Mitie Group plc (MTO) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Welcome to Mitie's FY '22 Annual Results Presentation. We are broadcasting, as usual, live from here in The Shard, so welcome, everybody. As usual, I'll make some introductory remarks, and then hand over to Simon on the detailed financial results. And afterwards, I'll pick up where we are from a strategic point of view. So in summary, we had a very strong year financially, record revenue, profits and cash generation. And clearly, our rapid-response COVID-related contracts had been a key contributor as we won more business and scaled up our delivery throughout the year, as has a 12 -- full 12 months of contribution from Interserve. But even after excluding these factors, our underlying revenue grew by 14% and has now recovered to pre-COVID levels. Interserve has performed ahead of expectations with good synergy delivery and good project growth in particular. Profits and margins have improved. Free cash flow was strong, helping to finance a number of acquisitions of high-growth, high-return businesses, another one of which, Custom Solar, we announced today, we've made it 7 deals in the last 12 months. We won GBP 3.8 billion of new contracts and extensions, and this momentum, along with our focus on inflation management, which Simon will get into, underpins our confidence in our FY '23 outlook. The Board is recommending a final dividend of 1.4p per share, taking the full year dividend to 1.8p per share, a payout ratio of 20%. And continuing the theme of increasing shareholder returns today, we've also announced an initial GBP 50 million of share buyback programs. So in summary, it has been a strong year, our best year since I joined Mitie, a year where we reached an inflection point, in my view, in the delivery of our strategy and did so sooner than we'd expected, as I'll explain shortly. But first, over to Simon.

