Final Results

RNS Number : 6542Z

Mears Group PLC

20 March 2012

 



20 March 2012

Mears Group PLC

("Mears" or "the Group")

Final Results

For the Year Ended 31 December 2011

Mears Group PLC, the provider of services to the Social Housing and Care sectors in the UK, is pleased to announce results for the year ended 31 December 2011.

Financial Highlights	Year ended 31 December 2011	Year ended 31 December 2010	Change
Total Group Revenue	£589.0m	£523.9m	+ 12%
Social Housing revenue	£415.0m	£379.4m	+ 9%
Care revenue	£108.5m	£100.4m	+ 8%
Operating Profit*	£33.6m	£31.3m	+ 7%
Profit before tax*	£31.5m	£28.9m	+ 9%
Diluted earnings per share	19.03p	16.57p	+ 15%
Normalised diluted EPS**	26.01p	23.38p	+ 11%
Dividends per share	7.50p	6.75p	+ 11%

*Stated before amortisation of acquisition intangibles, non-recurring and exceptional items

** Stated before amortisation of acquisition intangibles, non-recurring and exceptional itemstogether with an adjustment to reflect a full tax charge

Summary of Operations and Outlook

Financial:

·      Excellent year of new contract bidding. Awards in excess of £700m with conversion rate of 45%

·      Record revenue of £589.0m (2010: £523.9m), growth of 12%

·      Profit to cash conversion at 91% (2010: 97%).

·      Strong balance sheet with average net debt £58.5m (2010: £48.5m), and net debt at 31 December of £13.4m (2010: £12.2m)

·      Bank facility for the Group of £120m committed until July 2016.

·      Progressive dividend policy, dividend increasing in line with earnings by 11% to 7.50p per share (2010: 6.75p).

Social Housing Division:

·      Record revenue of £415.0m (2010: £379.4m), growth of 9%.

·      Growth in core maintenance revenue, up 21% including organic growth of 14%

·      Continuing high levels of customer satisfaction

·      Operating margin remains at market leading levels of 5.8% (2010: 6.0%)

Care Division:

·      Revenue increased by 8% to £108.5m (2010: £100.4m)

·      Operating margin increased to 8.0% (2010: 7.5%).

·      Successful integration of earnings enhancing Supported Living acquisition

·      Care operation maintained very strong regulatory compliance

Outlook:

·      Significant pipeline of new bidding opportunities over the next 12 months

·      Visibility of 94% of consensus forecast revenue for 2012 and 80% for 2013.

·      Ageing demographics and current fiscal challenges provide significant opportunities for Mears

·      Targeting acquisitions in both core growth markets

·      Continued roll-out of proprietary care IT system.

David Miles, Chief Executive, Mears Group said:

"In this challenging environment, the Group has performed strongly, particularly in terms of revenue growth, significant new contract awards and delivering strong operating margins. Since my appointment as Chief Executive, I have focused on enhancing further our market-leading service delivery and bidding capabilities through both senior management recruitment and training, and process improvement.

"We continue to position ourselves as the partner of choice for our customers (and their tenants), differentiating ourselves through our ability to add rigorous financial control to contracts whilst improving our (already market leading) tenant-centric service standards. I am particularly pleased by the positive impact we achieved turning-around the contracts we inherited over recent years from failed businesses. As customers continue to seek solutions to social housing's broad-based underlying challenges, I am confident that we will remain significantly differentiated from our remaining competitors. We continue to seek appropriate bolt-on acquisitions.

"I am proud of our achievements in the care business that we have built against a backdrop of significant industry change. We have delivered as we promised we would. The well documented challenges in the care market are likely to accelerate in 2012. Mears continues to be at the forefront of seeking solutions to these challenges, both intellectually, in terms of influencing policy makers and critically in terms of investment and training in our operational processes. Where appropriate, we will seek acquisitions to broaden our care offerings. The new internally-developed care IT system will further help to enhance our customer service as we widen the range of areas within which the Mears approach is delivered.

"In challenging market conditions overall, we continue to believe that our track record of superior customer service, financial strength and service innovation will position us well to meet our customers' needs in our two growth markets."

A presentation for analysts will be held at 9.30 a.m. today at the offices of Investec, 2 Gresham Street, London, EC2V 7QP.

About Mears                       www.mearsgroup.co.uk                     (tickers: MER.L  MER.LN  MER.PL)

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

Mears employs in excess of 11,000 people and provides maintenance and repairs services to in excess of 10% of the UK social housing stock. Mears also provides over 160,000 hours of care to 20,000 service users each week.

Enquiries:
Mears Group PLC
David Miles, Chief Executive	Tel: [phone]
Andrew Smith, Finance Director	Tel: [phone]
Bob Holt, Chairman	Tel: [phone]
Joint Broker - Investec
Keith Anderson/Daniel Adams	Tel: [phone]
Joint Broker - Collins Stewart
Mark Dickenson/Lucy Tilley	Tel: [phone]
Gable Communications	Tel: [phone]
John Bick/Justine James [e-mail]	Tel: [phone]

Chairman's Statement

Both profits and revenue have risen for the sixteenth consecutive year. Our Social Housing and Care revenues grew by 9% and 8% respectively. Profit before tax, amortisation and non-recurring items rose to £31.5m (2010: £28.9m) on revenue of £589.0m (2010: £523.9m). The normalised diluted earnings per share increased by 11% to 26.01p (2010: 23.38p). The Board is recommending a final dividend of 5.35p per share (2010: 4.85p) making 7.50p per share for the year, an increase of 11%.

Cash generated from operations as a proportion of the profit for the year (before tax and amortisation) amounted to 91% (2010: 97%) reflecting the strength of our working capital management.

We are extremely pleased with this robust set of results given both the continuing impact of the current economic situation, and critically, in the wake of the sudden decision by the UK Government to accelerate the reduction in the Feed-In-Tariff subsidy for solar photovoltaic (PV) installations.

