Final Results

RNS Number : 5973H

Mears Group PLC

17 March 2015

 

For immediate release

17 March 2015

Mears Group PLC

("Mears" or "the Group" or "the Company")

 

Final Results

For the year to 31 December 2014

Mears Group PLC, the provider of services to the Social Housing and Care sectors in the UK, is pleased to announce record earnings for the year ended 31 December 2014.

Financial Highlights

·      Revenue of £838.7m (2013: £865.6m), following the anticipated normalisation of the ex-Morrison revenue run-rate

·      Social Housing operating margin increased to 4.8% (2013: 4.5%), driven primarily by the improving margins being generated from the ex-Morrison business

·      Record profit before tax* of £42.0m (2013: £39.3m), growth of 7%

·      Excellent EBITDA cash conversion of 96% (2013: 103%)

·      New contract wins in excess of £300m: Social Housing awards of £170m with a conversion rate of 35% (2013: £420m and 32%) and Care awards of £130m with a conversion rate of 73% (2013: £96m and 69%)

·      Strong balance sheet with average net debt of £59.0m (2013: £70.0m); net cash at 31 December of £3.8m (2013: net debt £0.4m) and closing core debt of £75.0m following acquisition of Omega

·      Progressive dividend policy increasing total dividend by 14%, closely tracking growth in earnings ,  to 10.0p per share (2013: 8.80p)

	2014	2013**	Change
Group Revenue	£838.7m	£865.6m	-3%
Social Housing revenue	£714.7m	£742.5m	-4%
Care revenue	£124.0m	£123.1m	+1%
Profit for the year before tax *	£42.0m	£39.3m	+7%
Diluted earnings (loss) per share - all activities	24.65p	(1.17p)
Normalised diluted EPS* - all activities	32.20p	28.06p	+15%
Dividend per share	10.00p	8.80p	+14%

* Stated before amortisation of acquisition intangibles and exceptional costs. The normalised diluted EPS measure is further adjusted to reflect a full tax charge

** Continuing operations unless otherwise stated

Operational Highlights

Social Housing Division:

·      Revenue of £714.7m (2013: £742.5m): underlying Social Housing revenues flat excluding the anticipated reduction in ex-Morrison revenues

·      Operating margin of 4.8% (2013: 4.5%) driven primarily by the improving margins being generated from acquired Morrison contracts

·      Service quality remains our differentiator: the proportion of customers rating our service as "excellent" has improved further to 91% (2013: 82%)

·      Emphasis on Housing Management to tackle underlying challenges in social housing where demand exceeds supply:  acquisition of Omega will enhance our  offering as will our appointment as a joint venture partner with the Department for Communities & Local Government ("DCLG") for the commercialisation of its Planning Portal.  

Care Division:

·      Revenue increased by 1% to £124.0m (2013: £123.1m)

·      Operating margin maintained at 7.8% (2013: 7.8%) despite significant investment in improving the terms and conditions of our workforce

·      Continued strong regulatory compliance with 94% of branches fully CQC compliant

·      Our higher acuity Nurseplus activities have made strong progress since acquisition, driven from securing new high acuity packages with the existing Mears client base

Outlook:

·      Order book at £3.3 billion (2013: £3.8 billion). Solid pipeline of new opportunities

·      Visibility of 92% of consensus forecast revenue for 2015 and 82% for 2016 (2013: being 92% and 70% respectively)

·      Number of growth opportunities identified in both Housing and Care

·      Current year trading remains in line with Board expectations

Commenting, David Miles, Chief Executive, Mears Group, said:

"I am delighted with the progress Mears has made in 2014.

"I believe the opportunities for us in Social Housing remain very strong as our clients seek broader solutions to their increasingly complex housing challenges. Our core maintenance business is performing well and I believe we can deliver solid growth in that area through providing 'more of the same'.  We have been focused over the last twelve months on providing a broader housing offering to our customers, mirroring our clients' changing needs. For instance, our investment in Housing Management and our development of new forms of partnering arrangements are key highlights, including our preferred bidder status for the new Local Authority Planning Portal joint venture.

"We see the development of our Housing Management services as an important extension of our Social Housing offering. The demand for affordable housing will provide opportunities to work with housing providers to improve the delivery of housing and property management services and to increase the supply and management of housing through innovation and partnership. Currently, this area is highly fragmented and undeveloped. We believe the Group is well positioned to progress and deliver strong organic growth in this area. Where appropriate, we will make acquisitions to develop both the breadth of our services and enhance our scale.

"In Care, as a robust high quality provider at the forefront of change in the sector, we remain well placed strategically to take advantage of the longer term opportunities.  I am delighted at the success we have achieved in new contract bidding and, importantly, we continue to see a positive move in the structure of tendered opportunities with new contracts being awarded to fewer providers but with increasing contract lengths. The award of the Torbay contract is another crucial milestone for Mears and represents further evidence of structural development in the UK Care market.

"We are confident that further opportunities in Care will grow from health and social care outsourcing and the implementation of new localised commissioning models; consequently, we will continue to move further up the acuity chain, with an increased focus upon organic growth, extending our Nurseplus model across our clients, supported by in-fill acquisitions.

"I am delighted to report that we continue to achieve high levels of service delivery and customer satisfaction. The quality of our service delivery continues to be our key differentiator and underpins our success in winning new contracts in both of our core growth sectors.

"Since the turn of the year, trading remains in line with our expectations"

A presentation for analysts will be held at 9.30 a.m. today at the offices of Buchanan, 107 Cheapside, London, EC2V 6DN.

For further information, contact:

Mears Group PLC

David Miles, Chief Executive                                                             Tel: [phone]

Andrew Smith, Finance Director                                                       Tel: [phone]

Bob Holt, Chairman                                                                            Tel: [phone]

Alan Long, Executive Director                                                           Tel: [phone]

www.mearsgroup.co.uk

Buchanan

Richard Darby/ Sophie McNulty/ Sophie Cowles                         Tel: [phone]

www.buchanan.uk.com

Notes for editors

Mears is a leading social housing repairs and maintenance service provider to Local Authorities and Registered Social Landlords in the UK and now commands a leading position in the UK Local Authorities' outsourced care market, providing personal care services to people in their own homes.

Mears employs in excess of 13,000 people and provides maintenance and repairs services to in excess of 10% of the UK social housing stock. Mears also provides care, on a daily basis, to over 20,000 service users.

 

Chairman's statement

I am pleased to announce record profits for the year to 31 December 2014 and delighted to report excellent progress, particularly around strengthening our competitive position in our two growth markets.  We expected a reduction in Social Housing revenues given the normalisation of the Morrison run-rate. Group revenue amounted to £838.7m (2013:£865.6m), however, we significantly enhanced our future growth prospects through the development of our Housing Management business, both through the acquisition of Omega and through organic investment in people and systems.

We continue to drive margin improvements, with operating profit before amortisation increasing by 5% to £43.0m (2013, before exceptional costs: £41.1m).  Group operating margin increased to 5.3% (2013: 5.0%) driven primarily by the improving contract margins being generated from the ex-Morrison business. Normalised diluted earnings per share on all activities was up 15% to 32.20p (2013: 28.06p) and up 7% on continuing activities (2013: 30.08p).  We have 92% visibility of consensus forecast revenue for the current year and in excess of 82% visibility for 2016.

We have continued to deliver strong cash flows with cash generated from continuing operations as a proportion of EBITDA at 96% (2013: 103%) and net cash reported at the year end.  Average net debt for the year, before the acquisition of Omega, was £59m (2013: £70m) demonstrating continuing strong cash management.

