Mitie Group H1 24/25 Earnings Call Transcript

Quartr
Provided by Quartr
November 21, 2024

There are 10 speakers on the call.

Operator

Welcome to everyone to MITRE's headquarters here in Deschard. Thanks for joining us this morning in person or online for our preliminary results presentation for the year ended March 2024 FY 2024 as we refer to it. I was just thinking back, it's my 8th annual results presentation now for Meitier. As this cover says, FY 2024 has been another strong year of delivery for Meitier. And we're starting our new Facilities Transformation 3 year plan with some good momentum.

Operator

So just to summarize some of the key facts to start with. FY 2024 has been our 3rd successive year of record performance and completes the final year of our last 3 year plan. Our financial performance has been strong, 11% year on year revenue growth, 30% year on year operating profit growth and 29% year on year earnings per share growth. Our leading indicators are also encouraging, a 44% increase in wins and renewals in the year to €6,200,000,000 total contract value. Our order book was up 18 percent to €11,400,000,000 total contract value.

Operator

And our pipeline of those in flight tenders grew 27% to €18,600,000,000 total contract value. Engagement indicators are also at record levels. Customer Net Promoter Score was plus 60, up 18 points. And that's a world class level in B2B Scores. And it's the biggest year on year increase we've ever seen reflective of our service delivery.

Operator

Employee engagement also reached a new high, up 6 percentage points to 63% of our colleagues describing themselves as fully engaged with 40,000 colleagues now taking part. And colleague attrition fell by a third to a low of 13%. And it's this balanced scorecard that underpins our capital allocation strategy, gives us the confidence to continue to invest in our business model and to increase returns to shareholders. M and A spend was $66,000,000 that's 3 times more than we spent in the previous year, and we completed 7 acquisitions. And subject we returned £114,000,000 to shareholders.

Operator

And subject to shareholder approval of the next month's AGM, the Board is proposing a final dividend of 3p per share, taking the full year dividend to 4p per share. And that's a 30% 38% increase year on year and an increase in the payout ratio to 33%. So that's the big picture. Now over to Simon for more detail behind the results and then I'll talk about the progress of our new strategy.

Speaker 1

Thanks, Phil. Good morning, everybody. Let's start with the headline numbers. As Phil said, we've reported a strong set of results for FY 'twenty four. Revenues up 11.2 percent to £4,500,000,000 driven by organic growth of 7.1%.

Speaker 1

Operating profits improved by 29.7 percent to £210,200,000 underpinned by another positive performance from our margin enhancement initiatives. Margins increased by 70 basis points to 4.7% and EPS is up 29.5% to 12.3p a share boosted by the revenue growth, higher margins and share buybacks. As Phil said, the Board's proposed a final dividend of 3p a share, taking the total dividend to 4p, which is up 37.9 percent on FY 2023. And finally, we've had a free cash inflow of £158,000,000 with average daily net debt of £161,000,000 So moving on to cover the performance in more detail. And turning firstly to revenue, all divisions have contributed positively to the 11.2% growth in the year.

Speaker 1

Business Services grew by 5.4 percent to £1,500,000,000 as a result of strong growth in retail crime protection work as well as pricing and acquisitions. These upsides more than offset the headwind from completion of the high margin short term COVID and Afghan relocations contracts. Technical Services revenue grew by 14.9 percent to £1,300,000,000 underpinned by projects growth, revenue from new accounts and acquisitions. CG and D improved by 13.3% to £938,000,000 reflecting the continued growth in projects work, the landmark consolidation and pricing. And finally, Communities grew by 14.9 percent to £757,000,000 from increased work in care and custody and again, pricing.

Speaker 1

My next slide shows the key drivers of the revenue growth in the year, with the first block being the reduction in revenue of £81,000,000 for the completion of the COVID and Afghan relocations contracts. Next, we show £194,000,000 of growth from wins and losses, projects growth and incremental growth on existing contracts. Revenue from wins and losses is broadly neutral and the driver of the increase in this block is therefore £189,000,000 of incremental organic projects revenue. Pricing accounts for £177,000,000 of additional revenue and when we combine these three blocks, total organic growth for the year is 7.1%. Finally, acquisitions contributed 4.1 percentage points of growth in FY 2024.

Speaker 1

This block includes the acquisitions we've made in the last 18 months, including RHI, GBE and JCA as well as the Landmark Step acquisition, which added £42,600,000 worth of revenue for the year. Moving on to operating profit, which has increased by 29.7 percent to £210,200,000 with all divisions making a positive contribution. Business Services grew by 5.1 percent to £97,000,000 with increased retail crime work and margin enhancement initiatives more than offsetting the headwind from the completion of the higher margin public sector contracts, which I'll touch on shortly. In Technical Services, profit increased by 29.9 percent to £44,300,000 with margin enhancement initiatives, projects growth and acquisitions more than offsetting the headwinds from cost inflation. Like Technical Services, CG and D profit grew significantly in FY 2024, up 34.4 percent to £80,400,000 and this increase was driven by the projects growth as well as margin enhancement initiatives.

Speaker 1

And CG and D also benefited from higher profits at Landmark due to the improved margins and consolidation. Communities profit improved by 24.5 percent to £39,100,000 as a result of the higher revenue in care and custody, improvement on a loss making PFI contract and margin enhancement initiatives. And finally, the reduction in corporate costs contributed £4,900,000 to the improved profit with savings coming from a range of initiatives across all of the head office functions. Next, we show the drivers of the profit improvement on a bridge, with the first block being the £15,600,000 reduction in contribution from the Afghan relocation and COVID contracts. Margins on these contracts were particularly high compensating for the risks involved in standing them up and potentially winding them down at short notice.

