Okay, well, good morning, everybody, welcome to our results presentation for the financial year ending 31st of March, 2023. Thank you for everyone coming over to The Shard here, joining us today. As the cover slide says, we have delivered a strong performance in the year. We made further progress against our strategic priorities. We're entering FY 2024 with some degree of confidence. FY 2023 was indeed a record year in many ways, particularly as we entered the year with the challenge of replacing GBP 450 million of revenue from the short-term COVID work we'd done the prior year, which I'm pleased to say that we did. Indeed, group revenue grew by 1.5%, exceeding GBP 4 billion for the first time. We grew EPS by 3% to 9.5 pence per share.
We generated a good level of free cash flow, even after we'd stopped the invoice discounting program. We returned dividends, including dividends paid and the shares we bought back in FY 2023, GBP 117 million to our shareholders. Our recommended final dividend of 2.2 pence per share takes the total FY 2023 dividend to 2.9 pence per share. That's a 61% increase on last year. Our order book at the year-end was GBP 9.7 billion. That's up from the start of the year. Customer NPS, Net Promoter Score, was also up to a new high, having inherited a much lower insert base, as was employee engagement, also up at record levels.
While you could argue that the better engagement scores is correlated to our GBP 10 million winter support package, we were still proud that we could afford to make these payments to our most hard-pressed and deserving colleagues. All in all, we've had a good year, we are in a good place, and we've delivered good numbers, as Simon will show now.
Thanks, Phil. Good morning, everybody. Let's start with the headline numbers. As Phil said, we've reported a strong set of results for full year 2023. Headline revenue of GBP 4.06 billion was up 1.5%, but if we exclude the COVID contracts, underlying revenue was up by 13.9%. Headline operating profit before other items was 2.9% lower than last year, but was up by 44% on an underlying basis. Our headline operating profit margin was 4% in full year 2023, which was 0.2 percentage points lower than in full year 2022, but the underlying margin was up by 0.8 percentage points. Profit after tax was GBP 128 million, and as Phil also mentioned, EPS, which was 9.5p.
The 3.3% increase reflects the positive impact of our reduced finance costs and the GBP 50 million share buyback. A total dividend of 2.9p for full year 2023 would result in a payout ratio of 30%, which is within our target range. We've had a free cash inflow of GBP 66 million following the closure of the GBP 44, GBP 45 million invoice discounting facility, and our average daily net debt was GBP 84 million. Our balance sheet remains robust, with total net assets of GBP 422 million, and our BBB credit rating has been confirmed by DBRS. Moving on to cover the performance in more detail and turning firstly to revenue. All divisions have performed well in full year 2023.
Headline revenue in business services reduced by 23%, but underlying growth was 6% as a result of wins, including the re-tendered Afghan Relocations and Assistance contract, increased variable and project work, and a good pricing performance. Technical services revenue has grown by 18.6%, as the continued gradual recovery from COVID has been underpinned by new wins, pricing, and acquisitions. CG&D revenue of GBP 828 million reflects some significant wins, including the FDIS contract, which started in December 2021, and increasing volumes of fixed and project works across a number of its largest contracts. Communities revenue has grown by 6.6%, largely due to the pricing through of inflation. Finally, specialist services revenue is up 10.3%, following some key wins in care and custody and landscapes, cross-selling in waste and landscapes, and the acquisition of Biotecture.
On my next slide, I've included a revenue bridge to show the key drivers of the growth in the year. First, we have a reduction in revenue of GBP 433 million, or 10.8%, for the COVID contracts that completed earlier this year. Next, we show the GBP 116 million from net wins and losses, including the likes of FDIS, BAE Systems, and John Radcliffe Hospital. Contract growth and projects captures incremental growth on existing contracts, for example, where the scope of our work is expanded and the year-on-year growth in project revenues. When combined together, the wins and losses, contract growth, and additional project work drives 7.2% of organic growth.
We successfully priced through the majority of cost inflation in full year 2023, which accounts for GBP 163 million of additional revenue. Finally, acquisitions drive GBP 73 million of revenue. Moving on to operating profit. In business services, excluding the boost from the higher margin COVID contracts in full year 2022, profitability is improved by 26%. The key drivers of the improvement include wins, cost savings from the ongoing margin enhancement initiatives, and increased variable and project works. These upsides have been partially offset by a reduction in the scope of the Brexit security work at U.K. ports. Technical services operating profit of GBP 34.1 million is 13.7% higher in full year 2023, largely due to the ongoing delivery of cost savings and the post-COVID recovery of variable works.
These improvements have offset the headwind from cost inflation, which impacts technical services more severely than the other divisions, and Project Forte, where lower productivity temporarily reduced profitability. CG&D has had a very strong year in full year 2023, with operating profit growing by 55.7% to GBP 59.8 million. This improvement has been driven by the increase in revenue that I mentioned earlier, cost saving delivery, and pricing. Communities profit of GBP 21.3 million is 7% better than last year, as margin enhancement initiatives offset the impact of cost inflation and a handful of contracts which have been insourced by customers. In full year 2023, we've utilized GBP 4.9 million of provisions that were made against the loss-making Interserve contracts, and we retained GBP 10 and a half million pounds of provisions on the balance sheet.
