Full Year results for the twelve months to 31 March 2021

"A defining year of strategic progress and financial resilience"

·   Good trading resilience through COVID-19: revenue including share of joint ventures and associates of £2,589m¹, up 19.1%; excluding the contribution from Interserve, revenue was 1.6% lower

·   Group revenue¹ of £2,560m (FY20 £2,174m)

·   Operating profit before other items⁴ of £63.4m (FY20 £86.1m) - impacted by revenue mix and reduced project work due to COVID-19

·   Stronger second half with revenue growth of 6.5% versus previous year

·   Interserve Facilities Management ("Interserve") acquisition performing better than expected, accelerating value creation. £6.2m cost and revenue synergies achieved in FY21. Cost synergies raised to £42m (from £35m) achieved by FY23 - at same cost

·   Market leadership in our three core markets: Cleaning, Security and Technical Services

·   Strengthened balance sheet: £190m rights issue; £250m RCF refinanced; and BBB Investment Grade credit rating achieved

·   Average daily net debt significantly reduced to £47.1m (FY20 £327.6m) post-IFRS 16

·   Outlook for FY22 anticipated to be materially ahead of our prior expectations

Results for the twelve months ended 31 March 2021

Notes:

1.         From continuing operations.

2.         Other items are as described in Note 4 to the condensed consolidated financial statements.

3.         Group revenue from continuing operations adjusted to exclude revenue from Interserve Facilities Management.

4.         Operating profit from continuing operations includes share of profit after tax from joint ventures and associates.

5.         Earnings per share from continuing operations for FY20 have been restated for the bonus element of the rights issue.

6.         Interim dividend for FY20 was 1.33p; the subsequent 11 for 5 rights issue adjusts the dividend to 0.69p. 

7.         FY20 closing net debt has been restated for a change in accounting policy see Note 1 to the condensed consolidated financial statements.

Commenting on FY21 results, Phil Bentley, Group Chief Executive, said:

"FY21 was a defining year for Mitie and completes our four year transformation.  The Group showed great resilience during the COVID pandemic; we strengthened our balance sheet; and the Interserve acquisition is performing well.  Mitie is now the market leading provider of intelligent technology-led facilities management, with a clear pathway to deliver growth and sustainable free cash flow.

"I am so proud of our 65,000 front-line heroes who have gone to work every day throughout the pandemic, delivering exceptional customer service and keeping Britain's vital infrastructure - hospitals, schools, supermarkets, manufacturing plants and some of Britain's most strategic assets - clean, safe and properly maintained.  An unprecedented 30,000 of our colleagues recently completed our annual employee engagement survey which saw an impressive 9ppt improvement.

"Although COVID has challenged us all, our business has been far more resilient than we originally expected, with revenue, excluding the contribution from Interserve, just 1.6% lower than the prior year.  The second half of the year was significantly better than the first half, with 6.5% year on year growth, as variable projects and discretionary spend works picked up and cleaning and security demand increased. 

"Interserve is performing strongly as part of Mitie and we have successfully renewed or extended all major Interserve contracts that were due for renewal. We have also realised £6.2m of synergies in FY21 and have identified additional cost synergies to take our forecast run rate from £35m to £42m by end FY23. 

"Mitie has been transformed over the last four years.  Our focus on delivering great service, backed by our technology offering, has resulted in our highest ever customer net promoter score of +50 ppts and all-time high contract renewal rates of 96%, complemented by significant new customer wins. 

"As businesses slowly start to reopen and our customers' employees return to offices, we are starting to see some green shoots of recovery in the variable project and discretionary spend works and we anticipate this continuing as re-occupation plans solidify.   With some high-quality new contract wins, short-term support to the public sector and additional synergies from the integration of Interserve, we now anticipate FY22 will be materially ahead of our prior expectations.

"The transformation of Mitie and the acquisition of Interserve has created a strong base from which Mitie is well positioned to prosper.  Our new strategy will focus on increasing growth, margin enhancement and cash generation.  The new Mitie will target, over the medium term, mid single digit revenue growth, margins of 4.5-5.5%, sustainable free cash flow and ROIC in excess of 20%."

-      END -

The Chief Executive's Review, Operating Review and Finance Review follow from page 4.

Analyst Presentation and Q&A

Phil Bentley (CEO) and Simon Kirkpatrick (CFO) will host a presentation and Q&A session today (10 June 2021) at 9.30am via Zoom.  For dial in details please contact Fiona.lawrenceIR@mitie.com.  A copy of the presentation will be available on the Company website in advance of the live presentation.  www.mitie.com/investors.

For further information please contact:

Fiona Lawrence

Group IR Director

M: +447384439112 (D)

Fiona.lawrenceIR@mitie.com

Claire Lovegrove

Head of Media Relations

T: +44 (0)203 123 8716

M: +44 (0)790 027 6400

claire.lovegrove@mitie.com

About Mitie

Founded in 1987, Mitie's job is to look after the places where Britain works and is the leading facilities management company in the UK.

We offer a range of services in the Public Sector to Central Government and Defence customers; and to Communities (Healthcare, Education and Local Authorities) customers; and Technical Services (Engineering Services, Energy, Water and Real Estate Services) and Business Services (Security, Cleaning and Office Services) to Private Sector clients in Financial Services, Manufacturing, Transport, Retail and Telecoms and increasingly to the public sector.  Finally, our Specialist Services (Care & Custody, Landscapes and Waste Management) division serves both the public and private sector in higher margin niche businesses.

