Mitie Group plc (MTO) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for coming today to hear the Mitie interim presentation for the first 6 months of FY '25. We're broadcasting live as usual here from our headquarters in The Shard. And as you know, this is the first year of our facilities transformation 3-year plan, and it's the first half of that 3-year plan. And we've delivered both good strategic progress, I think, and financial performance in the periods, I hope we'll show. This photo on the cover shows our new brand creative for Mitie. We're sort of weaving together data and the built environment, and we're using this in our bidding materials now going forward. So let me kick off first with the highlights for H1 FY '25. As I said, I think our financial performance has been good. Revenue was up 14% year-on-year to GBP 2.4 billion, is actually has been stronger than we expected for this time of the year. Operating profit was also up 14% to GBP 101 million. And although EPS only grew by 2%, this was after a much higher corporation tax as levied this year. Of course, as I always say, financials are looking in the rearview mirror, more relevant are the forward-looking growth indicators in the middle column there. And these have been particularly strong this half. H1 is a record period for wins and renewals, up 54% versus the same period last year to GBP 3.7 billion of TCV, total contract value. This drove an 11% growth in our order book, where we've received orders to GBP 12.6 billion TCV, total contract value and our pipeline of in-flight opportunities grew by 19% to GBP 22 billion total contract value. So it's quite a big opportunity set that we see there. The final measures of our success is the way we look at our 3-year plan is, of course, capital deployment and shareholder returns. M&A spend year-to-date is up 7% at GBP 49 million, having completed 3 acquisitions in the first 6 months, where we had a couple of -- the last couple of weeks after the 6 months period. Shareholder returns, dividends plus share purchases are up 79% compared with the same period a year ago to GBP 109 million, and the Board has declared an interim dividend of GBP 1.3p per share and that's a 30% increase year-on-year. So a solid start to our new 3-year plan, which Simon will now take you through more detail.

