Final Results
Mears Group PLC
22 March 2005
MEARS GROUP PLC
Chairman's Statement
Once again Mears has produced an excellent set of figures. The strategy for
further growth is clear and the spirit within the Group is better than ever.
Look at our performance this year:
• Profit before tax and goodwill amortisation up 41.9%
• Turnover up 54.7%
• Cash inflow of £0.9m after absorbing strong growth
• Contract wins valued at £526m
• Order book up by £265m
• Normalised earnings per share pre goodwill amortisation up 39.7%
• Dividend up 40.7%.
These are the results we have achieved with a group of talented people who are
committed to Improving Homes, Improving Neighbourhoods, Improving Lives. Our
team is consistently delivering results that stand out in our sector. Why?
Because we are passionate about what we do and where we can take this Group.
This applies not only in social housing but across all the divisions of Mears.
Clarity and Ambition
We are the market leader in social housing. What defines 'leadership' in this
sector? For me it's about excellent and sustainable financial performance;
consistent, high quality, tenant-focused services, delivered in close
partnership with good clients; and a genuinely innovative approach that makes a
real difference to people's lives. I believe our job is to make tenants smile.
The Opportunity Has Never Been Bigger
Social housing is clearly the right market for us. It is a fragmented sector
with relatively few large service providers. Yet the outsourcing argument has
been won. More and more Local Government clients are exploring the benefits to
be gained by working with private sector providers and in developing long-term
partnerships with a smaller number of large service providers. We see an
addressable market opportunity in recurring repairs and maintenance of around
£5bn a year.
The available spend from Central Government is also very healthy, with at least
£3.5bn to be committed annually to the Decent Homes Standard. Although due to
end in 2010, we believe the Decent Homes commitment is likely to last until
2015.
It's not just about the numbers though. There is a strong client commitment to
quality and to community in this sector and that plays to our strengths. Clients
recognise that Mears people work extremely hard to meet their needs and the
needs of their tenants. We are problem-solvers: We are always looking to find
better ways to do things and to create long-term benefits and that approach
resonates with those who care about the local community.
Our work with Wigan & Leigh Housing is a great example of how our approach
achieves satisfaction and savings. We've been working with this client for 6
years now and in 2003 we were awarded a £5 million a year contract for repairs
and maintenance, and refurbishment with these services to be provided until
2020. Last year the scheme reduced overall repair costs by 15% and tenant
satisfaction with work quality was at 98%. We're working on the 2%.
Community - At The Heart Of Everything
Physical repairs and refurbishments are just one part of what makes a good
neighbourhood tick. Communities are about people and I believe our work should
set out to improve daily life in the neighbourhoods we serve. Our apprenticeship
schemes demonstrate what can be achieved when service providers think beyond the
obvious and really put the community at the heart of what they do. Through these
schemes we employ and train people so they can manage and maintain housing in
their area. This gives a boost to local employment and makes Mears part of the
fabric of everyday life.
We are always looking for new ways to support the local community. Take our
sponsorship of breakfast clubs in Hackney. Our teams open schools buildings up
at 7am and help to serve a meal to pupils. This is improving school attendance
and the general wellbeing of children for the benefit of the entire community.
Visiting these clubs was definitely one of the highlights of my year. Everyone
at Mears has the opportunity to contribute to schemes such as this in their
day-to-day work. Through our 100 Days In The Community programme they can also
contribute time and resource to any locally based community initiative.
Doing Things The Right Way
As Mears grows it is increasingly important for us to recruit, develop and
manage people to a consistently high standard. Our services are delivered at a
local level and we must ensure that everyone within Mears is committed to
providing truly excellent service.
The One Mears Way plays an effective role in enabling current and new employees
to understand and follow the right way to do things. We have built our success
on these principles and everyone within the management team is dedicated to
ensuring that our passion and standards continue to unite us as we grow.
Management Team Strengthened
The quality of our management team was recognised by a number of industry bodies
in 2004. In the Quoted Company Awards, for example, David Robertson was named
Finance Director of the Year. David deserves this recognition for his excellent
work.
