Full Year 2020 Mitie Group PLC Earnings Call
Bristol Jun 26, 2020 (Thomson StreetEvents) — Edited Transcript of Mitie Group PLC earnings conference call or presentation Thursday, June 25, 2020 at 6:45:00am GMT
TEXT version of Transcript
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Corporate Participants
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* Andrew Michael Peeler
Mitie Group plc – Group CFO & Director
* Carlo Alloni
Mitie Group plc – MD of Engineering Services
* David Cooper
Mitie Group plc – Chief Information Officer
* Jason Towse
Mitie Group plc – MD of Soft Services
* Peter Dickinson
Mitie Group plc – Chief of Staff & General Counsel
* Phil Bentley
Mitie Group plc – Group CEO & Executive Director
* Simon Venn
Mitie Group plc – Chief Government & Strategy Officer
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Conference Call Participants
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* Ben Watson
* Christopher Bamberry
Peel Hunt LLP, Research Division – Analyst
* James Beard
Numis Securities Limited, Research Division – Analyst
* Joe Brent
Liberum Capital Limited, Research Division – Head of Research and Equity Analyst
* Kean Marden
Jefferies LLC, Research Division – Head of Business Services Equity Research
* Samuel Frost Dindol
Stifel, Nicolaus & Company, Incorporated, Research Division – Associate
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Presentation
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [1]
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Good morning, ladies and gentlemen. Welcome to Mitie’s FY ’20 Results Presentation and Strategic Update. My name is Phil Bentley. I’m the CEO of Mitie. I think that this photograph shows on the front of our presentation just how much the world has changed in the last 6 months. This is a cleaner at the Mitie headquarters with our new Citrox, which has nanotechnology coatings to give protection against COVID-19. And that reminds me to thank you all for coming today and listening and also hoping you and your family are safe and well.
I’ll start by giving you an update of our strategic context at the moment in Mitie, then I’ll hand over to Andrew Peeler, our CFO, who will talk about our latest trading under COVID and our full year — fiscal year ’20 results, and then we’ll wrap up. And as this is a recording, we’ll then move to live Q&As with our investors and analysts.
It’s 3 years ago that I presented for the first time as the CEO and laid out our new strategy in Mitie: putting our customers at the heart of the business; focusing on our cost and deleveraging; ensuring that technology was a strategic weapon for us; and also making sure that our employees, our colleagues, felt really engaged in the company, and we’re really delivering what we call the exceptional every day. And as this slide shows, we’ve actually made some really good progress. We’ve arrested the decline of our revenue and have had revenue compound annual growth of 5.8%. We’ve made some modest profit improvements, but more importantly, we’ve been able to delever from the high level of total financial obligations that we’ve had. We’ve made great progress with our Net Promoter Score. We’ve made great progress with our engagement over the last 3 years with our colleagues. We’ve got our new government frameworks, and hence, our percentage of government business has also gone up. And that’s one reason why we’ve made such good progress with our pipeline of new opportunities facing Mitie today.
As we laid out in our November update and again in our Capital Markets Day presentations in December, we’re now moving from building the foundations Phase 1 of our strategy to Phase 2, that of accelerated value creation. And actually, again, we’re making good progress. We talked about our SAMs, our strategic account managers, and our key accounts. We’ve seen growth there of 5% in the last 12 months, a faster growth than the rest of our business. We’ve won GSK, a new account, SAM account. We’ve won Royal London and BMW, just to name a couple there. So good progress on customers. As I said, the NPS score, particularly — in particular, was very pleasing indeed.
We’ve also made great progress in technology as well, and today, over half of our strategic accounts are served by chatbot-automated processors to interact with our clients. Today, more than half of our strategic accounts have taken real-time management information from us, and our back office is working well as well. Our straight-through processes of HR and of finance are continuing to — were to — continue to do well.
And finally, as we mentioned, we were the first company to move to payment buying results, and that enabled us to extend our long-term relationship with Lloyds Bank and ensuring that clients really see what’s happening in their estate, as I say, in real time. So that was technology. And we do see the beginning as a really differentiated offer with our clients.
On costs, we’ve continued to save money, as Andrew will show, but continue also to invest back in our SAMs, in procurement and further investments in technology.
When it comes to cementing our cultural change program, I’m really pleased with the recognition that we’ve had in the last 12 months, one of Britain’s most admired companies, one of the Britain’s most diverse and inclusive companies, one of top employer awards. And I’m particularly pleased with our Plan Zero, our campaign to recycle and to reduce waste and reduce energy and for Mitie as a whole to be a zero-carbon company in 2025. And I think that’s been really welcomed by all those interested in our ESG credentials.
However, COVID-19 is impacting our business. We’ve seen short-term trading impacts, delaying of our transformation investment, the potential increase we must face in terms of late payments and bad debt and an overall slowing down of our ability to execute our strategy and a reduction in the pace of our deleveraging. And that was in the middle of the revolving credit facility discussions we were having with our banks at that time.
Now we’ve had to move quickly. We’ve got over 7,000 of our colleagues furloughed at the moment. We found extra cost savings and efficiencies of GBP 25 million, and our back office is functioning really well at the moment despite the fact that we are — many of us are working from home. But we do have 37,500 colleagues, remember, going to work at our clients, providing the essential services today to keep Britain moving. And actually, we’ve also won some GBP 30 million of new COVID-related wins. But I think, overall, we’ve come to the recognition that with the refinancing and with COVID, we have to have a financing package that really can see us through the worst of times. The most extreme downside scenarios allow us to execute our strategy and emerge a strong competitor in the marketplace, which is why, today, we’re announcing a new financing package of debt and equity: starting with equity, a GBP 200 million rights issue, fully underwritten by our new brokers, JPMorgan and Jefferies; 11 new shares for every 5 held at a 69% discount to our closing share price last night, adding some 805 million shares to our current 366 million shares outstanding, issued at a discount TERP of 40.76%.
We have a general meeting planned shortly. And with completion on the 3rd of August, these proceeds will strengthen our balance sheet and allow us to fund our accelerated growth strategy, which I’ll explain in a minute.
