Mears Group PLC Interim Results (2320H)

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RNS Number : 2320H

Mears Group PLC

16 August 2016

 
   16 August 2016

Mears Group PLC

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

Interim Results

For the six months to 30 June 2016

Mears Group PLC, the provider of support services to the Social Housing and Care sectors in the UK, is pleased to announce interim results for the six months to 30 June 2016.

Financial Highlights

 
                          2016       2015  change 
Revenue              GBP466.2m  GBP430.0m   +8% 
Operating profit 
 margin*                  4.2%       4.7% 
Profit before 
 tax*                 GBP18.2m   GBP19.2m   -5% 
Diluted earnings 
 per share               9.97p     11.16p   -11% 
Normalised diluted 
 EPS*                   13.55p     14.62p   -7% 
Interim dividend 
 per share               3.30p      3.10p   +6% 
Cash conversion            91%        92% 
-------------------  ---------  ---------  ------

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

   --      Revenue of GBP466.2m (2015: GBP430.0m), growth of 8%.

o The Housing division, which accounts for 84% of Group revenues, reported revenues increasing to GBP389.6m (2015: GBP366.5m), organic growth of 6%, following a particularly successful period of new bidding in the second half of 2015.

o The Care division, which accounts for 16% of Group revenues, contributed revenues of GBP76.6m (2015: GBP63.5m), reflecting a flat underlying performance after excluding the impact of the acquired Care at Home business ('CAH').

   --      Operating margin of 4.2% (2015: 4.7%).

o The Housing operating margin decreased as expected to 4.8% (2015: 5.0%) which reflects the diluting impact from a busy period of new contract mobilisations.

o Housing margins expected to normalise in the second half of the year as mobilisations bed down.

o The Care operating margin reduced to 1.3% (2015: 4.6%) which is in line with management expectations and reflects the trends reported in 2015.

-- Following the decision to exit unsustainable Care contracts, the planned reduction in revenues of 20% will reinforce our commitment to operational quality and allow us to focus on our more strategically important clients. Given the estimated cost of this decision, the Care division is expected to be close to break-even for the full year. All costs of change will be recognised within normal trading. Our Care margin expectations for 2017 remain unchanged.

-- Order book at GBP3.5bn (2015: GBP3.2bn) reflecting a particularly successful period of new contract bidding over the last twelve months.

-- 98% visibility of consensus forecast revenue for 2016 and 85% for 2017 (2015: 96% and 85% respectively).

-- Net debt at 30 June 2016 was GBP14.1m (2015: GBP4.2m) reflecting the increase in working capital required to support the new contract mobilisations. Cash conversion of 91% of EBITDA from continuing operations over the rolling twelve month period to June 2016 (2015: 92%) reflects continuing strong working capital management.

-- The Board is declaring an interim dividend of 3.30p per share (2015: 3.10p), an increase of 6%, reflecting confidence in the underlying performance of the Group.

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

"I am pleased with our progress delivered in the first half of 2016, particularly with the advancement made by our Housing division. We have positioned ourselves to provide a broader service offering in housing to a market where we are seeing an increasing blurring of the boundaries around social, affordable and private rented housing. Our early move into Housing Management makes us ideally placed to benefit from a healthy and wider pipeline of opportunities. The innovative nature of these propositions has meant that much of our work has been secured without the requirement for an extended, competitive tender process which I expect to be a continuing trend.

"We continue to find the Care market challenging. However, we remain confident that we have the right strategy and that the business is best placed to take advantage of industry evolution as it happens. In this period, our key partnering contracts have delivered well for all stakeholders. Moving forward, we will place greater emphasis on maintaining a portfolio of high quality contracts at sustainable margins. Our decision to exit unsustainable contracts necessarily impacts our results for the current year, but more importantly, it is an important step in our and the industry's evolution to a sustainable future.

"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.

"We have had a solid first half year. The Board expects underlying trading for the full year to remain on-track before the one-off costs associated with the pruning of our Care activities, and we look forward to updating you with further progress over the course of the second half."

A presentation for analysts will be held at 9.30 a.m. today at the offices of Buchanan, 107 Cheapside, London, EC2V 6DN.