Operating profit in specialist services is up 7.4% due to wins in care and custody, improved margins in Spain, and the addition of Biotecture in landscapes. Corporate costs have reduced by GBP 6 million in full year 2023 due to savings made across the functions and in shared services, which Phil will come onto shortly. My next slide is a profit bridge, which pulls out the key drivers of the decrease from GBP 166.9 million in full year 2022 to GBP 162.1 million in full year 2023. The first block on the graph shows the GBP 52.5 million reduction in contribution from the COVID contracts, which have now all completed.
The GBP 25.2 million improvement in underlying trading, which includes the upside from net wins, growth on existing contracts, and project and variable works across the divisions. We delivered GBP 41.4 million of profit from margin enhancement initiatives, which Phil will cover in detail later. The net hit to our bottom line from inflation was only GBP 7.2 million, which I'll come back to shortly. We show one-off downside of GBP 3.8 million from the lower productivity caused by the disruption from Project Forte, and the costs associated with the CMA investigation. Finally, as Phil said earlier, we've invested in a comprehensive winter support package to help our frontline colleagues with the cost of living. Of the GBP 10 million total cost, we incurred GBP 7.9 million of it in full year 2023.
Turning now to earnings per share, which has improved by 3.3% in full year 2023. The refinancing of the U.S. Private Placement notes and the revolving credit facility in full year 2022, and the closure of the invoice discounting facility in full year 2023, have contributed to a 41.9% reduction in net finance costs to eleven and a half million pounds. This has more than offset the small reduction in operating profit in the year, meaning the profit before tax has improved by 2.4% to GBP 150.6 million. Corporation tax of GBP 22.6 million represents an effective tax rate of only 15%, as we continue to benefit from the tax losses that we acquired with Interserve.
After accounting for the 119 million shares purchased in the year, this gives us an EPS of GBP 0.095, which is up GBP 0.003 on full year 2022. Looking ahead to full year 2024, we expect finance costs to remain at broadly the same level and the effective tax rate to increase to around 19% or 20%. Turning now to inflation, starting with the impact on full year 2023. With CPI running at an average of 10.1% in full year 2023, we have seen some cost increases in the business, but they've been significantly lower than the headline rates of inflation reported in the market.
The impact of inflation on our core cost base in full year 2023 was GBP 170 million, reflecting a 5% increase in wages and an 8% increase in materials compared to full year 2022. Whilst labor markets remain competitive, we continue to attract a good supply of available resources, meaning we've kept wage inflation below the headline CPI. In terms of pricing, our contractual protections again enabled us to pass on the majority of the GBP 170 million cost increase to our customers, resulting in a net GBP 7 million reduction in profit, which is better than we'd forecast.
Had we not incurred this GBP 7 million reduction in profit or the revenue pricing impact of GBP 163 million, then our full year 2023 operating profit margin would have been around 35 basis points higher, close to 4.4%. Looking ahead to full year 2024, based on the latest OBR forecasts, we expect CPI to fall to an average of 4.2%. We've benefited from labor and materials inflation remaining below CPI in full year 2023, with CPI expected to fall, this situation could reverse. We're therefore forecasting a net GBP 20 million reduction to profit from inflation in full year 2024, as contractual recovery falls below cost inflation. Moving on next to cash flow. We've generated GBP 186.8 million of cash.
from operations in full year 2023, driven by the operating profit of GBP 162.1 million, partially offset by cash other items of GBP 23.7 million. Other items in full year 2023 are largely made up of the costs of completing Forte and the costs to achieve our margin enhancement initiatives. The GBP 23.7 million is GBP 7 million or GBP 8 million higher than we expected at the start of the year, when we were forecasting a full year 2023 operating profit of GBP 140 million. The investment that we've made in these savings programs has been a key driver of the increase in the profit to GBP 162 million. We expect cash other items for our margin enhancement programs to be around GBP 10 million in full year 2024, driving further material benefits to the bottom line, as Phil will show shortly.
Next, we have a cash outflow from working capital of GBP 38.8 million. The outflow was largely due to the closure of the GBP 45 million invoice discounting facility, but was also impacted by two other factors. Firstly, the completion of the COVID contracts, which were on more favorable payment terms than the contracts that have replaced them. Secondly, the growth in the recently acquired projects businesses, which need greater working capital investment than our FM contracts. Structurally, we expect a modest working capital outflow each year as growth in the projects business accelerates. CapEx, leases, interest, and tax was GBP 82.3 million, GBP 16 million lower than in full year 2022. CapEx accounts for GBP 10 million of that GBP 16 million reduction due to the completion of Project Forte and the Interserve integration.
The remaining benefits are from interest and from the increased dividend from our joint ventures. These movements resulted in a free cash inflow for the year of GBP 65.7 million. Our capital allocation actions account for GBP 137.5 million of cash outflow in full year 2023, which is around GBP 100 million more than in full year 2022. Finally, at the bottom of the page, we see the overall increase in net debt of GBP 70.8 million. Moving on to the balance sheet. The GBP 70.8 million increase for the year results in a closing net debt of GBP 44 million and an average daily net debt of GBP 84 million. Our average daily net debt to EBITDA leverage ratio is 0.4 times in full year 2023. Our covenant leverage ratio remains at 0.
