Mitie Regulatory News (MTO)

8 June 2023

Mitie Group plc

Full year results for the twelve months to 31 March 2023

"A record year and continued strategic progress; entering FY24 with confidence"

Highlights

Results for the twelve months ended 31 March 2023

1. From continuing operations and including share of joint ventures and associates.

2. Other items are as described in Note 4 to the condensed financial statements. In FY23 £21.4m relates to non-cash amortisation of acquired intangible assets (FY22: £21.9m).

3. Operating profit includes share of profit after tax from joint ventures and associates. Operating profit margin is operating profit as a percentage of revenue including share of joint ventures and associates.

4. Total order book includes secured fixed term contract work, variable (including estimated variable work) and project work. Book to bill ratio is the relationship between orders received and revenue recognised for the year.

5. Performance before other items, performance excluding Covid-related contracts, net debt, free cash flow, EBITDA and return on invested capital are presented as Alternative Performance Measures. Explanations as to why these measures are presented, and reconciliations to the equivalent statutory measures, are set out in the Appendix to the condensed consolidated financial statements.

Commenting on the results, Phil Bentley, Group Chief Executive, said:

"Mitie's performance in FY23 has surpassed the Board's expectations. We entered the year with the challenge of replacing almost £450m of short-term and higher margin Covid-related contract revenue. Thanks to the hard work of our 64,000 colleagues and our technology-led approach, we have achieved this, and more.

"Group revenue in FY23 exceeded £4bn for the first time, reflecting good momentum from our new contract wins, renewals and extensions, alongside contributions from contract re-pricing and acquisitions. Basic earnings per share grew by 3.3% to 9.5p, benefiting from the refinancing of debt instruments and share buybacks, despite operating profit being slightly lower than last year due to the completion of the higher margin Covid work.

"When we exclude short-term Covid work, revenue and operating profit before other items increased by 14% and 44% respectively. Our operating margin excluding Covid work of 3.8% (FY22: 3.0%) reflects growth in projects work and the focus on margin enhancement initiatives. We expect to deliver an additional £5m of Interserve synergies, and therefore increase our guidance for total synergies to £55m by the end of FY24, significantly ahead of our initial expectation of £30m at the time of acquisition.

"Mitie has been transformed over the last six years, and we have made further significant progress this year against each of our strategic pillars. We are now the largest facilities management business in the UK, and our unrelenting ambition is to drive the business to reach its full potential, not just financially but also through its positive contribution to the environment and society. 

"Thanks go to all of our colleagues for their hard work in providing an exceptional service to our customers throughout the year. Our Net Promoter Score (NPS) rose a further 3pt to +42 in our survey conducted at the year end. Investing in our people and ensuring that Mitie is an 'employer of choice' remain top priorities. Our encouraging business performance during the year enabled us to offer a £10m Winter Support package to help our colleagues through the cost-of-living crisis. Our employee engagement score rose by 7ppt to a record 57% of colleagues 'fully engaged'.

"FY24 has started positively. Since the start of the year, we have won and extended a number of significant new contracts and we have a healthy pipeline of new opportunities, combined with the full year benefit from major contracts won and extended in the final months of FY23.

"We will continue our disciplined approach to bidding for contracts, even if it is challenging to maintain renewal rates at the current level, and we will continue to seek growth opportunities, both organically and through strategic bolt-on acquisitions in the decarbonisation, security technology and telecoms infrastructure sectors. We have already completed two acquisitions in FY24, both of which strengthen our capabilities as the UK's leading intelligence and technology-led security provider.

"We also expect to deliver further progress in FY24 on our ongoing programme of margin enhancement initiatives, including increased synergies from the Interserve acquisition, and efficiencies across our labour, third-party and overhead cost base, which will more than offset inflationary headwinds.

"This positive momentum carried forward into the new financial year gives the Board confidence in meeting its growth expectations for FY24. Mitie is cash generative and has a strong, stable, and flexible balance sheet to support increased returns to shareholders and future growth opportunities."

-END-

Analyst Presentation and Q&A

Phil Bentley (CEO) and Simon Kirkpatrick (CFO) will host a presentation and Q&A session today (8 June 2023) at 9.30am at The Shard and via a webcast. For dial in details please contact kate.heseltine@mitie.com. A copy of the presentation will be available on the company website in advance of the live presentation, www.mitie.com/investors.

Capital Markets Event

Mitie will host a Capital Markets Event on Thursday 12 October 2023. Further details will be provided in due course.

For further information

About Mitie

Founded in 1987, Mitie's job is to look after places where Britain works and it is the leading facilities management company in the UK. We offer a range of services to the public sector through our Central Government & Defence and Communities (Healthcare, Education and Campus & Critical) divisions. Our Technical Services (Engineering Services, Energy, Water and Real Estate Services) and Business Services (Security, Cleaning and Office Services) divisions serve private sector customers in Telecoms, Financial & Professional Services, Transport and Industrials and increasingly the public sector. Finally, our Specialist Services (Care & Custody, Landscapes, Waste Management and Spain) division serves both the public and private sectors.

Mitie employs 64,000 people. We are the champion of the 'Frontline Heroes' who kept Britain working during the pandemic. We take care of our customers' people and buildings, through the 'Science of Service', and we are transforming facilities to be more flexible, safe, sustainable, and attractive to all. Mitie continues to execute its technology-led strategy and in the past twelve months has received multiple awards and validation for its ambitious near and long-term science-based emissions reduction targets from the Science Based Targets initiative (SBTi). Find out more at www.mitie.com.

Chief Executive's strategic review

Overview

Mitie's journey over the past six years has been transformative. The first few years focused on improving customer service, increasing employee engagement, divesting non-core assets and strengthening the balance sheet. Once achieved, these were the foundations for the second phase of our strategy to build scale and drive operational leverage from the Interserve acquisition in 2020. Our strategic focus since then has been on delivering returns.

We are now the largest facilities management business in the UK, and our unrelenting ambition is to drive the business to reach its full potential, not just financially but also through its positive contribution to the environment and society. Despite the challenging macroeconomic environment, we have made significant progress against our strategic priorities this year, delivering a record level of revenue and growth in earnings per share, and continuing to strengthen our ESG credentials. We have a strong platform for future growth, and we are well-positioned to benefit from the opportunities that lie ahead for the business.

Delivering on our strategic priorities

We have continued to make progress this year against each of the strategic pillars we set out in June 2021: Grow Mitie, Enhance Margins and Generate Cash, underpinned by our three Capability Enablers - 'Science of Service', 'Great Place to Work' and 'Decarbonisation Delivered'. 

Our strategy targets mid-to-high single digit revenue growth, an operating margin before other items of 4.5%-5.5%, sustainable free cash flow and a return on invested capital (ROIC) in excess of 20% over the medium term. We will continue building our technology-led offering across our three core business areas of Cleaning & Hygiene, Security and Technical Services, where we already hold market-leading positions, alongside complementary services such as Landscapes, Waste and Care & Custody. We are also expanding our presence in the high-growth areas of decarbonisation, security technology and telecoms infrastructure, both through our in-house capabilities and our acquisitions strategy.

Mitie's three capability enablers are our differentiators, giving us a competitive edge to win new business, cross-sell our services and continue to build strong, long-term relationships with blue-chip customers across the public and private sectors. We aspire to be a trusted partner to every single one of our customers, and our talented colleagues are our ambassadors. That is why we strive to ensure our 64,000-strong team has the skills, expertise and resources to deliver The Exceptional, Every Day.

Grow Mitie

Our priority is to grow Mitie, both organically and through targeted 'bolt-on' acquisitions focused on the higher-growth, higher-margin sectors of decarbonisation, security technology and telecoms infrastructure.