Speaker 1

Next is a £19,900,000 improvement from projects, net wins and other trading where projects growth and higher profits from existing contracts more than offset the cost of our ongoing technology investments. This block includes £13,500,000 of incremental projects profit at a higher than average margin. We delivered £40,300,000 of incremental profit from margin enhancement initiatives this year with the largest component being the TOM program, which generated £27,900,000 worth of savings. As a reminder, the TOM program includes the outsourcing of finance, HR and IT as well as the consolidation of properties and help desks. The balance of the savings came from inter serve synergies, the Cooper rollout and the operational excellence programs.

Speaker 1

Next, we show the net hit of £6,200,000 to the bottom line from inflation, which I'll come back to shortly. And finally, the £9,700,000 of inorganic profit from acquisitions. This final block includes £5,000,000 of profit from the Landmark consolidation, offset by £3,000,000 of costs from G2 Energy, which we acquired from the liquidator without any order book or revenue. The £48,000,000 increase in profit to £210,000,000 was a key driver of the £29,500,000 29.5 percent improvement in EPS in FY 2024. EPS also benefited from lower finance costs, where we're seeing the benefit of the 10 year debt that we locked in at 2.9% as well as the closure of the invoice discounting facility and higher returns on cash deposits.

Speaker 1

Corporation tax of £37,900,000 reflects an effective tax rate of 18.9 percent with the increase in the headline rate of corporation tax offset by the recognition of tax losses that we acquired with InterServ. The share buyback program resulted in a 66,000,000 reduction in the weighted average number of shares contributing 6 percentage points to the overall 29.5% increase in EPS. Turning now to inflation and starting with the impact in the year. CPI has been falling in FY 2024 and labor markets remain competitive, but we continue to attract a good supply of resources and our attrition rates significantly improved. These factors have helped us to limit the impact of inflation on our cost base to £183,000,000 reflecting a 7% increase in both wages and materials compared to FY 2023.

Speaker 1

In terms of pricing, our contractual protections and customer relationships again enable us to pass on the majority of the cost increase to our customers resulting in only a £6,000,000 reduction in profit, significantly better than we forecast at the start of the year. Looking ahead to FY 2025, based on the OBR forecasts, we expect CPI to fall towards 2%, but we expect wage inflation to remain at around 5%. CPI is one of our contractual protections against inflation. So if it does remain below wage inflation, then we'll see the bottom line hit to the P and L increase to around £10,000,000 to £15,000,000 in FY 2025. Turning now to cash.

Speaker 1

We generated a free cash inflow of £157,600,000 in the year, with the key driver being the operating profit of £210,200,000 Other items was the £37,600,000 outflow of cash and was largely made up of the costs of delivering our margin enhancement initiatives as well as acquisition related costs. The acquisition costs included a non cash accrual of £9,500,000 relating to future potential future earn out payments for acquired businesses. Next, we have a cash outflow from working capital of £4,300,000 which is the net effect of continued growth in projects offset by process improvements. These improvements included the rollout of the Cooper system, rationalization of the supply base and alignment of our VAT groups, which collectively resulted in a one off improvement of around £25,000,000 CapEx, leases, interest and tax was £72,500,000 and £9,800,000 lower cash outflow than in FY 2023. And together, these movements resulted in the free cash inflow of £157,600,000 Our capital allocation actions account for £148,700,000 of cash outflow, which I'll come back to shortly and lease liabilities increased by circa £45,000,000 as we expanded our EV fleet and extended the average duration of our leases.

Speaker 1

Finally, at the bottom of the page, we see the overall increase in net debt of £36,700,000 This increase results in a closing net debt of £81,000,000 and an average daily net debt of £161,000,000 with the average leverage ratio of 0.6 times remaining below our targeted range. Debt today is consistent with FY 2023 and credit today is increased as we rationalize our supplier base through Cooper and move them on to standard payment terms. ROIC was 26.4% in FY2024 and net assets increased to £474,000,000 after distributing £114,000,000 of dividends, share buybacks and market purchases for employee share schemes. Our strong balance sheet and ongoing free cash flow generation underpin our capital allocation decisions. In FY 'twenty four, we've increased our dividend payout ratio to 33%, proposing a total dividend of 4 peer share.

Speaker 1

We've spent £20,000,000 purchasing shares in the market for incentive schemes and completed £66,000,000 of acquisitions in high growth sectors. And finally, we've acquired 58,000,000 shares for £50,000,000 through our ongoing share buyback program. Since we started the program in FY2023, we've acquired 134,000,000 shares at an average price of 81p. Looking ahead to the next 3 years, the dividend will stay within our targeted 30% to 40% payout range. We'll continue to purchase shares for all employee share schemes and the acquisition spend will flex to the opportunities identified in any given year.

Speaker 1

Finally, we'll continue to return excess cash to shareholders through buybacks with an expectation that our leverage will increase to between 0.75x and 1.5x EBITDA. Our capital allocation policy was a key element of the guidance we gave at the Capital Markets event in October, as were the financial targets that we show on the left hand side of this slide, where we said we'd reach £5,600,000,000 of revenue by FY 'twenty seven at a margin of at least 5%. As a result of this higher margin, we said EPS growth would outpace revenue growth over the period. And by FY 'twenty seven, we're forecasting £150,000,000 a year of free cash inflow. We've taken a positive step forward in FY 2024 with revenue growth of 11.2% and margin growth of 70 basis points, accelerating our progress towards the FY27 targets.

Speaker 1

We expect to continue to make good progress in FY 'twenty five, although our journey to FY 'twenty seven won't be linear. Revenue growth will be in the high single digits boosted by some large contracts already won in Q1 as well as good momentum in the projects business and growth from acquisitions. Margins will benefit from our margin enhancement initiatives and projects growth, but we'll face headwinds from cost inflation, higher margin contracts lost in FY 2024 and mobilization costs. And as Phil will explain shortly, we're continuing to make a significant investment in both our tech platform and our sales capability. As a result, we expect margins in FY 2025 to remain consistent with FY 2024.