We completed the acquisition of Omega in October 2014. The shortage of affordable, safe and secure housing is a significant challenge faced by our clients today. I anticipate Local Authorities having increased responsibility resulting in the need to provide more social homes and remove the reliance upon those private landlords who provide properties which are not of a uniformly high standard. Omega is a logical extension to our current offering; it will enhance our ability to work with housing providers to improve the delivery of housing and property management.  I am excited by the medium term organic growth opportunities that will be forthcoming through the development and integration of the Omega business model.  I know that our clients welcome our involvement in their challenge to professionalise and stabilise financially their housing management activities.

We are delighted to announce that we have been appointed preferred bidder with the Department for Communities & Local Government ("DCLG") for the commercialisation of its Planning Portal. The Planning Portal is a web-based one-stop-shop for advice and guidance on planning, building regulations and appeals. It is the sole electronic means to submit a planning application, with links to all Local Authorities in England and Wales. DCLG believes the portal has commercial value as well as opportunities to identify other revenue streams, particularly as some 80% of planning applications go through the portal. It is on this basis that DCLG sought a partner to take on the running costs of the service and to help transform it into a commercial business. We intend to take a 75% stake in the venture with DCLG.  This partnership will not only strengthen our housing management service with materially improved customer access but it will also provide an opportunity to bring further services to our clients.

Although our Social Housing order intake was impacted temporarily from a quieter period of new bidding opportunities, our conversion of new bidding opportunities reported an increase to 35%. This is an important metric and one that will serve us well, once the bid pipeline opportunities return to historic levels.

In Care, as a robust high quality provider at the forefront of change in the sector, we remain well placed strategically to take advantage of the long term opportunities.  I am delighted at the success we have achieved in new contract bidding.  Importantly, we are seeing a continued move away from frameworks towards strategic partnerships, often with longer contract lengths and fewer providers. This will benefit us disproportionately to the rest of the sector given our long-term partnership ethos.  Our award of the Torbay & Southern Devon NHS Trust contract for Living Well@Home Services is another crucial milestone in the evolution of the sector and for Mears' position within it.  We will deliver a full range of community based services including personal care and more complex services, such as healthcare at home, community support, mental health and learning disabilities support.   The contract will be for a minimum five year term with three potential one-year extensions and is due to commence in April 2015.  It has an estimated contract value of £50 million.  We understand that this is the first time a contract of this type has been awarded to a single prime contractor in the UK.

Dividend

The Board remains confident in the future opportunities in our growth markets and consequently it expects to be able to continue to follow a progressive dividend policy. The Board has recommended a final dividend of 7.15p per share which, combined with the interim dividend, gives a total dividend for the year of 10.00p (2013: 8.80p), a 14.0% increase. The dividend is payable, subject to shareholder approval at the Company's Annual General Meeting on 3 June 2015, on 2 July 2015 to shareholders on the register on 12 June 2015. The dividend is covered over three times by the normalised diluted earnings per share. The Board regularly reviews the Group's distribution policy to maximise returns to shareholders whilst maintaining a prudent capital structure and investing for growth.

Corporate governance and risk management

The Board continues to set itself high standards of corporate governance. Our Corporate Governance Report issued within our Annual Report will detail how we approach governance and the areas of focus for the Board in 2014 and into the future.

We have continued to invest resources in our risk management process. During the year, we have redrafted the Group's policy on fraud and anti-bribery. The revised policy enhances the process for continual review of our control effectiveness in this area. Moreover, we have delivered a fraud and anti-bribery training programme informing staff of their legal duties and to ensure that they are aware of our policies.

We have reviewed and updated the Group's risk register. The senior management teams play a central role in reviewing and challenging the Group's risks. The Group risk team presented risk management training modules to all levels of management, via the Group development programme, to further increase our strong risk management ethos. We engaged KPMG as our internal audit partner who completed a detailed audit programme on the Group's financial risks.

Board evaluation and effectiveness review

Performance evaluation of the Board, its Committees and individual Directors takes place on an annual basis. This year's review was externally facilitated, with an independent reviewer meeting with all Board members individually. The Directors were asked for their views on a broad range of areas including Group strategy, independence, experience, effectiveness, shareholders and the interaction between Board members. Some improvements were proposed and implemented but overall it was concluded that the Board was working in an effective and efficient manner.

Our people

I commend our employees for their commitment and energy throughout another significant year for the Group. I continue to be impressed by their quality, professionalism and loyalty.

We have continued to invest in the future generation. At the end of 2013, we launched the National Apprenticeship Scheme, a Group-wide approach to the end-to-end apprenticeship process.  This scheme, which has now been in place for a full twelve months, provides a best practice approach to recruitment with the aim of appointing the best quality candidates for our business. We are pleased to have been recognised as one of the Top 100 employers of apprentices in the UK.

Our corporate strategy includes the establishment of an internal talent scheme, which recognises the potential of our existing workforce and maximises the likelihood of retaining our most promising people. During 2014, we made significant progress in our management development programme, including senior leadership, branch manager and supervisory levels. These bespoke programmes call on internal experts and external specialists in order to create an effective scheme, combining the best of Mears with the latest in leadership thinking and wider-industry best practice.

I look forward to bringing you news of further success during the coming year.
 

Chief Executive's review of operations

	Social Housing			Care			Total
	2014	2013		2014	2013		2014	2013
	£m	£m		£m	£m		£m	£m
Revenue	714.7	742.5		124.0	123.1		838.7	865.6
Operating profit*	34.4	33.5		9.6	9.6		44.1	43.2
Operating margin*	4.8%	4.5%		7.8%	7.8%		5.3%	5.0%

* Before amortisation of acquisition intangibles, exceptional items and share based incentive payments.

Social Housing

The Social Housing business has delivered a solid performance with revenues of £714.7m (2013: £742.5m). As stated within our 2013 results, revenues for the ex-Morrison business initially benefited from a non-recurring spike in the period immediately following the acquisition. These former Morrison contracts delivered revenues in the year of £200m (2013: £235m) which was in line with our expectations.  Moving forward, we would expect these contracts to be maintained at the current level.

We are delighted to see an increase in the operating margin to 4.8% (2013: 4.5%) driven primarily by the improving contract margins being generated from the ex-Morrison business; these margins are ahead of our original expectations. A relatively quiet period has allowed the Group to progress with margin improvement initiatives whilst there have been fewer contract start-ups, which are typically loss-making during mobilisation.

Service quality remains our key differentiator.  We are pleased that our Social Housing division continues to achieve high standards of service delivery.  The proportion of customers rating our service as excellent has improved to 91% (2013: 82%). Typically, others in the sector measure only satisfaction, whereas our drive has been for excellence. I am pleased that within two years of completing the Morrison transaction, we have a new portfolio of financially sound contracts with good levels of customer service.

Social Housing - Business Development

The housing finance changes introduced in 2012 decentralised decision making and empowered Local Authorities to determine the future of the local housing offering they make to their communities. In addition, both Local Authorities and Housing Associations have been impacted by the introduction of Welfare Reforms which have changed the relationship between tenants and landlords.   We communicated these changes early, and as anticipated, they had a positive effect on the funding available to Registered Social Landlords ("RSLs"), as evidenced by the large number that are reporting surpluses.  A short-term negative however, has been the delays in new bidding opportunities resulting from these changes. Whereas historically, the focus for the Housing Revenue Account was in respect of maintaining the existing stock, the additional funds available now give rise to a variety of investment decisions, causing a number of RSLs to consider their next steps over a longer timeframe.  Whilst these delays have resulted in the absolute level of opportunities to bid for in the year being lower than originally anticipated, the bidding opportunities available to the Group over the longer term remain at historical levels.

