Final Results

RNS Number : 0559S

Mears Group PLC

15 March 2016

 

For Immediate Release

15 March 2016

Mears Group PLC

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

 

Final Results

For the year to 31 December 2015

Mears Group PLC, the provider of services to the Social Housing and Care sectors in the UK, is pleased to announce solid financial results for the year ended 31 December 2015 combined with excellent progress in positioning both our Core divisions for the future.

Financial Highlights

	2015	2014	Change
Group revenue	£881.1m	£838.7m	+5%
Social Housing revenue	£735.1m	£714.7m	+3%
Care revenue	£146.0m	£124.0m	+18%
Profit for the year before tax *	£36.8m	£42.0m	-12%
Profit for the year before tax from continuing activities	£25.9m	£29.7m	-13%
Diluted earnings per share*	20.10p	24.65p	-18%
Normalised diluted EPS*	27.94p	32.20p	-13%
Dividend per share	11.00p	10.00p	+10%

·   Group revenue of £881.1m (2014: £838.7m), reflecting the full year impact of Omega, acquired in October 2014, and the acquisition of the Care at Home business from Care UK ('CAH'), in May 2015.

·    Group profit before tax* of £36.8m (2014: £42.0m), a reduction of 12% following the acquisition of the loss-making CAH, which was anticipated at the time of the acquisition. 

·    Housing revenue of £735.1m (2014: £714.7m), driven primarily by the full year impact of Omega. Excellent revenue visibility for 2016 indicates solid underlying growth for the coming year.

·   Housing operating margin of 5.8% (2014: 4.8%) driven by improving contract margins generated from the Morrison business together with a changing sales mix towards higher margin Housing Management activities.

·    In Care, revenue increased by 18% to £146.0m (2014: £124.0m), driven by the acquisition of CAH. Underlying revenues fell by 9% reflecting a shortage of Care workers.

·    Care operating margin was reduced to negative 1.1% (2014: positive 7.8%) predominantly reflecting the loss generated from the newly acquired CAH business, together with the lower operational gearing following the  revenue reduction and an increase in Carer pay.

·    Excellent EBITDA cash conversion of 99% (2014: 96%).

·    New contract wins of circa £1 billion (2014: £300m); Housing awards of £900m with a conversion rate of 49% (2014: £170m and 35%) and Care awards of £80m with a conversion rate of 63% (2014: £130m and 73%).

·    Strong balance sheet with average net debt of £68m (2014: £59m); net cash at 31 December of £0.8m (2014: £3.8m).

·    Progressive dividend policy increasing total dividend by 10%, to 11.0p per share (2014: 10.0p), reflecting the Board's confidence in the underlying performance of the Group and the future.

·    The impact of residual losses from the Group's Mechanical and Electrical ('M&E') business, which was subject to a disposal in 2013, are included within discontinued activities reporting an operating loss of £8.0m

* Continuing activities, stated before amortisation of acquisition intangibles. The normalised diluted EPS measure is further adjusted to reflect a full tax charge.

 

Operational Highlights

Housing:

·    Traditional bid pipeline returning to historical norms following a quieter period in 2014 and early 2015.

·    We continue to capitalise on competitor weakness within our traditional maintenance business. In addition, the development of a broader based service offers further competitive advantage.

·  Securing the two strategically important opportunities of Milton Keynes and Key Worker Housing. The mobilisations are progressing well.

·   Service quality remains our differentiator: the proportion of customers rating our service as "excellent" was maintained at the record level of 91% (2014: 91%).

·   The Housing Management businesses acquired in 2014, will have increased four-fold by the end of 2016, well ahead of original expectations.

Care Division:

·    Repositioning our Care business - re-directing activities towards maintaining a portfolio of good quality contracts that can provide clear and sustainable margins with more sophisticated clients.

·    Solid progress being made in securing charge rate increases following the introduction of National Living Wage.

·    The integration of the Care at Home division of Care UK (CAH), acquired in May 2015, is substantially complete and the business is trading in line with original expectations.

·    Continued strong CQC regulatory compliance.

Outlook:

·    Order book at £3.5 billion (2014: £3.3 billion) and a solid pipeline of new opportunities.

·    Visibility of 96% of consensus forecast revenue for 2016 and in excess of 83% for 2017 (2014: being 92% and 82% respectively) indicating solid underlying growth for the coming year.  

·   The year has started well with a number of key mobilisations well advanced. Current year trading remains in line with Board expectations for 2016.

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

"I am delighted with the excellent progress Mears has made in 2015.

"Our Housing business has delivered a strong performance. We are delighted with the progress being made with our developing Housing Management business.  The speed of change in this area is particularly exciting and we are well placed to benefit from an extensive pipeline of opportunities.

"We continue to find the Care market challenging. We are placing greater emphasis on maintaining a portfolio of good quality contracts that can provide clear and sustainable margins whilst at the same time delivering a first class experience to our service users. The introduction of the National Living Wage has placed further financial pressures on both Care commissioners and providers but I have generally been encouraged by the initial reaction of our clients in recognising their responsibility to reflect the increase in our cost base with matching increases in our fee rates.  We have significantly increased our focus upon carer retention and recruitment and I am pleased with the progress being made in this critical area. We remain confident that we have the right strategy and that Mears is well placed to take advantage of industry evolution.

"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 for the full year. The Group is well positioned to take advantage of future opportunities and we look forward to updating the market with further successes."

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 about Mears

Mears is a leading provider to Local Authorities, Registered Social Landlords and the NHS. We deliver repairs and maintenance services and personal care services directly into communities and people's own homes.

Increasingly our growth is coming from Housing management services, that help reduce homelessness and more complex and integrated care solutions to the NHS that enable people to stay in their own homes for longer.

Mears employs around 18,000 people and provides maintenance and repairs services to circa 15% of the UK social housing stock. Mears also provides care, on a daily basis, to over 30,000 service users.

 

Chairman's statement

Summary

I am delighted to report a year of excellent progress, particularly in broadening our Housing service offering. The recent changes to social housing finance, combined with the increasing disparity between the supply and demand of housing, has constrained the number of new bidding opportunities over the previous two years. We used this hiatus wisely to strengthen our competitive positioning and our recent success at Milton Keynes is an early reward. Importantly, I do not believe that any competitor can offer such a broad-based, one-stop, solution in affordable housing.

Our market-leading Housing maintenance business continues to perform well. Since Mears extended its services to Housing Management, accelerated by the acquisition of Omega in 2014, the Group has successfully grown the business from around 2,000 homes under management to a figure fast approaching 10,000. We are working with Local Authorities, Housing Associations and institutional investors who are seeking to provide good quality homes. This is an exciting opportunity given the urgency for our clients to find solutions to address the homelessness issue and the pipeline remains buoyant. We are delighted to have been awarded a long-term joint venture partnership with Milton Keynes Council. This joint venture partnership represents one of the single largest contracts ever awarded to Mears.

The acquisition of the Care at Home division of Care UK (CAH) in May 2015 significantly increased the scale of Mears within the domiciliary care market and strengthened our position with several strategically important clients, who are more likely to adopt outcome-based contracts on re-tender. As the second largest provider in the market, with a differentiated approach, we are well placed to benefit from both the emergence of new style partnerships in domiciliary care and the wider integration of local health and social care.