In addition, the GBP 200 million equity raise unlocks the support we need from our RCF banks, allowing us today to announce a new extension of 2.5 years to the end of December 2022 of some GBP 250 million revolving credit facility, in addition to which, we’ve had some covenant waivers received from both the RCF banks and our USPP holders. Now no one knows how long COVID-19 will impact us. We all hope for the best, but we know that with this financing package, it gives us the resilience we need even in a worst-case scenario of over 4 years recovery from COVID to continue to prosper and to allow Mitie to deliver long-term growth even when others in the sector are struggling.
In short, this new financing package will lead to a stronger Mitie with greater strategic options. We’ve built the foundations. We’re moving through to accelerated value creation. We’ve reshaped the portfolio around the hard and soft core of facilities management, and our technology investments that we’ve been steadily investing behind are now really ready to be scaled up. And this is the big opportunity we have: contract margins of 10% to 12%, running on our technology platforms, dropping down to a greater margin — net margin contribution.
And that’s why we’re very excited today to announce our next strategic move, what we call Project Harlequin, a truly transformational transaction to accelerate shareholder value creation from a unique combination of scale, customer balance, synergies and that operational leverage and market leadership that will stand us in good stead for the future. There is only one opportunity in the U.K. that offers this price, and that prize is Project Harlequin.
Harlequin is the acquisition of Interserve’s Facilities Management division, giving the Harlequin shareholders 23.4% of the enlarged Mitie post rights issue, plus a cash consideration of GBP 120 million to enable the Harlequin business to be delivered debt-free, cash-free and with normal working capital. This will be a Class 1 transaction, requiring a future shareholder vote. To be clear, we’re not seeking that vote today. However, we’ve applied merger of equals principles using the Mitie multiple applied to the Interserve FM historical EBITDA. Now with our share price rising more recently, that gives a multiple just over 6x EBITDA. But after synergies, and this is the beauty of the MOE structure, after synergies, we get down to 3.7x. And those synergies essentially become available to Mitie shareholders without the need to pay a premium for the business.
Shareholder returns are strong. We expect the deal to be earnings-accretive in — straightaway in the first year and economic profit positive. Return on invested capital is also above our WACC after the charge for capital in year 1. And that’s before the GBP 30 million synergies that we see being achieved on a run rate basis by the end of our fiscal year ’22, 23. Free cash flow will be stronger for the group as a whole, and that will mean that deleveraging results faster as well for Mitie.
Just turning to the timetable and the process. There are essentially 2 separate transactions to be put to shareholders: firstly, the GBP 200 million rights issue put to the shareholders of the general meeting on the 13th of July following the issue and the prospectus this weekend; secondly, the issuance of the Class 1 circular later in the year for the Harlequin transaction, with expected completion by fourth quarter of this year. The deal is subject to a number of conditions precedent, a limited number, and the integration plan is being derisked by a 12-month transitional services agreement, which allows for an orderly transfer of contracts and data onto the IT — Mitie IT platform.
What is the nature of the Interserve FM business? It’s a leading provider of FM services today, GBP 1.4 billion of revenue last year, GBP 43 million of EBITDA, with particular strength in central government and defense, where Mitie is only just beginning to break through into that opportunity, having got recently onto a number of government frameworks. We don’t have the strength and depth that the Interserve team bring. Equally, they, Interserve, have great strengths in their communities, business, hospitals and schools, work that Mitie also undertakes but at a much smaller level. The Interserve FM PFI business is some 3x larger than the Mitie equivalent.
And then finally, their business and industrial divisions would really complement Mitie because that’s really our strength, around our private sector, our innovation and our technology, and we think we can bring real strength to that division. So it’s a good fit overall. It’s an asset we’ve been tracking for some time. Yes, some of Interserve Group’s divisions have had some challenges recently, but their Facilities Management division is a business to be proud of. It’s got some 37,000 great colleagues, some of whom I’ve already spoken with, who are totally motivated, and I’m really looking forward to meeting them in time.
In summary, Harlequin, in combination with the new debt and equity financing package, offers a truly unique opportunity to bring 2 strong companies together to create significant shareholder value and also be Britain’s leading facilities management company. With leading capabilities and leading sector positions and great synergy potential, Harlequin accelerates Mitie towards a 1-2-3 vision we laid out at our Capital Markets Day: #1 for market share; less than 1x net debt to EBITDA; less than 2x total financial obligations leverage; GBP 200 million of EBITDA; GBP 3 billion of sales and leading in the 3 core capabilities of FM, technical, security and cleaning services.
That’s why we’re so excited about 1-2-3 and joining forces with new colleagues in Interserve’s FM. With these strategic moves announced today, we have secured both our financial future and our strategic future, and I’m looking forward to creating Britain’s leading facilities management company.
Now at that point, let me hand over to Andrew Peeler, our CFO, who’ll talk about last year’s trading numbers and the first quarter trading, and then we’ll come back, I’ll wrap up, and we’ll move to questions and answers. Thank you.
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Andrew Michael Peeler, Mitie Group plc – Group CFO & Director [2]
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Thank you, Phil. I’ll now take you through the financial review for the year ending March 2020 and an update on current trading. Before I start on a review of the full year, I would remind you that during the period, we implemented IFRS 16 lease accounting, and I’ll highlight where this has a material bearing on our results.
From a highlights point of view, I’m pleased to report further progress against our strategy. Revenue reached GBP 2,173 million, an increase of 4% and flat organic growth. There was a pleasing 5% growth in our top 50 customers, with notable wins of GSK and BMW. Operating profits grew 8% driven by cost synergies from integration of VSG, the merger of cleaning and security operations as well as corporate center overhead savings. Operating margin improved by 20 basis points to 4% on the back of this improvement. Looking ahead, encouraging growth in order book of 4% driven by successful renewals of several of our largest clients as well as new customer wins mentioned earlier.
Earnings per share grew in line with operating profits at 16p per share. And we have continued to strengthen our balance sheet with average daily net debt improving by GBP 62 million against the same period last year. And in line with our self-help measures to conserve cash given the COVID-19 pandemic, the Board has decided not to recommend a final dividend for the year ending March 2020.