Speaker 1

EPS in FY 2025 will be impacted by an increase in our effective tax rate to 25% as the inter served tax losses are now fully utilized as well as higher finance costs as our leverage increases. In completing the FY 2025 guidance, we expect free cash flow to be lower than FY 2024 as the projects business grows, consuming working capital, both tax and lease payments increase and we incur mobilization costs for some large contracts. However, we still expect to generate free cash flow of more than £100,000,000 and ROIC will remain well above our 20% target. And on that note, I'll hand you back to Phil.

Operator

Okay. Thank you, Simon. So I think in summary, as Simon said, we've made good progress in FY 'twenty four, and we're on track for FY 'twenty five. So now I want to turn to our Facilities transformation strategy, which we unveiled at our Capital Markets event last October, it was now. So you recall our summary slide where we said the world of Facilities Management is changing with new needs emerging.

Operator

Taking our industry from Facilities Management to technology led, data rich facilities transformation, transforming the built environment, transforming the lived experience and transforming insights and decision making for our clients. Meeting these new needs is at the heart of our new strategy to deliver growth in key accounts, growth in projects upsell, growth and growth through infill M and A. And it's a strategy with clear financial targets and our customary capital allocation disciplines as Simon outlined. So what's been going on since we launched our Facilities Transformation Vision last October? Well, firstly and encouragingly, we're seeing demand for Facilities Transformation accelerating across each of our service lines.

Operator

Due firstly to regulatory changes, over 8% of the commercial real estate in the U. K. Does not meet minimum energy efficiency standards. Our clients' ambitions for renewable energy is growing as is a greater burden of reporting. Martin's Law, the Protect Duty Bill shifting responsibility to our clients to ensure public safety will be one of the biggest pieces of legislation to impact the security sector for decades.

Operator

And Fire and Security and regs for the use of chemicals are also tightening. And the biggest behavioral changes in decades are driving Facilities Transformation. Hybrid working is now the norm. Employees expect a modern, collaborative, safe and healthy working environment. And Facilities Transformation is also accelerating because our customers need to improve productivity, extending asset life cycles, upgrading only when cost efficient to do so.

Operator

And the need to manage retail crime costing the U. K. Retails over £3,000,000,000 a year these days is also accelerating facilities transformation, as is the need to flex and automate cleaning. And certain sectors and finally, certain sectors have their own unique facilities transformation agendas already announced in defense, in power, in retail and data centers and in the NHS. So in summary, these are the long term structural growth drivers for Myte.

Operator

And they won't in our view be affected by any change in government. So 8 months on from launching our vision, we're now beginning to execute our detailed plans. And we carry good momentum into FY 2025. Key accounts have performed well, more Amazon fulfillment centers, a new contract for the British Army in Germany, which went live on the 1st June, increased scope at Landmark and extensions at GSK, DWP and JLL. New marquee wins where FM and project spend could be over £30,000,000 per annum included Financial Services Group Phoenix, AENA, Spain's national airport operator.

Operator

And since the year end, we've won some further really good marquee names including Holford's, Oldie and Lidl. Of course, projects is also a key contributor to our facilities transformation strategy. And our revenue here grew 37% last year. Data center fit outs for Kayo Solar PV installations at NATS across the David Lloyd Estate, power upgrades and battery connections to the National Grid, and increased branch security for Lloyds Bank for many retailers. These are just to name a few of the projects we did last year.

Operator

And we're particularly pleased with our infill M and A and the high end engineering capabilities of JCA and sophisticated security capabilities of RHI and GBE, which we're now offering to our wider clients. So we're now poised to accelerate growth. Our ambition over the next 3 years is simple to grow faster than the wider FM market and to extend our market share leadership through firstly key accounts growth. We've invested in a new sales team structure with new incentives and new leadership with more consistent bidding processes, working more closely with marketing to develop bespoke sector and customer driven sales strategies. We're extending our account based marketing approach to target new individual clients, Adding just 2 new marquee IFM accounts per year over the next 3 years could add some £200,000,000 to £300,000,000 of revenue.

Operator

We're also investing heavily in our CRM functionality and growing out our business development capabilities. Mighty has a strong bidding capability and we now strive to be a more sophisticated business relationship developer. We're targeting growing our pipeline by 30% over the next 3 years. We're putting more resources into renewals. I mentioned we had a record year of wins and renewals in FY 2024, but we still lost the DEFRA contract on price and Rolls Royce to a global bid.

Operator

These were long standing relationships. So this was a fairly painful experience for us, which as Simon said, hits our FY 2025 earnings number. So we've taken on some key learnings. SAMs, our strategic account managers are a key growth driver for Mighty. Last year, we grew our top accounts by 11%.

Operator

But we have to invest more in talent, training and incentives, so that the in contract teams take more ownership of both innovation during the contract life and retention at the end of the contract. Secondly, we'll accelerate growth through projects upsell, building out firstly our consultant design capabilities, for example, helping our customers develop their carbon reduction strategies or redesigning their working environments. This is higher margin work and will help push our overall projects margin above 9%. We're launching a project center of excellence in Birmingham, supporting our 2,500 projects professionals applying consistent construction design and management standards with common BIM and PMO tools. We expect our projects business to be over £1,500,000,000 per annum by FY 2027, converting more of our current £3,300,000,000 projects pipeline and capturing greater margin by delivering more of the work ourselves.

Operator

I see Mark Caskey nodding there. So obviously, he's clear on what his targets are going to be. Finally, on M and A, we'll accelerate growth through infill M and A with a focus on deepening our engineering, our decarbonization and our fire and security capabilities. We've a healthy pipeline of opportunities for M and A with a couple of transactions now nearing completion. And whilst 90% of our business is in the U.