I am pleased to report a solid financial performance for the year to 31 December 2015. Group revenue amounted to £881.1m (2014: £838.7m), as a result of the full year impact of Omega, acquired in October 2014, and the acquisition of CAH, acquired in May 2015. Whilst our Housing division delivered only a small amount of organic growth, we have enjoyed our most successful period of new contract bidding, securing circa £1 billion of new work. The order book has increased to £3.5 billion (2014: £3.3 billion) providing 96% visibility of consensus forecast revenue for 2016 and in excess of 83% visibility for 2017 (2014: 92% and 82% respectively). Our Care division has endured a challenging market, reporting a like-for-like revenue reduction in the year. This is discussed in greater detail in the Operations Review.

Following the acquisition of the loss-making CAH, Group operating margins decreased to 4.6% (2014: 5.3%) with operating profit, before acquired intangible amortisation, decreasing by 10% to £38.7m (2014: £43.0m). We continue to drive margin improvements within our Housing division, which accounts for 83% of Group revenues, with margins increasing to 5.8% (2014: 4.8%). To see our Housing margins return to pre-Morrison acquisition levels, a year ahead of our original expectations, is a tremendous achievement.

Our headline normalised diluted earnings per share decreased by 13% to 27.94p (2014: 32.20p), due to the initial trading losses and integration costs associated with the acquisition of CAH which was anticipated at the time. The impact of the residual losses from the Group's Mechanical and Electrical ('M&E') business, which was subject to a disposal in 2013, are included within discontinued activities. We have continued to deliver solid cash flows with cash generated from continuing operations as a proportion of EBITDA at 99% (2014: 96%) with net cash reported at the year-end demonstrating our continued strong cash management. Average daily net debt for the year increased to £68.0m (2014: £59.0m), which reflects the outflow of cash to fund acquisitions.

Dividend

The Board remains confident in the future opportunities in our growth markets and consequently it expects to continue following a progressive dividend policy. The Board has recommended a final dividend of 7.90p per share which, when combined with the interim dividend, gives a total dividend for the year of 11.0p (2014: 10.00p), a 10% increase, reflecting the Board's confidence in the underlying performance of the Group. The dividend is payable, subject to shareholder approval at the Company's Annual General Meeting on 1 June 2016, on 7 July 2016 to shareholders on the register on 17 June 2016. The Board regularly reviews the Group's distribution policy to maximise returns to shareholders whilst maintaining a prudent capital structure and the ability to invest 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 2015 and into the future. 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.

Over recent months, I was delighted to welcome two new Non‑Executives to the Board. In October 2015, the Group appointed Geraint Davies who has a substantial breadth of commercial experience and has already made a significant contribution since his arrival. Geraint has also been appointed Audit Committee Chairman. In January 2016, we appointed Julia Unwin who has significant experience within the Housing sector and further improves the balance of the Board.

Board evaluation and effectiveness

Performance evaluation of the Board, its Committees and individual Directors takes place on an annual basis. The Directors were asked for their views on a broad range of areas including Group strategy, independence, experience, effectiveness, and the interaction between Board members. I am pleased with the structure of the Board and that it is working in an effective and efficient manner.

European Referendum

I note with interest the impending European referendum. While uncertainty is never positive for business, Mears does not envisage any significant negative impact from an EU exit, especially given that any exit is likely to be over a number of years. Notably, Mears has a very low level of reliance upon Eastern-European migrant workers. What is perhaps more relevant in the short-term, is that the domestic policy agenda is likely to take a back seat and legislative plans may slow down.

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.

Mears has a diverse workforce of over 18,000 staff including 400 apprentices; the vast majority of our employees live in the areas in which they work. Diversity and respect for all is core to our induction, recruitment and customer care programmes.

We continue to invest in the future generation. During the year, Mears opened its new national training academy in Rotherham which will oversee the delivery of the Group's Learning and Development programme. The capability of Mears' existing in-house training function has been further enhanced through developing external partnerships with training providers. The Group is committed to providing the best technical training for our people, as well as creating training and career development opportunities, particularly for young people and the unemployed, in the communities in which we serve.

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 talented people. We have broadened this management development programme to cover 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. We focus on enhancing and strengthening skills in order to improve performance, as well as stretching those delegates who have the potential to take on more senior roles in the future.

I look forward to reporting news of our further success during the coming year.

R Holt

Chairman

[e-mail]
 

Chief Executive's statement

Positive progress

I am delighted with the progress made by the Group, particularly within our Housing division where we have successfully extended our services from our traditional maintenance base to a broader affordable housing offering. The Housing Management businesses acquired in 2014 will have increased four-fold by the end of 2016, which is a remarkable achievement.

Our strategy to broaden our service offering in Housing has created a significant sustainable competitive advantage for Mears. A highlight in 2015 was our success in being selected by Milton Keynes Council to form a long-term joint venture partnership. The joint venture will provide total asset management to the Council's social housing portfolio and deliver regeneration opportunities across its priority estates. This joint venture represents one of the largest single contracts ever awarded to Mears. Our ability to provide a one-stop, affordable housing solution was fundamental to our success in securing this important opportunity.

Our Care division has experienced a challenging market environment this year. The sector has been under severe funding pressure. Whilst there has been no shortage of demand for care work, a significant barrier to growth has been the sourcing of sufficient good quality care workers. We have focused on those strategically important clients which we believe have potential to develop into partnerships where we are able to deliver a high quality service at sustainable margins. Our acquisition of the loss-making Care at Home business of Care UK (CAH) has now been integrated and will begin to deliver value.

Positive outlook

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 Housing business to continue to grow through further contract wins. Whilst we are the market leader, we deliver services to only 15% of the UK's social housing market, which provides us with significant headroom for growth. Furthermore, our Housing Management capabilities offer material growth opportunities, as the demand for affordable housing requires that housing providers work harder and smarter to increase the supply of suitable housing through innovation and partnership. We believe the Housing division is well positioned to deliver strong organic growth. Where appropriate, we will make acquisitions to develop the breadth and depth of our services.

Continued funding issues in the care market will create a catalyst for change, as will the consequences of implementing the National Living Wage. Whilst I do not see a strong prospect of immediate fundamental change, I am clear in my view that, increasingly, commissioners will look to re-balance their contract estate, focusing on working with fewer better-run service delivery partners. Moreover, further opportunities will result from localised health related outsourcing. Our market-leading approach to service quality and innovation puts us in a strong position, and as the Care market evolves, we will benefit disproportionately.

David J Miles

Chief Executive Officer

[e-mail]

 

Review of operations

	Social Housing			Care			Total
	2015	2014		2015	2014		2015	2014
	£m	£m		£m	£m		£m	£m
Revenue	735.1	714.7		146.0	124.0		881.4	838.7
Operating profit*	42.4	34.4		(1.6)	9.6		40.8	44.0
Operating margin*	5.8%	4.8%		(1.1%)	7.8%		4.6%	5.3%

*    Before amortisation of acquisition intangibles and long‑term incentives.

