Mears Group PLC Interim Results (9747N)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Mears Group Plc	LSE:MER	London	Ordinary Share	GB0005630420	ORD 1P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	-1.50	-0.42%	352.50	352.50	353.50	357.50	350.50	357.50	2,084,993	16:35:02

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Bldg Clean & Maint Svc, Nec	959.61M	29M	0.2640	13.39	388.25M

Mears (LSE:MER)
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TIDMMER

RNS Number : 9747N

Mears Group PLC

15 August 2017

 
 
     15 August 2017

Mears Group PLC

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

Interim Results

For the six months to 30 June 2017

Mears Group PLC, the provider of support services to the Social Housing and Care sectors in the UK, is pleased to announce its interim results for the six months to 30 June 2017.

Financial Highlights

 
                     Six months to  Six months to 
                         June 2017      June 2016  change 
Revenue                  GBP470.8m      GBP466.2m   +1% 
Statutory profit 
 for the period 
 before tax               GBP12.7m       GBP12.7m    - 
Adjusted profit 
 before tax*              GBP18.3m       GBP18.2m   +1% 
Operating profit 
 margin*                      4.1%           4.2% 
Statutory diluted 
 EPS                         9.86p          9.97p   -1% 
Normalised diluted 
 EPS*                       13.98p         13.55p   +3% 
Interim dividend 
 per share                   3.45p          3.30p   +5% 
Cash conversion                70%            91% 
-------------------  -------------  -------------  ------

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

   --      Interim results are in line with management expectations. 
   --      Revenue of GBP470.8m (2016: GBP466.2m), growth of 1%.

o The Housing division, which accounts for 85% of Group revenues, reported revenues increasing to GBP402.1m (2016: GBP389.6m), organic growth of 3%, reflecting the full year impact of a busy period of new contract mobilisations in 2016.

o The Care division, which accounts for 15% of Group revenues, reported revenues of GBP68.7m (2016: GBP76.6m). The reduction of only 10% reflects significant progress in securing new contracts to replace the lost revenues following the previously announced closure of sub-optimal branches accounting for around 30% of Care revenues. Our blended hourly fee rate as at 30 June 2017 was GBP16.10 (30 June 2016: GBP14.12).

   --      Operating margin before the amortisation of acquisition intangibles of 4.1% (2016: 4.2%).

o The Housing operating margin increased to 5.2% (2016: 4.8%), reflecting fewer new contract mobilisations in the period.

o As previously announced, the Care division reported an operating loss of GBP1.0m (2016: profit GBP1.0m) reflecting the lost productivity and additional costs incurred in restructuring our Care activities.

-- The recent tragic events at Grenfell Tower will impact the Housing division later this year as clients review the commissioning and safety practices at their properties. These unexpected events will inevitably impact the timing of our planned workloads as clients' attentions have naturally been diverted towards ensuring their housing portfolios are safe and fully compliant. Consequently, we expect to see delays in planned works orders this year and therefore anticipate Housing revenues of circa GBP800m in 2017 against an original expectation of circa GBP830m with a resulting loss of profit and lower overhead recovery. These delays in procurement decisions are expected to be temporary given the contractual nature of the work and the Housing order book is not affected.

-- Net debt at 30 June 2017 was GBP19.6m (2016: GBP14.1m) reflecting the increase in working capital required to support the new contract mobilisations in 2016. This is also reflected in the cash conversion of 70% of EBITDA from continuing operations over the rolling twelve-month period to June 2017 (2016: 91%). Cash generation for the full year is expected to be in line with historic norms in the 90-100% range.

-- The Board remains confident in the Group's long-term prospects and is declaring an interim dividend of 3.45p per share (2016: 3.30p), an increase of 5%.

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

"The Group has made solid progress in the period and I remain confident and optimistic for the future.

"In Housing, Mears is increasingly being asked by customers and other stakeholders to take greater involvement in helping customers deliver appropriate housing outcomes for a range of tenants and utilising a broader range of services. Consequently, the Mears addressable market is becoming much larger than it was previously and more complex. Our strategy to broaden our service offering has created a significant sustainable competitive advantage for Mears.

"Despite continuing to find the Care market challenging, we have made good ongoing progress in this area and our order book is significantly improved with a portfolio of good quality contracts at clear, sustainable margins. Given the scale of the reductions in the portfolio in the last twelve months, the revenue performance of Care in the period is encouraging. We remain confident we have the right strategy and the business is best placed to take advantage of industry evolution as it happens.

