Mitie Group plc (MTO) Earnings Call Transcript & Summary

Okay. Well, good morning, again, everyone, and welcome to our interim presentation for Mitie for the first 6 months ended 30th of September 2023 or H1 FY '24 as we refer to it. Now it's only 6 weeks since we launched our new strategy from facilities management to facilities transformation in our new FY '25 to FY '27, 3-year plan. So we'll keep it fairly brief today, if that's okay with you. As the cover slide says, we have delivered a good performance in the first 6 months of this year, and we are trading in line with the upgraded EBIT guidance we recently gave of GBP 190 million operating profit for the full year. Our first half performance shows good financial momentum, an encouraging sales performance and continuing shareholder returns. On the key financials, first. First half revenue was up 11% to GBP 2.1 billion. First half operating profit was up 24% to GBP 85 million. And first half EPS was up 39% to 5p per share. Our sales performance has also been encouraging, a 60% growth in first half wins and renewals, GBP 2.4 billion of total contract value added. Our total order book increased to a new high of GBP 9.9 billion and our pipeline, a leading indicator of future sales opportunities increased 38% also to a new high of over GBP 18 billion. Capital deployment and returns to shareholders have also continued. We've accelerated M&A in 1H, spending GBP 46 million on 5 acquisitions in the first half compared with GBP 20 million that we spent in the whole of FY '23. We've returned GBP 61 million to shareholders in the first half comprising the FY '23 final dividend payment of GBP 29 million, GBP 25 million -- GBP 29 million. GBP 25 million was spent on our second year of share buybacks and GBP 7 million of share purchases for employee incentive schemes. And finally, the Board has approved an interim dividend of 1p per share, up 43% compared to last year's interim dividend. So we had a good first half and momentum is building both to meet our full year EBIT guidance, as I mentioned, at least GBP 190 million and to start delivering our new facilities transformation strategy. With that, let me hand over to Simon and to highlight our financial performance in the first half.