Housing

The Housing business has delivered a strong performance with revenues of £735.1m (2014: £714.7m). Whilst the performance at an aggregate level appears relatively flat, the movements within the individual components are important and detailed below:

Revenue stream		Commentary
Maintenance
Day to day, Housing Revenue Account (HRA) funded, non-discretionary, maintenance spend 2015 revenue £589m (2014: £587m)		The changes to Housing Finance in 2012 had a positive impact on the level of funding within the ring-fenced Housing Revenue Accounts of Registered Social Landlords (RSLs), providing additional opportunities to generate income. A large proportion of RSLs were reporting large surpluses. Whilst the recent announcement to reduce social rents by 1% per annum for the next four years will have an impact on the income of RSLs, this change should be considered together with earlier changes that provide opportunities to increase income. Overall the changes to Housing Finance over the last three years have been positive for RSLs. The recent change will inevitably require RSLs to review their business plans, however, we do not anticipate any overall negative impact to our revenues. As previously reported, these changes to Housing Finance resulted in a short-term delay in bidding opportunities with activity at a low level in both 2014 and the first half of 2015. This resulted in a reduced number of new contract mobilisations during this time. However, as predicted, opportunities began increasing in the second half of 2015 and we enjoyed a particularly successful period of new contract bidding. We expect the bidding opportunities over the long term to remain at historical levels and our organic growth aspiration is 5% per annum.
Capital works, predominantly HRA funded 2015 revenue £98m (2014: £113m)		Whilst our main focus remains maintenance, we look to augment this with selective capital works opportunities. Given there is a higher proportion of discretionary spend from within this category, this spend can be susceptible to budgetary pressures. Our organic growth aspiration in this area is 5% per annum.
Housing Management
Housing and property management 2015 revenue £39m (2014: £8m)		Mears Housing Management Services is a logical extension of the services provided within our 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. There are currently over 64,000 households, the vast majority housing families, who are legally homeless and being supported by Local Authorities. It is predicted that these numbers will increase over the next few years as more people become homeless and the supply of suitable accommodation reduces. The shortage of safe and secure housing is a significant challenge faced by Mears' clients today. We anticipate Local Authorities having increased responsibility to provide more social homes and remove the reliance upon those private landlords who provide properties which are not of a uniformly high standard. Mears provides a range of solutions for Local Authorities. The Group has further extended its services in Housing Management with over 4,000 homes now under management across the country, the ongoing shortage of social housing being the prime driver for this growth. Our key offering focuses on work with Registered Providers, private landlords, investors and developers to create frameworks in which to provide and manage housing. Mears is not an asset holder and it focuses on managing assets for the benefit of owners, client public sector bodies and residents. Following the acquisition of Omega in 2014, our conservative growth target in this area was to double this part of the business over the following three years. This has already been achieved, having entered the market in 2014 with around 2,000 homes under management and now with good visibility for 10,000 homes under management by the end of 2016. This area of the business is also extending its activities to cover student accommodation.
Mears in-sourcing solutions 2015 revenue £8m (2014: £7m)		Our in-sourcing offering was developed in anticipation of an increase in the level of outsourced work being taken back in-house by Housing Associations following the VAT rate being increased to 20% and given the restriction they suffer upon the recovery of input VAT. Whilst the sector has seen a number of such transfers, they have typically been contracts of a smaller size. We see any further increase in the number of in-sourced solutions as an opportunity to deliver higher margins with a low revenue and working capital requirement. In addition we provide a stand-alone 24/7 call centre service to a number of RSLs and we have recently extended this white collar offering to income management and planning application administration.

We are delighted to report an increase in the operating margin to 5.8% (2014: 4.8%) driven by the improving contract margins generated from the Morrison business together with a changing sales mix towards higher margin Housing Management services. The turnaround of the Morrison business, which was heavily loss-making when acquired in 2012, is now complete with contracts aligned with the rest of Mears in terms of both financials and service delivery. The margins in both 2015 and 2014 were also assisted by a reduced number of new contract mobilisations, which are typically loss making in the first six months.

Service quality remains our key differentiator. We are pleased that our Housing division continues to achieve high standards of service delivery. The proportion of customers rating our service as excellent was maintained at the record level of 91% (2014: 91%). Typically, competitors in the sector measure only satisfaction, whereas our drive has been for excellence.

Housing - business development

The Housing division has secured new contracts of £900m, with a new contract win rate on competitively tendered works at its highest reported level of 49% (by value) (2014: £170m and 35%). Whilst I am delighted to report such a 'purple patch' in new bidding success, the conversion rate has been skewed given our success in being awarded two particularly large contract opportunities with Milton Keynes and Key Worker Housing. We will endeavour to maintain this high win rate but I believe that a success rate of one in three (by value) is a better indication of our future bidding success and more aligned with our historical trend.

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 Local Authorities 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.

Since the Group extended its services to Housing Management, accelerated by the acquisition of Omega in 2014, Mears has successfully grown the business with some 4,000 homes now under management across the country. With a number of new opportunities secured, including the mobilisation of our new Key Worker contract, we have good visibility of managing 10,000 properties by the end of 2016 which significantly exceeds our original expectations. Our key Housing Management offering is to work with RSLs, private landlords, investors and developers to create structures to provide and manage housing. Our not-for-profit Registered Provider enables us to offer our partners a regulated body which provides security and good governance.

Working with Local Authorities, Housing Associations and institutional investors, we are seeking to develop portfolios of good quality homes. In May 2015, working with a Local Government Pension Scheme, Mears coordinated the acquisition of 305 rented homes in the East Midlands. Rents will be kept below the full market level with any increases protecting this affordability gap. Mears is engaged to provide marketing, lettings and housing management services over a period of 20 years. This is typical of a large number of opportunities that we have secured or are in the process of negotiating. We anticipate strong organic growth in our portfolio over the next twelve months. This is an exciting, immature market, with a significant disparity between supply and demand. Given the urgency for our clients to find solutions to ease the homelessness issue, the current opportunity pipeline is particularly buoyant. In the short-term our bid pipeline comprises a small number of strategically important bids.

Mears has been engaged by a London Borough to arrange the purchase and refurbishment of 400 homes, currently under private ownership. The key aim is to provide the Borough with an alternative, affordable housing supply to replace the significant bed and breakfast accommodation costs incurred by the Borough. Mears has engaged funding partners to finance the purchase of properties on behalf of the client, carry out refurbishment works and act as managing agent for the portfolio. The contract will be operated by the Borough and Mears for 40 years and is valued at circa £50m. The operation mobilised in February 2016, and the purchase and refurbishment phase will continue over a period of 24 months. This is, once again, typical of a number of opportunities within the pipeline.

In parallel with growing homelessness, there is a national need to build new homes for social, affordable rent. Mears, through its Registered Provider, is working with house builders and investors to bring forward stalled development sites where the affordable housing elements can be funded without grants to provide rented and shared ownership tenures. Mears has, over the last two years, started developing its own house building capability. Whilst we do not intend to compete with the larger construction companies, our broad capabilities give us a competitive advantage, with the recently awarded Milton Keynes contract being a perfect example of this.

We have a good track record for contract retention when existing relationships come up for re-bid. We were therefore disappointed that we failed to re-secure our contract with Birmingham City Council; our Birmingham contract delivered revenues of circa £25m per year and we have provided a good level of service since 2007.The current contract will end in March 2016 and I would like to thank all our Birmingham employees who have provided loyal service over many years. Whilst we are disappointed to have lost a long-standing client relationship, I am encouraged by the overall quality of our order book, which has improved significantly over the last two years and has a better balance in terms of longevity and profitability. We have one further material re-bid in 2016 with our Sedgefield client, which currently delivers annual revenues of circa £15m, closely followed by two material re-bids in 2017 which carry combined annual revenue of circa £55m.

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 consider making further acquisitions where they reinforce our market-leading position.

Housing - new contract bidding

The Group has increased its historical Housing new contract win rate to 49% (by value) (2014: 35%) and secured new work with a total value in excess of £900m (2014: £170m). The most significant awards are detailed below.

Contract		Detail
Key Worker Housing		Throughout the UK and providing a full Housing Management service; this includes sourcing properties, managing the application and allocation process as well as the subsequent day to day administration. The contract, which is for an initial three year term plus an opportunity for a two-year extension, is valued at circa £65m per annum.
Milton Keynes		Mears has been selected to form a long-term joint venture partnership with Milton Keynes Council to deliver a total asset management service to the Council's social housing portfolio, and deliver regeneration and development opportunities across the Council's priority estates. This joint venture partnership, called YourMK, will represent one of the single largest contracts awarded to Mears.
London Borough of Greenwich		Mears has been awarded two lots in respect of the Asset Management Housing Repairs framework. This is a four-year contract worth approximately £12m.

