Mitie Group plc (MTO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome back to the office as it were, and welcome to our interim FY '22 results. And it's great to have you here live as it were. And for those of you on Zoom calls listening, it's time you got back to the office as well. But look, a week in politics is a long time, and I think the last 6 months in Mitie has absolutely flown by. So let me summarize the major highlights to start with as I see them. Firstly, we have had a strong first half financially. We have record revenue, record profits and pleasingly record cash flow generation. Clearly, the COVID-related work has been the main contributor. But on an underlying basis, we have now fully recovered back to pre-COVID levels. And therefore, the Board has declared the payment of interim dividend of 0.4p per share, our first dividend for 2 years. The Interserve business is performing well. And after almost 12 months of ownership, the operational integration is largely complete now, and synergies are on track. Our win and renewal performance has been good and with a growing pipeline of opportunities on the horizon. We've continued to reshape our portfolio towards higher growth, higher return businesses. We exited our Document Management business and acquired small but faster-growing businesses in telecoms, decarbonization and yesterday, in intelligent security. We've also secured our long-term capital structure with 2 outstanding deals in my view, by Simon, a new 4-year GBP 150 million revolving credit facility and a locked-in forward starting, 120 million U.S. private placement, an average coupon of 2.94% for 10-year money. And on the equity side, of course, we removed the potential overhang of the 248 million consideration shares paid to Interserve sellers by 2 block placings to long-term strategic investors, of which one is here today. So we're very grateful for their support. So overall, a strong start to the year, and we remain on track to deliver FY '22 in line with our previous EBIT guidance of GBP 145 million to GBP 155 million. So with that, now over to Simon for more detail on the financials, and then I'll come back afterwards on the strategy.