We anticipated that 2015 would be an important period for contract retention.  Three material contracts were expected to be rebid in the coming year. However, in a similar way to our recent experience with new contract opportunities, the contracts have not been rebid but rather extended to Mears to beyond 2015.

Over time, we have learned that in addition to excellent service delivery, strict bidding practice and innovation is essential in Social Housing.  We appreciate that clients and competitors are under enormous pressure in an increasingly complex market with challenging underlying needs.  We have become more aware this year of a material number of contracts held by competitors that are unsustainable either in terms of service delivery, financial viability or both.  We are confident that, over the next 18 months, our patience will be rewarded and our differentiated model vindicated, as these contracts reach breaking point.   This point is illustrated by our appointment by Sutton Housing Partnership ("SHP"), which we mobilised over a period of two days in late December 2014. This contract was awarded on an emergency one year basis after the exit of the incumbent contractor.  The contract covers 6,000 homes in the London Borough of Sutton, delivering responsive repairs, voids and a planned maintenance programme.  The contract mobilisation has gone extremely well, especially given the short timescales; our new client has experienced an immediate improvement in quality.

Our clients are looking to consolidate and transform an array of housing management activities, such as planning and asset management, income optimisation, lettings and the operation of related call centre infrastructure. The market for these types of white collar activities is significant, at circa £4 billion per year, and is largely untouched by the private sector. An evolving Social Housing market, following recent changes in the welfare system and tenancy arrangements, over and above the ongoing pressure on budgets generally, has increased the pressure on our clients to rethink how best to meet the needs of not only existing tenants but also the three million potential tenants on long Social Housing waiting lists. Recognising how Mears has worked in partnership with them in the past to address more broad-based blue collar challenges, we have been encouraged to collaborate to tackle the sector's housing management issues.

During October 2014, Mears completed the acquisition of the Omega Group ("Omega"). Omega is a leading private sector provider of residential lettings and management services to the Social Housing market, with a portfolio of circa 1,700 properties and a client base of 24 Local Authorities and Housing Associations. The acquisition of Omega is in line with the Group's strategic aim to continue growing in the evolving Social Housing market, adding further innovation to Mears' Housing Management offering and is sympathetic to our partnership ethos.

Mears Housing Management Services is a logical extension of the services provided within our Social Housing division. It aims to add value to the existing client base and to enhance our service offering. These new services have been established to work with housing providers to improve the delivery of housing and property management services and to increase the supply and management of housing. Our aim is to provide housing and property management services to our public sector clients, driving efficiency and better value in targeted communities.

Mears has a strong track record of turning around, integrating and extracting substantial value from acquired businesses, along with an excellent reputation for service delivery. As we look to broaden the services we offer across the sphere of Social Housing, we will look to make further acquisitions to reinforce our market leading position. 

The state of the housing market will feature highly in the run up to the General Election this year. All major political parties recognise that a correctly functioning housing market is central to the economic and social success of communities and the nation as a whole. The demand for affordable housing, whether that be at a social rent or a near market rent, is very high with circa 1.7m households on waiting lists in England and Wales. Recent research has concluded that circa 3m adults between the ages of 20 and 34 still live with their parents.

Local Authorities, especially those who have retained their housing stock, have been propelled to centre stage as leading players in bridging the gap caused by the national shortfall in housing supply. The revised financial settlement which came into being in April 2012 has proved productive for Local Authorities and has given many an increasing headroom for investment. However, that headroom, reflected in surpluses, has not yet generated major investment.

Social Housing - new contract bidding

The Group has increased its historical Social Housing new contract win rate to 35% (by value) (2013: 32%) and secured new work with a total value in excess of £170m (2013: £420m).  The most significant awards are detailed below.

Contract	Detail
Sutton Housing Partnership	Mears was awarded a contract to repair and maintain 6,000 homes. This followed the termination of the previous provider. The contract is anticipated to be worth £4m in 2015.
Medway Council	Mears was re-awarded a new five year repair and maintenance contract for its 3,000 properties with the new contract starting in August 2014.  The total contract value is estimated at £20m. Works include response and void maintenance together with modernisations and large maintenance projects such as new kitchens and bathrooms.
London Borough of Sutton	Mears has won a Housing Management contract to refurbish an ex-care home which has been unoccupied for several years.  The contract entails the conversion of the ex-care home into 43 units of self-contained accommodation for use as temporary accommodation. Mears will provide lettings, housing management, security and temporary accommodation services over the ten year lease period.
Central Bedfordshire Council	Mears has won a contract to provide lettings, housing management and temporary accommodation services in the Central Bedfordshire area. This contract, which will support Central Bedfordshire Council by placing homeless households into quality and affordable private sector rented accommodation, further strengthening Mears' presence in the Home Counties.
East Thames Housing	Mears have been awarded a contract to lease, refurbish and manage a total of 210 properties in East London earmarked for demolition and regeneration. The services will involve refurbishment, lettings, housing management and temporary accommodation services over the lease period. The deal further strengthens Omega's resolve of bringing empty properties back into use to increase the supply of affordable accommodation.
Preferred bidder status - partner with Department of Communities and Local Government (DCLG)	Mears has been appointed preferred bidder with the DCLG for the commercialisation of its Planning Portal. This strengthens our housing management services and represents an exciting opportunity to broaden our services as well as providing a further point of access into every Local Authority in England and Wales. The Planning Portal is a web-based one-stop-shop for advice and guidance on planning, building regulations and appeals. It is the sole electronic means to submit a planning application, with links to all Local Authorities in England and Wales. Some 80% of planning applications go through the portal and DCLG believes the portal has commercial value as well as opportunities to grow revenue. It is on this basis that it approached the market to locate a partner to take on the running costs of the service and further develop it into a truly commercial business.

In addition to the new contract awards, a number of material contracts, which had originally been due to come up for renewal in 2015, have been subject to extensions. Notably Gateshead (extended to 2017), Sedgefield (extension anticipated to 2016) and Birmingham (extended to 2016).

Our social housing strategy

We have maintained a consistent strategy over the last fifteen years, which is summarised below:

Strategic Focus	Delivery
Differentiate on customer service leadership as the prime driver of sustainable growth	Record level of customer satisfaction achieved in 2014
Support our clients to obtain maximum benefit from the opportunities presented by Government and funding	Provision of a full asset management capability to ensure appropriate investment in housing stock refurbishment. The acquisition of Omega further advances the Group's capability
Focus on building long-term partnerships	Retention of key client relationships in 2014, including Thurrock and Octavia and material contract extensions in Gateshead and Leeds. Successful development and introduction of new partnership models such as our joint ventures in Manchester and North Lanarkshire
Drive innovation to provide better outcomes for tenants	Investment in the development of housing management services and further enhancement to our Mears Direct model which provides solutions for clients who wish to insource their maintenance services
Develop a skilled and motivated workforce	Achieved Top 100 employer status in the UK for apprenticeships. Extensive investment in training and development of staff at all levels
Consider acquisitions to supplement our capabilities and support our increasing service breadth	Pipeline of potential housing management acquisitions to reinforce our leadership position but greater focus is upon organic growth

Care

The Board is pleased with the performance of the Care division in terms of both the quality of service delivery and the solid financial performance.

The Care division reported revenues of £124.0m (2013: £123.1m), growth of 1%. This growth reflects a full year impact from ILS, acquired in April 2013, without which the underlying business would have reported a reduction in revenues. The reduction, taken in isolation, is disappointing. Significant progress has, however, been made in developing the business and in the wider market. The main limitation to growth in Care remains in sourcing sufficient Care workers of good quality; this challenge will only increase as we move forward and we are focused on finding solutions to address this. There remains more work available than we can responsibly service. Maintaining both service quality and margin remain the primary drivers for the Group.

