Interim Results

Mears Group PLC 21 August 2007 MEARS GROUP PLC ANNOUNCEMENT OF INTERIM RESULTS SIX MONTHS TO 30 JUNE 2007 Mears Group PLC is once again pleased to announce record results for the six months ended 30 June 2007. The highlights for the six months include: * Turnover up 16.0% * Profit before tax up 23.3% * Diluted earnings per share up 19.7% * Interim dividend up 22.2% * Major contract awards £196m * Order book increased to £1.24 billion * Acquisition of Careforce Group plc Bob Holt, Chairman, said: 'I am pleased to announce record results for the 6 months ended 30 June 2007. Your Group is in good hands for the next stage of development. The management team remodelled how social housing services have been provided and purchased by local authorities. We will strive to replicate our success in the care sector and continue to be a market leader in all markets in which we operate.' For further information contact Bob Holt bob.holt@mearsgroup.co.uk 07778 798816 David Robertson david.robertson@mearsgroup.co.uk 07887 705357 Chairman's Statement I am pleased to announce record results for the 6 months ended 30 June 2007. These are the first set of results since I returned to the position of CEO. Profits before tax rose 23.3% up to £6.58m (2006: £5.34m) on turnover of £136.9m (2006: £118.0m) up 16.0%. Following a re-organisation of the Group I am particularly pleased by our decision to concentrate solely upon working with long term partners in our social housing division. We continue to work closely with those partners with whom we share the ambition of improving lives for those in the community for the very long term. The recent contract award of Welwyn and Hatfield for 15 years at a base award value of £168m is a testament to how this Group has been built. In March of this year we announced the acquisition of Careforce Group plc, the stepping stone to becoming a substantial provider of care services in the community. Subsequent to the Careforce acquisition we have completed three other acquisitions in the sector and today we believe that we will become the leading provider of care services to public sector clients. I hope to bring you news of further developments in this sector in due course. The post acquisition integration has gone well and the Careforce team are working closely with their Mears colleagues. One of our first actions has been to bring Mears experience of tendering and bid writing to improve and develop further the quality of the Careforce tender submissions. In addition we have invested significant resource into both IT and accounting systems and the Careforce workforce development and training programmes. It is the quality of our care workers by which our service will be judged. We see the social services domiciliary care market being in a similar position to where the social housing market was some five years ago. We believe that a Mears care provision will be a competitive force in a rapidly evolving market and I am determined that Careforce will be the quality offering and the partner of choice. David Robertson, who has been Finance Director since July 1997, has decided to step down from the Board in March 2008 in order to spend time with his family. David will be sadly missed by both employees and shareholders alike as he has been one of the major successes of this Group. In the 10 years I have worked with David at Mears he has been a most loyal working colleague and friend. David's retirement will see the appointment of Andrew Smith as Group Finance Director. Andrew joined the Group in 1999 and was appointed to the main Board earlier this year in order to facilitate his move into this position. Andrew is extremely capable and his appointment is recognition of the years he has spent helping to grow the Group. Shareholders will be aware of the recent BBC radio programme which suggested malpractices from one of our London offices. The Group and our client carried out an immediate investigation and we have both been satisfied with the outcome. We warmly welcome the actions of The Housing Corporation to whom our client belongs in insisting on an independent investigation which has our full backing. This investigation commenced on 6 August and the results will not be known for a number of weeks. I have personally interviewed all of our team at Hackney and I am happy that Mears will be fully exonerated by this investigation. It is a sad reflection of the times in which we live whereby the livelihoods of our 5,000 employees along with other stakeholders are put at risk without the opportunity to defend any situation before the media broadcast such a programme. Criticism has made us more determined to show that we continue to provide a first class service and to demonstrate that our impeccable reputation is beyond reproach. Your Board will leave no stone unturned to ensure that we are operating correctly and that these unfounded accusations are refuted. Your Group is in good hands for the next stage of development. This Group has been built with a great deal of passion, hard work and determination to succeed. The management team remodelled how social