For further information, contact:

Mears Group PLC

 
 David Miles, Chief        Tel: +44(0)7778 220 185 
  Executive 
 Andrew Smith, Finance     Tel: +44(0)7712 866 461 
  Director 
 Alan Long, Executive      Tel: +44(0)7979 966 453 
  Director 
 Bob Holt, Non-Executive   Tel: +44(0)7778 798 816 
  Chairman 
 
 www.mearsgroup.co.uk

Buchanan

   Richard Darby/ Sophie Cowles                         Tel: +44(0)20 7466 5000

www.buchanan.uk.com

Notes for editors

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 in excess of 17,000 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.

Business Review

We are pleased to announce a solid set of interim results for the six months ended 30 June 2016.

Group revenue amounted to GBP466.2m (2015: GBP430.0m), an increase of 8%, reflecting strong organic growth in Housing together with the full six month contribution from our 2015 acquisition of Care at Home. ('CAH').

We have enjoyed a successful period of new contract bidding, securing over GBP420m of new work. The order book has increased to GBP3.5bn (2015: GBP3.2bn) providing 98% visibility of consensus forecast revenue for 2016 and in excess of 85% visibility for 2017 (2015: 96% and 85% respectively).

Following the high number of new contract mobilisations in Housing, combined with a lower margin in Care, profit before tax and before the amortisation of acquisition intangibles shows a small reduction, in line with our expectations, to GBP18.2m (2015: GBP19.2m). Normalised diluted earnings per share, based upon earnings before amortisation of acquisition intangibles and after an 18% tax charge, reflects this profit reduction, decreasing by 7% to 13.55p (2015: 14.62p).

We have continued to deliver solid cash flows with cash generated from continuing operations as a proportion of EBITDA at 91% for the rolling twelve month period to 30 June 2016 (2015: 92%), this reflects some cash utilisation to fund organic revenue growth. Average daily net debt for the period increased to GBP75m (2015: GBP69m), which reflects the outflow of cash to fund acquisitions.

The Board is declaring an interim dividend of 3.30p per share payable on 1 November 2016 to shareholders on the Register on 14 October 2016. This represents an increase of 6% (2015: 3.10p) and indicates the Board's continuing confidence in the Group's future.

Housing

The Board is very pleased with the progress made by our Housing division, where we have positioned ourselves to provide a broader service offering to a market where we are seeing an increasing blurring of the boundaries around social, affordable and private rented housing. Whilst we have increased the depth and breadth of our capabilities, we place particular emphasis upon ensuring that our wide spectrum of core skills is entwined within the single operating unit which is important given the increasingly complex housing challenges being faced by our clients.

The Housing business has continued to deliver excellent financial performance with revenues of GBP389.6m (2015: GBP366.5m), an increase of 6% reflecting a particularly busy period of new contract mobilisations. We have excellent revenue visibility for the rest of 2016 and we are on track to deliver organic growth for the full year in the region of 10%. As anticipated at the start of the year, our operating margin in the first half year of 4.8% (2015: 5.0%) was diluted by the high number of mobilisations of new contracts. 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 resources to establish excellent customer service. The new contract mobilisations are proceeding to plan and we expect operating margins to normalise during the second half of the year.

The Housing division has secured new contracts of GBP259m, with a new contract win rate on competitively tendered works well ahead of its historical average of 33% (by value) (2015: GBP185m and 33%). Key to this success, now more than ever, is our ability to develop and deliver innovative solutions for our customers, as we have done with our new Milton Keynes contract. Service quality remains a key differentiator, and I am again pleased to report that over 90% of tenants continue to rate our service as excellent.

Whilst we focus upon a single Housing division, we have provided a breakdown of constituent revenue streams to assist commentary:

 
                          2016   2015 
                          GBPm   GBPm 
-----------------------  -----  ----- 
Maintenance              299.4  294.0 
Regeneration              49.2   50.5 
Housing management        41.0   22.0 
-----------------------  -----  ----- 
Total Housing revenues   389.6  366.5 
-----------------------  -----  -----

Maintenance

The Housing division saw Maintenance revenues increase to GBP299.4m (2015: GBP294.0m). Whilst this implies organic growth of only 1%, the majority of new contracts only commenced in April 2016 and so these new activities are therefore not fully reflected in the half year figures. Notable contract activities include:

-- Mears formed a new joint venture company with Milton Keynes Council called YourMK, initially 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 but we are already seeing a significant extension to the scope of works. This significant contract is valued at GBP250m over five years.

