Pre-Close Trading Update

RNS Number : 4143C

Mears Group PLC

28 June 2016

 

For Immediate Release

28 June 2016

Mears Group PLC

("Mears" or "the Group")

Pre-Close Trading Update

Mears Group PLC (LSE: MER), the provider of support services to the Housing and Care sectors in the UK, today issues a pre-close trading update ahead of its interim results for the six months to 30 June 2016.

Mears continues to deliver a solid trading performance and anticipates reporting results for the half year in line with management expectations.  The Group has now achieved 97% visibility of the £973 million consensus revenue forecast for 2016 and 85% visibility of the £1.03 billion consensus revenue forecast for 2017.

Housing

The Group continues to see a strong performance in its Housing division, which accounts for circa 83% of Group revenues.

The Housing division has experienced a particularly busy period of new contract mobilisations with a number of material contracts starting during the period. Two were of particular note:

·      Mears formed a new Regeneration Partnership with Milton Keynes Council called YourMK, focusing upon the regeneration of key areas in Milton Keynes. The contract, which mobilised in April 2016, is initially delivering repairs and maintenance services to nearly 11,500 homes and we are already seeing a significant extension to the scope of works. The contract is valued at £250 million over five years.

·      Mears mobilised a Key Worker Housing contract providing a full Housing Management service throughout the UK. This includes sourcing properties, managing the application and allocation process as well as the subsequent day to day administration. The contract, which fully mobilised in April 2016, is valued at £195 million over the initial three year term.

All new mobilisations are progressing well. Typically the Group anticipates a lower margin from a new contract during its mobilisation phase, being a time when the primary focus is in investing to establish excellent customer service. Accordingly, whilst these new contracts will generate a lower margin at the half year, operating margins can be expected to normalise during the second half of the year.

In addition, Mears was pleased to be re-awarded a contract with Sutton Housing Partnership to provide responsive repairs, voids and planned maintenance services to around 6,000 homes. The contract was previously awarded on an emergency basis following the termination of the incumbent provider. The new award of a ten year contract, valued at £45 million, is a reward for the Group's willingness to take the contract at short-notice. The new contract is due to mobilise in July 2016.

On a recurring theme, Mears is delighted to have been awarded additional areas to its existing Home Group contract. Mears is the incumbent contractor in both the South West and North East of England, covering circa 20,000 homes. Mears has been awarded a five year contract to deliver responsive repairs, voids, gas servicing and planned maintenance services to a further 5,000 properties in the Central region. In addition, Mears has also been awarded a twelve month emergency contract to deliver the same range of services to 10,000 properties in the North West region. These two additional contracts, which were mobilised over a short timescale in April 2016, are together valued at around £35 million.

As previously reported, this is an important year for three material contract re-bids. We are pleased to report that Mears was successful in re-securing our Sedgefield contract. The contract, which provides responsive and planned maintenance to around 8,500 homes, is valued at £110 million over the ten year contract term. The new contract starts in July 2016.  In addition, we have been notified that we have been successful, subject to the conclusion of a standstill period, in being appointed as Commercial Adviser in respect of our Gateshead contract. The new contract, which is due to commence in April 2017, will see Mears take a greater role in the strategic development of our partnership to an enlarged insourcing solution. Our Manchester City Council joint venture is the last material re-bid, with the existing contract due to expire in March 2017 and the tender process is on-going.

The Housing division is pursuing a solid pipeline of new bidding opportunities. Importantly, the Group is seeing a number of new opportunities resembling our Milton Keynes award.  The extension of our services from maintenance to a wider housing management offering has strengthened further our competitive advantage and opened up exciting new opportunities that were not available to the Group previously.

Care

The Care business, which accounts for circa 17% of the Group revenues, continues to find the current market conditions challenging. There remains a significant disparity between the short and long-term Care opportunity in the UK. Mears continues to focus upon improving carer recruitment and retention rates, which remains a significant constraint to progress.

Much of the focus in the first six months of the year has been with a view to managing the impact of the National Living Wage (NLW) which came into force on 1 April 2016. At this time, we have implemented rate increases covering approximately 75% of our Care business which, in aggregate, has delivered a blended increase in charge rates of around 6%.  The dialogue with clients around NLW has further emphasised the significant disparity between those clients who recognise that more innovative, outcome based working practices are key to sustainability and, at the other end of the scale, those commissioners of care whose key driver remains the purchase of care services at the lowest hourly rate.  We have commenced a detailed contract-level review by contract which we expect to conclude over the coming weeks. We are placing greater emphasis upon maintaining a smaller portfolio of good quality contracts, which can provide clear and sustainable margins, whilst at the same time delivering a first class experience to our service users.

As reported previously, Mears was appointed as primary provider by Devon County Council ('Devon') for the provision of homecare services across South Devon. The contract is fundamentally different from the norm, with the client outsourcing to Mears its Adult Social Care function, taking on responsibility for commissioning, co-ordinating and supporting other local providers. The contract represents an important step for Mears as it replicates the journey that it took in Housing. The contract is for an initial five year period with an option to extend for a further two years and is valued at over £100m. The contract, which is the largest care contract ever awarded to Mears, is currently in its pre-mobilisation phase and is due to commence in July 2016.

Further to our Devon success, we are delighted to report that we have been notified by Wiltshire Council, subject to completion of the usual standstill period and Cabinet ratification, of its intention to award Mears zones in the North and West regions of the county, to add to our existing work in the South and East. This will mean Mears will be the prime provider for the significant majority of work across the county, which will double the overall value of the work done by Mears.  The additional work has been awarded to Mears due to the high levels of service and partnership working we have delivered under our existing contract. We believe this is a further endorsement of our long-term strategy for care.

In the long-term, Mears continues to see significant opportunity in the Care sector and remains confident that it has the right strategy.

Financial position

Mears continues to benefit from its financial strength and its efficiency in managing working capital. As previously reported, the Group has recently amended and extended its revolving working capital facility. The total commitment under the facility increased from £120m to £140m together with a reduction in pricing. The Directors anticipate reporting a small net debt position at 30 June 2016.

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

"I am delighted with the solid progress made in the first half of 2016.

"We anticipated the increasingly complex challenges that would face our Housing clients and we broadened our offering accordingly.  However, I must say that the speed of industry change and growth in new style opportunities has exceeded my expectations.  Our early move into Housing Management has put us in a strong position to benefit from a healthy and wider pipeline of opportunities. We continue to develop our offerings to strengthen our competitive position.

 "We continue to find the Care market challenging but we are pleased with progress made in our key partnering contracts. I remain confident that we have the right strategy and that Mears is best placed to take advantage of industry evolution as it happens. In the short-term we will look to place greater emphasis on maintaining a portfolio of good quality contracts at clear, sustainable margins.

"We continue to achieve high levels of service delivery and customer satisfaction. This is particularly pleasing given the number of new contracts mobilised in the period. 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."

Mears will be announcing its interim results on Tuesday 16 August 2016.

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

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 circa 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.

 

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