Thanks, Phil. Good morning, everybody. Let's start with the headline numbers. As Phil said, we've reported a good set of results for the first half of FY '25. Revenue is up 14% to GBP 2.4 billion, driven by strong organic growth of 8.1%. Operating profits grown by 13.9% to GBP 101.1 million and we've maintained margins at 4.2% despite significant investments in the first year of our 3-year plan. EPS is up 1.9% to 5.4p share with profit growth and share buybacks, offset by the higher tax rate. As Phil said earlier, we've declared an interim dividend of 1.3p share, up 30% on FY '24. And finally, we've had a free cash inflow of GBP 34 million with average daily net debt of GBP 219 million. So I move on to cover the performance in more detail and start firstly with revenue. All divisions contributed double-digit increases to the 14% growth in the period. Business Services grew by 12.9% to GBP 1.1 billion through new wins, surge response security work, projects growth and acquisitions. These upsides more than offset the headwind from completion of the Afghan relocations and defer contracts in FY '24. Technical Services revenue grew by 10.6% to GBP 913 million underpinned by good growth in Defense, acquisitions and pricing. And finally, communities grew by 24.7% to GBP 438 million as a result of increased immigration work in Care & Custody, new wins and project growth. My next slide shows the key drivers of the revenue growth in the first half of the year with the good momentum from FY '24 continuing both organically and inorganically. The first block of the chart shows GBP 91 million of growth in core FM from wins and losses and incremental growth on existing contracts. Wins slightly exceeded losses in this block despite a headwind from the contracts that we lost in FY '24, with the key driver of the GBP 91 million being the scope increases on existing contracts. Organic projects growth of GBP 13 million was driven by good growth in most divisions, but was offset by the closure of the roofing business and contract exits in telecoms, 2 decisions that will enhance future profitability. We've also seen pauses to a number of data center projects, which Phil will come back to later. Pricing accounts for GBP 68 million of additional revenue. And when we combine these 3 blocks of core FM projects and pricing, total organic growth for the half is 8.1%. Finally, acquisitions contributed 5.9% of growth in half 1, and this block includes the acquisitions that we've made in the last 18 months, including GBE and JCA as well as the Landmarc step acquisition, which added GBP 42 million in the half. Moving on to operating profit, which has increased by 13.9% to GBP 101.1 million with all divisions making a good contribution. Business Services profit grew by 6.4% to GBP 72.8 million, with the surge response security work, new wins and margin enhancement initiatives, more than offsetting the headwind from completion of the 2 public sector contracts last year. In Technical Services, profit increased by 6.7% to GBP 30.1 million, with profit from margin enhancement initiatives, defense and acquisitions outweighing an GBP 11 million loss in the telecoms business, which Phil will cover later. Communities profit grew significantly in the half, up 39.8% to GBP 23.2 million with the improvement driven by increased immigration work and improvement in our PFI contract portfolio and project growth. And finally, corporate costs remained broadly flat year-on-year with ongoing functional savings and the offshoring of back-office activity offsetting investments in sales, technology and marketing, which Phil will come back to. Next, we pick up the key financial themes for the half on a profit bridge. This bridge highlights the resilience of our business model with our strategic profit growth of GBP 33.5 million, more than outweighing GBP 21.2 million of investments and headwinds. As we set out at the Capital Markets event last year, our growth strategy is focused on core FM, projects and acquisitions underpinned by margin enhancement initiatives. Core FM and projects profit growth was GBP 14.7 million in the half at a higher-than-average margin. There's always positives and negatives in the portfolio but the margins on the surge response security work and improvements on the PFI contracts more than outweighed the completion of the higher-margin public sector contracts last year. Next, we added GBP 7.8 million of incremental profit from acquisitions in the half, including GBP 5 million of profit from the Landmarc step acquisition. We're showing the final strategic block that we've made better-than-expected progress with margin enhancement initiatives, delivering GBP 11 million of profit. Phil will cover MEIs in detail shortly as well as the investments of GBP 7.3 million and the telecoms headwind of GBP 11.2 million. Final headwind that we show on the bridge is inflation, which I'll come on to now. Once again, we were successful in managing inflationary pressures in the first half of FY '25. Our contractual protections and strong customer relationships enabled us to pass on over 95% of the cost increase to our customers, resulting in only a GBP 3 million reduction in profit. We expect cost inflation and pricing recovery in half 2 to be broadly consistent with half 1, resulting in a net P&L impact for the year of around GBP 8 million. This is GBP 5 million better than we guided to at the full year results. Looking ahead to FY '26, I'd like to touch on the autumn budget. The national living wage will increase by 6.7% in FY '26, significantly less than the 9.8% rise in FY '25. We're confident that our contractual protections and strong relationships will enable us to price the vast majority of this increase through to customers as we've done this year and in previous years. The increase in national -- employers' National Insurance, however, is a new challenge. We expect our employees NI's bill to go up by around GBP 60 million to GBP 235 million, which is a 30% increase. We have a slightly lower level of contractual protection for NII costs than we have for national living wage increases and will therefore be more reliant on commercial negotiations with customers to recover the GBP 60 million. At this early stage, we can't forecast the recovery of this extra cost with absolute certainty but our current estimate is that we'll be able to recover around GBP 35 million through pricing. To mitigate the residual GBP 25 million, we plan to establish new margin enhancement initiatives and other management actions, which Phil will come back to shortly. We'll provide further updates as we progress through the balance of this year and as we finalize our FY '26 plans in the spring. Turning now to cash. We generated free cash inflow of GBP 34.3 million in the half with the key driver being the operating profit of GBP 101.1 million. Other items was a net GBP 20.6 million outflow of cash and was largely made up of acquisition-related costs as well as the costs of delivering our margin enhancement initiatives. We've incurred the majority of the cash other items for FY '25 in the first half of the year meaning that they should reduce to around GBP 10 million to GBP 15 million in the second half. Next, we have a cash outflow from working capital of GBP 37.6 million, driven by 3 factors: our seasonal cash outflow in the first half where we pay suppliers for project work completed at the end of the previous year, the growth in the projects business, which consumes more working capital than FM and the longer payment terms now being demanded by some of our private sector customers. Offsetting these outflows, we've made some incremental process improvements and renegotiated some customer payment terms. As the balance of project work in our portfolio increases, we expect the seasonal outflow of working capital in half 1 to get larger and for free cash flow to be increasingly weighted to the second half of the year. CapEx, leases, interest and tax was GBP 47.3 million of cash outflow, GBP 22.2 million higher than the first half of last year. The increase was driven by the higher tax, the growth in lease payments and a year-on-year reduction in dividends from joint ventures now that Landmarc is a subsidiary. Our capital deployment actions account for GBP 120.7 million of cash outflow, which Phil will come back to you shortly, and lease liabilities increased by GBP 20.3 million as we expanded our EV fleet and extended the average duration of leases. Finally, at the bottom of the page, we see the overall increase in net debt of GBP 106.7 million. This increase results in a closing net debt of GBP 188 million and an average daily net debt of GBP 219 million with the average leverage ratio of 0.7x remaining below our targeted range. Debtor days are consistent with FY '24 and creditor days have improved as we rationalize our supply base through Coupa and move them on to standard payment terms. ROIC was 25.4% and net assets decreased to GBP 419 million after distributing GBP 109 million of dividends, share buybacks and market purchases for employee share schemes. So in summary, we've made a good start to FY '25. Revenue growth has been higher than we expected, and we've maintained our margins despite the investments we've made and the headwinds from telecoms and inflation. We made a small step forward in EPS despite the significant increase in the effective tax rate. Free cash flow was in line with our expectations and ROIC has remained well above 20%. As we look ahead, we expect mid- to high single-digit revenue growth in half 2, which means we should get close to GBP 5 billion of revenue for the full year. Half 2 margins will be higher than half 1 but lower than half 2 of last year as our growth investments and mobilization costs ramp up and the surge security work completes. We remain confident of achieving our full year operating profit target in line with the Board's expectations. As we said at the start of the year, EPS in FY '25 will be impacted by an increase in our effective tax rate to around 25% now that the Interserve tax losses have been recognized and finance costs will be higher as our leverage increases due to acquisitions and share buybacks. Completing the FY '25 guidance, we expect free cash flow to be more than GBP 100 million this year and ROIC will remain above our 20% target. And on that note, I'll hand back to Phil.

