Mitie Group plc (MTO) Earnings Call Transcript & Summary

Okay. Good morning, everybody. Thank you for make it to the short on a wet and windy morning. Welcome to our interim results presentation for FY '23. On the cover here, you see a little bit of a sneak preview of our new employee value proposition, which we launched this week, and we're introducing the real stars of Mitie, the frontline heroes, who're going to be the face of our campaign. I'll talk about that a little bit in a second. But, first, as usual, I'll start with the highlights of the first 6 months before passing over to Simon and then I'll return to discuss our strategic progress. H1 revenue was GBP 1.9 billion, and the strong start we saw in Q1 has continued in Q2. Remarkably, we've replaced all of last year's COVID revenues through new contract wins, growth from acquisitions and through pricing. H1 operating profit also came in stronger than we had expected at GBP 68 million from improved trading performance, cost efficiencies and good inflation management. H1 new contract wins, renewals and project growth driven by our industry-leading technology and excellent customer service, added GBP 1.5 billion to our order book, once again, a positive book-to-bill ratio. And we mobilized a record number of new contracts in the first 6 months. Leverage at the end of H1 was only 0.1x trailing EBITDA, and that's after acquisitions, dividends, share buybacks and ending the invoice discounting program. The Board has declared an interim dividend of GBP 0.7p per share, and that's up significantly from the GBP 0.4p in the interim last year. But that was when we just started to restore dividends. And I mentioned our new employee value proposition on that cover there. This includes a GBP 10 million winter support package in H2, which I'll come back to shortly. Finally, with everything taken in the round, we're increasing our EBIT guidance to at least GBP 145 million for FY '23. So as I said, an encouraging start to the year, and over to Simon.