Turning to revenue. The continuing business increased to GBP 2,173 million as I said. Revenue for Mitie’s U.K. business, excluding the revenue from the VSG acquisition, was just ahead of the prior year by 0.5%. Technical Services declined by 3% in the year. Half of this decline came from exits of loss-making contracts in Continental Europe, and that’s about half the decline in Technical Services. We highlighted the risk at the half year of the variable nature of our project revenue given the uncertain economic environment. And this, together with COVID-19 and a reduction in our Ministry of Justice variable work, drove a 7% decline in engineering projects, whilst we had flat position in relation to our maintenance business.
Business Services grew by 10.4% and, stripping out VSG, total Business Services was flat. Security improved by 4.3% from growth in strategic accounts and new customer wins on the back of advanced technology offerings, including a decline by 4.8% as it completed its planned exits from low-margin contracts.
Within Specialist Services, Care & Custody grew by 2.7%, with full year benefit of the Detention and Escorting services contract. Waste has significant growth of 29% with a full year’s impact from the NHS clinical waste contract, which was mobilized in October ’18, and Landscapes saw growth constrained to 2.5% due to a mild winter.
Moving on to operating profit, which was growth of 8.2%. I’m going to explain the movements on a divisional basis now and then summarize on a profit bridge for the full year on the following slide. Technical Services operating profit decreased by 1.8% largely due to the second half decline in higher margin variable works and engineering projects, some large contract resets and mobilization costs for new customers. Savings in International and other operational cost savings allowed an overall increase of 10 basis points in operating margin to 5.9%.
Business Services grew by 8.2%, and the second half saw improved performance in growth in top security strategic accounts, cost benefits from the VSG integration, exiting lower-margin cleaning contracts and newly implemented workforce optimization program. Specialist Services recorded a 24% increase. The majority of this came from the lapping of the Detention and Escorting services contract mobilization costs. Waste benefited from a full year benefit of the NHS clinical contract, and Landscapes, as I mentioned earlier, held back by the milder winter but good overall strong margin performance of 120 basis points improvement to 10.6%. Corporate overhead cost of margin up at GBP 37.3 million, but this gave an overall 20 basis points margin improvement of 4%.
Looking at operating profit in large chunks across the year. We look at the operating profit bridge slide here. It’s reasonably self-explanatory. And some of these items were explained at the half year. So let me pull out to some of the key points. Trading performance benefited from contract wins and extensions from our strategic accounts as well as operational efficiencies. These were offset by the impact of the accelerated second half decline of higher-margin variable project work and losses of higher-margin contracts such as the Ministry of Justice, which did impact both Business and Technical Services. And as you know, we had a higher than average number of contract resets. On average, we’d expect to run about half this level.
Our transformation continues. We drove savings of GBP 12.7 million from overhead savings in divisional and central costs, VSG integration and the merger of the security and cleaning businesses. And pleased to say we continued to make investments of an additional GBP 5.7 million in technology, procurement and strategic account management.
Let me now turn to the balance sheet. Firstly, IFRS 16. Assets increased by GBP 87 million as capitalized leases are included in PPE. Net debt increased by GBP 93 million as the lease liabilities are included. Before the IFRS 16 adjustment, net debt [improved] by GBP 66 million in the year. The group reported positive net assets of GBP 80.5 million as at 31st of March 2020, with the prior year having net liabilities of GBP 12.4 million. The improvement comes from improved profitability and, equally, the gain on the disposal of the Catering business.
Retirement benefit liabilities have decreased by GBP 17 million to GBP 46.7 million, and the decrease is mainly due to decrease in inflation. We have a negative working capital, and this decreased to GBP 176 million, a bit more of that later on.
Let me now move on to cash flow performance. As you can see, our operating cash flow before working capital was GBP 105 million against GBP 39.5 million last year. So let me just explain that a little. Last year was impacted by provisions we took for Section 75 pension provision and provisions relating to the disposal of social housing. The GBP 105 million for this year is flattered by the IFRS 16 reclassification of lease payments of GBP 23.7 million, which you can see added low down the cash flow. These mean the operating cash flow before working capital were of a similar level as year-on-year.
I’ll cover capital in more detail on the following slide. But if you go down the cash flow, you can see that capital expenditure was in line with last year as we continue to maintain our investment in IT and Project Forte. The increase of GBP 10.8 million on the interest and tax line reflects the tax refund we had last year as we move to more normalized tax payments this year. This gives a positive free cash flow in each year. And then finally, looking at the net cash movement of GBP 60 million, this compares to GBP 53 million in the prior year, and that’s driven by the slightly higher disposal proceeds arising from our Catering business.
As promised, let me now talk about working capital and normalization of that. First of all, we’ve done a lot of transformational M&A and there is a negative impact of GBP 34 million. This was flagged at the half year and it relates to items, including reversal of final month of VSG payroll, which was then paid in the current year, for example. Other transformational moves around working capital relate to reduction of off-balance sheet financing, and we reduced customer invoice discounting by a further GBP 12 million.
We also took action last year to accelerate payments to suppliers by GBP 26 million. And this year, we reduced the amount of early payments we received from customers by GBP 24 million, so more normalization of working capital. Throughout all of this, we continue to support our suppliers as we adhere to the government’s payment guidelines of settling 95% of supplier invoices within 60 days. And within the year, we also had a benefit of GBP 33 million from the HMRC-led time to pay initiative as part of the government support in the COVID crisis. We will receive further benefit from this during 2021, with a full reversal in April ’21. Overall, underlying working capital movement is, therefore, GBP 6 million.
Let me now turn to average debt. We have consistently said that our primary focus is on reducing average daily net debt and aiming for an average net debt-to-EBITDA ratio of 1x. I’m pleased to say that we’ve reduced average net debt by GBP 62 million, and this means our average debt-to-EBITDA ratio reduces to 2.25 from just under 3 in the previous year.
I’ll move this on now to talk about TFO. And as you know, this is an important part of our transformational strategy, which is to reduce our total financial obligations and drive transparency in this area. And this is our measure of debt, which includes off-balance sheet finance plus operating leases and pension deficit, and this is now reduced by GBP 159 million over the last 2 years and a further GBP 89 million in the current year. I’ve already referred to the drivers of this improvement for net debt invoice discounting and lower pension deficit. And I will just note that the operating lease element increases because we renegotiated and extended lease contracts for vehicles and the lease on a key property.