Thanks, Phil. Good morning, everybody. So as you can see from the headline numbers on this slide, we're recovering well from the pandemic. The acquisition of Interserve and our strategic response to COVID has helped us to achieve a significantly improved set of results for the half. Headline revenue is up over 100% due to the inclusion of Interserve and the delivery of a number of material COVID-related contracts. On a Mitie stand-alone basis, excluding Interserve, revenue is up 36% versus the first half of last year. Operating profit before other items grew to GBP 85 million, inclusive of GBP 40 million of profit from COVID-related contracts and GBP 12 million of synergies. Operating profit and margins have improved to 4.4%, helped by the contribution from the COVID works and profit after tax of GBP 67 million has benefited from an effective tax rate of only 10% due to the increase in the value of our deferred tax assets. EPS before other items is 4.9p and we've declared an interim dividend of 0.4p a share now that the business is back to pre-COVID profitability. We expect to lift the dividend progressively over the course of the next few years. We have a robust balance sheet with net assets of GBP 428 million. We've generated GBP 86 million of free cash flow in the period. Average daily net debt is only GBP 60 million and our order book is now at a healthy GBP 6.8 billion. I'll now take you through the performance in a little bit more detail. Firstly, turning to revenue, and starting with the overall underlying group performance. So I've included a reconciliation at the bottom of the table here to show, excluding the Interserve contribution and excluding the COVID-related contracts, what does it look like? It shows that on a year-on-year basis, the remainder of the business has grown by 12%. Business Services has made a significant contribution to that growth, with revenue up by 74% in the period. Whilst the newly incorporated Interserve contracts and the COVID-related testing center and quarantine services contracts have made a significant contribution in the half, the underlying business has grown by 9% due to a number of new wins across cleaning and security. CG&D has delivered a strong performance in the half, reporting revenue of GBP 288 million, including additional project works across a number of its largest contracts. Communities revenue has now stabilized and is significantly ahead of half 1 of full year '21 as it now includes Interserve communities as well as Mitie PFI and the Healthcare business. Technical Services is the business area where operations were most significantly impacted by COVID. Revenues have recovered significantly in the first half of the year, growing by 44%, but it's still some 10% to 15% below pre-COVID levels. The growth drivers in the half have been an increase in customer activity as people return to work, the private sector Interserve contracts being folded into the business, and some new contracts won over the course of the last 12 months. Finally, Specialist Services revenue is up 66% year-on-year, largely due to wins in Care & Custody and the inclusion of Interserve's Spanish operation. Moving on to operating profit. At a group level, excluding the profits generated from COVID-related contracts, and excluding the MoJ and NHS properties contracts that completed in full year '20, profits are back to pre-COVID levels. All of the divisional numbers, including synergies, and I'll pull these synergies out separately on the next slide when I get to the profit bridge. Profitability for each of the 5 divisions is better than the first half of last year. Business Services performance in particular was strong, with profits increasing by GBP 44 million, largely due to the COVID-related works. Underlying profitability in the division was better than last year and full year '20 due to public sector wins in full year '21, such as the U.K. ports, combined with cost savings, efficiencies and increased project works. CG&D profits were ahead of our expectations for the period due to the additional project works that I mentioned earlier. First half profitability for Communities was in line with our expectations based on historic trading performance. And within the GBP 11.1 million of Communities' profits, we've utilized GBP 2.3 million of the provisions that we made against the loss-making contracts that we acquired with Interserve. These contract issues were known at the time of the acquisition and the new divisional management team is implementing a detailed turnaround plan to deal with it. Technical Services operating profit of GBP 12.7 million is significantly higher than last year when the business was significant -- was severely impacted by COVID. The performance is underpinned by a number of new wins, the incorporation of the Interserve contracts and high contract retention rates as well as synergies. However, the business is not yet back to pre-COVID profitability due to the more gradual recovery of variable and project works and the headwind caused by the completion of the MoJ and NHS properties contracts in full year '20. We expect to see continued improvement in half 2 as customers return to their places of work with a full run rate recovery expected by the end of full year '23. Operating profit in Specialist Services is up 17%, largely due to the inclusion of the Interserve Spanish business, partially offset by the rephasing of seasonal revenues and landscapes. Care & Custody profits were in line with full year '21, and Waste has improved as it recovered from COVID and benefited from testing center contracts. The GBP 10 million increase in corporate costs reflects the absorption of Interserve overheads, increased accruals for our long-term incentive plan now that we have a better line of sight of future performance, as well as the headwind from last year's COVID cost-saving initiatives where we temporarily reduced salaries. Finally, the profit from COVID-related contracts that I mentioned earlier contributed GBP 40.3 million, with the vast majority of it arising in Business Services. My next slide is a profit bridge, which pulls out the key drivers of the increase from GBP 18.2 million in the first half of last year to GBP 85 million this year. The first block on the graph shows the GBP 37.4 million additional contribution from COVID testing center and quarantine services in the half. Note that this is a year-on-year movement, so lower than the GBP 40.3 million that I showed on the previous page. Secondly, we show the GBP 15 million of profit contributed by the acquired Interserve business, excluding synergies, which are picked up on the next block. Synergies of GBP 12.1 million include GBP 10.8 million of cost synergies and GBP 1.3 million of revenue synergies. 110 heads have been taken out in the period and we've closed one more property, taking the total number of properties exited to 9. Based on our performance in half 1, we've nudged our full year '22 in-year synergy expectations, up by GBP 2 million to GBP 25 million. Phil will cover synergies in more detail later. The final purple block on the graph represents the remaining GBP 10.8 million upside driven by net wins and losses and net profit growth in the business. The profit growth broadly reflects the year-on-year improvements in Technical Services and Business Services and rephasing going in the other direction from landscapes. Together with the GBP 12.1 million of synergies, this GBP 10.8 million profit from the core business has driven an underlying trading improvement of GBP 22.9 million. Finally, the GBP 8.5 million in the pink block represents the group impact of the overhead increases that I referenced earlier. Now I haven't specifically mentioned inflation on this slide as it's been well managed so far this year, but we are starting to see signs of inflation coming through in our cost base. In our modeling, we've taken our labor and third-party cost base, which is around GBP 3.5 billion and applied a blended inflation rate of 4.5%. Some 85% to 