We made a number of significant new appointments in 2004 to further strengthen
the business, including the appointment of Stuart Black as Chief Operating
Officer in November. Stuart is highly experienced and will really help the
business to meet its operational challenges over the next few years. We have
also appointed talented individuals to the jobs of Group HR Director and Group
IT Director. With these additional specialists in place we have a well-balanced
executive team with real strength in depth.
Looking Ahead
I would like to thank everyone at Mears for their hard work in 2004 and to
congratulate them on the success they have achieved. The excellent figures
reported are down to them and they should also take great satisfaction from the
way their work has helped to improve the lives of others.
Many of you will know that I sold two million Mears shares recently and may
wonder what this signifies. I did this to satisfy demand from a number of
institutional investors. I remain absolutely committed to Mears and intend to
play a central role in the team that will take this Group to the next stage and
beyond.
There is a fantastic opportunity for everyone at Mears to be part of something
special. If we can all rise to the challenges ahead we can achieve an enormous
amount - together. This is a very exciting time; I hope everyone at Mears will
join me in working to strengthen our position as an outstanding leader in the
social housing sector.
Bob Holt
Chairman
21 March 2005
Operating and Financial Review
2004 was all about delivering excellent services and maintaining exceptional
levels of growth, while bringing even greater focus to what we do and how we do
it.
We believe our performance underlines that Mears is the strongest company in the
social housing sector and is able to deliver impressive and sustainable growth.
Turnover
In 2004 we grew turnover to £173.7m (2003: £112.3m), an increase of 54.7%.
Organic growth was the main driver. This significant growth reflects our ability
to win, retain and extend major contracts in a very active social housing
market.
Profit Before Taxation and Goodwill Amortisation
We achieved profit before taxation and goodwill amortisation of £7.4m (2003:
£5.2m), a 41.9% increase. Operating margins in our social housing activities
held up well at 4.9%, despite major growth in new work from contracts secured in
late 2003 and 2004. United Fleet Distribution (UFD) achieved a 4.2% operating
margin, unchanged from 2003. Scion's operating margin was 1.0%, as anticipated.
We believe there is room for further margin improvement where we share the
potential risks and benefits of service performance with our clients. We are
also able to find operational efficiencies as contracts mature. Our investments
in infrastructure - particularly Group-wide improvements in IT - provide scope
for better margins and even greater customer satisfaction.
Acquisitions
We are pleased to confirm that we have completed the turnaround of Scion Group
Limited, the multi-disciplinary facility services group we acquired in 2003.
This business is now focused on growing its margin.
We are continuing to build a national painting and decorating business by
acquisition. The businesses we have acquired are now integrated and are focused
on developing significant growth opportunities in the public sector.
Goodwill amortisation at £0.7m (2003: £0.4m) reflects the full year effect of
acquisitions in 2003 and two small painting business acquisitions in 2004.
Excellent market opportunities in social housing mean that organic growth is
likely to maintain our momentum. Having said that, we are able and willing to
make significant acquisitions that further our strategic ends and enable us to
improve or broaden our services.
Interest
This year's modest charge of £0.07m (2003: £0.08m receipt) reflects our broadly
neutral cash position throughout the year. Our constant emphasis on improving
the management of working capital has paid off and has been particularly
valuable given the scale of growth we achieved in the year.
Earnings Per Share and Dividend
Basic earnings per share (EPS) before goodwill increased 49.8% to 9.69p (2003:
6.47p). Tax was lower at 27.4% (2003: 32.6%) due mainly to a tax deduction for
share option exercises and utilisation of tax losses. Even after applying a full
tax charge, EPS is still up 39.7% at 9.04p (2003: 6.47p).
The dividend increase is in line with our earnings growth. A final dividend of
1.4p per share is proposed, making 1.9p for the full year - up 40.7% on 2003.
The final dividend is payable on 1 July 2005 to shareholders on the register on
10 June 2005.
Cash Flow
Once again, the cash flow position underlines our strength as a business. A net
cash inflow of £0.9m was achieved in 2004 (2003: £3.7m outflow). The Group
converted 77.6% of EBITDA into operating cash flow (2003: 80.1%). This was
achieved against a backdrop of 41.0% organic growth, which was contained at
£3.9m of additional working capital. Some £2.5m was invested in new technology
and operational bases, with 12 new sites opened in the year. Acquisitions
absorbed £1.1m of cash.
