Mitie Group plc (MTO) Earnings Call Transcript & Summary

Okay. Well, good morning, everybody, and welcome to our results presentation for the financial year ended 31st of March 2023. Thank you for everyone coming over to the shard here joining us today. As the cover slide says, we have delivered a strong performance in the year. We made further progress against our strategic priorities. And we're entering FY '24 with some degree of confidence. FY '23 was indeed a record year in many ways, particularly as we entered the year with the challenge of replacing GBP 450 million of revenue from the short-term COVID work we've done in the prior year, which I'm pleased to say that we did. Indeed, group revenue grew by 1.5%, exceeding GBP 4 billion for the first time. And we grew EPS by 3% to 9.5p per share. We generated a good level of free cash flow even after we stopped the invoice discounting program. And we returned dividends including dividends paid in the shares we bought back in FY '23, GBP 117 million to our shareholders. Our recommended final dividend of 2.2p per share takes the total FY '23 dividend to 2.9p per share that's a 61% increase on last year. Our order book at the year-end was GBP 9.7 billion, and that's up from the start of the year. Customer NPS, Net Promoter Score, was also up to a new high, having inherited a much lower Interserve base as was employee engagement also up at record levels. Whilst you could argue that the better engagement scores is correlated to our GBP 10 million winter support package, we were still proud that we could afford to make these payments to our most hard-pressed and deserving colleagues. So all in all, we've had a good year. We are in a good place, and we've delivered good numbers as Simon will show now.