Debtor days pleasingly improved from 29 to 28, which reflects the ongoing focus around control and speed of processing in that whole area. And we are looking to continue to reduce our TFO to 2x EBITDA. And we’re pleased with the progress to about 2.7 in this year. And also, I’d note that our covenants both improved by 0.5 turn in the year, with debt-to-EBITDA now at 0.7x.
In summary, for ’19/’20, we have progressed on all fronts: high sales, improved profitability and a stronger balance sheet.
What I’ll now do is I’ll cover current trading in the COVID-19 period we’ve seen over the last 3 months and our management actions to mitigate those impacts before handing back to Phil.
Let me now turn to current trading. And I’m pleased to say the performance has been better than expected in our first 2 months of COVID-19. The 12% revenue decline was in part impacted by the loss of the Ministry of Justice contract and the reduced coverage of NHS properties. This accounted for 1/4 of the decline. However, that was partially offset by new wins from GSK and BMW. The largest decline, 24%, occurred as expected within Technical Services, where we’ve seen between 40% to 50% declines in variable and project works, respectively, as our clients have both closed locations and reduced their discretionary spend. Business services only had a 3% decline as losses in COVID-19 sectors, such as airport and transport, were offset by higher spending in food retail and government business for testing centers and Nightingale hospitals. As expected, government business, which accounts for 30% of our portfolio, has been largely resilient.
Looking at profit impact, we see an overall drop-through at gross profit level of 20%, which reflects the higher-margin nature of our variable and project works. We expect June performance to be in line with the performance to date. And I’m pleased to report that the team continues to tighten their control over the revenue cycle, with overdue debtors running lower than this time last year and billing actually at a higher level than last year. And net debt on a pre-IFRS 16 basis was just over GBP 200 million lower than this time last year at GBP 70 million. A large part relates to the deferral of tax payments, but the balance reflects the benefits of disposal proceeds and the good working capital controls.
Let me now turn to the measures to mitigate COVID-19 and how it will help us prepare for the longer term. So with the arrival of COVID-19, the management team rapidly put self-help measures into place. These were — these included an immediate salary reductions from the Board, through exec, down to employees, giving a GBP 2.5 million mitigation over a 3-month time period. And as Phil indicated in the March trading statement, we have a GBP 25 million overhead cost reduction program that is already well underway. And given the COVID-19 pandemic and the impact on employees and other stakeholders, we are not recommending a final dividend for the year ending March 2020. We are using the CJRS scheme, and 7,000 employees are on furlough. And we have been supported by HMRC through their time to pay scheme, which allows deferral of taxes. So those are the mitigation measures we are taking place.
Let me now come on to and summarize in terms of what this means for the business as we look ahead. This GBP 200 million issue ensures Mitie is well capitalized to navigate COVID-19. It allows us to complete a transformational acquisition and to provide a base from which to pursue other opportunities. Let me illustrate this by looking at our balance sheet. Using the ’19 to ’20 average net debt position, we are at 2.2x levered. If you then add in the stand-alone capital raising element of GBP 120 million, this drives us to a 1.2x leverage. If we then take into account the contribution of the Interserve acquisition, the GBP 80 million balance on the rights issue, the GBP 120 million cash consideration, that results in a prospective enlarged group of 1.2x before any synergies.
If we then further look at the strength of the balance sheet, we have a GBP 401 million of facilities maturing in December ’22. We have applied severe COVID-19 stress test scenarios to working capital projections. We affirm that we do have adequate facilities. And looking ahead, Mitie, we’re much better positioned to access debt capital markets in ’21 and establish a longer financing maturity.
In summary, our shareholders will have an investment in a business with a stronger balance sheet and reduced financing risks, benefit from a highly accretive acquisition with a fast payback and a solid platform from which Mitie can capture more long-term opportunities. So with that, thank you very much. I’m going to pass this back to Phil. Thank you.
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [3]
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Thank you for that, Andrew. Now let me move on to summarize, and we’ll get on to Q&As.
So let me sum up, if I may. We’ve completed our third year of transformation in Mitie. We’ve made good progress financially in the last fiscal year. Our trading more recently has been proven more resilient to COVID than we initially feared. Our new financing package we’re announcing today will see us through even the worst of anything that COVID can throw at us and still emerge strong. And with our new balance sheet strength and the support of our shareholders and lenders, we can take advantage of the unique opportunity that Harlequin provides us to deliver our 1-2-3 vision and create Britain’s leading facilities management company. I know it’s tough out there for many people with COVID-19 challenges, but with challenges and adversity comes opportunity. And that’s the opportunity we’ve taken over the last few months, the opportunity to ensure our financial future, the opportunity to secure our strategic future and the opportunity to really become Britain’s leading FM company. Thank you for listening.
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Questions and Answers
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [1]
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So I’m not quite sure how we’re going to do it, but I’m going to try — if I can see you — if you’ve got a question, just wave your hand, and I’ll just call you out, if I may. I can see Joe Brent with his hand up there. Joe, you get the first dibs here.
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Joe Brent, Liberum Capital Limited, Research Division – Head of Research and Equity Analyst [2]
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Can you hear me?
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [3]
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Yes, we can.
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Joe Brent, Liberum Capital Limited, Research Division – Head of Research and Equity Analyst [4]
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Good. It works amazingly. Three questions, if I may. Firstly, could you talk us through the total obligations that you’re acquiring with Interserve? Secondly, can you talk through the GBP 30 million of synergies and kind of where those synergies will come from? And just help us understand if that’s a conservative estimate or if there’s — or not. And thirdly, I think you talked about achieving your cost of capital in 2022. Could you tell us what your cost of capital is or what you think it is and whether that’s cost of equity or cost or WACC?
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [5]
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Yes. Fine. The first question, I think — well, thanks, Joe, was around whether we were inheriting any debt or debt-like items. The answer is no. The business has been delivered cash-free, net-free and normalized working capital. So we’re not having to finance anything against — within working capital out of the blocks. There were no debt-like items. That was one of the questions that we’d had in the past, and that GBP 120 million is just gets rid of it all. So there’s no debt added. All we have is the, if you like, the Mitie debt. And the — think of the Mitie debt, we had a daily average of GBP 240 million, Joe; second half, GBP 260 million and it’s fallen a little bit more. So you can essentially, if you like, do the maths of the net equity raise. If we’re raising GBP 200 million, we’re paying out GBP 120 million, we’ve got GBP 80 million equity — additional equity left in the company, which will bring my debt down further. So there are no other debt-like in terms — with the exception of a small pension element of about GBP 10 million or GBP 11 million, which is not any legacy pensions. It’s simply the requirements to keep those employees that are on final [settled] pensions, the assets around that. But that’s a small element. The major part of the pension situation is in what this team would call the remainco.