Debtor days have increased, as expected, due to the closure of the invoice discounting facility. Creditor days have also increased. The 9-day increase in creditor days is worth around GBP 50 million and has been made possible by structural improvements that ensure we're not paying our suppliers any earlier than contractually necessary. ROIC has reduced by 4.5 percentage points since full year 2022, due largely to the increases in working capital and the effective tax rate. Total financial obligations of GBP 44 million is now comprised almost entirely of net debt. We've closed the customer invoice discounting facility. The net pension fund liability had reduced to almost zero at the end of the year. We continue to make pension deficit repayments of around GBP 40 million a year, which will be reassessed later this year when we undertake our triennial valuation.
In summary, we've delivered a strong financial performance in full year 2023, with record revenue, improved earnings, and a good free cash flow. We've started full year 2024 well, trading in line with the board's expectations and with positive momentum in the core business. We expect mid to high single-digit revenue growth, including a more modest level of inflation than in full year 2023. Margin enhancement initiatives will continue to underpin profit progress in full year 2024, and free cash flow will improve to at least GBP 100 million. On that note, I'll hand back to Phil.
Very good, Simon. That's your third year end out of the way. Well done. You're getting quite the hang of it now, good job. Let me address now, what's next for Mitie, as it were. I think to understand what's next, it's never a bad idea to reflect on where we've come from. I joined Mitie as CEO on 12th of December 2016. It was a cold, dark Monday, I remember, and our first few years were focused on building new foundations, improving how we engage with our customers and colleagues, disposing of non-core businesses, and strengthening the balance sheet.
That period of heavy lifting meant that we were then ready to move to phase 2 of our strategy to build the scale and industry leadership that we desired, a position which the acquisition of Interserve in December 2020 helped us to secure. Our investment in technology also started to come to fruition with industry-leading platforms and product innovation. The current phase 3 of our strategy, which we launched in June 2021, has all been about delivering returns to shareholders. Shareholders backed us with a GBP 200 million rights issue during COVID, and we were determined to show that we could be trusted to deliver a return from that money.
The overall result of these three phases of Mitie's strategy, Mitie is now the largest facilities management company in the UK, and in a highly fragmented market, we have doubled our market share to over 10%. If you're into strategic advantage of RMS, relative market share, that's almost twice the size of our next largest competitor. In a still fragmented market, it also indicates that more consolidation is available for the industry leader, and that's the theme I'll return to later. Where are we with phase three of our strategy? As you'll recall, delivering returns has 4 elements: accelerating growth, enhancing margins, generating cash, investing in capabilities.
On accelerating growth, we set a target of mid to high single-digit revenue growth. As Simon highlighted, we delivered 7.2% organic growth in FY 2023, and a further 4.6% from pricing. On margin enhancement, we set out to reach an operating profit margin of 4.5%-5.5%. As Simon showed, we are well on our way to achieving that. Cash generation was strong in FY 2023, as was progress on our capability enablers, as I'll show shortly. Done well, we said this strategy would deliver for our shareholders. It is doing. We set a target dividend payout ratio of 30%-40%, which we've reached. We said we would buy back stock. We're now on our second GBP 50 million program.
We said we'd generate a return on invested capital of at least 20%, which we are comfortably exceeding. Growth, of course, is key to any successful business that I've worked in. Our new contract wins last year were GBP 1.9 billion TCV, that's total contract value. This year included US visiting forces, Dublin Airport, Amazon, Home Office, NATS, National Grid, to name a few. We also had a strong year for projects and variable work, particularly across our largest customers, Ministry of Defence, Lloyds Banking, DWP. Contract renewals were over 90% again and added some GBP 2.4 billion TCV. Defence was again particularly strong, but Sainsbury's, Deloitte, Vodafone, Eurostar were also many of the contracts extended. As I said at the start, our order book grew and now stands at GBP 9.7 billion TCV.
We entered FY 2024 with a contract opportunity pipeline of almost GBP 15 billion. The question we often come back to is, why do we win? It's a question we ask ourselves a lot. Each bit is an opportunity to become more precise in answering that question. Let me give you just two examples of why I think we win. We win, firstly, through long-standing relationships. Take our Defence team with a proud record of delivery for the DIO, which stretches back more than 20 years. We have 1,400 colleagues working across Defence sites, experts in their field, trained to work in critical high-security environments. Whilst we are trusted by the client, be under no illusion, these are highly prized contracts, coveted by our competitors and competed for aggressively.
Past performance means nothing if we're not competitive on price and innovation on solution. FY 2023 was a really good year for us in defense. Following the Gibraltar +3-year win at the end of FY 2022, we added Cyprus, 7+3 years, and Landmarc Support Services , 7.3 years at the end of FY 2023. These latter two contracts represent over GBP 170 million base revenue per annum and over GBP 1 billion of contract value. We've also temporarily extended the Falklands Ascension Islands until late 2025. This bid is now live, though, and would give us the full house of wins in our defense portfolio. That was the jewel in the crown of the Interserve acquisition, you recall, were we to successfully retain that last contract. That's our absolute focus today.