Thanks, Phil. Good morning, everybody. So as you can see from the headline numbers on this slide, Mitie's recovered strongly from the pandemic. The acquisition of Interserve and our strategic response to COVID has helped us to achieve a strong set of results for full year '22. As Phil said, headline revenue is up 58% due to a number of significant wins, the inclusion of Interserve and the delivery of rapid-response COVID-related contracts. Operating profit before other items grew to GBP 167 million, boosted by profits from COVID-related contracts and synergies from the Interserve acquisition. Operating profit margins have improved to 4.2%, helped by the contribution from the COVID contracts. Profit after tax of GBP 128 million has benefited from an effective tax rate of 12.9%, and EPS before other items is 9.2p. We have a robust balance sheet, with total net assets of GBP 426 million. And we've generated GBP 133 million of free cash flow this year, which reflects our strong profitability and ongoing improvements in working capital. This has helped to reduce our average daily net debt down to GBP 25 million. 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. I've included a reconciliation at the bottom of the slide to show the movement in underlying revenue, excluding the Interserve contribution and the COVID-related contracts. As Phil said earlier, it shows that year-on-year, the underlying business has grown by 14%. Business Services has made a significant contribution to that growth, with revenue up by 49% in full year '22. Whilst the newly incorporated Interserve contracts and the COVID-related testing center and quarantine and services contracts have made a significant contribution this year, the underlying business has grown by 11% as a result of a number of new public sector wins across Cleaning and Security. CG&D revenue of GBP 669 million reflects the full 12 months of Mitie's ownership compared to just 4 months in full year '21. CG&D has achieved some strong wins and renewals in the year, in particular, the future defense infrastructure services contract for the DIO, and has delivered increasing volumes of project works across a number of its largest contracts. Communities revenue has increased by 74% year-on-year, driven by the inclusion of the Interserve health care and education contracts. Excluding this impact, revenues are broadly flat year-on-year. Technical Services is the business area where operations were most significantly impacted by COVID-19. Revenues have recovered significantly in full year '22, with growth of 30%, helped by the private sector Interserve contracts being folded into the business. As people have returned to work in the second half of the year and with the addition of the recent acquisitions and new contract wins, revenue run rates from Technical Services have now improved back to pre-COVID levels. Finally, Specialist Services revenue is up 41% year-on-year, largely as a result of wins in Care & Custody, cross-selling in Waste and Landscapes and the inclusion of Interserve's Spanish operation. Moving on to operating profit. At a group level, excluding the profits generated from the 2 COVID-related contracts, profits are broadly back to pre-COVID levels, representing a much improved 3% margin. Profit for each of the 5 divisions is significantly better than last year with Business Services performance, in particular, being very strong this year. Whilst Business Services received a significant boost from the higher-margin COVID contracts in the year, underlying profitability has also improved. The key drivers of this improvement have been large public sector wins, such as the ongoing security work being undertaken for U.K. ports and the immigration work for the home office, combined with cost savings, contract efficiencies and increased project works. CG&D profits for the 12 months of full year '22 significantly exceeded the comparative for 4 months of Mitie's ownership in full year '21, being almost 4x greater and thus, at a much higher monthly run rate. This improvement was largely driven by the additional project works that I mentioned earlier. Communities profits have improved year-on-year, but the loss-making contracts acquired with Interserve continue to be a headwind to the bottom line. As Phil will explain later, a number of the problem contracts are now back to a broadly breakeven run rate, but there remain a handful of underperformers. Within the GBP 19.9 million, we've utilized GBP 5 million of provisions that were made against these loss-making contracts on the Interserve opening balance sheet. Technical Services operating profit of GBP 30 million is significantly higher than last year when the business was severely impacted by COVID. The performance is underpinned by a number of new wins, high contract retention rates, cost savings and synergies. However, the business is not yet back to pre-COVID profitability as a result of the more gradual recovery of high-margin project -- high-margin variable and project works and the completion of the MoJ and NHS Properties contracts in full year '20. We expect to see continued improvement in full year '23, aided by the recent DAEL Telecom and Rock Power systems acquisitions and as customers continue to return to their places of work. Operating profit in Specialist Services is up 37%, including a full 12 months of the Interserve Spanish business and a strong performance from the legacy Mitie businesses. The GBP 11 million increase in corporate costs reflects the absorption of a full year of Interserve overheads and increased incentive accruals. And finally, at the bottom of the page, the full year profit from COVID-related contracts was GBP 59.6 million. The second half contribution from these contracts was around half of that delivered in the first half, as both testing center and quarantine services contracts have wound down to completion. The vast majority of this profit falls into Business Services. My next slide is a profit bridge, which pulls out the key drivers of the increase from the GBP 58.8 million in full year '21 to the GBP 166.9 million this year. The first block on the graph shows the GBP 47.6 million contribution from the COVID testing center and quarantine and services contracts, noting that this is a year-on-year movement, so lower than the GBP 59.6 million that I showed on the previous page. Secondly, we showed the GBP 21.7 million of year-on-year profit growth from the acquired Interserve business, excluding synergies, which are picked up in the next block. Cost synergies grew to GBP 30.2 million in full year '22, which is a GBP 25.2 million increase from full year '21. And Phil will cover the synergies in some more detail later. Net wins and losses have contributed a further GBP 8.4 million worth of profit this year. And the final purple block on the graph represents the remaining GBP 15.9 million upside, driven by the year-on-year improvements that I've explained in Technical Services and Business Services. The growth in the core business, net wins and losses and in-year synergy improvement have together driven an underlying trading improvement of GBP 49.5 million this year. And finally, on the right-hand side, the GBP 10.7 million in the pink block represents the group impact of the overhead increases that I referenced earlier. I'd now like to spend a little bit of time on inflation. With CPI running at an average of 5.6% in the second half of full year '22, we have seen some cost increases in the business but they've been significantly lower than the headline rates of inflation that we're seeing in the market. The total impact of inflation on our cost base in full year '22 was GBP 71 million, which, on a cost base of around GBP 3.6 billion, is only a 2% year-on-year increase. There are a number of reasons why the 2% is not higher. The first is because to date, wage cost inflation has been below headline inflation rates. Secondly, we've agreed scope changes with some of our customers, enabling us to keep our costs flat through delivering a reduced scope of work. Thirdly, on our variable and project works, we typically price at current costs. And the final factor is the labor market, which has remained relatively buoyant in our sector in full year '22, meaning we're not overpaying to fill open positions. Of the GBP 71 million cost increase that we did incur in full year '22, we were able to pass on GBP 63 million to our customers as a result of the broad contractual protection that we have in place and our strong relationships. This represents a recovery of around 90%. As we head into full year '23, although there's been an increase to the national living wage of 6.6% and CPI is currently at 9%, for the reasons explained above, we expect the impact on our cost base to be limited to 4% to 5%. After a recovery of circa 90%, this equates to a revenue increase of 4% and a net P&L impact of GBP 10 million to GBP 20 million. We expect to mitigate this through our cost-saving programs. As you can see from the right-hand side of the page, we now have a live suite of Power BI dashboards running off our data lake. These dashboards allow us to monitor financial, labor and operational metrics live, including inflation, and we can see all of this data on a contract-by-contract basis. Now moving on to the balance sheet, which has further strengthened during the course of the year. Net assets of GBP 426 million are up GBP 68 million. Average daily