Thanks, Phil. Good morning, everybody. Let's start with the headline numbers. So as Phil said, we've reported a strong set of results for the first half of FY '24. Revenue is up 10.9% to GBP 2.1 billion, driven by organic growth of 9.2%. Operating profits improved by 24.4% to GBP 84.6 million, underpinned by another positive performance from our margin enhancement initiatives. Margins increased by 50 basis points to 4% and EPS is up 38.9% to 5p a share boosted by the higher margin, lower finance costs and share buybacks. As Phil said, the Board has declared an interim dividend of 1p a share. And finally, we had a free cash inflow of GBP 48 million in the half with average daily net debt of GBP 156 million. If I move on to cover the performance in more detail and turn firstly to revenue. All divisions contributed positively to the 10.9% growth in the period. Business services grew by 1.5% to GBP 719 million despite the completion of the COVID works and the wind down in the Afghan relocations contract. The improvement was driven by an increase in variable works by pricing and acquisitions. Technical Services revenue grew by 20.8% to GBP 636 million, underpinned by the growth in the projects business, additional core FM services on a number of large accounts and recent acquisitions. CG&D improved by 14.6% to GBP 406 million, reflecting the continued growth in project's work as well as pricing. And finally, communities grew by 11.2% and to GBP 371 million through increased working care and custody and again through pricing. My next slide shows the drivers of the revenue growth in the half. The first block is the reduction in revenue of GBP 13 million for the COVID contracts that were completed last year. Next, we show GBP 97 million of growth from net wins, projects growth and incremental growth on existing contracts. This block includes over GBP 100 million of incremental organic revenue from projects works as well as a GBP 16 million headwind from the wind down of the Afghan relocations contract. Pricing accounts for GBP 93 million of additional revenue. And when we combine these 3 blocks, total organic growth for the half is 9.2%. Finally, the acquisitions that we've made in the last 18 months, including RHI Industrials and JCA contributed GBP 32 million or 1.7 percentage points of inorganic growth. Moving on to operating profit, which has increased by 24.4% to GBP 84.6 million in the first half of the year. Business Services profit grew by 3% to GBP 41.7 million in the half despite the reductions in higher-margin COVID and Afghan relocations contracts. The key drivers of the improvement were the margin enhancement initiatives, acquisitions and increased variable works. In Technical Services, profit increased by 38.3% to GBP 19.5 million with margin enhancement initiatives, project growth and new wins more than offsetting the cost -- the headwind from cost inflation. Like Technical Services, CG&D has had a strong start to FY '24 with operating profit growing by 33.3% to GBP 34 million. The improvement was driven by the increase in project work that I mentioned earlier and margin enhancement initiatives. However, in communities, profit reduced by GBP 12.7 million -- 12.7% to GBP 13.8 million in the first half of the year. In the half, we recorded a new GBP 4.7 million provision on one of the contracts that we acquired with Interserve, which has more than offset the increased profit across the rest of the division. This provision relates to a PFI contract where Mitie is liable for rectifying fire stopping defects. These defects have only recently been identified and arose from the original construction undertaken by a third-party contractor in 2012. And finally, the reduction in corporate costs contributed GBP 3.5 million to the improved first half profit with savings coming from a range of margin enhancement initiatives across the head office functions. Savings in shared services are realized in the divisions. My next slide is a profit bridge, which pulls out the key drivers of the profit improvement in the half. The first block on the graph shows the GBP 2.6 million reduction in contribution from the higher-margin COVID contracts. Next is a GBP 12.2 million improvement from projects, net wins and other trading, which is largely driven by the increase in project work across the divisions as well as a net GBP 1.6 million of inorganic profit growth from the businesses acquired in the last 18 months. The GBP 1.6 million includes GBP 3 million of profit from 5 acquisitions at a margin of 9.5%, offset by GBP 1.4 million of costs from G2 Energy, where we acquired the engineering capability from the liquidator, but left behind the onerous contract liabilities. We delivered GBP 20.7 million of incremental 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 GBP 6 million downside from the wind down of the Afghan relocations contract, where we bear the risk of termination at short notice in exchange for higher-than-average margins. And finally, we show the additional GBP 4.7 million provision in communities that I mentioned earlier. Turning now to earnings per share, which has increased by 38.9% to 5p. The refinancing of our debt facilities and the closure of the invoice discounting facility led to a GBP 2.9 million reduction in finance costs in the half. Corporation tax of GBP 15.3 million reflects an effective tax rate of 19.1% and with the increase in the headline rate of corporation tax, partially offset by the recognition of tax losses that we acquired with Interserve. After accounting for an GBP 84.6 million reduction in the weighted average number of shares driven by our ongoing share buyback program. As I said, EPS has increased to 5p a share. If we look ahead to the second half of the year, we expect finance costs, the effective tax rate and weighted average shares to be broadly consistent with the first half of the year. Turning now to inpatient and starting with the impact on the last 6 months. With CPI coming down to 6.7% at the end of half 1, there's now a closer alignment between the headline rates of inflation reported in the market and cost increases in the business. Labor markets remain competitive, but we continue to attract a good supply of available resources and our attrition rates have improved. These factors have helped us to manage the impact of inflation on our cost base to GBP 96 million in the first half, reflecting a 6.5% increase in both wages and materials compared to the first half of FY '23. In terms of pricing, our contractual protections and customer relationships, again, enabled us to pass on the majority of the cost increases to our customers, resulting in only a GBP 3 million reduction in profit, which is better than we'd forecast. Looking ahead to the second half of the year based on the OBR forecasts, we expect CPI to fall towards 4%, but we expect wage inflation to remain at around 6.5%. In this scenario where CPI and cost inflation crossover, we'll see the bottom line hit to the P&L increase to GBP 7 million in half 2. We, therefore, expect the full year P&L impact of inflation to be around GBP 10 million, which is lower than the GBP 20 million that we guided to at the start of the year. Turning now to cash. We generated GBP 95.5 million of cash from operations in the first half of the year with the key driver being the operating profit of GBP 84.6 million. Other items in the half were GBP 12.2 million and were largely made up of the cost of delivering our margin enhancement initiatives. The GBP 12.2 million is higher than we expected when we were forecasting a full year operating profit of GBP 170 million and, therefore, reflects the investment that we've made to increase full year profit to GBP 190 million. We now expect cash other items for our margin enhancement initiatives to be around GBP 15 million to GBP 20 million for the full year. Next, we have a cash outflow from working capital of GBP 22.5 million, firstly, due to the growth in the recently acquired projects businesses, which need a greater working capital investment than our FM contracts. And secondly, from our seasonal outflow in half 1 as we pay suppliers for the high volumes of works completed in Q4. The impact of this seasonal outflow is higher than in previous years due to the particularly high volumes of project works undertaken in Q4 of FY '23. CapEx leases, interest and tax was GBP 25.1 million, a GBP 17 million lower cash outflow than in the first half of last year. CapEx accounts for GBP 5 million of the GBP 17 million improvement due to the completion of Project Forte. Net lease payments reduced as a result of a rebate received in the period and interest and tax were also lower. Together, these movements resulted in a free cash inflow for the half of GBP 47.9 million. Our expectations for the full year are unchanged for at least GBP 100 million of free cash flow. Our capital allocation actions account for GBP 107 million of cash outflow in the half and lease liabilities have increased by GBP 14.7 million as we expand our EV fleet. Finally, at the bottom of the page, we see the overall increase in net debt of GBP 68.6 million. And moving on to the balance sheet. This GBP 68.6 million increase in net debt results in a closing net debt of GBP 113 million and an average daily net debt of GBP 156 million. This keeps our average net debt-to-EBITDA leverage ratio to 0.6x, which is comfortably within our guidance. Debtor days are consistent with FY '23 and creditor days have increased as we continue to rationalize our supplier base through Coupa, moving them on to our standard 60-day payment terms. ROIC was 24.6% in half 1 and net assets remain above GBP 400 million despite the cash return to shareholders through dividends and through the share buyback. So in summary, we've delivered a good financial performance in the first half of the year. As we look ahead to the second half, we expect revenue growth to continue, but at a slightly slower pace as we lap a high fourth quarter of project delivery and Afghan relocation work in FY '23. Operating profit for the full year will be at least GBP 190 million, and margins will increase, reaching 4.5% in the second half. Free cash flow will be at least GBP 100 million and average net debt will increase as we continue to implement our capital allocation plan. And on that note, I'll hand back to Phil.