Care

The Board is pleased with the performance of the Care division in terms of quality of service delivery, however, the year has been a challenging one in terms of its financial performance. I do believe that we enter 2016 in a stronger position than we entered 2015. Whilst 2016 will have its challenges, there is an increased commercial awareness throughout the Care division.

The acquisition of the loss-making Care at Home division of Care UK (CAH) in May 2015 significantly increased the scale of Mears within the domiciliary care market, making Mears the second largest provider in the UK. The acquisition strengthens the Group's position with a number of strategically important client relationships which we believe have potential to develop into output-based contracts on re-tender. Whilst initial investment in CAH was required, the combination of capability and scale has made Mears a more attractive partner for the emerging, larger partnering orientated contracts such as those already secured in Torbay and Wiltshire. Whilst the acquisition of CAH was anticipated to be financially challenging in the short term, we remain confident in our ability to turn around struggling operations as our track record is good in this respect, as the Morrison business demonstrates.

The Care division reported revenues of £146.0m (2014: £124.0m), including circa £33m in respect of CAH in its seven months of trading. The underlying organic revenues reflect a 9% reduction compared to the comparable period. The main limitation to growth in Care remains the sourcing and retention of sufficient care workers of good quality. This challenge will only increase as we move forward and we are focused on finding sustainable solutions to address this. There is no shortage of care work. With the continued focus upon carer retention and recruitment, we have started to see some improvement in churn rates during the last quarter of 2015 which is pleasing. This remains a key focus for 2016.

Following the acquisition of the loss-making CAH business, the Care operating margin reduced to a negative 1.1% (2014: positive 7.8%), delivering an operating loss of £1.6m (2014: profit £9.6m). The newly acquired CAH business contributed both a trading loss together with integration and rebranding costs. Notwithstanding the impact of the acquisition, however, which was in line with our original expectations, the underlying trading of the pre-existing Care business did fall short of our expectations. The reduction in the underlying Care operating margin reflect the negative impact of operating leverage following the reduction in revenue, a continued investment in the Care workforce and an intensive period of new contract mobilisation.

We are placing greater emphasis on maintaining a portfolio of good quality contracts that can provide clear and sustainable margins whilst at the same time delivering a first class experience to our service users and a value offering to our commissioners. We still have a long way to go to achieve this aim. We have carried out an intensive business planning process with particular focus on carer retention and recruitment which continues to be the primary challenge. The business planning process also addressed the impact of the National Living Wage (NLW), identifying key actions on a contract by contract basis. The business planning process encouraged the business to be more selective and to place increased focus on those commissioners with a desire to also move towards more innovative, outcomes-based solutions which better fit Mears' long-term model.

Prospects for the UK care market over the long-term remain very strong given the underlying growth drivers of an ageing population and the need to look after people in their own homes rather than in hospital or other residential settings. Domiciliary care will also benefit from greater integration of health and social care. Social care has seen a significant reduction in funding over the last few years, but these pressures have in turn created a momentum for change which is starting to support Mears' long-term vision for a more integrated and better commissioned range of services, delivered by a sustainable workforce.

Within this framework of financial pressure we have seen some significant change:

•   Commissioners are now increasingly recognising the need to improve pay and conditions for staff. The introduction of the new National Living Wage (NLW) has acted as a further catalyst for change. Whilst there is still dialogue taking place with a number of customers as to how the NLW is to be incorporated into charge rates, Mears has already secured significant price increases from a number of commissioners; Mears is committed to passing these increases on to our carers who have for too long been under-rewarded for the vital role that they carry out. Mears had already taken a long-term approach to this by investing significantly in care worker pay rates ahead of the introduction of the NLW to develop more sustainable contracts and will look to continue to pay at the top end of the sector.

•   We have continued to win two out of three of the Care tenders for which we bid, however, these bids have predominantly been for a single lead provider for a particular zone, as opposed to a previous practice of multi-provider, framework contracts. The most advanced example of this is at Torbay, where we are the single provider for the whole region, on a contract expected to grow to revenues of £10m per annum. We are extremely pleased with the positive start that we have had with this contract and see significant opportunity for future development. Following the positive start, we were almost immediately asked to take over a contract by the neighbouring Devon Council, giving us our first opportunity to work with this commissioner. The pipeline of opportunities is also characterised by significantly fewer providers, with longer-term contracts now typically three to five years in length.

•   Provider consolidation continues including our own recent acquisition of CAH. In an increasingly regulated environment and given the new requirements of the Care Act to more actively consider provider financial stability, scale and diversity of service are continuing to rise in importance. This is evidenced by the significant reduction in number of providers per let contract.

•   Greater integration between the NHS and Social Care is now an absolute necessity and is gathering pace, although we would still prefer this to be faster. The £5.3 billion Better Care Fund, which is the leading Government initiative to support NHS investment in community services, is felt by many to have not yet reached front line service delivery in the way intended. However, a large proportion of new tenders now include a pooled NHS and Local Authority funding contribution.

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 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, but momentum has now built up, endorsing our strategy.

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 contracts of over three years becoming the norm in 2015. 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.

Social care continues to be a focus for society at large and, consequently, further evolution of the market is 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 half of all tenders in 2015.

Care - new contract bidding

The Group has maintained its Care new contract win rate in line with its long-term average at 63% (by value) (2014: 73%) and secured new work with a total value in excess of £80m (2014: £130m). The most significant awards are detailed below.

Contract	Detail
Midlothian Council	Mears was awarded a contract for personal care and support worth £5.7m over three years. Midlothian is a new customer relationship and provides increased scale around the Edinburgh region.
North Tyneside Council and North Tyneside CCG	A three-year contract worth £4.8m to provide personal care. This is an increase in the level of work currently provided to this client.
Cumbria County Council	Mears was awarded a contract for homecare, extra-care and night services over a four-year term. The contract is valued at £13.4m.

D J Miles

Chief Executive Officer

[e-mail]
 

Financial review

Financial performance

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 Review of Operations.

Acquisition of the Care at Home division of Care UK

During May 2015, Mears completed the acquisition of Care UK Homecare Limited and Care UK Community Care Agency Limited, the corporate entities comprising the Care at Home division of Care UK Limited ('CAH'). CAH provided community-based care services to over 10,000 service users in England, Wales and Scotland, and had contracts with around 90 Local Authorities and Clinical Commissioning Groups (CCGs), employing over 4,000 staff. The acquisition of CAH significantly increased the scale of Mears within the domiciliary care market, making Mears the second largest provider in the UK. CAH provided an excellent geographic fit with Mears' existing Care business with limited cross-over.

The total consideration paid was £10.2m in cash comprising a base payment of £9.0m, valuing the business on a debt-free basis and assuming a normal level of working capital, together with a further payment of £1.2m made in respect of excess working capital acquired on completion. The total consideration of £10.2m represented a pound for pound payment against the reported book value of tangible net assets of the CAH business. Book adjustments, resulting in a reduction in the carrying value by £4.9m, were subsequently made to the balance sheet of the acquired business to ensure that the carrying values of the net assets acquired were both conservative and in line with Mears accounting policies.