Mitie acquired Interserve's Facilities Management business on 30 November 2020 and now employs 75,000 people.  We are the champion of the 'Front-Line Heroes' who have kept Britain working during the COVID-19 pandemic. We take care of our customers' people and buildings, through the 'Science of Service', delivering essential services and deploying industry leading technology to create safe and effective workspaces.

The business continues to execute its technology-led strategy has received multiple awards for the progress it has made.

Find out more at www.mitie.com.

The business continues to execute its technology-led investment strategy and has received multiple awards for the progress it has made:

Corporate

·      Armed Forces Covenant signatory

·      Best Website, UK Digital Experience Awards

·      Bronze Award, Fleet Operator Recognition Scheme

·      CIPS Procurement Excellence Award

·      Gold Award, Defence Employer Recognition Scheme

·      Inhouse Legal Team of the Year, LexisNexis Legal Awards

·      Institute of Internal Communications National Awards for Best News Magazine and Best Video Animation

·      IWFM COVID-19 Response Award: Keeping Good Work Going

·      Best Corporate Magazine, Corporate and Financial Awards

Technology

·      UK IT Industry award for the Artificial Intelligence/ Machine Learning project of the year with Esme Chatbot

·      Computing Digital Technology Leaders Award for Big Data / IoT Project of the Year

·      Data Into Insight and Artificial Intelligence & Machine Learning Project of the Year, Real IT Awards

·      Mitie Fire & Security Systems - Outstanding Security Installer/Integrator

·      Merlin Protect 24/7 - Mitie Security - Outstanding New Security Product

·      Mitie Security - Outstanding Contract Security Company

·      National British Security Awards: Best use of Technology

·      Verdantix Smart Building Innovation Award for Facilities Management Services

·      Lockdown Hero of the Year - Mitie Security, Security and Fire Excellence Awards

·      Outstanding Security Team - Mitie Security, Outstanding Security Performance Awards

ESG

Chief Executive's strategic review

Mitie's strategic transformation

Mitie has been transformed over the last four years.  Our focus on delivering great service, delivered cost-efficiently by great people, and backed by our technology, has resulted in our highest ever customer Net Promoter Score (NPS) of +50 ppts and all-time high contract renewal rates of 96%, complemented by significant new customer wins. 

Mitie's strategy has been based around the four pillars of Customer, People, Technology and Balance Sheet/Cost.  We are focused on becoming the market leader in the three core facilities management services of Cleaning, Security and Technical Services and achieving a best-in-class customer NPS.  The acquisition of Interserve Facilities Management ("Interserve") on 30 November 2020 has bolstered Mitie's Public Sector standing, gaining leadership positions across Central Government and Defence, Healthcare and critical infrastructure. 

Customer

Reflecting our focus on putting our customers at the heart of our business, Mitie's NPS has increased to +50ppts from -27ppts four years ago.  This is largely due to the introduction of award-winning marketing campaigns and Strategic Account Managers (SAMs) empowered to deliver exceptional customer service, backed by leading technology.  The creation of SAM accounts has also supported an increase in cross-selling and upselling, benefiting revenue growth. 

People

Four years ago Mitie set out to create a 'Great place to work' and to be the 'Employer of choice' in the facilities management industry.  Significant progress has been made on both counts with our Employee Engagement score increasing from 33% to 55% and employee retention rates significantly improving.  We have continued to invest in our colleagues, whether it be through an additional day's holiday for our front-line, an enhanced benefits package including salary finance, life assurance, a Virtual GP service, or learning and development to help colleagues build on their skills.  Uniquely all Mitie colleagues have been granted free shares and will therefore share in the value they are helping to create. All Mitie benefits were put in place for Interserve colleagues from 1 December 2020.

Technology

A third strategic imperative was to embed technology to differentiate Mitie's offering across all service lines.  The Group now has an advanced cyber-resilient, cloud-based IT platform to run the business, largely automating our systems supporting workforce management (Workplace+); workflow management systems (Forté); our HR/payroll processes (SAP Success Factors); and our back-office finance and procurement processes. COVID has highlighted the strength of Mitie's technology.  Digital Workplace and Monitoring have allowed customers to manage their building capacity, utilise cleaning more efficiently and keep buildings secure during periods of closure or semi-occupation.  There are now 34 customers automatically served by 'chatbots' and 94 customers receiving real time management information (MI).  Mitie leads the industry in cyber resiliency.  Straight-through processing in HR and Finance have advanced considerably. The roll out of Mitie technology to Interserve customers is a priority, with 26 customers expected to move onto our chatbot or MI platforms, with half due to be delivered between now and September.  This is a key driver to improve Interserve customers' NPS.

Balance Sheet/Cost

The fourth element of our strategy was to strengthen our balance sheet and reduce costs.  Our balance sheet today is significantly stronger with net assets of £362m at 31 March 2021, compared to £81m at the prior year end, with sustainable leverage of less than 1x our EBITDA and a significant reduction in off balance sheet financing.  £45m total savings were achieved from Project Helix (IT/Finance/HR/Management) and reinvested for long-term growth in SAMs, sales and marketing, modernising IT and investment in technology. Project Forté is expected to deliver net savings of £15-20m as it seeks to drive efficiency and productivity across Technical Services.  The experience gained from rolling out WorkPlace Plus and Forté, as well as from the integration of VSG in 2019, will help to deliver a successful integration of Interserve.