We are pleased that the operating margin at 7.8% has been maintained at the levels achieved in the prior year, despite our significant investment in improving the terms and conditions of our workforce. We are committed to improving the terms and conditions of our carers; notably our aspiration to increase pay rates towards the Living Wage and a movement away from zero hour contracts. We still have a long way to go to achieve this and further progress will require the care commissioners to share this ambition.

Care - Business Development

We entered the Care market in 2007 with a clear strategic vision that the market would develop in a similar way to Social Housing. Notably, we expected to see a shift towards outcome-based contracts, where vendor payments are based on the quality of the outcome for the recipient rather than simply based on the time spent in delivering the service. We also expected to see customers move toward awarding contracts for longer terms to fewer providers, who could provide broader services and who could also assist in driving efficiencies within clients' cost bases. We have positioned ourselves as a high quality business focused upon service delivery in readiness for the market change. The speed of change has been slow, however strong momentum has now built up which endorses our strategy.

The award of the Torbay contract is another crucial milestone for Mears and represents a further important development in the UK Care market.  While still early days, there are indications now that a number of other Local Authorities are looking to follow the lead of Wiltshire County Council and now Torbay. We share absolutely the vision for Torbay and are committed to harmonising standards, integrating IT systems and achieving great outcomes for all clients.  Local providers will continue to play an important role in the delivery of care and support in Torbay.

We are seeing a positive move in the structure of tendered opportunities, in line with our predictions at the time we entered the Care market. The majority of new opportunities are now leading to a consolidation in the number of providers, with several Councils adopting strategic partnering arrangements. This change has been driven by the need to deliver new service models, through greater integrated working with the NHS and by the need to address financial challenges. Contract lengths are also improving from an average of 2.5 years in 2012 to over three years in 2014. Those looking at strategic partnerships typically have contract lengths of five to eight years. We anticipate this change will continue at a pace over the next few years.

Our higher acuity, Nurseplus activities have made strong progress since acquisition in April 2013, driven from securing new high acuity packages with the existing Mears client base which had not been served previously. The business has now been integrated fully and the structure of the Care business has been further enhanced under two divisional managers covering the north and south of the UK, together with an additional ten technical case managers; this is a significant investment in an area of Care which we expect to deliver significant growth.

Social Care continues to be a focus for society at large; consequently further evolution of the market may be expected.  Councils are striving to protect spending on adult care as their overall budgets come under pressure due to the prevailing environment of austerity. These financial pressures are being offset by a phased programme of budget transfer from the NHS, announced last year, to promote better joint working between the 'free' at the point of delivery NHS and  'means tested' local domiciliary and residential care services.  The greater integration of the NHS can be seen in the proportion of opportunities involving complex services, having grown from one in four in 2012, to approaching one in two of all tenders in 2014.

The Better Care Fund is already having a significant impact at a local level with all Councils drawing up plans with NHS Clinical Commissioning Groups around the transfer of funds from NHS into community-based care and support. The £5 billion+ Better Care Fund will start to have a more significant impact from the middle of 2015.

Virtually all tenders now include an element of outcomes-based reward (compared to 2012 when all tenders were task and time-based.) There are a number of such opportunities in the pipeline in which outcome-based elements will be significant. We are working on an outcome-basis in our Wiltshire contract. 

The Health and Social Care Act, which came into force on 1 April 2013, established Health and Wellbeing Boards to promote this more efficient and productive local integration. This has now been re-enforced by the Care Act 2014, which comes into force this year and will see greater focus on outcome-based reward, integrated working and prevention activities. The Care Act also provides for the introduction of the £72,000 Care Funding cost cap for individuals in 2016, following recommendations from the Dilnott report. This will increase the number of people receiving public funded care.

Care - new contract bidding

In Care, the contract bidding success rate (by value) of all contracts bid was 73%, amounting to a total value of £130m (2013: £96m, 69%), including the amounts shown in the table below.

Contract	Detail
Torbay and South Devon NHS Trust	Mears Care has been awarded a 5 +3 year contract, estimated to be worth £50m. Mears is the single prime contractor to deliver 'Living Well@Home Services' across Torbay and Southern Devon. The innovative service delivery model integrates personal care and more complex healthcare at home (overseen by Mears Nurseplus), mental health and learning disability support services, together with housing related and community support. Outcome-based payments will be implemented as soon as possible after the contract commencement date
NHS Rotherham CCG	A three year contract worth £3.7m for domiciliary care, end of life services and complex care for service users with learning disabilities and/or physical disabilities, including spinal injuries and ventilated patients
Plymouth Council	We have been awarded a three year contract worth £5.5m. Services include a two-hour rapid response service and support for people with dementia, learning and physical disabilities. The contract will also promote joint working with the NHS
Stirling and Clackmannanshire	We have retained our major contracts with Stirling and Clackmannanshire which came as part of the ILS acquisition. The two contracts are for four years personal care and support services worth an estimated £18m over four years
Calderdale Council	Mears was awarded a new three year contract for personal care and support worth £8.5m over three years

Our Care strategy

Our Care strategy has evolved prudently over several years, reflecting the often slow speed of change in the sector. The positive moves we are seeing in the structure of tendered opportunities are in-line with our predictions and the momentum of change is now building and is positive. Our strategy seeks to reinforce this momentum and to benefit from it:  

Strategic focus	Delivery
Focus on delivering high quality care through the development of outcome-based working, as opposed to the traditional care focus on task and time	Our Wiltshire contract, which commenced in 2013, is very much the flagship for this development. Within Wiltshire, all care plans are written based upon achieving specific outcomes for individual service users. We agree a budget and a timeframe to achieve these outcomes and payments are linked to our success
Deliver sustainable pricing	We are focusing on those contracts that allow us to recruit a workforce delivering a high quality service. This has resulted in a further tightening of our bid/no bid decisions which included our not rebidding for one of our existing relatively high volume, but low priced, contracts
Invest in the workforce to ensure it is both motivated and well trained	We have agreed new minimum pay levels for our staff which are set ahead of national minimum wage with a further significant enhancement for those working within the London area. We are also investing further in training and a range of other benefits. We believe this investment is fundamental to help reduce the staff churn rate; as such, this investment  should be self-funding over the long-term
Evolve the breadth and depth of service offering	Increasing integration of NHS and Social Services is growing the number of people with more complex conditions who need care at home. Complex care covers services such as spinal injuries, head injuries, end of life care, dementia care and learning disabilities. Given the potential of this area, we will invest in our own Mears Nurseplus infrastructure and in a number of regional clinical leads, who can develop local relationships with Clinical Commissioning Groups (CCGs)
Consider acquisitions to supplement our capabilities and support our increasing service breadth	Our focus is on identifying any complex care businesses that can assist in the scaling up of a full national presence. We are looking for quality operations which, when combined with our own organic investment, will enable us to build a leadership platform across all levels of care in the home

Positive outlook for the Group

We operate in robust and defensive markets where spend is largely non-discretionary. We continue to place great emphasis on winning high quality contracts that provide clear and sustainable margins with good cash flow dynamics.  Our dedication to providing our clients with first class service and value remains undiminished.

We expect our Social Housing business to continue to grow through further contract wins. Whilst we are market leader, we deliver services to just 15% of the UK Social Housing stock which leaves us significant further growth opportunities given our differentiated market-leading positioning.

We see the development of our Housing Management services as an important extension of our Social Housing offering. The demand for affordable housing will provide opportunities to work with housing providers to improve the delivery of housing and property management services and to increase the supply and management of housing through innovation and partnership. Currently, this area is highly fragmented and undeveloped. We believe the Group is well positioned to progress and deliver strong organic growth. Where appropriate, we will make acquisitions to develop the breadth of our services and enhance our scale.