net debt has improved to only GBP 25 million. We have net cash on a pre- and post-IFRS 16 basis, and our covenant leverage is 0. TFO is down to only GBP 30 million, comprising GBP 27 million worth of cash, GBP 12 million of pension deficit and GBP 45 million of invoice discounting. We're repaying the pension deficit at a rate of around GBP 12 million per year, and we've been winding down the invoice discounting facility with a view to closing it in the first half of full year '23. Our debtor days have come down by 2 days to 28 days. Creditor days are in an all-time low, and we've generated positive free cash flow of GBP 133 million. Hopefully, most of you are now familiar with this chart, which I first presented a year ago. It shows that we've continued the positive performance of the last 3 years into full year '22, again, reducing average daily net debt by around GBP 100 million. Other than the ongoing reduction this year, the other feature that I want to pull out on this graph is the change in the shape of our in-year cash profile. In full year '19, it was an M-shape, as we actively managed our working capital of the period ends, whereas we now show a steady downwards trend in full year '22, reflecting the strong underlying profit delivery of the business throughout the year. Going forward, we expect a net cash outflow in the first half of full year '23, as we unwind the invoice discounting facility, account for the 3 new acquisitions, pay the dividends and commence the share buyback program. Finally, on this slide, looking at the box in the lower right-hand side of the page, the reason why the headline average net debt of GBP 25 million is only a GBP 22 million improvement from full year '21 is because full year '21 included the benefit of GBP 91 million of tax time to pay cash. When we rebase it, as we have done in the table and on the graph, you can see the full scale of the improvement this year. The final row on the table shows year-on-year finance costs. Despite the reduction in net debt, finance costs increased by GBP 2 million in full year '22, as a result of the costs associated with the financing that was undertaken during the pandemic. As we've now subsequently refinanced both our revolving credit facility and U.S. private placement notes at favorable rates, and we're terminating our customer invoice discounting facility, finance costs will start to reduce in the second half of full year '23, coming down by approximately GBP 4 million on an annualized basis. Moving on to cash flow. As you can see in the middle of the table, in bold, we generated a free cash inflow of GBP 132.8 million this year. This was due to the significantly improved operating profit of GBP 166.9 million, which you can see at the top of the page, and a cash inflow from working capital of GBP 60 million. These inflows were offset by a GBP 14.6 million net cash outflow from other operating movements, which includes GBP 29.6 million of cash other items and an outflow of GBP 131.1 million from CapEx, leases, interest, tax and other. Cash, other items were broadly consistent with last year and included GBP 14.3 million for the Interserve integration, which we completed within the GBP 33 million worth of costs that we originally guided to. We also spent GBP 7 million on Project Forte and GBP 3.9 million on the digital supplier platform. As we've explained previously, we'll continue to incur cash, other items in full year '23 as we make the final investments required to complete the Forte and digital supply chain programs. They will then fall away dramatically. At the bottom of the page, beneath free cash flow, we had a net GBP 5 million M&A inflow, we paid GBP 5.7 million interim dividend in the year and the majority of the GBP 18.7 million noncash movements relates to an increase in lease liabilities in the year. The result of all of these items is an overall reduction in net debt of GBP 113.4 million. Moving on to working capital. Our working capital performance this year has once again been encouraging, generating a net cash inflow of GBP 60 million. We've further improved our application billing and aged debt reporting processes this year, driving a 2-day reduction in our DSO and a cash improvement of GBP 28.6 million. Our incentive accruals have increased off the back of this year's strong performance and our improved outlook, and we've had a small cash inflow from working capital as a result of the overall growth in the business. Finally, despite the reduction in drawings on the invoice discounting facility this year, we've had a GBP 12.8 million working capital inflow. This inflow was caused by a large cash receipt on the final day of the year for an invoice that had already been factored. The facility will be closed in the first half of full year '23, which will result in a GBP 45 million outflow of cash from working capital and an increase of around 4 DSO days. Before handing back to Phil, I'm going to spend a couple of minutes wrapping up the Interserve acquisition as the synergies have been all but delivered, the completion accounts have now been agreed, and it's 2 years since we set out our acquisition case, amazingly. We now expect to deliver GBP 45 million of synergies from the acquisition, 50% more than we set out to achieve and at the same cost of GBP 33 million. We've balanced our public and private sector portfolios, delivering strong growth in the public sector. We've retained over 90% of the large Interserve contracts that have come up for renewal, and we've generated GBP 42 million of revenue from cross-selling Mitie services into Interserve customers. NPS scores have improved materially, supporting growth across the legacy Interserve contracts, and the acquisition has helped us to both delever the business and generate increased free cash flows. Summarizing the economics and accounting for the deal, we initially paid GBP 200 million for the business. Through the completion accounts process, we've reduced that GBP 200 million to GBP 193 million, having agreed a further GBP 7 million payment from the sellers a few weeks ago. This means that we've reduced the GBP 53 million completion accounts receivable that we were holding on the balance sheet down to GBP 7 million, with a noncash adjustment of GBP 46 million being made through other items. The adjustment was made to other items because we're now out with the period within which we can adjust goodwill. Against this GBP 193 million purchase price, Interserve contributed GBP 32 million to our full year '22 operating profit, and we're on course to generate GBP 45 million worth of synergies. After tax, this results in a payback of a little over 3 years and results in a return on invested capital of 32%. These figures exclude any potential benefit from the tax losses that we acquired with Interserve. The growth, delevering and free cash flow that the Interserve acquisition has helped us deliver leads us to take another look at our capital allocation strategy. Our overall goal is to maintain a leverage target of less than 1x net debt. Clearly, we're significantly below that level at the moment with average net debt of only GBP 25 million and an EBITDA of over GBP 200 million. As a result of our strong free cash flow, we've reinstated the dividend this year, declaring an interim dividend of 0.4p. We've recommended a final dividend of 1.4p a share, taking the full year '22 dividend to 1.8p a share, representing a payout ratio of 20% at a cost of around GBP 25 million. We intend to increase the dividend towards a payout ratio of 30% to 40% in the medium term. We've made 4 acquisitions in full year '22, all in high-growth sectors where we believe we'll achieve higher margins. We'll continue to look for appropriate bolt-on acquisitions into full year '23. And finally, as we're now back to pre-COVID profitability, we've generated substantial free cash flows in full year '22. And we're significantly beneath our target leverage position. We're announcing a program of share buybacks over the course of full year '23. We expect to return GBP 50 million of cash to shareholders this year, and we'll flex this figure in future years, depending on our free cash generation, success in the M&A market and our leverage position. So in summary, we've had a positive year, delivering double-digit growth in the underlying business, strong cash back profits and with group profits now back to pre-COVID levels. We've had another good year for working capital, further strengthened the balance sheet, and we have no debt. Earnings per share has increased to 9.2p. We're recommending an increased final dividend of 1.4p a share, and we intend to return cash to shareholders via a share buyback program this year. As we look ahead to full year '23, underlying free cash flow for the year will be strong, albeit we expect a headline cash outflow in the first half following the termination of the invoice discounting facility. Our revised capital allocation plans will see us increase shareholder returns with a modest increase in average daily net debt towards our target leverage position. COVID-related revenues will have largely ended, but we expect mid- to high single-digit growth from the remainder of the business. We've managed the impact of inflation well so far, and we expect to see underlying margins improve from this year's 3% base, as the margin enhancement initiatives ramp up in full year '23. And on that note, I'll hand back to Phil.