Thanks, Simon. Okay, right. Thank you. So let me turn now to strategy, if I may, in our new facilities transformation vision on our FY '25 to FY '27 3-year plan. Of course, we still have a lot of work to do to close out FY '24, but over the next couple of months, our management team will be focusing on setting the targets and plans required to deliver FY '25, as the first year of our new 3-year plan. Now this one page summarizes the new 3-year plan, satisfying our customers' evolving needs on the left, delivering our pillars of growth and meeting our ambitious financial targets. As we outlined last month, the world of facilities management is changing and new need states for our customers are emerging. Our customers are looking beyond facilities management to facilities transformation, transforming the built environment, transforming the lived experience and transforming insights and decision-making for our clients. Meeting these customer need states is the key to delivering our 3 pillars of growth: growth in key accounts, growth in project upsell and growth through infill M&A. And as you heard at the Capital Markets event, we've set ambitious financial targets for our FY '25, FY '27 3-year plan, high single-digit revenue growth plan, operating margin progression to at least 5%, EPS growth at a pace greater than revenue growth despite the headwinds of higher corporation taxes and strong free cash flow, GBP 150 million by FY '27. These financial ambitions will be balanced with our customary capital allocation disciplines, ensuring all acquisitions provide high returns on invested capital. A progressive dividend policy with payout ratios increasing from our current 30%, and maintaining a strong balance sheet with low leverage. That's our go-forward plan, but let's look back over the past 6 months to assess the momentum we're already building to deliver this vision, starting with key account growth. New contract wins in 1H were 1.3 TCV, total contract value. We added further Amazon sites, a large military contract in Germany, more work with the home office and a new market within financial services with Phoenix. We also had a good first half for contract renewals and extensions, adding GBP 1.1 billion of TCV and that's around a 90% renewal rate. Extensions included FCDO and MOJ in the public sector. Lloyds Banking Group in the private sector and renewals included Network Rail and Sky. Our H1 book-to-bill ratio was 111%, and our order book now stands at a record GBP 9.9 billion. We entered the second half of the year, as I mentioned, with record GBP 18 billion of pipeline. Pipeline measures government frameworks we've qualified for, plus other procurement processes already in train. So there's no shortage of new opportunities to grow our business over the next 3 years. And that's why our new 3-year plan forecast high single-digit revenue growth per annum, even though the impact of inflationary pricing is beginning to soften. The second pillar, growth pillar of our new strategy is project upsell. Consult, design, build and then maintain is our mantra for our new strategy. Projects span a wide range of areas. I think, as you know, from installation of mechanical and electrical systems, technology-led fire and security systems to the supplier of power systems and decarbonization, we're expanding renewable energy, battery storage, EV charging, of course, telecoms. In the first half, project sales across all our divisions were up an impressive 45% to GBP 437 million, 78% of which is with our core FM clients who are entrusting us to transform their estates. Project pipeline of GBP 1.8 billion in projects is by nature, short term, but is growing encouragingly. But let me be clear, we're not becoming a construction company. Firstly, we undertake a large number of relatively small projects with typical project values ranging between GBP 100,000 to GBP 150,000. Secondly, the vast majority of our work, as I mentioned, is with our core FM customers, who we know well as we do their extensive estates that requires transforming. And thirdly, most projects are short term in nature, lasting between 1 to 3 months, and, therefore, third-party costs are fixed and agreed upfront in our quotes to our clients. I picked up a couple of examples of project work completed during the first half. And in both cases, these are individual projects within a larger ongoing program. Per right, is the brand refurbishment program, we're delivering for Lloyds Bank to improve the customer experience and create a great place to work. This is Lloyds Bank, Great Yarmouth. We created a refreshed modern look with reduced energy usage and have received glowing feedback from staff and customers alike. At a cost of GBP 300,000, this is one of 20 branches in their 1,300 branch network that we modernized in the first 6 months. Below is our solar panel project at one of Vodafone's mobile telephone exchanges, MTX. We carried out structural and condition assessments of the roof areas undertaking the full design and build, including obtaining all the necessary planning and network approvals, a cost of GBP 250,000. This one is in Gloucester and we've now completed 3 more with a further 15 MTX sites planned in 2024. This is a momentum we expect of our projects business given the mega trends we have discussed before. And our new facilities transformation strategy accelerates our focus on projects, and our