Operator

K, we do aim to grow our Spanish business. It's a £12,600,000,000 FM market in a growing economy with consolidation opportunities. Having doubled revenue in the last 3 year plan, we can believe we can double it again over the next 3 year plan. Taken together, these are the specific investments and interventions, and interventions, which underpin our high single digit growth ambitions. Our second priority is to leverage our scale to secure a cost to serve advantage and to drive margins above 5%.

Operator

As we said at the Capital Markets event, with over 60,000 colleagues in the U. K, we are the clear market leader and it is the largest and most dynamic FM market in Europe. We are number 1 in each of our chosen core service lines. And although we've delivered significant margin enhancement initiatives already, as Simon showed, new technologies such as AI, new IT systems to deliver more straight through processing and new productivity analytics all offer new savings opportunities. Looking at our in contract cost structures, we still find different parts of the business doing similar things in different ways.

Operator

And I expect to see more consistency in self delivery of work, sharing resources across our accounts and greater productivity improvements. We've more to do on route density planning across our mobile workforces with separate public and private sector mobile engineers because of different vetting requirements with a separate mobile fire and security team and a separate mobile water team. So we've standardized our workflow deployment systems and investing in cross training, we expect to see time to travel to the job and time on-site to fall and time on-site to increase. And that'll drive major savings. We'll complete the rollout of our digital supplier platform Cooper, which has been incredibly successful for us already to drive procurement efficiencies in tech services.

Operator

That's the division with our biggest demand on the supply chain and they're not using Cooper right now. As also, we'll be rolling out Cooper in our new acquisitions. Repetitive admin work and even some engineering design work is now being offshored, and that will continue. And although colleague attrition has fallen to record low levels, we still have to recruit and train some 9,000 colleagues annually. That's a significant cost burden on our business model as is absenteeism.

Operator

So taken together, and this is before the headwinds of investment and investments that Simon mentioned, I see gross margins in our major contracts increasing the gross margins, whilst overhead as a percent of revenue falls through operational leverage. And that's exactly what happened in last year's numbers. This virtuous widening of the jaws as it were gives us a clear path to a margin that should exceed our 5% target. So let me turn now to our favorite drawing, the mighty verse. Our next strategic imperative is data driven intelligence.

Operator

In the parlance of PropTech world, Mighty is becoming an aggregator of workflow and workflow data in the built environment. But what does this really mean? And what does it really look like? The technology foundation layer is where all our core technology platforms come together, where our core workforce and workflow data is held. Our data layer is our data lake overlaid with functionality of Gen AI, cloud based systems and now Microsoft Fabric.

Operator

Our data is a unique asset for Mytee, millions of data points from our customers providing insight on how their build environment is performing. These insights then drive our facilities transformation product layer, enriching our service line capabilities across intelligent engineering maintenance, intelligent projects, intelligent security, intelligent cleaning and hygiene. So let me just give you a quick whistle stop tour of the product layers we've built since the Capital Markets event. Starting with intelligent engineering maintenance, We hold extensive histories on individual assets and asset classes across many customer states. By developing a diagnostic dashboard, applying AI and machine learning to our data, we can now predict and prevent asset failures, carry out remote fixes, reducing the numbers of those engineer visits, driving down costs, improving productivity.

Operator

And as we benchmark asset and estate performance for individual customers across their peer groups, We believe that we can help them make more informed decisions about their own capital spend. Intelligent Projects captures MITRE's deep skills in renewable energy And backed by data, develops pathways to net 0 for our customers reporting Scopes 1, 2 and 3 data in real time. And that's something MITRE already has today. Benchmarking emissions, pinpointing the project upgrades for our clients that Mike's team can then deliver. Intelligent Projects also lifts the growing burden of carbon reporting and disclosures for our customers.

Operator

Intelligent Security pioneers the development of security resources in response to risk and threat intelligence, pulling vast incident and shrink data using AI analytics. We can identify patterns and trends that predict threats for our customers, responding by deploying resources where and when they're needed, stopping incidents from happening, minimizing the cost of theft and improving employee and public safety, and providing the police with data rich case files to secure convictions. Finally, intelligent cleaning and hygiene flexing service to meet demand taking footfall analysis, square footage data, near field communication tags, shift patterns. AI ensures resources are targeted on the specific areas within a building that needs the most attention, responding to spillage incidents that pose an HSE risk, optimizing replenishment of consumables, again, reducing costs. So this is the mighty verse in action now.

Operator

And if you do have time at the end of the presentation to grab a coffee and head into the Tech Hub around the corner there, see the Intelligent technology team at work. We've got Ninja, we've got Dan there and Caroline, who can show you a little bit more about what we're doing with live data with our clients today. So if data driven intelligence, if you like, are the brains behind our Facilities Transformation strategy, our heart is being recognized as the industry leader in Facilities Transformation. Maintaining the best in class ESG ratings, the largest EV fleet, the 1st company in our sector to deliver net 0, leading in social value with the largest apprenticeship scheme in our industry, launching new engineering graduate scheme, a first for mighty, putting people on the 1st rung of the ladder of work. That's what makes a difference across the country.

Operator

Improving our line management skills with a new academy, supporting and caring for our frontline colleagues and making sure that everyone has an opportunity to be rewarded more for doing a job well done. You don't get great employee engagement scores and win U. K. Top employer 6 years in a row by luck, you get it by supporting our frontline colleagues day in, day out. And you don't achieve an NPS of plus 60 or BP or Diageo to be marketeer B2B marketeer of the year by chance, you get it by attracting some of the best people in the industry.

Operator

And you gain governance leadership by putting in new SOX like risks and control frameworks, a year ahead of U. K. Regulations. How we run the business, being proud of the impact we have on society, this is our greater purpose and what makes us really tick at mighty. And that's why getting external recognition for what we're doing is an absolute key part of our strategy.