Very good, Simon. Thank you for that. It's good news. In my introductory remarks, I said we'd reached an inflection point in our strategy. So I thought I'd explain why I think that this is the case in a little bit more detail. Just a reminder of the strategy we announced a year ago with four clear strategic drivers, number one, accelerating growth. We set a target of mid- to high single-digit growth, including bolt-on acquisitions. Second, a focus on enhancing margin. We set an ambitious cost savings program targeted to deliver our medium-term goal of 4.5% to 5.5% margins. Thirdly, we're seeking to generate cash. And I think as Simon has already touched on this, I won't revisit this further today. Fourthly, developing the key capabilities, which sets us apart from our competitors, is a key strategic driver as well. So taken together, our strategic aim is simple: to achieve Mitie's full potential and thereby deliver enhanced shareholder returns measured by a progressive dividend policy, paying out 30% to 40% of earnings; an ongoing share buyback program commencing with the initial GBP 50 million, as Simon explained; and returns of investment -- on investment, invested capital of over 20%. So how have we been getting on against these objectives? Let me start with accelerating growth. And at the heart of this is winning and retaining and growing existing contracts. We've had a record year of new contract wins with a total contract value of some GBP 2.1 billion: FDIS, BAE, Primark, John Radcliffe Hospital, South Wales Police, and many, many more. These FY '22 wins add an additional GBP 170 million of new revenue in FY '23. Now this good progress has continued into this year with a further GBP 56 million of annualized revenue from new wins in the last couple of months, including Netflix, DeepMind and even TikTok. Our win rate for new contracts remains very strong, at 57%, by value of all new bids that we bid on. Renewals and extensions added GBP 1.7 billion of total contract value, a renewal rate of over 7 -- over 90% as NPS, particularly Interserve, has continued to improve and numerous short-term extensions have already been agreed. And again, we've had a strong start to FY '23 with renewals at Cyprus and other overseas bases, at Hammerson and 2 top 10 strategic accounts, which are yet to be announced. Cross-selling Interserve contracts has added GBP 42 million of annualized revenue, progressing towards our GBP 100 million stretch target by FY '24. Finally, our pipeline of GBP 12 billion, slightly lower than last year due to the FDIS and BAE opportunities now converting to sales has recently been boosted in FY '23 by winning a place on the new GBP 4 billion RM 6232 framework, which procures for central government health and local authorities, and the GBP 500 million overseas capital framework with the DIO we have GBP 400 million total contract value at BAFO, and 125 million of which we expect to announce as wins in the next few weeks. Let me also deal with the long-term impact of COVID on our top 50 strategic accounts, which, as you know, represents about 60% of our group revenue. In total, revenue at our top 50 SAM accounts is up 14% versus pre-COVID levels, with only 3 out of that top 50 accounts, an airport, an aero engine manufacturer and an accounting firm showing declines in revenue versus FY '20, mainly in discretionary project work versus those pre-COVID levels. So overall, we're very pleased with the progress we've made in the SAM accounts. M&A is also an important part of our growth strategy as we target high-growth sectors such as telecoms, decarbonization and security technology. And we've completed 7 deals and acquired 7 companies in the last 12 months. Our acquisition of DAEL Telecoms, P2ML and recently 8point8, combined with Mitie's existing maintenance -- telecoms maintenance expertise, has created a market-leading capability in acquisition, design, construction and maintenance for mobile networks. In energy and sustainability, we've acquired Rock Power Connections and Custom Solar, which we announced today, and Biotecture, broadening our expertise, respectively, across high-voltage, transmission EV charging, commercial solar arrays and the greening of urban areas. These acquisitions are targeted at helping our customers meet their own net zero carbon targets. Finally, we acquired Esoteric, a leading technical counter surveillance provider, adding to our intelligence-led security offer. Collectively, these acquisitions represent an investment of GBP 47 million. But the key point, I think, as you can see, is that we expect to double their previous revenue by accessing our customer base and providing a working capital to fund this rapid growth. All of these deals are expected to generate returns on invested capital of over 20% by FY '24. And looking forward into this year, each division has got good momentum in sales. In Business Services, the focus remains on safe and secure environments, cleaning, quality and flexibility. Technical Services growth is backed by telecoms and decarbonization. And now that Forte is going live, increasing demand for remote monitoring of critical assets. Communities are also -- increased defense spending and an increase in decarbonization projects is benefiting CG&D, and Communities are also benefiting from the decarbonization agenda across local governments, hospitals and education. Even Specialist Services have got -- has good growth momentum. The Prison Operator's framework and increasing immigration services offers growth in Care & Custody division. Waste and landscapes are benefiting from our clients' sustainability agenda. And Spain is benefiting from tourism growth, again, in Airport Services. Backing this momentum is our industry-leading capabilities, credentials which are being increasingly recognized externally. So now let me turn to margin enhancement and how we meet our 4.5% to 5.5% margin target. Cost synergies from the Interserve integration play a key part, as Simon had said. In FY '22, we delivered GBP 30 million of in-year savings with an exit rate of GBP 40 million, and we've now identified further savings, taking the total to GBP 45 million in FY '23, another uplift, as Simon said, to the original GBP 30 million Interserve synergy target. But it is that still the same GBP 33 million cost that we originally forecast to achieve this. Headcount reductions of 459 have saved GBP 21 million. Property exits and IT savings have contributed GBP 4 million as we exited 12 properties, including the Interserve former HQ, Ingenuity House. Improved supplier deals contributed GBP 5 million and a further -- and further CAFM and help desk consolidation, additional procurement savings and productivity improvements in mobile technical services will add to the total in FY '23. Turning now to the 8 loss-making Interserve contracts that Simon mentioned, these are mainly in health care. It's another opportunity for us for margin improvement. Our new management team has improved operational KPIs, reduced maintenance backlogs and boosted our