The CAH business was loss-making at the time of its acquisition. The company had reported particularly poor results in certain regions and had already commenced localised closure plans. There was also considerable staff instability, impacting upon service delivery. The Board was fully aware of the challenges to improve the operations and financial performance of CAH. At the time of the acquisition, it was anticipated that the CAH business would continue to deliver trading losses in both 2015 and 2016 and to also suffer non-recurring costs in respect of restructuring and rebranding. The Board's expectations remain in line with the original estimates. These trading losses and integration costs are reported within the normal trading results.

Acquisition of Omega Group

In October 2014, the Group acquired the Omega Group ('Omega'), a leading private sector provider of residential lettings and management services to the social housing market. The initial consideration was £20.0m in cash. Additional contingent consideration is payable in instalments subject to future profitability, capped at £20.0m. The entity has performed strongly and the Directors believe it is highly probable that the full contingent consideration will be paid. The future instalments of £10m, £5m and £5m will fall due and be payable in 2016, 2017 and 2018 respectively.

The corporate structure of Omega, in addition to a number of wholly owned companies, also included an interest in 50% of the share capital of three jointly owned vehicles. Given the significant number of new opportunities being developed in this area, the Group increased its holding to 75% in the year for a cash consideration of £6.1m.

Discontinued activities

In November 2013, the Group completed the disposal of the entire share capital of Haydon Mechanical and Electrical Limited ('Haydon UK'). As part of that disposal, the Group retained the beneficial interest in 49% of the share capital of an investment in a company registered in the United Arab Emirates, Haydon Mechanical and Electrical Company LLC ('Haydon LLC'). This beneficial interest was retained due to a number of performance guarantees in place at the time of the disposal which would unravel as the underlying contracts were completed.  During the period the Group agreed in principle to sell its interest in the company to the management. The transfer will happen in stages as the performance guarantees are cancelled. The formal sales and purchase agreement is expected to be signed imminently.

At 31 December 2014, a balance of £2.6 million was due from Haydon LLC to the Group. During the period, the Group provided additional financial support to Haydon LLC of £4.5 million to fund on-going losses in the company so as to mitigate its risk in respect of the performance guarantees. The Group has fully provided for these losses and written the net carrying value of the company's assets and liabilities down to nil which equates to the full outstanding loan balance of £7.1 million. This is reported as a loss from discontinued operations. A further loss of £0.9 million was incurred during the year as a result of the Group making full provision against all remaining unsecured amounts due from Haydon UK.

Amortisation of acquisition intangibles

A charge for amortisation of acquisition intangibles of £10.8m (2014: £12.3m) arose in the period. This charge relates to a number of acquisitions in both Housing and Care over recent years. The amounts recognised as identifiable intangibles relate predominantly to customer relationships and are written off over their estimated lives.

Net finance charge

A net finance charge of £1.9m has been recognised in the year (2014: £1.3m). The finance cost in respect of bank borrowings was £2.7m (2014: £2.8m). The small decrease reflects the reduction in average debt.

The Group has two interest rate swaps which have 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 year. The Group pays a margin over and above the LIBOR which is subject to a ratchet mechanism and which, during the year, was typically in the region of 1.5% above LIBOR.

The finance costs also include other interest of £0.1m (2014: £0.3m) relating to the discounting of trade receivables and provisions to properly reflect the time value of money. The net finance income in respect of the defined benefit pension scheme was £0.7m (2014: £1.8m).

Tax expense

	2015	2014
	£m	£m
Current tax recognised in Income Statement	5.1	4.7
Deferred tax recognised in Income Statement	(1.3)	(0.3)
Total tax expenses recognised in Income Statement*	3.8	4.4
Profit before tax and before amortisation of acquired intangibles	36.8	42.0
Profit before tax	25.9	29.7
Effective current tax rate	19.8%	15.8%

*    Continuing activities

The headline UK Corporation Tax rate for the year was 20.3% (2014: 21.5%). The total tax charge for the year on continuing operations was £3.8m (2014: £4.4m) resulting in an effective total tax rate of 14.8% (2014: 15.0%). The key reconciling items to the headline rate were tax credits recognised following the conclusion of discussions with HM Revenue & Customs ("HMRC") on matters relating to prior years and an annual corporation tax deduction in respect of share options.

Total tax includes deferred tax, which is an estimate of the tax due on any differences between the carrying value and the tax base of assets or liabilities. The current tax charge excludes deferred tax and is therefore affected by both permanent and temporary differences in the recognition of items for tax and accounting purposes.

The current tax charge for the year on continuing operations was £5.1m (2014: £4.7m) which represents an effective tax rate of 19.8% (2014: 15.8%). For both the years, the key reconciling items to the headline rate were permanent differences on the amortisation of acquisition intangibles and the utilisation of brought forward tax losses, primarily associated with the Morrison business.

The Group complies with all relevant tax laws and regulations regarding the payment of tax and the provision of information to tax authorities. Mears does not undertake any aggressive tax planning or schemes that utilise low tax regimes in other jurisdictions for the purposes of tax avoidance. Mears seeks to maintain an open and honest relationship with the tax authorities and benefits from an HMRC 'low risk' status.

Earnings per share (EPS)

	2015	2014	Change
	p	p	%
Diluted earnings per share*	20.10	24.65	(18%)
Normalised diluted earnings per share**	27.94	32.20	(13%)
Dividend per share	11.00	10.00	+10%

*    Continuing activities

**  Continuing activities before acquired intangible amortisation with an adjustment to reflect a full tax charge.

The normalised diluted EPS, which allows for the potential dilutive impact of outstanding share options, reduced by 13% to 27.94p (2014: 32.20p). This reduction is in line with the reduction in profit reflecting the initial trading losses of CAH together with the costs of its integration and rebranding. Normalised earnings exclude the amortisation of acquisition intangibles together with an adjustment to reflect a full tax charge of 18.0% (2014: 21.5%). We believe that this normalised diluted EPS measure provides a more appropriate assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future performance.

Cash performance

	2015	2014
	£m	£m
Operating profit*	38.7	43.0
Depreciation and amortisation	6.3	5.5
Adjusted EBITDA	45.0	48.5
Cash inflow from operating activities	44.5	46.4
EBITDA to cash conversion	99%	96%
Net cash/(debt) at balance sheet date	0.8	3.8
Average debt in year**	68.0	59.0
Core debt at the year-end**	80.0	75.0

*    Before amortisation of acquisition intangibles.

**  Average debt represents a 365-day mean. Core debt provides a better indication of the Group's working capital requirement given the timing of acquisitions which would not be fully reflected in daily average.

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 year was 99% (2014: 96%). The Group has consistently set high standards of working capital management and high levels of conversion of profit into cash. Despite a lack of growth related working capital expansion, cash conversion in a high volume, low value and public sector environment always represents a challenge and we are delighted at this continued strong performance.

Balance sheet

	2015	2014
	£m	£m
Goodwill and intangible assets	224.9	227.4
Investment in joint ventures	-	1.9
Property, plant and equipment	18.4	15.9
Inventories	9.1	8.5
Trade receivables	146.9	142.6
Trade payables	(188.6)	(187.1)
Net cash	0.8	3.8
Deferred consideration	(20.9)	(21.0)
Cash flow hedge	(0.9)	(1.4)
Pension	4.0	6.8
Taxation	(2.1)	(2.9)
Net assets	191.6	194.5

Goodwill and intangible assets

The carrying value of identifiable acquisition intangibles at 31 December 2015 was £26.8m (2014: £32.0m) which predominantly relates to order book and customer relationships valued on acquisition. The carrying value will be amortised over its useful economic life, with over half of this value being expensed over the next three years. The net movement in the year comprised an increase of £5.6m relating to the acquisitions completed in the year together with a reduction of £10.8m relating to amounts amortised and charged to the Income Statement during the year.