Add in the significant project work we're doing in FDIS, Scotland, and Northern Ireland, and the win at RAF Mildenhall, where the US Air Force operates from. You can see why the MOD is still our largest and one of our longest relationships. It's the new clients, such as those wins at NATS and National Grid, that are also encouraging for Mitie. At both Grid and NATS, we dislodged a long-term incumbent with a mixture of innovation through both our Science of Service approach, helping the digital transformation of FM, and a promise of greater transparency, better service, together with more data and insights, more efficient workflow management, and a greater focus on net zero.
These core contracts, mobilizing in FY 2024, are worth GBP 250 million over the next 5 years, but it's the potential to add future project work that really excites me as the next slide hopefully illustrates. How we grow, therefore, is just as important as why we win. At the heart of how we grow is the upsell opportunity from our projects capabilities. Over the past year, we've grown our projects business by 18% to over GBP 800 million of revenue today. We employ some 2,300 colleagues, working with over 200 customers across all 4 of our major divisions. From MEP, mechanical, electrical, plumbing, fire and security systems, energy decarbonization, through to full office fit outs, we tackle all aspects of workspace effectiveness, with some great clients trusting us with their capital budgets.
We could be doing even more. This is a significant growth opportunity for Mitie, given the trends towards creating inspirational workplaces, post-COVID, the opportunity to repurpose buildings, the UK's need to invest in the grid and telco networks, and the tightening regulatory requirements to meet both security and energy efficiency standards. Revenue from our decarbonization business increased 65% to GBP 145 million in FY 2023, as our Custom Solar and Rock Power Connections acquisition scaled up, as did engineering service provision to telecoms industry, with GBP 76 million of revenue in FY 2023, a growth of 145%. We've just bought a sophisticated fire and security installer, R.H. Irving, in Newcastle, just as the new Protect Duty comes into law, requiring organizations to better safeguard members of the public on their sites. We're looking to add further engineering, design, and build capabilities.
That's why I'm excited about our new wins as the grid, such as the grid and NATS. R.H. Irving and Rockpower, for example, already provide sophisticated security systems, grid upgrade services, respectively, to National Grid. Custom Solar has just won their largest ever piece of business, a new solar project with NATS. Upselling projects, accessing our clients' capital budget is how we accelerate our growth. Let me turn now to margin enhancement initiatives, and cost out programs will always be part of the Mitie DNA, starting with Project Helix back in 2017, our first program. With GBP 3.8 billion of revenue, GBP 3.8 billion of labor, third-party spend, there's always more to go after. When we acquired Interserve, our original expectation was that we would deliver GBP 30 million of cost synergies.
Our cumulative savings at the end of FY 2023 are now GBP 51 million, We've identified further efficiencies in helpdesk and back office to get us to a cumulative saving of GBP 55 million in FY 2024. Operational excellence and our digital supply platform contributed GBP 14 million of incremental savings in FY 2023, with a full year of annualized savings to come in FY 2024. We launched a new set of margin enhancement initiatives in the second half of last year, relating to a new target operating model, our so-called TOM. Our TOM is focused firstly on consolidating and standardizing systems and processes to drive efficient straight-through processing, as well as ensuring we're operating in a lean and efficient manner. We've created MSS, Mitie Shared Services, which now manages the end-to-end outsourcing of all payroll, HR, finance, and procurement, working closely with our strategic partner, Wipro.
Group Operations is the second block of the new TOM, standardizing our operations for mobilizations, helpdesk, CAFM, admin, sales, and marketing, driving continuous improvement, as well as monitoring relative performance across all our contracts. The TOM program made a good start in FY 2023 and delivered GBP 6 million of savings in the second half. A further incremental GBP 20 million is now expected in FY 2024. Not all of this will drop to the bottom line, as we are still facing into inflation headwinds, as Simon explained, but those GBP 20 million of cost savings represent another 50 basis points of operating margin.
The bar chart shows the steady progress we've made in our underlying operating margins, that's excluding COVID, since between FY 2021 and FY 2023, improving margin from less than 2% after acquiring Interserve, which you'll recall, operated on lower margins than Mitie's, to a margin now exceeding 4% in the second half of FY 2023. As Simon said, inflation, which brings revenue, but no margin, as well as a net under recovery, diluted margin by 35 basis points in FY 2023. Okay, next slide. Let me now turn briefly to our three capability enablers, which underpin everything we believe in as a business. A Science of Service, technology-led approach is building momentum. For example, we're now at the forefront of technology and business services, and not just in technical services.
We opened our cleaning and hygiene center of excellence in Birmingham to showcase our tech-enabled solutions, such as robotic cleaning, directed by footfall analytics, porter and optimization hospitals. We launched Merlin Connect, tracking responses to reactive tasks, such as spillages, which built on our Merlin Protect 24/7, which manages security and shrinkage alerts. Tech Services, Forte, is now finally working. The technology has taken longer to bed down than we had hoped and at a greater cost, but we're now seeing a stable IT platform and good performance in our workflow automation. Core metrics of jobs per day, first-time fix rate, revenue recognition, supply chain management, real-time data analytics are all showing green against pre-Forte levels. Our second capability focus, Decarbonization Delivered, is another key plank of our ESG strategy, ensuring that we maintain our sustainability leadership at Mitie.