Net Promoter Scores. However, collectively, these 8 contracts contributed a gross GBP 15 million loss, net GBP 9 million after provision releases. Productivity improvements are needed, reduced absenteeism, less reliance on agency staff. And there are upcoming opportunities to market test these contracts, resulting in a potential reprice. And all this will help the management team with the turnaround plans. But clearly, there is more work still to be done. As you'd expect, Simon and I are laser-focused on these contracts with monthly reviews, and we'll continue to report back to you on our progress. Our operational excellence initiative is now up and running. We have completed 3 major SAM account reviews, which has identified GBP 3.5 million of savings. These range from reducing agency cleaning hours, help desk consolidation, leveraging existing technology to more centralized procurement and pooling static maintenance resources into our larger mobile teams. Maps across our 121 strategic accounts, some GBP 10 million savings in total over the next 2 years are expected. Six Sigma and Green Belt training is rolled out and as our operating standards are established and adhered to. Our digital supply chain investment is transforming our processes and making great progress. We now have complete transparency over 1/3 of our GBP 1.4 billion of supply chain spend, who ordered it, for which client, when was it paid and when was it billed to our client. Introducing e-auctions in commoditized categories is helping to offset some of those inflationary pressures that Simon described. But just as importantly, Coupa is automating our purchase-to-pay processes, with straight-through processing expected to be at 95%. However, the biggest gains in straight-through processing is in Technical Services workflow management. That's help desk, it's scheduling, it's field force management and it's billing. So I'm delighted to say that finally, Project Forte is now going live as we speak. Originally, it was a 2-year program with an original budget of GBP 30 million back in the day. With COVID delays, technical challenges and additional testing, it's taken us 3 years to complete the program at a much higher cost of GBP 52 million, but delivering much improved functionality. Now we have a world-class workflow management solution, and the films that are running this morning on the screens will go on the website, as you came in, will show what Forte really does. And we're already showcasing it to our customers. We can describe some of it to you later on after coffee. Customers and noncustomers are bowled over by what this system will do and what we've built. So we're, therefore, still very confident of delivering our original net efficiency savings of GBP 15 million, of which GBP 8 million was delivered in FY '22 and an overall return on invested capital of over 35%. But in a scale business such as ours with millions and millions of transactions a year, STP, straight-through processing is something that we're obsessive about as it drives our cost to serve competitive advantage. Today, workflow automation straight-through processing is only 19% in order-to-cash and only 36% and rising in purchase-to-pay and 12% in record-to-report. And such low percents indicate there's still much more to come from automation via Forte and Coupa as well as across WIP controllers, fleet and general administration, but also from HR processes. Today, H2R, hire-to-retire, STP is actually very low, 10%. That's because a number of our processes require manual intervention. This is a key efficiency being targeted this year, starting with Workplace+, an end-to-end employee app upgrades. The final leg of our strategy are the capability enablers that we like to think sets us apart from our competitors: creating a great place to work; leading in ESG; and firstly, the Science of Service. The Science of Service is a new campaign to highlight the industry-leading capabilities we bring in hygiene, security and technical services. And in the words of the marketeers, innovation plus intelligence equals impact. Innovation is the technology of what we do, whether in our TSOC, our ISOC or Cleaning & Hygiene Centre of Excellence. Intelligence is what the data tells us and the insights we derive from our data lake analytics. And impact is what our customers want, impact on driving continuous improvement, impact on greater uptime of critical assets, impact on a reduced shrinkage in retail. And with one example in impact, a 15% reduction in energy consumption achieved across multiple branch networks. Now with COVID and Brexit and the rising cost of living, creating a great place to work has never been more important, delivering a higher skilled workforce to drive customer retention, efficiencies in the workplace. We're proud that we have over 1,000 modern apprentices. We lead with additional benefits this year to our frontline staff, free shares, again, enhanced maternity pay, salary, financing. And from the boardroom downwards, we recognize the importance of diversity and inclusion. And we are making great progress, and we do have the awards to prove it. Lastly, our final capability, ESG leadership. Everyone talks about ESG. I'm proud to say that Mitie has the best ESG, MSCI, Sustainalytics rating of any FM company in the world. And with the U.K.'s largest EV fleet of over 2,200 vehicles, we're well on our way to achieving our zero carbon ambition by 2025. That's far further ahead of any -- of actually the clients we supply today. We've delivered 24 Plan Zero pathways to our clients, showing how they can follow Mitie to net zero. The acquisitions of Rock Power Connections, Biotecture, Custom Solar expand on our sustainability and decarbonization capabilities. We supported the removal of gas boilers at Rolls-Royce; and Lloyds Bank installed solar panels; Essex County Council, LED lighting, numerous locations; and EV charging points at over 200 client sites. But here's a key point. At Mitie, ESG isn't just a box-ticking exercise. It's not even simply a belief in doing the right thing. It's a leading capability that we have to grow our business and to differentiate ourselves from our competitors. So let me sum up. As I said at the start, a strong performance means that we have reached the inflection point of our strategy sooner than we might have expected. Number one, our accelerated growth strategy is giving us top line momentum in FY '23 with mid- to high single-digit growth expected. Number two, our margin enhancement strategy underpins our 4.5% to 5.5% margin targets. Three, our capabilities enablers, the Science of Service, creating a great place to work. ESG is differentiating Mitie from its competitors. And fourth, as Simon has laid out in his capital allocation slide, this is leading to increased shareholder returns, a new capital allocation strategy, a policy to grow our dividends towards our targeted 30% to 40% payout ratios and an ongoing commitment to share buybacks. Thank you for listening. And with that, let's get on with some questions.