-- Mears has 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 GBP35m.

-- Mears was 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 GBP45m, is a testament to the Group's willingness to take the contract at short notice. The new contract mobilised in July 2016.

-- As previously reported, this is an important year with three material contract re-bids. Mears was successful in re-securing the Sedgefield contract for responsive and planned maintenance to approximately 8,500 homes and is valued at GBP110m over the ten year contract term. The new contract started in July 2016. In addition, we have been notified that we have been successful 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 this year, with the existing contract due to expire in March 2017, and the tender process is on-going.

Regeneration

The Housing division saw capital work revenues broadly maintained at GBP49.2m (2015: GBP50.5m). Whilst the level of spend on one-off refurbishment projects has reduced, we are seeing a high number of new development opportunities with existing customers. During the last 12 months, Mears has broadened its service capability to include the provision of new build services, primarily targeting our existing Housing clients. Mears is not a property developer, general builder or asset holder and will focus on managing assets for the benefit of owners and client public sector bodies. Notable contracts secured during the period include:

-- Further to the long-term maintenance works that we are delivering for our Welwyn and Hatfield Council client, we have been engaged to develop 29 affordable rented homes on a brownfield site. The works are valued at GBP5.6m and the contract is due to complete at the end 2017. Mears will take over the long-term maintenance of these new homes giving a seamless solution to the housing requirements of Welwyn and Hatfield Council.

-- Mears' success in securing the venture with Milton Keynes Council, which saw the commencement of repairs and maintenance services in April 2016, has already seen the scope of works expanding. Mears has been engaged to develop 80 new homes, spread across seven infill sites around the city. These homes will be for affordable rent, once finished, with a contract value of approximately GBP11m. Site work starts in Spring 2017 and will complete in early 2018.

Housing Management

The Housing division saw Housing Management revenues increase by 86% to GBP41.0m (2015: GBP22.0m). This business stream is seeing significant growth opportunities with an annual revenue run-rate now exceeding GBP100m. Mears has quickly become the leading provider of housing management services to the Public sector, delivering a range of innovative and unique solutions. The innovative nature of these propositions has meant that much of the work has been secured without the requirement for an extended, competitive tender process. We expect this to be a continuing trend.

The number of units under management at this time are detailed below:

 
 
                                 June 2016    June 2015 
 
Homelessness                         4,785        3,384 
Affordable                             389          336 
Key worker                           4,132            - 
Student                                450            - 
-----------------------------  -----------  ----------- 
Total units under management         9,756        3,720 
-----------------------------  -----------  -----------

-- 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 around GBP190m over the initial three year term.

-- Mears has been engaged by a London Borough to arrange the purchase and refurbishment of 400 homes, currently under private ownership. The key aim is to provide the Borough with an alternative, affordable housing supply to replace the significant bed and breakfast accommodation costs incurred by the Borough. Mears has engaged funding partners to finance the purchase of properties on behalf of the client. We will then carry out refurbishment works and act as managing agent for the portfolio. The contract will be operated by the Borough and Mears for up to 40 years and is valued at circa GBP50m. The operation mobilised in February 2016, and the purchase and refurbishment phase will continue over a period of 24 months. This is typical of a number of opportunities within the pipeline.

-- Mears has entered into a contract with Safe Haven, a charity which acquires homes to use as temporary accommodation for the London Borough of Ealing. Safe Haven own around 200 homes with a clear plan to increase this number to 400. Mears is engaged, over an initial 20 year term, to carry out all housing management services, including an initial refurbishment programme, so that the homes will now be a long-term affordable housing provision for the Council.

-- Mears, through its Registered Provider of Social Housing, and HB Villages are working in partnership to create a new supply of purpose built accommodation for the Care sector. The objective is for HB Villages to develop and fund the new housing with Mears providing long-term tenancy and asset management services to the residents. This will provide both the residents, their families and the local authorities with assurance in the standard of housing services and the long-term security of affordable housing delivered by a Registered Provider. At the same time, Mears Care will engage with social care commissioners to develop the design and provision in each new development to ensure it meets the requirements of residents and to better understand local need. A pipeline of some 20 possible developments are being jointly brought forward on this basis. The first scheme in Northampton is for an 80 home Extra Care complex with Mears providing both housing management and care.