COVID-19 ("COVID")

Mitie has provided critical and essential support to customers and to the wider British public during the pandemic through its delivery of additional security and specialist cleaning services, mobilising three Nightingale Hospitals and standing up over 200 COVID testing centres.  Mitie has played an important role keeping Britain working during the pandemic, although profitability has been impacted from the reduced demand for core facilities management, and the drop off in variable project and discretionary work.  Customers have also delayed procurement decisions and offered short-term extensions for contracts which would normally have renewed for a longer period, thus resulting in a slightly reduced order book.

Mitie established three overriding priorities in response to the COVID crisis: protecting the health and safety of colleagues, customers, and the communities that Mitie serves; ensuring the Group could continue to operate and deliver essential services to customers; and finally, preserving financial strength through cost saving initiatives, delaying certain tax payments and utilising the Coronavirus Job Retention Scheme.

Pay rises for staff were deferred and the Board took voluntary pay cuts of up to 30% to preserve cash.

As trading performance improved in the second half of FY21, the financial benefits offered by Government were repaid, including HMRC's 'Time to Pay' initiative and those furlough payments relating to colleagues employed directly at Mitie's own operations. 

Outlook

Although the world of work in a post-COVID environment is changing, Mitie's investments in customer-facing technology, as well as in the efficiencies by which we manage our 'workflow' and our 'workforce' - collectively what we call 'The Science of Service' - positions Mitie well to prosper from its industry-leading NPS and E-ENG scores, with good performance in retention and new business wins.  New working environments require improved standards of assurance and monitoring with employee well-being at their heart.  This plays to Mitie's strategy of building leading technical skills at its Cleaning, Security and Technical Services' Centres of Excellence. 

As businesses slowly start to reopen and our customers' employees return to offices, we are starting to see some green shoots of recovery in the variable project and discretionary spend works and we anticipate this continuing as re-occupation plans solidify.   With some high-quality new contract wins, short-term support to the public sector and additional synergies from the integration of Interserve, we now anticipate FY22 will be materially ahead of our prior expectations.

The transformation of Mitie and the acquisition of Interserve has created a strong base from which Mitie is well positioned to prosper.  Our new strategy will focus on increasing growth, margin enhancement and cash generation.   The new Mitie will target, over the medium term, mid single digit revenue growth, margins of 4.5-5.5%, sustainable free cash flow and ROIC in excess of 20%.

Financial performance

Revenue

Revenue, including share of joint ventures and associates, from continuing operations and, including a four-month contribution from Interserve, was £2,589m, an increase of 19.1% compared to the prior year.  Excluding the contribution from Interserve, revenue was £2,139m, 1.6% lower than the prior year as variable and discretionary projects declined due to building closures or lower occupancy. 

Revenue growth in the second half of the year, excluding the contribution from Interserve, was 6.5% (H1 decline of 9.8%) as a result of a stronger performance from Technical Services - where projects and variable works saw an uplift in demand - combined with a very strong final quarter of the year from Business Services.   

Operating profit

Operating profit from continuing operations, before other items was £63.4m (FY20 £86.1m), 26% lower than the prior year as the additional profit from contract wins, inclusion of Interserve and associated £6.2m of synergies was more than offset by the impact of COVID on trading, the ending of certain profitable contracts in the prior year and the reinstatement of incentives and share based payments (which were waived last year to preserve our financial strength).  Operating margin reduced to 2.4% (FY20 4.0%). This margin decline largely reflects the lower margin mix of revenues related to contracts supporting the Government's fight against COVID, lost revenue from higher margin variable and project works and the higher margin contracts which ended in FY20.  Further margin declines were mitigated by tight cost management. 

Cost management

Managing costs and improving operational efficiency remains an important focus and whilst the short-term pay cut measures of up to 30% taken in the early months of the COVID pandemic have been reversed, the opportunity to remove costs through property portfolio rationalisation, procurement controls and our fixed cost base - including the creation of a single management team in Cleaning and Security - all resulted in cost savings.  Project Forté is making good progress, with additional savings delivered in FY21, and is on track to go live in December 2021.

Order book

The order book, as at 31 March 2021, was £7,202m, including £3,157m from Interserve.  Across the industry, many contracts due to renew in FY21 were extended temporarily, reducing the number of new, longer term opportunities.  However, overall win rates were at 70%, the highest level in the last four years, with retenders and extensions at 96%. 

Whilst sales activity is picking up it continues to be lower than pre-COVID levels. Mitie has won or renewed contracts worth c.£1.3bn, with Business Services winning or renewing £720m and Technical Services winning or renewing £427m. New wins included Magnox, MBNA, Marks & Spencer, East & North Hertfordshire NHS Trust, Essex County Council, Department of Health and Social Care, Co-Op and Cornerstone.  New contract extensions from longstanding clients such as Rolls Royce, Linklaters, Deloitte, Tesco and the Scottish Government helped our renewal rates.

The majority of the Interserve order book relates to the Communities division, where longer contracts (average 15 years) are prevalent.  All the major Interserve contracts that came up for renewal in the four-month period under Mitie have been renewed or extended.

Integration of Interserve Facilities Management ("Interserve")

Mitie acquired Interserve on 30 November 2020 and the integration has been proceeding smoothly and at pace with the early delivery of £6.2m cost and revenue synergies from headcount reductions, procurement savings and offices which were closed before the end of FY21.

