernible] drives balance sheet normalization, which I'll come back to on a later page. There are small movements on invoice discounting and provisions on one that net off. This leads in the period an underlying working capital improvement of GBP 15 million. This was primarily from a reduction in overdue debtors. And importantly, we managed all working capital down in line with our lower revenues. And as you see -- and you can see this impact in debtor days reducing by 2 days [indiscernible] on the right-hand side. I'm now going to turn to average debt and more details on the strong [ capital ] performance. Average daily net debt is our preferred debt measure, and it reduced by GBP 98 million as compared to the first half last year after adjusting for the impact of the time to pay scheme and the rights issue. And you can see those marked up in the right-hand side. If you look at the table at the bottom right-hand side, the GBP 98 million underlying improvement is balanced between benefit of disposal proceeds from the catering disposal in September 2019 of some GBP 53 million and improvement in working capital of GBP 45 million. And this GBP 45 million is driven by reductions primarily in overdue debt. And with an accelerated speed of billing, we've managed to reduce our accrued income as well. Given the steps we've taken both this year and previous year, the gap between our net debt and our closing net on a like-for-like basis at the period end is GBP 22 million versus [ a gap of ] GBP 90 million. And then finally, at the top right-hand side, we are tracking comfortably well within covenant tests. And now move on to total financial obligations. So our balance sheet further strengthens as we could focus on reducing our total financial obligations. Please note here that the debt show pre-IFRS 16 so that we show the IFRS 16 [indiscernible] the TFOs is presented on a closing basis. TFO has an improvement of GBP 22 million compared to September 2019 online basis. And noticeably within supply chain finance scheme has been run down from GBP 15 million to GBP 4 million in the period, and that scheme is now closed. There is a lower pension deficit and a small increase in operating leases as we [indiscernible]. So in summary, trading performance due to management actions has been more resilient than forecast, with a 6% decline before known contract losses and a profit drop-through limited to 10.9%. Our [indiscernible] further strengthened not only [indiscernible] issue but from improved working capital action, our financial obligations. And this has been done [indiscernible] management actions and management cash actions at period end gives the difference between [indiscernible] debt to average debt, all part of our approach of driving greater clarity and balancing our numbers. The interim dividend is [indiscernible] given the ongoing COVID-19 impact. We will continue to assess our dividend policy in the light of future trading performance. I will now hand back to Phil to cover our COVID-19 and other strategic goals.