The carrying value of goodwill of £193.1m (2014: £192.0m) is not amortised but is reviewed for impairment on an annual basis or more frequently where there is an indication of impairment. The headroom between the goodwill carrying value for the Housing division, when compared to the value in use, is significant. However the headroom is respect of the Care division is low, especially given the high level of sensitivity in the estimate of the value in use when the key assumptions are flexed. The Board has carried out a detailed business planning process which underpins its impairment review and supports the carrying value of the Care goodwill. The Board is confident that its strategy for Care will deliver long-term value for its stakeholders.

In addition, development expenditure was incurred in developing the in-house IT platform of £3.0m (2014: £1.5m). The increase in development expenditure was in line with expectations and is a direct result of our partnership with the Department for Communities and Local Government ("DCLG") for the commercialisation of its Planning Portal which commenced during the year. 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. The capital expenditure relating to this engagement will continue at this higher level until the end of 2017.

Tangible fixed assets

The Group capital expenditure of £6.2m (2014: £4.5m) relates to IT hardware, other office equipment and the refurbishment of new office premises. The majority of plant utilised by our operational teams is subject to short-term hire and motor vehicles are subject to operating leases and hence neither are included within capital expenditure or recognised as an asset within the balance sheet. The level of capital expenditure in respect of property, plant and equipment has been consistent over several years and we would anticipate these low levels being maintained in 2016.

Working capital and net debt

Trade receivables and inventories increased to £155.9m (2014: £151.1m), which reflects the increased size of the business following the acquisitions. Trade payables were consistent at £188.6m (2014: £187.1m) which reflects a shift in the sales mix in favour of Housing Management and Care, both of which carry lower levels of trade payables compared to the Housing maintenance activities.

Our net cash position at 31 December 2015 was £0.8m (2014: £3.8m). 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 was £68.0m; however, given the cash outflow of £17.4m in respect of acquisitions occurred across the period, a truer indication of the Group's core debt at the end of the year is £80.0m.

Since the year end, the Group finalised the 'amend and extend' to its revolving capital facility which extended the expiry date from July 2018 to July 2020 plus an extension option of a further one year. The total commitment under the facility increased from £120m to £140m. The revised facility results in a reduction to the interest cost with the margin payable over and above LIBOR, which is subject to a ratchet mechanism, reducing from a range of 150-250bps to 120-220bps. The Group continues to maintain a strong relationship with both of its bankers, Barclays and HSBC.

Pensions

	2015	2014
	£m	£m
Pension asset	8.3	15.1
Pension liability	(4.2)	(8.3)
Net asset	4.1	6.8

The Group participates in two principal Group pension schemes (2014: two) together with a further 28 (2014: 28) 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.

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 £8.3m (2014: £15.1m); the reduction being the result of a reassessment of mortality rates. In respect of the Mears Group Scheme, the Group continues to comply with a repayment plan agreed with the trustees of the scheme whereby the Group will pay £1.0m per annum for a period of seven years with a view to that scheme being fully funded by 2020.

Guidance for 2016

The 96% visibility of consensus forecast revenues secured for 2016 underpins the Board's confidence that the Group will meet its revenue forecast. The Group targets annual revenue growth of 5-10% per annum although over the last two years it has fallen short of this target. The improved revenue visibility gives a higher level of confidence in respect of 2016.

The housing margin returning to its historic normal level of 5.8% is pleasing and marks the completion of the Morrison turnaround. The shifting sales mix towards Housing Management services, which typically generates a higher operating margin, provides an opportunity to see margins edging above the historic 5.8% level. However, to balance this, the significant new contract mobilisations in 2016, which would be expected to generate losses in their first year of trading, will provide short-term headwinds to profitability.

With the introduction of National Living Wage, the Care margin is the hardest area to predict for 2016. This new legislation, which comes into force in April 2016, has further increased pressures on Councils, Trusts and care providers. We have completed a detailed review of all our Care contracts and agreed a clear plan on a client by client basis. Whilst our Care contracts rarely have an automatic contractual entitlement to a price increase, there is an increasing realisation from commissioners that care providers cannot absorb any further cost increases. The reaction from a number of commissioners has been reassuringly supportive. In the short term, the timing of charge rate increases matching the increase in our cost base will be a fine balance. Beyond 2016, we see the National Living Wage as being strongly positive for our Care business in terms of both operational delivery and financial output.

The CAH acquisition will continue to deliver a trading loss in 2016 in line with our original estimates. Our expectation in respect of the Care operating margin for 2016 is in the range of 2.5-3.5%.

We will continue to manage working capital to a high standard. Given the strong organic growth expected to be delivered in 2016, this will naturally utilise some additional working capital. We will continue to target EBITDA to cash conversion in excess of 90%.

A C M Smith

Finance Director

[e-mail]

 

Consolidated income statement

For the year ended 31 December 2015

		2015	2014
	Note	£'000	£'000
Continuing operations
Sales revenue	1	881,139	838,740
Cost of sales		(649,007)	(613,699)
Gross profit		232,132	225,041
Other administrative expenses		(193,470)	(182,046)
Amortisation of acquisition intangibles		(10,837)	(12,328)
Total administrative costs		(204,307)	(194,374)
Operating profit before amortisation of acquisition intangibles		38,662	42,995
Operating profit		27,825	30,667
Share of results of equity accounted joint ventures		-	299
Finance income	2	1,171	2,315
Finance costs	2	(3,076)	(3,604)
Profit for the year before tax and the amortisation of acquisition intangibles		36,757	42,005
Profit for the year before tax		25,920	29,677
Tax expense	3	(3,832)	(4,442)
Profit for the year from continuing operations		22,088	25,235
Discontinued operations
Loss from discontinued operations	4	(7,964)	-
Tax income from discontinued operations	3	165	-
Loss for the year after tax from discontinued operations		(7,799)	-
Profit for the year from continuing and discontinued operations		14,289	25,235
Attributable to:
Owners of the parent		12,874	25,286
Non-controlling interest		1,415	(51)
Profit for the year		14,289	25,235

Earnings per share - from continuing operations
Basic	6	20.31p	25.03p
Diluted	6	20.10p	24.65p
Earnings per share - from continuing and discontinued operations
Basic	6	12.65p	25.03p
Diluted	6	12.52p	24.65p

The accompanying notes form an integral part of this preliminary announcement

 

Consolidated statement of comprehensive income

For the year ended 31 December 2015

		2015	2014
		£'000	£'000
Profit for the year		14,289	25,235
Other comprehensive income/(expense):
Which will be subsequently reclassified to the Income Statement:
Cash flow hedges:
- losses arising in the year		(72)	(841)
- reclassification to Income Statement		559	722
(Decrease)/increase in deferred tax asset in respect of cash flow hedges		(97)	5
Which will not be subsequently reclassified to the Income Statement:
Actuarial loss on defined benefit pension scheme		(3,371)	(3,290)
Increase in deferred tax asset in respect of defined benefit pension schemes		675	694
Other comprehensive expense for the year		(2,306)	(2,710)
Total comprehensive income for the year		11,983	22,525
Attributable to:
Owners of the parent		10,568	24,302
Non-controlling interest		1,415	(1,777)
Total comprehensive income for the year		11,983	22,525

The accompanying notes form an integral part of this preliminary announcement

 