This year, three things stand out for me in particular. First and foremost, our already market-leading service delivery performance continued to be recognised by tenants and customers alike. Second, we demonstrated how we can make a real difference in challenging times, as we transformed the contracts we have inherited from failed businesses. Third, in a support services sector, where many well established businesses have struggled to deliver significant organic growth, we have managed to reap the rewards from our investment over the years in high quality customer service with strong organic growth.

The PV Tariff decision was reached without consultation and has been a disaster for the industry, which had been heralded as a major boost to the economy and the environment. The Government have been found to have acted unlawfully by the Court of Appeal; consequently, the industry is somewhat in "limbo". Pending clarification on the longer term outlook, we took the prudent view to mothball our solar panel operations and to write off the costs expended to date in the 2011 financial year. Whilst PV formed only a small add-on to our core Social Housing business, the speed of the government change resulted in a disproportionate impact.

As stakeholders begin tackling the underlying challenges in social housing and care, in a sustainable fashion, I am confident that our differentiated quality-focused market position will reap the rewards for which we have worked hard.

Record Order Book

Our order book stands at £2.9 billion. The demand for our services continues to be very strong with a bid pipeline in excess of £3.0 billion with immediate bidding opportunity for contracts due to start in the course of the next twelve months in excess of £2.0 billion. We enter the current year with visibility of 94% of the £649m consensus revenue forecast for 2012. Moreover, we have visibility over 80% of the £686m consensus revenue forecast for 2013 which demonstrates our strong position and reflects the long-term nature of our business.

We are well placed to benefit from the immediate bid pipeline and the wider contracting opportunity in both our core growth markets. Our relationship with our customers continues to be strong and our partnering ethos is recognised and appreciated widely. We are delighted that customers feel able to award, as well as renew, contracts to the Group across an array of activities.

Strategic developments

We have been broadening our care and support offerings to our clients. The acquisition of the Supported Living division of Choices Care brings the Group capabilities in providing a supported living service to adults with learning disabilities, autism and mental health needs, in their own homes. These adults tend to require a more complex care support package than is often offered in the traditional domiciliary care area. The acquisition of a group of Home Improvement Agencies from Anchor Housing further strengthens our capability to help keep people in their own homes for longer. Home Improvement Agencies contract with Local Authorities to provide primarily home adaptation and handyman services to vulnerable owner-occupiers in local communities. Together, these two acquired businesses are an excellent complement to our existing operations; both have reported growth since acquisition.

Progressive social housing customers continue to seek innovative solutions to their needs. The Group has been active in developing new propositions around "in sourcing" and "new homes". Our unique integrated care and housing offering continues to resonate with customers. Our first integrated service operation is up and running in Wigan. Irrespective of the current uncertainty with PV, we will continue to strive to provide solutions to our customers and clients to address the challenges of fuel poverty.

Committed employees

I commend our employees for their commitment and energy throughout another significant year for the Group. I continue to be impressed by the quality, professionalism and loyalty displayed by our people. We will return this faith with appropriate investment in our people. Given we work in some of the most deprived communities in the UK, we take our responsibilities regarding employment extremely seriously. We have 208 people enrolled in Apprenticeship and Job Experience programmes within Mears. We are proud of the many practical and local opportunities we are able to create in these challenging times.

Positive outlook

Both social housing and care are robust defensive sectors where spend is largely non-discretionary. We continue to place great emphasis on winning good quality contracts that can provide clear and sustainable margins, whilst at the same time providing a first class service and value offering for our clients. We will continue to differentiate ourselves through financial robustness, tenant-centric customer service, and proposition innovation developed in partnership with our customers.

We expect our Social Housing business will grow through further contract wins, underpinned by market leading service delivery and, where appropriate, regional in-fill acquisitions. In our Care business we will seek acquisitions which increase our ability to respond to growing opportunities from health and social care outsourcing and implementation of new localised commissioning models. We will look to enhance and broaden our offering through partnerships and acquisitions.

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

Bob Holt
[e-mail]
Chairman

Chief Executive's Review

Group performance

I am pleased to report a year of significant progress across the Group in what has been a challenging year. We have seen the Group further consolidate its market leading positions in both the Social Housing and Care sectors. The continued focus on providing first class value for money customer service through our partnership ethos has once again been rewarded with considerable new contract bidding success.

Group revenues increased by 12% to £589.0m. The Group's overall operating margin reduced from 6.0% to 5.7% predominantly driven by a shift in the sales mix with our lower margin Other Services division having a larger share of the whole. This is reviewed in greater detail below.

Social Housing - performance

£ million	Social Housing Total	Core Maintenance	Capital Projects
2010 Revenue	379.4	289.0	90.4
Impact of  acquisitions	25.6	20.3	5.3
Decent Homes expiry	(31.5)	-	(31.5)
Organic growth in core maintenance	41.5	41.5	-
2011 Revenue	415.0	350.8	64.2
Organic growth		14%

I am delighted that our Social Housing division continues to report improving service delivery notwithstanding the high standards already being achieved. The proportion of customers rating our service as excellent stands at 80%. (2010: 79%) Typically others in the sector measure only customer satisfaction whereas our drive has always been for excellence. We also had the lowest ever level of complaints as a percentage of work carried out at 0.30% (2010: 0.32%). Service quality remains our key differentiator. Whilst I am delighted at the strong performance delivered in terms of both new contract bidding and ultimately the financial outputs, it is important to remember that it is service quality that has always underpinned our success.

The Social Housing business has performed well reporting revenue growth of 9%. As expected, we have seen a reduction of £31.5m in our Capital Projects revenues as the Decent Homes programme moves towards its natural conclusion. This masks the continued strong growth within our core maintenance activities which registered an increase of 14%. We would anticipate a final reduction of around £30m from Decent Homes revenue in 2012. We remain optimistic that we can continue to deliver solid double digit organic growth in both the short and medium term.