housing services have been provided and purchased by local authorities. We will strive to replicate our success in the care sector and continue to be a market leader in all markets in which we operate. I am firmly committed to drive this Group onto the next stage and as always maintain an open management style allowing discussions with employees and stakeholders at every opportunity. We now enter an exciting and challenging period with a young management team eager to take the Group forward. I should like to take this opportunity to thank all our supporters both internally and externally for their commitment and look forward to bringing you further news of acquisitions and organic growth throughout the next decade. Bob Holt bob.holt@mearsgroup.co.uk Chairman and Chief Executive 21 August 2007 Business Review Turnover In the six months to 30 June 2007 we grew turnover to £136.9m (2006: £118.0m), an increase of 16.0%. Within this overall figure social housing turnover was up 10.3%. The acquisition of Careforce Group plc in April 2007 yielded £8.3m of turnover. Both the mechanical & electrical division ( M&E ) and vehicle collection business produced increased turnover compared to last year. Operating result We achieved an operating result before share-based payments and amortisation of £7.2m (2006: £5.6m), a 27.9% increase. The Group increased its operating margin from 4.7% to 5.2% partly due to the higher margin of 6.8% in our Domiciliary Care division. Social Housing margin was maintained at 5.6% whilst there was a useful increase in the M&E margin from 2.0% to 3.7% in the period. Share-based payments The share option charge in the first half of 2007 was £0.3m, unchanged from 2006. There is no cash impact from this expense. Amortisation A charge of £0.3m (2006: £nil) arose in the period. This represents the write down of the identified intangible assets acquired on the acquisitions of Careforce Group plc in April 2007 and Laidlaw Scott Limited in June 2006. The excess of purchase price over the fair value of identified net assets is capitalised as goodwill and under IFRS is not amortised but will be subject to an annual impairment review. Finance The Group again maintained its broadly neutral cash position throughout the six months to 30 June 2007 and achieved a net interest receipt of £0.01m (2006: £0.02m). The Group's focus on tight working capital control remains a cornerstone of our business. Tax expense £1.8m has been provided for a tax charge (2006: £1.4m). The effective rate in the first half of 2007 of 26.9% (2006: 26.2%) is low due to the impact of a corporation tax deduction received on the exercise of share options. Earnings per share (EPS) Basic EPS increased 14.7% to 7.26p (2006: 6.33p). Our diluted EPS of 7.00p was up 19.7% on the comparative 2006 figure of 5.85p. All figures are stated after the impact of share-based payments and a full tax charge. Dividend The dividend increase is in line with our earnings growth. An interim dividend of 1.1p per share is declared (2006: 0.9p), a 22.2% uplift. The dividend is payable on 5 November 2007 to shareholders on the register on 19 October 2007. Cash flow A net cash inflow of £6.2m arose in the first half of this year (2006: £1.3m inflow). The Group raised £24.2m after costs to fund the purchase of Careforce Group plc but used only £12.2m to complete the transaction. The balance was satisfied by the issue of 3.3m new shares. Some £1.3m was invested in new technology and operational bases. Our net cash position at 30 June 2007 was £18.1m, up from £11.9m at the start of the year. Acquisition The acquisition of the entire share capital of Careforce Group plc in April 2007 created a new business segment for the Group. The business had £5.9m of debt upon acquisition and this was subsequently repaid to take advantage of the preferential borrowing rates available to Mears. The business is performing in line with our expectations and came with a healthy pipeline of acquisition opportunities in the highly fragmented care sector. To date we have completed 3 further small acquisitions for a combined initial sum of £2.3m, with up to £0.6m deferred subject to future profitability. We have a number of other care acquisitions at various stages and are hopeful of converting some prior to December 2007. Order book The visibility of our earnings continues to improve. £196m of new work was secured in the period. Our order book now stands at £1.24 billion. The proportion of market forecast turnover secured for 2008 is 89% with some 71% of the 2009 projection. We continue to place great emphasis on winning good quality contracts that can provide clear and sustainable margins. We also hold a healthy mix of decent homes and repairs and maintenance work, giving us a balanced position in the social housing market that is not reliant on clients' future discretionary spending. The £168m over 15 years award from Welwyn and Hatfield on a sole partnership basis is the perfect demonstration of the benefits of adopting a long term partnering approach to our business. We intend to introduce this ethos into our Care division to unlock its potential