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Edited Transcript of MTO.L earnings conference call or presentation 6-Jun-19 8:30am GMT

Full Year 2019 Mitie Group PLC Earnings Presentation

Bristol Jun 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Mitie Group PLC earnings conference call or presentation Thursday, June 6, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Cooper

Mitie Group plc - Chief Information Officer

* Paul Woolf

Mitie Group plc - Group CFO & Director

* Phil Bentley

Mitie Group plc - Group CEO & Executive Director

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Conference Call Participants

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* Bilal Aziz

UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

* Christopher Bamberry

Peel Hunt LLP, Research Division - Analyst

* Gert Zonneveld

Canaccord Genuity Limited, Research Division - Analyst

* James Beard

Numis Securities Limited, Research Division - Analyst

* Joe Brent

Liberum Capital Limited, Research Division - Head of Research and Equity Analyst

* Kean Marden

Jefferies LLC, Research Division - Equity Analyst

* Samuel Frost Dindol

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

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Presentation

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [1]

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We might get started now, if that's okay with everybody. Good morning, everyone, and thank you for coming. Welcome to our fiscal year '19 preliminary results. It's not the ideal room, a very long, very wide room, but great to see so many people here. Appreciate it.

I thought we'd start with -- Paul for a change to start talking about numbers first, then I'll talk about the strategy and our outlook for the business and then we'll move into Q&As. We have here our Chairman, Mr. Mapp and a number of our nonexec directors are here as well, and then members of my Executive team are here to answer all the difficult questions.

So at that point, I'll turn it to Paul, and let's hear about the numbers.

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Paul Woolf, Mitie Group plc - Group CFO & Director [2]

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Thank you, Phil, and good morning, everybody. It is a wide room, isn't it? So our latest results show continued positive momentum in the business. So organic revenue growth was 5.5%, and reported revenue growth, including the acquisition of VSG, was 9.4%. Our operating profit increased 6% to GBP 88.2 million. Order book was more or less flat in the year, but the pipeline has grown, thanks to our success in being selected for several important government framework agreements.

We've continue to strengthen our balance sheet, so year-end net debt reduced by GBP 53 million to GBP 141 million. Our core year-end leverage multiple has reduced to 1.3x EBITDA. We are paying our suppliers quicker, and we generated a net GBP 38 million from our disposals and acquisition program. And we're recommending a final dividend of 2.67p giving a full year dividend of 4p same as last year.

So looking at our P&L, you can see the reported revenue growth of 9.4% and the operating profit growth of 6%. Our operating margin was broadly stable at 4%. This includes the dilutive impact of VSG, which we acquired at almost breakeven and the reinstatements of staff incentives. These 2 elements reduced our FY '19 margin by about 40 basis points. Other items reduced to GBP 38 million from GBP 82 million, still too high, but a good reduction on last year now that we are further through our transformation.

The results in profit before tax of GBP 36 million compares to a loss last year. EPS before other items increased 10% from 15.2p to 16.8p and period end net debt showed a significant GBP 53 million reduction to GBP 141 million, but the average net debt was GBP 16 million higher at GBP 302 million. I'll return to this later.

Looking at divisional revenue, you can see that all divisions reported growth with the exception of Catering. Underpinning this positive performance, we saw a strong growth of 8% in our top 50 strategic accounts. Our fastest growing divisions are Security and Care & Custody. Security grew at 6% increasing to 24% including the half year impact of VSG, which was acquired in October 2018. Care & Custody grew across most of its business with a large boost coming from the Detention and Escorting contract that we won in FY '18, resulting in overall growth of 79%. Engineering growth of 2% was driven by our strategic accounts, including project-related work offsetting contract losses the preceding year.

Cleaning grew at 5% off the back of prior year contract wins. Catering was a little down in the year with the core Gather & Gather brand performing well, offset by weaker outside events business. Encouragingly, Catering did secure a number of high-profile wins towards the end of the year, which will support strong revenue growth in FY '20.

In line with our strategy of focusing on our larger businesses, we showed good operating profit growth in Engineering up 8% and Security up 12%. Engineering was driven by the top 50 accounts, although we continue to reinvest some of that upside back into improving customer service. All the major operating units in Security grew profits plus there was a positive contribution from VSG in the year.

Professional Services benefited from winning a high-profile waste contract with the NHS and refocusing on higher margin activities, including pulling out of certain loss-making international contracts. However, Professional Services margins were then diluted by our consultancy areas refocusing their activities on assisting Mitie-wide strategic accounts rather than prospecting more broadly. Again, this is all aimed at increasing our strategic relevance to our largest customers.

Cleaning profits were down due to the dilutive impact of the contracts won in the preceding year, and Care & Custody more than doubled their profits following Detention and Escorting win, and this was despite mobilization costs in the year of GBP 3 million. Catering profits were little lower due to the lower revenues. And finally, corporate center costs increased due to investments in sales and commercial capability together with the reinstatement of staff incentives.

This next chart shows where our GBP 5 million or 6% profit growth came from. Our core contract growth, excluding Helix and other benefits, but including wins and losses, was GBP 11 million, representing a flow-through of our revenue growth. Incremental Helix savings were GBP 25 million. Added to the GBP 13 million that we disclosed last year, this gives a total cumulative saving from Helix of GBP 38 million. We then reinvested into capability GBP 8 million, customers GBP 14 million and incentive schemes GBP 9 million.

Capability investments are investments designed to drive future growth. They include technology infrastructure and resilience, our new showcase office at The Shard, investments into our sales and marketing teams. The customer investments included clearing the backlog by about 20,000 jobs in Engineering, mobilization cost, including the Detention and Escorting setup, Connected Workspace and MI dashboard developments as well as frontline and managerial resource, where we felt we could deliver more against our customer expectations.

And finally, Mitie has not paid staff incentives for a number of years having suspended them during the early years of the transformation. They form a key part of our turnaround program as we work to realign and motivate the broader workforce. These incentives cost us an incremental GBP 9 million in the year.