The Social Housing bid pipeline remains robust which further supports our confidence that we will continue to deliver strong growth in our core Maintenance business. The impact of the acquisitions of Jackson Lloyd and the Home Improvement Agencies added £20.3m to our Maintenance revenues. The contribution to Group revenues through the relationships acquired with the Bristol Social Housing division of Rok contributed £5.3m to our Projects revenue.

At a divisional level, operating profit is reported before amortisation, exceptional items and share option costs. The Government's announcement in October 2011 to significantly reduce both the level and the timing of the PV feed in tariff was extremely disappointing. The Board considered that the prudent course of action was to cease these activities immediately. This resulted in the write off of costs relating to the site set-up, system design and installation amounting to £2.0m. This cost has been excluded from the Group's headline financial performance indicators and is categorised as exceptional.

The Social Housing operating profit increased to £23.9m (2010: £22.9m), with the operating margin reporting a small reduction to 5.8% (2010: 6.0%). The continuing reduction in works relating to Decent Homes does inevitably add a challenge to margin in both 2011 and 2012 given that these contracts generated a solid margin and are being replaced by revenues that through their early stages, will generate a reduced margin. Typically the Group anticipates a low margin from a new contract during its mobilisation phase at a time when it is critical to ensure that the necessary processes are put in place while at the same time focusing on excellent customer service. It is important to note that Mears does not capitalise any of these start-up costs and the losses associated with new mobilisations are fully expensed in the period.

Whilst there have always been competitors with a greater appetite for revenue growth at the expense of margin, we remain highly selective and there is no shortage of opportunities where potential clients are willing to focus on quality and not simply the price paid to Mears. The high number of recent contract successes will provide the foundations for delivering robust growth in 2012. The first quarter of 2012 will see the most intense period of new contract mobilisation in our history with five significant new contracts due to start on or around 1 April 2012 with an annual value of £50m. We continue to invest heavily in our infrastructure to ensure that we can deliver on these new contracts whilst maintaining the high quality of our overall service delivery.

Care and Support - performance

The Care division reported growth of 8% with revenues increasing to £108.5m (2010: £100.4m). This growth in Care revenues includes the full year impact of the acquisition of Supporta plc, which was acquired in January 2010 and the revenues acquired from Choices Community Care (in administration) which came online in August 2011. The underlying organic growth was 2%. Whilst the level of organic growth is well below our stated target of double digit growth, the continuing improvement in operating margin is particularly pleasing in a sector which continues to see such an important service procured predominantly on price. The operating margin has increased to 8.0% (2010: 7.5%). The growth in margin has been achieved through identifying further synergies together with a change in sales mix as the division has commenced delivering more acute and higher-margin services. I am delighted at the performance of our Care division in terms of the quality of service delivery and its strong financial performance.

Care remains an environment where services continue to be purchased predominantly on price. We remain optimistic that this will change over the medium term. It is a fine balance between growing our top line whilst at all times protecting our operating margin. I do believe at times we have been a little too risk averse when bidding for new Care contract opportunities and this is an area that is under constant review. Certainly as we start to offer more acute services, this will provide more flexibility in terms of a growth and margin trade-off. I continue to believe that double-digit organic growth in Care is a very achievable target.

Our current focus is to complete the roll-out of our new Care IT platform. The IT development was completed during 2011 using the skills and experience learnt from the Social Housing division to generate opportunities for efficiencies for both ourselves and our clients and provide significant competitive advantage. We remain determined to reinvest those savings into our care workforce who provides quality care services for a relatively low wage and remain undervalued when considering the responsibility and social contribution of their roles.

Equally important is Mears new partnership with Tunstall for the implementation of telecare and telehealth systems within the home environment. Telecare and telehealth, when combined with effective personal care and support, can both improve service and reduce costs. The results of the Department of Health study into the use of telecare and telehealth were extremely positive. Through the Mears partnership with Tunstall, we are already implementing the largest telecare project in the UK in Birmingham, across an anticipated 24,000 homes, and we see an acceleration of these opportunities through 2012 and 2013.

Other Services - performance

Mears' Other Services predominantly comprises its Mechanical & Electrical (M&E) operation. This division has experienced a significant upturn in activity over the year with revenues increasing 48% to £65.5m. Whilst the trading environment remains competitive and is expected to continue to be so in the short term, the division does have full visibility of forecast revenues for the 2012 year and is already focussed on developing the order book for 2013. Whilst it is pleasing to report this significant increase in new works, the M&E environment is currently highly competitive and pricing is keen. I am delighted at the performance of the M&E operation and it is a credit to the quality of the team that it have continued to generate profits and meet budget expectations in what has been a challenging period.

Social Housing - new contract bidding

In the last twelve months we have been awarded new social housing contracts valued at £590m (including extensions) representing 43% by value of all contracts bid in the last twelve months. The key contract awards, which are all due to commence in 2012, are detailed below:

Contract award	Detail
Barnet Homes	A ten- year contract with Barnet Homes. The contract is valued at £69m over the ten-year period to provide responsive repairs, void maintenance and cleaning services to approximately 11,100 properties.
Waverley Borough Council	A seven-year contract valued at £52m over the initial seven-year period to provide responsive repairs, voids, capital works, aids and adaptations services. There is an option to extend the contract for a further seven years, taking the total opportunity to £104m. Waverley owns and manages in excess of 5,000 properties in Surrey.
Home Group	A seven-year contract with Home Group to cover properties in their South West region. The contract is worth £35m for the initial seven-year term and there is an option to extend for a further two years. We will be providing responsive repairs, voids, gas servicing and planned maintenance services. Home Group own and manage circa 3,200 properties in their South West region.
Tamworth Borough Council	A five-year contract to provide responsive repairs and void maintenance, together with a range of reinvestment works. The contract is valued at £40m over the initial five-year period and includes an option to extend for a further two years, giving a total contract value of £56m including extensions. We have been appointed as sole partner to deliver these services to 4,500 properties.
Gateshead Council	A three-year partnership contract to provide responsive repairs, void services, gas servicing, cyclical maintenance and adaptations services. The contract is valued at £60m for the initial three-year period, with an option to extend for a further two years giving a total contract value of £100m including extensions. We have been appointed as sole partner to deliver these services to 21,000 properties.