90% of our contracts contain change of law provisions or index-linked inflators and we have a good track record of passing our inflationary costs on to our customers. As a result, we estimate an inflation impact for full year '23 of between GBP 10 million and GBP 20 million. But as Phil will show later, we're well underway with an overhead reduction plan to mitigate this risk. Moving on to the balance sheet, which has further strengthened since the year-end. Net assets are up GBP 66 million. Average daily net debt is now only GBP 60 million. We've got a net cash on an -- on a post-IFRS 16 basis, and our leverage is now 0. Total financial obligations is at an all-time low of GBP 84 million, comprising GBP 9 million of net cash, GBP 33 million of the pension deficit and GBP 60 million of invoice discounting. We're repaying the pension deficit at a rate of around GBP 11 million a year, and we'll continue to utilize the invoice discounting facility whilst it remains cost-effective. Our debtor days have come down by 3 days to 27 days. Our creditor days remained close to our all-time low, and we've generated a positive free cash flow of GBP 86 million. Finally, on the balance sheet. I spent some time covering the acquisition accounting and the goodwill calculation in June. I wanted to briefly come back to it. We'll shortly be at the end of our 1-year so-called hindsight period within which we can adjust the acquisition accounting. Having spent a year running the Interserve contracts and in particular, the loss-making contracts in communities, we've made an adjustment to increase goodwill by GBP 12.6 million to GBP 15.9 million. This increase has been driven by a GBP 7 million uplift to the Community's provisions and a GBP 5 million reduction in the amounts that we've claimed through the completion accounts. The completion accounts process has now been taken to expert determination and we expect to conclude it in the new year. Turning to net debt. And some of you will recall that I presented this chart for the first time in June and it shows the continued improvement that we've made in the period. So to clear out the noise from one-off material transactions, such as disposals, acquisitions and the rights issue, we've moved these items to the start of the year in each of the charts. This means that the within year moves reflect the normal course of business. Looking from left to right, you can see from the line graphs and from the purple numbers above the graphs, that rebased average net debt has reduced by over GBP 100 million in each of the last 3 years and by another GBP 100 million in the first half of this year. As I explained in June, we no longer have significant reductions in net debt at period ends because we no longer manage our working capital at period ends. This means that the gap between the minimum and the maximum in-year net debt has normalized. This is shown by the height of the pink dotted arrows, which highlights a 40% improvement from full year '19. Finally, on this slide, looking at the box in the lower right-hand side, let me just take a couple of minutes to explain the average net debt. If we strip out the effect of rebasing, headline average net debt of GBP 60 million is actually a deterioration of GBP 13 million from full year '21 and an improvement of only GBP 9 million from the first half of last year. However, this is because half 1 of last year included the full GBP 200 million received from the rights issue, but excluded the GBP 105 million cash payment for Interserve, which didn't take place until November 2020. Half 1 of last year also benefited from a GBP 97 million of tax time to pay cash and the full year '21 average benefited from GBP 92 million of tax time to pay cash. The rebasing that you can see on the graph here adjusts for those items showing a much closer like-for-like comparison. My final slide is pick up cash flow and working capital. So first of all, picking up on cash flow. As you can see near the bottom of the table, in bold, we generated a free cash inflow of GBP 85.9 million. This compares favorably to half 1 of last year, where the free cash flow of GBP 77.7 million was flatted by GBP 97 million of cash from tax time to pay. Key to the cash inflow from the half was a significantly improved operating cash flow of GBP 85 million, which you can see at the top of the page and a cash inflow from working capital of GBP 31.2 million. These inflows were offset by an outflow of 42 -- sorry, GBP 45.2 million from CapEx, leases, interest and tax. The cash outflow from these items has increased in the period as a result of the CapEx spent on project Forte and Interserve, the expansion of the vehicle fleet, higher interest from the old debt facilities and increased tax payments. Within the other payments of GBP 9.8 million, the largest single element of this is a cash outflow from other items of GBP 12 million. This includes OpEx outflows from the Interserve integration and from Project Forte. As I said in June, other items will remain relatively high over the course of the next 18 months as we deliver the Interserve synergies and we complete the Project Forte and digital supply chain programs. They will then dramatically reduce by the end of full year '23. At the bottom of the page, the GBP 9.3 million M&A outflow is broadly the net of the cash inflow relating to the sale of Document Management and the cash inflow -- cash outflow from the acquisition of DAEL. The result of all these items is an overall reduction in net debt of GBP 95.2 million in the half. We expect to reduce cash -- reduced free cash flow in the second half as profitability and working capital return to more normal levels, we complete Project Forte, and we purchased shares for our share incentive plans. Moving on to working capital. Our working capital performance in the period has been encouraging. We've had a net cash inflow from working capital of GBP 31.2 million despite the significant increase in revenue. And on the left-hand side of the working capital graph, you'll see that revenue growth in the first half has led to a GBP 34 million increase in receivables. We've offset our GBP 34 million increase in receivables with a 3-day reduction in our DSO, which has improved our cash by GBP 33.8 million. So we've offset the growth from a revenue perspective with what we've done from a DSO perspective, therefore, neutralizing it. And the impact of that has meant that our debtor days have improved by 3 days. On the other side of the equation, our payables have increased by GBP 55.1 million. As with receivables, a large chunk of the increase relates to growth, which is included in a GBP 43.3 million increase in payables and then an GBP 11.8 million increase in a payroll timing difference in the second half of the year. Creditor days have increased by 2 days to 28 days. But when you look back to the first half of full year '21, when we were at 60-something days, we've made -- we've come on a significant journey in terms of paying our suppliers on time. This therefore, means that our working capital has contributed GBP 31.2 million upside to our free cash flow in the first half of the year. So in summary, we've made a positive start to the year. We've delivered strong cash back profits and with the majority of the underlying business coming back to pre-COVID levels. We've had another good period for working capital, further strengthened the balance sheet, and we secured our long-term funding future. As we head into the second half of the year, COVID-related revenues will reduce but we expect that the remainder of the business will increase. Variable and project work should continue their gradual recovery. Underlying margins should recover closer to pre-COVID levels, and we expect the average net debt will again improve. And we're, therefore, confirming that our profit guidance of GBP 145 million to GBP 155 million for full year '22 still stands, and we're comfortable with analyst consensus for full year '23. And on that note, I'll hand back to Phil.