We are confident that further opportunities in Care will grow from health and social care outsourcing and the implementation of new localised commissioning models. Consequently, we will continue to move further up the acuity chain, with an increased focus upon organic growth, extending our Nurseplus model across our clients with this growth being supported by in-fill acquisitions.

In closing, since the turn of the year, trading remains in line with our expectations and we look forward to another year of progress across the Group.

Financial review

This Financial Review provides further key information in respect of the financial performance and financial position of the Group, to the extent that this is not already covered within the Chief Executive's review of operations.

Acquisition of Omega Group

During October 2014, Mears completed the acquisition of the Omega Group ("Omega"), a leading private sector provider of residential lettings and management services to the Social Housing market, with a portfolio of circa 1,700 properties and a client base of 24 Local Authorities and Housing Associations.

The initial consideration for the acquisition was £20.0m in cash, funded from Mears' existing banking facilities. A further consideration of £1.8m was paid to normalise the level of working capital at completion.  Additional contingent consideration is payable in instalments in the event that average EBITDA over a 36 month period to 31 October 2017 exceeds £3.4m per annum. The additional consideration payable will be an amount based upon a multiple of 6.8 applied to the average EBITDA, less the initial consideration of £20m paid, with total consideration capped at £41.8m. The deferred consideration will be satisfied using either cash or shares, at the discretion of the Company.

Exceptional costs

It is pleasing to report a set of numbers where all transactions are included within normal trading. This followed the previous year which had seen the Group dispose of its non-core Mechanical & Electrical business resulting in a loss on disposal of £18.8m together with integration and restructuring costs of £6.5m following the acquisition of Morrison Facilities Services Limited in late 2012. Whilst extracting certain non-recurring items can at times be a necessity to ensure the Financial Statements properly reflect underlying trading, it has always been our strong preference to keep our normalising adjustments to a minimum.

The Group inherited a number of financial challenges with the acquisition of Morrison which naturally brought with it an increased level of uncertainty. Our focus upon service delivery and a commitment to invest in those contracts has enabled us to resolve the key financial challenges positively and has placed the ex-Morrison contracts on a sound footing. The introduction of the Mears systems and proven operational processes drove through further improvements. Inevitably there were some positive and negative variances as judgments and estimates were revised in the light of changing circumstances, however, these combined to give a neutral impact to 2014 trading and underlying trading remains consistent.

Amortisation of acquisition intangibles

A charge for amortisation of acquisition intangibles of £12.3m (2013: £10.9m) arose in the period. This charge relates to a number of acquisitions in both Social Housing and Care over recent years. The increase in the period is principally driven by the full year impact of ILS Group, acquired in May 2013, together with the impact of the acquisition of Omega in October 2014 which generated an identified acquisition intangible of £8.2m and which is to be amortised over a period between 5 and 12 years.

Net finance charge

A net finance charge of £1.3m has been recognised in the year (2013: £1.8m).

The finance cost in respect of bank borrowings was £2.8m (2013: £3.2m). The small decrease reflects the reduction in average debt. The Group has two interest rate swaps which has fixed LIBOR at a blended rate of 1.87% on the first £57.5m of its borrowing. The remaining debt bears a variable LIBOR rate that has been in the region of 0.5% throughout the period. The Group pays a margin over and above the LIBOR which is subject to a ratchet mechanism but which is typically at the lower end of the range of 1.5 to 2.5%.

The finance costs also include other interest of £0.3m (2013: £0.4m) relating to the discounting of trade receivables and provisions to properly reflect the time value of money.

The net finance income in respect of defined benefit pension schemes was £1.8m (2013: £1.7m).

Share of profit in Joint Ventures

The acquisition of Omega included two joint ventures where the Group has an interest in 50% of the share capital of the related entity. Whilst the Group has joint control over their activities, it does not have outright control, and therefore the results of the Joint Ventures are not consolidated in the Group results and are incorporated within a single entry on the face of the Group Income Statement. In the period since acquisition, the Joint Ventures generated a profit of £0.6m of which half is recognised within the Group Income Statement.

Tax expense

	2014	2013*
	£m	£m
Current Tax recognised in Income Statement	4.7	3.4
Deferred Tax recognised in Income Statement	(0.3)	1.4
Total tax expenses recognised in Income Statement	4.4	4.8
Profit before tax and before amortisation of acquired intangible	42.0	32.6
Profit before tax	29.7	21.7
Effective current tax rate	11.2%	10.2%

*continuing activities

The tax charge for the year was £4.4m (2013: £4.8m). The headline rate of corporation tax for the year was 21.5% (2013: 23.3%). The effective current tax recognised in the income is significantly lower than the headline rate due to the utilisation of losses brought forward, primarily associated with Morrison, combined with an annual corporation tax deduction in respect of the exercise of share options. For the same reason, the Group has also enjoyed a reduction in the cash outflow from Corporation Tax of £2.3m (2013: £3.1m).

The headline rate of corporation tax will reduce to 20.3% in 2015 in line with tax legislation. We anticipate the gap between the headline rate and effective rate will narrow moving forwards, however Corporation Tax losses carried forward, together with an annual corporation tax deduction in respect of the exercise of share options, is likely to maintain an effective rate below the headline rate over the medium term.

The Group continues to follow a non-aggressive policy in respect of taxation and this behaviour, combined with an excellent record of tax compliance, continues to provide the Group the benefit of an HMRC low risk status.

Earnings per share (EPS)

	2014	2013	Change
	p	p	%
Diluted earnings per share - continuing activities	24.65	16.96	+45%
Normalised diluted earnings per share - continuing activities*	32.20	30.08	+7%
Normalised diluted earnings per share - all activities*	32.20	28.06	+15%
Dividend per share	10.00	8.80	+14%

*Before acquired intangible amortisation, exceptional costs with an adjustment to reflect a full tax charge.

The normalised diluted EPS, which allows for the potential dilutive impact of outstanding share options, increased by 15% to 32.20p (2013: 28.06p). Normalised earnings are stated before exceptional costs and exclude the amortisation of acquisition intangibles together with an adjustment to reflect a full tax charge of 21.5% (2013: 23.3%). We believe that this normalised diluted EPS measure better allows the assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future performance.

Cash performance

	2014	2013*
	£m	£m
Operating profit**	43.0	41.1
Exceptional costs with cash impact	-	(8.8)
Depreciation	5.5	5.6
Adjusted EBITDA	48.5	37.9
Cash inflow from operating activities	46.4	38.9
EBITDA to cash conversion	96%	103%
Net cash (debt) at balance sheet date	3.8	(0.4)
Average debt in year	59.0	70.0
Core debt at the year end	75.0	70.0

*Continuing activities

**Before amortisation of acquisition intangibles and exceptional items.

The efficiency with which the Group manages working capital remains a cornerstone of our business. The Group's conversion of EBITDA to cash in the period was 96% (2013: 103%). The Group has consistently set high standards of working capital management and high levels of conversion of profit into cash. Given the absence of growth in the top-line in 2014, the achievement of strong cash conversion might be viewed as easy, however cash collection in a high volume, low value and public sector environment always represents a challenge and so we are delighted at this continued strong performance.

Our net cash position at 31 December 2014 was £3.8m (2013: net debt £0.4m). Whilst the year end cash position was pleasing, typically the accounting period end has a low debt balance when compared to the rest of the year. A far more important metric is the Group's daily net debt balances which provide a better indication of working capital management. The average net debt over the year, excluding the Omega transaction, showed a reduction to £59.0m compared to core debt in the previous year of £70.0m.

The Group has a £120m unsecured revolving credit facility expiring in 2018. The Group continues to maintain a strong relationship with both of its bankers, Barclays and HSBC.