So I hope I’ve answered that question. Our WACC, we use 9.2% nominal, 8% really is in equity. So it’s a weighted cost of capital so includes [own] equity. Synergies of GBP 30 million out of an overhead of the base on their — like their sausage machine, of about GBP 18 million. I think we’ve got to kick the tires before we start to lift any numbers from that, but we would see opportunities in back office, in the sausage machine, the IT, the HR shared services, finance, back office and procurement out of the traps. And then obviously, we’ll need to dig deeper into more operation contract efficiencies over time. So I think they’re sort of modest ambitions, but I think yes, we’ve got to deliver them before we start declaring victory beyond that.
Who have we got? I saw James. James Beard, did you have a hand up? Or was that your new haircut?
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James Beard, Numis Securities Limited, Research Division – Analyst [6]
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That might be the new haircut. But yes, I’ll go. Just following up on the synergies point. What’s — what was the — your sort of anticipation in terms of the phasing of delivering those synergies?
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [7]
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Yes. I mean look, this deal — well, it’s a good question. The deal won’t realistically close much before the end of the calendar year in reality. By the time, we’ve got the Class 1, the shareholder vote, all of the clearances and what have you — so I — think of the deal starting maybe on the 1st of January. It might be a little bit before, but that’s sort of where I’m headed as it were. So in our fiscal year ’20, which ends in March ’21, we’re not going to get a lot of synergy on an annualized basis. But what we are saying, in what then becomes fiscal year ’21, 22, by the end of that, we should be at a point where starting in ’23, we’ve got all of the synergies — out of the GBP 30 million up to a point of being annualized, if you follow that.
And on the slide, I think — Andrew, jump in if you can, but we put something in around the synergy timing on Slide 14. So by the end of the second year of ownership, we should have the run rate synergies of GBP 30 million in the bag. They won’t all be in that year because they’ll be phased in over time. But by the end of the second year, we’ll have the synergies running at GBP 30 million, if I may.
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James Beard, Numis Securities Limited, Research Division – Analyst [8]
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Okay. That makes sense. Can I also just ask another Interserve question on that? Just on what you’re sort of seeing in the moment in terms of order book and pipeline trends during the current period.
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [9]
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Yes. I think we — there’s no question that COVID — we’ve seen the impact of COVID in terms of fewer invitation to tender that are out there at the moment, particularly in the private sector. We’ve seen contracts, decisions around procurement deferred. We’ve seen contracts that we’ve won deferred in terms of mobilization. We had one that was due to start on the 1st of April, and they pushed it back to September (inaudible). So I mean, there’s a number of deferral type of impacts.
And it’s a sort of a double-edged sword. On the one hand, we’ve seen extensions in our contract base short term. But equally, we aren’t seeing some of the bigger opportunities coming our way to bid for as well. Now as you know, we have a number of big MoD bids that are out there, and that process with the DIO, the Defence Infrastructure Organisation, [part of the] MoD is running. And Simon Venn, you’ll work close to that. But that’s — I think their decision is expected later on this year. So that hasn’t been pushed back, but other decisions have. And I think the net-net of all that is that we’ll be producing more out of our order book this year than we’re putting back in just simply because there are these big contracts that have landed yet. Simon, anything to say on the (inaudible) contracts?
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Simon Venn, Mitie Group plc – Chief Government & Strategy Officer [10]
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No. Just to confirm what you’ve said, which is that the (inaudible) award is being held at — still due to go ahead on November 3. There are a number of contracts like the U.S. visiting forces and the defense training estate tenders, which have been delayed by 4 months. So not sort of material delays, but we are keeping a watchful eye on those. And there’s an awful lot of work, obviously, ongoing to ensure that our bids are world class.
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Christopher Bamberry, Peel Hunt LLP, Research Division – Analyst [11]
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So Chris Bamberry at Peel Hunt’s. Just a question really on Slide 24, the trading in April, May, you said the drop-through from revenues to profit is 20%. Is that pre or post synergies — sorry, cost savings that you’ve implemented?
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [12]
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No. It’s a really good question. And I’ll let Andrew embellish it a little bit. I mean out of the blocks, you get a higher drop-through profit impact by losing revenue, if you think about it, because you’re always playing catch-up on your costs. And so you never get your costs ahead of your loss of revenue as it were. And so what we are expecting is to see that drop-through rate diminish as the cost initiatives that we’ve invoked start to be annualized and have a full year impact. Andrew, do you want to just sort of…
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Andrew Michael Peeler, Mitie Group plc – Group CFO & Director [13]
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Yes. Let me just add a couple of things in there. I mean the gross — that’s a drop-through level at the gross profit level. It reflects some savings. That is before, though, our overheads. And we have already got some savings coming through (inaudible) which mitigate that through to the bottom line. And I’d reiterate what Phil says, we’re 2-and-a-bit months now into the COVID crisis. We have plans and we expect to be able to flex, to a greater extent, our gross costs as we go into the crisis and expect for that drop-through to be mitigated as we go forward.
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [14]
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They will be fully mitigated, but it will be, as I say, diminished in impact if you run the models through the full year. I mean we’ve avoided giving guidance at this point simply because I think none of us really know where it’s going to turn out. What we — all I can — what we can say is that we’ve been modeling about — initially, we were thinking we’d have more of a V, so more of like a 20% drop-through but faster recovery. We think of it now as almost like a tick mark or an (inaudible) on its side as it were, where we see the fall in 1H probably, I don’t know, 12%, 15% but a longer impact in the second half as well and maybe continued at 7%, for example, rate. I think when we talk to clients, and Carlo, you might want to chip in here. Some clients are saying that they’re not going to be coming back immediately. It might be September through to Christmas before they do. And I think there’s a wider point there as well — and Jason, I have to call you, you might want to jump in as well, which is, will it change? Will COVID change the way we work? I think it will. I think it will change the way offices are occupied. But I also think it will change the way facilities are managed and, I think, in a number of ways. I think it will change it in the way facilities are cleaned. It’ll change it in the way facilities are secured in terms of access and also in terms of social distancing and things like office sensor. Desk sensors will come more to play. It’ll come through more in air quality. And I know with our handling units, there’s a lot of discussion there around cleanliness. So I think we’ll have fewer people in the building. But I do think FM will become a far more important aspect of creating safe working environments. But Carlo, why don’t you start, and then jump in to Jason?