Our new contract successes have increased our Social Housing order book to £2.4 billion. Our bid pipeline remains robust and in excess of £3.0 billion with the immediate bidding opportunity for contracts due to start over the course of the next twelve months in excess of £2.0 billion.

Care and Support - new contract bidding

In Care, our new contract bidding success rate (by value) is 70% of all contracts bid for in the last twelve month period amounting to a total value of £70m.

This once again reflects the on-going trends in awarding consolidating contracts to providers with an excellent quality reputation and a capability to deliver against the emerging personalisation agenda. The most significant new contract awards include the following:

Contract award	Detail
Wirral Council	The most significant single award has been with Wirral Council. The contract has an expected value of £14m with a term of five years. Wirral Council is an existing Mears Care client and having retained our existing business we added further specialist services, which is representative of our strategy to increase work in the higher end care areas.
Sefton Council	The five-year contract with Sefton Council has an estimated value of £7m with an estimated volume of 2,300 hours per week with Mears being named one of four providers.
Liverpool City Council	A three-year contract with Liverpool City Council with an estimated value of £3.5m. Of the eight existing main providers for Liverpool, Mears is one of only three that have been retained. The estimated volume is 1,900 hours per week, which represents an increase on existing work levels.
Rotherham Metropolitan Borough Council	A three-year contract with Rotherham Metropolitan Borough Council with an estimated value of £5.8m. This contract awarded represents a key existing contract retention.
South Gloucestershire Council	A contract with South Gloucestershire Council for the provision of Extra Care and Support Services at a newly built extra care scheme which will be home to older people and those with learning disabilities, physical disabilities, mental health, sensory impairment, dementia, alcohol/substance misuse issues and those with HIV. The five-year contract is valued at £3m.

Management team

Since my appointment as Chief Executive, I have focused on further enhancing our market-leading operational capabilities through both senior management recruitment and training and process improvement. We have the right management team in place to take our business forward and capitalise on the many opportunities in our growth markets.

Safety, health and environment (SHE)

Another great year for Mears: accidents rates down, recycling rates increased, waste costs reduced and quality standards introduced across the Group to improve standards further. This has been complemented with improved training and committed management teams. This has been further affirmed by RoSPA with 2012 being the tenth consecutive year in which Mears has been awarded the Gold Award and also achieved the 18001 accreditation.

Our environmental performance continues to improve. In 2011 we teamed up with our waste partner Network Waste and in the last 10 months we reduced our overall cost for disposing of waste by 10% and improved our recycling from 76% to 88%. I hope to be able to report further improvements in a year from now.

Our training commitments continued in 2011 including further refresher training for all operatives and carers. Specific on the job training included scaffold, lifting and working at height training and these are all contributing to our improved safety performance.

Training and development

We are delighted that through periods of employee growth we have retained our accreditation with Investors in People. We have opted for annual assessment and our 2011 report provided very positive feedback. In addition to this we now carry out annual employee satisfaction surveys which provide valuable information.

In 2011 our apprentice and trainee numbers increased by 95, 13 of which transferred from other companies as a result of contract wins and the remaining were newly created opportunities. At the end of 2011 we launched our apprentice programme in Care. During the same year we retained 85% of apprentices and trainees that had completed their training programme.

In January 2011 we launched a new leadership training programme, which 76 senior managers completed. The results have been positive with all managers stating that they felt more confident, particularly in respect of people management and presentations. On average every employee receives five days of training per year in areas of people management, health & safety, customer services and trade skills.

Our communities

We have operations throughout the UK and all our branches are dedicated to helping to improve people's lives. We work in some of the most socially deprived areas of the country and so we feel a strong sense of responsibility toward the wider community. Helping a community thrive increases the quality of life for residents and supports community cohesion and development.

David Miles
[e-mail]
Chief Executive Officer

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 Chief Executive's Review.

	2011 £m	2010 £m	Change  %
Group Revenue	589.0	523.9	+12%
Operating profit before exceptional items*	33.6	31.3	+7%
Profit before tax and before exceptional items*	31.5	28.9	+9%
Profit before tax*	28.4	26.5	+7%
*pre-amortisation of acquisition intangibles

Exceptional items

Costs of £3.1m (2010: £2.5m) were considered to be non-recurring and exceptional in nature. Notably:

·      The Government announced a significant reduction to both the level and the timing of the PV feed in tariff in October 2011. The Board took the swift decision to terminate those activities resulting in the write-off of costs relating to the site set-up, system design and installation amounting to £2.0m. This cost has been identified as a non-recurring item and as such has been adjusted for within the Group's headline financial performance indicators.

·      During the year, the Group completed a refinancing of its bank facilities. The costs attributed to the arrangement of the new facility of around £1.6m were capitalised and are to be amortised over the life of the facility. The exceptional cost of £1.1m relating to the carrying value of the transaction costs of the previous facility together with the costs relating to its termination will be treated as a non-recurring item and expensed in the current year.