for sustained growth. Total equity Total shareholders' equity value rose by £39.0m in the first half year from £38.0m to £77.0m at 30 June 2007. This was largely due to the strategic acquisition of Careforce Group plc where some £28.4m of goodwill and intangible assets were created by the transaction. Mobilised contracts Over the last six months nine key contracts have come on-stream. These are: • North Lincolnshire Homes - A decent homes partnership, valued at £38.4m over a four and a half year period. • Shoreline Housing Association - We commenced a gas servicing partnership, worth £4.8m over four years. This is in addition to our decent homes partnership, which we commenced last year with this client. • Brighton and Hove City Council - We commenced a response and void maintenance partnership worth £25.0m over five years. This is in addition to our gas servicing partnership with this client. • Yorkshire Coast Homes - A kitchen replacement project, worth an initial £2.5m. We are also bidding for further opportunities with this customer. • Cross Keys Homes - We commenced two contracts for gas servicing and cyclical decorating. We are already carrying out a decent homes project for this client. • Orbit Housing Association - We mobilised a gas servicing partnership, worth £4.9m over four years. • Watford Borough Council - A Heating Installation and gas servicing partnership, worth £3.3m over three years. • Catalyst Communities Housing Association - A revenue works and decent homes contract worth £18.0m per annum over 5 years. Training and development We are now an established Investor in People and we are meeting the challenge of the skills shortage in our sector through a comprehensive national programme of employee development, together with structured work experience and training programmes for prospective employees. This year we will take all of our trade professionals through a trade-based NVQ programme and we are developing a unique Mears Professional Development Customer and Community Care NVQ to further raise our customer service standards. Awards We are delighted that since the start of the year we have received several awards recognising our commitment to customers, staff and investors: • Mears won the 'Best Investor Communication' award at the AIM Investment Awards. • We were awarded 'Best Annual Report and most effective communication, small cap' at the IR Best Practice awards. • At the South West Financial and Corporate Communications Awards we were successful in the following categories: • 'Best Annual Report Design and Presentation' • 'Best Commitment to Environmental and Social Responsibility' • 'Best South West Chairman/Chief Executive Communicator of the Year'. We believe we are well placed to continue delivering on 'improving homes, improving neighbourhoods, improving lives'. Bob Holt bob.holt@mearsgroup.co.uk Chairman and Chief Executive David Robertson david.robertson@mearsgroup.co.uk Finance Director 21 August 2007 Our Communities CSR strategy We work in some of the most socially deprived areas of the country. Along with our professional commitment to tenants, we feel a strong sense of responsibility towards the wider community and we work towards achieving three specific aims: • To support and strengthen the communities in which we work. • To recruit employees locally whenever we can. • To encourage employees to volunteer their time and skills to specific community projects. Helping a local community to thrive increases the quality of life for tenants and makes our job that little bit easier. It's also rewarding for our employees, especially as 90% of our people live in the community they support. Employee volunteering In 2007 our staff are on track to volunteer around 15,000 hours to community work, an increase of more than 25% on 2006 with over 50% of staff participating. We support over 200 projects, including: Russell Gardens in Stockport This sheltered housing development was in danger of closure due to its poor condition. Mears staff completely redeveloped the gardens, improving residents' pride in their surroundings and their well being. This has helped keep the housing scheme open for the benefit of all the residents. Western Skills Training Centre in Wigan Mears developed a partnership with the local authority and five schools to help set up the skills centre. The aim has been to provide youngsters with direct training on key trades as part of their studies. Mears has provided support in a number of areas; staff have volunteered their time to mentor the pupils and donating all the tools and safety equipment for the Centre. This training has given many young people the opportunity to consider going on to formal trade qualifications. Garden Makeover Scheme, Dorchester Mears staff worked with residents of a hostel to create a communal garden in their courtyard. Service users were involved at every stage of the process, from planning to completion, to ensure the garden met their needs. Ealing Diploma and Enterprise Centre We have refurbished premises for the centre which will offer vocational courses for 14-16 year olds studying Construction