During FY23, we were awarded new contract wins of £1.9bn TCV (FY22: £2.1bn). This included contracts with Dublin Airport, the Department for Work and Pensions (DWP), Hammerson, the Home Office, Lloyds Banking Group, National Air Traffic Services (NATS) and National Grid.

Following a full and extensive re-tender process, we were retained as the strategic partner to the Ministry of Defence (MOD) for its overseas military base in Cyprus and the Landmarc 'Training Estates' contract. In total, £2.4bn TCV of contracts were renewed or extended in FY23 (FY22: £1.7bn), including with Deloitte, the DWP, the MOD, Sainsbury's, Manchester Airport Group and Vodafone. Our renewal rate was again over 90%, which is testament to the strength of our customer relationships, quality of service and competitiveness on pricing.

For any new or re-tendered contract, we have robust internal bidding processes in place, including the review of all contracts valued at more than £3m by our Bid Committee, comprising members of the executive leadership team. We are continually improving our approach to ensure our capabilities and the competitive cost-to-serve afforded by our scale are reflected in our bids.

We also continue to leverage our expertise by cross-selling services and insourcing work formerly contracted out to third parties, wherever opportunities are identified. In FY23, £43.5m of cross-selling revenue from projects was delivered by Technical Services (including a number of decarbonisation projects), and by Waste, Landscapes and Security.

Mitie's projects business brings together around 2,300 colleagues in our project delivery teams, predominantly across Technical Services and Central Government & Defence, and contributed £0.8bn to FY23 Group revenue, an 18% increase compared with the prior year. Our projects capabilities extend across all aspects of workplace effectiveness, including mechanical and electrical packages, fire and security hardware, and energy decarbonisation. There are significant growth opportunities in this area, given the wider trend towards employers wanting to create inspirational workplaces post Covid, and the regulatory requirements for buildings to meet energy efficiency standards. The projects business includes Mitie Telecoms and our decarbonisation offering, as described below.

During FY22 and FY23, we completed seven strategic bolt-on acquisitions, including three businesses at a total cost of £20m (P2ML, 8point8 and Custom Solar) in FY23. We have completed two further acquisitions since the year end, Linx International Group and R H Irving Industrials, for a total consideration of £21m, both of which strengthen our capabilities in the intelligence and technology-led security market.

The acquisitions of P2ML and 8point8 in H1 FY23 were combined with DAEL Telecoms (acquired in FY22) to create Mitie Telecoms, one of the UK's largest telecoms infrastructure businesses, which is benefiting from the roll-out of 5G and the decommissioning of Huawei assets. Our services include both infrastructure projects and network coverage for special events, such as music festivals. During the year, we partnered with Cellnex, Digital Mobile Spectrum Limited (DMSL) and H3G, and extended relationships with BT, Vodafone and VMO2, such that we are now working with all of the mobile network operators. 

We are also focused on building on our Plan Zero offering (Mitie's own Net Zero commitment) to deliver decarbonisation for our customers. The acquisitions of Custom Solar in H1 FY23 and Rock Power Connections (acquired in FY22) have facilitated the rapid expansion of our capabilities in this area. We have been awarded contracts from existing Mitie customers, including ABP, the DWP and Amazon, for electric vehicle (EV) charging infrastructure and solar panels.

The FY22 and FY23 acquisitions contributed £98m to Group revenue in FY23 and approximately 2ppt of our underlying growth (excluding Covid work). While these bolt-on acquisitions will deliver future growth for the Group, they have required investment during the year to win new contracts and are therefore only expected to contribute to Group profitability from FY24.

Margin Enhancement

We are targeting an operating profit margin, before other items, of 4.5%-5.5% in the medium term. This will be achieved through growth in the higher margin projects business, as well as our ongoing package of savings and efficiencies, from delivering the Interserve synergies, driving operational excellence, rolling out Coupa (our digital supplier platform), implementing Forté (the digital platform to automate scheduling in Technical Services) and undertaking overhead cost savings.

Notwithstanding inflationary headwinds, we achieved an operating margin of 4.0% in FY23 (3.8%, excluding Covid work), reflecting an increase of 1.7ppt over the two-year period since acquiring Interserve (which operated on a margin around 1.0ppt below that of Mitie).

In FY23, we have delivered an incremental £41m of savings through our margin enhancement initiatives. These cost-saving initiatives materially exceeded the cost of the Winter Support package (£8m), the relatively limited inflationary increases that we were unable to pass on to customers (£7m), and the delay in achieving the full benefits from Forté (£4m).

A significant proportion of these savings has come from Interserve cost synergies. In FY23, we delivered an incremental £21m of synergies, driven by further reductions in headcount and procurement savings. In aggregate, since December 2020, we now expect to deliver total synergies of £55m (previous guidance £50m), significantly ahead of our initial expectation of £30m at the time of acquisition.

Our operational excellence initiatives delivered an incremental £7m of savings in FY23, largely from the portfolio of former Interserve contracts where efficiencies are being delivered from the roll-out of our workforce management system (Workplace+), reduced agency cleaning hours and harmonising processes for mobile technicians.

We have continued to digitalise, rationalise and simplify our third-party supplier base. In FY23, we saved an incremental £7m from the roll-out of Coupa to Business Services, Communities, Landscapes, Care & Custody and the Corporate Centre, which together account for 60% of our total third-party spend. We have also reduced our supplier base, from 12,000 to 8,300 suppliers, and we remain on track to meet our target of 6,000 suppliers in FY24.

Forté went live in the first half of the year. After an initial period of stabilisation, which resulted in some short-term operational challenges, service level performance has returned to 'pre-Forté' levels, and is improving daily. The delay in getting the system to full capacity held back the cumulative benefit from Forté savings to £9m in FY23, although we expect to meet our full planned savings run rate of £15m in FY24, as previously communicated.

We are also continuing to make progress with the handful of under-performing contracts in Communities which we acquired with Interserve. Six of the contracts showed improved performance during the year, with two contracts now contributing to Group profitability. One contract remains particularly challenging and only showed a marginal improvement in performance (£8.4m loss in FY23 compared to £8.7m in the prior year). The majority of the remaining under-performing contracts will be at, or close to, break even by the end of FY24, with the final contract expected to achieve profitability in FY26, after productivity improvements and re-sets to pricing.

During the second half of the year, we expanded our suite of margin enhancement initiatives. This phase of the programme addresses our Target Operating Model and includes the outsourcing of further HR and Payroll, Finance and IT functions, consolidation of systems and processes, and optimisation of our organisational structure. The Target Operating Model initiatives delivered £6m of savings in FY23 and are expected to deliver a further £20m of savings in FY24.

The costs to deliver the margin enhancement initiatives outlined above are reflected in 'cash other items' of £24m in FY23 (FY22: £27m), which include £8m of costs associated with the Target Operating Model (for redundancies, systems testing, project resources, and dual running).

Labour and third-party cost inflation totalled £170m. Approximately £163m of these rising costs were recovered from our customer base via contract re-pricing.

Generate Cash

Our ability to translate revenue into earnings growth and free cash flow is integral to the success of our strategy, including our ability to reinvest for future growth and increase shareholder returns while maintaining a robust balance sheet position.

During FY23, we generated a free cash inflow of £66m, compared with £147m in the prior year. This reduction reflects the £45m impact from the decision to terminate the invoice discounting facility and a higher working capital outflow arising from replacing Covid-related contracts on 30-day payment terms with revenue on longer payment terms.

Our performance during the year, combined with our forecast future cash flows, provides confidence in the delivery of our capital allocation policy. This sets out a proactive but disciplined use of resources to pursue bolt-on acquisition opportunities, return cash to shareholders via share buybacks and dividends, and purchase shares for our employee incentive schemes to eliminate the otherwise dilutive effect of issuing new shares to fulfil vesting awards.