Balance sheet

	2014	2013
	£m	£m
Goodwill and intangible assets	227.4	193.6
Investment in Joint Ventures	1.9	-
Property, plant and equipment	15.9	15.1
Inventories	8.5	10.5
Trade receivables	142.6	151.6
Trade payables	(187.1)	(197.0)
Net debt	3.8	(0.4)
Deferred consideration	(21.0)	(1.8)
Cash flow hedge	(1.4)	(1.2)
Pension (net of deferred tax)	5.4	6.8
Taxation	(1.5)	3.0
Net assets	194.5	180.3

Acquisitions and intangible assets

The value of goodwill and other identified intangibles carried within the balance sheet is £227.4m (2013: £193.6m). The significant increase during the period was due to the acquisition of Omega which created an intangible asset of £8.2m and goodwill of £32.9m.

A total of £12.3m (2013: £10.9m) of amortisation on acquisition intangibles was charged to the Group Income Statement during the period.

Other trading balances

The Group capital expenditure of £4.5m (2013: £4.2m) relates to IT hardware, other office equipment and the refurbishment of new office premises. Predominantly all our plant and machinery is hired and motor vehicles are subject to operating leases and hence are not included within capital expenditure or recognised as an asset within the balance sheet. In addition, development expenditure was incurred in developing the in-house IT platform of £1.5m (2013: £1.2m). We would anticipate our capital expenditure in property, plant and equipment be maintained at a similar level in 2015. However, following our success in being awarded the position as joint venture partner to the DCLG, we would envisage development expenditure recording a spike to around £3.5m in the three years to 2017, before reducing to the historical level.

Trade receivables and inventories decreased to £151.1m (2013: £162.1m) which reflects a combination of reduced revenues and strong working capital management. Trade payables decreased to £187.1m (2013: £197.0m), in line with revenues.

Total equity rose by £14.2m to £194.5m at 31 December 2014. The increase in net assets is driven by retained profits.

Pensions

	2014	2013
	£m	£m
Pension asset	15.1	14.7
Pension liability	(8.4)	(6.1)
Net asset	6.8	8.6

The Group participates in two principal Group pension schemes (2013: two) together with a further 28 (2013: 30) individual defined benefit schemes where the Group has received Admitted Body Status in a Local Government Pension Scheme. At the point of tendering for new contract opportunities, the Group seeks to minimise its exposure to future changes in the required pension contribution rates and to future liabilities resulting from scheme deficits.

We have experienced significant tightening in our pension assumptions reflecting the changing market conditions and this has resulted in an increase in liabilities in the current year.

The Group's largest single scheme is the Morrison Facilities Pension Scheme which is predominantly attached to our North Lanarkshire contract. This scheme currently enjoys a net asset position of £15.1m (2013: £14.7m). Whilst a small increase in the carrying value of the asset is pleasing, the Board is mindful that valuations can fluctuate. Importantly, based on the latest triennial valuation, dated April 2012, the scheme reported a surplus of £4.8m utilising a more prudent set of assumptions based on the statutory funding principles. The IAS 19 actuarial valuations for the other schemes as at December 2014 reported a deterioration following the increase in scheme liabilities, with an increase in the net pension liability by £2.3m to £8.4m.

The Group continues to comply with a repayment plan agreed with the trustees of the Mears Group scheme whereby the Group will pay £1.0m per annum for a period of seven years with a view to the scheme being fully funded by 2020.

 

Consolidated income statement For the year ended 31 December 2014			2013
		2014
	Note	£'000	£'000
Continuing operations
Sales revenue	1	838,740	865,574
Cost of sales	2	(613,699)	(641,115)
Gross profit		225,041	224,459
Other administrative expenses	2	(182,046)	(183,344)
Exceptional costs	4	-	(6,663)
Amortisation of acquisition intangibles		(12,328)	(10,860)
Total administrative costs		(194,374)	(200,867)
Operating profit before exceptional costs and amortisation of acquisition intangibles		42,995	41,115
Operating profit		30,667	23,592
Share of results of equity accounted Joint Ventures		299	-
Finance income	3	2,315	2,119
Finance costs	3	(3,604)	(3,966)
Profit for the year before tax, exceptional costs and the amortisation of acquisition intangibles		42,005	39,268
Profit for the year before tax		29,677	21,745
Tax expense	5	(4,442)	(4,757)
Profit for the year from continuing operations		25,235	16,988
Discontinued operations
Loss for the year before exceptional costs and before tax from discontinued operations		-	(2,638)
Exceptional costs from discontinued operations	4	-	(18,830)
Tax income from discontinued operations	5	-	3,307
Profit/(loss) for the year after tax from discontinued operations		-	(18,161)
Profit/(loss) for the year from continuing and discontinued operations		25,235	(1,173)
Attributable to:
Owners of the parent		25,286	(942)
Non-controlling interest		(51)	(231)
Profit/(loss) for the year		25,235	(1,173)
Earnings (loss) per share
Basic	7	25.03p	(1.21p)
Diluted	7	24.65p	(1.17p)

The accompanying notes form an integral part of this preliminary announcement.

 

Consolidated statement of comprehensive income For the year ended 31 December 2014			2013
		2014
		£'000	£'000
Net profit/(loss) for the year		25,235	(1,173)
Other comprehensive income/(expense):
Which will be subsequently reclassified to the Income Statement
Cash flow hedges:
- (losses)/gains arising in the year		(841)	593
- reclassification to Income Statement		722	791
Increase/(decrease) in deferred tax asset in respect of cash flow hedges		5	(319)
Which will not be subsequently reclassified to the Income Statement
Actuarial loss on defined benefit pension scheme		(3,290)	(2,196)
Increase in deferred tax asset in respect of defined benefit pension schemes		694	577
Other comprehensive expense for the year		(2,710)	(554)
Total comprehensive income/(expense) for the year		22,525	(1,727)
Attributable to:
Owners of the parent		24,302	(1,496)
Non-controlling interest		(1,777)	(231)
Total comprehensive income/(expense) for the year		22,525	(1,727)

The accompanying notes form an integral part of this preliminary announcement.

 

Consolidated balance sheet As at 31 December 2014			2013
		2014
		£'000	£'000
Assets
Non-current
Goodwill		192,003	157,945
Intangible assets		35,375	35,646
Share of net assets of Joint Ventures		1,856	-
Property, plant and equipment		15,880	15,068
Pension and other employee benefits		15,131	14,731
Deferred tax asset		8,573	10,570
		268,818	233,960
Current
Inventories		8,468	10,452
Trade and other receivables		142,616	151,693
Cash at bank and in hand		66,634	79,552
		217,718	241,697
Total assets		486,536	475,657
Equity
Equity attributable to the shareholders of Mears Group PLC
Called up share capital		1,011	1,007
Share premium account		56,714	56,082
Share-based payment reserve		1,653	1,050
Hedging reserve		(962)	(848)
Merger reserve		46,214	46,214
Retained earnings		92,179	77,366
Total equity shareholders' funds		196,809	180,871
Non-controlling interest		(2,347)	(570)
Total equity		194,462	180,301
Liabilities
Non-current
Long-term borrowing and overdrafts		57,500	55,000
Pension and other employee benefits		8,372	6,107
Deferred tax liabilities		9,418	9,764
Financing liabilities		788	701
Other liabilities		25,956	1,278
		102,034	72,850
Current
Short-term borrowings and overdrafts		5,300	25,000
Trade and other payables		182,098	196,975
Financial liabilities		580	478
Current tax liabilities		2,062	53
Current liabilities		190,040	222,506
Total liabilities		292,074	295,356
Total equity and liabilities		486,536	475,657

The accompanying notes form an integral part of this preliminary announcement.