We've got a mic, I think, somewhere. Lucy and Chris?

Phil, Simon, two or three questions, if I may. We're now 18 months into the Interserve acquisition, what are your thoughts and things like the quality of the business and the growth opportunities, where you thought you might be now at the time of the acquisition? And secondly, for people that came from Interserve, if you could share what's changed, would be helpful. And you mentioned in the part managing inflation was changing scope of contracts. Just how extensive that has been, and how those kind of conversations go, do you initiate in the customer and that sort of thing? And finally, on the kind of health care problem contracts in Interserve, can you give a little bit of detail on the potential timing of getting those back to breakeven or profitability?

Okay. Good ones. Let me pick up Interserve growth. And I'm going to ask Brian Tolbert, who runs our CG&D business, to comment on the -- some of the extensions that we've won and the NPS improvements. Simon, do you want to do health care timing? And I'll do the scope question.

Sure.

So I think, overall, as we touched on, the Interserve business, we've been very pleased with, and as Simon says, the return is very good. If you look back at the 3-year HFI in the prospectus, so historical financial information, Interserve's revenues have been declining year-on-year. And we've not just reversed that. We've grown it. So we're very pleased with that. We are seeing Net Promoter Score improvements. Now -- we were at minus 18, the first year when we ran it, when we started. We're now at plus -- minus 18 with plus 13. And Brian, we've made some good progress on extensions. But you're on the receiving end of being part of my team. What's your view?

Thanks, Phil. Yes, obviously, since joining Mitie from a former Interserve business, Mitie provided some great deal of security, some investment in technology and IT and people and systems and really created a foundation for us to realize our thank true potential, as Phil said, in addition to resecuring the Gibraltar contract for 7 to 10 years. We have succeeded and extended pretty much all of our contracts that have come up for renewal this year and still negotiating some of those and obviously winning ones in the process. So we've got a great foundation now, good technology, great potential for cross-selling to existing Mitie parts of the business, which has yielded great benefit and also bolting on the decarbonization capabilities to meet the government's greening agenda. So it's all pretty plus, pretty good, positive..

We have a deal that we were hoping to announce today, but it hasn't -- we haven't got approvals yet, but that's another one in Brian's area, which is a new win. So I think that's been pretty positive. The conversations around scope, just to assure we're all clear, this is -- generally, the conversations around with clients and brands will be a good example of that, is that we've got the ability to price through, as we've said before, and we are doing. But there are some accounts where probably more in the Mitie -- on the old Mitie state where we have to have a conversation with a client. And at the end of the day, how we work, collaborative with our clients, and they want to ensure we can get the right people to do the job. And so they are pretty good. And so generally, clients will be supportive of a price improvement. But there are some clients who say, look, we'd rather you found some savings for us. So you can pass your -- you can pass here your higher prices through, but we need less of you or less work. And that's the scope point. That's probably a lesser proportion than the actual clients who want more. And as I was touching on around our -- well, our top 50 accounts, it's quite interesting because there's only -- I mentioned it, but there's only 3 accounts where we are less revenue than we used to be. And I'll just -- one is an airport. You can sort of go figure. One is an aero engine manufacturer, and one is an accounting firm. And that the first 2 around projects really and conservation of capital for the client. The third one is -- I think, is more structural, but it's a real outlier. It's 1 out of 50 of our top accounts. So -- and I think that we're trying to sort of nail this concern around COVID is going to impact your business. I've got -- and literally, I've got 1 out of 50, where there is probably a structural impact, and the rest are growing. On the health care?

Yes. Let me pick up the health care contract. So we had something in the region of 8 of the health care contracts that we picked up from Interserve that were, if you like, problematic. And as I said in my presentation, we're left with something like 2 or 3 that are not back to a broadly breakeven position at this point, and therefore, we describe as still problematic and 1 in particular that is worse than the other 2. For a couple of them, my expectation is that we'll get them back to that broadly breakeven position over the course of the next 12 months. And then for that final contract, I'd say we're looking at 12 to 24 months and therefore, by the end of full year '23.

We could have asked Alice Woodwark, who runs our Communities business. She's actually on site today with the client on the most challenging accounts. So I think it just gives you a sense. We put in a new SAM, a Strategic Account Manager there, who lives locally somewhere in the West Midlands. And we've also put in Alvarez and Marsal, who have done some work with us around operational efficiency, and we've got a very good health care expert who is helping us on that. So that's going to take a bit more time. Good questions. Sam, over here in the front.