Operator

Finally, we've put in place bespoke development plans and new incentive scheme for each exec team member to deliver this new 3 year plan. Building a better run business does require investment, but these are the investments which will make MITEI an even more successful company and a company to be proud of. So in summary, our new facilities transformation plan for FY 2025 to FY 2017 is now fully underway. We're moving from strategy to execution and we're making investments, investments in sales and marketing, in acquiring new skills through M and A, investing in cost efficiencies, in data and intelligent products and in management capabilities. And it's these investments that will deliver our new 3 year plan targets.

Operator

Number 1, by accelerating growth through key accounts, growth projects and infill M and A to drive high single digit revenue. Number 2, by building a cost to serve advantage, delivering a Group margin beyond our 5% target supported by the continued delivery of cost savings and increasing margins from our projects division. Number 3, by investing in data driven intelligence. And number 4, through investing in management leadership. Taken together for our shareholders, this 3 year plan means a free cash flow of £150,000,000 by FY 2027, returns of invested capital in excess of 20%, despite the uptick in M and A and despite the higher corporation taxes that we now face.

Operator

A progressive dividend and the proactive return of surplus capital to shareholders via buybacks, ensuring we keep leverage within and not below, which is where we've currently been, but within our desired range of 0.75 times to 1.5 times EBITDA. As I said, at the start of our Facilities Management strategy has begun. It's stretching and I hope exciting in equal measure. It's one that we believe will once again deliver for our shareholders. With that, I look forward to updating you on our progress during FY 'twenty five.

Operator

And let's turn it over now to Q and A. We'll hear some mics and some names. Go with Sam. Sam, to start with.

Speaker 2

Hi, good morning guys. It's Sam Niddell from Stifel. Three questions from me please. Firstly, obviously, 8 months on from the CMD and you're trading very well. Has your conviction on any of your medium term targets changed at all in terms of maybe slightly more positive than it was 8 months ago?

Speaker 2

Secondly, on projects, obviously, very strong growth there. Is there any sort of insight into where that's coming from? And is the margin on those projects as you would have anticipated about that 9% mark? And then finally on M and A, appreciate a couple of deals close to completion, but any commentary on the wider pipeline and competition from PE or whoever in that industry? Competition?

Speaker 2

Competition for deals from Private Equity, any change in dynamics there?

Operator

Yes. Okay. Well, let me take the targets and you chip in a little bit, Simon. Then Mark, maybe grab a mic and Mark Cassidy can talk a little bit about projects and what we're on with. And then the M and A pipeline, I'll touch on.

Operator

Pete, maybe you could chip in as well a little bit. But look, I think it's too early to change the targets at the moment. What you're sort of saying is around our conviction. I think our conviction, we're very confident about what we've already laid out. But 8 months on, for us, it's too early to be updating any sort of targets.

Operator

We've got to see inflation, as Simon said. We don't know how that's going to quite play out right now. But of course, demand for labor labor increases in terms of demands from sort of unions are higher than the inflation adjusters that we've got in our inflators. So we've got to see that play out. We still got to deliver some of the margin enhancement initiatives that we've laid out this for the future.

Operator

So it's too early to tell. And I think as we said, FY 'twenty five, because we're investing and we had the hit from the loss of those two contracts, And we've got some further inflation risk. It's too early to sort of say how it's going to play out. Would you agree?

Speaker 1

Yes. I totally agree. And we're not coming off any of our FY 'twenty seven targets, Sam. And we see as I said in my piece, we see FY 'twenty five as a year of progression towards those FY 'twenty five targets. I'll just start to pick up on projects and then we can see if Mark's got anything to add.

Speaker 1

So we're not up to 9% margins yet on projects. We said we'd get there by FY 'twenty seven, but we have seen the growth in projects in FY 'twenty four at higher margins than the rest of the group. So we're pleased with that. And we expect that as we continue to build our capabilities through acquisitions over the course of the next couple of years that we'll get to that 9% by FY 'twenty seven.

Operator

Mark, on General Lease?

Speaker 3

Simon, so Sam, in terms of where we've seen a lot of demand coming through, I think it's probably 3 areas. First is around decarbonization. Our clients are wanting to decarbonize their real estate portfolios, and we're seeing an increased amount of, I guess, revenue opportunity in that space. Secondly, is in terms of improving working environments, commute worthy space, clients are often looking at how can we modernize the places of work. And then lastly, just generally in terms of modernizing assets across our client portfolios and whether that's in terms of data centers, hospitals, retail facilities, manufacturing facilities.

Speaker 3

So for example, one of our clients won a new production opportunity and we sat alongside them over a 4 month project to actually expand their production capability. So there's some real positive revenue drivers coming through. And I think the other point on margin enhancement is by through acquisition, we can self deliver more. And by definition, we can actually self deliver at a higher margin capture than maybe the old way we actually delivered some of our project works.

Operator

And then finally on M and A, yes, we have a couple of things sort of it all seems to take longer than we think. I mean, we there is a PE sort of bid out there. And of course, if you're starting to see interest rates fall, perhaps they'll become more aggressive. So we see it as quite an opportunity at this moment to sort of push on. And we'd like to be closing more deals in this year.

Operator

And as you know, I mean, the last time we did announce it was September last year. And as you get to the end of a 3 year target, it's quite hard to get returns in the last year of a 3 year plan. So we really want to get off to a fast start in this year. There's some quite interesting opportunities. I think we've got to be we've got to be prepared to pay up.

Operator

I think we've been pretty good at bottom fishing. But I think we've got to be targeting what we want to where we want to add real scale. And we should have the synergies above what a PE bid can pull together. Pete, how are we going on with all our deals?