Okay. Thanks for that, Simon. I think as Simon said, I think we've made a decent start in H1. And as he said, we are on track for our FY '25 full year guidance. But of course, 1.5 year doesn't make a 3-year plan. So let me turn now to the underlying progress we're making to deliver our strategy behind our facilities transformation 3-year plan. And you'll recall, as we said at the time of the Capital Markets Day event we are moving from facilities management to technology-led and data-rich facilities transformation, transforming the built environment, transforming the lived experience and transforming insights and decision-making for our clients. And at the heart of this strategy is growth. With our scale and our operational leverage, we know that if we grow our top line above 10%, for example, as we've comfortably done in H1 '25, our margins, our earnings per share and our cash flow will all grow as will shareholder returns. So growth is the key. And we announced our 3 pillars of growth at the CMD last October, and we've now broken our GBP 1.2 billion growth target into their component parts for revenue. Remember, these are deltas from FY '24, so they're measured net of any contract losses since FY '24. Now GBP 600 million, we expect to come from key account growth and scope increases, winning the trust of new customers and upselling further services to our existing customers. And this is a real key strength of mites in my view. Second, unique of strength and unique strength of Mitie is our projects capabilities. Here, we're targeting GBP 200 million of incremental revenue growth from a strong base in FY '24. Finally, we're targeting GBP 400 million of revenue growth through infill M&A. So as we've said, FY '25 is the foundation year of our 3-year plan. And to kickstart this growth, we've invested over GBP 10 million in the first 6 months. Starting with the new sales team with refreshed incentives and key hires from some of our competitors. We've appointed our first group Chief Sales Officer, Kevin Tyrrell, who's here somewhere. Where is Kevin? Here we go at the back of the room there. Kevin's single focus is on key account growth. We've added deep subject matter expertise, for example, in social value, operational excellence and quality management. We've created the Mitie Way, our growth Academy for all sales colleagues standardizing our approach to finding, winning, growing and retaining customers through the life cycle. We've added AI-driven bidding capabilities we're bringing in more sales resources with targeted sector expertise. We're also investing more in marketing and aside from our new brand positioning, we've up-weighted our market research, that word outreaching to clients and non-clients shining a light on our expertise, whether in Net Zero carbon or retail security, for example. Our award-winning facilities transformation podcast had an amazing 100,000 hits an industry record and our security radar there was download over 6,000 times. This means that many people are looking at Mitie's capabilities now. And we're bolstering our projects capabilities in the core areas of decarbonization, power and grid connections, fire and security and buildings infrastructure, moving also as well to a consulting and more advisory service rather than just selling, adding over 100 new employees, adding new clients like McDonald's for Energy Management. And of course, like many companies, we're also upgrading and integrating our core systems. We started with Coupa and our Maximo platform has now got AI skills embedded in them, and we're accelerating our intelligent rollout for engineering, security, hygiene and emissions capture. It's early days in this, our foundation year. There's always a lag in our industry between improving bid quality and actually seeing the revenue in the numbers. But we've added GBP 159 million of incremental revenue, net of losses through key account growth in H1, against our GBP 600 million 3-year target. New wins were up 62% year-on-year to GBP 2.1 billion. We're doing particularly well in the retail sector, for example, with new wins in Aldi, Lidl, Boots and Tesco in security, technical services added Halfords and the Met Police. And our largest win was actually in communities at HMP Millsike, a 10-year GBP 400 million total contract value starting next spring to run a new zero-carbon 1,500-bed category C prison. We've had a strong year as well for renewals growing 40% year-on-year and adding GBP 1.6 billion total contract value despite, as you know, not retained to large public sector contracts. With a book-to-bill ratio in the first half of 150%, our order book grew by 11% to GBP 12.6 billion. And just as importantly, as I mentioned in the summary, our pipeline of opportunities is up 19% to a record GBP 22 billion, of which GBP 16 billion total contract value is coming up over the next 18 months with procurement processes already in flight. And this is the price, and this is our focus. Really strong performance here, we would significantly exceed our incremental revenue growth target of GBP 600 million by the end of FY '27. And it's a simple math really a bigger pipeline, a good sales conversion delivers key account growth. And our pipeline, as we've said, has grown by GBP 9 billion in the last 2 years to GBP 22 billion. That's a huge opportunity set for Mitie. But we need to be focused on the core sectors where we see good growth and where we have proven capabilities and credentials and we've broken down our pipeline now into sectors for the first time. Immigration & Justice holds our largest pipeline, in GBP 6 billion total contract value. And there's some significant upcoming opportunities in prisons with the new government announcing a further GBP 2.3 billion of new investment within the wider MoJ estate and in immigration with the Home Office for Immigration services. Central government has an attractive GBP 3 billion pipeline. And with the new 2023 Procurement Act and new frameworks focused on value, innovation and faster decision-making, we're hoping to win a fair share of this sector as well. Defense has a GBP 2 billion pipeline with the government's new commitment to invest in the Army estate with new opportunities now that we see to support the RAF and the Navy. The NHS, of course, continues to receive record government funding. And now we have a GBP 1 billion pipeline of at least 40 hospital contracts coming up. Critical national infrastructure plays to our strengths in JCA and GB and RHI and offers an attractive GBP 2 billion pipeline as does retail security backed by new government initiatives to reduce crime in stores. And in Transport and Aviation, our 2 recent train operator wins and Madrid and Heathrow airport renewals gives us confidence in this sector where we see another GBP 1 billion of contract opportunities. So as I said, in H1, we've got off to a good start but we do know there's a lot more to go after that we can deliver over the next 2.5 years. And that's why we're really excited about the pipeline now. Projects upsell is our second growth pillar. Now we were lapping a strong H1 project delivery, and therefore, we've only added GBP 13 million versus the same period last year of net organic growth in this first half. As Simon said, we've reduced or exited some capabilities like roofing and some contracts like telecoms for strategic reasons, along with some clients delaying commitments for capital investment as they're actually assessing their investment needs particularly around power upgrades. And this means more likely than not, when they do come back, they'll come back with a larger order