Three from me. Firstly, on the CMA investigation, do you have any update on time line on that? And can you sense is at all impacting your public sector contracts? I mean have you heard about Landmark here, for example? Secondly, on cash returns, should we think about special cash returns as a sort of formulaic process in terms of the difference between your year-end net debt or cash versus the one-times? Does that give a sense of what they could be? And then finally, on inflation, in terms of sort of wage inflation in particular, do you increase wages once a year? Or is it an ongoing process? Just thinking about how -- if you would need to react if inflation is higher than sort of the market suggests.

Okay. So CMA, I might give a chance to bring Peter Dickinson in, our Chief of Staff and General Counsel, in short, Pete. But I'll deal with the impact of it in terms of wins and what have you and where we are in landmark. Formulaic, no, I think I'd answered that straightforward in terms of it's really a case of what's excess in terms of capital. So I don't want people thinking it's formulaic. But the issue, I think, or the challenge we have is that to get a return on our 20% return on invested capital is quite a challenge, it's quite a challenge. So it means that we're probably spending a little bit less than we might have hoped on some of these infill acquisitions because we just can't get the math to work. So that -- and that's why it may be a bit lumpy, and that's why we don't want to be formulaic. Inflation, do you want to do with that one, Simon?

Yes. So Sam, your question was, is our inflationary increase once a year or ongoing? It depends on the contract. It's a slightly not that helpful answer. We increase wages on most of our contracts as there's changes in the national living wage. So for example, on the 1st of April, when it went up by 6.6%, but we try to manage the impact of inflation between that national living wage and the arbitrage between our frontline workers, our supervisors, et cetera, all the way up through the chain. So...

It's a really good question because, as Simon said, we're leading in a way, the CPI inflator through the contracts is running higher than wages, but that might reverse later on. So we have to watch it. I think generally, I'd take away that it's once a -- it's once-a-year adjustment in the main...

But that once-a-year is spread throughout the course of the year. And hence, if you're looking at a sort of lag between headline inflation rates and wage inflation rates, we have some hedging in our contracts renewed all the way throughout the course of the year.

Yes. Pete, CMA?

Sure. Thanks, Phil. As you'll appreciate, it's an ongoing investigation. So we are limited in what we can say. But when we first announced the existence of the CMA inquiry, we were very clear that we expect to be exonerated. That does remain our position. We have instructed a Magic Circle law firm to carry out an independent inquiry to review all of the materials that the CMA themselves are reviewing. That review has confirmed our position that there is no evidence of any anticompetitive behavior on Mitie's part. And our expectation is that the CMA will close their investigation in September of this year. In relation to the question as to whether or not our contract bidding has been impacted by the CMA inquiry, we do not believe so. The Cabinet office advised all government public sector clients of the existence of the inquiry. They committed to us that if any of their departments were to raise concerns, we would have an opportunity to make representations. That has not been necessary. So we believe at the moment, we're unaffected.

Yes. Great point, Pete. And actually, if you look at it, Gibraltar was awarded after CMA, the one we can't announce yet. We were hoping to. It's another big government contract. And we've won business subsequently in Care & Custody work. So far, it's not affected us in any way. You asked about Landmark. I mean, it's imminent. We haven't heard yet. So we'll let you know when we do. Yes, I'm sorry, I don't...

Tom Truckle here from Jefferies. I have three, if I may, First of which, just coming back to the Technical Services, I appreciate the commentary around the variable work is still below the pre-COVID run rate. Is there any color as to what the size of that would be to come back? And is there any line of sight as to how long that could take to return? And then secondly, just turning to capital allocation, that 30% to 40% payout. Is that something that we should expect in the nearer term? Or is that more of a mid- to medium-term ambition to get there? And then lastly, just on the GBP 2.1 billion of new contract wins, I appreciate FDIS was quite a chunk of that, but even so, still seems higher than historical years. Just wondering what the main driver is of that. Is that largely due to the Interserve integration? Or are there other factors that are causing Mitie to achieve these high levels of new wins?

Okay. Simon, if you pick up the Technical Services growth, and Simon Venn, if you've got any comments to throw in, do, Simon K. The capital allocation, 30%, 40%, the reason why we're at 20% now, if you think about it, Tom, is that within some of our profit after tax, our EPS is sitting the COVID benefit, which, as we know, now has stopped. So if you took out the COVID profits, you'd be closer to that distribution target already if you follow us. And we didn't want to step off at a 30% to 40%, but intrinsically, we're at 30% to 40% already in what we've done if you stripped out the COVID profits. So that deals with that one. Technical Services for the 2 Simons, and I'll pick up wins.

Sure. I'll let Simon Venn chip in with the extra color. But Tom, the shortfall against, if you could describe it as that, against the pre-COVID run rate in terms of the projects and variable works in Technical Services is something in the region of 20% in full year '22 versus full year '20. But you've also got, within Technical Services, the MoJ and NHS contract -- NHS properties contracts that closed in full year '20 that are causing a little bit of a headwind there.

That's 20%, Tom.

20%.

What would that be in money?

So 20% of revenue, which is probably something in the region of GBP 10 million of margin profit.

Anything else to add, Simon?