Speaker 4

So just a couple of things. We appointed a new Head of M and A last year who's been brought in to help us identify opportunities consistent with our strategy, particularly in the decarbonization space. And what we're trying to do is identify opportunities that are not yet up for sale. Our clear preference is to do deals on a bilateral basis rather than on a fully competitive basis. And if we can do that, then that obviously avoids the risk of being in a competitive pressure with PE who are potentially prepared to pay more than we are.

Speaker 4

The other thing is clearly demonstrating that for owner managers, mighty is the right place for them to bring their business to. And the success of the companies that we have acquired over the last few years, we think is a clear testament to that. And we have a very strong culture with our Gazelles, and we think more people will find that attractive going forward.

Operator

It's a really good point that's about the owners. But if you look at Rock Power is more than double the revenue in the last year, Custom Sellers more than double the revenue. JCA have got some huge orders coming through. And at GBE, Jason, I think, are doing pretty well as well. So yes, we're very this is a really good point about they're the best advocates for us in terms of coming to Mytea and then helping you grow your business more.

Operator

So thank you for those questions. We had one there, was it Adam? Is it? No, no, no, I can't see. It's Alan

Speaker 5

from Liberum. A couple of questions from me, if I may. Firstly, I think maybe just picking up on the M and A theme. You mentioned that there's a consolidation opportunity in Spain. Clearly, most of your or all your acquisitions so far have been in the UK.

Speaker 5

Is that something that you'd explore to kind of invest in that territory? And the second question is just on the pipeline, obviously, very, very strong growth there to about $19,000,000,000 I just wanted to clarify, does that include framework agreements? And if it does, are you estimating your share of the frameworks? Or is it the framework as a whole?

Operator

Okay. So we have made an acquisition in Spain. We bought a security company, and it's doing really well. And we were over there a couple of months ago because it has been confined to operating in the Azores and is now in Madrid. So there's a lot of regulation around licenses.

Operator

And we are actually looking at another security company that is in Catalonia because they have a separate set of licenses. So we have done deals in Spain already. And one of the deals that Peter is working on is another one in security because we want to try and build Spain out from what is essentially a cleaning offer into an FM offer, and that's the whole point. The other thing about the so frameworks are yes, your question is a good one. So for example, there are significant prison operator frameworks.

Operator

So we put the whole of the framework into the pipeline because we don't know it's just we know it's live, we know it's going to come up, and we know how much it is. And it goes into the pilot. We're not making any indication of our expected success, although you'll have seen that we won Mill Site. Alice, do you want to have a quick word about Mill Site? We're very excited about that because that's a 10 year.

Operator

And this is the other thing about you look at the order book, a 3 year deal has a third of the waiting of a 10 year deal. And a lot of these government contracts are becoming longer. And I think government's recognizing that if you really are going to work with a partner to transform an estate, a 3 year contract isn't long enough. And so that's a new trend, which I probably should have picked up. We were with our biggest client, DIO, recently, Defense Infrastructure.

Operator

And they're looking to think about now how can we extend the length of contracts and the landmark contract, which we won retained, was a longer contract again. So I think that's the trend we're seeing a little bit more of, Alice.

Speaker 6

Milsike is a brand new prison, will be completely carbon free. So a good investment in the government in the future of that industry. We're very proud to be a part of it. We're a very large site and as Phil said, it will be on long terms. It's a really good example of where Mytea has put its faith in and invested in growth in an industry over a relatively long period of time with the first new entrant into British prisons for a number of decades.

Speaker 6

It's a relatively small market. So the trust that's been placed in us to run that very extensive new facility, I think is a real marker for our ability to demonstrate that we are willing to stay in the game and demonstrate what we're capable of doing, and we're looking forward to mobilizing that right at the end of this financial year.

Operator

And I think it's a good point finally on the frameworks, because there's a lot more frameworks where we're getting on to. In the past, we wouldn't have had the credibility or credentials to be on the capital frameworks. So there's some big capital frameworks now, Mark, that we're on. And again, that provides a flow of opportunities. And as we say, you've got to be in it to win it.

Operator

So I think if it's there, we're going to have a go at it. Next question?

Speaker 7

Thanks. Tom from Investec. Yes, just picking up on Sam's point actually on sort of the project piece, dollars 19,000,000,000 market, potentially higher margin moving forward. Long run, I guess, where do you think that can get to in terms of percentage of group revenue? Just trying to get an idea as to what the split might look like beyond the end of FY 'twenty seven?

Operator

That was a net margin. Is that what you're

Speaker 1

talking about?

Speaker 7

Of revenue, just in terms of what it could be as a percentage of the overall group. And then just on those two contracts that you sort of picked up on before, I think it was Defra and Rolls Royce. Can you just give us a bit more color as to why those two contracts were sort of a bit away from you? And yes, any more sort of detail on that would be helpful. Thank you.

Operator

Okay. Why don't you pick a project, Simon? I'll pick up the DEFRA and the Rolls Royce.

Speaker 1

Sure. Thanks, Tom. So the guidance that we gave at the Capital Markets Day, Tom, was that we expected our Projects business to get to about €1,500,000,000 by FY 'twenty seven, and that would be therefore out of a €5,600,000,000 revenue base by that point. And we're as I said to in response to one of the previous questions, we're standing by. We're confident in the targets that we set out for FY 'twenty seven, so we're not changing that.

Operator

And the I mean, I don't want to over sort of overemphasize it because we've won a lot more than we've lost, as it were. But DEFRA is obviously a government contract. And so you have to be on the game around price, and you have to be on the game around the way you bid. And this is one of the changes that we've made is we have put in a new sales team for government bidding because we've on playback, we felt there was a lot more that could have been brought into that bid that was not brought into the bid. And the reason for that is because without going into a lot of detail, it was the ex InterServe sales team.