Thanks, Phil. Good morning, everybody. Let's start with the headline numbers. As Phil said, we've reported a strong set of results for full year '23. Headline revenue of GBP 4.06 billion was up 1.5%. But if we exclude the COVID contracts, underlying revenue was up by 13.9%. Headline operating profit before other items was 2.9% lower than last year but was up by 44% on an underlying basis. Our headline operating profit margin was 4% in full year '23, which was 0.2 percentage points lower than in full year '22, but the underlying margin was up by 0.8 percentage points. Profit after tax was GBP 128 million and as Phil also mentioned EPS, which was 9.5p. The 3.3% increase reflects the positive impact of our reduced finance costs and the GBP 50 million share buyback. A total dividend of 2.9p for full year '23 would result in a payout ratio of 30%, which is within our target range. We've had a free cash inflow of GBP 66 million following the closure of the GBP 45 million invoice discounting facility and our average daily net debt was GBP 84 million. Our balance sheet remains robust with total net assets of GBP 422 million and our BBB credit rating has been confirmed by DBRS. Moving on then to cover the performance in more detail and turning firstly to revenue. All divisions have performed well in full year '23. Headline revenue in Business Services reduced by 23%, but underlying growth was 6% as a result of wins, including the retendered Afghan relocations and assistance contract, increased variable and project work and a good pricing performance. Technical Services revenue has grown by 18.6% as the continued gradual recovery from COVID has been underpinned by new wins, pricing and acquisitions. CG&D revenue of GBP 828 million reflects some significant wins, including the FDIS contract, which started in December 2021 and increasing volumes of fixed and project works across a number of its largest contracts. Communities revenue has grown by 6.6%, largely due to the pricing through of inflation. And finally, Specialist Services revenue is up 10.3%, following some key wins in Care & Custody and Landscapes, cross-selling in Waste and Landscapes and the acquisition of Biotecture. On my next slide, I've included a revenue bridge to show the key drivers of the growth in the year. First, we have a reduction in revenue of GBP 433 million or 10.8% for the COVID contracts that completed earlier this year. Next, we showed GBP 116 million from net wins and losses, including the likes of FDIS, BAE Systems and John Radcliffe Hospital. Contract growth and projects captures incremental growth on existing contracts, for example, where the scope of our work has expanded and the year-on-year growth in project revenues. When combined together, the wins and losses, contract growth and additional project work drives 7.2% of organic growth. We successfully priced through the majority of cost inflation in full year '23, which accounts for GBP 163 million of additional revenue. And finally, acquisitions drive GBP 73 million of revenue. Moving on to operating profit. In Business Services, excluding the boost from the higher-margin COVID contracts in full year '22, profitability has improved by 26%. The key drivers of the improvement include wins, cost savings from the ongoing margin enhancement initiatives and increased variable and project works. These upsides have been partially offset by a reduction in the scope of the Brexit security work at U.K. ports. Technical Services operating profit of GBP 34.1 million is 13.7% higher in full year '23 largely due to the ongoing delivery of cost savings and the post-COVID recovery of variable works. These improvements have offset the headwind from cost inflation, which impacts Technical Services more severely than the other divisions and Project Forte, where lower productivity temporarily reduced profitability. CG&D has had a very strong year in full year '23 with operating profit growing by 55.7% to GBP 59.8 million. This improvement has been driven by the increase in revenue that I mentioned earlier, cost-saving delivery and pricing. Communities profit of GBP 21.3 million is 7% better than last year, as margin enhancement initiatives offset the impact of cost inflation and a handful of contracts which have been in-sourced by customers. In full year '23, we've utilized GBP 4.9 million of provisions that were made against the loss-making Interserve contracts, and we retained GBP 10.5 million of provisions on the balance sheet. Operating profit in Specialist Services is up 7.4% due to wins in Care & Custody, improved margins in Spain and the addition of Biotecture in Landscapes. Corporate costs have reduced by GBP 6 million in full year '23 due to savings made across the functions and in shared services, which Phil will come on to shortly. My next slide is a profit bridge, which pulls out the key drivers of the decrease from GBP 166.9 million in full year '22 to GBP 162.1 million in full year '23. The first block on the graph shows the GBP 52.5 million reduction in contribution from the COVID contracts, which have now all completed. Next is the GBP 25.2 million improvement in underlying trading which includes the upside from net wins, growth on existing contracts and projects and variable works across the divisions. We delivered GBP 41.4 million of profit from margin enhancement initiatives, which Phil will cover in detail later. And the net hit where our bottom line from inflation was only GBP 7.2 million, which I'll come back to shortly. Next, we show a one-off downside of GBP 3.8 million from the lower productivity caused by the disruption from Project Forte and the costs associated with the CMA investigation. And finally, as Phil said earlier, we've invested in a comprehensive winter support package to help our frontline colleagues with the cost of living. Of the GBP 10 million total cost, we incurred GBP 7.9 million of it in full year '23. Turning now to earnings per share, which has improved by 3.3% in full year '23. The refinancing of the U.S. private placement notes and the revolving