"We continue to achieve high levels of service delivery and customer satisfaction. The quality of our service delivery together with our ability to adapt and find innovative solutions to address the immediate needs of our clients continues to be our key differentiator underpinning our success.

"Whilst the likely revenue shortfall for the full year is frustrating, it is entirely understandable in the circumstances and the Group will be working closely with its partners and clients at this time to address their immediate priorities. Our order book remains strong and the Board remains confident in the Group's future prospects."

A presentation for analysts will be held at 9.30am 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 
 
 www.mearsgroup.co.uk

Buchanan

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

www.buchanan.uk.com

About Mears

Mears today employs over 13,000 people, providing services in every region of the UK. In partnership with our Housing clients, we maintain, repair and upgrade the homes of hundreds of thousands of people in communities from remote rural villages to large inner city estates. Mears has extended its activities to provide broader housing solutions to solve the challenge posed by the lack of affordable housing. Our Care teams provide support to over 15,000 people a year, enabling older and disabled people to continue living in their own homes.

We focus on long-term outcomes for people rather than short-term solutions, and invest in innovations that make a positive impact on people's quality of life and on their communities' social, economic and environmental wellbeing.

Business Review

We are pleased to announce our interim results for the six months ended 30 June 2017, which are in line with management expectations.

Group revenue increased to GBP470.8m (2016: GBP466.2m). Profit before tax and before the amortisation of acquisition intangibles increased to GBP18.3m (2016: GBP18.2m), which includes a lower first half performance of the Care division following further branch closures to focus on contracts that can provide clear and sustainable margins. Normalised diluted earnings per share, based upon earnings before amortisation of acquisition intangibles and after an 18% tax charge, increased by 3% to 13.98p (2016: 13.55p).

Cash generated from continuing operations as a proportion of EBITDA was 70% for the rolling twelve month period to 30 June 2017 (2016: 91%), a period which included significant working capital investment, as previously reported, in the second half of 2016. Trade receivables and inventories increased to GBP178.1m (2016: GBP167.4m), reflecting the organic growth of the Group. Trade payables reduced to GBP176.1m (2016: GBP182.9m), driven by the increasing significance of housing management activities in the Group's changing sales mix. Cash generation for the full year is expected to recover to levels in line with historic norms. Average daily net debt for the period was maintained at GBP85m (FY2016: GBP85m) and includes the outflow of GBP5m cash to fund the deferred consideration resulting from prior acquisitions.

Whilst the half year results are in line with management expectations, the recent tragic events at Grenfell Tower will impact the Housing division later this financial year as clients review the commissioning and safety practices at their properties. These unexpected events will inevitably impact the timing of our planned workloads as clients' attentions have naturally been diverted towards ensuring that their housing portfolios are safe and fully compliant. As a consequence, we expect to see delays in planned works orders and therefore the Board has reassessed its guidance for the full year. Housing revenues are now expected to be in the region of GBP800m in 2017, compared to our previous expectation of circa GBP830m. This shortfall in revenues will mean both a loss of profit and, more significantly, lower overhead recovery. As a result, the Board anticipates Housing margins in 2017 to be in the range of 5.3-5.5% rather than the previous expectation of 5.6-5.8%. These delays in procurement decisions are expected to be temporary given the contractual nature of the work and the Housing order book is not affected. Reassuringly, the significant majority of the Group's Housing revenues are non-discretionary with only around 15% of revenues being considered discretionary; it is predominantly this spending which is at risk of being delayed or re-phased in the short-term. The Board's medium-term expectations for Housing remain unchanged with a blended annual revenue growth rate in excess of 5% p.a. and the Housing margin returning to our historic normalised range of 5.6-5.9%. In the meantime, the Group will be working closely with its partners and clients on their

immediate priorities.

The Board is declaring an interim dividend of 3.45p per share (2016: 3.30p), an increase of 5%. The Board regularly reviews the dividend policy to maximise returns to shareholders whilst maintaining a prudent capital structure. The Board is confident in the future opportunities in both our markets.

Housing

In a period where high quality affordable housing has been at the top of the political and social agenda, the Board is extremely satisfied with the progress made by our Housing division, which contributes 85% of the Group's revenues.

The Housing division has continued to deliver a solid financial performance with revenues of GBP402.1m (2016: GBP389.6m), an increase of 3% reflecting the full year impact of a particularly busy period of new contract mobilisations in 2016. Our operating margin in the first half year increased to 5.2% (2016: 4.8%), reflecting fewer new contract mobilisations in the period, which are typically dilutive to operating margin.