with Mitie. With an order book of GBP 1.9 billion and a GBP 3 billion pipeline, I'm confident we've got the right strategy to grow this pillar of our growth. On the right there, though, is our telecoms performance, and that's been disappointing, to say the least. And we're not used to a business performing like this. Our telecoms business was bought from a Dutch private equity business rather than the usual founder owners that we target and have tended to retain in the business. We've had a bit of a clear out. Recently, we brought in a new management team. We've been provisioning some overdue debt, reevaluating our costing models, we've put in SAP and Coupa finance and purchasing controls. We've exited from certain commercial frameworks. We've also been improving the quality of our design engineers, where much of rework, which we weren't getting paid for was occurring. And we've removed 30% over 100 FTEs from the team. So these are fairly tough measures we're having to take, and we aren't out of the woods yet, but we expect to exit this year at breakeven run rate, albeit with a smaller business on a go-forward basis. We've owned telecoms now for 3 years, and it is a drag on our project upsell ambitions, and it is a distraction for us. So one way or another, I made it clear that I don't expect this to be repeated in FY '26. Infill M&A measures the revenue we bring in from the first 12 months of ownership of a new company after which time future growth is then moved into projects upsell. And infill M&A is the third leg of our growth strategy. We therefore include acquisitions made last year where we don't have a full year of trading yet, we've added 3 new businesses this year as well. So H1 infill M&A contributed GBP 126 million of incremental growth. In power and grid connections with the acquisition of ESM Power, we're now a leading high-voltage independent connections to provide ICP. We have a full suite of power connections capabilities. And we see further opportunities to add scale through infill M&A in this growth sector. In the GBP 3 billion fire and security market, we're now top 3 in the sector following our recent Argus Fire acquisition with tightening legislation, clients integrating fire and security systems into intelligent building management systems, we see a number of further roll-up targets and what is a really good growth segment for Mitie. Finally, Spain, we originally acquired this from the -- within the ISV and serve acquisition but it showed an impressive 55% top line growth in the first half of this year. We assess the Spanish FM market to be one that is attractive as large private construction companies are exiting the space, providing opportunities for consolidation in the market. We also have a number of U.K.-based clients, including Santander here today seeking to expand in Spain, and we see big opportunities for growth. Our Grupo Visegurity was our second acquisition, and we're targeting another GBP 50 million to GBP 100 million at least of revenue in Spain through further acquisitions. In total, as you know, we've set aside GBP 75 million per annum on M&A, GBP 225 million in total over the 3-year plan as we guided at the CMD, and we're on track to deliver our incremental GBP 400 million of revenue targets for infill M&A. So that's the growth part of our new 3-year plan. I think we're off to a good start. But like any growth, growth must be sustainable and profitable growth. And that's why margin enhancement initiatives, MEIs, as we call them, are in Mitie's DNA and very much part of our new 3-year plan. As you know, we are targeting above 5% operating margin by FY '27. And to do that, we've got to deliver incremental cost savings net of cost inflation in every year of our 3-year plan. As Simon showed, we've got off to a good start in H1, generating GBP 11 million of net savings across our target operating model, contract optimization, digital supply platform and through in contract overhead efficiency focus. We now expect to deliver around GBP 25 million of total net savings in FY '25, and that's a GBP 5 million beat to our previous forecasts. But looking ahead to FY '26 and FY '27 we're obviously facing headwinds, particularly in regard to employers’' National Insurance as Simon mentioned. Now for our 3-year plan for MEI is technology and AI are playing a key role in reducing our GBP 4 billion plus cost base. We've got gen AI now automating back-office e-mails, IBM Watson's AI platform, simplifying end-to-end processes, gen AI, bringing all our energy management systems and energy project capabilities together and automation through task and process mining has commenced with Wipro's support. There's a lot more to come. We're partnering also with our leading technology providers, Salesforce, IBM, Microsoft and AWS to accelerate our AI strategy. As Simon indicated, the additional headwinds of NI rather than AI, national insurance could be some 50 basis points before mitigation. I'm, therefore, tasking the business to deliver 110 basis points over the next 2 fiscal years from MEI initiatives to more than meet our 5% margin goal. On say, GBP 5.5 billion of revenue in FY '27, that's the saving required net of costs of some GBP 60 million. Now it sounds like a big number but it represents the equivalent of less than 1.5% productivity and efficiency savings across our direct labor and supply chain spend. And with AI at our side, I'm more than confident we can deliver this objective. Finally, a reminder that we are in a strong financial position. We generate free cash flow every year. We're under leveraged. And therefore, we have choices in how we deploy our balance sheet strength to maximize returns to shareholders. As Simon said, in FY '25, we expect to generate over GBP 100 million of free cash flow and expect to return over GBP 170 million, 50% more than last year through progressive dividend growth, purchase management shares to prevent shareholder dilution and GBP 100 million share back program. So GBP 170 million returned to shareholders. When we combine our top line growth ambitions with our MEI targets and the widening jaws, if you like, of growth, then our EBITDA will grow materially over the next 3-year plan. And as it does so, so does our leverage headroom. And you see that in the chart on the right. So even when we deploy more funds than we're generating as we did in the first half and our average daily debt approaches GBP 250 million applying consensus FY '25 EBITDA, it still means that our leverage is at the very bottom of our targeted 0.75 to 1.5x leverage range. Thus, we have significant firepower to further increase shareholder returns. So in summary, it's the first half of a 3-year plan. We've made a good start, good strategic progress and solid financial performance. Revenue profit have grown by 14%. Wins and renewals reached a record high as has our pipeline. We've continued to expand our projects capabilities in high-growth markets, and we expect good momentum to continue in H2, as Simon said, and remain on track to meet the Board's expectation for FY '25. We do have additional NIC headwinds, though, to navigate in FY '26, which is occupying a lot of our thinking as we finalize our FY '26 budgets between now and the end of March next year. But overall, I'm confident that our -- the momentum in our facilities transformation 3-year plan is building. I'm confident that our investments in growth and our focus on increasing margins will deliver, and I'm confident that we will continue to progress towards our ambitious 3-year plan targets. With that, thank you for listening, and let's turn over to Q&A.