Thanks, Phil, and good morning, everybody. Let's start with the headline numbers. We've reported a strong set of results for the first half of full year '23, with headline revenue ahead of last year's performance despite the GBP 250 million of short-term COVID-related work that was delivered in the first half of last year. As Phil said, headline operating profit before other items was down 20% to GBP 68 million, but was up 45% if we exclude the COVID contracts. We've delivered significant savings from our margin enhancement initiatives in the period and have continued to manage inflation effectively. Excluding the COVID contracts, operating profit margins have improved by 0.7 percentage points to 3.4%, and profit after tax was GBP 49.1 million. EPS for the half was [ GBP 0.036p ], and we've declared an interim dividend of GBP 0.7p, up 75% on half 1 of last year. We've had a free cash outflow of GBP 11 million in the period largely due to the planned closure of the customer invoice discounting facility and our average net debt was GBP 62 million. Our balance sheet remains robust, with total net assets of GBP 402 million, and our BBB credit rating has been confirmed by DBRS. Moving on to cover the performance in more detail and turning firstly to revenue. All divisions have performed well in the first half of the year, with revenue growth, excluding COVID contracts, of 15.5%. Underlying growth in Business Services was 9% as a result of a strong start of the year on wins, the continuation of the Afghan relocations and assistance contract and a good pricing performance. Technical Services revenue has grown by 18% as the continued gradual recovery from COVID has been underpinned by new wins and acquisitions. CG&D revenue of GBP 355 million reflects some significant wins, including the FDIS contract, which started in December 2021 and increasing volumes of project works across a number of its largest contracts. Communities revenue has grown by 10%, largely due to pricing and increased life cycle and project work. And finally, specialist services revenue is up 13%, following some key wins in Care & Custody and Landscapes, cross-selling in Waste and Landscapes and the acquisition of Biotecture. On the next slide, I've included the revenue bridge to show the key drivers of growth in the period. The graph bridges the revenue in the first half of full year '22 on the left-hand side, to the revenue in the first half of full year '23 on the right-hand side. First, we have a reduction in revenue of GBP 246 million or 12.9% for the COVID contracts that completed earlier this year. Next, we show the GBP 78 million growth from net wins and losses, including FDIS, BAE Systems and John Radcliffe Hospital. Contract growth and projects captures the incremental growth on existing contracts, for example, where the scope of our work has expanded and the year-on-year growth in project revenues. This includes over GBP 20 million of incremental revenue from CG&D projects. When combined together, the wins and losses, contract growth and additional project work drives 8.3% of organic growth. This organic growth will reduce in the second half as we lap some of the large wins in project delivery from the second half of last year. We've successfully priced through the majority of cost inflation so far this year, which accounts for GBP 82 million of additional revenue, and acquisitions drive GBP 38 million of additional revenue. Moving on to operating profit. In Business Services, excluding the boost from the higher-margin COVID contracts in the first half of last year, profitability has improved by 24%. The key drivers of the improvement have been wins, such as the Afghan relocations and assistance contract, Sky Studios and Netflix as well as cost savings from the ongoing margin enhancement initiatives. Technical Services operating profit of GBP 14.1 million is 11% higher as a result of the impact of new wins and cost savings. These improvements have offset the headwind from cost inflation, which impacts technical services more severely than the other divisions, and Project Forte, where the lower productivity has temporarily reduced profitability. CG&D has had a strong start to full year '23, with operating profit growing by 71% to GBP 25.5 million. This improvement has been driven by the increase in project work that I mentioned earlier, new wins and cost saving delivery. Communities profit of GBP 11.1 million is in line with the first half of last year, with an improved underlying performance and good delivery of cost savings being offset by the continuing challenges on one of the loss-making contracts acquired with Interserve. In the period, we've utilized GBP 3.3 million of provisions that were made against the loss-making contracts on the Interserve opening balance sheet. Operating profit in Specialist Services is up 11% due to wins in Care & Custody, improved margins in Spain and the addition of Biotecture in Landscapes. And corporate costs have reduced by GBP 1.8 million in the half as a result of savings made across the corporate functions and shared services. My next slide is a profit bridge, which pulls out the key drivers of the decrease from GBP 85.3 million in the first half of full year '22 to GBP 68 million in the first half of this year. The first block on the graph shows the GBP 37.7 million reduction in contribution from the COVID contracts. Next is the GBP 12 million improvement in underlying trading, which is largely made up of the upside from net wins and the increase in project work across the divisions. This block also includes a small profit contribution from the recent Mitie telecoms and decarbonization acquisitions. We're investing in these businesses in full year '23, and expect them to materially contribute to group profitability in full year '24. We delivered GBP 17.2 million of profit from margin enhancement initiatives in the half, which Phil will cover in detail later. And the net hit to our bottom line from inflation was only GBP 3 million, which I'll