Total cost synergies are now expected to be £42m (previously £35m) to be delivered by end FY23 and for the same costs to achieve of £33.4m as originally identified.  Additional synergies have been identified across headcount, additional property exits and further procurement savings.  To drive revenue synergies a 'Mitie First' policy was implemented to increase self-delivery particularly in Fire & Security, Landscapes and Waste.

All transferred Interserve colleagues received access to Life Assurance, Virtual GP Service and Mitie's Employee Assistance Programme from 1 December.  Two cohorts of ex-Interserve employees have already been migrated to Mitie's HR and payroll systems providing access to additional benefits, such as the employee discount site and Salary Finance.  The remaining transferring Interserve colleagues will be transitioned by October.

Five transferring Interserve properties have been exited with leases ending or being made onerous and a further two Mitie properties have been exited through the integration property rationalisation.  Two further properties have been identified for closure within the next six months.  Ingenuity House will be exited and replaced with a smaller Midlands hub by November.  

Technology integration has made excellent progress with key deliverables including; the roll out of Mitie laptops; Microsoft Teams roll out to all Central Government & Defence customer support teams; completion of a number of Cyber enhancement projects; and the transition from the Interserve ERP system AX12 to Mitie's SAP environment.  For the roll out of customer-facing technology, 26 former Interserve customers have been prioritised.  The 'Mozaic' MI dashboard is being configured with the first customers live in July and 'Aria' and 'Esme' is being piloted for 2 customers.  Proactive engagement with customers is ongoing around Connected Engineer, Digital Maintenance and Monitoring as a Service.  As technology integration progresses, elements of the transitional IT support provided by Interserve Group Ltd have been exited, with the remainder to be terminated on schedule by the end of November.  

From 1 April 2021 all contracts previously managed under the Interserve Business & Industry division have been moved to Technical Services or Business Services thus allowing the B&I management team to be exited.  CG&D will operate as a standalone division, as will the Communities division which now includes all the PFI and Healthcare contracts formerly within Mitie.  Mitie will report in line with the new divisional structure for the first six months of FY22 in November 2021.

Since taking over Interserve it is clear that there is greater opportunity to create value through additional cost and revenue synergies than first thought.  Whilst there remains considerable work to be done, we are optimistic that there is significant additional value to be gained over the next three years. To align the senior leadership team with delivering greater benefits from the acquisition and to incentivise accelerated delivery of shareholder value, the Board intends to seek approval for a one-off conditional share award (Enhanced Delivery Plan) at this year's Annual General Meeting.  The award will only crystallise with the delivery of superior returns on invested capital and exceptional cost and revenue synergies measured over three years. 

Social Value and Responsible Business

Environmental, Social and Governance (ESG) initiatives form a key part of the philosophy of the way we do business at Mitie.  We are aiming to be net zero carbon by 2025 and generate increased social value as a leading ESG company. 

Mitie has received external recognition from three of the leading ESG rating organisations: CDP rating of A-, MSCI rating of AA; and Sustainalytics rating of 9.8.  Together these position Mitie as a global leader in ESG and the highest ranked FM company globally.

Mitie has the largest electric vehicle fleet in Britain with over 1,200 EVs; we have signed up to the Business Ambition for 1.5°C, the Race to Zero, RE100/EV100/EP100, and are committed to science-based targets to decarbonise our supply chain by 2035.

Dividend

In light of the unprecedented events caused by the COVID pandemic in FY21, the Board does not recommend the payment of a final dividend for FY21.  The Board will keep under review the possibility of a resumption of dividends in FY22 as confidence in the delivery of free cash flow and acquisition synergies grows.  

Operating Review

Business Services

¹ Office Services comprises Document Management, Vetting and Front of House

Performance highlights

·       Revenue growth of 9.9% as a result of new Government contracts from DHSC and HMRC and the demand for additional hygiene services

·       Single management team for Cleaning and Security delivered cost savings and productivity improvements contributing to margin improvement to 4.6%

·       £720m worth of new, renewed or extended contracts 

·       Net promoter score of +47 (FY20 +28)

·       4,725 additional employees joined during the pandemic

Operational performance

Working with customers to keep their workspaces safe, clean and operating during the COVID pandemic has been the priority.  COVID has accelerated the demand for Mitie's intelligent technology solutions in Cleaning and Security as the transition to remote working and flexible office occupation is managed alongside creating a safe and secure environment. 

Financial performance

Business Services increased revenue by 9.9% to £1,085.0m (FY20 £986.9m), boosted by a 17.9% increase in the second half compared with the second half of the prior year.  Whilst work supporting the UK Government in testing centres was the primary factor, the division also secured a number of new contract wins.  Office Services reported a decline in revenue of 20.3% with a slightly better second half performance, influenced largely by the aviation sector in the Vetting (Procius) business.

Operating profit before other items was up by 17.1% to £49.4m (FY20 £42.2m) reflecting both increased sales and the benefits of combining the Cleaning and Security management teams.  Despite adding lower margin COVID related revenues, margin increased to 4.6% (FY20 4.3%) due to an increase in higher margin specialist cleaning. 

Business Services has won, renewed or extended £720m of contracts this year including Co-Op, East & North Hertfordshire NHS Trust, Hogan Lovells International, and North West Anglia NHS Foundation Trust.  Key retentions in the period included Heathrow Airport, Kellogg's and the Scottish Government. 

Business Services has started FY22 strongly with a number of new or expanded COVID contracts being mobilised from June.  New contract wins with Associated British Ports and Amazon alongside contract renewals from existing key customers, including Co-Op, Heathrow Airport, Network Rail and SSE, will all contribute to a strong divisional performance in FY22.     