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Carlo Alloni, Mitie Group plc – MD of Engineering Services [15]
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Sure. No, thank you, Phil. No, I agree with what you’re saying. What we do see is that — I mean, I think we are in [different] conversations with our clients to understand what is going to be the new [layout] of (inaudible) buildings, and still there is nothing defined. It’s everybody kind of talking and reflecting that we do see already, as we mentioned in our results, is a contraction in discretionary spend, especially in variable works or projects. However, on the other side, we start seeing a higher uptake in our service operations center and remote monitoring, i.e., there is, I would say, an acceleration of the digitalization of the environment, by which we do see much more focus on sustainability, energy and as well remote monitoring. Especially with the COVID-19 now, let’s say, concerns, there is an interest from the clients to monitor the social distancing even if it’s going to be 1 meter and/or occupational buildings is going to be kept under control. So there might be opportunities in that sense.
I do see as well, as you said, Phil, that FM is going to — I mean it’s — it increased in the value chain in the sense that it becomes more of a strategic arm. Just to give you an example, I mean, Vodafone reopened 350 stores and Mitie allowed that in shorter than 2 weeks. So I mean, it’s — again, to reopen in the economy, we play a fundamental role. And I mean, that has been seen as an important point.
So I do see as well that, I mean, maybe there are going to be changes in — so less buildings or building less occupied but more intelligent with more analytics and analysis being provided. When it comes to discretionary, I think that, again, is going to take a little bit time to retake it in full. It’s going to be focused on compliance, focused on sustainability, energy and health and safety driven and/or retrofitting of HVAC systems and implementation of additional, let’s say, more sustainable products. That is how I feel.
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [16]
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And Jason, just a quick one. I know — [I don’t want to labor it] with anything more to add. I mean we’ve got our Getting Britain Back to Business brochure, which I know has gone down really well; and Building Confidence, which is, again, showing the FM’s managers for clients, but also CEOs are aware of the things that really need to be thought about to create a safe working environment.
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Jason Towse, Mitie Group plc – MD of Soft Services [17]
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Yes. I think what we’ll see with the advanced introduction of technology and monitoring, I think the [optimize] will work [better than we] think we’ll see in the future and utilizing our people at the front line for more than they’re doing today. So we’re already seeing that and utilizing sort of security, cleaners and engineers from a much broader range of services from a remote perspective. And we’ve seen how the FM sector has absolutely stood us during COVID and to filled some of those gaps that we’ve had and allowed people to make decisions to use our people for much broader things rather than what we’ve used them for in the past. And I think we’ll see more of that. And our customers will become more reliant on our people, but it will be an optimized model is what I see in the future with our people. So I have nothing else more to add, Phil.
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [18]
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Okay. Thanks, Chris, for that. Anything (inaudible) out there (inaudible) you around or — what have you got?
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Ben Watson, [19]
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Ben Watson here from JPMorgan. Just picking up Chris’ points about trading in the current year in COVID. Obviously, the numbers that you’ve given for the Interserve asset are historic, and you [needn’t go to] and carve the asset out of its current ownership structure. I appreciate it’s a more defensive asset with a bit more government exposure to it. But do we have any idea about how the Interserve assets have traded in the current fiscal or financial year, a firm base on which to sort of integrate those on a current year basis into estimates?
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [20]
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I mean I think all the details are going to come out in the prospectus. And we’ve had to be very careful with our auditors and lawyers to only produce limited information now because I think you’ll understand, Ben, most of that detail has got to go into the Class 1 secular. And we were at pains to mention — the numbers even that we’ve quoted are unaudited to our audit standards. So we’ve had to put lots of caveats around that.
So I think what I’d do is give you a slightly different way of answering that question. When we look at our 12% decline, and we’d — if you remember, we lost the MoJ contract. And the national health properties wasn’t a loss, but they insourced it again at the end of last fiscal year because they had a VAT advantage of doing so. They were very happy with our service. But that took 3 percentage points off of that 12%. So it had nothing to do with COVID. So our COVID is more like a 9%. But we’ve got that contract lapping year-on-year so it will still be, I don’t know, a 12% growth, if you like, if that continues.
But the point there is you’ve got to look at in, both Carlo and Jason is making that point, across the sectors. We’ve got a different situation. What we know is that our government contracts have held up better through COVID than our private sector. And if you think about it, Atomic Weapons Establishment, Sellafield nuclear decommissioning, they’re not going to be furloughing people. As I say, no one’s — if I make that analogy in Interserve, I’m not aware that the army is on furlough. So these services are still out there and being delivered. So I — my expectation is that the public sector strength in Interserve will be more — even more resilient to the COVID situation.
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Samuel Frost Dindol, Stifel, Nicolaus & Company, Incorporated, Research Division – Associate [21]
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It’s Sam Dindol here from Stifel. A few questions from me. On the GBP 25 million overhead saving, are you able to say how much of that is from Forte? So it was already sort of in there and how much you sort of added to that?
Secondly, do you think there’ll be any competition issues in terms of how we divest certain contracts with the merger? And then finally, given your margin target was already 4.5% to 5.5%, do you think a 5% margin is pretty conservative over the medium term given your sort of sausage analogy and overhead, sort of better overheads that’s in there?
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [22]
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Okay. I mean, maybe let’s — I mean, let me take the last one first, and then we’ll — I’ll turn you over to Andrew on the savings. I mean there’s — there is a bit of Forte but not a lot. Most of that GBP 25 million is new, but I’ll give Andrew the opportunity to answer. And then Peter, our General Counsel and Chief of Staff, just a brief picture on competition. But essentially, I think, Pete was saying we don’t think there’ll be any major overhead. If you take our clients and their clients, there’s really only Home Office, where we both provide services, but we provide immigration removal and Interserve provide FM. So they’re not even competing services, very, very, very different. So in that regard, I think we feel reasonably comfortable and — I’ll pick up margin again. So Andrew, why don’t you just quickly, on the GBP 25 million, most of that’s incremental through our overhead base, isn’t it?