come back to shortly. Next, we show the incremental downside from the loss-making contract in communities. Despite the loss in the half, we are starting to see the impact of the turnaround effect on this contract, which Phil will come back to you later. And in the final block, we show the one-off downsides from the lower productivity caused by the disruption from Project Forte and the costs associated with the CMA investigation. Turning now to inflation and starting with the impact on the first half of this year. With CPI running at an average of 9% in the half, we have seen some cost increases in the business, but they've been significantly lower than the headline rates of inflation reported in the market. The total impact of inflation on our cost base in the period was GBP 85 million, which is a 5% increase on the first half of last year. There are a number of reasons why this 5% is not higher. The first is because, to date, wage inflation has been below headline inflation rates. Secondly, we typically price variable and project works at current costs. And finally, we continue to see a good supply in the labor market. In terms of pricing, our contractual protections enabled us to pass on the majority of the GBP 85 million cost increase to our customers, resulting in a net GBP 3 million reduction in profit, which is better than we forecast. We expect inflation to have a greater impact on our cost base in the second half of this year. But, overall, the P&L impact for full year '23 should be GBP 10 million or less, which is at the lower end of the range that we guided to in June. Finally, as I mentioned earlier, we've delivered a number of additional cost savings in the half, which have more than offset the GBP 3 million impact of inflation. We expect to be able to continue to mitigate the impact of inflation with cost savings in the second half of the year. Turning now to cash flow. As you can see, about 1/3 of the way down the table, in bold, we generated cash from operations of GBP 84.5 million in the first half of the year. This was driven by the strong operating profit of GBP 68 million, which you can see at the top of the page, partially offset by other operating movements of GBP 8.1 million. The largest balance within the GBP 8.1 million was cash, other items of GBP 6.9 million, which were less than half of what they were in the first half of last year. Next, we have a cash outflow from working capital of GBP 47.4 million. This GBP 47.4 million outflow was largely a result of the closure of the invoice discounting facility worth GBP 45 million, but was also impacted by 3 other factors. Firstly, the slower billing and collection associated with Project Forte; secondly, the completion of the COVID contracts, which were on more favorable payment terms than the contracts that have replaced them; and thirdly, the growth in the recently acquired projects businesses, which require a greater working capital investment. Offsetting these outflows was the timing difference at the end of the half. CapEx leases, interest and tax was just under GBP 48 million in the half. Within this GBP 48 million balance, the cash outflow from CapEx and leases was consistent with the first half of last year, and interest reduced by GBP 2.1 million to GBP 7.7 million as a result of our reduced net debt and the refinancing undertaken in full year '22. Cash tax of GBP 9 million is GBP 4.9 million higher than the first half of last year as a result of the timing of the utilization of tax losses. And finally, we spent GBP 5.7 million on share purchases for incentive schemes in the first half of the year as we limited the issuance of new shares during the share buyback period. As a result, we had a free cash outflow in the first half of the year of GBP 10.7 million. Lower down the page, beneath free cash flow, we see the impact of the other capital allocation actions that we set out in June, including GBP 20 million of acquisitions, GBP 50 million of share buybacks and the GBP 19.5 million full year '22 final dividend. The result of all of these items is an overall increase in net debt of GBP 90.7 million. Moving on then to net debt and TFO. The GBP 90.7 million increase in net debt in half results in a closing net debt of GBP 64 million and an average daily net debt of GBP 62 million. This keeps our average net debt-to-EBITDA leverage ratio of 0.1x, well below our medium-term guidance of less than 1x. Debtor days have increased as expected, following the closure of the invoice discounting facility and creditor days have also increased compared to last year as a result of the disruption caused by Project Forte in addition to the timing difference at the end of the half. Creditor days remain at almost half the level of 2 years ago. Total financial obligations of GBP 63 million, shown on the bar graph on the right-hand side of the page, is now comprised almost entirely of net debt. We've closed the customer invoice discounting facility and the pension funds were in a net accounting surplus position at the period end. We continue to make deficit repayments of around GBP [ 13 ] million a year, which will be reassessed in 2023 as we undertake our next triennial valuation. So, in summary, we've delivered a strong financial performance in the first half of the year. As we look ahead to the second half of the year, we expect average net debt to increase off the back of the plans that we implemented in half 1, and full year free cash flow to be positive, in line with our previous expectations. We expect revenue in the second half to be higher than in the first half, which means that full year revenue will be broadly in line with last year. The impact of inflation on the bottom line is likely to be at the lower end of our GBP 10 million to GBP 20 million range, and we expect margins to further gradually improve as the cost savings initiatives continue to gather momentum. As a result, we now expect full year operating profit of at least GBP 145 million. And on that note, I'll hand back to Phil.