credit facility in full year '22, and the closure of the invoice discounting facility in full year '23 have contributed to a 41.9% reduction in net finance costs to GBP 11.5 million. This has more than offset a small reduction in operating profit in the year, meaning that profit before tax has improved by 2.4% to GBP 150.6 million. Corporation tax of GBP 22.6 million represents an effective tax rate of only 15% as we continue to benefit from the tax losses that we acquired with Interserve. After accounting for the 119 million shares purchased in the year, this gives us an EPS of 9.5p, which is up 0.3p on full year '22. Looking ahead to full year '24, we expect finance costs to remain at broadly the same level and the effective tax rate to increase to around 19% or 20%. Turning now to inflation and starting with the impact on full year '23. With CPI running at an average of 10.1% in full year '23, 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 impact of inflation on our core cost base in full year '23 was GBP 170 million, reflecting a 5% increase in wages and an 8% increase in materials compared to full year '22. Whilst labor markets remain competitive, we continue to attract a good supply of available resources, meaning we've kept wage inflation below the headline CPI. In terms of pricing, our contractual protections again enabled us to pass on the majority of the GBP 170 million cost increase to our customers, resulting in a net GBP 7 million reduction in profit, which is better than we forecast. Had we not incurred this GBP 7 million reduction in profit or the revenue pricing impact of GBP 163 million, then our full year '23 operating profit margin would have been around 35 basis points higher, close to 4.4%. Looking ahead to full year '24 based on the latest OBR forecasts, we expect CPI to fall to an average of 4.2%. We've benefited from labor and materials inflation remaining below CPI in full year '23, but with CPI expected to fall, this situation could reverse. We're therefore forecasting a net GBP 20 million reduction to profit from inflation in full year '24 as contractual recovery falls below cost inflation. Moving on next to cash flow. We've generated GBP 186.8 million of cash from operations in full year '23 driven by the operating profit of GBP 162.1 million, partially offset by cash other items of GBP 23.7 million. Other items in full year '23 are largely made up of the costs of completing Forte, and the cost to achieve our margin enhancement initiatives. The GBP 23.7 million is GBP 7 million or GBP 8 million higher than we expected at the start of the year when we were forecasting a full year '23 operating profit of GBP 140 million. The investment that we've made in these savings programs has been a key driver of the increase in the profit to GBP 162 million. We expect cash other items for our margin enhancement programs to be around GBP 10 million in full year '24, driving further material benefits to the bottom line as Phil will show shortly. Next, we have a cash inflow from working capital -- cash outflow from working capital of GBP 38.8 million. The outflow was largely due to the closure of the GBP 45 million invoice discounting facility but was also impacted by 2 other factors: firstly, the completion of the COVID contracts, which are on more favorable payment terms than the contracts that have replaced them; and secondly, the growth in the recently acquired projects businesses, which need greater working capital investment than our FM contracts. Structurally, we expect a modest working capital outflow each year as growth in the Projects business accelerates. CapEx, leases, interest and tax was GBP 82.3 million, GBP 16 million lower than in full year '22. CapEx accounts for GBP 10 million of that GBP 16 million reduction due to the completion of Project Forte and the Interserve integration. The remaining benefits are from interest and from the increased dividend from our joint ventures. These movements resulted in a free cash inflow for the year of GBP 65.7 million. Our capital allocation actions account for GBP 137.5 million of cash outflow in full year '23, which is around GBP 100 million more than full year '22. And finally, at the bottom of the page, we see the overall increase in net debt of GBP 70.8 million. Moving on to the balance sheet. The GBP 70.8 million increase for the year results in a closing net debt of GBP 44 million and an average daily net debt of GBP 84 million. Our average sustaining net debt-to-EBITDA or leverage ratio is 0.4x in full year '23 and our covenant leverage ratio remains at 0. Debtor days have increased as expected due to the closure of the invoice discounting facility and creditor days have also increased. The 9-day increase in creditor days is worth around GBP 50 million and has been made possible by structural improvements that ensure we're not paying our suppliers any earlier than contractually necessary. ROIC has reduced by 4.5 percentage points since full year '22 due largely to the increases in working capital and the effective tax rate. Total financial obligations of GBP 44 million is now comprised almost entirely of net debt. We've closed the customer invoice discounting facility and the net pension fund liability had reduced to almost 0 at the end of the year. We continue to make pension deficit repayments of around GBP 14 million a year, which will be reassessed later this year when we undertake our triennial valuation. So in summary, we've delivered a strong financial performance in full year '23 with record revenue, improved earnings and a good free cash flow. We started full year '24 well, trading in line with the Board's expectations and with positive momentum in the core business. We expect mid- to high single-digit revenue growth, including a more modest level of inflation than in full year '23. Margin enhancement initiatives will continue to underpin profit process in full year '24, profit progress in full year '24 and free cash flow will improve to at least GBP 100 million. And on that note, I'll hand back to Phil.