and other courses from September 2007. We have committed to delivering training at the centre four days per week to ensure courses are relevant to employment today. Community Allotment, Sheffield Staff in Sheffield are supporting a local tenant group in creating a community allotment, by erecting fencing to secure the land, supplying children's safety clothing and equipment and assisting with start-up costs. The facility will be used by Surestart to give children the experience of growing organic vegetables and fruits. This will improve their understanding of healthy eating, recycling and organic growing methods. Community Coffee Morning Careforce and Mears staff worked together to organise coffee morning events across the country. These events were organised in order to raise awareness of elder abuse issues, for older residents and the general public. To coincide with these events, Mears staff also undertook hands-on community projects, such as the Wakefield Community Garden makeover in a local Day Centre for Older People. Thought Leader conferences (www.thoughtleader.org.uk) The Thought Leader conference aims to provide answers to the main issues facing Local Authorities and Registered Social Landlords. By bringing together leading figures within the social housing sector, the Thought Leader conference debates and recommends practical ways to deliver best practice solutions to the main issues facing the housing sector. The next conference in this series, which will feature the important issue of: 'Meeting the carbon challenge on existing social housing stock', will be held at Wembley Stadium on November 1st 2007. Unaudited consolidated income statement For the six months ended 30 June 2007 Six months Six months Year to to 30 June to 30 June 31 December 2007 2006 2006 Note £'000 £'000 £'000 £'000 £'000 £'000 Sales revenue Continuing operations 128,555 117,998 241,414 Acquisitions 8,344 - - 1 136,899 117,998 241,414 Cost of sales Continuing operations (95,250) (85,974) (174,399) Acquisitions (5,707) - - (100,957) 85,974 (174,399) Gross profit Continuing operations 33,305 32,024 67,015 Acquisitions 2,637 - - 35,942 32,024 67,015 Administrative expenses (28,787) (26,431) (53,970) Operating result 1 7,155 5,593 13,045 before share-based payments and intangible amortisation Intangible amortisation (332) - (255) Share-based payments (250) (270) (535) Operating result Continuing operations 6,178 5,323 12,255 Acquisitions 395 - - 6,573 5,323 12,255 Finance income 128 45 130 Finance costs (120) (30) (118) Result for the period 6,581 5,338 12,267 before tax Tax expense 2 (1,770) (1,400) (2,068) Net result for the 4,811 3,938 10,199 period Earnings per share Basic - normalised 4 7.26p 6.33p 14.53p Diluted - normalised 4 7.00p 5.85p 13.63p Unaudited consolidated balance sheet As at 30 June 2007 As at As at As at 30 June 30 June 31 December 2007 2006 2006 Note £'000 £'000 £'000 Assets Non-current Goodwill 35,873 14,610 13,811 Intangible assets 7,065 - 1,029 Property, plant and equipment 6,496 5,941 5,716 Deferred tax asset 5 1,990 3,300 3,000 51,424 23,851 23,556 Current Inventories 11,053 5,963 9,104 Trade and other receivables 49,294 36,408 40,334 Cash at bank and in hand 23,733 14,136 12,127 84,080 56,507 61,565 Total assets 135,504 80,358 85,121 Equity Equity attributable to the shareholders of Mears Group PLC Called up share capital 726 592 615 Share premium account 42,172 4,223 5,547 Share-based payment reserve 1,735 1,220 1,485 Retained earnings 32,349 24,969 30,363 Total equity 76,982 31,004 38,010 Liabilities Non-current Other liabilities 2,858 3,280 2,876 2,858 3,280 2,876 Current Short-term borrowings and overdrafts 5,629 5,874 228 Trade and other payables 47,432 38,206 42,186 Current tax liabilities 2,145 1,701 1,438 Pension and other employee benefits 458 293 383 Current liabilities 55,664 46,074 44,235 Total liabilities 58,522 49,354 47,111 Total equity and liabilities 135,504 80,358 85,121 Unaudited consolidated statement of recognised income and expense For six months ended 30 June 2007 Six months Six months Year to to 30 June to 30 June 31 December 2007 2006 2006 Note £'000 £'000 £'000 Actuarial losses on defined benefit (75) (50) (77) pension scheme Decrease in deferred tax asset 5 (1,010) (260) (550) Net expense recognised directly to (1,085) (310) (627) equity Profit for the financial period 4,811 3,938 10,199 Total recognised income and expense for 3,726 3,628 9,572 the period Unaudited consolidated cash flow statement For the six months ended 30 June 2007 Six months Six months Year to to 30 June to 30 June 31 December 2007 2006 2006 Note £'000 £'000 £'000 Operating activities Result for the period before tax 6,581 5,338 12,267 Adjustments 6 1,418 975 2,312 Change in inventories (1,949) (535) (3,468) Change in operating receivables (3,947) (3,371) (7,697) Change in operating payables 1,308 3,015 9,023 Cash inflow from operating 3,411 5,422 12,437 activities before taxes paid Taxes paid (1,213) (1,523) (2,394) 2,198 3,899 10,043 Investing activities Additions to property, plant and (1,251) (622) (1,593) equipment Proceeds from disposals of - - 146 property, plant