ambition is to increase revenue by 60% to GBP 1.5 billion by FY '27. The final element of our new facilities transformation strategy is an infill M&A, adding new capabilities in high-growth, high-margin adjacencies. We completed 5 acquisitions during H1 and a further 2 after the period end, investing GBP 67 million so far this year. In the building infrastructure space, JCA brings significant experience in complex engineering and critical environments such as data centers, life sciences and health care, specializing energy systems and office upgrades and fit-outs. We also completed 2 small acquisitions in sustainability. Cliniwaste is a specialist in heat treating and recycling NHS plastic waste. G2Energy, a leading high-voltage and battery energy storage contractor. And finally, we've been active in the fire and security area, where post Grenfell and Manchester Arena, the burden of protection is increasingly being placed on building owners and tenants. RHI industrials, specializing in sophisticated secured systems perimeter hardening, remote access, cyber protection was acquired for GBP 19 million. GBE Converge, bringing intelligence-based fire and security capabilities. And again, particular expertise in data centers was acquired for GBP 20 million. And we acquired 2 smaller companies, Linx Group, a specialist security adviser for 1 million. And Biservicus, a security provider in Spain for EUR 3 million. So that's our first move to expand our service line capabilities to provide full IFM in Spain. Overall, our new strategic plan envisages an accelerated acquisition spend of GBP 300 million between FY '24 this year and FY '27, contributing, of course, to faster top line growth. Now whilst top line growth is an absolute imperative of our facilities transformation strategy, margin enhancement initiatives are also a vital element of our new strategic plan and plays a key role in enhancing the bottom line and achieving our 5% margin target. As Simon showed in the first half, we delivered GBP 21 million of incremental MEI savings, GBP 12 million from outsourcing HR, centralizing finance, streamlining our organizations. Further GBP 4 million of cost synergies came from IT and sales in the Interserve state, taking cumulative savings from the acquisition of Interserve to GBP 55 million. And operational excellence initiatives and the roll out of our digital supplier platform, Coupa, saved a further incremental GBP 5 million. I've been really pleased with the momentum we are building in MEI. The way we work in Mitie continuously searching for new efficiencies. And remember, we have nearly GBP 4 billion spend in labor and third-party costs. We've now raised our FY '24 cost saving target by GBP 5 million to GBP 35 million this year, which was reflected in our recent upgrade last month. It's these MEI savings, which are pushing a far more margins, 4% in H1, 4.5% in H2. So in our new facilities transformation strategy, we are launching a further set of cost-out initiatives, targeting GBP 15 million of new savings per annum from contract efficiencies and further automation as GBP 45 million or 100 basis points in total over the new 3-year plan. The final aspect of our facilities transformation strategy is increasing returns to shareholders. We set ambitious targets for our new 3-year plan in the capital markets update, so I won't repeat them here. But suffice it to say that the actions we took in the first half show that momentum in capital allocation is building. In H1, we declared a 1p per share interim dividend, as Simon mentioned. We generally set the interim dividend at 1/3 of the previous year's full dividend -- full year dividend, and the FY '23 dividend was up 61% on FY '22. This flowed through into this year's interim dividend increase of 43%. We also purchased 7 million shares for employee share schemes in H1, and we expect to buy a similar level again in H2, thereafter, maintaining this rate at about 15 million shares per annum to stop dilution to our shareholders. We invested GBP 46 million in M&A, as I mentioned, in H1, with a further GBP 21 million so far in H2. And finally, we completed the first GBP 25 million tranche of our second GBP 50 million share buyback program in H1, and we'll complete the balance in H2. Year-to-date, we have purchased 34 million shares at an average price of 97p, and we will continue to return excess funds to shareholders through buybacks to stay within our new 3-year plan target leverage range of 3 quarters to 1.5x EBITDA. So in summary, we've delivered a good performance in the first 6 months of FY '24. Revenue was up 11%, basic EPS grew by 39%. Momentum is building in margin enhancement initiatives with a strong balance sheet, generated good free cash flow. And this momentum gives us increasing flexibility with our capital allocation choices. Acquisitions are a key part of our new facilities transformation strategy as is raising dividends progressively. With over -- with just over 4 months to go to the final year of our current 3-year plan, we're confident of meeting full year guidance. This would represent a 20% increase in operating profit in FY '24. And that's the sort of momentum being built at Mitie as we commence our new 3-year strategic plan. We'll be giving our usual Q3 trading update at the end of January, and I look forward to updating you then on our continued progress. So with that, let's turn it over to Q&A.