Thank you for that, Andrew. It's very sharp and to the point there. Thank you. So as Andrew shows, there's no doubt that COVID has significantly impacted our business and that of our customers. And I'll move the slide again. So how do we future? Well, from 2 angles, I guess. One, from the industry perspective and the other from Mitie's perspective as well. So yes, the industry, FM industry is expected to decline by 15% this year in line with GDP, with some recovery during '21 and '22. Clients are generally reducing cost to preserve cash, with the greatest impacts on projects and capital budget works, just as we've seen; so Heathrow and Rolls-Royce, some of the biggest customers for projects. Particularly in the financial and professional services sector, where Savills, for example, are forecasting a 10% decline here, not everyone is going to go back to their office as they did before. However, the winners [indiscernible] market will be to adapt to the rise of remote working and the changing role of the office, those who've invested in technology. And might I believe we are well positioned to grasp these new opportunities. There are signs of hope out there that certainly play to our strengths. Starting with increased public sector investment in health care and infrastructure where the acquisition of Interserve and their public sector expertise will position as well. And whilst demand for office space is likely to fall and building occupancy levels are reduced, we still believe that per building spend on the facilities we manage will increase. It has to. More in-depth cleaning, using our specialist anti-COVID products, more technology, remote monitoring of desk occupancy, air quality, meeting room availability to create safer, better optimized working environment [indiscernible] restoring trust and confidence and the essence of working as part of a team. A lockdown is encouraging us to focus on resource utilization, particularly in energy and waste, where technology again [indiscernible] the role. And just this week, I was encouraged to hear that we had been appointed to 2 new Crown Commercial Services frameworks for vehicle charging infrastructure and renewable electricity, major opportunities for Mitie in the future. Finally, our clients are increasingly turning to real-time intelligence and remote monitoring to help manage the buildings by the hour almost as it were or by the risk incident. So whilst the facilities management market is forecast to fall before recovering, we at Mitie believe we can weather the storm more effectively. The most as technology accelerates the change in the post-COVID world. So let me go to technology where we genuinely believe it is giving us an edge, both with our customers and in driving our own operational efficiencies in how we run the business. Starting with customers, increasing stickiness. Our service operations center is connected to 380 customers now with over 40,000 assets monitored remotely. 78 of our customers take our real-time MI suite of Mosaic. 32 customers use our Esme chatbot instead of going through a traditional call center. Improving win rates, Mosaic, Aria, digital workplace, have all been instrumental and recent key IFM wins, increasing revenue and reducing total cost of ownership for clients. Digital maintenance is reducing maintenance cost of Vodafone, for example, monitoring as a service is enabling a 30% increase in energy savings. But technology isn't just about what we give our customers. It goes to the heart of how we run the company, whether it be driving automation, workforce deployment, electronic time sheets for our frontline workforce linked to accurate payrolls and straight into chargeable costs on clients' bills through SAP, WBS, work breakdown structures. Self-service in HR, reducing our shared services costs, a much increased automation in our back office finance processes where today straight-through processing in purchase to pay, for example, is 80%. And all exceptions are dealt with by a robotic agent, helping to reduce our Indian back office by 1/3, some 110 FTEs, which is quite remarkable. And of course, the last plank in our technology stack, the workflow efficiency [indiscernible] has the potential to make the biggest difference of all. Project Forte is an industry-leading solution for managing complex workflow in technical services, becoming the Amazon of FM, as we call it, upgrading our IBM Maximo core dynamic scheduling of the 5 million jobs our technicians do annually through the click software, supply chain management to manage our GBP 800 million per annum of third-party spend, and an automated billing and accounting system in SAP to give straight through billing and accounting. The scale of it, as we've said, is huge, 700 million fields of data verified, 20 million of new asset records added, 100 million commands from the scheduler to the front line, 800 customers' commercial terms now ingested. Almost 4,000 suppliers tied to and increasingly scrutinized by our supply chain management module. And over 100 business processes mapped and standardized. But inevitably, with such complexity, there have been challenges, not least of which was the lockdown during the first 5 months of COVID, which forced us to mothball the program. And although we've restarted it and delivery momentum is building, after reflecting on the complexity of this breakthrough technology, we brought in EY to oversee program integration between our technical services team, our finance team and IT. And we've factored in much more extensive testing regime, reducing any risk to operations, any risk to billing and, of course, any risk to cash collection. The upshot is that while some blocks of functionality will be going live sooner, as this chart shows, the fully integrated in-service date is now December 2021. Net-net, the cost of the program, including the Oracle to SAP upgrade, have increased by GBP 13 million to GBP 48 million, but with GBP 5 million of benefits improvements, albeit delivered a year later. For modeling purposes, as you know, we are guiding that only half of the benefits be dropped to the bottom line to cover margin pressures elsewhere in the business. Just wrapping up and I won't go into this in a lot of detail, we've continued to create a great place to work with engagement improving across our colleagues and a wider recognition of Mitie being an employer that cares. A milestone was achieved early in the pandemic when direct communication to all our frontline employees via Teams was achieved for the first time. We can now regularly communicate directly with all our 48,000 colleagues, not at the same time I hastened to add. We've also added additional benefits, life insurance, free Virtual GP Service and additional days holiday to those on the line working as [indiscernible]. We are being recognized over a number of fronts for our progress. Of course, everyone likes winning awards, and we've been winning quite a few recently, particularly on the people front, in ESG and in technology. And you don't win [indiscernible] awards as we have done that easily. We're up against the best across the country, BP, [indiscernible] and many more. You win them because you've something tangible, something in commission, something providing breakthrough value to clients. And that's something we're very proud of in Mitie. So where are we now? I'd summarize it that we have made huge progress, but we aren't yet at our fighting weight as it were. Yes, we are weathering the COVID storm with better-than-expected revenue declines and continued new wins. And yes, we are ready for the post COVID world with technology at the heart of what we do with the upside of Forte to come. Yes, our people really are setting us apart and have been magnificent during the whole COVID pandemic. Yes, our financial position is strong with underlying leverage, as Andrew said, at the lowest for many, many years. So we are, therefore, firmly in phase 2 of our strategy, that of accelerated value creation. And the reach and scale of the Interserve acquisition will leverage that technology further, giving us greater runway to grow. But as I said, our transformation is far from complete. We've now got to prove that we will make a success of integrating Interserve. CMA clearance has been recently given. Our shareholder vote is next week. And then hopefully, we get to work on the 1st of December. I'm confident we'll be successful. And when we do, I'm confident we'll finally reach our full potential and deliver our margin aspirations over the next 2 years. So with that, let's talk over to questions -- go over to questions.

Okay. First question from Joseph Brent at Liberum. How are you, Joe?

Jonathan actually, just for the record. Three questions, if I may. Firstly, could you talk through the phasing of the new GBP 35 million of gross Forte benefits? Over what time period does that bill up? Secondly, not much profit impact from GSK and BMW in the first half. Can you give us some indication of how that might ramp-up in the second half of the year from a profit point of view? And thirdly, a fantastic cash performance in the first half. Can you talk through some of the trends, the key sort of drivers in the second half, notably working capital, reverse factory unwinds, time to pay, CapEx and all of that good stuff?