Very good, Simon. That's your third year-end out of the way, well done. Quite a hang of it now. So good job. So let me address now what's next from Mitie as it were. I think to understand what's next, it's never a bad idea to reflect on where we've come from. I joined Mitie as CEO on 12th of December 2016. It was a cold dark Monday, I remember. And our first few years were focused on building new foundations, improving how we engage with our customers and colleagues disposing of noncore businesses and strengthening the balance sheet. That period of heavy lifting meant that we were then ready to move to Phase 2 of our strategy to build a scale and industry leadership that we desire to position which the acquisition of Interserve in December 2020 helped to secure. Our investment in technology also started to come to fruition with industry-leading platforms and product innovation. The current Phase 3 of our strategy, which we launched in June 2021 has all been about delivering returns, returns to shareholders. Shareholders backed us with a 200 million rights issue during COVID, and we were determined to show that we could be trusted to deliver a return for that money. The overall result of these 3 phases of Mitie's strategy, Mitie is now the largest facilities management company in the U.K. And in a highly fragmented market, we have doubled our market share to over 10%. And if you're into a strategic advantage of RMS, relative market share, it's almost twice the size of our next largest competitor. And in a still fragmented market, it also indicates that more consolidation is available for the industry leader, and that's the theme I'll return to later. So where are we with Phase 3 of our strategy. As you recall, delivering returns has 4 elements: accelerating growth; enhancing margins; generating cash; investing in capabilities. On accelerating growth, we set a target of mid- to high single-digit revenue growth. And as Simon highlighted, we delivered 7.2% organic growth in FY '23, and a further 4.6% from pricing. Margin enhancement, we set out to reach an operating profit margin of 4.5% to 5.5%. And as Simon showed, we are well on our way to achieving that. Cash generation was strong in FY '23 as was progress on our capability enablers, as I'll show shortly. Done well, we said this strategy would deliver for our shareholders. And it is doing. We set a target dividend payout ratio of 30% to 40%, which we've reached. We said we would buy back stock, and we're now on our second GBP 50 million program. And we said we'd generate a return on invested capital of at least 20%, which we are comfortably exceeding. Growth, of course, is key to any successful business that I've worked in. New contract wins last year were GBP 1.9 billion TCV that is total contract value. And this year included U.S. visiting forces, Dublin Airport, Hammerson, Home Office, NATS, National Grid to name a few. We also had a strong year for projects and variable work, particularly across our largest customers, Ministry of Defense, Lloyds Bank and DWP. Contract renewals were over 90% again and added some GBP 2.4 billion TCV, Defense was again particularly strong. Sainsbury's, Deloitte, Vodafone, Eurostar, were also many of the contracts extended. And as I said at the start, our order book grew and now stands at GBP 9.7 billion TCV. We entered FY '24 with a contract opportunity pipeline of almost GBP 15 billion. The question we have to come back to is why do we win? There's a question we ask ourselves a lot on each bid is an opportunity to become more precise in answering that question. So let me give you just 2 examples of why I think we win. We win firstly through long-standing relationships. Take our defense team with a proud record of delivery for the DIO, which stretches back more than 20 years. We have 1,400 colleagues working across defense sites, experts in their field, trained to work in critical high security environment. But whilst we are trusted by the client, be under no illusion that these are highly-priced contracts coveted by our competitors and competed for aggressively. Past performance means nothing if we're not competitive on price and innovation on solution. So FY '23 was really a good year for us in defense. Following the Gibraltar 7 plus 3 years, we're at the end of FY '22. We added Cyprus, 7 plus 3 years and Landmarc training estates 7.3 years at the end of FY '23. These latter 2 contracts represent over GBP 170 million base revenue in per annum and over GBP 1 billion of contract value. We've also temporarily extended the Falklands, Ascension Island until late 2025. This bid is now live, though -- and would give us a full house of wins in our defense portfolio. That was the jewel in the crown of the Interserve acquisition, you recall, were we to successfully retain that last contract. So that's our absolute focus today. Adding the significant project work we're doing in FDIS Scotland, Northern Ireland and the win at RAF Mildenhall where the U.S. Air Force operates from. And you can see why the MoD is still our largest and one of our longest relationships. But it's the new clients such as those wins at NATS and National Grid that are also encouraging for Mitie. Both Grid and NATS we dislodged a long-term incumbent with a mixture of innovation through both our science of service approach, helping the digital transformation of FM and a promise of greater transparency, better service, together with more data and insights, more efficient workflow management and a greater focus on net zero. These core contracts mobilizing in FY '24 are worth [ GBP 250 million ] over the next 5 years, but it's the potential to add future project work that really excites me as the next slide, hopefully illustrates. So how we grow, therefore, is just as important as why we win. And at the heart of how we grow is the upsell opportunity from our projects capabilities. Over the past year, we've grown our projects business by 18% to over GBP 800 million of revenue today. We employ some 2,300 colleagues working with over 200 customers across all 4 of our major divisions. From MEP, Mechanical Electrical Plumbing, Fire and Security Systems, Energy Decarbonization through to full office fit-outs, we tackle all aspects of workspace effectiveness with some great clients trusting us with their capital budgets, but we could be doing even more. This is a significant growth opportunity for Mitie given the trends towards creating inspirational workplaces, post COVID, the opportunity to repurpose buildings. The U.K.'s need to invest in the grid and telco networks and the time in regulatory requirements to meet both security and energy efficiency standards. Revenue from our decarbonization business increased 65% to GBP 145 million in FY '23 as our Custom Solar and Rock Power acquisition scaled up, as did engineering service provision to telecoms industry with GBP 76 million of revenue in FY '23, a growth of 145%. We just bought a sophisticated fire and security installer, R H Irving and Newcastle just as the new protect duty comes into law requiring organizations to better safeguard members of the public on their sites. And we're looking to add further engineering, design and build capabilities. That's why I'm excited about our new wins as the grid, such as the grid and that. R H Irving and Rock Power, for example, already provide sophisticated security systems, grid upgrade services, respectively, to National Grid. Custom Solar has just won their largest ever piece of business, a new solar project with NATS. So upselling projects, accessing our clients' capital budget is how we accelerate our growth. So let me turn now to margin enhancement initiatives and cost-out programs will always be part of the Mitie DNA, starting with Project Helix back in 2017, our first program with GBP 3.8 billion of revenue -- GBP 3.8 billion of labor, third-party spend, there's always more to go after. When we acquired Interserve, our original expectation was that we would deliver GBP 30 million of cost synergies, our cumulative savings at the end of FY '23 are now GBP 51 million. And we've identified further efficiencies in help desk and back office to get us to a cumulative saving of GBP 55 million in FY '24. Operational excellence and our digital supply platform