We've optimized energy management systems for all our buildings with 100% renewable energy. Over 50% of our fleet is now electric, and we've installed over 2,800 charging points. In April, we were extremely proud that the prestigious Science Based Targets initiative, SBTi, validated our 2025 net zero plans and our scope 3 emissions targets of 80% reduction by 2030. We were a double winner in Decarbonisation Delivered last year, collecting both the edie Net-Zero Carbon Strategy of the Year award, as well as GivEnergy's Solar Installation of the Year award. Being both a technology and a decarbonization really helps to attract talent and underpin our UK top employer status, which we won for a fifth year running, and creating a great place to work.
Last year, we launched My Mitie, our new employee value proposition, EVP, led by our own people telling my story. The EVP includes My Slice, our industry-leading benefits package, including the winter sport package, My Voice, facilitated by numerous board listening sessions, My Achievements, backed by My Stars. My Community is supported by our many ED&I events, and My Achievement, My Wellbeing. Together, they all help us to contribute to our highest ever employee engagement score, up 7 percentage points. Let me try to draw together all the threads of phase 3 of our strategy of delivering returns. If you remember, the first element of returns that we look at is dividends. On the top left there, in FY 23, we've stepped up the dividend payout ratio to 30% in line with our target range.
The board believes this now to be an appropriate payout ratio for Mitie, with progressive dividend subsequently reflecting the future growth of the business, not just from the payout ratio increasing. Block two is share buybacks, and this continues to be a key plank of shareholder returns. As I said, we announced the second GBP 50 million tranche this April. For employee tax efficiency reasons, some of this year's buyback will be used to fulfill the particularly high uptake of the SAYE 2020 scheme that was launched at 27 P and matures this December. There are over 2,000 Mitie colleagues participating in this scheme, these colleagues will see a three and a half times return on their savings, which is great for all those that took part in that.
Third element of returns, avoiding dilution of our shareholders' interest, is the purchase of shares for all other employee incentive schemes. Last year, we purchased 50 million of shares at a cost of GBP 38 million. This was the high-water mark, if you like, of spend, following introduction of our new policy as we caught up with our numerous in-flight schemes. FY 2024 and FY 2025 requirements, therefore, are much lower at about 15 million shares per annum. The final element of our capital allocation policy is M&A. I'm referring to this as final, not to signal its lack of importance, but rather to give it the prominence that it warrants.
I mentioned, upselling in our projects business, benefiting from the macro trends of regeneration, workspaces, decarbonization, security technology, telecoms, et cetera, is a key element of Mitie's growth story as we pivot from the old world of facilities management to the new world of facilities transformation. I highlighted the great contribution from our higher growth, higher margin, bolt-on gazelles. Carefully chosen, we believe that future gazelles can further enhance our existing project skills and capabilities, accessing more of our customers' capital budgets. During phase three of our strategy, in terms of returns, our M&A spend has actually been quite modest. FY 23 spend was only GBP 20 million, and FY 22 was a net divestment of GBP 5 million. Net over two years, we've only spent GBP 15 million.
However, with minimal leverage, as Simon showed, and good returns from the Interserve acquisition, we're now ready to allocate more capital to M&A to accelerate growth in the longer term. After 2 months in FY 2024, we've now spent GBP 20 million, the same amount that we spent in the whole year of FY 2023. The acquisitions of R.H. Irving and Linx International Group were a great fit for Mitie's fire and security offer. Looking ahead, we see attractive pipeline of gazelle opportunities, particularly in technical services and in intelligent security in FY 2024. That's probably a good segue to the next phase of Mitie's strategy. We're currently working on our next 3-year plan for FY 2025 to FY 2027, code-named Mitie four point zero.
It'll be an ambitious plan, a plan that builds on our three capabilities, which we fundamentally believe will sustain strong organic growth, but a plan where our projects business strengthens our leadership position as Britain's number one facilities transformation company, and a plan that promises greater returns for our shareholders. We'll hold a capital markets event on the 12th of October, 2023, so please put that in your diary, and we'll follow up with an invitation shortly. I look forward to sharing more of our Mitie four point zero thinking with you then. Until October, and in summary, FY 2023 was a good year for Mitie. It surpassed our expectations. It was a year of strong financial performance, a strong cash generation, continued low leverage, and growing shareholder returns.
As period 2 has now closed in FY 2024, FY 2024 is also shaping up to be another strong year. Thank you for listening, and with that, let's turn over to Q&A. Chris, straight out the block.
Well, good morning. Chris Bamberry, Peel Hunt. I've got three questions. Firstly, could you give us an update on the availability of labor?
On the what, Chris?
The availability of labor, how, you know, applications per job, that sort of thing.
Yep.
Secondly, you mentioned an acceleration in M&A. What's the pipeline looking, and what are key areas of interest? Finally, you mentioned the move from facilities management to facilities transformation. Could you just give a little bit more flavor of what that means in practical terms? Thanks.