In FY23, we invested £20m in acquisitions in the telecoms and decarbonisation sectors and returned £117m to shareholders via dividends paid (FY22 final and FY23 interim dividends), share buybacks and the purchase of 50m shares at a total cost of £38m for employee incentive schemes. Our leverage of 0.4x average net debt/EBITDA gives us significant headroom within which to maintain our capital allocation activities.

Capability Enablers

Our strategic pillars of growth, margin enhancement and cash generation are underpinned by three capability enablers: the Science of Service; creating a 'Great Place to Work'; and Decarbonisation Delivered. 

The Science of Service

Over the past five years, we have made substantial investments to develop leading cloud-based platforms for facilities management. Our 'Science of Service' approach allows us to put cutting-edge technology at the forefront of all our services, providing customers with innovative solutions to create safe, clean, sustainable and energy efficient spaces. This technology sets Mitie apart from its competitors and creates a strong platform from which to win and retain customers, and to be recognised as a trusted partner for their businesses.

Forté is our industry-leading digital platform to automate workflow in Technical Services. Forté incorporates a suite of Connected Workspace products, including ESME (our AI-driven chatbot), Aria (our workplace app) and MOZAIC (our AI/Machine Learning analytics suite), which are revolutionising the way our people work by enabling our customers and their employees to seamlessly connect to workplace services. They have been adopted by 40 customers to date, with over 14,000 registered users reporting and tracking workflow across their estates.

We have developed an application, combining virtual reality and the Internet of Things, which enables our remote and on-site engineers to collaborate through our Connected Engineer headset. This aims to improve fault detection and diagnosis, deliver cost savings on planned maintenance activities and improve the overall customer experience. We have also been expanding our use of Machine Learning models to provide holistic digital solutions to support our customers with their workplace and decarbonisation strategies, using software such as Building Management Systems (BMS) and Building Information Modelling (BIM).

We have introduced some of these technologies to customers such as the BBC and Deloitte, where a 'partnership technology roadmap' has been integral both to securing recent contract extensions and to deploying our workplace consultancy services. We have also grown our Connected Branches service for Lloyds Banking Group, with 460 branches having been fitted with our remote connectivity products to reduce energy consumption, and a further 100 in progress. In the public sector, customers such as Sellafield, the Department for Transport (DfT), the DWP and Ofcom are implementing our technology to improve the workplace experience for their employees and increase productivity.

Mitie operates the UK's leading intelligence and technology-led security business, identifying and assessing threats through its intelligence network and dedicated Intelligence Hub in Northampton. This technology provides significant advantages in winning, transforming and retaining contracts across multiple sectors, including the retail, financial services, and transport and aviation sectors.

Furthermore, Mitie is at the forefront of the acceleration of technology within the cleaning and hygiene sector. In early 2022, we opened the Cleaning and Hygiene Centre of Excellence (CHCoE) in Birmingham to showcase our tech-enabled solutions to existing and potential customers. Our robotic cleaners deliver a consistent level of cleaning, day and night, while reducing the use of water and electricity by identifying the most efficient route around a building. They are commonplace in high-traffic environments such as railway stations, and in NHS settings, and can be combined with footfall monitors to create a 'demand-led' pattern of cleaning activity. We have also developed leading technology to improve the air quality in a range of settings, including offices and transport hubs, using UVC air disinfection systems.

Creating a 'Great Place to Work'

Our ambition is to be the destination 'employer of choice' in the facilities management industry. We will achieve this by creating a 'Great Place to Work', empowering our 64,000 colleagues by developing their skills, providing meaningful career opportunities and ensuring that they are suitably recognised and rewarded for their contribution. This, in turn, enables us to continue delivering outstanding customer service.

We are an industry leader in the provision of benefits to our frontline colleagues. During the year we launched a £10m Winter Support package of new benefits to help our colleagues through the cost-of-living crisis, including one-off bonuses, the removal of fees for using salary finance, retail discounts and additional free shares. We have also expanded our 'Choices' platform to our hourly-paid colleagues, so that they can take advantage of discounts on everyday products and services.

The positive steps that we have taken to create a 'Great Place to Work' have been reflected in the results of our latest annual employee engagement survey. Some 84% of our full-time employees participated (54% of all colleagues), our highest participation rate to date. Our overall Mitie engagement score rose to a record level of 57% of colleagues 'fully engaged', a 7ppt increase on last year's score, and a 24ppt increase since we introduced an annual survey in 2018.

Decarbonisation Delivered

The third enabler to our strategy is to support an increasing number of public and private sector clients to define and deliver their own Net Zero strategies through our growing decarbonisation capabilities.

During H1 FY23, we completed the acquisition of Custom Solar, which specialises in solar photovoltaic panel installation, further strengthening our suite of decarbonisation services. This complements our FY22 acquisitions of Rock Power Connections, which delivers high-voltage power connections (including for electric vehicles), and Biotecture, which installs living walls for interior and exterior urban spaces.

Our decarbonisation business revenue increased by 65% to £145m (FY22: £88m), through cross-selling these capabilities to existing customers. Rock is now working with five of the UK's leading sustainable energy providers, including Gridserve and Roadchef, to install fast EV charging points in a variety of settings, including motorway service stations, petrol stations and destination hubs such as garden and shopping centres. In addition, we continue to develop heat decarbonisation plans for five central government bodies across over 100 buildings, and to provide other services, such as LED lighting installation and energy consumption management, for our customers.

Financial highlights

Our financial results for the year ended 31 March 2023 are encouraging and we have made further progress against each of our strategic priorities. We entered the year with the challenge of replacing almost £450m of short-term and higher-margin Covid-related contract revenue. Thanks to the hard work of our 64,000 colleagues and our technology-led approach, we have achieved this, and more.

Group revenue

Group revenue, including share of joint ventures and associates, from continuing operations of £4,055m was 1.5% better than the prior year (FY22: £3,997m), even after the completion of short-term Covid work (FY22: £448m), representing our highest ever revenue. Excluding the Covid-related contracts, underlying revenue growth was 14%. This increase is broadly attributable to organic growth of 7% (including net contract wins and losses, contract growth and projects), contract re-pricing of 5% and acquisitions of 2%.

Profitability

Basic earnings per share before other items grew by 3.3% to 9.5p (FY22: 9.2p). EPS benefited from the refinancing of debt instruments and share buybacks, which more than offset the small reduction in operating profit before other items to £162m compared with the prior year (FY22: £167m) due to the completion of the higher margin Covid work. Basic earnings per share after other items more than tripled to 6.8p (FY22: 2.2p), reflecting a £60m reduction in Other items after tax to £37m (FY22: £97m).

Financial position

We generated £117m of cash from operations (FY22: £264m), leading to £66m of free cash flow (FY22: £147m) in FY23, which helped us to maintain a strong balance sheet with leverage (average net debt/EBITDA) of only 0.4x.

Our average net debt was £84m (FY22: £25m), reflecting the implementation of the capital allocation policy announced last year and our decision to terminate the customer invoice discounting facility. Closing net debt at 31 March 2023 increased to £44m (FY22: £27m net cash).

Capital allocation

Mitie is cash generative and has a strong, stable and flexible balance sheet to support future growth and increased returns to shareholders.

The Group has made a number of targeted bolt-on acquisitions over the last two years, focused on the higher-growth, higher-margin sectors of decarbonisation, security technology and telecoms infrastructure. The Board believes that value-accretive acquisitions represent an increasingly important route through which Mitie can accelerate growth and build on its earnings and cash generation platform for the future.