Okay. Thanks very much, Simon. Things seem to be looking up since you became CFO, so well done. Let me turn now to a little bit more of a strategic update, if I may. And you recall my saying at our last presentation that I considered our strategy to transform Mitie as completed. I explained that we were, therefore, moving to a new strategy, a strategy focused on growth and margin enhancement with increased investment in key capability enablers and improved cash generation and returns to shareholders. A strategy designed to deliver our full potential with returns on invested capital of over 20%. So how have we got on in the first 6 months of our new strategy? Well, let me start with growth and winning and retaining and growing existing contracts. And overall, our progress here has been good. The total contract value of new wins in the first half was GBP 881 million, and included $646 for the Scotland and Northern Ireland FDIS contract, GBP 78 million for home office immigration work. This is our best performance in wins for over 5 years. And on an annualized basis, adds some GBP 180 million of revenue. Retentions are running at 94%. Now this is slightly lower than historical rates due to our decision not to seek extension of a number of low-margin contracts. Total contract value extensions in the period were GBP 678 million. It's particularly pleasing to see Interserve renewals and extensions running at 100%, reversing historical declines. Project work is also picking up, showing that we are winning more of the capital budget of our clients. Revenue from projects was GBP 287 million in the first half, up 50% on last year with good progress across all divisions, albeit, as Simon said, we're not yet back to pre-COVID levels. It sounds like I'm getting COVID here as well. So I [ got to sweep ]. Project work, as I said, is improving. So finally, cross-selling into the Interserve accounts is accelerating with GBP 25 million of waste, landscaping and technical services work now being self-delivered rather than passed on to subcontractors. To drive faster growth, we've also invested in more sales and business development, bringing in greater sector expertise across industry advisers as well as specialized third-party bid management support. Our business development is focused on accessing a greater share of public sector frameworks in particular, and our pipeline is growing. We currently have over GBP 1 billion total contract value of bids at best and final battle stage, with half of these tenders being for new customers rather than simply retentions, growth in momentum should continue. Final part of our growth strategy is investing in higher growth, higher-margin M&A opportunities, as I mentioned at the start. M&A is an important part of our growth strategy, offsetting the inevitable decline in our COVID-related work and supporting our mid-single-digit growth ambitions over the next 3 years. We target a hurdle rate of return in excess of 20% for all M&A which can be comfortably funded from our free cash flow and from the new bank facilities in place. All 3 of the investments we made in the first half gave us access to technology, which we currently lack. But in return, we provide access to Mitie's loyal customer base and the capital to scale up rapidly. DAEL Telecoms brings design, construction, active maintenance in Mitie's telecoms business. We've already added new business from Vodafone and BT and expect full year revenue to be double the previous year. Rock Power Connections is a leader in high voltage and EV charging design and construction project management. With a growing order book and now with access to Mitie's clients again, such as Gridserve and [ Road Check ] full year revenue should also double this year. Finally, Esoteric a small deal we announced yesterday, although only small today, it has leading technical counter-surveillance measure skills, which we will expand through our intelligence-led security offer to our wider customer base. And we'll continue to look at similar infill deals as part of this growth strategy. So that's growth. Now let me turn to margin enhancement. And as you know, we're targeting an improvement of some 150 to 200 basis points margin improvement over the next 3 years to get us to our 4.5% to 5.5% margin target. So dropping the Interserve -- GBP 42 million Interserve synergies, some 180 to 200 basis points margin improvement to the bottom line is a big piece of this. ISV's ERP accounting system, AX12, has now been successfully migrated to SAP with billings now being processed through our Indian shared service operation without cracking on with absorbing old Interserve CAFM systems and moving everything into the cloud. One thing we are particularly proud of is gaining our Cyber Essentials Plus reaccreditation given that last year Interserve had, had a cyberattack. The Interserve property portfolio has been simplified, including exiting ISV's former headquarters Ingenuity House in early December. As Simon mentioned, run rate synergies are now accelerating. In HR, we've completed the move of 27,000 Interserve employees on to Mitie's payroll systems. And now the TSA is ending, headcount reductions will increase. The value of negotiating better supplier deals is also coming through. So next year, we'll see the full year impact of these savings, and we are on target to deliver an exit rate of GBP 42 million at the end of FY '23. There's a lot more though to margin enhancement than just the Interserve synergies. Turning around a handful of loss-making ISV contracts with contribution of 10 to 15 basis points of margins, we now have a better data transparency over the drivers of profitability. And we have brought in a new management team with further technical support. We're also targeting a further 30 to 40 basis points of margin enhancement from a new operational excellence initiative, using motor industry best practice and Six Sigma lean process, a lean approach to eliminate wasteful working practices and process variances, thereby better automating our operations. And process mapping work, has begun on a major GBP 150 million a year of major strategic account, which we will then roll out to our other strategic accounts with extensive Six Sigma training for all our people. And better controlling our GBP 1.4 billion third-party spend through our digital supplier platform will contribute a further 30 to 40 basis points of margin enhancement. You'll recall that the Interserve synergies included already GBP 15 million of procurement savings from negotiating better deals, but this isn't the end of procurement savings. Our [ Cooper ] digital supply chip platform automates all these sourcing deals into formal contracts and a single digital catalog. So local purchasing deals outside of the catalog will then cease. And at this point, all third-party purchases will run automatically through our purchase-to-pay process, not to customers' bills. We'll have complete transparency over the GBP 1.4 billion third-party spend who ordered it, for which client, when it was paid to the supplier and when it was billed to the client. This is the way we minimize nonrecoverable third-party spend, improve our stock turnover and just-in-time delivery of services and improve client billing accuracy. Finally, we are launching a new cost-out initiative targeting a further 20 to 30 basis points of margin enhancements from our nonrecoverable GBP 200 million per annum of group overheads. Since the acquisition of Interserve, our overheads have been going up, and we're now undertaking a full spans and layers new target operating model and back-office review to offset the GBP 10 million to GBP 20 million of labor inflationary pressures that Simon mentioned earlier. In aggregate, we expect the run rate impact of all these initiatives to have landed by the end of FY '23. And of course, the final piece of delivering our 150 to 200 basis point margin enhancement is Project Forte. There's no doubt that Forte is an extremely complex and ambitious IT solution. And having cloned our production environment, our first dress rehearsal is tested the end-to-end integration of workflow capture and triage, dispatch to appropriately qualified technicians, delivery of asset history and completion of task, pricing linked to contract terms, billing to clients, recording and accounting and Data Lake extraction, a real-time MI. And when scaled up, we found some data inconsistencies in straight-through processing. So we've taken the decision to extend integrated product testing for another 3 months. Remember, we're building a system for 7,000 users with 5 million assets, 20 million lines of new data loaded, up, 2 million jobs per annum and automated billing for over 800 of our top technical services customers. So we have to get it right. We need to be 100% assured. We can't take the risk of the work not getting done, suppliers not getting paid and clients not being billed accurately nor indeed have not been able to close our accounts. So we've pushed back the go-live date until after the year-end. And cutover will begin on the 1st of April. Now there's a small cost overrun of the extended testing that is absorbed within the existing contingency of the project. And overall, we can definitely see the light at the end of the tunnel now, where we remain confident. We've got a product that works and that will deliver the original GBP 15 million to GBP 20 million net savings, 34 to 40 basis points of margin enhancement in FY '23. So that's margin enhancement. Now let me turn to our capability enablers. And with COVID and Brexit and inflation, probably never been more important than now to put our people at the heart of our business and deliver our ambition to be a great place to work. Our engagement program built on say, stay and strive is now in its third year. And our people trust us to support them. We lead in additional benefits for our frontline staff. Alongside life assurance, this year, we've introduced 24/7 virtual GP-free flu vaccinations, given free shares to all our employees and intend to do so again this year. We also launched a more generous Save As You Earn, our share incentive plan, where the take-up has been more than double the average of the last 5 years. And our salary finance uptake is up 50%. We lead in diversity inclusion and have the awards to show it. We lead in skills-based learning, now with 1,000 apprentices, work placements and growing our own talent. And we lead in charity partnering, we do to help people get on the first rung of the ladder of work. That's why we continue to win awards, reflecting our investment in our people, creating that great place to work. The colleagues want to work for a company that not only cares about its people but cares about the environment. Hence, why we've also been investing in our decarbonization capabilities, Mitie has the best ESG, MSCI, Sustainalytics rating of any FM company in the world, a position we're extremely proud to hold. With the U.K.'s largest EV fleet of 1,700 vehicles and another 1,200 on order, we are well on our way to achieving our zero-carbon ambition by 2025. We also have a leading position in zero-carbon energy procurement, EV rollout, renewable energy projects and in waste elimination and biodiversity investments. And the recent tie-up with Sustainable Capital Development -- Sustainable Development Capital Limited, SDCL, which is funding our clients' own zero-carbon ambitions is an exciting new development. And now with the acquisition of Rock Connections, our decarbonization capabilities are growing, and we expect our Energy Projects business to double to GBP 200 million next year. Our final capability enabler is what we call the science of service, the industry-leading capabilities we bring in Security and Hygiene and in Technical Services. Capabilities our clients want in a post-COVID world, such as our intelligent security operations center, demonstrating the real-time analytics on shrinkage that we provide to our retailers, for example. The effectiveness of anti-COVID hygiene products, Citrox. We've got [indiscernible] UV here at our Cleaning & Hygiene Center of Excellence, where the new robotic cleaners that you met out there today are also being evaluated. And at the Amazon of FM at our Technical Service operations using Project Forte to track workflow and our Connected Workspace capabilities, which, again, are available to be demonstrated to anyone who wants to see it later on this morning. So it's, in our view, it's this capability, the science of service that will determine who will win in a post-COVID world of smarter workplaces. So in summary, we've had an encouraging start to the year. COVID has helped, but our underlying business is back to pre-COVID levels. Cash generation is strong, and our net debt and total financial obligations are extremely low. Our balance sheet is stable and we're comfortably able to fund modest infill acquisitions. We've resumed paying a dividend to shareholders and plan to do so, as Simon said, on a sustainable, progressive basis going forward. And finally, we are making steady progress towards delivering our medium-term strategic targets. So thank you for listening. And with that, we'll turn it over to questions. Chris?