contributed GBP 14 million of incremental savings in FY '23 with a full year of annualized savings to come in FY '24 and we launched a new set of margin enhancement initiatives in the second half of last year relating to a new target operating model, our so-called, TOM. TOM is focused firstly on consolidating, standardizing systems and processes to drive efficient straight through processing as well as ensuring we're operating in a lean and efficient manner. We've created MSS, Mitie Shared services, which now manages the end-to-end outsourcing of all payroll, HR, finance and procurement, working closely with our strategic partner, Wipro. Group Operations is a second block of the new TOM standardizing our operations for mobilizations helped us CAFM, admin, sales and marketing, driving continuous improvement as well as monitoring relative performance across all our contracts. The TOM program made a good start in FY '23 and delivered GBP 6 million of savings in the second half. And a further incremental GBP 20 million is now expected in FY '24. Not all of this will drop to the bottom line as we are still facing into inflation headwinds, as Simon explained. But those GBP 20 million of cost savings represent another 50 basis points of operating margin. The bar chart shows the steady progress we've made in our underlying operating margins, as excluding COVID since between FY '21 and FY '23. Improving margin from less than 2% after acquiring Interserve, which you'll recall operate on lower margins than Mitie to a margin now exceeding 4% in the second half of FY '23. And as Simon said, inflation, which brings revenue but no margin as well as a net under-recovery diluted margin by 35 basis points FY'23. Next slide. Let me now turn briefly to our 3 capability enablers, which underpin everything we believe in as a business. Science of Service technology led approach is building momentum. For example, we're now at the forefront of technology and business services and not just in Technical Services. We aimed our cleaning and hygiene center of excellence in Birmingham to showcase our tech-enabled solutions, such as robotic cleaning, directed by footfall analytics, portering optimization hospitals. We launched Merlin for cleaning, tracking responses to reactive tasks such as villages, which built on our Merlin Protect app, which manages security and shrinkage alerts. Tech Services, Forte is now finally working. The technology has taken longer to bed down than we had hoped and had greater cost. We're now seeing a stable IT platform for a good performance in our workflow automation. Core metrics of jobs per day, first-time fixed rate, revenue recognition, supply chain management, real-time data analytics are all showing green against pre-Forte levels. Our second capability-focused decarbonization delivered is another key plank of our ESG strategy, ensuring that we maintain our sustainability leadership at Mitie. We've optimized energy management systems of all our buildings with 100% renewable energy. Over 50% of our fleet is now electric and we've installed over 2,800 charging points. And in April, we're extremely proud that the prestigious science-based targets initiative, SBTi, validated our 2025 net zero plans and our Scope 3 emissions target of 80% reduction by 2030. And we were a double winner in decarbonization delivered last year, collecting both edie's Net Zero Carbon Strategy of the Year award as well as GivEnergy's solar installation of the Year Award. Being both the technology and the decarbonization really helps to attract talent and underpin our U.K. top employer status, which we won for a fifth year running and creating a great place to work. Last year, we launched My Mitie, our new Employee Value Proposition, EVP, led by our own people, telling my story. The EVP includes my slice, our industry-leading benefits package, including the winter sport package includes my voice, facilitated by numerous board listening sessions, my achievements by Mitie Stars. My community is supported by our many edie events and my achievement, my wellbeing together, they all help us to contribute to our highest ever employee engagement score up 7 percentage points. Okay. So let me try to draw together all the threads of Phase 3 of our strategy of delivering returns. If you remember the first element of returns that we look at is dividends on the top left there. In FY '23, we've stepped up the dividend payout ratio to 30% in line with our target range. The Board believes this now to be an appropriate payout ratio for Mitie with progressive dividend subsequently reflecting the future growth of the business, not just from the payout ratio increasing. Block 2 is share buybacks, and this continues to be a key plank of shareholder returns. As I said, we announced a second GBP 50 million tranche this April. For employee tax efficiency reasons, some of this years buyback will be used to fulfill the particularly high uptake of the SAYE 2020 scheme that was launched at 27p and matures this December. There over 2,000 Mitie colleagues participate in this scheme. And this [indiscernible] cost will see a 3.5x return on their savings, which is great for all those that took part in that. Third element of returns avoiding dilution of our shareholders' interest as repurchase of shares for all other employee incentive schemes. Last year, we purchased 50 million of shares at a cost of GBP 38 million. This was the high watermark, if you like, of spend following introduction of our new policy as we caught up with our numerous in-flight schemes. FY '24 and FY '25 requirements, therefore are much lower at about 15 million shares per annum. And the final element of our capital allocation policy is M&A. I'm referring to this as final, not to signal its lack of importance, but rather to give it the prominence that it warrants. As I mentioned, upselling in our projects business, benefiting from the macro trends, regeneration workspaces, decarbonization, security technology, telecoms, et cetera, is a key element of Mitie's growth story as we pivot from the old world of facilities management to the new world of facilities transformation. I highlighted the growing contribution from our higher growth, high-margin bolt-on gazelles carefully chosen, we believe that future Gazelles can further enhance our existing project skills and capabilities, accessing more of our customers' capital budgets. Now during Phase 3 of our strategy in terms of returns, our M&A spend has actually been quite modest. FY '23 spend was only GBP 20 million, and FY '22 was a net divestment of GBP 5 million. So net over 2 years, we've only spent GBP 15 million. However, with minimal leverage, as Simon showed, and good returns from the Interserve acquisition, we're now ready to allocate more capital to M&A to accelerate growth in the longer term. After 2 months, in FY '24, we've now spent GBP 20 million, the same amount that we spent in the whole year of FY '23. And the acquisitions of R H Irving and Linx are a great fit for Mitie fire and security offer. Looking ahead, we see attractive pipeline of Gazelle opportunities, particularly in Technical Services and in intelligent security in FY '24. So that's probably a good segue to the next phase of Mitie's strategy. And we're currently working on our next 3-year plan for FY '25 to FY '27, code name Mitie 4.0. It will be an ambitious plan, a plan that builds on our 3 capabilities, which we fundamentally believe will sustain strong organic growth, but a plan where our projects business strengthens our leadership position as Britain's #1 facilities transformation company, and a plan that promises greater returns for our shareholders. We'll hold a Capital Markets event on the 12th of October '23. So please put that in your dairy and we'll follow-up with an invitation shortly and I look forward to sharing more of our Mitie 4.0 thinking with you then. So until October and in summary, FY '23 was a good year for Mitie. It surpassed our expectations, a year of strong financial performance, strong cash generation, continued low leverage and growing shareholder returns. And as period 2 has now closed in FY '24, FY '24 is also shaping up to be another strong year. Thank you for listening. And with that, we'll turn over to Q&A. Chris?