Order Book
The visibility of our earnings has never been better. £526m of new work was
secured in 2004 from 18 contracts. Our order book now stands at £815m. The
element of consensus forecast turnover secured for 2005 is 81%, with some 60% of
2006 and 48% of 2007.
We take a conservative approach to quantifying our order book and 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.
Net Assets
Asset value had risen from £12.3m to £16.4m at year-end. Net current assets
within this improved by £2.3m to £4.5m.
Major Contract Wins
We achieved a number of major successes, winning contracts valued at £526m in
total. Highlights included:
• Sheffield
A one-fifth share of the largest contract placed to date. In total £1bn is to be
spent over seven years to service 55,000 houses.
• Ealing
A five-year, £27m partnership contract to provide response maintenance services,
void repairs and decoration services to 7,500 homes.
• Newcastle
A six-year, £60m Decent Homes Standard contract covering 32,000 homes. The
client's total spend is £500m for all service providers, so we have secured more
than 10% of the total contract value.
• Leeds
A five-year, £3m a year contract to carry out responsive repairs and voids work
for 3,300 houses.
• Crawley
A five-year, £2m a year contract to undertake responsive repairs and voids work
in 8,500 homes.
• Hackney
A five-year £7.5m a year contract covering responsive repairs, void properties
and planned maintenance for 6,000 homes.
Risks
We believe the most significant risk we face is damage to our reputation as a
result of a service failure. We mitigate this through our very strong focus on
service delivery and a constant emphasis on innovation. The One Mears Way
approach helps to ensure that the standards we - and our customers - expect are
clear to everyone within Mears and are part of everything we do.
We also recognise that a significant skills shortage would represent a risk to
growth. We are mitigating this risk through investment in innovative recruitment
and development programmes, such as our highly successful apprenticeship
schemes. We intend to further strengthen our reputation as a highly attractive
employer that offers rewarding jobs, good rates, consistent income,
opportunities for career and personal development and a great working culture.
Market Outlook
The social housing market provides us with excellent opportunities in both
Decent Homes and repairs and maintenance work.
The Government's Decent Homes Standard capital programme is likely to be
extended to 2015 and is yet to address 1.2 million homes that still do not meet
the Decent Homes Standard. We expect continued Decent Homes-related expenditure
of around £3.5bn a year.
The repairs and maintenance market is also thriving and we believe expenditure
of around £5bn a year through to 2020 is likely.
Despite the substantial budgets of local authorities, social housing is a
fragmented market. The ten largest service providers currently account for just
13% of the total market. We believe this will change, with the larger service
providers increasing their share. Market consolidation is being driven by wider
client recognition of the benefits of outsourcing. An increasing number of
clients also prefer to work with a smaller number of service providers for a
longer period of time. We expect these market developments to increase the
addressable opportunities for large, proven service providers such as Mears.
Our Strategy
Social housing offers the biggest and best long-term growth opportunities for
Mears and our focus is now firmly on this sector. In other words, our work is
all about Improving Homes, Improving Neighbourhoods, Improving Lives. There are
two particularly important aspects of our strategy:
• Innovation
We are constantly searching for new and better ways to support clients and help
tenants. For example, our mobile show homes enable tenants to see the options
available in terms of new colour schemes and fixtures and fittings and to
discuss their preferences with us before any work is carried out. We also
provide mobile comfort homes when work is in progress and we give tenants a
video to explain how the repairs process might affect them.
• Partnership
We are committed to developing close relationships with clients and communities
and delivering tangible, long-term improvements. We have discontinued bids where
we felt the client did not share our commitment to partnership. We believe this
makes good business sense, as strong client relationships enable us to do better
work, increase the scale and scope of existing contracts and achieve sustainable
margins and clear visibility of future earnings.
We are now broadening our service offerings with key clients. In Richmond, for
example, we are working very closely with our client to jointly offer white and
blue-collar services. Our collaborative approach also enables us to work
effectively with our peers. In Sheffield, for example, we are developing a
common supply chain with the four other partners.