Okay. Well, thank you for that, Simon. As I said, I think we've made a fairly encouraging start to the first half of the year. So let me now give a little bit more of an update on our sort of strategic progress. 12 months ago, I declared that we had reached a strategic inflection point at Mitie and the transformation of Mitie was over. And we laid out this new strategy. And 12 months later, I'm pleased to say that we are making good progress with the strategy against the 4 imperatives. #1, Block 1 is all about accelerating growth, and Simon showed you the financial impact of growth in 1H. And I'll give you a bit more color behind our progress in -- as we look towards achieving our mid- to high-single-digit revenue growth targets. Block 2, we laid out the margin enhancement initiatives. Again, Simon showed you the major contribution just made in H1. And again, I'll provide more detail as we aim for our 4.5% to 5.5% margin target. Block 3, which Simon covered, cash generation. I'll add to this by giving a bit more line of sight on some of the levers we will be pulling to improve cash flow delivery even more. On Block 4, I'll update you on the progress on the capability enablers were up waiting to deliver our strategy. And this June, we laid out our capital allocation strategy. And in particular, the measures of success by which we wanted our shareholders to hold us accountable for. Dividends progressing to a 30% to 40% payout ratio, share buyback programs when we identified structural surplus of capital, returns on investment in excess of 20%. And so how have we gone on? Well, I'm pleased to say that 12 months into the new strategy, on a trailing 12 months basis, dividend payout is at 27% now, and that includes last year's 2H EPS boost in the denominator. We've executed an initial GBP 50 million share buyback program, and ROIC is a commendable 23%. So let me pick our strategic drivers in a bit more detail, starting with growth. As Simon said, we have delivered organic growth of 8% in the first half year. And this excludes pricing, which has added a further 5 percentage points of revenue growth. We had GBP 382 million of total contract value with major wins, as Simon said, at Birmingham Airport, John Lewis, Sky Studios and the U.S. visiting forces. The TCV of these wins will translate to revenue of about GBP 111 million this financial year. And last year's wins, such as FDIS, [ Costa ], BAE will contribute a full impact in FY '23 growth. Retentions and extensions in H1 were GBP 1.1 billion TTV, and this success provides a key underpin to our positive book-to-bill ratio. Retentions and extensions were again over 90%, 93% in particular, I'd call out our new 5-year deal with one of our top 10 clients, Vodafone. We're making steady progress in cross-selling Mitie services into ISV contracts. We're aiming for a target of GBP 100 million by the end of '24. Currently, we've achieved some GBP 57 million of waste and landscapes and now moving some of the service and cleaning into Mitie as well. We have a high-quality pipeline of GBP 13 billion, which has been boosted by GBP 3 billion of new opportunities in CG&D in particular. And that's before we start adding in the new opportunities from the new GBP 21 billion frameworks we've just been included in where call-off activities are yet to start. Just wait for James to finish blowing his nose and then carry on. Finally, our decarbonization and telecoms investments are performing well and added a further 3 percentage points of group revenue growth. And what's most pleasing for me here is that the order books of these divisions, GBP 70 million for decarbonization, GBP 140 million for telecommunications. Order books in these businesses are generally less than 1-year duration and like FM contracts are more like 3 -- 4 to 5 years. So this augurs well for revenue growth over the next 12 months. And you can start to see the scale-up potential that Mitie is bringing, 90,000 square meters of solar installed. That's up 4x from a year ago. 3,600 cell sites being upgraded, and that's up 8x from a year ago. So that's growth. So now let me turn to margin enhancement. Last year, I set out how we intended to deliver margin improvements of 100 to 150 basis points over the next 3 years to get to our to 4.5% and 5.5% margins. So how are we getting on? Well, I must say we are making decent progress with GBP 17 million of cost savings in the first half, as Simon showed. That's an overall 70 basis points improvement towards our target. Interserve synergies are a large part of this improvement delivering an incremental GBP 11 million in the first half of the year. And we've identified a further GBP 5 million of new savings opportunities to take our total savings target to GBP 50 million exit run rate by the end of fiscal '23. This compares to our original expectation, if you recall, a GBP 30 million of synergies when we first announced the Interserve deal. And we are benefiting from a full period of property and IT savings at Interserve, and we've removed a further 60 roles this year following a [ restructure ] in cleaning and operational management. The extra GBP 5 million of further savings will come from CAFM consolidation, which is now already in train, and help desk efficiencies. Moving to the second one. Our operational excellence initiative is also on track to hit its contribution target of GBP 10 million in FY '24. We've implemented an OE program in [ 51 ] of our SAM accounts that all our largest accounts, with early savings of GBP 2 million achieved in H1, ranging from pooling M&E resources, mechanical, electrical, reducing agency, cleaning hours, rolling out Workplace+, our workplace management system, and improving automated data capture, reducing manual processing. We've now trained 327 yellow belts in lean management and the more advanced Green Belt training starts later this month. We're also on track of Block 3 with our digital supplier platform, Coupa, which went live earlier in the year, and is now yielding great data and significant opportunities for further savings. We've rolled out Coupa in business services, in communities, corporate center and specialist services so far. That's 60% of our total group third-party spend now on 100% electronic invoicing. And from the get-go, we are achieving 60% straight-through processing. The rest requires GRNs or chasing up. But in time, we think the straight-through processing will increase to over 85% if there is behaviors change. Now supply chain inflation is running at 8% growth, but we've done a great job in mitigation through e-auctions, volume discounts and better category management. And just a final data point on supply chain on numbers of suppliers. Before Coupa, we had 15,000 different suppliers across Mitie and Interserve. Suppliers for tech services and CGD, where we haven't rolled out Coupa yet, are still 4,000 of that number, but active Coupa suppliers, which has covered 60% of our purchasing, now number just 2,000. So that's already a 60% reduction in our number of suppliers with more to come as we concentrate our spend on fewer, bigger suppliers at finer pricing. We've also made savings in our group overhead and have achieved further efficiencies in both finance and IT and new outsourcing initiatives in HR and payroll were announced this Monday. Fleet has already been outsourced. And together, this will yield larger savings in H2. However, not every initiative has gone to plan, it's fair to say both the communities ISV contract turnaround and Project Forte are now unlikely to deliver meaningful savings in FY '23 as I'll now discuss. In communities, we've got 8 problem contracts, 4 of those are now breakeven, but we have experienced a delay in resolving one key commercial dispute, where performance, as Simon showed, has actually deteriorated in H1 rather than improved. Some improvements are forecast for H2. But I know from having visited the client a couple of times, it's going to take some more time to fix the problems there. And therefore, it won't be until FY '25 before the full GBP 9 million turnaround benefit. We talked about GBP 15 million turnaround, GBP 6 million of that is through netting off provisions that we're releasing annually from the balance sheet. So it will be a net GBP 9 million turnaround being realized in FY '25. Forte has also experienced problems from the July go-live date, which was disappointing despite the extended testing period that we had applied. It's in a database of some 700 million unique references. We've experienced some data corruption, data loss and some data mismapping issues, which has meant that some jobs sent to our technicians couldn't be worked. This resulted in reduced productivity in H1, as Simon mentioned. Now we're slowly recovering the situation, but it means that the anticipated productivity savings will not now arise in H2. And further hyper costs have been incurred. Technician productivity is now back to pre Forte levels, but of course, our target was to get to much higher productivity levels than pre Forte. And we need