Chris Bamberry, Peel Hunt. I've got 3 questions. Firstly, could you give us an update on the availability of labor and applications per job, that sort of thing. Secondly, you mentioned an acceleration in M&A. What's the pipeline looking and what are areas of -- key areas of interest. And finally, you mentioned the move from facilities management to facility transformation. Could you just give a little bit more flavor of what that means in practical terms.

Yes. Simon, why don't you do labor? I'll do the M&A and facilities transformation.

Sure. So we've spoken a number of times, Chris, about the availability of labor, which we've kept at around 3 or 4 applications per vacancy over the course of the 12 months running up to the half year, that's actually got better during the second half of the year. And as we got towards the back end of the year, increased to 5 or 6 applications per vacancy. Hence, my comments in the inflation section that we do still see a relatively good market from our perspective.

And just picking up M&A. I mean -- look, I think there's -- maybe answer the first question -- the last question first, which is about facilities transformation because what a client wants now is, as we've mentioned, is attractive workspace that is energy efficient. They want data. And everyone is facing the same challenges of having to repurpose their buildings. And so when we think about the [ build-to-stay, ] it's not enough from our point of view, just to manage the assets that are there, but we want to be a lot more proactive in helping that transformation journey for our clients. And that's true of public sector as it is of private sector. I mean, one of our clients was saying to me, half the footprint but double the experience. So that's what facilities transformation is about. And our point is we need to capture the installation and the design, the consulting and the build capability as well as the maintenance. And that's what we've been doing, and we -- if you take Custom Solar, Custom Solar do consulting, advising clients what they think they should -- is better to use. They do design, they then build it and then we're maintaining it. And so we're sort of munching back up from managing facilities to being a real strategic partner in -- on the journey to transform facilities. So that's what we mean by that. And that, I think, goes to the point then about M&A. And we're not going to name individual deals where we have a number that fit that bill. And as I said, I think the fact that we've only spent GBP 15 million net in the last 2 years on net M&A sort of does give you a sense that there is a little bit more, we feel that we can start to do now, having got the returns on the big investment, which obviously was Interserve. Sam?

Three questions from me, please. Firstly, on the inflation calculation. Can you give us a sense of your assumptions around the wage and materials cost increase for '24. Secondly, the retention rates are really strong at 90% plus. Do you think that is sustainable? Would you expect it to come back a little bit in the coming years? And then finally, on M&A and Mitie 4.0, could you reduce the very high returns target to ensure you can do more deals given the strong free cash flow of the business?

I think I'm going deaf. What was the last question?

Sorry, could you reduce the returns target to accelerate M&A?

Yes, yes. Got it. Yes. Okay. So Simon, why don't you do wages, I'll do retention and M&A 4.0.

So Sam, we're expecting wages to remain broadly where they have been for full year '23 in terms of inflation, so around about 5%. As I said in the presentation, we've seen good inflation about 8% in full year '23. I'd expect that to come down a little bit, perhaps to 6% or 7%. And that's broadly what we've factored into our modeling there's obviously a lot of moving parts there.

And then the other side of that is obviously the CPI inflators which, again, we are seeing dropping. And that's why there's potential a crossover where we were having bigger inflators on the CPI before wages were catching up. Therefore, we were in a better place and that's why inflation impact net wasn't so high, but you might see the CPI coming down a bit, which is why we've widened our forecast impact where perhaps there's more lagging in the supply chain and labor versus the CPI. Retention is always hard. I mean there's always somebody out there with a lowball bid or the potential to make a lowball bid and we do lose bids. And it's a fact. It's in occupational hazard that we live with. You'd like to think you've got [ CDNR ] buying OCR an Italian service a bit of consolidation there. You've got ISS with a new CEO. And so they'd like to think there's a bit of stability there, but we don't take it for granted. And then on the ROIC 4.0, could we see a lower return? I mean, look, we said above 20%. And if you take -- I mean, our capital -- invested capital, the way we calculate, we take our cash, but invested capital is about GBP 540 million, and we're making about 25%. So the incremental GBP 50 million, even if a lower ROIC in the next couple of years, doesn't actually impact the weighted average that much. I think what -- when we talk to shareholders, what they would say to us is. Look that's fine. If you're giving us more than in aggregate, more than 20% return on invested capital and you're growing, we'll take that whole day. So that's sort of where our thinking is.

It's Kean on from Jefferies. Could I start on the contingent liabilities, first of all? So for GBP 14.7 million liability, which I think sat there for it for a while. I'm just looking for a bit more of an update on that because I think that would have probably been there for a couple of years. And really looking just when the cash out potentially occurs with that.

So we've put in here a potential liability, which is what the contingent liability is for some fire door issues on one of our contracts, which is what the word. I'm not sure which one you're referring to, Kean, actually, in Note 20. But if you're looking in the top half of Note 20, the wording here relates to a potential fire door issue, which we don't know yet will be an issue or not. The multiemployer pension scheme stuff is perhaps the stuff that you're referring to that's been there for a while, no?