Yes. As always, good questions. I mean, Andrew, I'll let you deal with the -- maybe the cash flow point at the end. And you're right. I mean we've certainly had good performance on getting -- converting unbilled to billed and then billed to cash, as it were, which Andrew can go on a little bit more in detail. If you look at, I guess, where we were on Forte on the savings before, yes, we've had to delay it a year. And as we've said, COVID was 5 months of that. And then I think we just felt that we needed to take a little bit more time over testing. The biggest risk at all is if you're putting a new billing system and workflow deployment, and I've seen it in British Gas, you can lose track of collecting cash. And we certainly don't want that to happen. So we've added, as we said, more EY oversight and more testing in that. But essentially, on gross savings, our profile, originally, I think we were forecasting GBP 7 million this year and GBP 15 million next year and the full GBP 25 million the year after. And now we're looking at GBP 3 million this year, so less benefits this year, but we are getting some. And I mentioned the supply chain management. That's quite important now because in the old days, suppliers would send us a purchase order, trenching services, it would just be paid. Whereas now, we -- the system is scrutinizing what trenching, what rate, how many meters, which job. And then if it's less than the purchase order, we will not pay the [ purchase ] order anymore. So there are benefits coming through, I'd say about GBP 3 million of savings there. And then on the [indiscernible] I'm looking here at net savings here and you might want to throw in the gross savings, Andrew. Net of the numbers here, [indiscernible] year, GBP 15 million the year round. So I think we actually -- I think you need to help me with, Andrew, because the brief in here is net. But I'm aware, essentially, things move back a year on the gross. If you want to sort of chip in on that one when we get to it. The GSK and BMW, they're good clients for us to have. Like all these things, when you win a contract, you work up the margin through experience and building the relationship. So you start at a lower values, probably a couple of million in the first half. We'll probably get a little bit more around the second half. We just won a new building for a new factory for GSK up at Barnard Castle. And certainly, I know Carlo was out with BMW last week and week before, and they're very pleased with the progress we're making. But I think it does take time to build that up and it's replacing as you picked up. Contracts at the end of life, like the MOJ or NHS Properties, which were -- was the first generation after them where margins were higher. So it takes a bit of time to build it up. Do you want to talk about the cash flow, Andrew, and also pick up my slightly muddled message around Forte gross versus net?

Yes, I'll do that. So in terms of cash flows, as we look forward, there's 3 or 4 points to cover here. First of all, from a working capital point of view, we will continue to drive some level of improvement through our ongoing improvement of automation and basically good governance and control. So I would expect to see some improvement. I would caveat that with the fact that this will be a further few months of COVID-impacted period and therefore pressures will build on both suppliers and clients. So we're fighting a lot of headwinds there. So for me, a big win is to make sure we offset the headwinds as well. But I expect some level of improvement going forward. I would note that when we have implemented Forte and SAP in 12 months' time, that will give us a further benefit to improve speed of billing later on.

Do you have the actual numbers?

The...

[indiscernible] for some reason, it's not enough [indiscernible].

Yes. So I mean, the first question about Forte, the phasing of the gross savings up to GBP 35 million. We do see around GBP 10 million next year, '21-'22, and we do see GBP 25 million in '22-'23 and then sustain [indiscernible] going up to GBP 35 million in '23-'24. That is the gross savings profile that we have. And on BMW and GSK, I think that's another good question, if I may, since I'm already on the line. The reason why the initial 6 months margin is depressed is that where we incurred in the highest mobilization costs. And so we have been -- it's 2 massive contracts that we'll be mobilizing. We're injecting technology, and it's -- this is why usually the first 6 to 7 months, the profits are depressed.

Okay. We've got [ Chris ] [indiscernible].

First question, if I may, on Business Services, the increase in the profits there, how much of the improvement came from cleaning? And second, looking at the margin improvement, could you give us a flavor of how important those factors were mentioning the statements, the cost savings, the improved operational performance? Second question will be on COVID-19 revenues. There's about GBP 125 million you've won. How much of those landed in the first half? And how much would you expect to land in the second? And is there any further COVID opportunities beyond the ones you've currently won?

Yes. I mean cleaning, as you know, we put together the 2 businesses between cleaning and security, and putting a new management team there. And there's probably, of the profit, [indiscernible] we don't [indiscernible] the cleaning profit percent [indiscernible] to show the Business Services. But I'd probably say there's 3 that come through [indiscernible] out of the cleaning [indiscernible] in aggregate [indiscernible] 4% margin between [indiscernible] Business Services, which was 120 basis point improvement. So I think that's pretty good news. And James Gilding and the team who we recruited from internally as it were have done a really good job. As have [ Gary Connolly ] and the testing centers, in particular, understanding that we've got, I think, about 4,000 people now working in those testing centers around the country. And yes, the second half will be stronger than the first half. And the -- I think, what are we, at the first half, Andrew, in terms of testing center revenue?

Testing is about GBP 30 million odd in the first half and that will accelerate rapidly in the second half.

More than double, won't it?

More than double in the second half, yes.