Looking now at the cash flow. EBITDA was GBP 108 million. To arrive at operating cash flow, we need to deduct cash flows from discontinued, GBP 20 million; pension deficit repayments, GBP 11 million; and restructuring and other items of GBP 38 million.

Working capital was in an inflow of GBP 8 million. You will see in the next chart that we performed well in H2 after a disappointing performance in H1. This gives an operating cash flow of GBP 48 million against an outflow last year.

CapEx at GBP 19 million and interest at GBP 12 million were both lower than last year. We received tax refund of GBP 5 million due to the accounting adjustments made over the last 2 years, meaning that -- giving us free cash flow of GBP 21 million. This is a GBP 54 million improvement over the prior year and demonstrates that the group is cash generative before any M&A activity.

Acquisitions and disposals, excluding deal-related costs, contributed GBP 44 million, and we paid out GBP 44 million in dividends. This all results in that reduction in net debt of GBP 53 million and the closing net debt of GBP 141 million.

Underlying -- so looking at working capital. The underlying working capital reduced significantly in H2. To arrive at the movements in underlying working capital, we've adjusted for various items, including a further reduction in invoice discounting, GBP 3 million; paying our suppliers faster, GBP 26 million; increases in provisions GBP, 26 million; and M&A-related timing differences, GBP 10 million; as well as the impact of other and discontinued items of GBP 5 million. The resulting underlying working capital movement of GBP 6 million is made up of 2 very different half-year performances. In H1, we saw a significant outflow, but this more than all reversed in H2.

The H1 outflow was explained at the time. It was a consequence of the outsourcing of our transactional processing activities. This resulted in a deterioration in our billing and collection capability. After identifying the problems, it then took several months to resolve. We are now looking at how we improve our billing performance compared to before the outsourcing. We're working account by account, and we're also looking at enterprise-wide process improvements, as Phil would explain later in his section.

Trade receivables increased by 3 days over the year to 29. This is again a consequence of the outsourcing. Delays earlier in the year to our billings, meant that we did not then have time to collect the amounts due prior to the year-end. On a positive note, the quality of our debt book has improved with the percentage of debt older than 90 days now down to 3%.

Importantly, we're paying our suppliers quicker. We believe this is the right thing to do, and we, therefore, are asking our own customers to reciprocate and pay us faster. We're having some success here.

Trade payable days declined by 8 days over the year to 50 at the year-end. At the bottom of the chart, I've also included important analyst model guidance. Our cash flow over the next 2 years will be impacted by the unwind of provisions and liabilities we recognized in the year connected to our now disposed Social Housing business and other post-transaction cash flows. We estimate outflows of around GBP 40 million over the next 2 years or so.

Average daily net debt, whilst our period end net debt was GBP 53 million lower than last year, our average daily net debt was higher. The higher daily net debt in the first part of the year was again, a result of the issues following the transactional process outsourcing. The chart on the right shows that we made significant progress in reversing this negative trajectory.

Q4 average daily net debt was over GBP 30 million lower than the previous year. This includes net M&A proceeds of GBP 38 million, but it also includes paying our suppliers quicker, worth about GBP 26 million. We finished the year with comfortable covenant headroom. Leverage was 1.3 against a covenant of 3, interest cover was 8.8 against a covenant of 4.

So I first showed a financial scorecard at the interims. And for the full year, you can see that we're pleased with our organic revenue growth and our operating profit growth. Our operating margin dropped 10 basis points in the year, but this was after the 40 points dilution from the VSG acquisition and the reinstated staff incentives. We're continuing to reduce off-balance sheet finance. We're successfully reshaping our portfolio to focus on our larger businesses, whilst deleveraging; and closing net debt was significantly lower than last year, although average net debt didn't move in the way we planned. The performance just turned around in Q4 as I showed you, and this positive trajectory has been maintained into Q1 FY '20.

Lastly, I'd like to provide an update on our amended reporting schedule. So based on recent experience, we don't feel that our pre-close announcements are helpful for any of our stakeholders. Therefore, we will be moving to 4 quarterly updates a year. So the Q1 update will be given at the AGM on July 30 and the Q3 update will be provided in January, and these will both give an update on our current trading at that time. We will also be hosting a Capital Markets Day towards the end of the year. There will be time at the end for questions on the financial slides.

So on that note, I'd like to pass over to Phil, who will take you through the strategic and operational review.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [3]

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Okay. Thanks, Paul, and it just sort of feels like finally the numbers are sort of heading in the right direction, which is encouraging to see. And it seems a bit longer than 2 years ago, but it was 2 years ago that I stood up in front of all the investor and analyst community for the first time at Mitie and laid out our strategic imperatives. And we knew we had to improve customer service, engage our people, get on top of our cost inefficiencies and stabilize our financial position and start to invest in sort of technology that would differentiate Mitie.

2 years ago, I certainly didn't foresee the challenges of the FM industry has faced. Since then, the demise of Carillion, it's going into administration profit warnings and failed equity raises from others. And actually throughout this difficult time, Mitie has survived, and we are now emerging as the numbers show a stronger company.

So what will the next 2 years bring? Can Mitie prosper? Will things be better? I believe they will. We've seen over the last 2 years like-for-like revenue growth, when other companies have been contracting, plus 3% in our first year of turnaround plus 5.5% organic growth in the second year. There's been a huge turnaround in Net Promoter Score, plus 17 points in the first year, plus 22 points this year. And reassuringly, in our largest accounts, both revenue and NPS growth has been above the group average. Like-for-like revenue at our top 10 clients, for example, haven't changed, has grown by over 21% over the last 2 years. We've had some good wins and encouraging retention performance. And in the end, our order book held up year-on-year.

Now a big step forward was getting on the key public sector procurement frameworks over the last 2 years. This is significant as increasingly more central government departments, including some of our biggest existing clients, who previously bought off the framework -- outside of the framework are now retendering on the framework. Without being on it, we wouldn't have retained recent business, for example at Sellafield and AWE.