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Andrew Michael Peeler, Mitie Group plc – Group CFO & Director [23]
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Yes. I mean just (inaudible) it basically relates to our divisional and corporate center overheads. It covers most functions and equally as well, I’d point out, Phil, that we’re also sort of taking a lot of actions to improve the efficiencies of our back office and the processing of our transactions, where that’s coming from. I’d also point out the fact that we’ve also been benefiting from a variety of [integration] activities of VSG, and we expect to see some more benefits coming through as we accelerate the merger of our cleaning and security services, which, if you remember, we put together sort of in the past year. So it’s a combination of impacting all of those parts of the overhead base, but not Forte, as you say, Phil, at this point.
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [24]
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And actually, I mean, Forte is a small amount of savings anyway this year, which is mainly out of the supply of vendor management systems. So we do say that we’ve pushed Forte back a little bit as part of the cash conservation, but it wasn’t a big number in terms of impact in FY ’21 on a stand-alone basis.
And CMA, Peter, I know something we’ve given some thought to obviously.
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Peter Dickinson, Mitie Group plc – Chief of Staff & General Counsel [25]
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Yes. Sure. Our desktop analysis is that we don’t believe that the CMA is likely to take measures as a consequence of the proposed merger. But we do recognize that the combination brings together 2 major players in the FM sector. And because of the timetable for the deal, the production of the HFI, the need to prepare the Class 1 circular, we do have the luxury of some time before we are going to be issuing our circular. And we felt that it was just prudent to go and seek a competition clearance rather than have the uncertainty in this. I’m sure people are aware, the competition authorities are perhaps being a little more proactive than they were in the past, and hold separate orders are not uncommon. We want to avoid that. We want the certainty that the CMA are comfortable with the deal so that when we complete, we can then move very quickly for — do the [warrant integration] activities.
The other point just to make, as you’ll appreciate, within the FM sector, there’s a whole series of submarkets depending on what activities. And it’s difficult with certainty to say what — how the competition authorities will look at the market, which, again, is the reason why we just think the cautious approach is to have a CMA condition.
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [26]
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And then on margins, Sam, I mean, let’s get up to 5% before we go any further than that. But if we had a good run on the synergies, you can see what it would do. I mean this industry is very leveraged to the cost of running the sausage machine. That is the reality. You’ve only got — you only got 10%, 12% gross margins if you just got to get more through the sausage machine. And that has been our strategy around investing in technology that we can scale up. I mean, David Cooper, our CTIO, I mean, just some comments there on just the — what’s in the cloud and how do we — how easy it is for us to run more data through payroll or more data through purchase to pay or more processing and back office. In theory, it’s (inaudible) limitless, isn’t it, David? But you have a better view than me.
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David Cooper, Mitie Group plc – Chief Information Officer [27]
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Yes. We spent quite a bit of money in my team, transforming ourselves and moving to the cloud, wherever possible. Our end-user compute is completely scalable, based on O365 cloud proxies. We can easily move this number of people onto these systems with no impact at all in a very short timescale. Same for our HR systems. And our finance system, our subsystem, we moved it several months ago to also run in the cloud. So almost at a moment’s notice, you can increase capacity, scale it up. So we see no issues in scale in any of this whatsoever. It’s because of the previous investment. And one big thing, Mitie is CE+ and so whatever we do is secure, resilient, which is so key in this marketplace as well.
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [28]
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And it has been as well through with people working from home, you hear of companies getting into difficulties, but all ours is through an Internet proxy and nobody can download and whatever. And actually, amazingly, when we first looked the lockdown and working from home, to think that we can run our back office in India through a monsoon as well our whole applications maintenance and applications development in Wipro at Hyderabad, it’s all gone pretty well. And David has a little hand drawing of the systems of Interserve, and there’s lots of crosses and lots of arrows. So that’s going to be a key part of the synergy delivery. It is what comes out of the IT estate. And it’s not — this is a whole point about a TSA, service provided to us as opposed to a reverse TSA, where we get everything and provide services back to the remainco, which would have left us managing their estate. We’re not doing that. We are moving it off the estate. And I think that it’s going to be quite a key point as we go through the next part of getting the synergies.
Any other questions out there that anyone hasn’t had a chance to raise?
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Kean Marden, Jefferies LLC, Research Division – Head of Business Services Equity Research [29]
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It’s Kean. I’ve got a couple. I think you’ve partly answered the question, but maybe you can expand. So if we think about the integration risk for Interserve, does it sit mainly with people or systems or migrating the clients over after potentially a situation where maybe the Net Promoter Score and the service delivery hasn’t been where clients necessarily would have liked it to have been over the last 2, 3 years?
And then secondly, you’ve been shedding low-margin work in your cleaning business for the last few years. Is that something that’s sort of (inaudible) to recur at Interserve as well? And therefore, is it likely that actually the revenue at Interserve could shrink for a while because of those factors as you try and focus more on margin before returning to growth?
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [30]
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Integration, I think the fact — I mean, we’ve — we are very conscious of the risk around integrating, as David said, 30-odd-thousand people and the number of contracts. The advantage of Interserve is that they have — each — a lot of their big contracts have their own sort of firewall around them. And therefore, they’re managers’ almost like separate systems, which means that we can port them over one by one when all the data is cleansed. We’re not going through a big bang. And I think there’s 20 — I mean, you tell me if there’s more, David, CAFM systems, but they’re all linked to a contract. So there are obviously, in any integration I’ve done — I did BP, Standard Oil, way back in the day, Diageo, Cable & Wireless, Columbus, I mean, the people and the culture is really important. This is a merger of all the best of both companies and the talent and the skills. Both are very complementary. So we’ll be very careful to ensure we create a culture that is appropriate to the new company with the opportunities that everyone should have.
And I think the system side of things, I think, we’ll feel that — we’re [fairly] well covered on that, David. But [Dave], to your other point, we know that from Forte, we know that getting the data right in the CAFM because it might be there’s assets missing. It might be we’re doing maintenance on things [that aren’t on] in the schedule of works. It might be the record-keeping of statutory maintenance is not as good as it should be. We don’t know. But I think either David or Carlo, that’s probably — that’s where a lot of heavy lifting needs to go in, isn’t that?