Technical Services

Performance highlights

·    Strong retention rate of 99% throughout a challenging year and extended key relationships with a number of top customers

·    Productivity improved with jobs per day up 13%; self-delivery increased to 87% (FY20 84%)

·    Project Forté delivered £4.4m of savings, £1.3m ahead of expectations, through the early introduction of supply chain management, RPA technologies and call centre efficiencies

·    £427m worth of new, renewed or extended contracts 

·    Delivered £72m in renewable projects and services (FY20 £81m)

·    Net promoter score increased to +51, a record high (FY20 +31)

Operational performance

Mitie responded quickly to the challenge of COVID and worked to renegotiate contracts and repurpose team members to support customers in a flexible manner.  

During COVID, Mitie's technology ensured customers' buildings were safely maintained during long periods of closure.  The remote monitoring platform monitored 125% more data points (desk sensors, room sensors) compared to the prior year.  On five key contracts where Mitie deployed Monitoring as a Service, c.7,000 call outs / jobs were avoided, representing a reduction of 16% in the total jobs in the period for those contracts, reducing cost and carbon emissions and minimising onsite risk from COVID. 

Mitie's Digital Workplace platform has supported customers to safely manage their workspace through the booking of desks and meeting rooms, and monitoring the occupancy and CO₂ changes to support a safe return to work.  Our Luxibel UVC air purification product has been installed at four customers. 

Project Forté is a complex project focused on re-engineering Technical Services' workflow processes. The  Project continues to make good progress and we remain confident of a 'Go Live' in December 2021.  In FY21 Project Forté has delivered £4.4m of benefits, £1.3m ahead of schedule, and remains on budget and on track to deliver a £15-20m net benefit by FY23. 

The sector focused approach has continued to deliver new customer wins and, with a renewals rate of 99%, £427m has been added to the order book.  Although many bids were delayed due to COVID, new deals were secured with key customers such as Magnox, QBE Insurance, MBNA, Bravissimo and Hain Daniels.  Mitie Energy has delivered £72m in renewable projects and services including installing ground source heat pumps at one of our largest clients.

Financial performance

Technical Services reported revenue of £820.7m, a decrease of 13.4% in the year (FY20 £947.2m). Excluding the contracts which ended in FY20 (MOJ and a portion of NHS Properties), revenue decline was 8%. The broader economic impact from the pandemic was manifested in reduced office occupancy and retail footfall with significant reductions in the travel, automotive and leisure sectors. Performance in the second half reflected some improvement as customers increased spend on getting 'Back to Business'. 

Operating profit before other items decreased by 52.8% to £26.4m (FY20: £55.9m).  This is primarily due to the impact of COVID on higher margin discretionary spend works and engineering projects, and contracts which ended in FY20.  Technical Services was quick to respond with a 17% reduction year on year in overheads including headcount, overtime and property reductions.  The benefits from these actions, and a contribution from better supply chain rates, resulted in an improved second half performance. Operating profit margin for the second half was 3.9%, resulting in a full year operating profit margin of 3.2% (FY20 5.9%).

Technical Services has started to see some early signs of a recovery in variable project and discretionary spend works as businesses slowly start to reopen and our customers' employees return to offices.  We anticipate this continuing as re-occupation plans solidify.  This, in combination with some quality new wins and renewals, including the Scottish Government, make for an encouraging start to FY22.

Specialist Services

Performance highlights

·     During the year Care & Custody won a new contract at Hassockfield IRC

·     Waste was successful in being added to two additional framework agreements for NHS Trusts to support future revenue growth

·     Landscapes renewed its two largest customer contracts JLL and CBRE

Specialist Services revenue declined 2.5% to £233.6m (FY20 £239.6m) with operating profit of £22.5m, 11.1% below the prior year (FY20 £25.3m), and operating profit margin of 9.6% (FY20 10.6%). 

Care & Custody's revenue declined to £108.8m (FY20 £110.2m). A reduction in variable escorting services activity and the closure of the Campsfield Immigration Removal Centre in FY20 were largely offset by the continued growth in revenue from Police services. Operational improvements have continued through the integration of Care & Custody's Workforce IT system with the bespoke detention and escorting 'MEDS' case management system.  Cost reductions have been achieved as IT developments have enabled Care & Custody to reduce the number of call handlers and to consolidate the Police Health Control Centre activity into a single office. Operating profit before other items and operating profit margin were both slightly reduced to £7.4m (FY20 £7.7m) and 6.8% (FY20 7.0%).

Landscapes revenue increased by 5.0% to £50.2m (FY20 £47.8m) as growth returned strongly in the final quarter of the year.  Operating profit before other items was slightly lower at £8.4m (FY20 £8.6m) as a result of higher costs relating to winter services, partially offset by cost savings.  Landscapes has renewed its two largest customer contracts and, as part of a broader Mitie bundled offering secured £10.4m of new work.

Waste revenue decreased by 8.6% to £74.6m (FY20 £81.6m), as volumes reduced due to lower occupancy or footfall in travel, industrial, financial and commercial sectors.  Revenue has also reduced due to operational efficiencies being passed back on the NHS clinical waste contract, offset by additional work for waste removal at our Testing Centres and Nightingale Hospitals.  Operating profit before other items has fallen by 25.6% to £6.7m (FY20 £9.0m) with an operating profit margin of 9.0% (FY20 11.0%) as profitability declines were partially offset by savings from headcount reductions.