Tom Callan from Investec. Can I ask three, please? Just firstly, on that sort of pipeline of M&A opportunities. Could you maybe sort of break that down in terms of where you see the opportunity between the U.K. and Spain? And also, if there's any other geographies in there that sort of could form part of that plan moving forward. Then just in terms of that GBP 35 million offset on the GBP 60 million NIC headwind, could you just provide a bit of color in terms of what gives you the confidence of that GBP 35 million? Is that based on commercial discussions that you've had with your client base? How do you get so that number and have confidence in that number? And then just on the rationale for combining CG&D and Communities, can you just provide a bit of color on that as well in terms of why you've done that? And yes, just a bit more on that, please.

Okay. Let me -- okay, Tom, let me deal with the last one first, and then I'll deal with the first one second. And I might ask Jason to touch a little bit on the NIC offset and the commercial discussion because a lot of the -- a lot of the impact is in Jason's area where we've got 40,000-odd of our 72,000 employees. So he's got a big chunk of that. So I'll pitch that one to him at the end. So the Central Government & Defense, the first point, it hasn't gone into Communities, it's gone into Defense went into engineering Technical services because mainly, those contracts we have in Defense are maintenance contracts there. The Army bases, Gibraltar, Cyprus, Falklands, we are doing big runway jobs, we've done big fuel bunkering renovations in Cyprus. We're doing a big extension of what they call the mole in Gibraltar, which is the outer wall. So it's basic engineering. So we've moved the Defense into engineering. And what was left of CG&D was Central Government and Defense. Central Government went to Jason. So Central Government, these are the big government departments, we've got cleaning and security generally contracted on IFM sort of integrated contracts. And we put them into Jason. We haven't had a great success rate up to the changes we made in sales, although we had some good businesses we brought from Interserve. We haven't had a great success rate in winning new business. And we've started now by making the changes, puts the Central Government, Jason, Kevin is much more actively involved with bidding now on CG&D. And you'll see that in the next 6 to 12 months that we are accelerating our wins. And that was the main reason why we made the changes. It was the old Interserve team, long answer. Second one was around Spain. And we tried to sort of drop some hints around the spending rates because if you look at Page 19 in the book, you can sort of equate the proportion of the spend to the revenue targets, if you follow that. So you asked me about Spain. We've said to GBP 50 million to GBP 100 million of revenue and if you take the midpoint of the range you'd see that's just under 1/3 of our spend. So that's -- it's the revenue that drives the top line. It would be that sort of number. We're not going to go mad. I think one of the key things we look at is the ratio of revenue to purchase cost. And we like to buy businesses that maybe got 2x revenue, something like that. It's not always possible, a really, really good business. might be 1, 1.5x. But the impact of revenue is really important to us and where we spend the M&A dollar. And if you think about Interserve, we got 5x revenue for the acquisition cost. So that was -- that gave us a lot to play with. So yes, we're looking -- whenever we do a deal, ask us what the revenue ratio is to cost because that's a key metric we look at. And then on Jason, this is on the offset. So as Simon said, we've got GBP 60 million of gross cost, we've got commercial -- we've got legal cover, and then we've got commercial. How do you see it, Jason?