Phil and Simon, just some questions on the margin enhancement opportunities you talked about in Slide 18. Of the 4 blocks, which will be the quickest to deliver? Secondly, when we look at fixing the loss make Interserve contracts, what's the total aggregate losses we're looking at there? When we talk about -- and you were saying about fixing, is that getting to breakeven or actually looking to positive profit contribution? And finally, when you talk about codifying operational excellence, I'm just trying to put that into scale, I don't know is in terms of productivity, efficiency, what kind of level of improvements are you looking at there? Just to put into context.

Great. Okay. Well, slide -- let me deal with the quickest one. And then maybe, Alice, do you want to have a go at -- the -- just particularly the health contracts, and then I'll come back on the final one around the operational excellence. So look, I'll do the first 2. I think the quickest for me, I think, is going to be in the third-party spend, and we think that's quite an exciting opportunity to control. Really, we might have signed a deal with the supplier for better rates. It doesn't necessarily mean that we get it because someone might buy off the framework. Or indeed, we're not always tracking the deal we signed is the deal that then goes on to the invoice. So a lot more discipline around how we spend and really challenging why things are being ordered. So it's not just about more efficient buying. It's stopping buying as well and the accountability that goes with that transparency. So that's quite a key one. The operational excellence is an interesting one because we'll see it could go -- it could be quite significant because there's still a lot of manual processing in operations. And even in the one contract we're looking at, and Brian knows it well. We do things differently within the contract. So it's about standardizing process the most efficient way. And like as we said, codifying that, and I think it will drive quite a lot of efficiencies there as well. I mean, if you look at the amount of agency spend we have and manual working still, particularly they are in Brian's area, I think it's fair, to say we're quite optimistic about that one as well. Simon and I are on the overhead cost reduction, our plan is to have made a decision so that they are up and running for the 1st of April so they're in our new fiscal year. And then Alice, do you want to have a go at turning around our Interserve contracts? Alice is on, I mentioned, we changed the management team in the Communities business, and Alice is the Managing Director of that team.