FY22 has started well as Landscapes and Waste benefit from businesses slowly starting to reopen and our customers' employees returning to offices.  Care & Custody has continued to see growth from Police Healthcare services and a small increase in detention escorting services.   

Interserve Facilities Management ("Interserve")

Interserve was acquired by Mitie on 30 November 2020 and contributed four months of trading from 1 December 2020 to 31 March 2021 to Mitie's FY21 results.  During this period, Interserve operated through three principal business divisions: Central Government & Defence ("CG&D") which provides facilities management services to central government departments in the United Kingdom and Europe, and the Ministry of Defence in the United Kingdom and overseas; Communities which provides services to devolved public sector customers, with a focus on community environments in healthcare, schools and universities, emergency services, and local authorities; and Business & Industry ("B&I") which provides services to private sector and other customers, including regulated businesses, shopping centres, transport providers and manufacturing and industrial companies.

Performance highlights

·     Strong performance from CG&D in the UK with increased projects in the final quarter

·     Early delivery of synergies of £3m contributed to £13.3m operating profit 

·     Three new contract wins and 10 renewals or extensions

·     Project works won across schools and hospitals, including at King George's Hospital, Ilford

Operational performance

Since the acquisition focus has been on the early delivery of synergies, contract wins and renewals, and improving customer service.  Interserve employees are in the process of transferring onto Mitie's payroll and HR systems, and strategic account managers are being trained in the Mitie SAM Programme to improve cross-selling and upselling capabilities.

Customer relationships are largely positive with 10 renewals or extensions in the four-month period.  In addition, Communities won its  first new contract under the Mitie brand with East and North Hertfordshire NHS Trust awarding a soft services contract for 10 years.  Early customer feedback recognises the benefits that the introduction of Mitie's technology will bring, alongside enhanced data quality and operational excellence.

Financial highlights

Revenue of £450.0m for the four months to 31 March 2021 was an improvement on the comparative period last year due to additional COVID and non-COVID project works in CG&D and extra COVID related work in the Communities Healthcare portfolio.  However, this was offset by COVID related downsides due to site access restrictions impacting catering and parking in Communities, and shopping centres in B&I in particular.

Operating profit before other items for the four-month period was £13.3m and includes £3m upside from Interserve's share of synergies, largely relating to headcount reductions.  Profitability benefited from additional project works towards the end of the year which, when combined with the synergies, delivered an operating profit margin of 3.0%.

Following the strong fourth quarter of FY21, FY22 has started well for CG&D with the continued pick up in project work.  Interserve has renewed or extended a further 13 contracts, with all divisions reflecting a promising start to FY22. 

Corporate overheads

Corporate overheads represent the costs of running the Group and include costs for the head office commercial and business development, financial, marketing, legal and HR teams. Corporate overhead costs have increased to £48.2m in the year (FY20 £37.3m). The increase includes the additional costs incurred in providing all staff with Personal Protective Equipment (PPE) and making properties COVID compliant, the repayment of £4.1m of furlough monies, and the re-instatement of management incentives, which were put on hold last year due to COVID.

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 underlying 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:

¹   Earnings per share for FY20 have been restated for the bonus element of the FY21 rights issue

Revenue

Revenue from continuing operations of £2,589m, including share of revenue from joint ventures and associates, and including a four-month contribution from Interserve Facilities Management ("Interserve"), represented an increase of 19.1% when compared to the prior year.  Excluding the contribution from Interserve, revenue was £2,139m, 1.6% lower than the prior year.  Group revenue from continuing operations (which excludes revenue from joint ventures and associates) increased 17.8% to £2,560m, also including the post-acquisition contribution from Interserve.

Operating profit

Operating profit from continuing operations before other items was £63.4m (FY20: £86.1m), which was 26.4% lower than the prior year as the additional profit from contract wins and the four-month contribution from Interserve, including the associated £6.2m of synergies, was more than offset by the COVID impact on trading, completed contracts, the reinstatement of incentive payments and an increase in share-based payments. Operating margin reduced to 2.4% (FY20: 4.0%), largely reflecting the addition of COVID-related revenue at lower margins (supporting UK Government contracts) and temporarily lost revenue from higher margin variable and project works, combined with some higher margin contracts completed in FY20.

Operating profit was £8.3m, reflecting the additional impact of other items for the year.

Government support

The Group took advantage of UK Government support offered under the Time to Pay (TTP) scheme, allowing Mitie to defer payment of £133.2m of tax (PAYE and VAT) which would have been due in the period April to June 2020.  Together with the £33.0m deferred in March 2020, the total amount deferred by Mitie under TTP was £166.2m.  These deferred taxes were repaid in instalments, with the final payment made in January 2021, earlier than the April 2021 deadline.  In addition, Interserve held an £18.5m deferred payment balance under TTP on the balance sheet at the date of the acquisition, which was repaid in December 2020, bringing the net repayment during the year to £51.5m.  During the year the Group made use of the Government's Coronavirus Job Retention Scheme.  The Group has subsequently repaid £4.1m to the Government relating to furloughed colleagues employed directly at Mitie's own operations^[1].

Other items

Other items in FY21 resulted from the Group's ongoing transformation and M&A activity, which includes Project Forté, the property transformation programme, and the costs associated with the Interserve acquisition and integration.