Yes. I mean all I would say is that the war for talent dictates that all of our customers are having to review their portfolios and effectively optimize their workplaces. So we expect to see variable work sort of recover quite strongly as we forge ahead with the recovery from COVID post-pandemic.

And then on the wins, I've forgotten the question now, but FDIS was one. And what was I looking for? Is it all our top wins? I mean why are we winning? I think we win because we've got good credentials. That's why we show all the credentials. That's why we have our Cabinet that keeps growing of all the industry awards that we win. But also, I think we can demonstrate with -- through existing clients. And if you do have 5 minutes at the end, we have someone who could show you some of the connected workspace technology, for example. But what tends to happen is if we win 1 motor manufacturer, it's this expertise in the sector, we might win some others. And if they're going to award a contract to a company they haven't worked with, i.e., Mitie or a new bid, they like to talk to clients who have already started to work with us. So GSK was a great client for us to win. And I know we've had then potential new clients, picture GSK to see how we're doing. So I think that sector expertise is absolutely something that we are focused on. And it is the same in financial services. We've got a couple of bids out there at the moment. And again, of course, they want to know how do we service the Lloyds Bank, for example. So sector expertise is something, I think, that will give us further growth momentum. And send our regards to [ Ken ] as well. We know he's not been very well. At the front here.

Alex O'Hanlon from Liberum. Just one question for me, if I may. In the last 12 months, you made 3 acquisitions in the telecoms sector in DAEL, PTML and 8point8. Could you just speak a bit widely about the opportunity that you see in that space?

It's a really good question. I mean I think -- I mean, I used to run Cable & Wireless, but we all know that the demand for consumption of bandwidth through mobile phones is just -- is ever, ever increasing. And 5G is coming, and they get into autonomous vehicles. So the networks need upgrading. And the mobile phone networks, as we all know, are not always the best. So putting -- we've got growth in terms of what do you bolt-on to a site? And you see all those dishes. Well, someone's got to do that. That's what we do. And then what -- there's what's known as passive maintenance is what we used to do, which was making sure the structure was sound and the aircon worked and the security was good and the grass, if it was in the middle of the field, was cut. That's passive maintenance. For active maintenance, it's all about what traffic is going through these dishes and how is it getting backhauled through the fiber network. So we see that as an opportunity for growth. On top of that, as you're aware, there is the Huawei rip and replace because the Huawei infrastructure is being removed from the towers. And then there's new towers all the time being -- what we call ADC: acquire, design and construct. And it's those ADC skills, it's the ability to do active maintenance, which is what we've been buying into. And I was out with a client. I mean there's just a huge amount of investment going into mobile networks, whether it's along the railway lines, whether it's in government and hard-to-reach areas, whether it's in the TfL and the tube, there's just huge investments going in, and we want a piece of that. I liked one question. They're always good. It's [ always running ] to three questions. Any more? Chris?

Just a couple of short ones. The cross-selling revenues, Interserve margin looks pretty high, about 17%. Just understanding behind that, I guess, is probably partly leveraging existing overhead. And secondly, you just talked about the increasing use of technology. And the question would be, does that when your extra business just or does that actually enhance margin as well? Is there any evidence you could give or indications you could give us on that point?

Very good questions. Very good questions. So the cross-sell is -- to a large extent, is that point you made. Because if you think about it, we're replacing an outsourced provider today is what we're doing. And they have their profit margin baked into that provision of service into Interserve. So FDIS Scotland would be a good example, where we're now able to put our landscaping people in. And it's all about labor efficiency. If we've got somebody cutting the grass at Scottish government, they can pop down the road and do something at the barracks in Edinburgh. So that -- it's all about -- in our business, it's all about scale. B2B is about scale. And we've still got more to do. If you look -- this is one of the benefits of this Coupa system around procurement, because we can now see exactly how much we're spending on services that we deliver ourselves. You'd be amazed to know how much we spend on third-party cleaning. This is the agency point. And we still spend money on third-party waste removal, and we still spend money on third-party landscaping and we even have third-party spend on security guards. So yes, there's always a bit of variability, but we want to try and capture more of it ourselves. So that would be that one.

You also have the simplistic point, Chris, of where we're cross-selling the work into, which is waste and landscapes, which historically have been higher-margin parts of our business. So we're typically making around those sorts of margins in those businesses.

I think the question then about the technology, this is a great question, because we've spent the thick end of GBP 100 million, if you include Forte and all the upgrades we put in through SAP and Coupa and laptops and cybersecurity and then, then, then and the Data Lake and the Mosaic. I mean Mosaic now is our real-time MI. We've got 148 clients taking real-time MI. That's a big -- that's a lot. In the past, we might have had 1 or 2 clients. So what we know is two things. We know that we're winning new business, and we know that the technology is a key element of that pitch. And we know that where clients already take it, there is a direct correlation between Net Promoter Score and technology uptake. And I can sort of live with that. I take the view that if I can renew and extend over a longer-term period and upsell, that's how we'll make our money. And I think it's a mistake too, I think, and therefore, we don't do it, is to charge clients for services, additional services. We'd like to bring it as part of the package and play a slightly longer -- a longer game. Because I think if you're asking clients to pay for something they've never had, it's always quite a tough sell, that one. I'd much rather they got used to what we give them and like it and build a longer-term relationship with us. So that's -- we're not looking to charge clients more for what we've built. Okay. Well, thank you for coming today and have a great summer. Thank you.

Thanks, everyone.