all the elements of the system to be working as designed to deliver that increase in productivity. We expect the system to be working fully by the end of December, but that does mean that the full GBP 15 million benefits of Forte, that's again an incremental GBP 6 million, will not now be delivered until FY '24. Obviously, the progress on these last 2 initiatives are disappointing. But in such a major cost-out program as we are executing in Mitie, you have to sort of take it in the round as it were. Overall, over delivering the first 4 blocks, more than offsetting the impact of the communities and Forte slippages in FY '23. Therefore, we're still confident of the material uplift between FY '23 and FY '24. On Block 3, cash generation, just some comments there about how we're tightening up the effectiveness of our working capital management. First, we've got huge data that we never had before in term of data transparency. And we review weekly debtors and cash flows at the Mitie Executive. We'll be using the accuracy and confidence that Coupa gives us as well to ensure that our supplier term payment terms have been optimized commercially. And what I mean by that is, sometimes, we're paying suppliers early, sometimes the suppliers are baking in a cost towards assuming will be late, and we want to really get after that and be accurate, but -- so get the margin in benefits from those payments. Simon showed that as our project business grows, as Simon mentioned, we are also introducing upfront stage payments to reduce that working capital investment required that we're currently experiencing as the business has been growing rapidly. We tend to build projects at the end of the delivery, not through the stage payments. Simon showed as well that cash and other items are falling, which is good news, and CapEx will as well as Forte and Coupa compete shortly, and they were the main drags on the CapEx build in the last couple of years. Finally, a call out to our CFO, Simon Kirkpatrick. As you saw with even higher debt, our cash interest has actually been falling. We have a new 4-year RCF, and thank you for the banks who supported that. And a new 10-year USPP starts next month at an average coupon of 2.9%. So whilst many companies face refinancing or rising interest rates, we're, therefore, in a very fortunate position from a funding perspective, and therefore, our cash interest will remain modest. Finally, as we've discussed before, the deferred tax assets we inherited when we bought Interserve. And this show that these assets should limit any material rises in cash taxes when the general corporation tax rates rises to 25% next April. So all in all, we feel that we're moving into a strong period of cash generation. Finally, to Block 4, the capability enablers. We're up waiting to differentiate Mitie capabilities that don't just enable us to manage facilities, but to transform facilities. Science of Service is all about the technology we bring to bear on how our facilities are being used. Our so-called [ prop tech ] offering, we're very excited about the increasing interest of our customers and our prop tech, and indeed, our shareholders, a number have now been to see some of our prop tech in action as it were. And these capabilities are capabilities, which are really helping us to win and retain new business, one of which we have arriving today shortly. I hope it's not on the screen. So on our Science of Service campaign, which was a video that was running and the whole campaign, the digital campaign is proving to be our most effective campaign with growing customer interest. It's been seen over 8 million times, 6x more than any previous Mitie campaign. And the video itself, which you saw there has been viewed over 0.5 million times, which my marketing team tells me -- qualifies it as having gone viral. This data -- this quarter alone, we've led 3 webinars in hybrid working, in data and in FM, and 140 companies attended yesterday's pathways to net zero. Later this month, we're holding a conference supported by outside technology speakers on prop tech, called FM, tech tools or toys. So if you're interested, sign up for that webinar as well. So here's the point, thought leadership, in our industry, is vital, and very much part of our marketing and business development strategy. Turning to create a great place to work. You had a glimpse of our new EVP campaign on our front slide. And I mentioned that we're using our real true frontline heroes to talk about what Mitie means to them. And every individual has a story. And they're just great advocates of the company because a lot of them have had real personal difficulties that they have managed to work through with Mitie support. So the campaign is called [ My Mitie ], together we are Mitie, and colleagues talk authentically about my story, my community, my career, my voice, my achievements, and even how our benefits package have made a real difference, My Slice. And with -- talking to sites, with today's cost of living crisis, it's never been more important to support our people. That's why we launched a winter support package of discount vouchers, salary loans, cash bonuses, and free shares. It's a package of value to our colleagues of GBP 10 million. But just to be clear, not everyone will stay in Mitie, and not everyone will redeem the benefits that are on offer, and therefore, the one-off net cost to Mitie in the second half is GBP 5 million. I hope that's clear. And that land in H2. It will benefit some 40,000 of our lower-paid colleagues, and we're confident it will more than pay back in increased loyalty and reduced attrition and cementing our position as a great place to work. Our final capability enables what we now call is ESG, but we've sort of moved it on to Decarbonization Delivered. Decarbonization Delivered bridges the gap for our clients between the imperative to reduce energy consumption, not just from a climate change in CO2, but also from the huge eye watering bills risers that all clients -- heavy end-user clients are experiencing. It bridges that gap with the uncertainty that our clients have on the way forward. So they want to do something, they're not quite sure what to do with the plethora of technology solutions on offer. Mitie's Decarbonization Delivered approach brings our broad range of solutions from solar PV, EV charging, PPAs, heat pumps to provide our clients much more of an Energy-as-a-Service capability, not just selling single projects. And we were thrilled this year to win the prestigious Commercial Solar Project of The Year Award for our solar array work at Portsmouth Ferry Terminal. And our solar team has now doubled in size in the last 12 months. And similarly, our EV team and our charging business is really taking off with some of the work we're doing with the likes of [indiscernible] and DEFRA. Now such upfront investments are the reason why the EBIT contribution in FY '23, as Simon mentioned, is low. But we're okay with that. We're trying to build a position of strength through leadership. So we're delighted to be growing these capabilities. And that you should expect further infill acquisitions in this Decarbonization Delivered space. So wrapping up, we started the year well with encouraging momentum from new contracts wins and projects. Our margin enhancement initiatives are benefiting the bottom line, and we expect greater savings in the balance of the second half. Our balance sheet remains strong. We've removed the off-balance sheet discount facility. And even having done so, our leverage remains low at 0.1x EBITDA. We're increasing the dividend by 75% to GBP 0.7p per share. We're increasing full year EBIT guidance to at least GBP 150 million -- GBP 45 million, that's after the GBP 5 million EVP one-off costs, as I mentioned. But in business, it's never a plain sailing. We've got wage inflation starting with the [indiscernible] in wage rises, which should be announced later today. And they'll inevitably knock on to supervisory and managerial levels. And despite the good inflation performance Simon highlighted and the national living wage rises don't go until April, so it won't impact FY '23, but we could see continued impact of inflation headwinds in FY '24 due to that labor inflation. State of the U.K. economy and the strain on our clients' capital budgets and the squeeze on public sector [ book ] budgets could also reduce some project growth. And then, of course, there's property rationalization, particularly in our financial and professional services sectors that needs to be managed, but it's a small element now of our overall sector portfolio. But as I hope these results show, Mitie continues -- Mitie model continues to demonstrate its resilience. We've weathered Brexit. We've weathered COVID. We're weathering inflation. We've refinanced the business. We're still attracting great people to the company, and we've got clear technology and scale advantage. So in short, despite the macro headwinds, we're feeling confident about our future. So with that, let's turn to Q&A Chris.