Amortisation of acquisition intangibles

A charge for amortisation of acquisition intangibles of £7.8m (2010: £10.1m) arose in the period. The majority of this charge is in respect of the Group's Care division and represents the amortisation of the identified intangible assets acquired in respect of a number of Care acquisitions. In addition, the Social Housing division has completed a number of small acquisitions, typically of distressed businesses, over recent years. The decrease in the charge in the year reflects the Group's prudent approach in respect of identifying intangibles and their subsequent release. In 2010, the intangibles identified in respect of the acquisition of certain trade and assets of Connaught Partnership Limited and Rok Building Limited were written off entirely in the period resulting in a particularly high charge in that year.

Net Finance costs

The finance cost in respect of bank borrowings was £2.4m (2010: £2.0m). The increase in interest cost reflects an increase in the average core debt following the acquisitions of Supporta plc, Jackson Lloyd Limited and Choice Care. The net interest credit in respect of the defined benefit pension scheme was £0.3m (2010: £0.3m charge).

Tax expense

A tax charge of £3.7m has been provided (2010: £1.6m). The effective current corporation tax rate recognised in the income statement before adjustments for deferred tax is 22.1% (2010: 14.3%). The effective current corporation tax rate was unusually low in the prior year due to a deferred tax credit in respect of the amortisation of acquisition intangibles of £2.8m and a non-taxable pension benefit of £3.7m. Historically the Group's effective tax rate is lower than the headline rate of corporation tax, which for 2011 is 26.5%, given the Group receives a corporation tax deduction in respect of the exercise of share options. It is anticipated that this trend will continue.

Earnings per share (EPS)

	2011 (p)	2010 (p)	Change  %
Normalised diluted earnings per share*	26.01	23.38	+11%
Dividend per share	7.50**	6.75	+11%
*before exceptional items and pre-amortisation of acquisition intangibles and based on a normalised tax charge of 26.5%
**including a proposed final dividend of 5.35p per share

Normalised basic EPS increased by 8.8% to 27.16p (2010: 24.96p). The normalised diluted EPS, which allows for the potential diluting impact of outstanding share options, was up 11.3% to 26.01p (2010: 23.38p). Normalised earnings are stated before exceptional costs and exclude the amortisation of acquisition intangibles together with an adjustment to reflect a full tax charge of 26.5% (2010: 28.0%). We believe that this normalised diluted EPS measure better allows the assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future performance.

Dividend policy

The Board remains confident in the future opportunities in its growth markets and consequently expects to be able to continue to follow a progressive dividend policy. The Board has recommended a final dividend of 5.35p per share which, combined with the interim dividend, gives a total dividend for the year of 7.50p (2010: 6.75p), an 11.1% increase. The dividend is payable on 3 July 2012 to shareholders on the register on 15 June 2012. The dividend is covered 3.5 times by underlying earnings per share.

Cash performance

	2011 %	2010 %
Cash conversion (PBT)*	91.1%	96.7%
Cash conversion (EBITA)*	84.7%	88.9%
Net debt at balance sheet date	£13.4m	£12.2m
Average daily net debt	£58.5m	£48.5m
*cash inflow from operating activities before taxation and before the effect of acquired contracts

The efficiency with which the Group manages working capital remains a cornerstone of our business. The Group's conversion of profit for the year before tax and pre amortisation to cash in the period was 91.1% (2010: 96.7%). The Group has consistently set high standards of working capital management and high levels of conversion of profit before tax into cash with an average conversion rate during the last five years of 84.3% against its stated target of 80%. Over the same period, the business has more than doubled through organic growth.

Our net debt position at 31 December 2011 was £13.4m (2010: £12.2m). Whilst the year end cash position was pleasing, typically the accounting period end reports 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 amounted to £58.5m (2010: £48.5m). This increase is predominantly due to the acquisitions completed during 2010 and 2011 which increased net debt by in excess of £35m over the last two years. Given the timing of the non-trading outflows, the true underlying core debt at the year end is in the region of £60m (2010: £59m). We have always been and remain conservative in respect of our appetite for debt and, whilst the Group has ambitions for making acquisitions through 2012, our expectation would be to work to a net debt to EBITDA ratio of no greater than two times.

Treasury facilities

The Group has completed a refinancing of its banking facilities with a new £120m unsecured revolving credit facility and an additional accordion mechanism allowing the facility to be increased to a maximum of £160m. This provides significant additional funding capacity for the Group. The new facility will mature in July 2016 and its terms include lower debt pricing and higher operational flexibility than under the previous facility. This new arrangement replaces the Group's previous £85m secured bank facility. Our ability to achieve such a refinancing in the current economic environment is a testament to the continued strong performance of the business and the strength of the longstanding relationship we have with both Barclays and HSBC.

Balance sheet

	2011 £m	2010 £m	Change %
Goodwill and Intangible assets	127.5	124.5
Property, plant and equipment	12.7	12.1	+5%
Inventories	12.5	12.1	+3%
Trade receivables	127.5	111.6	+14%
Trade payables	(104.0)	(95.8)	+9%
Net debt	(13.4)	(12.2)
Deferred consideration	(2.9)	(2.8)
Cash flow hedge	(1.7)	-
Pension	(5.8)	(7.7)
Taxation	(0.6)	(0.2)
Total Assets	151.8	141.6

Acquisitions and intangible assets

The value of goodwill and other identified intangibles carried within the balance sheet is £127.5m, of which over three-quarters relates to the Group's Care division. A balance of £7.8m of amortisation was charged to the income statement during the period. Two acquisitions were completed during the year adding a further £6.3m to intangibles and are detailed below:

Acquisition	Detail
Acquisition of certain business assets of Anchor Housing relating to its Home Improvement Agencies division.	During the period January to April 2011, Mears completed the acquisition of a group of Home Improvement Agencies from Anchor Housing for a nominal fee. Home Improvement Agencies are currently contracted by Local Authorities to provide primarily home adaptation and handyman services, to vulnerable owner occupiers in local communities.  We consider this purchase to be an excellent complement to our existing operations and one which extends our geographic footprint into a number of Local Authorities where we previously had no presence.
Acquisition of the Supported Living division of Choices Care Community Services Limited ('Choices'), a leading provider of Social Care services in Scotland and the North of England.	The main business of Choices is the provision of a supported living service to adults with learning disabilities, autism and mental health needs, in their own homes. Service recipients tend to have a more complex care support package than can be seen in the more traditional domiciliary care area, due to the higher acuity needs of the individual. The Board's strategy is to broaden the diversity of Mears' care offering and to begin supplying services to individuals with higher acuity needs in their own homes. The acquisition of Choices fits well with these criteria and is consistent with our strategy of targeting growth in higher need care areas. Mears acquired the trade and certain assets of the Supported Living division for an initial cash consideration of £7.40m, which included a significant refundable deposit dependent upon the successful novation of the acquired contracts. Since completion, the Group has been repaid a sum of £2.1m in respect of two contracts that were not novated, leaving a net consideration paid of £5.3m.

Other trading balances

The Group capital expenditure of £4.0m (2010: £2.9m) relates to IT hardware, other office equipment and the refurbishment of new office premises. Predominantly all our plant and machinery is hired, and motor vehicles are subject to operating leases and hence are not included within capital expenditure or recognised as an asset within the balance sheet.

A balance of £2.4m (2010: £1.9m) is included within non-current trade and other receivables. This relates to sales retentions in relation to our M&E activities within our Other Services division. This is normal practice within that sector, where a small percentage of the contract sum is withheld for a short period. This is typically settled twelve months after the completion of works.

Trade receivables have increased by 14% to £127.5m (2010: £111.6m), slightly ahead of our top-line growth of 12%. Whilst cash inflows within our two core sectors are consistent with historical sales cycle, cash conversion has been slower within our M&E division, in particular in relation to the Athletes' Village project in support of London 2012 which is now at a practically complete stage.

Trade payables have increased by 9% to £104.0m (2010: £95.8m), which is slightly behind the growth in top line growth. This is in line with our expectations given the entire provision of Care services is self-delivered, which inevitably means that whilst revenue-growth is mirrored with an increase in trade receivables, it is not supported by a similar increase in its outstanding creditor balances.

All costs relating to tender, contract set-up and the initial inefficiencies during the period of contract mobilisation are written off as they are incurred.

Total shareholders' equity rose by £10.2m to £151.8m at 31 December 2011. The increase in net assets is primarily due to retained profits.

Pensions

	2011 £m	2010 £m
Income statement - pension costs
Current service cost	2.7	2.4
Past service cost	-	(3.7)
Interest on obligation	(0.3)	0.3
Total defined benefit pension cost charged to the result for year	2.4	(1.0)
Balance sheet - pension liability	5.8	7.7

The Group participates in a principal Mears Group pension scheme together with a further fourteen 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.

Net pension charges amounting to £2.4m have been made to the income statement (2010: £1.0m credit). The current service cost has increased due to an increase in membership on the back of new contract awards. In the previous year, past service cost included a credit relating to the change in the measurement of future pension increases being linked to CPI rather than RPI. The reduced interest charge on the obligation reflects the higher expected return on scheme assets.

The latest actuarial valuations for the schemes as at 31 December 2011 reported a reduction of the pension deficit by £1.9m reducing the carrying value of the liability from £7.7m to £5.8m. This reduction is caused by a reduction in the anticipated future pension payments. The Group has also agreed a repayment plan with the trustees of the Mears Group scheme at £0.9m per annum for a period of nine years with a view to the scheme being fully funded by 2020.

Mears has reported strong growth over its sixteen years as a listed company. Fundamental to this success has been our ability to identify and manage both risks and opportunities in a constantly changing environment. Over the course of 2011, significant resource has been directed towards corporate governance, with particular focus being given to significantly enhancing the Group risk management process that will ensure a uniform approach across all our business to identify and mitigate risk.

Andrew Smith
[e-mail]
Finance Director

Consolidated income statement

for the year ended 31 December 2011

		2011			2010
	Note	£'000	£'000		£'000	£'000
Sales revenue	3		588,971			523,935
Cost of sales			(414,207)			(373,402)
Gross profit			174,764			150,533
Other administrative expenses		(141,156)			(119,213)
Operating result before amortisation of acquisition intangibles and exceptional items		33,608			31,320
Exceptional items	5	(3,094)			(2,450)
Amortisation of acquisition intangibles		(7,783)			(10,119)
Total administrative costs			(152,033)			(131,782)
Operating profit			22,731			18,751
Finance income	4		484			63
Finance costs	4		(2,633)			(2,462)
Profit for the year before tax			20,582			16,352
Tax expense	6		(3,668)			(1,588)
Net profit for the year			16,914			14,764
Earnings per share
Basic	8		19.87p			17.70p
Diluted	8		19.03p			16.57p

Consolidated statement of comprehensive income

for the year ended 31 December 2011

		2011	2010
	Note	£'000	£'000
Net result for the year		16,914	14,764
Other comprehensive income/(expense):
Cash flow hedges:
- losses arising in the year		(1,463)	-
- reclassification to Income Statement		204	-
Actuarial loss on defined benefit pension scheme		846	(3,651)
Increase in deferred tax asset in respect of defined benefit pension schemes		(479)	1,022
Other comprehensive expense for the year		(892)	(2,629)
Total comprehensive income for the year		16,022	12,135
Attributable to:
- equity holders of the parent		16,022	12,135