We've already had a couple of decent wins off the framework now, and we are well placed on some particularly large bids today, which is why our pipeline has grown over 17% to over GBP 10 billion. A lot of the opportunities are in Care & Custody and in Engineering, but Security, Gather & Gather and Waste have all recently won framework business. And we heard last night, we just got on to another new framework, I'm not at liberty with our Crown Commercial -- reckon the (inaudible) here to say which one -- but it offers another GBP 1 billion of upcoming opportunities and just highlighting the importance of government business going forward.

On the cost side, Project Helix has hit its targets -- GBP 45 million saved on a run rate basis at the end of the year. Savings were across the board, centralizing HR and finance, outsourcing our IT operations and back office to India, the T200, the delayering of middle-management, reducing our property footprint by over 35%, increasing central procurement from 43% originally 2 years ago of our spend to now 60%, we still have more to do there.

But as I will show shortly there are still more process efficiencies to go after, particularly in Engineering Services, where we'd aimed off frankly whilst we were getting after the lower-hanging fruit and driving so much change elsewhere in the business.

We've also improved our financial stability, reducing our leverage over 2 years from the 1.8x to the 1.3x today. We now track our total financial obligations, as I know many of you do already to include not just reported net debt, but invoice discounting, supply chain financing, pension obligations and now IFRS 16 lease obligations. And the good news is our total financial obligations measured this way have fallen by over GBP 63 million over the last 2 years and on top of that, our creditor days over the same period have fallen from 72 days to 50 days. That's GBP 60 million we are spending paying our suppliers faster than we were 2 years ago.

No transformation was ever achieved without engaging the frontline and creating a great place to work, which we're starting to do now in Mitie. Getting to over 50,000 colleagues, many of whom work part-time and don't even have a Mitie e-mail address, is though particularly challenging. The first step is recruiting the right people. We've consolidated over 150 providers of labor into one resourcing framework, getting better people and lower recruitment charges. And having consolidated all HR data into SAP success factors and a single payroll system, we now have the means to better connect with our people.

We launched a new vision and values backed by exec road shows. Jenny Duvalier is our Head of our Engagement of -- from the nonexec Board Director of Responsibility point of view. And the impacts of these changes are being felt. Our employee engagement score has now increased by 12 percentage points in the last 12 months, that's quite significant. There's more to be done still around low rates of pay and supporting our colleagues with more training, apprenticeships and development, but I was delighted to win our first employer recognition awards. We were officially accredited as a U.K. Top Employer by the Top employment (sic - Employers) Institute, and achieved #17 in the U.K.'s 50s -- top 50 most inclusive and diverse employers. Well, hopefully, it's one of many more awards we will receive.

The last leg of our strategy was our commitment to technology, differentiating Mitie as in -- as a leader in the Connected Workspace, improving client experience for them and our margins for Mitie. These investments are beginning now to pay off as the next 2 slides show. In Security, for example left-hand side, risk analytics, loan work and monitoring, fire and security alarm responses, incident management, assisting shoplifting prosecutions contributes now over 20% of the division's profits. As you know, that's one of our fastest growing divisions today and our second largest.

And on the right, the data lakes we've now built providing real-time client information for our clients. Once we identify the client's needs such as real-time performance tracking -- here shown a cleaner's port, catering staff in hospitals -- extracting the data from the data lakes we've built is becoming a lot easier.

And on Engineering, we've developed 4 core technology products, starting with Monitoring as a Service. In the middle of this chart it shows real-time data gathered from a client's air-handling unit in a critical manufacturing location. After functioning well for a period, excessive vibration, abnormal functioning led to asset failure. And such learning algorithms, which we're now collecting the data of, enabled us to monitor essential equipment and service assets before they fail, thereby avoiding unnecessary downtime for clients, but also reducing our own maintenance costs.

And as data is built up over multiple sites, the Mitie performance index for buildings as we're calling it, shows clients which of their buildings are, for example, consuming excessive energy and why.

Workspace management solutions have started to take off and have really been welcomed by our largest clients, both FM managers struggling to get real-time data on workspace utilization as well as giving app-based tools to their employees to manage their day-to-day work experience. Data science and MI are the engine for our digital transformation with our customers which I'll come back to.

So what have we learned over the past 2 years in -- of Mitie? What didn't go as well as we planned? Well, I think the biggest point for me is that there is still huge complexity across Mitie, complexity in processes. The past virtue if being customer-responsive in the Mitie model has often meant there were still far too few standard processes across Mitie: paying suppliers, raising invoices, allocating cost, all done in multiple ways. The work gets done, but it still requires too much manual intervention rekeying.

And complexity of our business model as well: too many divisions, too many cross charges, lack of accountability in front of the client. And the next phase of our strategy must address this.

Talent and how we develop, empower and incentivize is another big issue particularly amongst our SAMs, our strategic account managers. So our SAMs, we've -- where with our SAMs, we've introduced now new commercial accountability and decision-making powers are being introduced across our top clients. Sales effectiveness is another area falling short of my expectations, and we are growing, but we've still more to do in the sales team. We've got a new sales academy of standardizing bid writing, a new bid library with better case studies and

(technical difficulty)

more server capacity.

Moving to the cloud. The good news is that most of this heavy lifting is now complete, at least David Cooper tells me it is, and therefore, CapEx -- our CapEx spend will start to fall.

We now have a modern IT infrastructure built to be the backbone of our future digital transformation. I also learned that client expectations of always wanting more for less are high across the industry. That's why so much of the Helix savings that we made needed to be reinvested to offset some of the risks that we'd taken on commercially. With the new outsourcing playbook in the public sector and being firmer on pricing and more confident in the private sector is, I believe, helping to shift risks towards fairer contracting.

And the last thing I learned, as when Peter Drucker said, "Culture eats strategy for breakfast," he probably had Mitie and our 50,000 employees in mind. We certainly have the full English with extra hash browns at Mitie. So new values, consequence management, leaders who care are all making a difference, but it is a long journey and longer than I'm used to, I have to be honest.