Having reinstated the dividend last year, post Covid, the Board's intention has been to increase the dividend payout ratio to 30%-40%, and thereafter deliver dividend growth in line with earnings growth. In light of the Group's robust financial position and continued progress against its strategy, the Board is therefore recommending a final dividend of 2.2p per share which, when added to the dividend paid in respect of the first six months of the year, takes the total dividend for FY23 to 2.9p per share (FY22: 1.8p). This represents a payout ratio of 30% (FY22: 20% payout). The final dividend will be paid on 4 August 2023.

In April 2023, the Board announced its decision to purchase shares to satisfy all employee incentive schemes, eliminating the otherwise dilutive effect of issuing new shares to fulfil vesting awards. The majority of our share schemes are satisfied through the Company's Employee Benefit Trust (EBT), while Save As You Earn (SAYE) schemes are satisfied through treasury shares, in order to mitigate unnecessary stamp duty costs for the employee.

Consistent with this approach, 50m shares were purchased through the EBT, including 4m shares for our employee Winter Support package, at a total cost of £38m in FY23. We expect share purchases through the EBT to reduce significantly to c.15m shares in FY24 and FY25, as specific incentives put in place in respect of the Interserve acquisition mature.

The Board also announced in April 2023 a new £50m share buyback programme for FY24, following on from the initial £50m programme executed in the first half of FY23. The first £25m tranche of the new programme is underway and includes the purchase of 15m shares to be held in treasury for our 2020 SAYE scheme, which vests in December 2023. The remaining shares purchased from the first tranche will be cancelled. The timing of the second tranche of the new programme will be dependent on M&A opportunities and will include the additional 15m shares required for the vesting of the 2020 SAYE scheme (30m shares in total), with all remaining shares being cancelled.

Outlook

FY24 has started positively. Since the start of the year, we have won and extended a number of significant new contracts and we have a healthy pipeline of new opportunities, combined with the full year benefit from major contracts won and extended in the final months of FY23.

We will continue our disciplined approach to bidding for contracts, even if it is challenging to maintain renewal rates at the current level, and we will continue to seek growth opportunities, both organically and through strategic bolt-on acquisitions in the decarbonisation, security technology and telecoms infrastructure sectors. We have already completed two acquisitions in FY24, both of which strengthen our capabilities as the UK's leading intelligence and technology-led security provider.

We also expect to deliver further progress in FY24 on our ongoing programme of margin enhancement initiatives, including increased synergies from the Interserve acquisition, and efficiencies across our labour, third-party and overhead cost base, which will more than offset inflationary headwinds.

This positive momentum carried forward into the new financial year gives the Board confidence in meeting its growth expectations for FY24. Mitie is cash generative and has a strong, stable, and flexible balance sheet to support increased returns to shareholders and future growth opportunities.

Operating review

Business Services

Business Services delivers Intelligent Security, Cleaning and Hygiene Services, and Office Services. During the pandemic, Business Services was also primarily responsible for the delivery of Mitie's short-term Covid-related contracts. These contracts completed early in FY23.

Performance highlights

· Revenue reduced by 23% to £1,172m (FY22: £1,522m), largely due to the completion of Covid work.

· Excluding £15m of revenue from Covid work in FY23 (FY22: £429m), revenue increased by 6% largely driven by contract re-pricing plus contributions from variable and project works.

· Operating profit before other items reduced by 37% to £68m (FY22: £108m). Excluding the £7m contribution from Covid work in FY23 (FY22: £60m), operating profit increased by 26%, and the operating margin increased by 0.8ppt to 5.2%, driven by margin enhancement initiatives

· £1.0bn TCV of new, renewed or extended contracts, including for Eurostar, Hammerson, Home Office, National Grid, NATS and Sainsbury's

· Four significant contracts mobilised in early FY23 for BAE Systems, Hammerson, John Lewis & Partners, and Poundland, worth £33m of annualised revenue and TCV of up to £120m

· Awards include: British Security Awards 2023 - Service to the Customer and Best Team; Metsä Sustainability Awards 2023 - Team Sustainability Excellence and Social Value Impact; Cleaning Excellence Awards 2022 - Cleaning & Hygiene Team of the Year; Fire and Security Matters Awards 2022 - Security Guarding Company of the Year and Security Team of the Year

Operational performance

Business Services delivered an encouraging performance, with the continuation of the Afghan Relocations and Assistance contract, increased variable and project work, and contract re-pricing, alongside the delivery of margin enhancement initiatives, partially offsetting the completion of higher margin short-term Covid work that had benefited the prior year and a reduction in scope of the Brexit security contract at UK ports. Excluding Covid work, revenue, operating profit before other items and the operating margin were all better than last year.

The division secured £1.0bn TCV of new contract wins, renewals and extensions, including wins for Hammerson, the Home Office, John Lewis & Partners, National Grid, NATS and Poundland. The largest extension was for three years with Sainsbury's, while other renewals and extensions included Eurostar, Hammerson and Manchester Airport Group.

Margin enhancement initiatives implemented during the year were a key driver of growth in underlying operating profit and the operating margin. The initiatives primarily focused on operational excellence, the roll-out of the Coupa digital supplier platform and leveraging the Workplace+ workforce management app to optimise workforce productivity and workflows across the division's core services.

Technology continues to drive change across the industry and Mitie is a leader in this area. In Business Services, the 'Merlin Protect 24/7' platform (business intelligence software for security incident management) is being developed into a leading 'Merlin for Cleaning' version to monitor and track responses to reactive tasks such as spillages. Trials were carried out across several clients, including Amazon, Co-op, Deloitte and Standard Life, with results showing notable productivity improvements in frontline cleaning operations.

The division also operates the UK's leading intelligence and technology-led security business, including Mitie Intelligence Services (MIS). MIS identifies and assesses threats through its intelligence network and dedicated Intelligence Hub, and provides significant advantages in winning, transforming and retaining contracts across multiple sectors, including the retail, financial services, and transport and aviation sectors. MIS is well-positioned to work with customers when 'Martyn's Law' (formerly the Protect Duty) comes into effect, setting out requirements for venues and other organisations to ensure public safety.

Since the year end, we have continued to build the division's capabilities in intelligence and technology-led security through the acquisitions of Linx International Group and R H Irving Industrials, for a total consideration of £21m. These businesses bring a range of complementary services and security infrastructure technology to Mitie and will enhance the division's ability to provide comprehensive support, including training, to our customers as they prepare to meet the requirements of Martyn's Law. 

Technical Services

Technical Services is a leading supplier of technical engineering services and delivers projects to a range of predominantly private sector customers. Through a series of strategic acquisitions, the division is also focusing on the high growth areas of telecoms infrastructure and innovative decarbonisation solutions.

Performance highlights

· Revenue increased by 19% to £1,154m (FY22: £973m), benefiting from acquisitions, contract wins, renewals and extensions, contract re-pricing and a full year of revenue from significant wins in the prior year, in addition to the steady recovery of the projects business post Covid

· Operating profit before other items increased to £34m (FY22: £30m), primarily driven by the uplift in revenue and margin enhancement initiatives more than offsetting inflationary cost increases and the impact of short-term operational inefficiencies from Forté

· The creation of one of the UK's largest telecoms support services companies, following the acquisitions of P2ML and 8point8 in FY23, combined with DAEL Telecoms (acquired in FY22)

· Decarbonisation offering strengthened in FY23 through the acquisition of Custom Solar, a specialist in the design and installation of solar photovoltaic (PV) panels

· Awards include: Commercial Solar Project of the Year (Custom Solar); Computing News Digital Technology Leaders Awards 2022 - Best Large Enterprise Digital Project (Aria); Edie Awards - Net-Zero Carbon Strategy of the Year Award (Mitie Plan Zero); RoSPA Gold Award for health and safety performance (Magnox contract); Facilities Management Awards 2023 - Total FM Provider of the Year (Mitie Ireland)

Operational performance

Technical Services continued to benefit from a steady recovery in projects and variable works, increased demand from customers for its technology-led solutions and growth in the telecoms infrastructure and decarbonisation businesses. This, combined with contract wins (which more than offset two notable losses), renewals and extensions, contract re-pricing and a full year of revenue from significant prior year wins (including BAE Systems and Legal & General), contributed to a 19% increase in revenue to £1,154m.