 

Consolidated cash flow statement For the year ended 31 December 2014		2014	2013
	Note	£'000	£'000
Operating activities
Result for the year before tax		29,677	21,745
Adjustments	8	20,191	18,558
Change in inventories		2,195	1,291
Change in trade and other receivables		11,967	9,242
Change in trade and other payables		(17,595)	(11,920)
Cash inflow from operating activities of continuing operations before taxation		46,435	38,916
Taxes paid		(2,285)	(3,099)
Net cash inflow from operating activities of continuing operations		44,150	35,817
Net cash outflow from operating activities of discontinued operations		-	(3,632)
Net cash inflow from operating activities		44,150	32,185
Investing activities
Additions to property, plant and equipment		(3,962)	(3,660)
Additions to other intangible assets		(1,484)	(1,169)
Proceeds from disposals of property, plant and equipment		106	6
Acquisition of subsidiary undertakings, net of cash		(22,221)	(23,617)
Interest received		78	2
Net cash outflow from investing activities of continuing operations		(27,483)	(28,438)
Net cash outflow from investing activities of discontinued operations		-	(1,390)
Net cash outflow from investing activities		(27,483)	(29,828)
Financing activities
Proceeds from share issue		636	21,260
Discharge of finance lease liability		(62)	-
Interest paid		(3,707)	(3,565)
Dividends paid		(9,252)	(8,116)
Net cash (outflow)/inflow from financing activities of continuing operations		(12,385)	9,579
Net cash outflow from financing activities of discontinued operations		-	-
Net cash (outflow)/inflow from financing activities		(12,385)	9,579
Cash and cash equivalents, beginning of year		(448)	(12,384)
Net increase in cash and cash equivalents		4,282	11,936
Cash and cash equivalents, end of year		3,834	(448)
Cash and cash equivalents comprises the following:
- cash at bank and in hand		66,634	79,552
- borrowings and overdrafts		(62,800)	(80,000)
Cash and cash equivalents		3,834	(448)

The accompanying notes form an integral part of this preliminary announcement.

 

Consolidated statement of changes in equity

For the year ended 31 December 2014

	Attributable to equity shareholders of the Company
		Share	Share-based			Retained earnings	Non-
	Share	premium	payment	Hedging	Merger		controlling	Total
	capital	account	reserve	reserve	reserve		interest	equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 January 2013	919	34,910	1,685	(1,913)	46,214	87,342	(339)	168,818
Net result for the year	-	-	-	-	-	(942)	(231)	(1,173)
Other comprehensive income/(expense)	-	-	-	1,065	-	(1,619)	-	(554)
Total comprehensive income/(expense) for the year	-	-	-	1,065	-	(2,561)	(231)	(1,727)
Deferred tax on share-based payments	-	-	-	-	-	(599)	-	(599)
Issue of shares	88	21,172	-	-	-	-	-	21,260
Share option charges	-	-	665	-	-	-	-	665
Exercise of share options	-	-	(1,300)	-	-	1,300	-	-
Dividends	-	-	-	-	-	(8,116)	-	(8,116)
At 1 January 2014	1,007	56,082	1,050	(848)	46,214	77,366	(570)	180,301
Net result for the year	-	-	-	-	-	25,286	(51)	25,235
Other comprehensive income/(expense)	-	-	-	(114)	-	(870)	(1,726)	(2,710)
Total comprehensive income/(expense) for the year	-	-	-	(114)	-	24,302	(1,777)	22,525
Deferred tax on share-based payments	-	-	-	-	-	(418)	-	(418)
Issue of shares	4	632	-	-	-	-	-	636
Share option charges	-	-	670	-	-	-	-	670
Exercise of share options	-	-	(67)	-	-	67	-	-
Dividends	-	-	-	-	-	(9,252)	-	(9,252)
At 31 December 2014	1,011	56,714	1,653	(962)	46,214	92,179	(2,347)	194,462

The accompanying notes form an integral part of this preliminary announcement.

 

Notes to the preliminary announcement

For the year ended 31 December 2014

1. Segment reporting

Segment information is presented in respect of the Group's operating segments. Segments are determined by reference to the internal reports reviewed by the Board.

The Group operated two operating segments during the year:

Social Housing - services within this sector comprise a full repairs and maintenance service to Local Authorities and other Registered Social Landlords; and

Care - services within this sector comprise personal care services to people in their own homes.

All of the Group's activities are carried out within the United Kingdom and the Group's principal reporting to its chief operating decision maker is not segmented by geography.

The principal financial measures used by the chief operating decision maker and the Board to review the performance of the operating segments is that of revenue growth and operating margins in both the core divisions of Social Housing and Care. The operating result utilised within the key performance measures is stated before amortisation of acquisition intangibles, exceptional costs and costs relating to the long-term incentive plans.

		2014				2013
						Social Housing	Care	Total
	Social
	Housing		Care	Total
Operating segments	£'000		£'000	£'000		£'000	£'000	£'000
Revenue	714,733		124,007	838,740		742,479	123,095	865,574
Operating result pre amortisation of acquisition intangibles, exceptional costs and long-term incentive plans	34,410		9,641	44,051		33,530	9,623	43,153
Operating margin pre amortisation of acquisition intangibles, exceptional costs and long-term incentive plans	4.81%		7.78%	5.25%		4.52%	7.82%	4.99%
Long-term incentive plans	(1,056)		-	(1,056)		(2,038)	-	(2,038)
Operating result pre amortisation of acquisition intangibles and exceptional costs	33,354		9,641	42,995		31,492	9,623	41,115
Exceptional costs				-				(6,663)
Amortisation of acquisition intangibles				(12,328)				(10,860)
Finance costs, net				(990)				(1,847)
Tax expense				(4,442)				(4,757)
Profit for the year from continuing activities				25,235				16,988

All revenue and all non-current assets arise within the United Kingdom. All of the revenue reported is external to the Group. No revenue in respect of a single customer comprises more than 5% of the total revenue reported.

2. Operating costs

Operating costs, relating to continuing activities, include:

	2014	2013
	£'000	£'000
Share-based payments	670	665
Long-term incentives	386	1,373
Depreciation	4,362	4,748
Amortisation	13,480	11,904
Loss on disposal of property, plant and equipment	(3)	(215)
Hire of plant and machinery	5,916	4,944
Other operating lease rentals	24,705	24,644

3. Finance income and finance costs

		2013
	2014
	£'000	£'000
Interest charge on overdrafts and short-term loans	(1,975)	(2,401)
Interest charge on hedged items (effective hedges)	(722)	(791)
Interest charge on hedged items (ineffective hedges)	(70)	-
Other interest	(80)	-
Finance costs on bank loans, overdrafts and finance leases	(2,847)	(3,192)
Interest charge on defined benefit obligation	(426)	(401)
Unwinding of discounting	(331)	(373)
Total finance costs	(3,604)	(3,966)
Interest income resulting from short-term bank deposits	10	2
Interest income resulting from defined benefit asset	2,238	2,117
Other interest income	67	-
Finance income	2,315	2,119
Net finance charge	(1,289)	(1,847)

4. Exceptional costs

Exceptional costs incurred in the period which are considered non-trading or non-recurring in nature are detailed below:

	2014	2013
	£'000	£'000
Costs of acquisitions	-	200
Costs of integration	-	6,463
Total continuing operations	-	6,663
Total discontinued operations (see note 8)	-	18,830
Total continuing and discontinued operations	-	25,493

The costs of acquisition in the prior period relate to the acquisition of ILS Group Limited.

The costs of integration in the prior period relate to the integration of the Morrison and Mears Social Housing businesses.