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David Cooper, Mitie Group plc – Chief Information Officer [31]
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So we’re breaking this into 2 phases. The first phase delivers the cost savings that you’ve seen, and that’s more about usually (inaudible) our HR, our finance, our key systems effectively and having access to the CAFM still and using access methods, either where they sit or when we flip them across. Exactly as Phil says, there are quite a few, always one per contract. And so that delivers you all the savings that you’ve seen.
And there’s a second phase, which obviously takes longer and is why we’ve sort of split [a lot of] this, which then needs Carlo and his team, how you harmonize processes, et cetera. So what you see and we think we can easily do, and it’s basically leveraging all of the investment we’ve put in to date. And the second phase, which should deliver some more benefit (inaudible) but they’re not in our case. But that’s slower. That’s more complicated. And that’s — that would be driven by Carlo’s team. That’s around process and how you operate as a business and contracts.
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [32]
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And I think the other point, just to add, is their CAFM system and — is the IBM Maximo, which we have in Forte and have as well. So there are different instances and there’ll be different processes, but at least, it’s the same system. And on the shedding the margin, in fact, instead of got out of some of the private sector retail in the last 12 months or so and they’re probably less exposed to us in that regard, I mean, Jason, obviously, we won’t name the clients where we seem to do a lot of work and not make a lot of money. But it’s a lot of retail is where the action is. And Interserve actually had been defocusing on their retail business.
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Jason Towse, Mitie Group plc – MD of Soft Services [33]
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Yes. I think if you where — I think where we do operate and you think about the reach and the breadth and the network of operations that we have, it’s ideally suited to bring a more cleaning business. But I think if you focus around the development of the technical cleaning services, where we have, rather than just the commoditized cleaning sales and the true value of cleaning, the investments and the focus around product, in innovative products, such as Citrox as we’re focused on recently with our customers, and if you think about the technology that we acquired through Global Aware last year and how we’re developing that through cleaning, it’s a more intelligent cleaning offer by demand rather than just numbers of people. So I think I do expect that to deliver some great productivity as we move forward with this really.
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [34]
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Okay. Any more questions?
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Christopher Bamberry, Peel Hunt LLP, Research Division – Analyst [35]
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Chris Bamberry again, Phil. What’s the estimated costs of delivering GBP 30 million of synergies? Do you have an idea at this point you can disclose?
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [36]
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I mean we model 1:1 in the year, so 1 year payback, GBP 30 million. And is that on the high side? I mean it will depend really, Chris, on what David said about how much time and effort goes into data and process redesign. Generally, the people side of things, this isn’t the big cost actually. It’s the IT that’s a bigger part of it. But we’ve put GBP 30 million in the — in our modeling.
Joe, one more?
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Joe Brent, Liberum Capital Limited, Research Division – Head of Research and Equity Analyst [37]
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Yes. Two more, if I might be greedy. Just going back to the results. Obviously, I haven’t started (inaudible) detail, but the working capital looked pretty complicated. But it looked like a big outflow, both on a reported and an underlying basis. Can you just talk us through that?
And then I’m not sure if you’re willing to give the information, but can you give us a sense of the public sector exposure of Interserve, which I would view as a positive right now?
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [38]
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So public sector, and I’ll let Andrew talk about the working cap. It’s complicated. There’s a Slide 22 in the deck that might help (inaudible) But Andrew, you can find your way through that, I know, in a fairly quick way because there’s just lots of ins and outs, Joe. And you’ve got to look at the underlying DSO and, I don’t know, creditor days as it were [upon] payment. That’s the real underlying. But put that to one side, their business is more like 70% public sector. So private sector is like 70-plus percent. So then the inverse (inaudible) where it’s more like 70/30 [private].
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Andrew Michael Peeler, Mitie Group plc – Group CFO & Director [39]
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Yes. So let me make a couple of comments on working capital. Page 22 is a useful one to refer to. So [deliberately] (inaudible) unconscious, a little bit complex. Let me break it into 3 component parts. The first thing is, as we actually flagged at the half year, there is a cash outflow of about GBP 30-odd million in relation to M&A activity (inaudible) example (inaudible) in this last year for payroll cost (inaudible) prior to the transition shared services arrangement. But it’s basically working, basically M&A related. Other aspects we’ve got in there, we have, as part of our (inaudible) transformation changes, we have continued to reduce our invoice discounting by GBP 12 million. And additionally, in the year, from (inaudible) point of view, we have reduced the amount of advanced payments we receive from clients, particularly at the year-end. And then on the beneficial side of things, we did start to benefit from the HMRC time to pay arrangement. This is a deferral of [those taxes]. And the benefit in the year was GBP 33 million. So in fact, it’s actually — the actual underlying working capital movement is probably closer to 6.
And I’d also point out, as you mentioned on later pages, that our debtor days have actually [saw a compound] slightly. And even [as we speak] at the moment, our income overviews are actually [sort of] (inaudible) than last year, which is pleasing in the current environment. But those are the one-offs and aspects in there, and I’d stress, it relates to M&A and deliberate choices we’ve been making around our transformational changes.
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Phil Bentley, Mitie Group plc – Group CEO & Executive Director [40]
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And if there’s any follow-up, Joe, I mean follow up with (inaudible).
Last one, have you got any one more? Joe, you’re not (inaudible) today.
Okay. Well, thank you for that again. It’s — as we say as we wrap up, we’ve made a lot of progress strategically in the last few years. But in the last few months, securing our financing with our banks, recapitalizing the balance sheet really secures our financial future as a well-capitalized, low-leverage provider of services, particularly to — it’s particularly important to government. And the opportunities now, putting together 2 great companies and getting the best out of it, certainly, from my experience, when we created Diageo, we had 2 companies that struggled a little bit. And suddenly, the opportunities came along. So I’m very excited about our future because I think [neither have we] secured our financial security as it were, but we’ve also secured our strategic security for the next few years. And that’s what the team and the new, hopefully, Interserve colleagues, when we finally close the deal, will be playing a key role in.
So at that point, thank you very much. Have a good day. And thank you for your support. We appreciate your coming in on to the call. And sorry, I was late at the start. Thank you.