Yes, sure. Good question. And it's something at the forefront of every conversation today. So we're not really waiting for further down the road. But first of all, we've got a strong history of good recovery around legislative increases. Obviously, we've got the 3 legged issue we're faced with. But first and foremost, Mitie has got great people and our customers have demonstrated loyalty to us through our -- and you've seen that through our strong retention rate year-on-year. We're expecting to have early discussions with our customers. And we started some of the now early indication is good. Phil and Simon also alluded to the fact that we've brought experts into our business, not just from a sector point of view but people that really understand the challenges and the other macro trends that we face into, particularly around some of the crime issues we're seeing. And the third benefit we've got, we've invested well in relation to tech and AI solutions. So we're going to have to offer alternative solutions to some of our customers. This cannot just be a labor increase. And I think we are positioned perfectly well to offer customers alternative solutions that will actually create stronger value in the value proposition going forward. So we remain confident. We've got good visibility of where our challenges are and early indication is good.

And therefore, Tom, the numbers that we've come up with are our best guess of what we expect to happen over the course of the next few months.

Maybe Sam and then Chris.

Sam Dindol from Stifel. A couple of questions from me, please. Firstly, it's obviously early days from a -- of a Labour government. Any sort of views on as their approach to outsourcing changed? Or any color on that would be interesting. And then secondly, on intelligent solutions, I think that's sort of picking up with clients. Can you give any color on how that's going and where the key opportunities are?

Okay. So I'll deal with the Labour government. I might turn over intelligent solutions down to you and Jason, thinking about IFM and then tech services and what we're doing there maybe was like an EY, for example, or a Lloyds Bank and then Jason worth talking about intelligent solutions around the hygiene, what we're doing there and around security, which did pretty well. We have a good track record on that. And if you really bored at the end, you can have a look at all our kit around the corner there. Labour government, we tried -- again, I'm trying to leave these little hints around. But if you looked at the slide on 17, that's the pipeline. I made my comments in the context of government policy changes as well because we've got -- there's money going into integration justice. And it cannot be -- the service cannot be delivered without the supply chain, it cannot be delivered. And if you look at the statistics of reoffending rates in prisons, the performance of privately run prisons is better than state-run prisons. So that's just data. Defense, we're spending more money. Are we going to some of the in-source delivery the Falklands runway to the Army? And we're not. It's what we do. And that's why we say we're not outsourcers. We're experts. We're experts in engineering. We're experts in hygiene, and we're experts in security. And so we don't ever really -- we don't recognize this outsourcing sort of moniker as it were. But overall, whether it's health care, I mentioned government procurement rules are changing, which should favor more innovation, less price on the post-Brexit procurement rules, you finally went into Royal assent at the end of last year. So I don't sense -- I mean now I'll do -- I'll shoot myself in the foot. Apart from the NIC, it's all been going -- swimmingly well, actually, I'd say, and then we get NIC. But to pick up Jason's point as well, this isn't -- NIC is not a Mitie issue, this is all our competitors felt the same issues, all our customers face the same issues. And we've got contractual coverage. We've got work through it. But we've got a shareholder the burden as we're asked to do, and that's what we're doing. Intelligent Solutions. Jason, do you want to kick off? Turn around and then you look at the camera as well. And Dan, if you come to the front, there'd be good.