On 5 November 2013 the Group entered into a sale agreement to dispose of Haydon Mechanical & Electrical Limited, which undertook design and build M&E services. The disposal was completed on 21 November 2013.

Exceptional costs on discontinued activities in the prior period relate to the loss on disposal and associated costs of disposals of Haydon Mechanical & Electrical Limited.

5. Tax expense

Tax recognised in the Income Statement:

	2014	2013
	£'000	£'000
United Kingdom corporation tax effective rate 18.2% (2013: 15.5%)	5,410	3,360
Adjustment in respect of previous periods	(721)	(23)
Total current tax recognised in Income Statement	4,689	3,337
Deferred taxation charge:
- on defined benefit pension obligations	285	533
- on share-based payments	(130)	524
- on accelerated capital allowances	293	(200)
- on amortisation of acquisition intangibles	(2,127)	(2,364)
- on short-term temporary timing differences	2,285	178
- on corporate tax losses	(674)	2,655
- impact of change in statutory tax rates	(179)	94
Total deferred taxation recognised in Income Statement	(247)	1,420
Total tax expense recognised in Income Statement on continuing operations	4,442	4,757
Total tax credit recognised in Income Statement on discontinued operations	-	(3,307)
Total tax expense recognised in Income Statement	4,442	1,450

6. Dividends

The following dividends were paid on ordinary shares in the year:

	2014	2013
	£'000	£'000
Final 2013 dividend of 6.30p (2013: final 2012 dividend of 5.70p) per share	6,370	5,617
Interim 2014 dividend of 2.85p (2013: interim 2013 dividend of 2.50p) per share	2,882	2,499
	9,252	8,116

The proposed final 2014 dividend of 7.15p per share has not been included within the Consolidated Financial Statements as no obligation existed at 31 December 2014.

7. Earnings per share

	Basic (continuing)			Basic (discontinued)			Basic (continuing and discontinued)
	2014	2013		2014	2013		2014	2013
	p	p		p	p		p	p
Earnings per share	25.03	17.50		-	(18.71)		25.03	(1.21)
Effect of amortisation of acquisition intangibles	12.20	11.19		-	-		12.20	11.19
Effect of full tax adjustment	(4.54)	(2.91)		-	1.74		(4.54)	(1.17)
Effect of exceptional costs (including tax impact)	-	5.26		-	14.89		-	20.15
Normalised earnings per share	32.69	31.04		-	(2.08)		32.69	28.96

	Diluted (continuing)			Diluted (discontinued)			Diluted (continuing and discontinued)
	2014	2013		2014	2013		2014	2013
	p	p		p	p		p	p
Earnings (loss) per share	24.65	16.96		-	(18.13)		24.65	(1.17)
Effect of amortisation of acquisition intangibles	12.02	10.84		-	-		12.02	10.84
Effect of full tax adjustment	(4.47)	(2.82)		-	1.68		(4.47)	(1.14)
Effect of exceptional costs (including tax impact)	-	5.10		-	14.43		-	19.53
Normalised earnings per share	32.20	30.08		-	(2.02)		32.20	28.06

A normalised EPS is disclosed in order to show performance undistorted by amortisation of intangibles. The Group defines normalised earnings as excluding the amortisation of acquisition intangibles, exceptional costs and adjusted to reflect a full tax charge. The profit attributable to shareholders before and after adjustments for both basic and diluted EPS is:

	Normalised (continuing)			Normalised (discontinued)			Normalised (continuing and discontinued)
	2014	2013		2014	2013		2014	2013
	£'000	£'000		£'000	£'000		£'000	£'000
Profit/(loss) attributable to shareholders:	25,286	16,988		-	(18,161)		25,286	(1,173)
- amortisation of acquisition intangibles	12,328	10,860		-	-		12,328	10,860
- full tax adjustment	(4,588)	(2,824)		-	1,685		(4,588)	(1,139)
- exceptional costs (including tax impact)	-	5,114		-	14,452		-	19,566
Normalised earnings	33,026	30,138		-	(2,024)		33,026	28,114

The calculation of EPS is based on a weighted average of ordinary shares in issue during the year. The diluted EPS is based on a weighted average of ordinary shares calculated in accordance with IAS 33 'Earnings Per Share', which assumes that all dilutive options will be exercised. The additional normalised basic and diluted EPS use the same weighted average number of shares as the basic and diluted EPS.

	2014	2013
	Millions	Millions
Weighted average number of shares in issue:	101.02	97.09
- dilutive effect of share options	1.54	3.10
Weighted average number of shares for calculating diluted earnings per share	102.56	100.19

8. Notes to the Consolidated Cash Flow Statement

The following non-operating cash flow adjustments have been made to the result for the year before tax:

	2014	2013
	£'000	£'000
Depreciation	4,362	4,748
Loss on disposal of property, plant and equipment	3	215
Amortisation	13,480	11,904
Share-based payments	670	665
IAS 19 pension movement	(1,425)	(2,538)
Finance income	(77)	(2)
Finance cost	3,178	3,566
Total	20,191	18,558

9. Acquisitions

On 15 October 2014 the Group acquired the entire issued share capital of Omega Group for an initial consideration of £21.8m and a maximum contingent consideration of £20.0m. The contingent consideration is dependent upon future profitability and is payable over a period of up to three years. The effect of this acquisition on the Group's assets is detailed below.

In addition, the Group completed the acquisition of four small Care businesses for an aggregate consideration of £2.7m. The effect of these four acquisitions on the Group's assets is detailed below.

	Book and provisional fair value
	Omega
	Group	Other	Total
	£'000	£'000	£'000
Assets
Non-current
Property, plant and equipment	706	40	746
Investment in associate	1,617	-	1,617
Current
Inventories	211	-	211
Trade receivables	2,855	282	3,137
Other receivables	134	31	165
Current tax asset	137	-	137
Cash at bank and in hand	2,382	37	2,419
Total assets	8,042	390	8,432
Liabilities
Current
Trade and other payables	5,736	1,018	6,754
Current tax liabilities	-	154	154
Deferred tax liabilities	-	4	4
Total liabilities	5,736	1,176	6,912
Net assets /(liabilities)acquired	2,306	(784)	1,520
Intangibles capitalised	8,228	3,497	11,725
Deferred tax liability recognised in respect of intangibles capitalised	(1,645)	(527)	2,172
Net assets acquired	8,889	2,184	11,073
Goodwill capitalised	32,911	527	33,438
	41,800	2,711	44,511
Satisfied by:
- cash	21,800	2,711	24,511
- deferred consideration	20,000	-	20,000
	41,800	2,711	44,511

Analysis of net outflow in respect of the purchase of the subsidiary undertakings:

	Total
	£'000
Cash consideration	(24,511)
Cash at bank and in hand acquired	2,419
Cash payments in respect of prior year acquisitions	(129)
	22,221

10. Publication of Non Statutory Accounts

The financial information set out in the announcement does not constitute the group's statutory accounts for the years ended 31 December 2014 or 2013. The financial information for the year ended 31 December 2013 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under s498 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2014 will be finalised on the basis of the financial information presented by the Directors in this preliminary announcement and will be delivered to the Registrar of Companies.

The Listing Rules of the UK Listing Authority (LR 9.7A.1) require that preliminary unaudited statements of annual results must be agreed with the listed Company's auditor prior to publication, even though an audit opinion has not yet been issued. In addition, the Listing Rules require such statements to give details of the nature of any likely modification that may be contained in the auditor's report to be included with the annual report and accounts. Mears Group PLC confirms that it has agreed this preliminary statement of annual results with Grant Thornton UK LLP and that the Board of Directors has not been made aware of any likely modification to the auditor's report required to be included with the annual report and accounts for the year ended 31 December 2014.

 

END

 

 

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