The operating margin remained broadly flat at 3.0%, due to the benefits of the good underlying performance and margin enhancement initiatives being offset by the impact of inflation, short-term operational challenges following the going live in H1 of Forté (the digital platform to automate scheduling in Technical Services) and the initial investment in recently acquired businesses.

During the year, the division won, renewed or extended £1.0bn TCV of contracts, including wins with GSK, NATS, National Grid and Sky, and renewals or extensions with Deloitte, E.ON and Vodafone.

Technical Services is at the forefront of Mitie's 'Science of Service' ambitions, using its leading-edge technology platforms to optimise employee wellbeing, enhance estate intelligence and provide smart decarbonisation and green energy solutions. Mitie's Connected Workspace suite of products has been pivotal to the division's new wins and scope expansions with existing customers, as they adapt to new, hybrid ways of working. There are more than 18,000 sensors remotely monitoring occupancy and utilisation across several new accounts, including the BBC. The Aria workplace app has been adopted by 40 customers to date, with over 14,000 registered users reporting and tracking workflow across their estates.

Reactive tasks are increasingly being logged in Chatbot ESME. In addition, assets such as heating, ventilation and cooling systems are managed remotely through Mitie's Technical Services Operations Centre (TSOC) in Manchester, delivering both operational efficiencies as well as energy savings for customers (16% energy reduction, on average, through digital maintenance).

After an initial period of stabilisation for Forté, service level performance is now at 'pre-Forté' levels and is improving daily. The delay in getting the system to full capacity held back the cumulative benefit from Forté savings to £9m in FY23. The full planned savings run rate of £15m is expected to be achieved in FY24, as previously communicated. The division also implemented a number of overhead cost savings and operational excellence margin enhancement initiatives during the year, as part of the wider Group programme.

The acquisitions of P2ML (April 2022) and 8point8 (May 2022) were combined with DAEL Telecoms (acquired in August 2021) to create Mitie Telecoms, one of the UK's largest telecoms infrastructure businesses.  Mitie Telecoms' services include both infrastructure projects and network coverage for special events, such as music festivals and the funeral of HM Queen Elizabeth II in September 2022. During the year, Mitie Telecoms partnered with Cellnex, Digital Mobile Spectrum Limited and H3G, and extended its relationships with Vodafone and VMO2, so is now working with all the mobile network operators. The business contributed £76m of revenue in FY23 (FY22: £31m) and is well-positioned to benefit from the ongoing roll-out of 5G across the UK and the decommissioning of Huawei assets.

Technical Services is also capitalising on increased demand for decarbonisation services, including solar power, LED roll-outs, air source heat pump installation and electric vehicle charging projects. The decarbonisation business has grown from £88m of revenue in FY22 to £145m in FY23, driven by the acquisitions of Custom Solar (June 2022) and Rock Power Connections (November 2021).

Central Government & Defence (CG&D)

The CG&D division provides facilities management services across central government and defence contracts. CG&D operates across 21 contracts and 28 government departments and agencies, at over 3,000 locations across the UK and overseas. 

Performance highlights

· Revenue increased by 24% to £828m (FY22: £669m), benefiting from strong growth in projects and variable work, contract re-pricing, scope increases and a full year of the Future Defence Infrastructure Services (FDIS) contract

· Operating profit before other items increased by 56% to £60m (FY22: £38m), and the operating margin increased by 1.5ppt to 7.2%

· New wins of £0.3bn TCV, including for the Ministry of Defence (MOD) overseas military base in Gibraltar and United States Visiting Forces

· Significant renewals or extensions of £1.4bn TCV (100% retention rate), including for the MOD's overseas military bases in Cyprus and the South Atlantic Islands and the Landmarc 'Training Estate', the Department for Transport (DfT) and the Department for Work and Pensions (DWP)

· Projects included decarbonisation work across MOD/FDIS sites and 'back to work' initiatives for the DWP

· Awards include: MOD Heritage Award for refurbishment of Gibraltar Tower, recognising the work of Mitie and the Defence Infrastructure Organisation (DIO); Gold recognition by the RoSPA for the Ascension Island team

Operational performance

CG&D had a strong year, driven by growth in higher-margin projects work across the division (including for the MOD, FDIS, DIO and through Landmarc for the UK Defence Training Estate), contract re-pricing, scope increases and a full year of the FDIS contract, which started to mobilise in December 2021. As a result, divisional revenue increased by 24% to £828m.

Operating profit before other items increased by 56% to £60m and the operating margin improved by 1.5ppt to 7.2%, reflecting margin enhancement initiatives and revenue related to services disrupted by the pandemic.

In total, CG&D secured £1.7bn of new contract wins, renewals and extensions in FY23. The division was awarded and mobilised new contracts for the MOD's overseas military base in Gibraltar, and to support United States Visiting Forces. CG&D has also been retained as strategic partner to the MOD for its overseas military bases in Cyprus and the South Atlantic Islands, and through Landmarc for the UK Defence Training Estate contract. Other significant contract extensions included those for the DfT and DWP.

Projects and scope increases included work for the DWP where CG&D has continued to implement 'back to work' wellbeing initiatives, and decarbonisation work to assist the UK Government to achieve its 2050 Net Zero target. The latter includes the refurbishment of the accommodation blocks across the MOD and FDIS estates to incorporate low-carbon features, such as building energy monitoring systems, heat pumps, solar power, thermal insulation and other smart features to reduce energy consumption and automate processes.

CG&D played an important role in the delivery of support for the funeral of HM Queen Elizabeth II in September 2022 across Whitehall and Westminster, including the provision of extensive extra security and providing the facilities management for rehearsals (across several defence training sites) and for the ceremony.

Mitie's technology is a key differentiator, and the division has continued to focus on the deployment of the secure asset management system across the defence contracts with benefits such as MyJobs, the fully mobile workflow application, 3D building scanning capability and construction management software, Asite, which has Building Information Modelling (BIM) capability.

The 'Mitie First' strategy, which is focused on insourcing services formerly provided by third parties, resulted in an additional £20m of cross-selling revenue synergies in FY23.

CG&D implemented operational excellence initiatives during the year across eight of its largest contracts. These initiatives are focused on improving the work order scheduling process, which has led to improved utilisation of mobile engineers and an increase in the proportion of work being self-delivered. In addition, the implementation of the Workplace+ workforce management app has enabled more effective scheduling of shift work.

Communities  

The Communities division delivers sustainable outcomes as a trusted partner to the public sector, across Healthcare, Education and Campus & Critical Services. The division operates over 100 PFI and traditional commercial contracts.

Performance highlights

· Revenue increased by 7% to £490m (FY22: £460m), benefiting from contract re-pricing and increased lifecycle and projects work across Healthcare and Education 

· Operating profit before other items increased by 7% to £21m (FY22: £20m)

· Communities secured a place on two significant procurement frameworks: London Procurement Partnership (a four-year NHS framework) and Everything FM (an education framework), which are valued at up to £5.8bn and £300m respectively

· Good pipeline progression in the Local Government and Healthcare markets and successful mobilisation of the contract with Kingston Council

Operational performance

The Communities division delivered an encouraging performance during the year, with revenue and operating profit both 7% ahead of the prior year and the operating margin maintained at 4.3%. The division secured £0.2bn TCV of contract wins and extensions including a new contract with Kingston Council and contract extensions with Poole Hospital and West Herts Hospital.