Consolidated balance sheet

As at 31 December 2015

		2015	2014
		£'000	£'000
Assets
Non-current
Goodwill		193,058	192,003
Intangible assets		31,851	35,375
Share of net asset of joint ventures		-	1,856
Property, plant and equipment		18,436	15,880
Pension and other employee benefits		8,272	15,131
Deferred tax asset		6,584	8,573
		258,201	268,818
Current
Assets included in disposal group classified as held for sale		13,255	-
Inventories		9,021	8,468
Trade and other receivables		146,879	142,616
Cash at bank and in hand		68,612	66,634
		237,767	217,718
Total assets		495,968	486,536
Equity
Equity attributable to the shareholders of Mears Group PLC
Called up share capital		1,019	1,011
Share premium account		58,124	56,714
Share-based payment reserve		1,651	1,653
Hedging reserve		(572)	(962)
Merger reserve		46,214	46,214
Retained earnings		86,438	92,179
Total equity attributable to the shareholders of Mears Group PLC		192,874	196,809
Non-controlling interest		(1,246)	(2,347)
Total equity		191,628	194,462
Liabilities
Non-current
Long-term borrowing and overdrafts		57,500	57,500
Pension and other employee benefits		4,224	8,372
Deferred tax liabilities		6,970	9,418
Financial liabilities		368	788
Other liabilities		15,396	25,956
		84,458	102,034
Current
Liabilities included in disposal group classified as held for sale		13,255	-
Short-term borrowings and overdrafts		10,290	5,300
Trade and other payables		194,103	182,098
Financial liabilities		510	580
Current tax liabilities		1,724	2,062
Current liabilities		219,882	190,040
Total liabilities		304,340	292,074
Total equity and liabilities		495,968	486,536

The accompanying notes form an integral part of this preliminary announcement

 

Consolidated cash flow statement

For the year ended 31 December 2015

		2015	2014
	Note	£'000	£'000
Operating activities
Result for the year before tax		25,920	29,677
Adjustments	7	19,887	20,191
Change in inventories		(553)	2,195
Change in trade and other receivables		6,668	11,967
Change in trade and other payables		(7,458)	(17,595)
Cash inflow from operating activities of continuing operations before taxation		44,464	46,435
Taxes paid		(5,888)	(2,285)
Net cash inflow from operating activities of continuing operations		38,576	44,150
Net cash outflow from operating activities of discontinued operations		(4,503)	-
Net cash inflow from operating activities		34,073	44,150
Investing activities
Additions to property, plant and equipment		(4,297)	(3,962)
Additions to other intangible assets		(2,978)	(1,484)
Proceeds from disposals of property, plant and equipment		86	106
Acquisition of subsidiary undertakings, net of cash		(17,590)	(22,221)
Interest received		158	78
Net cash outflow from investing activities		(24,621)	(27,483)
Financing activities
Proceeds from share issue		1,418	636
Discharge of finance lease liability		(545)	(62)
Interest paid		(2,764)	(3,707)
Dividends paid - Mears Group shareholders		(10,445)	(9,252)
Dividends paid - Non-controlling interests		(128)	-
Net cash outflow from financing activities		(12,464)	(12,385)
Cash and cash equivalents, beginning of year		3,834	(448)
Net (decrease)/increase in cash and cash equivalents		(3,012)	4,282
Cash and cash equivalents, end of year		822	3,834
Cash and cash equivalents comprises the following:
- cash at bank and in hand		68,612	66,634
- borrowings and overdrafts		(67,790)	(62,800)
Cash and cash equivalents		822	3,834

Cash conversion key performance indicator
Cash inflow from operating activities of continuing operations		44,464	46,435
EBITDA for continuing operations		44,940	48,509
Conversion (%)		98.9%	95.7%

The accompanying notes form an integral part of this preliminary announcement

 

Consolidated statement of changes in equity

For the year ended 31 December 2015

	Attributable to equity shareholders of the Company
		Share	Share-based				Non-
	Share	premium	payment	Hedging	Merger	Retained	controlling	Total
	capital	account	reserve	reserve	reserve	earnings	interest	equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
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 expense	-	-	-	(114)	-	(870)	(1,726)	(2,710)
Total comprehensive (expense)/income for the year	-	-	-	(114)	-	24,416	(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 1 January 2015	1,011	56,714	1,653	(962)	46,214	92,179	(2,347)	194,462
Net result for the year	-	-	-	-	-	12,874	1,415	14,289
Other comprehensive expense	-	-	-	390	-	(2,696)	-	(2,306)
Total comprehensive (expense)/income for the year	-	-	-	390	-	10,178	1,415	11,983
Deferred tax on share-based payments	-	-	-	-	-	(552)	-	(552)
Issue of shares	8	1,410	-	-	-	-	-	1,418
Share option charges	-	-	771	-	-	-	-	771
Exercise of share options	-	-	(773)	-	-	773	-	-
On acquisition	-	-	-	-	-	-	282	282
Transactions with non-controlling interests	-	-	-	-	-	(5,695)	(468)	(6,163)
Dividends	-	-	-	-	-	(10,445)	(128)	(10,573)
At 31 December 2015	1,019	58,124	1,651	(572)	46,214	86,438	(1,246)	191,628

The accompanying notes form an integral part of this preliminary announcement

 

Notes to the preliminary announcement

For the year ended 31 December 2015

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:

·  Housing - services within this sector comprise a full housing management service, predominately 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 are that of revenue growth and operating margins in both the core divisions of 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.

	2015				2014
Operating segments	Housing £'000	Care £'000	Total £'000	Housing £'000		Care £'000	Total £'000
Revenue	735,129	146,010	881,139	714,733		124,007	838,740
Operating result pre amortisation of acquisition intangibles, exceptional costs and long-term incentive plans	42,413	(1,601)	40,812	34,410		9,641	44,051
Operating margin pre amortisation of acquisition intangibles, exceptional costs and long-term incentive plans	5.77%	(1.10%)	4.63%	4.81%		7.78%	5.25%
Long-term incentive plans	(2,150)	-	(2,150)	(1,056)		-	(1,056)
Operating result pre amortisation of acquisition intangibles and exceptional costs	40,263	(1,601)	38,662	33,354		9,641	42,995
Amortisation of acquisition intangibles			(10,837)				(12,328)
Finance costs, net			(1,905)				(990)
Tax expense			(3,832)				(4,442)
Profit for the year from continuing activities			22,088				25,235

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 10% of the total revenue reported.

2. Finance income and finance costs

	2015	2014
	£'000	£'000
Interest charge on overdrafts and short-term loans	(2,136)	(1,975)
Interest charge on hedged items (effective hedges)	(559)	(722)
Interest charge on hedged items (ineffective hedges)	-	(70)
Other interest	(4)	(80)
Finance costs on bank loans, overdrafts and finance leases	(2,699)	(2,847)
Interest charge on defined benefit asset	(252)	(426)
Unwinding of discounting	(125)	(331)
Total finance costs	(3,076)	(3,604)
Interest income resulting from short-term bank deposits	16	10
Interest income resulting from defined benefit asset	964	2,238
Unwinding of discounting	49	-
Other interest income	142	67
Finance income	1,171	2,315
Net finance charge	(1,905)	(1,289)
Gains and losses on hedged items recognised in other comprehensive income
Losses arising in the year	(72)	(841)
Reclassification to the Income Statement	559	722
Changes in mark-to-market of interest rate swaps (effective hedges)	487	(119)