and equipment Acquisition of subsidiary (19,865) (2,220) (3,543) undertaking, net of cash Interest received 108 45 136 (21,008) (2,797) (4,854) Financing activities Proceeds from share issue 25,155 267 1,614 Discharge of finance lease (40) (17) (46) liability Interest paid (100) (32) (124) Dividends paid - - (1,676) 25,015 218 (232) Cash and cash equivalents at 11,899 6,942 6,942 beginning of period Net increase in cash and cash 6,205 1,320 4,957 equivalents Cash and cash equivalents at end of 18,104 8,262 11,899 period Cash and cash equivalents is comprised as follows: Cash at bank and in hand 23,733 14,136 12,127 Short-term borrowings and (5,629) (5,874) (228) overdrafts Cash and cash equivalents 18,104 8,262 11,899 Unaudited notes to the financial statements For the six months ended 30 June 2007 1. Segment reporting The Group operates four business segments: social housing, mechanical and electrical, domiciliary care and vehicle distribution. All of the Group's activities are carried out within the United Kingdom. Six months to 30 June 2007 Six months to 30 June 2006 Revenue Operating Revenue Operating profit before profit before share-based share-based payments and payments and pre pre amortisation amortisation £'000 £'000 £'000 £'000 Social housing 97,069 5,416 88,027 4,903 Mechanical and electrical 26,904 982 25,982 523 Domiciliary care 8,344 570 - - Vehicle distribution 4,582 187 3,989 167 Total 136,899 7,155 117,998 5,593 2. Tax expense The tax charge for the six months ended 30 June 2007 has been based on the estimated tax rate for the full year. 3. Dividends The following dividends were declared on ordinary shares in the six months to 30 June 2007: Six months Six months to 30 June to 30 June 2007 2006 £'000 £'000 Final 2006 dividend of 2.40p (2006: final 2005 1,740 1,125 dividend of 1.90p) per share No dividends were paid during the six months to 30 June 2007. The proposed interim dividend of 1.10p (2006: 0.90p) per share has not been included within the interim financial statements as no obligation existed at 30 June 2007. 4. Earnings per share Basic earnings per share is based on equity earnings of £4.81m (2006: £3.94m) and 66.63m (2006: 58.99m) ordinary shares at 1p each, being the average number of shares in issue during the period. For diluted earnings per share the average number of shares in issue is increased to 69.11m (2006: 63.84m) to reflect the potential dilution effect of employee share schemes. A normalised pre amortisation earnings per share is disclosed in order to show performance undistorted by amortisation of intangibles and the tax effect of share options. The normalised earnings per share is based on equity earnings of £4.84m (2006: £3.74m). Basic Diluted Six Six Six Six months to months to months to months to 30 June 30 June 30 June 30 June 2007 2006 2007 2006 p p p p Earnings per share 7.22 6.68 6.96 6.17 Effect of amortisation of intangibles 0.48 - 0.50 - Effect of share option tax adjustment (0.44) (0.35) (0.46) (0.32) Normalised pre amortisation earnings per share 7.26 6.33 7.00 5.85 5. Deferred taxation The Group asset for deferred tax as at 30 June 2007, which relates entirely to share-based payments, is £2.29m (2006: £3.30m). Six months Six months to 30 June to 30 June 2007 2006 £'000 £'000 At beginning of period 3,000 3,500 Credit to income statement - 60 Debit to consolidated statement of recognised income and expense (1,010) (260) 1,990 3,300 The cumulative amount recognised in the income statement is limited to the tax effect of the associated cumulative share-based payment expense. The deficit has been debited directly to equity. This is presented in the consolidated statement of recognised income and expense. 6. Notes to consolidated cash flow statement The following non operating cash flow adjustments have been made to the pre-tax result for the period: Six months Six months to 30 June to 30 June 2007 2006 £'000 £'000 Depreciation 844 707 Intangible amortisation 332 - Loss on disposal of - 13 fixed assets Share-based payments 250 270 Finance income (128) (45) Finance cost 120 30 Total 1,418 975 7. Preparation of interim financial information The interim financial statements have been prepared on a basis consistent with the accounting policies disclosed in the Annual Report and Accounts for the year ended 31 December 2006. The consolidated results for the year ended 31 December 2006 have been extracted from the financial statements for that year and do not constitute full statutory accounts for the Group. The Group accounts for the year ended 31 December 2006 received an unqualified audit report and did not include a statement under section 237 (2) or (3) of the Companies Act 1985 and have been filed with the Registrar of Companies. 8. Interim financial statements Further copies of the interim financial statements are available from the registered office of Mears Group PLC at 1390 Montpellier Court, Gloucester Business Park, Brockworth, Gloucester GL3 4AH or www.mearsgroup.co.uk This information is provided by RNS The company news service from the London Stock Exchange

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