The acquisition and integration of Interserve is significant in terms of both size and complexity, and the costs incurred reflect this.  The acquisition related costs largely relate to the one-off professional fees for the transaction, whereas the integration costs primarily relate to the resources being deployed to implement integration and redundancies.  The amortisation charge of £6.7m relates to the reduction in the intangible asset value of the acquired customer contracts and relationships, reflecting the passage of time towards the contracts' forecast expiry dates.

The total cost before tax of the Group's other transformation activity was £24.8m, of which £10.6m related to Project Forté. Project Forté is focused on re-engineering Technical Services' workflow processes.  A further £11.3m related to the Group-wide property portfolio rationalisation, including impairments to right-of-use leased assets and provisions associated with related onerous contracts.  This reflects the closure of seven offices.

The amortisation of non-Interserve acquisition related intangible assets is primarily associated with Vision Security Group, which was acquired in FY19, and Other Items relating to discontinued operations includes the partial release of provisions relating to the disposal of the Social Housing business, which are no longer required.

Net finance costs

Net finance costs were £17.4m (FY20: £16.2m), an increase of 7.4% compared to the prior year. The increased costs were principally driven by debt arrangement and amendment fees associated with the June 2020 refinancing and the securing of a relaxation of covenant thresholds until September 2022 (as discussed below).

Tax

Profit before other items and tax of £46.0m from continuing operations (FY20: £69.9m) resulted in a tax charge of £8.5m (FY20: £11.9m), representing an effective tax rate of 18.5% (FY20: 17.0%). Including other items, the tax charge for continuing operations was £1.0m (FY20: £7.9m).

Mitie is a significant contributor of revenues to the UK Exchequer, paying £640.0m in the year (FY20: £504.9m).  Of this total, £116.6m relates to taxes borne by Mitie (principally employer's National Insurance contributions) and £523.4m relates to taxes collected by Mitie on behalf of the UK Exchequer (principally VAT, income tax under PAYE and employees' National Insurance contributions).

Joint ventures and associates

Operating profit includes Mitie's share of the results net of tax of joint ventures and associates that were acquired as part of the Interserve transaction.  £1.9m was reported within operating profit before other items and a charge of £1.2m for amortisation of acquired intangible assets was reported within other items.

Earnings per share

Basic earnings per share before other items from continuing operations, decreased by 57.8% to 3.5p (FY20 restated: 8.3p).  This is as a result of the lower profit before tax, driven by the lower operating profit noted above, combined with a higher weighted average number of shares in issue following the rights issue and shares issued as part of the acquisition of Interserve.  Earnings per share for FY20 has been restated for the bonus element of the FY21 rights issue.

Basic earnings per share was (0.9)p (FY20 restated: 5.8p), with the reduction reflecting the factors outlined above, plus the impact of a higher level of other items in FY21.

Balance sheet

¹  Working capital and net debt balances for FY20 have been restated due to a change in accounting policy related to BACS payments (see Note 1 to the condensed consolidated financial statements)

Overall, the Group reported net assets of £361.8m at 31 March 2021, which is an increase of £281.3m compared with 31 March 2020.  The increase is primarily the result of the £190.4m net proceeds from the rights issue plus £138.7m of net assets acquired related to the Interserve transaction and the £57.6m receivable related to the provisional adjustment to consideration (see below), partially offset by the £105.0m cash consideration paid.

Acquisition of Interserve

The acquisition of Interserve has added the provisional values of £3.3m for goodwill and £138.7m for the acquired identifiable net assets and liabilities to the balance sheet, in return for total consideration of £142.0m. 

The net assets acquired of £138.7m include £219.3m attributed to acquired intangible assets, recognising the value associated with the customer contracts and relationships, £66.7m of provisions, and a £13.9m net liability from other assets and liabilities such as deferred tax, leases and joint ventures.  Provisions include £13.0m for onerous contracts, mainly related to certain PFI contracts, and £37.2m for rectification works associated with pre-acquisition issues.

The total consideration of £142.0m comprises £199.6m of consideration already settled (£105.0m cash paid and £94.6m shares issued) less a provisional adjustment to consideration of £57.6m related to a completion accounts process, which is included as a receivable in the balance sheet as at 31 March 2021 (within Other net assets in the table above).  The outcome of the completion accounts process is inherently uncertain, given that this is subject to a commercial negotiation and potentially expert determination, and the final adjustment agreed could therefore be materially different from this estimate.

Change in accounting policy

The Group has changed its accounting policy in relation to the recognition of BACS payments, whereby BACS payments are now recognised at the settlement date, rather than when they are initiated.  This change was implemented as part of the alignment of accounting policies with Interserve and will provide operational benefits including simplifying the cash management process and accelerating period end reporting. 

As a result of the change in accounting policy the balance sheet for FY20 has been restated to reclassify amounts between cash and working capital, which has had the result of reducing net debt by £14.9m at 31 March 2020 and increasing net debt by £5.4m at 1 April 2019.  The impact of the new accounting policy for FY21 was an increase in net debt of £5.6m at 31 March 2021.  As a consequence of the accounting policy change, cash generated from operations for FY21 is lower by £20.5m, but for FY20 the restated amount is better by £20.3m.

There has been no impact on the income statement, earnings per share or net assets as a result of this restatement.