So now we have to shift gears. We've had 2 years of transformation. Now we need to get payback from our investments and payback from the progress we're making. We need to focus on where we add the most value through technology in our biggest businesses and focus on our biggest clients where our growth opportunity is. Moving Mitie from a defensive investment-led strategy of fixing the basics into an offensive, focused, efficiency-led strategy to reward shareholders. To be that trusted partner for our clients, that's what we call Mitie Phase II, targeting our Connected Workspace product catalog on our largest accounts, strategic account managers to manage all the services we offer, a standard MI platform, an operating model to oversee both self-delivered and partnered delivered services.

Mitie Phase II also anticipates a step change in our sales success, more sophisticated marketing campaigns ensuring our website generates leads and drives better conversion from that huge pipeline of opportunities that we have. M&A will play a role in Mitie Phase II, releasing equity from noncore activities, making our business simpler to run, whilst paying down debt further and providing the headroom for infill acquisitions to support the core.

Secondly, I mentioned the inefficiencies arising from our lack of process disciplines, particularly as I said in Engineering Services. The second leg of Mitie Phase II, what we call Project Forte, targets a truly digitally enabled Mitie, driving efficiency and simplicity. Online client interactions with chatbot service centers, engineers dynamically scheduled and automatically dispatched, work orders, supply chain digitized, billing automation, real-time MI for clients, all supported by a simpler operating model.

Project Forte is targeting growth run rate savings by March 2021 of GBP 30 million. Unlike Project Helix though where we needed to reinvest much of these savings back in the business, in Project Forte, we're expecting some GBP 10 million to GBP 15 million dropping through to the bottom line by FY '22.

So wrapping up, Mitie Phase II, our focused growth strategy and Project Forte together, should increase our profits and shareholder returns. We aren't changing our medium-term guidance at this time, but our confidence in our future, I guess, is growing. Yes, it's taken longer for us to get here and yes, we've had to invest more of those savings and yes, there's still much to do. But I do believe we are building a business and a set of capabilities that will give us the leadership in the evolution, the technology evolution in next-generation facilities management, and with that, higher shareholder returns.

Okay, at that point, we'll turn it over to questions and hopefully, Paul, you'll have all the answers.

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Questions and Answers

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [1]

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Who wants to start? I thought Kean you weren't going to come in today, but you were a late arrival. Gert?

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Gert Zonneveld, Canaccord Genuity Limited, Research Division - Analyst [2]

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Gert Zonneveld, Canaccord. You already alluded to this, but could you talk a little bit more about the strategic accounts and the initiatives planned to drive future revenue growth? And how these technology allows you to increase penetration as well as sell additional service lines? And 2 more, if that's okay.

Firstly, on the staff incentive schemes. Do you expect any incremental payments to be made as your outlook improves and as your profitability improves? And finally, maybe a few words on cost inflation and what your thoughts are over the next 12 to 18 weeks.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [3]

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The last one was on cost inflation?

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Paul Woolf, Mitie Group plc - Group CFO & Director [4]

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Cost inflation, yes.

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Gert Zonneveld, Canaccord Genuity Limited, Research Division - Analyst [5]

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Cost inflation. That's correct.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [6]

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Okay. I'll -- if you want to do the last one, Paul and I'll do the first 2. I mean the strategic accounts -- I mean, we've touched on that in the past around the old Mitie model, how each team did their own bit, and we'd never really been able to cut a relationship through the entirety of the P&L, with putting -- and with one management team in place managing Catering, Cleaners, Engineering staff and Security and the rest, which we've now started to do. And the opportunity there then is to really properly incentivize the leaders and show that we've got the right assessment Board, which we are now running through, the right training around commercial -- the right cross-selling awareness and sales linkage. So each unit account manager's -- place account manager's link has a sales buddy. They now have incentives and they're incentivized across the piece around profit, cash, top line growth, NPS and EPS. So employee engagement.

So we've got clarity in a way that we never had before, and we've got incentives that back that up. And -- in a way, we've grown those top accounts almost through serendipity rather than being really focused on these top accounts. But I think as we get better partnership skills in there ensuring that they are open to conversations around the technology opportunities that they present, teaching them can really make a difference. I mean there's -- I won't name the account, but one we started, Jason knows who it is. We started with just Manned Guarding in one part of the country and now it's over GBP 100 million account, and that's grown through really targeting a strategic relationship with the account. And even our biggest accounts, I mean last week, we'd just won GBP 7.5 million in Fire and Security systems from a strategic account. So we're getting the project work that we didn't used to get and our projects team, I think are doing a pretty good job at focusing on those top accounts. So that's partly why we -- we always say it's sort of fish where the fish are and where the money is and the opportunities are still in those strategic accounts.

On the staff incentives, will we increase more with profits?

The answer is potentially yes. If I look at my British Gas experience, our engineers were in a game share pool -- our frontline call center staff have cross sell targets, and we don't have that really embedded all the way into the front line in Mitie yet. We're scratching the surface of it, starting to pay people with incentives. All of those, we've said this year we want to push down incentives, but they all have to be self-funding. So yes, I'd expect to see some increase spend with staff incentives potentially, but equally I don't think it's going to be a drag on our profits because it's got to be earned.

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Paul Woolf, Mitie Group plc - Group CFO & Director [7]

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So I mean in terms of inflation, we've got a reasonably good track record of handling inflation. We've had inflation particularly in labor costs for the last 2, 3 years through the living wage, et cetera. So -- I mean, it remains the case in Mitie that the majority of our contracts, the vast majority of our contracts are struck in a way that we are able to directly pass through any labor inflation which is a result of any change in law. And our core pricing has priced in an element of inflation that, we believe, is the right level.

We then have opportunities around that in many of our large contracts to have a sensible conversation in the event that particular labor inflation becomes anything other than that which was agreed was set out at the time that we put in our bid. I think yes, in a small discrete area of our business, I think the one area where we work hard but have been, we've had large success, but not total success is in our Catering business where input price inflation there -- input cost inflation there, we have, over the last 2 or 3 years, particularly in the light of the pound performance and the import costs there, we've passed on the majority of, but not all of.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [8]

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Joe? Sorry -- so we'll go to Joe and then Bilal.