Projects work included the installation of LED lighting in one of the major London hospitals, and the delivery of improvement programmes over the summer holiday period across six large schools.  The 10% reduction in Campus & Critical revenue reflected two contract losses, of which one was insourced, and the other Mitie declined to re-bid.

The Computer Aided Facility Management (CAFM) upgrade programme across Healthcare was successfully completed by the year end, having been rolled out across 24 sites. This included the introduction of a new payment mechanism model at one hospital trust. Technical operational performance has strengthened materially as a result, with maintenance completion above 96%. In healthcare environments, Mitie's Merlin for Cleaning application has been piloted to improve soft services productivity and innovation.  Several other operational excellence margin enhancement initiatives were implemented during FY23, including helpdesk upgrades in Education, and the roll-out of the Coupa digital supplier platform.

The division is also continuing to make progress in turning around the handful of under-performing contracts which were acquired with Interserve. Six of the contracts showed improved performance during the year, with two contracts now contributing to Group profitability. One contract remains particularly challenging and only showed a marginal improvement in performance (£8.4m loss in FY23 compared with £8.7m in the prior year). The majority of the remaining under-performing contracts will be at, or close to, break even by the end of FY24, with the final contract expected to achieve profitability in FY26, after productivity improvements and re-sets to pricing.

Specialist Services

The Specialist Services division encompasses Care & Custody, Landscapes, Spain and Waste. From FY24, Landscapes, Spain and Waste will be moved into the Business Services division and Care & Custody will be moved into the Communities division. 

Performance highlights

· Revenue increased by 10% to £411m (FY22: £373m) and operating profit before other items increased by 7% to £35m (FY22: £33m)

· Care & Custody revenue increased by 24% to £169m, driven by contract wins, extensions and renewals, alongside additional project work in escorting services

· Landscapes revenue increased by 20% to £66m, largely reflecting a full year of revenue from the FDIS contract and the acquisition of Biotecture, the living walls specialist (acquired in January 2022)

· Spain revenue reduced by 3% to £102m, mainly as a result of the significant reduction in Covid work at airports

· Waste revenue reduced by 4% to £74m due largely to the closure of NHS Covid Test & Trace sites

· Awards include: Seven Green Apple awards (Waste), Three Green Apple awards (Landscapes), BALI National Landscape Award 2022 (Landscapes)

Operational performance

Care & Custody revenue was 24% ahead of the prior year, mainly due to a full year of revenue from the Dungavel and Derwentside Immigration Removal Centre contracts, alongside additional escorting services project work, primarily at Manston. Within Police Services, contracts with Cleveland, Greater Manchester and Nottinghamshire Police were renewed during the year, while extensions were secured for Cheshire, Northumbria, South Wales and West Mercia Police. New contracts were awarded for Lincolnshire, Derbyshire and South West Police consortium. Mitie is a leading provider of forensic health and custodial support services for the UK's police forces.

Landscapes revenue was 20% ahead of the prior year, primarily driven by a full year of revenue from FDIS and Biotecture. In FY23, Landscapes won £35m TCV of new and additional work, including contracts with Busy Bee, Kew Green Hotels, Lidl, NATS and Savills. Renewals and scope changes in the year totalled £6m TCV and included BNP Paribas, Deloitte, E.ON, The Church of Jesus Christ of Latter-day Saints, NHS Property Services, Vodafone and Morrisons.

Biotecture performed well during the year and won the BALI National Landscape Award 2022 for the exterior living wall installation at Canary Wharf, which includes over 25,000 plants in 750m2 of walls around the site, as well as three Green Apple awards, including one for its sustainability credentials for work on the Landscapes office in Hampshire.

Spain revenue reduced by 3%, due to new contract wins being offset by a reduction in short-term Covid work at numerous airports. New contract wins included those with EMT Madrid (public bus transport), Ajuntament de Cornellà de Llobregat (municipal governing body) and EYSA (mobility services).

Waste revenue reduced by 4% largely due to the closure of NHS Covid Test & Trace sites. This reduction in revenue was partially offset by the recovery of contracts impacted by previous lockdowns, and new contract wins, including with Hammerson and Covent Garden Market Authority. Waste has also been successful in extending its contract with a major global FMCG manufacturer for a further two years, and securing retenders with Hull and East Yorks Hospitals, JLL and Manchester Airport Group.

Corporate overheads

Corporate overheads represent the costs of running the Group, and include costs for central functions such as commercial and business development, finance, marketing, legal and HR. Corporate overhead costs have reduced significantly, by 10% to £55.5m in FY23 (FY22: £61.4m), mainly as a result of cost-efficiencies delivered from the margin enhancement initiatives.

Finance review

Alternative Performance Measures

The Group presents its results as those of continuing operations, before other items. Management believes this is useful for users of the financial statements, providing both a balanced view of the financial statements, and relevant information on the Group's financial performance. Accordingly, the Group separately reports impairment of goodwill, cost of restructuring programmes, acquisition and disposal related costs (including the impairment and amortisation of acquisition related intangible assets), gains or losses on business disposals and other exceptional items as 'other items'.

Financial performance

The reported Income Statement from continuing operations is set out below:

Revenue

Revenue from continuing operations for FY23 of £4,055.1m, including share of revenue from joint ventures and associates, has increased by £58m compared with the prior year.

Excluding revenue from short term, Covid-related contracts of £15m (FY22: £448m), revenue from continuing operations has grown by £491m (+14%) in FY23. This growth has been driven by new contract wins (including the large FDIS contract in CG&D, and the BAE Systems contract in Technical Services and Business Services), growth in projects work (in particular in CG&D), revenue from recent acquisitions (DAEL, P2ML, 8point8, Rock, Custom Solar, Biotecture and Esoteric), and the impact of inflationary price increases. The impact of inflation on revenue was approximately £163m in FY23.

Operating profit

Operating profit from continuing operations before other items was £162.1m (FY22: £166.9m), a reduction of £4.8m, which arose primarily as a result of the reduction in contribution from the short term, Covid-related contracts.

Excluding the contribution from Covid work of £7m (FY22: £60m), operating profit before other items increased by £48m (+44%) in FY23, largely driven by margin enhancement initiative savings of £41m, projects work and contract wins and extensions.

All divisions contributed positively to this 44% profit improvement. CG&D made the greatest contribution (£21.4m) as a result of new wins, pricing and increased projects work, with other notable increases in: Business Services (£12.6m) from wins, projects work and margin enhancement initiatives; Technical Services (£4.6m) from the post-Covid recovery in variable works; and Corporate Centre (£4.1m) as a result of the ongoing delivery of margin enhancement initiatives.

Inflation had a negative impact on operating profit of approximately £7m in FY23, representing a 96% recovery of the £170m of cost inflation experienced in the year. This recovery is better than expected due to the strong contractual protections in place, and good customer relationships. There were also net reductions in operating profit in the year from Project Forté (£1.9m), which is now complete, and from the Winter Support package (£7.9m).

After accounting for £45.1m of net charges in other items (FY22: £94.8m), operating profit from continuing operations was £117.0m (FY22: £72.1m), a year on year improvement of 62%.

Other items

Other items have reduced significantly in FY23, largely due to the conclusion of the Interserve integration and completion accounts process. This reduction has been partially offset by costs associated with the Group's margin enhancement initiatives.