Chris. Straight in there.

Chris Bamberry, Peel Hunt. I'll start with 3 questions, please. You mentioned obviously the worsening macro backdrop, have you seen any signs for your clients, particularly private sector in terms of delays to orders or cautions about spending? Secondly, given where leverage is, what are your thoughts on capital allocation, things like share buybacks and M&A over the next coming 12 months? Could you please give us an update on the CMA investigation and the landmark contract rebid?

Which one, Landmarc?

Yes.

Okay. Okay. I -- sorry, on projects, on prices. The short answer is no, we haven't seen any impact yet. But that doesn't mean to say that we won't. So we only talk about what we've got, and what's under our belt rather than what might come our way. We've got some -- as you saw some big orders out there. But you never know, people change their minds and just looking at the Vodafone results in the day. I mean, they're one of our big clients for some big orders out there. [indiscernible] Simon, with -- nothing really to say other than what we've already said. I mean, where we think the surplus and buy back stock, we bought back GBP 50 million. And how many shares was that?

GBP 69 million.

GBP 69 million. And we've bought back another GBP 33 million of EBT shares. So these are shares that pay out against the [indiscernible] you earn scheme for our colleagues and for senior management incentives. Historically, we would have issued stock there, but we bought it in. So that's the cash flow impact. But the net of what got issued, there's 5 million shares got issued for EBT. And for technical reasons, GBP 33 million were bought in. So that's quite an important message around dilution, which I know [indiscernible], you're always interested in. CMA, Pete, do you want to have a word microphone back for Peter Dickinson, our Chief of Staff and General Counsel.

Thanks, Phil. We're expecting the CMA to issue their decision as to whether they get to close the investigation or continue with it in December. Our expectation remains that we will be fully exonerated. As I think I mentioned at the preliminary results announcement in June, we carried out our own investigation supported by Linklaters to confirm that no inappropriate action have taken place that investigation revealed nothing. We've worked closely with the CMA, and I'm very hopeful that we will find ourselves being cleared by December.

And on Landmarc. I mean, remember, about 50% were in with a JV with PAE, which is American military service provider now bought by another American company called Amentum. But in aggregate, it's GBP 1 billion -- it's more than GBP 1 billion contract. It's a [ 7 plus 3. ] We're doing over GBP 150 million in aggregate there. There's a lot of work going on in the [indiscernible] states. There are people with Eastern European accidents involved. And there's a lot of activity today. And I think there has been a delay in the award. I think the DIO, the Defence Infrastructure Organization, the procuring arm of the MoD, I just want to make sure that everything is on a contract that size -- everything is they take the dot of the Is and cross the Ts. So we expect to hear at some point that the longer we don't hear it keeps getting extended because there's time to mobilize. So we're fairly relaxed on that.

If I may just come back to the capital allocation point, Chris, just to build on Phil's point. So as you'd expect, we have a number of possible acquisitions in the pipeline as we always do. And so we'll revisit where we think we'll land on capital allocation as we see how those acquisitions play out during second half of the year.

James. How are you? I hope you haven't brought COVID into The Shard.

Just one for me on the communities contracts that's been somewhat challenging in the period. What level of onerous contract provision, if any, have you got against that particular contracts? What's the duration? And what's the sort of potential further downside risk if we don't see performance improves as you expect over the second half of '23 and into '24?

So yes, absolutely. Thanks for that, James. So provisions wise, we have no provision against this contract. And the reason for that is, to the second part of your point, it's an 18-year contract, it's got 18 years left to run. It has been profitable in the past. We are experiencing some issues at the moment. So we've experienced a GBP 4.5 million loss from that contract in the full first half of this year. We're expecting that to decrease in terms of the amount of loss in the second half. And as Phil described in his presentation, improve from there on out, say because it's got 18 years left to run, whilst we might experience a loss over the course of the next few years. You just through to say, full year '25, by the time we get to beyond that, we would expect it to be breakeven or better.

I mean, on the blocks, I mean, which is a contract we know, well, and Peter spent a lot of time on it, and as have I. There's -- we're losing money on energy, we're losing money on cleaning, we're losing money on catering and we're losing money on hot services. So we haven't planned, each of those blocks has a plan. And we have shared those plans with our clients, and we hope that we will get their support to a reset against those blocks. Lots of [ works ] going into in.

Yes.

[indiscernible].

I'm sure we'll get there, and we don't need to go down there. But I'm sure working collaboratively, we will get to an outcome that is good for the hospital and good for us. Because it's -- in the long run, it's not an interest at a hospital as a supplier is losing money on the provision of services. Sam?

Sam Dindol from Stifel. A couple from me. Firstly, on cash flow and one-off items in CapEx reducing. When do you think that normalizes? Is that FY '25? And do you have a sense of free cash flow conversion or pounding your free cash this business should be able to generate over the medium term? Secondly, on renewables in the [indiscernible] and other renewals, are you finding the Science-as-a-Service offer reduces sort of the margin decline initially on renewals? Is that something that's coming through?

Did anyone else catch that? I'm going to get that, but I think there was a question there. We have, I think, CapEx normalization. Look at FY '24 or FY '25 on there, would that be fair?