Operator

And in that time, might as a much bigger animal. And there wasn't a reach out as much as we'd like to have seen into the mighty mothership. And so one of the changes around sales is to ensure we've got one head of sales that's overviewing all of them, and we've consolidated sales teams. So Alice's sales team and the central government defense team, all the government sales team, they're all under 1 and under our most successful sales leader who's coming from the Business Services side. So that would have been the point there.

Operator

And the point I was making about the you can't just win a contract and just sit on it for 5 years and then rebid it. You've got to be innovating throughout to make it harder for a new engine to come in. If you bid it based on how you bid it 5 years ago, and then you're going to miss it. So and that was a real learning for us. The interesting thing is we're still doing work for DEFRA.

Operator

I mean, we do project work for them. We're doing all their EV work. So it's an interest that's an interesting thought, isn't it? And that's the same point about Rolls Royce. Rolls Royce is a completely different kettle of fish because Rolls Royce bid on a global basis.

Operator

It's the it came from CEOs ex BP BP had a global provider, JLL. The procurement team of Rolls Royce are in Chicago, JLL. They're based in Chicago. So close relationships in North America, and they went global. And we couldn't do that.

Operator

But again, the interesting thing there is that we're still doing the security there. We're doing the higher end smart maintenance. We're doing the landscaping and we're doing the waste. And we're also doing projects. We've done about $20,000,000 of projects, and we're carrying on doing projects.

Operator

So we're still an approved provider of projects. So I get those are so they're not all as bad as you think. And it just we've got to build keep building those relationships. And it goes to my last point as well. The and it's a to Tim for Simon.

Operator

The project offer of Myte is unique in our industry. You've got FM providers, but they don't look at it the same way with the same eye to upgrade facilities. And we I had lunch yesterday with a new client. I won't say who it is, but and they're in the building. It's been 20 years old.

Operator

And we've just got the FM, and they're talking to us now about office fit out. And that's the key. When we win NATS, we won the FM, but we're doing the project work. We're doing the solar work. And that's unique to us is the sell through of projects.

Operator

If you take FDIS Scotland and Northern Ireland, that was a basic maintenance contract for military estates in Scotland and Northern Ireland, which is the smallest piece of the pie that we got as a new entrant. That's a €30,000,000 base contract. We did €90,000,000 of projects last year. So that is what's driving our growth. It's not just it's not FM, it's Facilities Transformation.

Operator

Was it a question about No,

Speaker 1

I answered the projects question, I think, which is £1,500,000,000 out of £5,600,000,000 by FY 2027.

Speaker 8

Chris? Chris. Chris Banbury, Peel Hunt. I've got three questions, please. You mentioned that apart from changing the sales structure, it also changed incentives.

Speaker 8

So a little bit more flavor on that would be helpful. Thank you.

Speaker 1

Sorry, say it again, Chris.

Speaker 8

You mentioned you changed some of the sales incentives. Just a little bit more on what you've done there would be helpful. Secondly, could you give us a flavor of the areas or the activities which have the greatest opportunities within the pipeline? And finally, under the 3 year plan, you're targeting about $15,000,000 per annum of savings through the margin enhancement initiatives. Your thoughts on this year, And I'm guessing that most of that's going to come from the TOM, but are there other areas where you're going to have benefit savings as well this year?

Operator

So yes, I mean, look on incentives. We our incentives were quite they were slightly selfish in a way that the individual got the money. And we want to try and broaden it so more people have skin in the game. And that was the point about the SAMs. The SAMs, the strategic managers, need to be involved in sales.

Operator

And it's interesting, I'm not going to say what it is, but one of our very large clients, we've just renewed for until 2,030. And that sale was actually driven by the SAM because the SAM was all over the client. And so we've got to get the SAMs much more engaged in sales. I think we've put more money in, Jason, haven't we, overall? And you're the sales commission guru here.

Operator

But what I would say, and it'll answer your second question, the best pipeline we've got is in Business Services in Jason's team. We've got a big retail pipeline. We have some big cleaning opportunities. And what we're trying to do, and if I'm being frank, our thinnest pipeline is in tech services, okay? So we've got to use the skills that have been applied for a period of time building relationships with non clients for 2 to 3 years in the noise that when they do come up, we're not strangers to them.

Operator

And Kevin Tull now is running all of the sales. He's put in some new incentives to that as well. Yes.

Speaker 9

I think what we've done, we've invested in the sector lead position as well to really start to identify the target addressable market for us to really highlight what are the big game changers for us in terms of contracts. And we started to see some good early signs of that. And following on that theme that we're a sales led organization, they have as much responsibility and accountability in building the pipeline to make it far more easier for the sales team to deliver a compelling bid. And you alluded to earlier, Phil, that the primary responsibility of Assam is to win, grow and retain the account. So I think the fact that we brought the sales teams and the sector lead teams together and shared, I guess, the benefit and the commission parts from the sales team to the overall operational team and sales team is really going to well, it started to help drive that growth already.

Operator

And it's interesting, when you look at the targeted addressable market, we have some really strong sectors. We're really starting to get into the sectors, and that's why I was talking about sector led strategies and sector led products. So the product you sell to a hospital can be very it might be cleaning, but it's sold as a different product for, let's say, in Amazon. So you're trying to drive sector. And we find, as we really start to dig into the data analytics, we've got some really strong sectors.

Operator

But some other sectors, we haven't really got after yet. So that's part of the target. But in terms of our for the next 12 months, until we really get the pipeline going in Tech Services, we're probably going to over index on more wins out of Business Services Secure. So Security and Cleaning is we have a very strong offer.

Speaker 4

Shall I pick up

Speaker 1

on the £15,000,000 per year of savings? So to answer your question, Chris, yes, we said £15,000,000 per year in the Capital Markets event. We might do a little bit better than that in FY 2025. As you know from our numbers in FY 2024, we've done better than we expected in FY 2024 and that's through the range of activities that we outlined. So offshoring and outsourcing, IT, finance and HR, consolidating property and then driving savings from a 3rd party perspective through the implementation of Cooper and then through all of our operational excellence savings.