Thank you. Yes. I think Phil mentioned 2 related business services, one being hygiene. A perfect example of how it works in hygiene is, we collect millions and millions of lines of data in everything we do every day. The secret is turning that data into intelligence, so we can then evidence to ourselves, first of all, that we can be far more productive. And we've seen that come through some of our margin enhancement initiatives that was alluded to earlier. And we've also seen that coming through for our customers. So for instance, if we can evidence that we can clean and maintain an area in half the time as the specification stage, then we're ideally placed to take some of that benefit ourselves and pass them on that back to the customer. And we're starting to see returns where that's equivalent of around about 5%. So as Phil alluded to, is around the corner, you must have a look at it. It's a very, very brief amount of your time. The second point for me is around security, which is very much client focused. We've all you've heard me speak before, and you've heard Phil speak about the increase in crime trends. And we are now taking billions of lines of data from our security officers and our people on the ground and our customers every single day. And we're turning that data into intelligence to tell our customers where the hotspots are. So they're not spending the budget. We're helping them spend it in a different way. And there's a range of where they're spending our labor, whether they're spending it through intelligence collection or whether they're spending through technology. And you've seen the result of that come through in our high concentration levels across retail. You're now seeing that across transport aviation. We're now seeing that transfer across our corporate estate, particularly into Central Government and some real exciting things happening. And again, great evidence of what's happening behind us here. I think what that does is it separates us from the pack of providing labor and people and really does add value to our frontline proposition but ultimately raising us up the value chain with our customers.

Dan, how are you getting on ...

So from an engineering perspective, we've got 2 key areas we're focused on. Phil and Simon talked about increasing productivity and our engineers and the investments we've made in technology the site we've got in Manchester in terms of the TSOC enables us to start automating some of the tasks that we would previously sent an engineer out to do. So we're targeting 15% increase in productivity across our engineered base, which is much greater than, obviously, the wider productivity savings we need to make. That gives us 2 options. Similarly, as Jason described, will obviously take some of those benefits for ourselves but we'll also be able to share savings with our customers, increasing that retention rate that we've already had a strong start to. The second part is around IFM. So as we bring together all of the data, whether it's security, cleaning, engineering, we're now in a place where we can not only provide great benchmark and an insight to our customers but help them to make those decisions of where to spend from a capital investment perspective, which feeds the growth into projects. We've seen great results in that from new wins with EY, as Phil mentioned, but likewise, the connectivity to our customers' estate with Lloyds Banking Group has enabled us to help them save energy, which doesn't benefit us directly, but it benefits us from a longevity perspective, and it's enabled us to extend that contract, which is a significant benefit to us as well.

Okay. Chris?

Chris Bamberry, Peel Hunt. A couple of questions, if I may. By the year-end, you're expecting telecom to breakeven. But looking beyond out, how confident are you in the ability to grow that business and to get to a sensible margin. And secondly, could you elaborate a bit more on the contract optimization MEI?

So I'll do -- let me -- I'll do the telecoms. Contract optimization, Pete, do you have a shot at that when if you come forward and all the things we're doing on the MEAs, I'll introduce you at that point. I mean, look, I think we've -- I think we've reflected on our position in telco. And I think where it's different to every other business we bought is, a, as I mentioned, we bought it off PE. So that's maybe one learning rather than having a founder owner. The rest of our founders are absolutely committed in Mitie and doing a brilliant job but also when you think about that industry, you've got 6 clients. You've got Vodafone 2, you got BT 3 coming. It's a very small buying group with a very fragmented supply chain delivery, of which we are one of the 150. And we brought into that business thinking that it would enable us to be considered more favorably in FM bids because of some big FM bids associated with these clients. And the reality is it's a completely different group of people. It has no bearing whatsoever on any award of the FM, and we win FM on our merits, whether -- irrespective of whether we do the network rollout. So that's the strategic point. And we've been cutting back revenue because back to these very small number of buyers, they're buying on pricing frameworks, which are all very similar, and they won't budge from and some of them don't take into account current pricing for supply chain and the like. So that's where we've been handing work back. So I think we have -- we've discussed this with the board just in the week. We've got -- first thing's first, we've got to fix what's been going wrong. And then we've got a lot to take stock at where we think we can go and look at more where we think we can take it. But I think you can conclude -- I'd like you to include that we're not going to buy another telecoms engineering business. Pete. So Peter has many hats -- wears many hats, he is our Chief Legal Officer, head up and he's a General Counsel but he's also responsible for all the MEI programs around the group. So the question was around how do we get on with contract optimization and maybe a bit of a look forward going forward in the rest of the year and what have you.