Thank you. Yes. So yes, to answer these questions about what's happening with some of our -- the business that's come across from Interserve. So yes, we do have some loss-makers there. In the time that we've had our Interserve contracts, the number of loss-makers has gone down from 14 to 8. So we're making some good progress in terms of that. And the loss-makers that we have, you asked, what's the drag that they're creating for us. At this point in time, it's about GBP 5 million. And you asked where could that go to and how? So yes, we are targeting better than breakeven. Let's get them to breakeven first, but we keep going from there. And I would point to, I think the factors that we see that are moving us in the right direction is, firstly, bringing in much better management practices around commercial management for those contracts. They're all within the PFI arena, and that means that your commercial management is particularly important, and we have some really good best practice that we're bringing across. And one of the reasons that we're seeing it take its time to wash through is that there are a number of commercial matters that we need to resolve in order to get to those better places and that's going through the business at the moment. Compliance, basic technical compliance is something that Mitie brings a huge amount of value to those contracts on. September was the first month in which we met our core maintenance requirements for those contracts, which is good to see. So we're moving compliance in the right direction, which, again, in a PFI environment means that you can also do better financially. There's a lot of operational best practice to bring across, things like the Cleaning Center of Excellence that we're setting up really shows the power of bringing Mitie's divisions together. Cleaning is the largest single service line that we have within communities and hooking that up with the Center of Excellence, getting the robots in, which is what we've done this week, for example, at John Radcliffe, one of our newest accounts, but also in our more troubled accounts helps us move the productivity forward. And the last bit of the piece here is Maximo, which will be coming into the communities estate, including those accounts over the next 12 to 18 months, and that will again help us turn the corner. So work to be done, but a lot of areas in which the adoption by Mitie is really critical to the turnaround.

Sounds like we need to be putting your budget up next year, Alice, but thanks for that. And when Alice talks about Maximo, that's Forte, I mean that's our new system, as you're aware of. And Alice mentioned John Radcliffe, that's not in the numbers at the moment. That's another GBP 18 million to GBP 20 million a year contract that mobilized last Monday. So it's a good contract of one. Joe?

Joe Brent, Liberum. Three questions, if I may. Can we start off with the inflation story? You say 85% to 90% of contracts have protection. Previous management had told me it's all of the contracts. Could you just tell me why you can't get protection on all contracts? I'm sure there are good reasons for that. And secondly, you talked about making up GBP 10 million to GBP 20 million of that cost through the overhead saving. Could you just explore a little bit more on that, how we get to GBP 10 million to GBP 20 million of savings? And thirdly, maybe for Simon, could you just talk through the back to payment distortion on working capital?