Project Forté was completed in FY23, and therefore no further other items costs will be incurred. The Target Operating Model programme is the next phase of the Group's transformation, and includes the further outsourcing of back office functions, consolidating systems and processes, and optimising the organisation structure. This programme has contributed £6m to cost savings in FY23 and, combined with further investment, is expected to drive £20m of additional savings in FY24.

The £3.7m Interserve acquisition related income for FY23 relates to the release of provisions established on the opening balance sheet for contract specific matters, which are no longer required because the matters have since been resolved.

Net finance costs

Net finance costs from continuing operations improved (decreased) by 42% to £11.5m (FY22: £19.8m). The decrease was driven by the benefit of the improved terms negotiated as part of the refinancing of the Revolving Credit Facility (RCF) (signed in October 2021), and US Private Placement (USPP) notes (from December 2022 onwards), together with amendment fees from the June 2020 refinancing (during Covid) becoming fully amortised and the termination of the Group's customer invoice discounting facility. Finance income also improved due to increased interest rates on deposited funds. 

Tax

The tax charge for the year for continuing operations was £14.4m (FY22: £21.0m), comprising a tax charge on operating profit before other items of £22.6m (FY22: £19.0m) and a tax credit for other items of £8.2m (FY22: tax charge of £2.0m). The tax charge on continuing operations represents an effective tax rate of 13.6% (FY22: 40.2%), which includes an effective tax rate before other items of 15.0% (FY22: 12.9%). 

The effective tax rate before other items for FY23 includes the benefit of a tax credit of £5.3m which primarily results from the recognition, in accordance with the Group's accounting policy, of deferred tax assets related to losses acquired with the Interserve business. Excluding the impact of this tax credit, the effective tax rate before other items would be 18.5%. 

The lower effective tax rate before other items for FY22 reflected the increase in the rate of UK corporation tax from 19% to 25%, with effect from 1 April 2023, which was substantively enacted during FY22.  This resulted in a £9.0m tax credit for FY22 related to the revaluation of deferred tax assets, which reduced the effective tax rate before other items by c.6ppt.

The tax credit for other items for FY23 of £8.2m represents an effective tax rate of 18.2%, which is slightly lower than the standard tax rate due to the non-tax deductible nature of certain other items charges. The equivalent charge for FY22 of £2.0m comprised a tax credit of £6.1m related to other items before tax, and a tax charge of £8.1m in respect of the revaluation of deferred tax liabilities related to acquired intangible assets, resulting from the UK corporation tax rate change enacted in FY22.

Mitie is a significant contributor of revenues to the UK Exchequer, paying £850.1m of taxes in the year (FY22: £864.3m). Of this total, £158.5m (FY22: £148.0m) relates to taxes borne by Mitie (principally UK corporation tax and employer's National Insurance contributions) and £691.6m (FY22: £716.3m) relates to taxes collected by Mitie on behalf of the UK Exchequer (principally VAT, income tax under PAYE and employees' National Insurance contributions).

The Group paid corporation tax of £19.8m in the year (FY22: £16.2m), of which £14.0m (FY22: £14.1m) was paid in the UK and £5.8m (FY22: £2.1m) overseas.

Joint ventures and associates

Operating profit for FY23 includes Mitie's share of the results of joint ventures and associates that were acquired as part of the Interserve transaction, net of tax, of £8.3m (FY22: £4.2m).

Earnings per share

Basic earnings per share before other items from continuing operations increased to 9.5p (FY22: 9.2p). This is as a result of the lower net finance costs and reduced number of shares in issue following the share buyback programme, partially offset by the higher effective tax rate.

Basic earnings per share from continuing operations was 6.8p (FY22: 2.2p), with the significant improvement in FY23 reflecting the factors outlined above, and the lower level of other items in FY23.

Return on invested capital (ROIC)

1 Tax charge has been calculated at the effective tax rate for the year on pre-tax profits before other items for continuing operations of 15.0% (FY22: 12.9%)

ROIC (before other items, on continuing operations) has decreased to 25.4% in FY23 (FY22: 29.9%), due to a combination of the completion of the short term, higher margin Covid work, the higher effective tax rate and increased invested capital. The higher invested capital relates to the investment in businesses acquired in FY23, and the closure of the invoice discounting facility.

Balance sheet

The Group's reported net assets of £421.7m at 31 March 2023 were broadly unchanged compared with 31 March 2022.

Net debt increased to £44.1m (FY22: £26.7m of net cash), as a result of the planned capital allocation actions and working capital movements, including the impact of the decision to terminate the invoice discounting facility which increased receivables by £45m, both of which are discussed further below (under Cash flow and net debt).

Goodwill and intangible assets increased by £4.7m as a result of acquisitions during the year and investments in software, with the increase partially offset by the amortisation of intangible assets. Property, plant and equipment increased by £13.0m due to the continued expansion of the fleet of leased electric vehicles, as part of the programme to achieve the Group's decarbonisation goals. Net retirement benefit liabilities benefited from the increase in discount rates related to movements in corporate bond yields, which is explained further below. 

The net deferred tax asset balance has increased, primarily due to the recognition of deferred tax assets related to losses acquired with the Interserve business. Other net assets have reduced as a result of the receipt of £6.0m in May 2022 in respect of the expert's determination on the Interserve acquisition completion accounts, and by £31.1m as a result of movements of restricted cash, and the remittance of cash held on trust for the invoice discounting facility provider.

Change in accounting policy

During FY23, Mitie has adopted the amendment to IAS 37 Onerous Contracts - Cost of Fulfilling a Contract on 1 April 2022. The amendment clarifies that for the purposes of an onerous contract assessment, costs to fulfil a contract comprise both direct costs that are specific to the contract but also an allocation of shared direct costs that relate to fulfilling the contract. This has resulted in a change in accounting policy for onerous contract assessments in FY23, as the Group had previously (in common with many other companies) included only direct costs that were specific to the contract when determining whether a contract was onerous. The change in accounting policy brings the Group policy in line with the amendment to IAS 37.

As a result of the revised accounting policy, certain direct supervision and management costs have been included in determining the costs of fulfilling a contract, which has resulted in the recognition of additional provisions of £1.1m for onerous costs that existed at the start of the reporting period (see Note 13 to the condensed consolidated financial statements). Under the amendment to IAS 37, the changes apply prospectively and therefore the Group has not restated comparative information.

Provisions

Provisions at 31 March 2023 of £111.4m (FY22: £117.0m) largely comprise contract specific costs of £49.3m (FY22: £56.3m), the insurance reserve of £26.2m (FY22: £26.0m), and pension provisions of £21.7m (FY22: £23.7m), which mainly relate to Section 75 pension liabilities. See Note 13 to the condensed consolidated financial statements for further details on provisions.

Provisions have reduced by £5.6m in the year, largely reflecting the utilisation of contract specific provisions.

Retirement benefit schemes

Net retirement benefit liabilities have reduced to £0.2m at 31 March 2023 (FY22: £12.2m), principally due to an increase in discount rates related to movements in corporate bond yields, combined with Mitie's contributions. This is partially offset by an adverse performance of plan assets, driven by the downturn in financial markets.

The net liabilities at 31 March 2023 include a net accounting surplus of £2.4m (FY22: £1.6m) for the main Group scheme, which now includes a separate section for the main scheme acquired with the Interserve business. There is also an accounting surplus related to a joint venture acquired with Interserve, Mitie's £1.5m (FY22: £3.8m) share of which is reported within interest in joint ventures and associates on the balance sheet.

The latest funding valuation of the Mitie Group defined benefit scheme, as at 31 March 2020, indicated an actuarial deficit of £92.1m. The Group has agreed a deficit recovery plan with the trustees totalling £93m over seven years, of which £35m had been paid to 31 March 2023, including £14m paid during FY23. An initial funding valuation as at 31 December 2020 for the main scheme acquired with Interserve indicated an actuarial deficit of £1.6m.