Yeah. Simon, why don't you do labor? I'll do the M&A facilities transformation?
Sure. We've spoken a number of times, Chris, about the availability of labor, which we've kept at around three or four applications per vacancy over the course of the 12 months running up to the half year. That's actually got better during the second half of the year, and as we've got towards the back end of the year, increased to five or six applications per vacancy. Hence, my comments in the inflation section, that we do still see a relatively good market from our perspective.
Just picking up M&A, I mean, I think there's, maybe answer the first question, this last question first, which is about facilities transformation. What a client wants now is, as we've mentioned, is attractive workspaces, energy efficient, they want data, and everyone's facing the same challenges of having to repurpose their buildings. So when we think about the build to state, it's not enough from our point of view, just to manage the assets that are there, but we want to be a lot more proactive in helping that transformation journey for our clients, and that's true of public sector as it is of private sector. I mean, one of our clients was saying to me, you know, "Half the footprint, but double the experience." So that's what facilities transformation is about.
Our point is, we need to capture the installation and the build, the design, the consulting, and the build capability, as well as the maintenance. That's what we've been doing, and we If you take solar, a Custom Solar, Custom Solar do consulting, advising clients what they think they should, is best to use. They do design, they then build it, and then we're maintaining it. So we're sort of munching back up from managing facilities to being a real strategic partner in on the journey to transform facilities. That's what we mean, that's what we mean by that. That, I think, goes to the point then about M&A, and we're not gonna name individual deals, but we have a number that fit that bill.
As I said, I think the fact that we've only spent GBP 15 million net in the last two years on net M&A, sort of does give you a sense that there is a little bit more we feel that we can start to do now, having got the returns on the big investment, which obviously was Interserve. Sam?
Morning. Three questions from me, please. Firstly, on the inflation calculation, can you give us a sense of your assumptions around the wage and materials cost increase for 2024? Secondly, the retention rates are really strong at 90%+. Do you think that is sustainable, would you expect that to come back a little bit in the coming years? Finally, on M&A and Mitie four point zero, could you reduce the very high returns target to ensure you can do more deals given the strong free cash flow of the business? Thanks.
I think I'm going deaf. What was that last question?
Sorry.
The ROIC.
Could you reduce the returns target to accelerate M&A even further?
Return on returns. Yeah, yeah, got it. Yeah, yeah. Okay, Simon, why don't you do wages? I'll do retention and M&A four point zero.
Sure. Sam, we're expecting wages to remain broadly where they have been for fully 2023 in terms of inflation, around about 5%. As I said in the presentation, we've seen goods inflation about 8% in fully year 2023. I'd expect that to come down a little bit, perhaps to 6 or 7, and that's broadly what we've factored into our modeling. There's obviously a lot of moving parts there.
The other side of that is obviously the CPI inflators, which again, we see dropping. That's why there's potentially that crossover where we were having bigger inflators on the CPI before wages were catching up, therefore, we were in a better place, and that's why inflation impact net wasn't so high. You might see the CPI coming down a bit, which is why we've widened our forecast impact, where perhaps there's more lag in the supply chain and labor versus the CPI. Look, retention's always hard. I mean, there's always somebody out there with a low ball bid or the potential to make a low ball bid, and we do lose bids. It's a fact. It's a occupational hazard that we live with.
You know, you like to think you've got CD&R buying OCS and Atalian Servest, there's a bit of consolidation there. You've got ISS, you know, with a new CEO and, you know, so there's a, we'd like to think there's a bit of stability there, but you, we don't, you know, we don't take it for granted. On the ROIC four point zero, could we see a lower return? I mean, look, we've said above 20%, and I mean, our capital, invested capital, the way we calculate it, we take out cash, but invested capital is about GBP 450 million-GBP 540 million, and we make about 25%. The incremental GBP 50 million, even if a lower ROIC in the next couple of years, doesn't actually impact the weighted average that much.
I think when we talk to shareholders, what they would say to us is, "Look, that's fine, as long, you know, if you're giving us more than, in aggregate, more than 20% return on invested capital and you're growing, you know, we'll take that all day." That's sort of where our thinking is. Kean?
Thanks. Morning, all. It's Kean Marden from Jefferies. Could I start on the contingent liabilities first of all? For GBP 14.7 million liability, which I think sat there for a while, I'm just looking for a bit more of an update on that, because I think that would have probably been there for a couple of years. Really looking just when the cash out potentially occurs with that.
We've put in here a potential liability, which is what the contingent liability is for, some fire door issues on one of our contracts. I'm not sure which one you're referring to, Kean, actually, in the, in note 20. If you're looking in the top half of note 20, the wording here relates to a potential fire door issue, which we don't know yet will be an issue or not. The multi-employer pension scheme stuff is perhaps the stuff that you're referring to, that's been there for a while. No?
No. It's the fire doors.
It's the fire doors.
They've been around for about three years.
It's the fire doors piece.
I'm just wondering if we.
So actually-
Any visibility with the cash out?
We've closed out the historic fire doors piece.
Yeah.
This is a new piece. The wording looks very similar because the issue is very similar. We've closed out the historic issue, and this is a new one that we're looking at now.