Group Structure
We have a lean corporate centre that is efficient, agile and flexible. We try to
avoid bureaucracy whenever and wherever we can. The centre of the Group drives
strategy, best practice and controls; the individual businesses drive delivery,
client relationships and local innovation.
We are not yet achieving the right levels of synergy between our businesses and
that is an area we are addressing. Our investment in a Group-wide IT system is a
major step forward and will offer an excellent return on investment as we grow.
Our focus on social housing has driven the development of our core businesses.
Haydon, for example, has developed from a largely private sector mechanical and
electrical services contractor into a more dedicated social housing contractor.
UFD is clearly outside the scope of our focus on housing and we expect this
mature business to become less significant in terms of Group turnover and profit
over time. We are happy to have UFD within the Group, however. It is a
profitable, well-managed business with highly motivated people and leads its
sector in terms of service delivery and market share.
People - Our Greatest Differentiator
What really sets us apart as a business is the quality and spirit of our people.
As we grow we must give our employees the support they need to do a fantastic
job for clients and tenants. In 2004 we further strengthened our management team
to ensure this happens, appointing a Chief Operating Officer and making senior
appointments in human resources, finance, IT and marketing.
We also invested in attracting a strong mix of new employees and put particular
emphasis on recruiting local people. Local recruitment is an effective way to
compete for talent and ensure we can grow quickly to meet clients' needs. We
have innovative local recruitment initiatives in place to attract the best
talent available. Many Mears people don't just serve the local community, they
live in the area and are part of it. These close connections between Mears and
local neighbourhoods are invaluable, not least because they help us to
understand the real needs of the people we serve.
Retention of good people is very important and our excellent Save As You Earn
(SAYE) schemes underline our belief that employees should have the opportunity
to share in the Group's success. Currently, 229 employees are involved in SAYE
schemes.
At our Group Management Conference in January 2005 we spent time discussing the
values that have made Mears successful and will help us to thrive in the future.
The values we agreed are: Commitment; Customer focus; Teamwork; Reliability;
Integrity; and Innovation. These values will become a central part of the One
Mears Way and will guide everything we do.
If we are to succeed in realising our ambitions for the Group we will need to
recruit many new people over the next few years. It is absolutely vital that
those who join - at all levels - share the same spirit, values and drive as
Mears people today. The entire management team is dedicated to making this
happen. We know that the passion and commitment that has taken Mears to this
point can take us a very long way indeed.
David Robertson, Finance Director
Stuart Black, Chief Operating Officer
21 March 2005
Consolidated Profit and Loss Account
for the year ended 31 December 2004
2004 2004 2003 2003
Note £'000 £'000 £'000 £'000
------ -------- -------- -------- --------
Turnover
Continuing operations 2 172,078 112,271
Acquisitions 1,607 -
------ -------- -------- -------- --------
173,685 112,271
Cost of sales
Continuing operations (127,456) (83,268)
Acquisitions (1,310) -
------ -------- -------- -------- --------
(128,766) (83,268)
Gross profit
Continuing operations 44,622 29,003
Acquisitions 297 -
------ -------- -------- -------- --------
44,919 29,003
Administrative expenses (38,081) (24,276)
Operating profit
Continuing operations 6,747 4,727
Acquisitions 91 -
------ -------- -------- -------- --------
6,838 4,727
Share of operating profit in 4 9
associate ------ -------- -------- -------- --------
6,842 4,736
Net interest (68) 78
------ -------- -------- -------- --------
Profit on ordinary activities
before taxation 2 6,774 4,814
Tax on profit on ordinary 3 (1,855) (1,571)
activities ------ -------- -------- -------- --------
Profit on ordinary activities
after taxation 4,919 3,243
Equity minority interests (5) 7
------ -------- -------- -------- --------
Profit for the financial year 4,914 3,250
Dividends 4 (1,105) (773)
------ -------- -------- -------- --------
Profit retained 3,809 2,477
------ -------- -------- -------- --------
Earnings per share
Basic 5 8.54p 5.72p
------ -------- -------- -------- --------
Basic - normalised, 5 9.04p 6.47p
pre-amortisation ------ -------- -------- -------- --------
Diluted 5 7.98p 5.48p
------ -------- -------- -------- --------
Diluted - normalised, 5 8.45p 6.20p
pre-amortisation ------ -------- -------- -------- --------
There were no recognised gains or losses other than the profit for the financial
year.