Yes. So I'll pick up the first piece, Sam, which was on one-offs and CapEx. And I see by one-offs you mean the other items. Yes. So you'll have seen it's come down in the first half of this year already to GBP 6.9 million. My expectation is that we'll be roughly double that for the full year, which is in line with the guidance we gave at the end of last year and substantially less than last year. As we go ahead into full year '24, I expect cash and other items to come down again. And I would expect CapEx to also come down again. So we're at just under GBP 14 million worth of CapEx in the first half of this year. I expect we'll be around GBP 30 million of CapEx, give or take, for the full year, and that will should come down next year. Sorry, what was your next question?

There was a question about renewables and Science of Service. There's 2 aspects of it. We -- notwithstanding the investments that we're putting in, we would be expecting on a run rate basis that we would make higher margins in those renewable decarbonization. We aren't at the moment. But that capability that we have, it's not generally part of the bid, but it's part of a follow-through. So DWP is not in the bid, we're doing a heck of a lot of decarbonization work. And so, today, DWP is our second largest client now. So it's really -- and that's all -- it's all through project work. So you can't expect to be growing a business 200% and not be investing in it. And that's what we're doing off of a low profit base because these are only small companies we're ramping up. So we're checking a lot of [ resource ] at it, and then you get the working capital impact as well. So it's very early days yet, but maybe start and we've got more to do.

And, Sam, I think you had one final point on free cash flow conversion. So we'd expect, whilst this year, for the reasons I discussed in my presentation, and Phil just referenced a few of them, this year has been a little bit of an anomaly, but I would expect that from full year '24 onwards, we'd be back to the sort of levels of free cash flow that we had last year, so 50% plus.

Anymore, Kean? And then we'll go to Chris.

Kean Marden from Jefferies. Just first of all, you -- any early indications about whether the Atalian-OCS merger might create contract opportunities for you during integration, churn, et cetera? And then just coming back to CMA. So if we don't get the sort of desired outcome here, and we did move to investigation, what does that mean to costs and management bandwidth to Mitie?

That's all you've got?

I can ask the difficult ones.

I mean Italian OCS, they paid -- what is that? It rumored to be paid EUR 2.7 billion for a business with 200,000 employees with a revenue that's less than [ Mities ]. We've got 68,000 employees in one country -- oh, and they operate in 35 countries. So it's a complex, it's a complex deal for them. Do I see it being antitrust impacted in the U.K.? No, no, I don't. Because [ they're ] still quite small players individually. And so we welcome any consolidation that's going on in the sector, we would welcome generally. They're mainly a cleaning company as you know so rather than a hard services business. But we'll bid against them in network rail. We've bid against them hospitals, we have bid against them -- so sort of -- they're a good operator, they're a good operator. CMA, what happens if, Pete, I don't know. I don't know. I haven't got a clue. Do you have a view, Pete? We haven't considered it.

We have obviously carefully considered it. The reality is, we have already done all of the hard work. When the CMA first raised their inquiry, we, as a prudent organization, had to do all of the work to validate that we had not breached any competition rules. And that's involved us doing a huge document [ reviews ], having Linklaters and PwC providing technical support, go through everything to reach a conclusion that there is no evidence that we have behaved inappropriately. So we do have a very high degree of confidence that the matter will be closed with no action being taken against Mitie. If the CMA were decide to extend their review period for any reason, I don't see it as requiring significant management time and effort because we have already done that. It would just be a case of obviously us continuing to fully engage as we've done to date and assisting respond to any additional questions. At the moment, CMA have confirmed to us that we have provided appropriate responses to everything that they've raised. So, hence, the reason for my high degree of confidence that we will be exonerated.

Okay. Stephen Rawlinson?

Stephen Rawlinson. Can I ask 4, if I may. Firstly, on employees. I mean, most of the meetings, I go to the -- talk about labor shortages, labor difficulties, you talked a little bit about sort of some of the things you're selling to employees to attract them. Can you just give us some views if you've gotten to [ hand ] and [ round ] what they think they're buying from you in terms of churn rate in terms of employee satisfaction, some of those measures. Secondly, if I look at Slide 16 and the savings that are in there, which the net savings this year are about GBP 14 million, the GBP 17 million minus side with GBP 3 million. But I get a number that would give you margins at EUR 4 billion turnover of over 5.5%. Am I reading that right? Because I think there's total savings there are about GBP 100 million added to the existing operating profit, you'd be getting [indiscernible]. So set me right on what I'm thinking there. Thirdly, with regard to inflation adjusters in the public sector, quite a number of contracts normally in the public sector have a 1st of April implementation based on the September inflation figure. Obviously, that might, if it's in some of your contracts, give you a good kick start to Q1 next year. Could you just help me out on that one a bit, please? And finally, when do you think we might get a situation where we get fewer adjustments to the operating profit that are related to structural improvement? And if you get a cleaner number there, if possible, is there a date in your mind?

Okay. Simon, I let you do labor. I'll come back to that one. Let's do this one then. So the -- most of our -- so you're right, in public sector, we have a CPI inflator, but they tend to apply on the day the contract was originally signed. And if you can -- I think you've got hundreds of contracts throughout the year, they're renewing or they're repricing through the year. So there isn't one big 1st of April. So it gets moved out. That's point one. I think you -- we may take it offline. I think you must be misreading the numbers because these numbers -- yes. It's what -- you've got to look at what's incremental versus what's in total. So a lot of the Interserve, you can't just add GBP 50 million because a lot of that is already in the numbers. That's why Interserve used to make GBP 30 million and now it's making GBP 70 million. So that -- and not the -- even in Forte, we had earlier savings a little footnote for the optically challenged. It says I don't think that's all incremental, it's already in the numbers. So Simon can take you through it. But I think you'll get -- you won't get to 5 but you'll get closer to the bottom end of our range is where you'd get to. Do you want to...