Okay. I guess my question is: are we likely to see the cash out from that GBP 14.7 within the next three years?
We don't. I'm not sure where you got 14.7 from, but if we thought there was gonna be a cash outflow in the next 3 years, then we'd have made a provision.
Okay.
No.
I think in the text, you also talk about the plan for the loss-making hospital contract, which looks like it lost about GBP 8.4 million in the year, but likely to move into profitability.
Which contract was that, Kean? You've spoken very-
Sorry, the hospital contract.
Yeah.
that's-
Communities contract.
Yeah.
GBP 8.4 million loss this year, projected to be profit, by fiscal 2026.
That's right.
Is Science of Service, the key deliverable to get that into profitability and deliver a sort of GBP 10 million EBIT swing?
Definitely.
over the next three years or something like that?
That's. As I said, we've got some specific provisions which we're releasing, but we have one contract, which is a very long-dated contract. It runs till 2030 something, I can't remember the date. It's another inherited contract. It's in the West Midlands. I've spent quite a bit of time up there. The fundamental issue is that for reasons that predate us, the opportunity to run market test and repricing was not taken, we ended up inheriting a delivery obligation, which we were being paid for at a much lower level than it was costing us to fulfill. We need to reprice it, and our reprice opportunity, reset opportunity, comes in between now, we're having discussions with the client, between now and the end of FY 2024 or the end of FY 2025.
It'll be somewhere in the middle. You know, Peter's involved in the legal positioning of that. That's quite a big change. On top of that, there is operational things that we can do. We've put in a new management team. We've just refreshed the catering facilities and brought in a new catering partner, which has allowed us to put prices up because we haven't ever adjusted prices. There's just a lot of operational tactical things that we're doing there to sort of munch away. The biggest change is the benchmarking market test. It's actually gonna be a benchmarking exercise, and it might sound a subtle point, but no one's gonna bid on something that against Mitie is loss-making.
We've got to do a sort of almost like an independent process to reset the benchmark.
Thank you. Sorry, last one. You've given us some stats on connected workspace, sort of uptake from clients. If you take a sort of step back, have you got a sense for how much, what percentage of your revenue currently comes from clients that are using that connected workspace facility, and where that potentially goes to over the next few years?
I mean, in its widest sense, it always comes up, this question always comes up, which is: do we charge for it, or is it part of our offer? It's, essentially, it's part of our bid. That's how we bid National Grid and NATS, because we're offering the opportunity to bring in technology that will provide real-time information of how an estate's being used. The percentage of clients utilizing automated feed is going up and up all the time. Actually, what I was looking at, just as Simon was talking, but the actual revenue, what we'd look at is our top clients. Our top 25 clients is 125% of our. No, it's GBP 1.8 billion. Let me get that right.
The top 25 to top 50 accounts are.
Six.
Yeah, GBP 1.8 billion of revenue, and the top 25 accounts really by... I'm gonna get the number right. Just have a look at something. Top 25 accounts.
23%.
That's, that's indicative. Here we go. Yeah. Top 25 represents 45% of our revenue, GBP 1.8. Top 50 represents 60% of our revenue, GBP 2.4. Okay? Our top 25 grew 23% on a like-for-like basis. That's projects, it's the upsell, it's the connected workspace. It's all of the above, we don't really think of it now as connected workspace per se. It's just all about upsell. Even, you know, we work with an audit firm, as you may know, and that, through COVID, they drastically cut back their footprint. In FY 2023, they spent more money with us. They've got technology, you know, backing that as well. Go on, Steve.
Hi.
Just put wait for this.
Um, uh-
Gonna get picked up, Steve, on the tape.
Stephen Rawlinson, hi. Can I ask some questions about the revenue line, and just better to understand that on the GBP 4.1 billion? You've talked about winning work within contracts. Can you just give us a feel, for example, in the GBP 4.1 billion for last year, how much of that was actually contractually based, and how much was work that you were asked to do because you were there and you were incumbent at the time, or you can either do it in reference to the GBP 4.1 billion, or perhaps also the GBP 4.3 billion of new work, and how much extra work you might expect to get from out those contracts, from what you've talked about in terms of the onselling?
Can I ask a second question also, if you don't mind, with regard to, basically, you know, the volume times price, that contributes to the revenue line? I mean, it may well be that your clients have got reduced budgets, and therefore there might be volume effects. Take, for example, Deloitte, where, you know, I think they've closed a couple of their offices in London, and they're one of your clients. Could you just talk through, if you like, the volume effects, which might come either from constraints on client budgets or from an increased working from home? I get the point about connected workspace and what you're doing with regard to that, and what then it's sort of equally, you know, an opportunity as well as a problem.
If you could just talk a little bit about the volume size of, side of that. Thirdly, just in terms of the repricing, I'm assuming that the 5% repricing is in relation to inflation clauses within contracts, or is that additional to what you would have expected from the inflation clauses within contracts?
Sorry, say-
Why are?
Say that last bit again, about the 5%?
You've got 4.6%.
Yeah.
repricing impacts.
I got you.
Your contracts will include inflation clauses.
Yes.