-- Mears is working with investors and universities to provide good quality, well managed and value for money accommodation for students in the UK. We are taking a long-term interest in the letting, management and maintenance of purpose built accommodation. Initially, we are focussing on identifying assets which, whilst enjoying great locations, require investment and refurbishment. This enables the Group to deploy its combined core strengths of refurbishment, facilities management and customer service through management services. The first sites have been secured and it is anticipated that 2,200 beds across 8 sites will be under management for the 2016/17 academic year. One such building in Dundee will undergo a multi-million pound investment programme during the year to significantly enhance the experience to students. In addition, two new opportunities are being developed for opening in 2017 and 2018 respectively which will bring the portfolio to 3,000 beds.

Care

The results of the Care division continue to reflect the challenging trading conditions in the market. Revenues were GBP76.6m (2015: GBP63.5m), reflecting a flat underlying performance after excluding the contribution from the acquisition of CAH and other minor reclassifications. The Care margin reduced to 1.3% (2015: 4.6%), in line with management expectations, reflecting the continuing trends reported in 2015, specifically the acquisition of the loss-making CAH division of Care UK and continued investment in the Care workforce.

As previously reported, in the second half of 2015 we commenced a business planning process which involved a detailed review, on a contract by contract basis, of charge rates and care worker pay rates. The process placed particular focus upon managing the impact of the National Living Wage (NLW) and also finding more effective solutions to the sourcing and retention of sufficient, good quality, care workers.

It is critical for all care providers to maintain a significant differential between their care worker pay rates and the NLW. We have now concluded the dialogue with all our clients. Pleasingly a large number of care commissioners have shown a deeper understanding of the true underlying cost of delivering care. This has resulted in an increasing acceptance that the NLW represents solely a legal minimum, and that one cannot expect to recruit individuals to deliver home care, and to accept the responsibilities that go with this role, at this minimum rate. It remains a key part of our long-term strategy to see care workers properly recognised as the skilled workers they undoubtedly are.

Following this review, we are placing greater emphasis on maintaining a portfolio of contracts that can provide clear and sustainable margins. In aggregate, we have seen a blended increase in our charge rates of circa 6.6%, which is generally in line with the increase in our carer payroll cost and is better than the average increase given to providers within the sector. However, our detailed review has highlighted a significant disparity both between regions and in some cases within regions. We would not generally anticipate significant price variances except in London and in particular rural locations. The outcome of our review has highlighted those care commissioners who we believe, in the medium term, have little desire to change their commissioning strategies and where there is little likelihood of contract pricing that will allow providers to deliver care responsibly. This outcome has led to a more aggressive restructuring of our Care division which will see a reduction in Care revenues of some 20%, a significant proportion of which arise within our North region, which has the lowest charge rates and traditional procurement methods.

Where charge rates are not sustainable, Mears has formally communicated its intention to withdraw from delivering services to all those clients. We are committed to the well-being of our service users and are at an advanced stage of agreeing exit plans with those clients while maintaining a good level of service and compliance in the lead up to a successful transition. The majority of the exits will conclude during the second half of 2016 with a number extending into the early part of 2017. Whilst the local closures come at a cost, the significant majority of our 1,800 employees attached to the respective branches will have the opportunity to transfer to the new provider. As a result of the closures, the Group has also commenced a restructure of all its Care support functions - our focus is not just to re-size the business to reflect reduced volumes, but more importantly to create a long-term support structure that is more scalable. Given the estimated cost of these changes, we expect the Care division to be close to break-even for the full year. All costs of change will be recognised within normal trading and to the extent permissible by accounting standards, we would look to make full provision for these exit costs within the current financial year.

During the first half of 2016, encouraging progress has been made in improving the quality of our Care order book. Notably:

-- Mears was awarded a contract with Devon County Council (Devon) for the provision of homecare services. The contract is for an initial five year period with an option to extend for a further two years and is worth over GBP100m. Mears is acting as the lead provider partner in four geographic areas across the South of Devon and is responsible for organising and delivering personal care services in that area, predominantly co-ordinating and supporting the local SME providers. The new approach to commissioning local services aims to ensure a more sustainable supply of care and support, recognising and rewarding care providers and care workers in their vital role, whilst also reducing Devon's costs of managing the outsourced services. The contract commenced in July 2016.