Alex O'Hanlon from Liberum. Just a couple of questions from me. Firstly, obviously, a lot of strength in the pipeline. Could you give us a rough split between the divisions of the pipeline, if possible? The second question is, obviously, you've been quite active in the M&A space. I'd just be interested to know if there have been any companies or deals that you've looked at and really like the capability but had to walk away because the multiple is too punchy.

Okay. The last one is yes. Last question is yes. Mark is involved in -- Mark Caskey runs our projects business, a couple we've walked away from. And in fact, at least to one of them that we did acquire, we did walk away from and then came back to when they failed to get a PE deal way. So it feels like it's a good time at the moment where debt packages from PE maybe costing 8% to 9%, and we've got very low cost of borrowing our 10-year money that Simon pulled out from the -- from our USPP investors which we very much appreciate was, on average, 2.9% cost of funding. So I think we've got a funding advantage there. But equally, I take the view if we're paying a multiple above the existing Mitie multiple, then it looks like it's dilutive unless we can get real value from it. Pipeline is probably weighted by nature of the way pipeline gets built into public sector because the public sector define a large pipeline. There's -- we're on the RM6232 and it's like an GBP 8 billion pipeline, we've prequalified. So every deal that is awarded on that framework comes to us. I mean, it comes to us as in we can apply and win. So you've got some quite big pipelines in central government defense. You've got some quite big frameworks in communities, whereas I think in the main, our business services pipeline is built up from more of the public -- the private sector. So we don't -- we tend not to look as far out in that space in the private sector. Suffices to say, I mean, I had a team in this morning at 6 a.m. bidding on a financial services bid that is potentially over GBP 100 million a year. So there are some big contracts coming to market that we're already in flight. James?

James Beard from Numis, 2 questions, please. Firstly, yesterday, we had the announcement that the National Living Wage is getting uprated by another 10% in April next year. Just wondering how that plays into your sort of purchase assumptions, particularly when it comes to at the CMD, you discussed the sort of 70 basis points of sort of margin erosion over the sort of -- over the 3-year period from contract pricing and from where you can't recover inflation. Does that change any of your sort of planning assumptions around that sort of potential margin erosion over that sort of -- over that 3-year time frame? And if so, how do you sort of plan to go about mitigating that? And then secondly, just wanted to sort of touch on gross margin, there was a sort of modest erosion in the gross margin number, I think, about 20 basis points year-on-year during the period. What are the moving parts there?

Do you want to take the second one?