Okay. Thanks, Phil. So we've been doing MEIs now for some 3 years. Until this year, our focus has been predominantly on looking at sort of group costs and overhead. What we've begun to do now is to look at our individual contracts to see in what ways can we optimize the way in which we deliver service to obviously improve the quality of what we deliver to our clients to ensure the service is more resilient but for us, most importantly, to ensure we can deliver service more efficiently. And what we've been looking at is what we call on account structures to analyze how is it we deliver service to our clients? Are there opportunities for us to bring together simple administrative tasks, either within the TSOC or to look for opportunities to deploy technology. And as Phil mentioned, we're going through an exercise at the moment of task mining to identify how efficiently are we doing activities, particularly in administrative type tasks? And can we bring those together more efficiently, can we deploy intelligent process automation. So the hope is that over the next few years, we'll be able to really drive our contracts more efficiently, and that will deliver savings. Linked to our contracts also, we've been doing a piece of work to analyze where are we doing activities, which are chargeable but perhaps we haven't been charging our clients for those because we don't focus closely enough on the terms and conditions that we've agreed with our clients. And that's enabled us just relatively minor enhancements but to drive further profitability with the clients. So over the next 3 years, we'll see more activities to try and deliver higher levels of savings. I think one of the things we recognized when we began the MEI program, we thought it was perhaps 1, 2 years and then we would be able to sort of step back. I think MEI across most large organizations is now a business-as-usual function. So we're really focused on it. We have to each year try and ensure we can face off to additional costs. make our cost base lower and to drive our margin. And if we're going to achieve the 5% margin, which Phil referenced, we have to continue to make a way in which we deliver service more efficient. And that will also become a differentiator. All the investments we're making now, we hope, will give us a lower cost to serve than our competitors, enable us to win more business and to drive growth.

There's one here. If you just say your name, I'm sorry, I forgot.

[ Alex Smith ] from Berenberg. Just a quick question on the projects business. You mentioned you added quite a bit to the consulting and the advisory part and how that can open up the value chain. Just some targets and color on where you think you can target kind of excellent value chain. Is it decarbonization, a bit more cut on those sectors where you think you can open up quite a lot of opportunities.

I feel like I'm sort of dodging every question. I'm going to bring Mark in, Mark Caskey only because quite -- like Mark runs all our projects team, we've got a brilliant energy management team. I mentioned we've just won McDonald's. So we do all the energy -- all their energy advice. We've got some great clients, and we probably don't sing enough about it because it's quite small in its own standing but it's the knock on it bit like Dan mentioned about Lloyds Bank, it helps us win the FM beyond that. But we've got a big team now with Alex being...

So we've got over 300 energy and sustainability consultants. They do a wide range of activities from energy management bill validation, consulting with our clients on energy optimization strategies. And then also that links into sustainability. And obviously, the challenges around achieving Net Zero across the built environment. And one of the good things are -- and also we've invested as well in terms of carbon accounting. So if we think about helping our clients go from -- get to net zero, whether it's their Scope 1, Scope 2 and also Scope 3 emissions. A good link to that, however, is downstream project work that comes because we've got the ability to go and consult and provide the opportunities and provide the pathways around energy and sustainability optimization, which then leads to a downstream level of, let's say, project-related work, which could be anything from renewable energy programs. We've recently signed up with Co-op, for example, and also a funding partner to provide renewable energy systems to co-op in their offices, distribution centers and their retail facilities. But you see the downstream work that materializes off the back of that. And a significant part of the forward order book we have for projects and the pipeline is around the world of sustainability and decarbonization.

And the onus on carbon reporting is just increasing all the time. So we've signed -- how many clients we've got now signed up in Net Zero carbon...

In terms of the carbon accounting, we've got 8 clients signed up but we're in active discussions, we have another 27 that we should be working with before the end of this fiscal year.

And all this then link the energy consumption and the energy purchasing into the carbon reporting obligations through. So we're using it with a Salesforce AI tool that looks quite interesting to me.

And the investments we're making around building management systems as well, you've got the linkage then between the building management system and the energy system. So you get that complete life cycle opportunity.

Anything else. I think we were told there won't be any questions today. So thank you for the questions. Is there anymore? If not, thank you for coming, and we'll see you next time. Thanks again.

Thanks everyone.

Thanks.