-- Mears was awarded further contracts by Wiltshire Council (Wiltshire), as lead provider within 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 this work across the county. The new contract will double the overall value of the work done by Mears in the county. 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. The new contract commences in August 2016.

-- Mears has re-secured our existing care contract with the London Borough of Richmond, a client with whom we have enjoyed a long-standing relationship. The new contract, which commenced in July 2016, is for six years and will see us provide around 4,000 hours of support per week, potentially doubling our current sales volume. The new contract also requires all care workers to be paid in line with the London Living Wage, being GBP9.40 per hour, which is very positive for carer recruitment and also better reflects the high-quality service that our Richmond carers deliver.

-- We currently see three other partnering opportunities in the pipeline and we expect more to follow this promising trend.

We have become increasingly selective in new contract bidding focusing on larger sustainable opportunities. We are pleased to have secured circa GBP165m of contract wins at a win rate of 77% by value (2015: GBP35m and 60%). More importantly, the quality of the new orders secured is much improved, enjoying a significantly higher charge rate, so enabling us to reflect this within our carer pay and conditions. The average contract lengths of these latest awards has increased to in excess of five years and the number of providers reduced significantly, which reflects the trends which we anticipated and should in the future result in a better quality of earnings from our Care activities.

The drivers for change in the care and support market have never been greater. The last five years have seen a 160% increase in the number of delayed hospital discharges due to lack of care capacity in the community. The last twelve months alone have seen a 40% increase. Overall, Local Authority spend has seen a slight increase in the last year, partly financed by the ability of councils to increase Council Tax by an additional 2% to help fund NLW cost increases. The Mears strategy is clear and focused, being to concentrate our support on those Council and NHS Trusts that are prepared to invest in front line homecare services as a means to prevent much greater cost increases across the health and social care spectrum. We are also demonstrating market leadership by exiting contracts where councils continue to focus on an outdated and unsustainable hourly charge rate. We believe it is by supporting the innovators, and taking a stand on poor commissioning practices, that we can drive the change that the homecare market needs. Mears is being widely recognised now as the organisation in homecare that is doing the most to drive change and which we believe is a real positive for the long-term development of our business.

Balance Sheet

The Group's reported total equity at 30 June 2016 of GBP195.1m (2015: GBP202.1m). The carrying value of goodwill is GBP193.1m (2015: GBP192.5m) and is not amortised but reviewed for impairment on an annual basis or more frequently where there is an indication of impairment. The Board recently carried out a detailed business planning process which underpins its impairment review and supports the carrying value of the Care goodwill. The Board remains confident that its strategy for Care will deliver long-term value for its stakeholders.

The Group's capital expenditure of GBP5.2m (2015: GBP1.8m) relates to IT hardware, other office equipment and the refurbishment of new office premises. The majority of plant utilised by our operational teams is subject to short-term hire, whilst motor vehicles are subject to operating leases and hence neither are included within capital expenditure or recognised as an asset within the balance sheet. The level of capital expenditure in respect of property, plant and equipment has been consistent over several years and we would anticipate these low levels being maintained.

Trade receivables and inventories remained stable at GBP167.4m (2015: GBP168.0m), which reflects good working capital management within a growing business. Trade payables rose to GBP183.2m (2015: GBP173.6m), in line with the organic growth of the Group.

Strong working capital management has always been and remains a cornerstone of our business. Our IT systems have a strong financial focus and this is a driving force behind our efficient cash management. Our net debt at 30 June 2016 was GBP14.1m (2015: GBP4.2m) following conversion of 91% of EBITDA from continuing operations to cash over the rolling twelve month period to June 2016 (2015: 92%). Typically, following an intensive period of cash collection, the accounting period end has a low debt balance when compared to the rest of the year. A far more important metric is the Group's daily net debt balances which provide a better indication of working capital management throughout the period. The average net debt over the six months was GBP75.0m (2015: GBP69.0m), which is pleasing given the Group incurred outflows of GBP16.1m in respect of acquisitions over the last twelve months.