3. Tax expense

Tax recognised in the Income Statement

	2015	2014
	£'000	£'000
United Kingdom corporation tax effective rate	5,783	5,410
Adjustment in respect of previous periods	(642)	(721)
Total current tax recognised in Income Statement	5,142	4,689
Deferred taxation charge:
- on defined benefit pension obligations	133	285
- on share-based payments	(151)	(130)
- on accelerated capital allowances	(232)	293
- on amortisation of acquisition intangibles	(2,130)	(2,127)
- on short-term temporary timing differences	(276)	2,285
- on corporate tax losses	1,609	(674)
- impact of change in statutory tax rates	-	(179)
Adjustment in respect of previous periods	(262)	-
Total deferred taxation recognised in Income Statement	(1,310)	(247)
Total tax expense recognised in Income Statement on continuing operations	3,832	4,442
Total tax credit recognised in Income Statement on discontinued operations	(165)	-
Total tax expense recognised in Income Statement	3,667	4,442

4. Discontinued Activities

On 21 November 2013, the Group completed the disposal of the entire share capital of Haydon Mechanical and Electrical Limited ('Haydon UK'). As part of that disposal, the Group retained the beneficial interest in 49% of the share capital of an investment in a company registered in the United Arab Emirates, Haydon Mechanical and Electrical Company LLC (Haydon LLC). This beneficial interest was retained due to a number of performance guarantees in place at the time of the disposal which would unravel as the underlying contracts were completed. During the period the Group agreed in principle to sell its interest in the company to the management. The transfer will happen in stages as the performance guarantees are cancelled. The formal sales and purchase agreement is expected to be signed imminently.

At 31 December 2014, a balance of £2.6m was due from Haydon LLC to the Group. During the period, the Group provided additional financial support to Haydon LLC of £4.5 million to fund on going losses in the company so as to mitigate its risk in respect of the   performance guarantees. The Group has fully provided for these losses and written the  net carrying value  of the company's assets and liabilities down to nil which equates to the  full outstanding loan balance of £7.1million.This is reported as a loss from discontinued operations. A further loss of £0.9 million was incurred during the year as a result of the Group making full provision against all unsecured amounts due from Haydon UK.

The loss on disposal in respect of discontinued activities is all attributable to the equity holders of the parent.

5. Dividends

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

	2015	2014
	£'000	£'000
Final 2014 dividend of 7.15p (2014: final 2013 dividend of 6.30p) per share	7,286	6,370
Interim 2015 dividend of 3.10p (2014: interim 2014 dividend of 2.85p) per share	3,159	2,882
	10,445	9,252

The proposed final 2015 dividend of 7.90p per share has not been included within the consolidated financial statements as no obligation existed at 31 December 2015.

6. Earnings per share

	Basic (continuing)			Basic (discontinued)			Basic (continuing and discontinued)
	2015	2014	2015		2014	2015		2014
	p	p	p		p	p		p
Earnings per share	20.31	25.03	(7.66)		-	12.65		25.03
Effect of amortisation of acquisition intangibles	10.65	12.20	-		-	10.65		12.20
Effect of full tax adjustment	(2.73)	(4.54)	-		-	(2.73)		(4.54)
Normalised earnings/(loss) per share	28.23	32.69	(7.66)		-	20.57		32.69

	Diluted (continuing)			Diluted (discontinued)			Diluted (continuing and discontinued)
	2015	2014	2015		2014	2015		2014
	p	p	P		p	p		p
Earnings per share	20.10	24.65	(7.58)		-	12.52		24.65
Effect of amortisation of acquisition intangibles	10.54	12.02	-		-	10.54		12.02
Effect of full tax adjustment	(2.70)	(4.47)	-		-	(2.70)		(4.47)
Normalised earnings/(loss) per share	27.94	32.20	(7.58)		-	20.36		32.20

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)
	2015	2014	2015		2014	2015		2014
	£'000	£'000	£'000		£'000	£'000		£'000
Profit/(loss) attributable to shareholders:	20,673	25,286	(7,799)		-	12,874		25,286
- amortisation of acquisition intangibles	10,837	12,328	-		-	10,837		12,328
- full tax adjustment	(2,784)	(4,588)	-		-	(2,784)		(4,588)
Normalised earnings/(loss)	28,726	33,026	(7,799)		-	20,927		33,026

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.

	2015	2014
	Millions	Millions
Weighted average number of shares in issue:	101.77	101.02
- dilutive effect of share options	1.06	1.54
Weighted average number of shares for calculating diluted earnings per share	102.83	102.56

7. 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:

	2015	2014
	£'000	£'000
Depreciation	4,963	4,362
Loss on disposal of property, plant and equipment	45	3
Amortisation	12,151	13,480
Share-based payments	771	670
IAS 19 pension movement	(660)	(1,425)
Finance income	(158)	(77)
Finance cost	2,775	3,178
Total	19,887	20,191

8. Acquisitions

On 11 March 2015 the Group acquired certain trade and assets relating to the UK Planning Portal from the Secretary of State for Communities and Local Government in exchange for 25% of the share capital of PortalPlanQuest Limited, the subsidiary company established to undertake this activity. This acquisition was completed as part of the award of a contract for the commercialisation of the Planning Portal.

On 30 April 2015 the Group acquired the entire issued share capital of Energy Insurance Services Limited for total consideration of £0.3m which was satisfied in cash. This acquisition was completed to expand the Group's offering within gas services and maintenance. The effect of this acquisition on the Group's assets is detailed below.

On 29 May 2015 the Group acquired the entire issued share capital of Care UK Homecare Limited and Care UK Community Care Limited for a total consideration of £10.2m which was satisfied in cash. The acquisition of Care UK's Homecare business expands the Group's Care offering across the United Kingdom.

On 1 July 2015 the Group acquired certain trade and assets of Full Circle Learning Limited for contingent consideration of £0.1m payable based on future contract profitability. The Directors' best estimate of contingent consideration payable is the full £0.1m. The acquisition was completed to enhance the Group's training offering for employees and clients.

On 1 January 2015 the Group re-assessed the level of influence it held over O&T Developments Limited, Tando Property Services Limited and Tando Homes Limited and concluded that the threshold for control had been met and therefore in accordance with IFRS10, the Group has accounted for these entities as subsidiaries from that date. On 19 October 2015 the Group acquired an additional 25% of the issued share capital of O&T Developments Limited, Tando Property Services Limited and Tando Homes Limited for total consideration of £6.2m satisfied in cash. The acquisition of an additional holding in these subsidiaries brings the Group's shareholding to 75% and allows the Group to better integrate their offering with its services.

The effect of the acquisition of Care UK's Homecare business is disclosed below individually and the effect of the remaining acquisitions is disclosed in aggregate.

	Fair value
	Care UK
	Homecare*	Other	Total
	£'000	£'000	£'000
Assets
Non-current
Property, plant and equipment	1,395	38	1,433
Deferred tax asset	150	28	178
Current
Trade receivables	12,152	765	12,917
Other receivables	748	729	1,477
Cash at bank and in hand	-	384	384
Total assets	14,445	1,944	16,389
Liabilities
Current
Bank overdraft	1,262	-	1,262
Trade and other payables	7,907	1,069	8,976
Current tax liabilities	-	571	571
Total liabilities	9,169	1,640	10,809
Net assets acquired	5,276	304	5,580
Intangibles capitalised	4,922	726	5,648
Deferred tax liability recognised in respect of intangibles capitalised	(985)	(69)	(1,054)
Net assets acquired	9,213	961	10,174
Goodwill capitalised	985	70	1,055
	10,198	1,030	11,229
Satisfied by:
- cash	10,198	344	10,542
- contingent consideration	-	123	123
- transfer from investments		282	282
Non-controlling interest		282	282
	10,198	1,031	11,229

* Provisional

9. 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 2015 or 2014. The financial information for the year ended 31 December 2014 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 2015 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 2015.

 

END

 

 

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