Yes. So if I start -- let me start with the second one, James. So in terms of the gross margin coming down 20 basis points, as I flagged in the operating profit bridge that I put up, the Afghan relocations, contract winding down has had a reasonably significant impact in the first half of the year, in that it was a high profit number compared to the revenue because of the fact that it's a relatively short-term contract stood up on short notice. Therefore, we accept the risk that comes with doing that. It could be terminated at any point. But in return, we get higher margins. So that's had a little bit of an impact on the gross margin in the first half. If I cover your other point then on the National Living Wage, what I'd say is that if cost inflation remains higher than CPI, which is what we're expecting it to do in the second half of this year. So labor inflation remains higher than CPI in the second half of this year, which is what we're expecting. Then what we'll see going forward is an impact more similar on the P&L that we've seen in the second half of this year than we've seen in the first half in terms of the sort of size of the impact. Obviously, we'll do some more detailed analysis when we come to the end of the year and we do our proper budgeting. But there's a couple of points, which give us some reasonable mitigation against the inflation going up. The first one is the level of protection that we've got against change of law clauses. So we've got good protection across our contract base as we've discussed over the course of the last couple of years. And as we've seen coming through in our inflation numbers from those change of law clauses, but the other point is that only 10% of our workforce is on the National Living Wage. So they're the ones who will see that circa 10% increase come through. There'll be a little bit of a knock-on effect as we go further up the scale. But that's why we're forecasting GBP 7 million in the second half and not a bigger number.

I think the -- you're absolutely right. It's something we're watching because up until now, we've seen CPI inflator is probably ahead of labor and now it's reversing. So you're right to call that out. And I think, as Simon says, we therefore -- you'd expect to see a bigger impact in FY '25 than we saw in FY '24. But as we flagged the second half of the year, probably about GBP 7 million, full year GBP 10 million. So a little bit more than GBP 10 million that we've quoted this year in 2025. I think the other side of it is, I think we're quite modest with our margin enhancement initiative targets at the moment, and we like to sort of put targets out that we can beat and then keep hedging them up. That's what we have done on our current MEI program. We've just brought in [ Philip Hendrix, ] who is sitting in the back there from CBRE, who's done a lot of margin enhancement initiatives in their global FM contracts. And we'd like to think we can do a little bit better than that GBP 15 million as well. So I think we've got it in our capabilities to manage. If inflation, we do find sort of getting ahead of ourselves and the impact. But so far, I think we've got -- we've had a good track record of managing it. It means that Simon and I won't get a pay rise, of course, but that's the way it goes.

Chris Bamberry, Peel Hunt. Just a couple. You mentioned an improvement in terms of labor attrition and availability. Could you just give us some stats behind that? And secondly, you've seen very strong growth in projects. Just trying to get a sense of how much of that is due to increased client budgets because of decarbonization, et cetera. I don't know perhaps how much is the strength of your proposition and effectively taking market share, just to get a feeling for that?

Yes. Let me pick up the first one, Chris. So in terms of labor availability, we've been talking about this over the course of the last 18, 24 months. If I wind the clock back 12 or 18 months, we were looking at having somewhere in the region of 3 applications per vacancy that we had out there in the market, and that's now gone up to about 6. So it's roughly doubled. And then from an attrition perspective, our attrition rate was running again, if we look back sort of 12 to 24 months was running at roughly 20%, and we're now down to about 15%.

And on that point about, I think it's a combination of both in terms of extra project spend. I mean that 45% project growth is -- I think it's pretty impressive in saying myself. Yes, we've had some acquisitions. But once an acquisition has run -- we've had it for more than 18 months, it's in the core then because it's no longer a delta on like-for-like. So you saw what the impact of acquisitions was in the first half, we showed the revenue and the profit. But behind that, our acquisition we made 2 or 3 years ago, which are now just part of our normal course of business. So if I take Custom Solar, when we bought that, we were doing about GBP 15 million of revenues, now doing GBP 30 million. Rock was doing GBP 20 million, it's now doing GBP 60 million. So we've got some good growth there. And that's capability that we wouldn't have had. I think I probably mentioned to you, NATS is a perfect example. We are signing solar deals there now that potentially would be greater than the actual FM annual income -- annual revenue that we have with NATS. And that's the sort of opportunity set we'd like to see. R H Irving, for example, did quite a lot of work at the grid in security, physical security and yet, we feel there's a big opportunity to grow that relationship as well. So I think it's a combination of the 2. I think the final add point, if you look at the incremental revenue from the M&A, the incremental profit, it looks like we've only made about 5% margin. But that's because we bought G2E out of administration. Then essentially, we brought the name and we for the people, but all of the contracts terminated. So essentially, we had to -- we stood up. A whole new team of payroll costs without any contracts, and that had an immediate impact. And that's why the margin in the incremental acquisitions is half of what the real underlying margin is. So we're quite happy with the way that business is going.