Speaker 1

My expectation as we look ahead to FY 'twenty five is that the TOM program to your point will continue and we'll continue to see some savings coming out from that next year. We'll shift the balance a little bit, as we said we would do at the Capital Markets event, towards in contract savings rather than the sort of more overhead focus that we've had within the TOM. And that will be driven partly by the tech investment that Phil outlined in the presentation before. So we'll become more efficient. We'll have better data and we'll be able to drive savings out of that.

Speaker 1

But we'll also continue to focus on 3rd party savings. We've still got around 9,000 suppliers across the group. So there's still opportunity to go after there to drive further savings.

Operator

And if you got, let me go and have a look at the cleaning intelligent cleaning in the hub. If you take a client, we know if you got multiple sites, we know which is the most productive, how much is being cleaned per square foot by part of, let's say, part of the building, the loos versus the corridors versus the whatever, and then how it compares to different sites and why. So you get some really interesting data. And that's what I meant by technology. The other piece of it, if you look to that the Cooper and tech services is probably half of our procurement slate, maybe a little bit less.

Operator

And that's not on Cooper yet, okay? But everything else has gone on Cooper. And we just put Germany, it only came on on the 1st June, we got Cooper. It's a really good system. And what that point about the structural working capital savings, is it, that we had, it's not by not paying our suppliers.

Operator

The old game was you didn't pay your suppliers till 2 months a week after the year end. We don't do any of that now. We pay when it's due. But what we were finding is that some subcontractors were sending us invoices predated. So a week it already had a week on it before it landed on our So we were paying it earlier than we needed to.

Operator

But first, when it's delivered, that's when it gets the stamp on it, and we pay it 60 days later. Now the other thing we had for VSMEs, SMEs, the small medium enterprises are voluntary, we pay 30 days. But actually, we found we were paying a load of quite large subcontractors on 30 days. Well, we didn't need to. So it's that level of data and accuracy that we've got that really drive savings.

Operator

And I think there'll be I think when we get a grip of Tech Services, and it's fair to say Tech Services, they'll get any supplier from anywhere to do anything. And it's got to be a lot more rigorous. Anything else? Last one. We missed Keane.

Operator

He's not here today.

Speaker 1

No.

Operator

Okay. Yes. Last one here.

Speaker 1

Yes, sorry. Mark Harrison, Daghou. Just going to ask, so close to the election, any discussions with Labour in terms of insourcing and stuff like that is the first question for government contracts. Are they still staying sensible? And also, any contracts you got caught up in, any hiatus ahead of the election?

Speaker 1

Thanks.

Operator

Good question. I mean, we have got my whole labor's policies on all of the different points about I want to start I mean, we spent time I spent a bit of time, as many CEOs have done, just talking to them and getting to know them. Ed Miliband used to be the Energy Minister when I run British Gas, so I know him well. And when he was leading the Labour Party, he was 42. He's now 52.

Operator

He's got a bit more experience and sees what sort of work can work and what doesn't work. Rachel Reeve and Starmer seem, and I'm not making a political point at all, quite sensible in the understanding of the need to invest in infrastructure and create jobs. And so that when I run British Gas, the GMB and us, we were really close because we were always trying to create good jobs and good training schemes. And so things like the apprentice levy, everyone we give half our apprentice levy back to Treasury. And if you ask the people who designed it, they'll tell you privately it was designed that way so you couldn't spend it.

Operator

The only people who spend their apprentice levy are consultants. Why is that? Because you can put somebody through an MBA on the apprentice levy, but there are so many hoops and hurdles to get a technician on an apprentice levy. We want to convert a lot of our gas engineers who are skilled to do solar fitting. It's only a 3 month training.

Operator

They've got to be on an apprentice levy for 12 months, so they can't just count. There's so many rules. So, Lane, I think, have had a quite sensible approach to that. They've got a sensible approach, in my view, to things like 0 hour contracts. We don't have anybody on 0 hour contracts.

Operator

They've got a sensible approach to pay fair pay. I mean, the problems we have on low pay are all in government contracts. We lost a small contract in Whitehall Security because we bid it at London Living Wage, oddly enough. It was awarded minimum wage, the lowest pay you can get. And they are the front the first impression you'll get as you go into a major government department.

Operator

So I think there's some positives in there. I think the this is my other chart, which I quite like, because this is the there's a whole Rwanda thing. And we will I think the lines are drawn on that. But this actually is a chart around returns generally from the U. K.

Operator

And it's on the website. But you can see, returns have been falling a lot. It's got nothing to do with Rwanda. This is before Rwanda. And I think Labour are actually thinking they've got to do something about more returns.

Operator

It might not be to Rwanda, but more returns. So even that may not change a lot. And I think the conversation we have with Labour is about people talk about outsourcing, but we don't think of ourselves as outsourcing. We're experts in engineering. We're experts in how to deploy clean and efficiently.

Operator

We've got great scale. And we're experts in security and risk management. That's it. I mean, if you want that, and you're a hospital, you've got a problem if you kind of try and become an expert suddenly in that stuff. So I don't I'm not convinced it'll be a major change.

Operator

The only thing we've seen to your second point was that a couple of bids are in flight at the moment that will get potentially delayed. Most of those are ones we've already got. So they don't really it doesn't bother us in some ways. But there's a couple of big ones that probably got pushed back a bit, Pete, but nothing material. Okay.

Operator

I feel like you need a coffee, there will be coffee at the back. I'll just say, there's the team there. If you do want to have a look at what we're up to, it's I recommend it. It's quite interesting. Thank you for listening.

Speaker 4

Thank you.

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Earnings Conference Call
Mitie Group H1 24/25
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