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Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [9]

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Joe Brent, Liberum. Three questions, if I may, all about cash flow. The first one on the Social Housing provision. Could you talk us through what's happened there and the phasing of those costs? Secondly on the exceptional costs -- cash costs, can you talk through how those are phased? And what exactly they relate to? And thirdly, my understanding of working capital is that it's underlying flat. Am I right in thinking that basically an outflow in creditors is being funded by an inflow in debtors? And could you just talk through the dynamics that net off to a flat underlying work capital position?

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [10]

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Paul, this sounds completely up your street but -- I mean, look, when we got out of Social Housing -- as inevitably and one of the reasons why we got out of the sector, there's always these claims at the end of the account period and truing up. So it's not unusual. And these are in accounts where they have come to the end. So we weren't going to be selling those to nears; they needed to be managed by us, and they are being. And that we will resist some of it. We think we've got insurance cover potentially in some of it, and we'll have to sort of work through it. But I think, we'd be -- we are sort of trying to flag to you some of the existence of that and hopefully, we can do a little bit better but I know, Paul, you flagged that in your GBP 40 million outflow in your chart. Do you want to pick up the -- so the timing, it will depend on the insurance claims, it will depend on negotiation. We've had to negotiate our way out of a number of Social Housing contracts already in the time I've been here and would be glad to be out of that sector.

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Paul Woolf, Mitie Group plc - Group CFO & Director [11]

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Well, we'd expect -- I mean -- yes. So on the -- in terms of the contractual sort of remediation, rectification work type activity over a couple of years potentially mitigated by some insurance and/or ultimate end supplier contributions. In terms of the Section 75 potentially over a longer period, as yet undetermined. We're in active conversations with the trustees of that scheme potentially over a longer period. And then -- and as always I said and that really gets to the heart of the other -- to the question you asked about -- that the confusing thing in our accounts is that, so one element of that is sitting in exceptionals and one element of that is sitting not in exceptionals, one's in discontinued, one's not in discontinued. So there's 2 -- these 2 GBP 20 million blocks, one of them is the -- I'll say one of them is in continuing operations, one of them is not. So they total to GBP 40 million.

The conversation around the -- the question around the underlying working capital, I tried to lay it out on that page -- Slide 11. So really if you sort of step back from it all, our working capital has not really moved in the year. I mean it's improved by GBP 8 million on the face of it, so it's pretty flat. Really, the big moving parts in there are the fact that on the -- we are paying our suppliers quicker and that has cost us GBP 26 million, but at the same time, there are incremental provisions sitting in there to the tune of GBP 20 million or GBP 26 million, which pretty much exactly offsets it.

So really, the sort of -- Phil and I and the rest of the leadership team are laser-focused on the billed and unbilled, so how quickly do we get a bid out to the door and how quickly do we collect that bill once it's being billed, that's the headline number. That's the -- that's where we actively have incentive schemes across the organization to improve our performance, that's the piece that went the wrong way in H1, went the right way in H2 and is basically back to where it started again. So we are -- we're as -- I would say, we're as bad as we ever were before the outsourcing. So there's still an opportunity there, we believe. There's still on average over GBP 450 million of receivables either billed or unbilled in Mitie, but we've recovered what was a deteriorating situation in the midyear.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [12]

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I'm interested as well the -- those pension liabilities also came from acquisitions in Social Housing. So it's another reason why we are happy to be -- answer that. Bilal? Over in the corner.

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Bilal Aziz, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [13]

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Bilal Aziz from UBS. Two questions from me, please. Firstly, I think it's a 50 bps dilution from contract renewals in the upcoming year. Can you please update us with any further renewals on large material contracts? And secondly, how you expect the margin on the contracts that have been renewed to ramp up in -- by '21? And secondly, with the focus on strategic accounts, they usually come with longer payment terms, is that correct? And how do you square that up with sort of pushing working capital that you're trying to make?

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [14]

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What was the second point, that longer-term for credit terms?

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Paul Woolf, Mitie Group plc - Group CFO & Director [15]

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Will the margins...

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [16]

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I got the first point. The second one about longer credit terms.

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Bilal Aziz, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [17]

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So with the focus on large accounts and strategic accounts, does that typically come with longer payment terms? And how that's going to work?

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [18]

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Yes, yes. Okay, I'll do the first one -- second one first. We're actually having quite good dialogue with clients now. I'm looking at Carlo. We negotiated one extension with better credit terms with another big strategic client with credit terms. And actually, funny enough, the government have been quite helpful as well because they're placing under -- us under scrutiny on the prompt-payment code, but some of our clients are also government providers and yet, they're paying us on 90 days. So there's got to be, I think, a sort of equity point here, generally, which when we talk to our clients is well understood. Having said that, our single biggest client pays us in advance, actually. So it's a bounce. So I don't think it follows that if we focus on strategic accounts, we, by definition, end up with longer credit terms. I just don't think -- I don't see that happening at all.

On the wins at the end of the year, we had some good hospital renewals, which are quite good contracts for us, sort of 7 years plus 2. So if you have got GBP 30 million there in the 2 and the 7 years, you can see why the order book can recover quite quickly. And it's why we have kept saying the order book can be quite lumpy and then, you win one big contract and suddenly, it's gone up again. And remembering that the order book, I should say this to Kean, but the order book is only representative of about 60% of our revenue because another 40% comes out of project work and variable work and sales at the till. They're not -- never touch the order book, consulting work, workspace management assignments, no, it's never in the order book. I've lost my plot now. Where was the question was going on the...