Unfortunately, we didn't have the slide to show. It's kind of -- it's being printed now, so we'll have it before you leave. But -- so let me take the first 2 of that. Look, most -- let's just sort of break it down. All government contracts generally have change of law provisions in there. So national insurance increases change of law. National living wage, minimum wages are a change of law and then usually have the differentials fix. So if one knocks in, it knocks through the other levels. And as well has CPI and some contracts have both, actually, which is quite nice because the CPI is there to cover parts and third-party stuff. In the -- if you work down through the divisions, so Business Services has very, very good recovery and pass-through on pricing because it tends to be labor and it's -- and so labor is the main. It's security guards, it's cleaning. It's embedded in the contract, and it's passed through. Central Government & Defence, again, I've mentioned it's got good cover, and the Communities business has got good cover as well as they tend to be, again, public sector contracts. Where we've got the lease cover is in Technical Services. And that's because historically, we had signed some contracts for very large IFM contracts that have deflaters in them. So actually, I won't name them, but you signed a 5-year deal, you commit deflator savings. So those, you don't have the protection on it, that explains the difference. However, the other side of the coin of those contracts is that you've got more flexibility in the contract to drive efficiencies because the basis of committing a deflator regime is that you could change the way you did things. So it's always a bit of a battle. Can we make the changes sufficiently quickly? So that's the contractual reason why we're not 100% covered, but it's also why, through customer practice, we're pretty comfortable with that sort of 90%. But there is an element we are not covered for. And we're quite open about that. And partly, it's absolutely factored into our numbers. What we didn't want was everybody going off and doing their own maths, we wanted to make sure everyone understood the situation. The point about the overhead is overheads have been going out and there's always a reason for overhead going up. And of course, we brought in Interserve, and yes, we saved money, but overhead has still gone up. So we are having to look at that now with a third-party company to help challenge us with a team that we stood out and Simon, working with Simon. And essentially, it's the same old chestnuts. It's and this is all part of -- this is nonrecoverable cost ins -- costs. So that's the key. We -- every time -- if we can charge a client, that's great. But if we can't, it's a drag. So it's a significant drag. So we're looking at spans and layers again, and we've got that now. We've got our -- everybody on the new payroll systems, we've got absolute clarity on all our spans and layers. So we've got 20 layers -- 20 layers [ just of ] different work categories. We know exactly what the pay is. We know the reporting lines. We know the work they undertake. There's lots of work going into the IT behind the workforce and looking where it is. And we have this strange sort of barrel approach to our cost where you think we'd have more of a triangle, but we have a little sort of middle age spread in the middle of the cost, which is category of work being done and then the cost. And so it helps to point into spans and layers were -- and the banding where we need to look. So that's one. I think, as I mentioned, back offices, we're driving a lot of efficiencies out of the back office and continue to do so. And then we'll look at the target operating model. Yes, we're a year in with Interserve now, and we didn't make all lots of changes. So we just looking around is a different way of looking at how we deliver. For example, we do project work that collar just project works in Technical Services. We do project work in brands area. We do project work in analysis area. And is there another operating model that might drive more efficiencies out of that. So that would be it, for example. Simon, do you want to do working capital? Sorry, I don't have your slide.

Are you sure you don't want to pick up on banks? Joe, I think your question on banks is, what has changed? And what is...

Can we get that slide circulated?

And Joe, what has changed from a banks perspective? And we changed this actually at the year-end. So this is not new in the first half of this year. But we're now recognizing cash once it's landed in our customers' accounts as opposed to -- sorry, we were previously recognizing cash once it landed in our customers' accounts. We're now recognizing it when it leaves our account. So it's sort of a cash-based accounting, if you like from a year-end cash perspective. And in terms of the impact on the year-end, it's relatively insignificant. Matt, I think we're talking sort of in the region of GBP 10 million of impact? Yes. We're talking GBP 10 million of impact?

[ Was supplemented ].

So for this first half versus first half of full year '21...

Just to understand the impact on working capital, which you said is an GBP 11 million benefit.

Fine. Okay.

I mean, it's more complicated than that, and that's why you have a look at it because you've got growth and you've got to fund growth, but also we've done a better job getting bills out. If you look at accrued income in the balance sheet, accrued income is falling even though growth is rising. So that's telling you something about how much more quickly we're getting work built. And generally, as we always say -- as you know, the way it works with it, we have to apply for permission to bill. So the clients already cleared the bill once we've applied, and that's when we bill. So we generally don't have any bad debt problems because the clients essentially preapproved it and it just runs through the purchase to pay settlement at that point. Okay. Any other questions. Kean?

It's Kean Marden from Jefferies. I've got questions -- do you mind if I sort of go through them one by one? Because you're going to get -- a lot -- some of them are linked...

What do you think? Should we allow him -- how should we allow him? Go ahead.

So first of all, sort of stand-alone one is some of the bolt-on acquisitions that you've made recently, you have some quite substantial growth aspirations for those businesses. I'm just wondering what gives you the confidence and visibility over scaling up the revenue quite so much, particularly for 2 of them, I'm thinking in mind?