No, so it's the fire doors that has been around for about 3 years. I'm just wondering if we got any visibility when the cash goes out.

We've closed out the historic fire doors piece and this is a new piece. The wording looks very similar because the issue is very similar. But we've closed out the historic issue, and this is a new one that we're looking at.

Okay. I guess my question is are we likely do you see the cash out from that GBP 14.7 million within the next 3 years?

We don't. So 14 -- I'm not sure we got GBP 14.7 million from. But if we thought there was going to be a cash outflow in the next 3 years, then we would have made provision. So no.

Okay, I think in the text, you also talk about the plan for the loss-making hospital contract, which looks like it lost about GBP 8.4 million in the year, but likely to move into profitability.

Which contract was that Kean. You speak very...

Sorry, the hospital contract? Communities contract. So GBP 8.4 million loss this year projected to be profit by fiscal '26. Is Science of Service the key deliverable to get that into profitability and deliver a sort of GBP 10 million EBIT swing over the next 3 years...

As I said, we've got some specific provisions, which we're releasing, but we have one contract, which is a very long dated contract. It runs until 2030, something I can't remember the date. And we -- it's another inherited contract. It's in the West Midlands. I've spent quite a bit of time up there. And the fundamental issue is that for reasons that predate us the opportunity to run market test and repricing was not taken. And so we ended up inheriting a delivery obligation which we have been paid for at a much lower level than it was costing us to fulfill, okay? And so we need to reprice it, and our reprice opportunity, resell opportunity comes between now, we're having discussions with the client, between now and the end of FY '24 or the end of FY '25, it will be somewhere in the middle. And Peter is involved in the legal positioning of that. But that will be -- that's quite a big change. But on top of that, there is operational things that we do. We put in a new management team. We've just refreshed the catering facilities and brought in a new catering partner, which has allowed us to put prices up because we haven't ever adjusted prices. And so there's just a lot of operational tactical things that we're doing there to sort of munch away. But the biggest change is the benchmarking market test. And we -- it's actually going to be a benchmarking exercise. And it might sound a subtle point, but no one's going to bid on something that against Mitie is loss-making. So we've got to do a sort of almost like an independent process to reset benchmark.

And just -- sorry, last one. So you've got some stats on Connected Workspace sort of uptake from clients. If you take a sort of step back, have you got a sense for how much -- what percentage of your revenue currently comes from clients that are using that Connected Workspace facility and where that potentially goes to over the next few years?

I mean, in its widest sense, I mean it always comes up. This sort of question always comes out, which is, do we charge for it? Or is it part of our offer. And it's essentially, it's part of our bid. That's how we bid National Grid and NATS because we're offering the opportunity to bring in technology that will provide real-time information of how an estate's been used. So the percentage of clients utilizing automated feed is going up and up all the time. And actually, what I was looking at, just as what Simon was talking, but the actual revenue, so what we look at is our top clients, our top 25 clients is [ 125% ] of our -- it's GBP 1.8 billion. So it's -- we get that right. But the top 25 and top 50 accounts are yes, GBP 1.8 billion of revenue and the top 25 accounts grew by I'm going to get number right [indiscernible] top 25 account.

23%.

23%. So that's indicative. here we are, yes, So top 25 represents 45% of our revenue, GBP 1.8 billion. Top 50 represents 60% of our revenue, GBP 2.4 billion, okay? And our top 25 grew 23% on a like-for-like basis. So that's projects. It's the upsell. It's the Connected Workspace. It's all of the above. And so we don't really think of it now as Connected Workspace per se. It's just all about upsell. And even we work with an audit firm, as you may know. And that through COVID, they drastically cut back their footprint. In FY '23, they spent more money with us. So -- and they've got technology backing that as well. Come on, Steve if just put wait fo this because it gets picked up Steve on the tape.

Steve Rawlinson, I have some questions about the revenue line and just better to understand that on the GBP 4.1 billion. You've talked about winning work within contracts. Can you just give us a feel, for example, in the GBP 4.1 billion for last year, how much of that was actually contractually based, and how much was work that you were asked to do because you were there and you're incumbent at the time or you can either do in reference to the GBP 4.1 million or perhaps also the GBP 4.3 billion of new work and how much extra work you might expect to get from those contracts from what you've talked about in terms of the on-selling. And can I ask a second question also, if you don't mind, with regard to basically the volume times price that contributes to the revenue line. I mean, it may well be that your clients have got reduced budgets, and therefore, there might be volume effects. Take, for example, Deloitte where I think they closed a couple of their offices in London and they're one of your clients. So could you just talk through, if you like, the volume effects, which might come either from constraints on client budgets or from an increased working from home? I get the point about Connected Workspace and what you're doing with regard to that? And then sort of equally an opportunity as well as a problem, but if you could just talk a little bit about the volume size of side of that. And thirdly, just in terms of the repricing, I'm assuming that the 5% repricing is in relation to inflation clauses within contracts, or is that additional to what you would have expected from the inflation clauses within contracts.

Can you say last part again about 5%.

I've got it, I've got it, I've got it.