I'd like to touch on 2 areas, please. Just going back to bid pipeline. If you're including framework contracts in the bid pipeline definition, they tend to have quite a few people on frameworks. So I wonder whether potentially your win rate percentage is influenced by that? Then also just wondering how you include projects within the big pipeline definition as well if they're quite short duration and maybe the bid pipe doesn't fully capture the opportunity set there? And then thirdly, just whether the bid pipeline in its current form is big enough to support your medium-term organic revenue growth aspirations or whether you need it to scale up a little bit more? And then I've got a quick question just on non-self-delivered services, just looking for an update there. I'm wondering when -- particularly with catering, are you still partnered with CH&CO? Or are you sort of unencumbered to use others? And the reason I ask is the specialists like Compass and Sodexo are now focusing back on their foodservice core, and thinking less about FM, which potentially present some partnership opportunities for you in the U.K.

Okay. Good questions. So pipeline -- I mean, if you look at -- we've bid on a number of cleaning contracts and security contracts on RM6232, standalone, cleaning-only, security-only, and we've had a high success rate. The big contracts are in the integrated, so the contract we lost out was on the framework. But each contract is judged on its own merits. So it's our -- the onus is on us to win. So it's no different to -- being in the framework doesn't presume that we'll have a lower win rate. We should have -- there's no -- actually no reason why we shouldn't have the same win rate if we're good at what we do. So that would be the first point. Projects pipeline. Maybe give Mark Caskey mic there. Mark runs our projects business. Mark joined us from JLL. Any thoughts on pipeline because it is a very short-term pipeline, isn't it?

It is. But I think, overall, what we're seeing is the projects pipeline growing for a lot of the reasons Phil you outlined earlier for the earlier question. It's around about GBP 1.8 billion of opportunity. And the main trends within that, there's a lot around building modernization, leveraging from the FM contracts we manage each and every day, decarbonization as well as workplace transformation. But we're also seeing that pipeline growing as we continue to -- as those trends continue to [ withers ] the way for the portfolios of the clients that we actually manage.

I've got my bifocals on here. I've lost my glasses. I can't actually see. But I'm looking at the pipeline 3 years ago in FY '22, it was GBP 12 billion and now it's GBP 18 billion. So I think the answer is we're working hard on the pipeline. We're ensuring we're getting on more frameworks and there's some big project frameworks, Mark, as well that we're now getting into that we weren't on before. So I think that would -- I think you should expect that to continue to grow. And in answer to the question, is it enough to support our double-digit growth? Absolutely, because that's all -- it's more of that is new wins rather than renewals as it were. Non-self-delivered around catering. We are in a preferred supplier arrangement with CH&CO and we're very happy to do that. They were The Queen's and now The King's caterer and have some high-profile clients. And thinking in terms of if you go to Royal London or Phoenix, they're doing a really good job. We do, though, have the right to use other providers if the client so requests it because they sometimes have their own favorites. NATS, we teamed up with BaxterStorey as we did at BAE. So we're not absolutely committed, but they are our preferred supplier and quite recently, you will maybe not be aware, maybe we haven't mentioned it, but embedded in some of the Interserve original IFM contracts. There was a small element of self-delivery of catering and we've been moving that out. And in May, we've moved that to CH&CO as well. Any more? Stephen? Last word?

I'm intrigued by projects, could you just help us out a little bit as to sort of what you would do and what you'd not do? I mean, for example, it may well be that you're doing the cleaning work at a data center and you're saying hang about, we can build one of these or the client is asking you to do it because he trusts you. So what are the sort of boundaries that you're thinking of in that area at the moment? On the second question, just with regard to the Interserve GBP 4.7 million. Have you had a thought process around looking to see if there's anything else that might crop up around Interserve FM that might come as surprise to you? I guess, you did a massive amount of due diligence at the time, but this has come up as a little bit of a shock. And obviously, fire sort of prevention is a key topic at the moment post Grenfell, at least for the last 5 years, at least anyway. So is that -- has it caused you to have a look and see if there's anything else?