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Paul Woolf, Mitie Group plc - Group CFO & Director [19]

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[Sir], I think the sort of the final part of the question, I think was having -- so we signaled to the market that it's going to be a 50 basis points dilution in our profitability next year from the contracts that we renewed in last year in FY '19. We would expect those, and we've got detailed models behind this, that those margins would gradually drift up again over the 3, 5 -- however many years each of those contracts are, but the key point is that they've been rebased lower than they were, which is this one-off sort of rebase of 50 basis points.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [20]

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You're coming off a -- the last year of a long-term contract, is probably your best year of margin and then you're resetting. And then you hope to see sort of earn it back up again. And before, we had an interesting chart here showing how -- at what percentage of our -- we'll renew the share because it's, last year we had a real bow wave of renewals, which we are not expecting going forward.

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Paul Woolf, Mitie Group plc - Group CFO & Director [21]

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So the amount of renewals in FY '19 was -- in terms of the sort of contribution of those renewals was about double what it would normally be in a year. So we've got -- so again, that -- it happens every year. It's not unusual to renew accounts, but there was a far bigger number. We've gone back over the last 4 years, and it was a far bigger number last year than in the preceding years.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [22]

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In 2018, we had 24% of our top accounts renewing. This year, we have had 54%. That's why it's significant hit, and we've just got to work harder, bringing the margins back up again. Kean?

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [23]

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It's Kean Marden from Jefferies. I've got quite a few, so sorry if you could bear with me. So first of all, on the -- was it work in progress or the GBP 450 million billed and unbilled. Am I right in thinking that you made some progress in reducing that? So I think remembering about that GBP 50 million, I think, was the sort of number that you were talking about towards the end of last year. Does that sort of correct, sort of scope? And is your ability to reduce that further in fiscal '21 determined to some extent by Project Forte as well?

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Paul Woolf, Mitie Group plc - Group CFO & Director [24]

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So in the year -- and you're right in terms of your recollection of the figures and the numbers. So in the year, we didn't really make any progress against that at all. So it was a year -- so that this block of trade receivables, I'd say it went the wrong way through until about November time. And then once we'd reestablished some of the key protocols and operating procedures between ourselves and our outsource partner, we are -- we ended up back to where we started.

The one piece of progress that I did mention in my presentation is the -- actually we are getting -- we did, at the end of the year, start to -- we got the billing, so it was moving through a little bit quicker, but it was then jammed up in the collections piece. So in this year, in for FY '19, limited progress, but the direction of travel is now a stable platform, well I say, as stable as it was prior to outsourcing. So what we are saying going forward so for this current year, FY '20 and really into FY '21 is we do expect some progress on that. So I would expect to be able to reduce the average receivables from this GBP 450 million number down. But what we're then saying is we would expect to reinvest the majority of that whatever we're freeing up from that into further reductions in invoice discounting and continuing to pay off suppliers quicker. What we -- but we're going to do that -- as a consequence of getting quicker, rather than just taking cash we've got and using that and deploying that otherwise.

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [25]

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And do you need Project Forte to be a success in order to press over that all? Or are they separate?

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Paul Woolf, Mitie Group plc - Group CFO & Director [26]

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Project Forte is intricately linked with it, but there's progress we can make in any events. But Project Forte will be a massive unlock. Project Forte benefits won't -- that will be back end of Forte, the cash benefits. So those benefits are not really going to be seen until -- say, if we're in FY '20 now until the back end of FY '21 because it actually needs the final little piece of the system, which is we're migrating our billing engine from an -- I say, from a financial system into the core case management system. And when that happens, we are able to bill more effectively and quicker, that a while out.

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [27]

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Okay. And then just moving on to the covenants. Thank you so much for publishing the covenant calculation. That's really helpful. Could you just help me understand the nature of the GBP 7.1 million deduction that is made from your headline EBITDA what that relates to and how an analyst might forecast that in the future?

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Paul Woolf, Mitie Group plc - Group CFO & Director [28]

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Yes. So that's it -- it's in the finance review...

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [29]

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What page you on?

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Paul Woolf, Mitie Group plc - Group CFO & Director [30]

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Page 13.

So the -- yes, the GBP 7.1 million include -- so those are effectively elements of what is -- what are other items in the P&L, so exceptional items, which we are -- which our covenants do not enable us to deduct from the computation. For instance, the FRC investigation costs, for instance, it's those types of costs where we're not -- we're not able to make a deduction.

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [31]

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(inaudible) management costs (inaudible) given you've got more exceptions?

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Paul Woolf, Mitie Group plc - Group CFO & Director [32]

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It's a good question. It will be a smaller deduction going forward. So the core body of restructuring costs we are able to deduct, which is the majority of the going forward other items, so back to the Project Forte conversation. So that will be a dwindling number. I don't show a precise number for this year, but it's smaller.

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [33]

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And then on Note 25, is the right interpretation of that that there was a GBP 9.7 million credit to the P&L from provision releases in the year?

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Paul Woolf, Mitie Group plc - Group CFO & Director [34]

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No. I don't believe so. Right, Note 25?

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [35]

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I haven't got Note 25, Kean.

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Paul Woolf, Mitie Group plc - Group CFO & Director [36]

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Where is your Note 25?

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [37]

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What page you on, Kean?

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [38]

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Right at the back.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [39]

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20 -- last page?

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Paul Woolf, Mitie Group plc - Group CFO & Director [40]

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Here you go, so Kean, what page? What page of the RNS?

Page number? Sorry, we've got -- you don't have that, do you?

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [41]

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Sorry, it's Note 15. I'm sorry...

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [42]

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All right.

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Paul Woolf, Mitie Group plc - Group CFO & Director [43]

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Note 15. All right. Okay fine. Yes, yes. So the question again just so we're clear on it?

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [44]

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It's the GBP 9.7 million utilized in the year [revenue] ended up on the P&L.

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Paul Woolf, Mitie Group plc - Group CFO & Director [45]

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No. So it's here, Phil.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [46]

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Oh, over there. Yes, yes. Utilized in the year.

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Paul Woolf, Mitie Group plc - Group CFO & Director [47]

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So if I look at those costs, utilized in the year in this sense, is that's the cash paid out against those provisions. That's the cash paid out against this provisions. It's not going back to the P&L. No.