Over time, Mears has redefined the contracting market in social housing, effectively setting the standard for partnering with Local Authorities and Housing Associations to tackle and address a changing market. Mears has broadened its offer in housing to encompass helping clients with more planning and coordination work, referred to as Housing Management. In this way, Mears is often involved in managing the estate of properties in a more holistic fashion over and above simply scheduling and delivering various maintenance and repairs. Mears is increasingly being asked by clients and other stakeholders to take greater involvement in helping clients deliver appropriate housing outcomes for a range of tenants. Consequently, whilst the overall market is growing slowly, the Mears addressable market is becoming much larger than it was previously and more complex. This larger market is best characterised by two solutions; contracting partnerships and placemaking partnerships. Contracting partnerships comprises maintenance and regeneration together with some elements of housing management outsourcing; this market is essentially the latest incarnation of the traditional Mears market. It is large and, while exhibiting lower growth, is also lower risk. Placemaking partnerships, on the other hand, are a new, faster growing part of the extended housing market. It comprises our traditional maintenance contracting, but also requires a full housing management offering which includes full asset management.

Over recent years, the Group positioned itself to provide a broader service offering to address the changing needs of our clients, who face increasingly complex housing challenges. Whilst the pipeline of traditional contracting partnership opportunities continues to flow through at a consistent level, Mears remains highly selective as to the opportunities for which it chooses to tender. The main focus of our housing operation has switched towards developing placemaking partnerships. These opportunities, which are often secured through a less competitive tender process, require a wide spectrum of core skills to address the increasingly complex housing challenges being faced by our clients and which also act as a barrier to entry. These opportunities will provide Mears with a far greater influence on delivering revenue growth combined with a good mix of margin and longevity.

As Mears has broadened its service offering, an increasingly important component of our offering is to identify funding solutions to sit beside our Housing Maintenance and Management solutions. An early example of this was our contract with the London Borough of Bromley, completed in 2016, whereby Mears was engaged to arrange the purchase and refurbishment of 400 homes from private ownership. As part of this service, Mears engaged funding partners to finance the purchase. Mears has developed an extensive pipeline of opportunities requiring the support of a funding partner. The Group may, in the short-term, take on a small amount of leverage to facilitate a number of these opportunities. Medium to longer term, the Group has identified a partner that is a leading originator and provider of finance to long-term social infrastructure assets in the UK and is developing a new and highly scalable platform to invest in social housing assets which will serve to increase Mears' capabilities in servicing its Housing clients.

The Homeless Reduction Bill passed its final reading and has become law, coming into force in early 2018. The onus will now be on Councils to provide housing plans for all families and single people approaching them. Realistically the solution for the vast majority will not be a social tenancy. Much work will be in sustaining vulnerable private tenancies and sourcing more homes in the private rented sector. The continued deflation of Housing Benefit rates and the buoyant rental market sets a major challenge for Councils with new statutory duties. Consequently we are seeing increased demand for accommodation from all our existing Council partners.

The Housing division experienced a quieter period in respect of securing new traditional maintenance opportunities with new orders of circa GBP105m at a win ratio of 30% by value. (2016: GBP259m and 33%). The pipeline of Housing Management opportunities remains strong and a number of opportunities are at a late stage of negotiation.

Care

The Care division, which accounts for circa 15% of Group revenues, continues to find current market conditions challenging although our underlying trading shows improvement month on month as the benefits of our restructuring decisions begin to be realised.

Care revenues were GBP68.7m (2016: GBP76.6m), a reduction of only 10% reflecting the significant progress made in rebalancing the Group's portfolio of Care contracts so as to focus upon those which have a better mix of longevity, certainty of spend and price. As previously announced, during the second half of 2016, following a detailed contract by contract review of charge rates and care worker pay rates, the Group commenced a restructuring of the Care division. This resulted in a reduction in Care revenues of some 20%, a significant proportion of which arose within our North region, which had the lowest charge rates and traditional procurement methods. That initial round of branch closures was commenced and substantially completed in the second half of the 2016 financial year. We have continued to place significant emphasis on maintaining a portfolio of contracts that can provide clear and sustainable margins. Further closures have been made during the first half of 2017, predominantly in the Midlands and London region, covering a further 10% of revenues. Given these closures in the last twelve months, which account for around 30% of Care revenues, it is encouraging to note the strong progress made in securing new orders at higher fee rates such that the Care division has reported a reduction in revenues of just 10% in the period.