Consolidated balance sheet

as at 31 December 2011

Company number: 3232863

		2011	2010
	Note	£'000	£'000
Assets
Non-current
Goodwill		101,030	97,405
Intangible assets		26,449	27,136
Property, plant and equipment		12,681	12,113
Deferred tax asset		7,379	8,056
Trade and other receivables		2,384	1,929
		149,923	146,639
Current
Inventories		12,541	12,147
Trade and other receivables		125,095	109,765
Cash at bank and in hand		46,571	21,757
		184,207	143,669
Total assets		334,130	290,308
Equity
Equity attributable to the shareholders of Mears Group PLC
Called up share capital		857	848
Share premium account		33,554	33,243
Share-based payment reserve		2,965	2,905
Hedging reserve		(1,259)	-
Merger reserve		38,243	38,243
Retained earnings		77,425	66,315
Total equity		151,785	141,554
Liabilities
Non-current
Pension and other employee benefits		5,840	7,693
Deferred tax liabilities		5,297	6,983
Financing liabilities		1,325	-
Other liabilities		879	959
		13,341	15,635
Current
Short-term borrowings and overdrafts		60,000	34,000
Trade and other payables		105,916	97,879
Financing liabilities		403	-
Current tax liabilities		2,685	1,240
Current liabilities		169,004	133,119
Total liabilities		182,345	148,754
Total equity and liabilities		334,130	290,308

Consolidated cash flow statement

for the year ended 31 December 2011

		2011	2010
	Note	£'000	£'000
Operating activities
Result for the year before tax		20,582	16,352
Adjustments	9	14,046	17,799
Change in inventories		(394)	5,588
Change in trade and other receivables		(13,340)	(13,835)
Change in trade and other payables		5,026	431
Cash flow from operating activities before taxation before effect of acquired contracts		25,920	26,335
Change in working capital from acquired contracts		(2,820)	-
Cash flow from operating activities before taxation		23,100	26,335
Taxes paid		(4,615)	(6,599)
Net cash inflow from operating activities		18,485	19,736
Investing activities
Additions to property, plant and equipment		(3,991)	(2,935)
Additions to other intangible assets		(1,419)	(920)
Proceeds from disposals of property, plant and equipment		208	243
Acquisition of subsidiary undertaking, net of cash		(5,771)	(28,122)
Disposal of business activities, net of cash		-	986
Interest received		-	2
Net cash outflow from investing activities		(10,973)	(30,746)
Financing activities
Proceeds from share issue		320	743
Discharge of finance lease liability		(86)	(557)
Interest paid		(2,970)	(2,851)
Dividends paid		(5,962)	(5,079)
Net cash outflow from financing activities		(8,698)	(7,744)
Cash and cash equivalents, beginning of year		(12,243)	6,511
Net decrease in cash and cash equivalents		(1,186)	(18,754)
Cash and cash equivalents, end of year		(13,429)	(12,243)
Cash and cash equivalents is comprised as follows:
- cash at bank and in hand		46,571	21,757
- short-term borrowings and overdrafts		(60,000)	(34,000)
Cash and cash equivalents		(13,429)	(12,243)

Consolidated statement of changes in equity

for the year ended 31 December 2011

		Share	Share-based
	Share	premium	payment	Hedging	Merger	Retained	Total
	capital	account	reserve	reserve	reserve	earnings	equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 January 2010	744	32,505	2,649	-	11,548	58,482	105,928
Net profit for the year	-	-	-	-	-	14,764	14,764
Other comprehensive income/(expense):				-
- deferred tax on pension obligation	-	-	-	-	-	1,022	1,022
- actuarial loss on pension and other employee benefits	-	-	-	-	-	(3,651)	(3,651)
Total comprehensive income for the year	-	-	-	-	-	12,135	12,135
Deferred tax on share-based payments	-	-	-	-	-	283	283
Issue of shares	104	738	-	-	26,695	-	27,537
Share option charges	-	-	750	-	-	-	750
Exercise of share options	-	-	(494)	-	-	494	-
Dividends	-	-	-	-	-	(5,079)	(5,079)
At 1 January 2011	848	33,243	2,905	-	38,243	66,315	141,554
Net profit for the year	-	-	-	-	-	16,914	16,914
Other comprehensive income/(expense):
- cash flow hedge				(1,259)	-	-	(1,259)
- deferred tax on pension obligation	-	-	-	-	-	(479)	(479)
- actuarial loss on pension and other employee benefits	-	-	-	-	-	846	846
Total comprehensive income for the year	-	-	-	(1,259)	-	17,281	16,022
Deferred tax on share-based payments	-	-	-	-	-	(349)	(349)
Issue of shares	9	311	-	-	-	-	320
Share option charges	-	-	200	-	-	-	200
Exercise of share options	-	-	(140)	-	-	140	-
Dividends	-	-	-	-	-	(5,962)	(5,962)
At 31 December 2011	857	33,554	2,965	(1,259)	38,243	77,425	151,785

Notes to the preliminary announcement

1. Corporate information

Mears Group PLC is a public limited company incorporated in England and Wales whose shares are publicly traded. The preliminary announcement of the company and its subsidiaries ('the Group') for the year ended 31 December 2011 was authorised for issue in accordance with a resolution of the Directors on 5 March 2012.

2. Basis of preparation and accounting principles

(a) Basis of preparation

The preliminary announcement contains extracts from the full financial statements.

The full financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The financial statements are prepared under the historical cost convention.

(b) Significant accounting policies

The accounting policies remain unchanged from the previous year except for the adoption of IAS 24 (Revised) 'Related Party Disclosures' and the adoption of the May 2010 Annual Improvements to IFRS which have not had a material impact on the financial statements of the Group.

3. 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 three operating segments during the year:

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

•     Care - services within this sector comprise personal care services to people in their own homes; and

•     Other - services within this sector comprise provision of design and build M&E services.