Carlo, do you want to have a go at that one? Why don't you come forward? We've got DAEL Telco. Carlo used to be CTIO at Cable and Wireless. So he knows a lot about telecommunications and then Rock, the EV charging. Why don't you...

Sure. Thanks for the question. Well, on DAEL Telecom, they provide, as we said, acquisition design and construction capabilities for cell towers, and we believe that, I mean, coupling that with our maintenance capabilities, where we already maintained the cornerstone that stayed, which is Vodafone [ NO2 ], 26,000 towers can propel us, I mean, to offer these end-to-end services to other operators. They're already operating EE and Vodafone and as well as in other kind of tower companies. Last year, they did 80 million. This year, they're trending towards the 30 million. So I mean that's already 1 year. I mean, we see significant growth opportunities. And again, the market is with the Huawei decommissioning, the 5G uptake, is, I would say, pretty hot out there. Rock Power Connections is an independent connection provider that provides high-voltage capabilities up to 132 kilovolts, operates pretty much in 3 segments with DNO, distribution network operators, providing new connection to the grid and asset renewals and as well, I mean, now pretty much into EV charging stations. And it does have some exclusivity agreements with some of the important, I would say, for courts providers of EVs. Again, as we see this year revenues, we see already now, I mean, 50% up year-on-year. Now the -- I would say the value is going to be extracted by bringing it together with the current capability in Mitie, both in advisory and project delivery capabilities that we have in our Mitie Energy team. And therefore, opening as well, as Phil mentioned, our distribution of clients into their technical capabilities. So again, we have very ambitious growth plans. And year-to-date, that's proven to be fine.

Then the sort of next group just sort of looks at, I guess, margin and your sort of pass-through comments. So the new wins that you've booked and obviously, you've booked quite a few new wins over the last 6 to 12 months. Were those booked with a target margin that's consistent with the 4.5 to 5.5 medium-term range or higher? And also with more recent contract wins, given the environment, have you looked to change the legal terms? So presumably, you've got some flexibility in the legal language. And if you can't get 100% pass-through, then is there some way of dealing with that contractually, which basically helps narrow the gap on the slide that you mentioned earlier on? And then adjacent to that, you mentioned you walked away from some turnover in the first half. Do I guess from the slide that you put up that, that might have been 1% to 2% of group revenue? Because you look to give us a retention number, which you look at it come down from 96% to 94%, I think, if I read the chart correctly. And if you walked, was it because of pass-through and margin?

So let me deal with that last question first around the -- what we walked away from. I would say there's probably GBP 70 million of revenue that we walked away from. And it was probably making 1% to 2% margin?

Yes.

I think the renewals -- the short answer is yes, because we have a minimum -- we have a minimum margin target that we -- and we have minimum rules around credit terms and the like and the legal terms as well. So it depends. I mean some -- it depends. Public sector, as Brian will tell you, it's a lot harder to negotiate stuff like that. You basically lob it into a portal. And then if you're lucky, you get a reply that it's not usually very -- not always what you want to hear. So I think in commercial negotiations with the private sector, you have -- it's all part of the mix. So I think you're never going to have a one-size-fits-all approach. The other bit of data that I was looking at a couple of days ago, we track margin renewal. This is a big thing for us is because historically, as you know, we would renew margin -- renew contracts at lower margin. So we're tracking all the renewal margins versus the historical margin. And at the moment, it is slightly higher. And where we've watched the data, if we got comfortable with it, we'll share it with you. There are 2 bits of data that are worth -- I think are worth on picking a bit more detail. One is that margin renewal, how much are renewed compared -- and what was the margin compared with what we used to get. The other one is, is there any correlation between higher margins and technology uptake? And it would appear, certainly, there is some evidence of that emerging, which is good to hear because that's why we're -- people ask me, why are we spending all this money on Connected Workspace and science of service. Well, if I can demonstrate to you that I'm renewing again with higher margin in aggregate, that's how it's getting paid for. Was there any other questions in there? You had a few more.

Sorry, one last quick one. Is there any boost in the first half from sort of the one-off sanitation work that some of your peers referred to in the states or in Europe? Or is that de minimis?

There's a bit in DWP, Brian, isn't there? But it's coming off now. And I mean I think the hospitals are more at a level where they'd want to maintain it, right? The last thing they're going to be doing is cutting it back. Alice, what do you say?

We've maintained it.

Maintain. Any other takers? Chris, go on. Last one.

Just with regard to the Esoteric acquisition, just the relative scale off in the consideration plan?

Small. It's -- we're talking less than GBP 1 million of revenue and in the hundreds of thousands of profit. So it's small.

Okay. Thank you very much. If anyone wants to see the Connected Workspace in action around the corner, you are more than welcome to have a cup of coffee. But thank you for coming and see you in 6 months' time. Thank you.

Thanks, everybody.