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Kean Marden, Jefferies LLC, Research Division - Equity Analyst [48]

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And then finally, could you just provide us with an update, please, on where you stand with some of your larger public sector bids? Or whether you're still in the process, whether you've decided to withdraw from some of them? Where we are in timeline of decision-making as well would be really helpful?

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [49]

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I couldn't possibly comment on that with our current [rep] listening to anything I would say. But no, I mean look we're, as you know, there's some large bids out there. We've made it clear that we're keen to be more of a strategic partner to government departments. There's a lot of work coming out in MoD in the next 18 months, where we've never done any work before. So we've been gearing up for that with some big contracts likely to be awarded in the next 6 months in the custody Home Office world.

And we think we're seen as a credible partner for government, and we want to increase having been underweight in government business generally from not having been on the frameworks. We feel like we're in a good place to pick some work up, and they are large contracts. As I said, I mean, just yesterday we received another notice on another framework. And they are all 10-, 15-year contracts, and I think that's the point about -- the other point I think we've talked about privately, but just to be clear on it, we are not forecasting in our guidance any of these big government contract wins because they're so binary. We either win them or we don't. And we've always said that were we to win them, then obviously, it'd be disclosed, but it also would be, therefore, an upside to our current guidance. We're not banking it.

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Christopher Bamberry, Peel Hunt LLP, Research Division - Analyst [50]

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Chris Bamberry, Peel Hunt. I have 3 questions, if I may. The targeted reductions in the invoice discounting and supplier days, what are you trying to achieve over the next couple of years and what are your targets? Secondly, what percentage of revenues the top 50 accounts now account for? And finally, IFRS 16, what's the impact in depreciation? You've disclosed other parts in lease statement.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [51]

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Well that's a good question.

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Paul Woolf, Mitie Group plc - Group CFO & Director [52]

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Okay, so I'm going to get the last one. I'll do the first 2, if I may, and then..

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [53]

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Am I doing leasing? [I don't know anything about that.]

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Paul Woolf, Mitie Group plc - Group CFO & Director [54]

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What are you going to do? Leasing.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [55]

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There [isn't] a lot there on that one. That's -- you've got the top accounts.

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Paul Woolf, Mitie Group plc - Group CFO & Director [56]

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I've got the top accounts. So top 50%, 65%. The invoice discounting, so we're currently at GBP 73 million today, down from GBP 76 million at the beginning of the year, down from GBP 110 million 2 years ago. What we are saying is we'd like -- we have a plan to reduce that to mid/low 50s over the next 2 years to be funded, as I replied to Kean, out of any reductions in our core billed and unbilled debt, the core receivables, so we're not going to do it unilaterally, we're going to do it as and when we get the funds to do it. And in terms of the -- it's a similar response, really, in terms of these suppliers. We are paying our suppliers on 50 days. We would expect that to come down to the mid-40s over the next 2 years, and again, it's to be funded out of the -- reducing the core receivables at the top.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [57]

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And I mean it's slightly enlightened self-interest on paying our supply chain because it is a condition of the government bidding that we are compliant with the prompt-payment codes so we needed to do this, but it's well and long overdue.

The IFRS 16 is about the lease accounting, which I believe will actually optically improve -- obviously it will improve our EBIT because we know that we're charging what was an operating cost now through to interest and therefore will improve our leverage as well, but you [don't have details] I'm sure you have details of this Paul.

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Paul Woolf, Mitie Group plc - Group CFO & Director [58]

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Yes, so Chris, what was the actual -- what's the last question on it besides?

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Christopher Bamberry, Peel Hunt LLP, Research Division - Analyst [59]

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What's the impact in terms of depreciation because you gave the EBIT and [except the] PBT impact?

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Paul Woolf, Mitie Group plc - Group CFO & Director [60]

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Yes, it's in the -- I mean, we've -- I'm trying to find the right page actually -- we've -- it's in the -- it's on Page 32 of the RNS. So it's obviously -- we're not accounting for it in that way -- this way at the moment. We will be from this fiscal year. So what we're suggesting is that there will be -- I mean the net assets will increase between GBP 4 million to GBP 6 million. The -- what else we got?

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [61]

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The profit's between 0 and 3.

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Paul Woolf, Mitie Group plc - Group CFO & Director [62]

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The profit between 0 and 3.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [63]

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Operating profit by 24 to 29. Note whatever it is.

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Paul Woolf, Mitie Group plc - Group CFO & Director [64]

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Yes, it's in -- there's all sorts of numbers in there. I mean at the headline level it translates at about 3x about the cost to the, the charge to the P&L versus the liabilities about sort of 3x multiple for us because the majority of our leases are vehicles, so relatively short-term leases. We have got some buildings, which obviously have a much -- where the conversion ratios are a lot higher.

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Christopher Bamberry, Peel Hunt LLP, Research Division - Analyst [65]

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So one quick follow-up. Given the supplier prompt payment code, I presume that the use of reduction in your receivables will be targeted there, first of all, I suppose invoice discounting. Will that be a kind of a priority over that?

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Paul Woolf, Mitie Group plc - Group CFO & Director [66]

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No. No. I mean the most important thing in terms of the prompt payment code is that we are paying -- we're being seen to be -- we are continuing to pay our suppliers faster and fairly. So we are doing that. We are -- I'd say, we are -- so we have reduced the terms to a number of suppliers unilaterally, and we are continuing to edge down or speed up the way in which we pay our suppliers without actually telling them why. So they're just getting the money quicker.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [67]

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So just be clear, it's a cost to it, remember. We don't apply it somewhere. We're putting the money in. The upside, if you like of it though, is that we are now starting to build greater dialogue with our strategic suppliers because we have thousands of suppliers. And to the extent that if you're used to Mitie not paying you and then paying you late and you're sort of somehow, you're sort of bake that into your costs, don't you? So we are looking -- as this is where the procurement piece comes in -- we are looking to really skinny down our suppliers. We've had a lot of them into The Shard and laid it out fairly clearly that we expect a fewer of them to be there in a year's time. But we want to work with deep relationships with suppliers. On the basis, we start to become a good payer, we'd expect to see some benefits of that coming through in pricing.