All activities are continuing.
Consolidated Balance Sheet
at 31 December 2004
2004 2004 2003 2003
£'000 £'000 £'000 £'000
------ ------ ------ ------
Fixed assets
Intangible assets 10,406 12,273
Tangible assets 4,450 3,093
Investments - associates 48 45
Investments - other - 62
------ ------ ------ ------
14,904 15,473
------ ------ ------ ------
Current assets
Stocks 4,628 2,487
Debtors 30,410 24,875
Cash at bank and in hand 8,078 3,408
------ ------ ------ ------
43,116 30,770
Creditors: amounts falling due within one (38,624) (28,600)
year ------ ------ ------ ------
Net current assets 4,492 2,170
------ ------ ------ ------
Total assets less current liabilities 19,396 17,643
Creditors: amounts falling due after more
than one year (2,960) (5,351)
------ ------ ------ ------
16,436 12,292
------ ------ ------ ------
Capital and reserves
Called up share capital 579 570
Share premium account 3,362 3,041
Shares to be issued 90 90
Profit and loss account 12,310 8,501
------ ------ ------ ------
Equity shareholders' funds 16,341 12,202
Equity minority interests 95 90
------ ------ ------ ------
16,436 12,292
------ ------ ------ ------
The financial statements were approved by the Board of Directors on 21 March
2005.
R Holt D J Robertson
Director Director
Consolidated Cash Flow Statement
For the year ended 31 December 2004
2004 2003
Note £'000 £'000
----- -------- --------
Net cash inflow from operating activities 6 6,661 4,691
Returns on investments and servicing of finance
Interest received 16 103
Interest paid (61) (8)
Finance lease interest paid (26) (14)
----- -------- --------
Net cash (outflow)/inflow from returns on investments
and servicing of finance (71) 81
----- -------- --------
Taxation paid (1,312) (1,543)
Capital expenditure
Purchase of tangible fixed assets (2,540) (829)
Sale of tangible fixed assets 11 3
----- -------- --------
Net cash outflow from capital expenditure (2,529) (826)
----- -------- --------
Acquisitions
Purchase of subsidiary undertakings (1,176) (2,037)
Net cash acquired with subsidiary undertakings 88 (3,351)
----- -------- --------
Net cash outflow from acquisitions (1,088) (5,388)
----- -------- --------
Equity dividends paid (864) (623)
Financing
Issue of shares 330 76
Capital element of finance lease rentals (210) (97)
Repayment of borrowings - (36)
----- -------- --------
Net cash inflow/(outflow) from financing 120 (57)
----- -------- --------
Increase/(decrease) in cash 7 917 (3,665)
----- -------- --------
Notes to the preliminary announcement
for the year ended 31 December 2004
1. Basis of preparation
The financial information set out in the announcement does not constitute the
Company's statutory accounts for the years ended 31 December 2004 or 2003. The
financial information for the year ended 31 December 2003 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 s237(2) or (3) Companies Act 1985. The
statutory accounts for the year ended 31 December 2004 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
following the Company's annual general meeting.