Retirement benefit schemes

Net retirement benefit liabilities have reduced to £42.5m, compared with £46.7m at 31 March 2020, principally due to contributions and returns on plan assets, partially offset by a decrease in the discount rate reflecting a decrease in yields on high-quality corporate bonds.  The net liabilities at 31 March 2021 included a net accounting surplus of £3.0m related to a scheme acquired with the Interserve business.  There is also an accounting surplus related to a joint venture acquired with Interserve, Mitie's £2.2m 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 negotiated, subject to final approval, a deficit recovery plan with the trustees totalling £93m over seven years, of which £11m was paid in FY21.

Cash flow and net debt

¹  Working capital balances for FY20 have been restated due to a change in accounting policy related to BACS payments with an increase in cash generated from operations of £20.3m for FY20 and a reduction of £14.9m in net debt at 31 March 2020 (see Note 1 to the condensed consolidated financial statements)

²  Dividends & other for FY21 includes lease liabilities of £14.2m acquired with Interserve, and for FY20 includes dividends paid of £14.4m

The lower cash generated from operations is largely driven by the reduced operating profit before other items, due to the factors noted above, combined with the cash outflow from the increased level of other items, and higher adverse movements in working capital (see below).  Other movements within cash generated from operations include pension deficit payments and non-cash adjustments relating to share-based payments.

Capex, capital leases, dividends from JVs, interest and tax resulted in a cash outflow of £64.3m, and there was a net Free Cash Outflow of £24.5m in FY21.  Within this outflow there have been £98.0m of one-off working capital outflows in the year, which are explained further below.  Excluding these one-off items, the Group would have had a Free Cash Inflow of £73.5m.

The Group received £190.4m of net proceeds from the Rights Issue, and the net cash outflow to acquire Interserve was £84.0m, reflecting £105.0m of consideration paid less cash on the balance sheet (excluding restricted cash of £19.4m).  No dividends were paid in the year (FY20: £14.4m).

Working capital

Working capital movements resulted in an outflow for the year of £36.4m after the repayment of £51.5m of tax previously deferred under the HMRC TTP scheme, a further reduction in the invoice discounting programme of £19.0m and paying our suppliers faster over the year end period (impact estimated at £27.5m).  Adjusting for these items, the underlying working capital showed an improvement of £61.6m, which was driven by strong working capital management, including billing process efficiencies.

Net debt

Average daily net debt of £47.1m for FY21 decreased by £280.5m in comparison to FY20, primarily as a result of the £190.4m net proceeds from the rights issue, and the benefit, at the maximum point, from the £166.2m of taxes deferred under the TTP scheme, which have since been fully repaid.  Together, these two items improved average net debt by c.£220m compared to FY20, with the remaining improvement due to the underlying improvement in working capital referenced above.

Closing net debt on a post-IFRS 16 basis as at 31 March 2021 was £86.7m (compared with the restated £153.0m at 31 March 2020), reflecting the strengthened balance sheet following the rights issue.

Total Financial Obligations (TFO)

¹   Net debt balance for FY20 has been restated due to a change in accounting policy related to BACS payments (see Note 1 to the condensed consolidated financial statements)

Mitie closed its supply chain finance programme in December 2020. Period-end TFO have continued to decrease significantly, reflecting Mitie's strategy to strengthen the balance sheet and decrease leverage.

Liquidity and covenants 

As at 31 March 2021, the Group had £401.5m of committed funding arrangements.  These comprised a £250m Revolving Credit Facility maturing in December 2022, and £151.5m of US Private Placement notes spread over two maturities: December 2022 (£121.5m); and December 2024 (£30.0m).

With effect from 10 June 2021, DBRS Morningstar assigned a credit rating of BBB with a stable outlook to Mitie.  The Group intends to refinance its existing facilities over the course of the next year.

Mitie's two key covenant ratios are calculated on a pre-IFRS 16 basis. These are leverage (ratio of consolidated total net borrowings to adjusted consolidated EBITDA) and interest cover (ratio of consolidated EBITDA to consolidated net finance costs).  Following the COVID-related amendments agreed in June 2020, the covenant thresholds on these ratios vary each period until September 2022, as set out in the table below:

As at 31 March 2021, the Group was operating well within these ratios at < 0x leverage and 8.5x interest cover.  A reconciliation of the calculations is set out in the table below:

¹   Net debt balance for FY20 has been restated due to a change in accounting policy related to BACS payments (see Note 1 to the condensed consolidated financial statements), however consolidated total net borrowings for covenant purposes remains unchanged

 ² Continuing and discontinued operations

Condensed consolidated income statement

For the year ended 31 March 2021

Notes:

1. Other items are as described in Note 4.

2. Including impairment losses on trade receivables and accrued income of £6.2m (2020: £4.4m gains).

3. Earnings per share for the year ended 31 March 2020 have been restated for the bonus element of the 2020 rights issue. See Note 22.

Condensed consolidated statement of comprehensive income

For the year ended 31 March 2021

Note:

1.  Net (losses)/gains on cash flow hedges taken to equity include a fair value loss of £13.7m (2020: £11.8m gain) on derivative financial instruments used for hedging private placement notes. This loss is netted against reclassifications related to foreign exchange gains on private placement notes of £12.6m (2020: £6.0m losses) and interest costs of £nil (2020: £0.1m).

Condensed consolidated balance sheet

As at 31 March 2021

Note:

1.  The Group has changed its accounting policy in relation to the recognition of BACS payments (see Note 1). As a result, the comparatives as at 31 March 2020 have been restated with a reclassification between trade and other receivables, trade and other payables and cash and cash equivalents as set out in Note 1. There has been no change in net assets.