During the first half year, the Group finalised the 'amend and extend' to its revolving capital facility which extended the expiry date from July 2018 to July 2020 plus an extension option of a further one year. The total commitment under the facility increased from GBP120m to GBP140m. The revised facility results in a reduction to the interest cost with the margin payable over and above LIBOR, which is subject to a ratchet mechanism, reducing to a range of 120-220bps. The Group continues to maintain a strong relationship with both of its bankers, Barclays and HSBC.

The Group participates in a number of defined benefits pension schemes. Whilst the aggregate of all the schemes reports a net asset position, the Group is mindful of managing its risks in this area. The Group has not carried out a revised actuarial valuation in support of the half year position. Under IAS19, pension scheme liability values are driven by changes in the net discount rate, which is the yield on high quality corporate bonds less the long-term rate of expected price inflation. Since late June, following the result of the EU referendum, an increasingly volatile macro-economic environment has resulted in a downward move in the net discount rate. If this position were to remain the same at the December 2016 year end, one could expect a significant increase to pension liabilities which may result in the current net asset position of GBP4m deteriorating to a net deficit position.

Dividend

The Board remains confident in the future opportunities in our growth markets and consequently it expects to continue following a progressive dividend policy. The Board is declaring an interim dividend of 3.30p per share payable on 1 November 2016 to shareholders on the Register on 14 October 2016. This represents an increase of 6%, reflecting the Board's confidence in the underlying performance of the Group. The Board regularly reviews the Group's dividend policy to maximise returns to shareholders whilst maintaining a prudent capital structure and retaining the ability to invest for growth.

Corporate governance and risk management

Our Corporate Governance Report issued within our Annual Report for 2015 detailed how we approach governance. The Board continues to set itself high standards of corporate governance.

We continue to review our risk management and principal risks. The Senior Management Team reviews and identifies the key risks which will impact upon the achievement of the Group's strategic goals and considers how these risks are developing with changes in its operations. The key risks of the Group as at 30 June 2016 are those detailed within the Annual Report for 2015 and remain unchanged.

Our people

I commend our employees for their commitment and energy throughout another significant period for the Group and I continue to be impressed by their quality, professionalism and loyalty. Mears has a diverse workforce of over 17,000 staff including 400 apprentices; the vast majority of our employees living in the areas in which they work. Diversity and respect for all is core to our induction, recruitment and customer care programmes.

Outlook for the Group

Our dedication to providing our clients with first class service and value remains undiminished and is key to how we manage the business.

I am pleased with the progress made by the Group, particularly within our Housing division, where we have successfully extended our services from our traditional maintenance base to a broader affordable housing offering. Our strategy to broaden our service offering in Housing has created a significant sustainable competitive advantage for Mears. We expect our Housing business to continue to grow through further contract wins. Whilst we are the market leader, we deliver services to around 15% of the UK's social housing market, which provides us with significant headroom for growth. Furthermore, our Housing Management capabilities offer material growth opportunities, as the demand for affordable housing requires that housing providers work harder and smarter to increase the supply of suitable housing through innovation and partnership. We believe the Housing division is well positioned to deliver strong organic growth. Where appropriate, we will continue to make acquisitions to develop the breadth and depth of our services.

Our guidance remains unchanged in Housing. We remain on-track to deliver annual revenue growth of 5-10% per annum over the medium term and the strong revenue visibility underpins the Board's confidence. We believe we can maintain our Housing margin at its historic normalised range of 5.7-6.0%, assisted by the shifting sales mix towards housing management services, which typically generate a higher operating margin.

We firmly believe in our long-term Care strategy and that Mears is best placed to benefit from the inevitable market evolution. The planned reduction in revenues, following our decision to exit around 20% of our existing contracts, will allow the business to focus on operational quality and switch focus to those strategically important clients which we believe have potential to develop into partnerships and where we are able to deliver a high quality service at sustainable margins. Whilst the cost of these changes will impact negatively on our financial performance in the current financial year, we believe the margin generated by this division can reach similar levels to those of Housing in the medium to long-term.

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

We have had a solid first half year and we look forward to updating shareholders with further successes over the course of the second half.

David Miles

david.miles@mearsgroup.co.uk

Chief Executive Officer

16 August 2016

Half year condensed consolidated income statement