The next triennial valuation for the main Mitie scheme will take place during FY24.

Cash flow and net debt

1 Adjusted to exclude movements in restricted cash and other adjustments which do not form part of net debt (as explained in the Alternative Performance Measures Appendix to the condensed consolidated financial statements)

2 Includes £3.6m of debt acquired with acquisitions (FY22: £nil)

3 Leverage is calculated on a 12-month rolling basis, and uses post-IFRS 16 net debt

The Group generated a free cash inflow of £65.7m for FY23, which was a decrease of £80.9m compared with FY22. Within this cash inflow there was a cash outflow from working capital of £38.8m, which was largely a result of the decision to terminate the invoice discounting facility, investments required to support the growth of the projects businesses, and the completion of the Covid contracts, which were on more favourable payment terms than the contracts that have replaced them.

Other movements of £27.7m included a cash outflow from other items of £23.7m, which is predominantly made up of the costs of completing Project Forté, and the costs to achieve our margin enhancement initiatives. Capex and the capital element of lease payments of £59.6m were £9.5m lower than FY22, driven by capex which reduced following the completion of the Interserve integration and Forté projects in FY23. Net interest payments reduced by £5.3m as a result of the refinancing actions implemented in FY22 and FY23, whereas tax payments increased by £3.6m largely due to overseas tax payments related to the Interserve pre-acquisition period. 

The planned £50m share buyback programme was successfully completed in FY23, resulting in the purchase and cancellation of 69m shares during the year. A new £50m share buyback programme was announced on 18 April 2023, and an initial £25m tranche has already been launched, from which 15m of the shares purchased will be held in treasury and used towards the vesting of the 2020 SAYE share options. The remainder will be cancelled.

In addition, £38m has been invested in the acquisition of 50m of Mitie's own shares for the Employee Benefit Trust (EBT), to fulfil future vesting of all employee share incentives schemes, including 4m shares for the Winter Support package. The decision to purchase shares for all employee incentive schemes was made by the Board in order to eliminate the otherwise dilutive effect to shareholders of issuing new shares to fulfil the schemes. The 50m shares purchased included a 'catch up' for schemes that have already been running for two or three years. We expect share purchases through the EBT to reduce significantly to c.15m shares in FY24 and FY25, as specific incentives put in place in respect of the Interserve acquisition mature.

The acquisitions of P2ML, 8point8 and Custom Solar in FY23 resulted in an increase in net debt of £20.2m, comprising the proceeds paid (of £18.6m) adjusted for the cash and debt acquired with these businesses (of £1.6m net debt).

The final FY22 dividend of £19.5m and interim FY23 dividend of £9.4m resulted in a cash outflow of £28.9m in FY23. The £5.7m of dividends paid in FY22 is much lower than in FY23, as it included only the FY22 interim dividend, and no final dividend payment from FY21, because dividend payments were only resumed in FY22 following the Covid pandemic.

Lease liabilities and other cash flows reduced by £19.7m during the year, with the key drivers being the receipt of £6.0m in May 2022 in respect of the expert's determination on the Interserve acquisition completion accounts, and an £8.2m reduction in the value of new leases entered into during the year, compared with FY22 which included a number of significant new and renewed property leases.

Net debt

Average daily net debt of £84.3m for FY23 was £60m higher than in FY22, due mainly to the planned capital allocation activities, including the share buyback programme (£50m), the termination of the Group's invoice discounting facility (£45m), share purchases for the EBT (£38m), dividends paid (£29m) and in-year acquisitions (£20m). This resulted in a leverage ratio (average daily net debt post IFRS 16 / EBITDA before other items on continuing operations) of 0.4x for FY23 (FY22: 0.1x).

The Group reported closing net debt of £44.1m as at 31 March 2023 (FY22: net cash of £26.7m), again reflecting the planned capital allocation activities outlined above.

Total Financial Obligations (TFO)

TFO at 31 March 2023 increased due to the net debt movements outlined above (other than the termination of the invoice discounting facility, which has a nil net effect on TFO), partially offset by a reduction in net retirement benefit liabilities.

Liquidity and covenants

As at 31 March 2023, the Group had £300.0m of committed funding arrangements. These comprised a £150.0m RCF, for which a one year extension was signed in September 2022, extending the maturity date to October 2026, and £150.0m of USPP notes. In December 2022, £121.5m of USPP notes matured and were replaced by £120.0m of new notes, issued on more favourable terms, with 8-12 year maturities. The remaining £30.0m of USPP notes are due to mature in December 2024.

On 29 July 2022, DBRS Morningstar confirmed Mitie's credit rating of BBB with a 'stable' outlook.

Mitie's two key covenant ratios are leverage (ratio of consolidated total net borrowings to adjusted consolidated EBITDA) and interest cover (ratio of consolidated EBITDA to consolidated net finance costs), with a maximum of 3.0x and minimum of 4.0x respectively.  Covenant ratios are measured on a post-IFRS 16 basis with appropriate adjustments for leases, being primarily the exclusion of lease liabilities.

As at 31 March 2023, the Group was operating well within these ratios at

1 Continuing and discontinued operations

2 Covenant adjustments to EBITDA relate to share-based payments charges, and pension administration expenses and past service costs

3 Leases adjustment for EBITDA relates to depreciation charge for leased assets and interest charge for lease liabilities

4 Leases adjustment for net finance costs relates to interest charge for lease liabilities

5 Leases adjustment for net cash relates to lease liabilities

Condensed consolidated income statement

For the year ended 31 March 2023

Notes:

1. Other items are as described in Note 4.

2. Including net impairment losses on trade receivables and accrued income of £2.8m (2022: £0.8m).

Condensed consolidated statement of comprehensive income

For the year ended 31 March 2023

Note:

1. Net losses on cash flow hedges taken to equity include fair value gains of £9.6m (2022: £5.1m) on derivative financial instruments used for hedging private placement notes. These gains are reclassified to profit or loss and netted against foreign exchange losses on private placement notes of £9.9m (2022: £5.6m).

Condensed consolidated balance sheet

As at 31 March 2023

Note:

1. Trade and other receivables of £17.3m have been reclassified from current assets to non-current assets as at 31 March 2022. See Note 1.

Condensed consolidated balance sheet continued

As at 31 March 2023

Note:

1. Other reserves include the share-based payments reserve and the capital redemption reserve.

Condensed consolidated statement of changes in equity

For the year ended 31 March 2023

Notes:

1. Other reserves include the share-based payments reserve and the capital redemption reserve.

2. Retained losses as at 1 April 2022 have been adjusted for the change in accounting policy for onerous contract assessments as a result of the amendment to IAS 37 Onerous Contracts - Cost of Fulfilling a Contract. Refer to Note 1.

3. The merger reserve represents amounts relating to premiums arising on shares issued subject to the provisions of Section 612 of the Companies Act 2006. During the year ended 31 March 2023, the realisation of the merger reserve included £170.3m related to intercompany loans that have been settled as qualifying consideration in connection with the rights issue during the year ended 31 March 2021, which utilised a cashbox structure.

4. The share buyback resulted in the purchase of 68.8m ordinary shares which have subsequently been cancelled during the year ended 31 March 2023.

5. Includes £0.9m and £0.7m in respect of new shares and treasury shares respectively, which were issued on exercise of Save As You Earn share options.

Condensed consolidated statement of cash flows

For the year ended 31 March 2023

Note:

1. Acquisition of businesses is net of cash acquired of £2.0m (2022: £4.8m). Refer to Note 18.

Condensed consolidated statement of cash flows continued

For the year ended 31 March 2023