You've got 4.6% repricing impacts. Your contracts will include inflation clauses. And next year, you seem to be a little bit pessimistic about the impact that, that might have this year. So I just want to explore that a little bit more. Obviously, inflation is abating, but is there something in there that you can't get the full price recovery that might be in a CPI clause in the contract, for example, or something of that nature? And why you seem to be a little bit -- the GBP 20 million impact you talked about on profit this year compared with GBP 7 million last even when inflation is abating. I just want to know a little bit or help us to understand a little bit more what might be in the price clauses in those contracts, which makes you possibly more cautious, possibly guiding us to a figure you can beat or whatever it may be that's in your minds at the moment that's leading you to think that there will be GBP 20 million impact on earnings this year from inflation as opposed to what we've seen in previous years. When inflation was much higher.

Okay. Those are really good questions. I'm not saying that for because you're here, but that's a good question. So the first question about how much are we sort of contracted to do versus we end up doing. If you break that down, I mentioned with GBP 800 million of project work out of the GBP 4 billion that doesn't include fire and security. So that's probably another GBP 70 million, GBP 80 million, call it GBP 100 million. And then it doesn't include that GBP 800 million plus say, GBP 100 million, doesn't include variable work. So there's a lot of variable work. So there's a lot broken on the loo door or there's a call out for a heating job. It's variable costs. So the absolute bare minimum, if there's no variable cost, it would probably be less than GBP 2 billion variable costs. But I thought you can rely on it on an average to be there more or less, will probably take us up from GBP 2 billion to GBP 3 billion. And then that there -- the true discretionary incremental is probably about GBP 1 billion. So that's the way I look at it. And that's why, hence, the whole point about facilities management versus facilities transformation, we've got to get that GBP 1 billion up. That's the game plan because the core won't grow at the same rate because that's a share gain game. It's not an underlying growth opportunity the way that decarbonization is, for example. So that's point one. The volume and price, I mean, if you go back to what I said, if I -- if our top 25 grew by 23%, we know that that's not all. We know that's not all -- it's not applied across all our accounts. But the chart that Simon showed on the bridge on revenue on Page 6, you deal with the pricing in a minute, Simon because I know, you know the answer to that one. But the 4.6%, that's just contractual pricing. So contractual pricing plus pricing that we negotiate with our client, and what do I mean by that? A lot of public sector, which is half of our revenue has pricing compounders in the contract. Not all of our private sector do, but we negotiate an increase because we proved our input costs have gone out, and it's the same for anybody. So the large amount of our private sector are also increasing -- will increase prices as well. But the actual -- the volume -- what you're looking for is that deals with price, but the rest then you could argue is upsell and cross-sell. And that's the underlying organic. If you take out net wins and losses, you've got contract growth in projects of 4%. So that's, if you like, that's your volume. Now within that, that's going to be pluses and minuses because volume is more project work, but it might be less cleaning square meters. But I don't have the breakdown all the way down. What we tend -- what we look at, for example, is FTEs, employees, because our FTEs fell versus FY '22, but we had 10,000 people working in testing centers in FY '22 and our employee numbers have fallen from 68,000 to 63,000. So we've actually -- we've been adding underlying people. And that's not a bad leading indicator of volume and people, which is a long answer to not answering your question. But the fact is we are getting volume growth for sure.

Let me got your inflation question, Stephen. So it's -- there's obviously a lot of moving parts within the inflation question, particularly given that all of our contracts are set differently. Some of them were able to recover inflation against CPI, RPI or another metric. Some of them we get no recovery whatsoever. If you sort of step back to a high level, we've been recovering on a lot of our contracts, 10.1% CPI on our contracts throughout the course of full year '23 because CPI stayed at around about 10%. And so the reason we've got that GBP 20 million outflow hit to the bottom line in full year '24 is because we're looking at the OBR forecast, which says that CPI is going to come down to 4.2%. But we can see that wages and product inflation is going to stay at 5%, 6%, 7% and so we end up in this potentially crossover situation, where the amount that we're able to recover on some of our contracts falls below the amount that we're paying out in costs. And it will vary. But on a in the round across all of our contracts. We're therefore saying the impact to the bottom line will probably go up threefold from GBP 7 million to GBP 20 million.

And there's -- you can tell, there's a sort of mix -- there's a mix effect going on as well because if Simon is getting 10% on some contracts, and we end up at 4.6%, and others, we aren't getting the same degree. The other thing to remember is that of that GBP 800 million of project work, that's quoted on current cost -- current price. So there's no inflator in that because it's a job or price -- current supply chain cost with current labor and I'm paid within 3 months of quoting. So you knock GBP 1 billion out straight away of that GBP 4 billion, which is saying that is current cost pricing. And then you look at what's the mix as a public sector mix that's higher and there's a private sector mix that's lower, and that's how you end up with where you're at. That's a good question to end on. Anything else to add? Okay. At that point, we look forward to seeing you on the 13th of...

12th of...

12th of October. Thank you very much.

Thanks.