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Paul Woolf, Mitie Group plc - Group CFO & Director [68]

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Sam?

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Samuel Frost Dindol, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [69]

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Sam Dindol from Stifel. A couple from me. You seem to talk about simplifying portfolio further offsetting pest control in The Shard in this year. So just wondering, so how you and come how you approach that and how you think about that? And then secondly, on IFRS 16, will you provide both post-and pre-IFRS 16 numbers in the next couple of years just so we can sort of measure progress against your medium-term [off-rank] profit target?

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [70]

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Yes, I mean, I'll let Paul delve into the detail of IFRS 16, which we've obviously had more questions on that than strategic ones, well there you go. The point about the simplifying just the business model as I say was built historically on different service lines, separate companies, and we're trying to ensure that we -- if you like we build our service around our clients rather than around the way we traditionally organized ourselves. So we had a lot of cross charges going around; if you went out to India, you'd see armies of people allocating cross charges across each of all these legal entities that we've got.

We want to therefore get to a point where we can sort of pivot our reporting and our almost our legal structures around the clients in aggregate, rather than around all the different, separate divisions. And as well, we've got to -- just like Pests, as an example, where we are trying to -- around there is a core offer and then we'd have if you like the tail of it, of stuff that we do and the question is are we better off -- potentially playing more of a managing agent-type of -- a managing service and have somebody else to do some of that work, rather than always self-delivering ourselves and that's -- in doing that, it makes for just a simpler way of operating a business because we've got fewer pieces that we've got to manage ourselves directly. At least that's our thinking behind it.

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Paul Woolf, Mitie Group plc - Group CFO & Director [71]

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And in terms of IFRS 16 and how we will report next year and the year after. I mean that's -- we haven't determined it yet. So it's one of my jobs in the next month or so is to put in place the planning for those types of things. I think what I can say is we'll be -- we'll obviously follow what is best practice in the market and do what we believe is that. So I don't know but we'll -- as soon as I do I'll let you know.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [72]

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And James at the back.

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James Beard, Numis Securities Limited, Research Division - Analyst [73]

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It's James Beard from Numis. A quick one on CapEx. The number was somewhat lower than maybe we'd expected for FY '19. Looks like you were sort of helped a little bit by asset disposals from looking at the cash flow. So just wondering what your expectations are for CapEx in FY '20?

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Paul Woolf, Mitie Group plc - Group CFO & Director [74]

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I think it will drift up a little bit again. So in FY -- so FY '20 and FY '21 as Phil mentioned, we are going to be embarking on Project Forte. Project Forte, which is a GBP 30 million program, split over 2 years, somewhere sort of round about 40% of it is likely to be capital. So I think the number will go up again into the sort of low 20s, but we don't expect it to be higher than that.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [75]

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Yes, I know. We will have that debate when we get to it. I mean I think [Dan] and David maybe have a chance to bring you in on the -- they've done a lot of heavy lifting on the IT. So Paul is right, the Forte has a cost to it, and we end up capitalizing a lot of labor, don't we, as the way it sort of works. But in terms of just hardware and refresh, beyond the Maximo upgrade and the Oracle to SAP, I mean, it's fair to say a lot of the heavy lifting in IT has now been completed, isn't it?

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David Cooper, Mitie Group plc - Chief Information Officer [76]

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Yes. Phil is correct. So we've migrated everything to new infrastructure, and we've upgraded networks, all the PC infrastructures has been upgraded to be CEplus compliant. We've outsourced our operations to Wipro and added in capabilities. And so we're now in a much more stable state. As Phil says, the focus is really on the PCs for engineering, they're the last pieces of the jigsaw and most of the other systems are in a pretty good state. There are a few bits of intersystem linking that are in-flight at the moment and a few more projects will land in the next few months like our SAP to cloud with a massive upgrade as well. So lots of things are landing over the next few months but focus will all be on the engineering going forward and that's the real area.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [77]

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And phones and laptops and then we're through a lot of that refresh now, aren't we?

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David Cooper, Mitie Group plc - Chief Information Officer [78]

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Absolutely. We will be CEplus compliant and we've refreshed a large proportion of the estate.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [79]

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8,000 laptops, [is that right]?

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David Cooper, Mitie Group plc - Chief Information Officer [80]

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Yes. So we've upgraded 8,500 laptops and we put in lots of advanced technology, O365 is in, everything is on the cloud. We've introduced Intune for control at the end. We've swapped Zscaler for iboss. We've done a whole load of things, 0365 ATP is running. So cyber protection is higher than it's ever been. Masses of the infrastructure's now done, and the focus is really now business-driven change from engineering, the Forte piece as Phil says.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [81]

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I think the other point, David, is it right that by moving to Wipro are now doing our applications development as well as our applications maintenance? Some of that cost comes through as an OpEx cost rather than a capital cost as well and their capital cost should be lower than ours. And that's why I say, if you stripped out Forte, certainly the rest of the CapEx we should be -- we are coming off that -- off that high watermark on the investment there.

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David Cooper, Mitie Group plc - Chief Information Officer [82]

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Absolutely, so we've moved the AD to Wipro where a good fraction of the work is done offshore, fixed-price contracts, a catalog-based pricing so we can contain both the risk and the cost, and we can get access to a wider range of skills than Mitie could traditionally have in-house. You've had a very limited range. You used to use a lot of very, very small and third parties who didn't really have the ability to do fixed price and didn't also have the depth of skills. So absolutely, I mean, we will see the IT level of investment that's required driven by any IT infrastructure, which we were driving a lot of the past CapEx because we have to refresh the estate. The IT elements are now dropping significantly through: a, we don't need -- most of it's done; and b, as Phil says, using other suppliers is significantly cheaper.

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Phil Bentley, Mitie Group plc - Group CEO & Executive Director [83]

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Any other final thoughts? Okay, we're going to end on iboss and Zscaler, then are we? Okay, well, thank you for attending. And see you in a few weeks' time. Thank you.