2. Segmental analysis
Turnover and profit on ordinary activities before taxation are attributable to
the following activities carried out entirely within the UK:
Turnover Profit before taxation Net assets
---------- ---------- ----------
2004 2003 2004 2003 2004 2003
£'000 £'000 £'000 £'000 £'000 £'000
-----------------------------------------------------------
Maintenance,
mechanical 162,770 99,574 6,206 4,193 14,702 10,693
and electrical
services
Vehicle
collection and 10,915 12,697 568 621 1,734 1,599
delivery ------- ------- ------- ------- ------ -------
173,685 112,271 6,774 4,814 16,436 12,292
------- -------- ------- ------- ------- -------
3. Tax on profit on ordinary activities
The tax charge represents:
2004 2003
£'000 £'000
-------- --------
United Kingdom corporation tax at 30% (2003: 30%) 1,855 1,285
Share of tax charge of associate - 1
-------- --------
Total current tax 1,855 1,286
Reversal of timing differences - 285
-------- --------
Tax on profit on ordinary activities 1,855 1,571
-------- --------
The tax assessed for the year is lower than the standard rate of corporation tax
in the United Kingdom of 30% (2003: 30%). The differences are explained as
follows:
2004 2003
£'000 £'000
-------- --------
Profit on ordinary activities before tax 6,774 4,814
-------- --------
Profit on ordinary activities multiplied by standard rate of
corporation tax
in the United Kingdom of 30% (2003: 30%) 2,032 1,444
Effect of:
Expenses not deductible for tax purposes 178 111
Depreciation in excess of capital allowances 14 138
Tax relief on exercise of share options (237) (106)
Utilisation of tax losses (132) (301)
-------- --------
Current tax for the year 1,855 1,286
-------- --------
4. Dividends
2004 2003
£'000 £'000
-------- --------
Ordinary shares
- interim dividend of 0.50p (2003: 0.35p) per share paid 290 200
- final dividend of 1.40p (2003: 1.00p) per share proposed 815 573
-------- --------
1,105 773
-------- --------
5. Earnings per share
Basic earnings per share is based on equity earnings of £4.91m (2003: £3.25m)
and 57.57m (2003: 56.78m) ordinary shares at 1p each, being the average number
of shares in issue during the year.
For diluted earnings per share the average number of shares in issue is
increased to 61.56m (2003: 59.29m) 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, the tax effect of the exercise of share
options and the utilisation of tax losses acquired. The normalised
pre-amortisation earnings per share is based on equity earnings (after adding
back amortisation) of £5.20m (2003: £3.68m).
Basic Diluted
---------- ----------
2004 2003 2004 2003
p p p p
-------- -------- ------- --------
Earnings per share 8.54 5.72 7.98 5.48
Effect of eliminating amortisation 1.15 0.75 1.08 0.72
Effect of full tax adjustment (0.65) - (0.61) -
--------- -------- --------- --------
Normalised, pre-amortisation 9.04 6.47 8.45 6.20
earnings per share --------- -------- --------- --------
6. Net cash inflow from operating activities
2004 2003
£'000 £'000
-------- --------
Operating profit 6,838 4,727
Depreciation and amortisation 1,746 1,122
Loss on disposal of fixed assets 33 39
Increase in stocks (2,043) (1,069)
Increase in debtors (5,235) (3,461)
Increase in creditors 5,322 3,333
-------- --------
Net cash inflow from operating activities 6,661 4,691
-------- --------
7. Reconciliation of net cash flow to movement in net funds
2004 2003
£'000 £'000
------- -------
Increase/(decrease) in cash in the year 917 (3,665)
Cash outflow from financing 210 133
------- -------
Change in net funds resulting from cash flows 1,127 (3,532)
Loans and finance leases acquired with subsidiaries (30) (434)
Net funds at 1 January 2004 1,600 5,566
------- -------
Net funds at 31 December 2004 2,697 1,600
------- -------
8. Analysis of changes in net funds
At At
1 January Cash 31 December
2004 flow Acquisitions 2004
£'000 £'000 £'000 £'000
-------- -------- -------- --------
Cash at bank and in hand 3,408 4,582 88 8,078
Overdraft (1,507) (3,753) - (5,260)
-------- -------- -------- --------
1,901 829 88 2,818
Finance leases (301) 210 (30) (121)
-------- -------- -------- --------
1,600 1,039 58 2,697
-------- -------- -------- --------
9 Calendar
The proposed final dividend will be paid on 1 July 2005 to shareholders on the
register on 10 June 2005.
The Annual Report will be posted to shareholders on 9 May 2005 and will be
available from the registered office at The Leaze, Salter Street, Berkeley,
Gloucestershire, GL13 9DB.
The Annual General Meeting will be held on 1 June 2005 at the offices of
Arbuthnot, Arbuthnot House, 20 Ropemaker Street, London EC2Y 9AR.
This preliminary announcement of results for the year ended 31 December 2004 was
approved by the Directors on 21 March 2005.
This information is provided by RNS
The company news service from the London Stock Exchange
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