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

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

	2011					2010
	Social					Social
	Housing	Care	Other	Total		Housing	Care	Other	Total
Business segments	£'000	£'000	£'000	£'000		£'000	£'000	£'000	£'000
Revenue	415,000	108,518	65,453	588,971		379,400	100,358	44,177	523,935
Operating result pre amortisation of acquisition intangibles, exceptional items and share-based payment	23,866	8,674	1,268	33,808		22,896	7,532	1,642	32,070
Operating margin pre amortisation of acquisition intangibles, exceptional items and share-based payment	5.8%	8.0%	1.9%	5.7%		6.0%	7.5%	3.7%	6.1%
Share-based payment	(150)	(25)	(25)	(200)		(600)	(50)	(100)	(750)
Operating result pre amortisation of acquisition intangibles and exceptional items	23,716	8,649	1,243	33,608		22,296	7,482	1,542	31,320

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.

Reconciliation to the Consolidated Income Statement:

	2011	2010
	£'000	£'000
Operating result pre amortisation of acquisition intangibles and exceptional items	33,608	31,320
Exceptional items	(3,094)	(2,450)
Amortisation of acquisition intangibles	(7,783)	(10,119)
Finance costs, net	(2,149)	(2,399)
Tax expense	(3,668)	(1,588)
Net profit for the year	16,914	14,764

4. Finance income and finance costs

	2011	2010
	£'000	£'000
Interest charge on overdrafts and short-term loans	(1,994)	(920)
Interest charge on interest rate swap	(205)	-
Changes in mark to market of interest rate swaps (ineffective hedges)	(103)	(913)
Finance charges in respect of finance leases	(86)	(216)
Finance costs on bank loans, overdrafts and finance leases	(2,388)	(2,049)
Interest charge on defined benefit obligation	(205)	(373)
Unwinding of discounting on deferred consideration	(40)	(40)
Total finance costs	(2,633)	(2,462)
Interest income resulting from short-term bank deposits	-	2
Interest income resulting from defined benefit obligation	484	61
Finance income	484	63
Net finance charge	(2,149)	(2,399)
Interest recognised in other comprehensive income
Changes in mark to market of interest rate swaps (effective hedges)	(1,679)	-

5. Exceptional items

Exceptional items have arisen as a result of acquisition and integration costs in the period.

	2011	2010
	£'000	£'000
Costs of acquisition	224	1,289
Costs of refinancing	890	-
Costs relating to PV	1,980	-
Costs of integration	-	1,161
Exceptional items	3,094	2,450

The costs of acquisition in the period relate to the acquisition of the Supported Living division of Choices Care Community Services Limited in the period. The costs of acquisition in the previous period relate to the acquisition of Supporta plc and Jackson Lloyd Limited.

The costs of refinancing relate to the write off of costs relating to the Group's previous facility.

As a direct result of the Government's decision to substantially reduce the Photovoltaic (PV) Feed-in Tariff (FIT) subsidy, the Board took the decision to cease these activities immediately, as the commercial attractions that led us to explore the PV space, in the short term, no longer exist. The Board has written-off costs relating to the site set-up, system design and installation amounting to £1.98m which are now considered irrecoverable.

The costs of integration in the previous period relate to the integration of the Careforce and Supporta Care businesses and re-branding as Mears Care.

6. Tax expense

Tax recognised in the Income Statement:

	2011	2010
	£'000	£'000
United Kingdom Corporation Tax effective rate 22.1% (2010: 14.3%)	6,266	3,779
Adjustment in respect of previous periods	(206)	(159)
Total current tax recognised in Income Statement	6,060	3,620
Deferred taxation charge:
- on defined benefit pension obligations	215	1,150
- on share-based payments	54	(418)
- on accelerated capital allowances	-	69
- on amortisation of acquisition intangibles	(2,661)	(2,833)
Total deferred taxation recognised in Income Statement	(2,392)	(2,032)
Total tax expense recognised in Income Statement	3,668	1,588

7. Dividends

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

	2011	2010
	£'000	£'000
Final 2010 dividend of 4.85p (2010: final 2009 dividend of 4.1p) per share	4,123	3,469
Interim 2011 dividend of 2.15p (2010: interim 2010 dividend of 1.9p) per share	1,839	1,610
	5,962	5,079

The proposed final 2011 dividend of 5.35p per share has not been included within the annual results  as no obligation existed at 31 December 2011.

8. Earnings per share

	Basic			Diluted
	2011	2010		2011	2010
	p	p		p	p
Earnings per share	19.87	17.70		19.03	16.57
Effect of amortisation of acquisition intangibles	9.14	12.13		8.75	11.36
Effect of full tax adjustment	(4.52)	(6.98)		(4.33)	(6.54)
Effect of exceptional items (including tax impact)	2.67	2.11		2.56	1.99
Normalised earnings per share	27.16	24.96		26.01	23.38

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 items and adjusted to reflect a full tax charge of 26.5%. The profit attributable to shareholders before and after adjustments for both basic and diluted EPS is:

	2011	2010
	£'000	£'000
Profit attributable to shareholders:	16,914	14,764
- amortisation of acquisition intangibles	7,783	10,119
- full tax adjustment	(3,848)	(5,824)
- exceptional items (including tax impact)	2,274	1,764
Normalised earnings	23,123	20,823

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.

	2011	2010
	Millions	Millions
Weighted average number of shares in issue:	85.14	83.42
- dilutive effect of share options	3.75	5.66
Weighted average number of shares for calculating diluted earnings per share	88.89	89.08

9. Notes to the consolidated cash flow statement

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

	2011	2010
	£'000	£'000
Depreciation	3,238	3,182
Cost of acquisitions	79	748
Loss on disposal of property, plant and equipment	(24)	94
Loss on disposal of investments	-	115
Amortisation	8,404	10,511
Share-based payments	200	750
Finance income	(484)	(63)
Finance cost	2,633	2,462
Total	14,046	17,799

10. Publication of Non Statutory Accounts

The financial information set out in the announcement does not constitute the group's statutory accounts for the years ended 31 December 2011 or 2010. The financial information for the year ended 31 December 2010 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 2011 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 2011.

 

END

 

 

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