I think the labor pressure point. Stephen, I think I'm answering your question. There are a few there that you rattled through. But in terms of what we're seeing in the market at the moment, we've got still a -- as I said in my presentation, a reasonably good level of applications per vacancy that we have. It's been relatively stable since the start of our fiscal year sort of between 3 and 4 applications per vacancy, and our attrition rates have also been stable over the course of the last 6 months. So they -- both of those metrics went broadly in the wrong direction during full year '22, but they've stabilized from the back of full year '22 through to this half year.

I think -- I mean, the employee engagement over the last 6 years has been increasing every year. And last year, it fell back. And the year before, it shot out quite a lot. And a lot of companies saw this sort of COVID boost where [ people ] are really supported through COVID and engage. And so we got a big jump up in '21, but it came off in '22. Some of that coming off in '22 is about pay. And this is always the challenge that we have in trying to explain to our people that we can only pay them what our clients agree to pay us. And this is the point, and maybe you'd say Atalian service point, OCS point. But any -- when you bid at minimum wage, in our view, that's the wrong thing to do. We think it's the wrong thing for our people. We also think it's a wrong thing for our clients because it's difficult to get people. You spin your wheels, you never deliver great service. And there hasn't been a client I've spoken to you who says, we're really happy that we went down the minimum wage. There are still clients that do that, and we avoid those deals. We'll always put in a foundation living wage bid on those deals. So I'd like to think the industry as a whole can help in supporting the people in our industry because they work hard. As COVID showed they provide vital services to keep the country running, and they should be rewarded fairly for that in our view.

And on the point on adjustments to operating profit?

Yes.

Yes. So if you look at the adjustments this year, Stephen, as I said in the presentation, we're at GBP 6.9 million of cash, other items in the first half of this year. I expect that to roughly double by the time we get to the full year, which is significantly less than last year and broadly in line with the guidance that we gave at the end of last year. The key components -- 2 of the key components of that being Project Forte, and the Coupa, the digital supplier platform should be largely complete by the end of this year and will, therefore, drop away. We'll see where we get to on acquisitions. We've had some acquisitions in the first half of this year. As I said, we've got a pipeline that we're looking at for the second half of the year, and that's another element that feeds into that, and therefore, I suppose, in short, to answer your question, as we said before, we expect it to fall away fairly dramatically after full year '23.

But don't forget, so we always look at cash, really what you're thinking about is cash, and that's been coming down. But you've got intangible asset amortization, that's GBP 20 million a year come what may. That's just a book accounting that amortizes the contract values of acquisitions that we bought. Because you don't -- you don't buy hard assets when you buy a company like Interserve. So you're buying contracts. And so you depreciate those over a 4- to 5-year period. In a way that I like that, it's a good thing because it's not sitting in goodwill. It gets written off the balance sheet, but it does go through other items. So that actually -- a lot of that ends in '26, isn't it?

Will start to wind down in a couple of years' time.

Yes. It will come down. It is mainly off the Interserve acquisition, which was '20, December '20. We are now 2 years into that, it's another 4 years. 3 to 4 years are gone.

[indiscernible].

It's the cash. And look, I think it's a very fair point. because it feels like -- I mean, I've been here nearly 6 years now. It's quite depressing in some ways, but we haven't so fixed the business, but it's a sort of gift that keeps giving. There's always something else to do. But there was -- there's a lot of restructuring going on. And I suppose the only thing you'd say is the fact that, that's now coming down is a good sign that we built the foundations that give us sustainable profitable growth. And I was thinking about that as I just came and walked in. I mean you can sort of do the quick way or you can do the right way. And I think the right way is to do and build the foundations up brick by brick, as I call it, and not just scale over the top. So we laid out a strategy that would build the foundations from the bottom up, but it takes time. Yes. I'm sorry, I don't know your real name. Alex, isn't it? Liberum, isn't it?

Just a quick question on the recent acquisitions. You noted that the required investment in the first half of FY '23 to kind of scale them up and win some contracts. Should we expect that, that investment is largely done now? Or should we expect that to carry on into the second half of the year?

Yes. Second half. We really won't see a delta -- and material delta impact from those until FY '24. I think it's that point I made about the uptick in from -- we're already thinking about FY '24. I'm sure you are as well. But I'm not saying FY '23 is in the bags, a lot of hard work to be done. But when thinking about FY '24, and can we get the same level of kicker. If you take away COVID last year, we did [ 107 to 145, ] let's say, on like-for-like. Can we get a similar level of kicker in FY '24. And that's what, through all the other efficiencies. So anything that gives nothing in FY '23 and gives something in FY '23, we like those because it's giving us the kicker, delta, in FY '24. And that's our focus right now. Okay. Thank you, everybody, for your time. Thank you for coming into the chart, and have a good day.

Thanks, everyone.