Next year you seem to be a little bit pessimistic about the impact that that might have this year.
Yeah.
I just want to explore that a little bit more. Obviously, inflation's abating.
Mm-hmm.
Is there something in there that you can't get the full price recovery that might be in a CPI clause in a contract, for example?
Yeah
... or something of that nature?
Simon-
Why you seem to be a little bit, you know, the GBP 20 million impact you talked about on profit this year, compared with GBP 7 million last, even when inflation's abating. I just want to know a little bit, or help us to understand a little bit more, what might be in the price clauses in those contracts, which makes you possibly more cautious, possibly guiding us to a figure you know you can beat, or whatever it may be that's in your minds at the moment, that's leading you to think that there will be a GBP 20 million impact on earnings this year from inflation, as opposed to what we've seen in previous years, when inflation was much higher.
Okay, those are really good questions. I'm not saying that for, 'cause you're here, but those are good questions. See, it's the first question about how much are we sort of contracted to do versus we end up doing. If you break that down, I mentioned we'd GBP 800 million of project work out of the GBP 4 billion. That doesn't include fire and security, so that's probably another GBP 70 million-GBP 80 million. Call it GBP 100 million. And then it doesn't include. That GBP 800 million, plus say GBP 100 million, doesn't include variable work. There's a lot of variable work. You know, there's a lot broken on the loo door, or there's a, you know, there's a call out for a heating job. It's variable costs.
The absolute bare minimum, if there's no variable cost, would probably be less than GBP 2 billion. Variable costs, but of a sort, you can rely on it on an average to be there, more or less, would probably take us up from GBP 2 billion to, what, GBP 3 billion. That the true discretionary incremental is probably about GBP 1 billion. That's the way, that's the way I look at it, and that's why. Hence, the whole point about facilities management versus facilities transformation. We've got to get that GBP 1 billion up. That's, well, that's the game plan, because the core won't grow at the same rate, and because that's a share, that's a share gain. It's not a, it's not a underlying growth opportunity the way that decarbonization is, for example. That's point 1.
The volume and price, I mean, if you go back to what I said, if our top 25 grew by 23, we know that that's not all. We know that's not all. It's not applied across all our accounts. The chart that Simon showed on the bridge, on revenue, on page 6. You deal with the pricing in a minute, Simon, 'cause I know you know the answer to that one. The 4.6%, that's just contractual pricing. Contractual pricing plus pricing that we negotiate with our client. What do I mean by that?
A lot of public sector, which is half of our revenue, has pricing compounders in the contract. Not all of our private sector do, but we negotiate an increase because we prove that our input costs have gone up, and it's the same for anybody. The large amount of our private sector are also increasing price. We increase prices as well. The actual volume, what you're looking for is that. That's, that deals with price. The rest then, you could argue, is upsell and cross-sell. That's the underlying organic. If you take out net wins and losses, you've got contract growth and growth in projects of 4%. That's, if you like, that's your volume.
Within that's gonna be pluses and minuses, because volume is more project work, but it might be less cleaning square meters. I don't have the breakdown all the way down. You know, what we look at, for example, is FTEs, employees, because our FTEs fell versus FY22, but we had 10,000 people working in testing centers in FY22, and our employee numbers have fallen from 68,000 to 63. We've actually been adding underlying people. And that's not a bad leading indicator of volume, you know, people. Which is a long answer to not answering your question. You know, the fact is, we are getting volume, we are getting volume growth, for sure.
Let me have a go at your inflation question, Stephen. There's obviously a lot of moving parts within the inflation question, particularly given that all of our contracts are set differently. Some of them we're able to recover inflation against CPI, RPI, or another metric. Some of them we get no recovery whatsoever. If you sort of step back to a higher level, we've been recovering on a lot of our contracts, 10.1% CPI on our contracts throughout the course of full year 2023, because CPI stayed at around about 10%. The reason we've got that GBP 20 million outflow hit to the bottom line in fully of 2024, is because we're looking at the OBR forecast, which says that CPI's gonna come down to 4.2%.
We can see that wages and product inflation is gonna stay at 5%, 6%, 7%, and so we end up in this potentially crossover situation, where the amount that we're able to recover on some of our contracts falls below the amount that we're paying out in costs. It will vary, but on a in the round, across all of our contracts, we're therefore saying the impact to the bottom line will probably go up threefold from GBP 7 million to GBP 20 million.
You can tell, there's a sort of mix, there's a mix effect going on as well, because if Simon's getting 10 on some contracts, and we end up at 4.6, then others, we aren't getting the same degree. The other thing to remember is that of that GBP 800 million of project work, that's quoted on current costs, current price. There's no inflator in there because it's a job, a price at current supply chain cost, with current labor, and I'm paid in within 3 months of, you know, of quoting. You can knock GBP 1 billion out straight away off that GBP 4 billion, which is saying that is current cost pricing. Then you look at what's in, what's the mix?
There's a public sector mix that's higher, and there's a private sector mix that's lower, and that's how you end up with where you're at. That's a good question to end on. Anything else to add? Okay, at that point, we look forward to seeing you on the 13th of, 13th or 12th?
12th.
12th October. Thank you very much.
Thanks.