Well, let me deal with that first one. Last one first. I mean, we didn't do a massive amount of due diligence. Because it was COVID, if you remember, we were all sat at home, and we bought a business from people we never met and with clients we had never spoken to. But that -- but we didn't make provisions for some of the contracts that we knew about. This has come out because the wall was removed and found that the internal skinning of the fire stopping requires a cap on the top for expansion. And in some parts of the hospital, the cap had not been completed. The drawings required it. The design was signed off as having built it. And 12 years later under the contract that Interserve have signed, Interserve were liable for remediation. Now we do have claims -- we have claims, but capped against the builder, which was a Spanish-Irish joint venture that's no longer in existence. So I think that has taken us by a bit of surprise. And as you know, we just took that on the chin. We could have an argument with the auditors perhaps about other items and nonrecurring, but we just took that on the chin. But I'd like to think we -- you don't know -- it's an unknown and known. We've provisioned it. We'd like to think that we understand on an operational basis, what's going on. And I think a point Kean had picked up in his remarks this morning around our famous loss-making contract that we are finally at a hospital starting to make inroads into and we've halved the losses this year on that. On the -- what will we do and what won't we do. I think what -- I'd go back to my point that I make, which is that we're doing mechanical electrical. We're doing fire and security systems. We're doing decarbonization. So that defines what we will and won't do. We put in a grand source heat pump in Halifax, where my mother came from, so I know the building. Halifax building societies with their headquarters, and we built -- we drilled a heat pump deeper than the height of the chart. It's quite impressive in the middle of Halifax. So we can take on big projects. But again, it's a client that we know in a space that we know. The data center is an interesting area for us because if you remember, we identified it as a mega trend, major investments going into data centers. We had a client came in just a couple of weeks ago, building 4 new data centers in the U.K., each data center somewhere between GBP 60 million and GBP 80 million, of which the fire and security and the mechanical and electrical is 75%, 80% of the build cost. So we are principal contractor there through JCA. We will manage somebody else point concrete, getting the steel, but we are design, consult design build. And we're very comfortable with that capability. And again, to that earlier question, people spending more, yes, they have to. But also our capabilities have expanded. So that for us is a key element of our new strategy.

Stephen, just building on Phil's point as well on the first one, on the provision that we've made of GBP 4.7 million. It's relatively unique in that we've made the provision because we -- so Interserve back in the day are liable for the fire stopping defects coming out of the construction, as I said in the presentation. So we have looked back across other contracts. And we don't see the same clause existing in other contracts relating to these defects and related to the construction. That's not to say that nothing else is going to come up across any of these contracts going forward, but we don't see this issue arising anywhere else.

And I think if we take it around, I mean, at the end of the day, we bought Interserve. As I mentioned, we've got GBP 55 million of synergies out of the acquisition. We held on what had been a declining portfolio and retained effectively. The debt recontract was the first one we've lost from Interserve in 3 years. And of course, at the same time, whilst we might have the occasional hit in the -- in the hospital contracts, the central government, particularly, the defense side of the business is going from strength to strength.

Just questions have all been asked, which is quite good. So it's just a simple one. We've got to dot the I's and cross the T's. Politics is a fast-moving business at the moment. Is there any update from what you said 5 or 6 weeks ago in terms of the attitude of Labour towards outsourcing, et cetera, et cetera. Things may change, you're talking to them, et cetera?

I mean, I had -- I was one of many that admittedly, but at breakfast was at Rachel Reeves, last week, I think, generally, they've been quite sensible. I think they've already tempered some of the outsourcing comment in terms of saying, "Well, they'll only look at it when the contract comes up for renewal." So that's a step forward. We have a whole lobbying strategy around expertise. We don't think of ourselves as outsourced. We think of ourselves as experts in what we do, whether it's cleaning, security, or engineering. So we are making that case that if a hospital decides to in-source, they're not going to pay the -- they're cleaning, they're not paying the same for their loo rolls that we'll be paying. They're not paying the same for their robotic cleaners. And when someone doesn't turn out to work, they're going to have to find somebody to fill the gap. So there's a complex delivery supply chain that we manage. And so I think, generally, I don't see it as a major issue. Just as we've outsourced catering and document management and pests and what have you, to those who do better than us. I don't think it's a massive expectation that someone will start taking on something they've never done before. I think that would be the first point. The other thing I thought you're going to ask me was about the autumn statement. This one is headed a shot in the arm for solar. So I think there is recognition around certainly decarbonization in terms of tax incentives, we'd like them to go further. But the point I make is that Rachel Reeves and Labour have definitely got the grid and the need to invest and the need to speed up planning permission and all those elements that we've been lobbying for. So I don't see any winding back from that, and that's a major part of our projects business. Okay. Well, thank you for your time. It seems too early to wish you a Merry Christmas, but see you in January. Thank you.

Thank you.