In the first half year, as previously reported, the Care division reported a loss of GBP1.0m (2016: profit GBP1.0m), reflecting the lost productivity and additional costs incurred in restructuring the Care activities.

A summary of the changing volumes and charge rates as a result of the refocusing of our Care activities is detailed below:

 
 
                              Hours     Implied      Blended 
                           per week     revenue       charge 
                                       run-rate     rate per 
                                           GBPm     hour GBP 
-----------------------------------  ----------  ----------- 
 As at 1 January 2016       216,000       148.1        13.19 
 Net volume decrease       (11,800) 
------------------------  ---------  ----------  ----------- 
 As at 30 June 2016         204,200       149.9        14.12 
 Contract closures         (48,200) 
 Net volume increase          5,400 
 As at 31 December 2016     161,400       126.2        15.04 
 Contract closures         (12,800) 
 Net volume increase          8,000 
------------------------  ---------  ----------  ----------- 
 As at 30 June 2017         156,600       131.1        16.10 
------------------------  ---------  ----------  -----------

The above figures exclude contracts under notice of termination at the relevant date.

During the first half of the year, the Care division has secured good price increases to match the increases in its cost base driven by the National Living Wage ('NLW') and Apprentice Levy; an increase in charge rates of circa 3.6% is in line with the increase in our carer payroll cost. The greatest challenge within Care remains the recruitment and retention of good quality carers.

Whilst we have become increasingly selective in new contract bidding, it is pleasing that there continues to be a solid pipeline of good quality bidding opportunities. During the first half, we have secured circa GBP97m of new contracts at a win rate of 64% by value (2016: GBP165m and 77%). More importantly, the quality of the new orders secured is much improved, enjoying a significantly higher charge rate which enables us to reflect this within our carer pay and conditions. The average contract lengths of these latest awards is in excess of five years and the number of providers has reduced significantly; this reflects the trends we anticipated and should, in the future, result in a better quality of earnings from our Care activities.

We continue to see a great deal of interest from Local Authorities to procure new care accommodation for supported living and extra care services. Our care based experience is obviously relevant to this and, in the majority of instances, an integrated fund, build, property management and care provision is seen as being very attractive. Mears, through its Registered Provider of Social Housing, and a funding partner HB Villages, are working together to create a new supply of purpose-built accommodation for the Care sector. The plan is for HB Villages to develop and fund the new housing with Mears providing long-term tenancy and asset management services to the residents. Our first schemes in Northampton, Winsford and Bolton will be on site in 2017 and there is a good pipeline developing.

There has never been greater stakeholder pressure to increase funding into social care, including from organisations such as the NHS which has been impacted by the underfunded social care system. Mears is playing its part in encouraging additional investment. 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. In addition, the Spring Budget this year committed a further GBP1 billion of additional funding in 2017/18 which will go some way to preventing an immediate collapse but does not represent a long-term solution. The Mears strategy is clear and focused, being to concentrate our support on those Councils 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 have demonstrated market leadership by exiting contracts where councils continue to focus on an outdated and unsustainable hourly charge rate. We believe that by continuing to support the innovators in the sector, and by remaining resilient when encountering poor commissioning practices, that we can drive the change that the homecare market needs. Mears continues to drive change and we believe these actions are a real positive for the long-term development of the sector and our leading position in the public sector.

Dividend

The Board remains confident in the future opportunities in both our markets and consequently it expects to continue following a progressive dividend policy. The Board is declaring an increased interim dividend of 3.45p per share (2016: 3.30p) payable on 7 November 2017 to shareholders on the Register on 20 October 2017. 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 2016 detailed how we embrace governance. The Board continues to set high standards of corporate governance.

The Board was delighted to welcome Roy Irwin and Jason Burt as Non-Executive Directors of the Company following their appointment at the 2017 AGM. Both Roy and Jason bring the right skills and experience that will add considerably to the Board. The Board wishes to place on record its thanks to Michael Rogers and David Hosein for their significant contribution and who, having served as Non-Executive Directors for nine years, did not offer themselves for re-election at the AGM.

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 as a result of changes in its operations. The key risks of the Group as at 30 June 2017 remain those detailed within the Annual Report for 2016.

Following the tragic events at Grenfell Tower, the Government has expressed concerns with certain cladding systems, notably those utilising Aluminium Composite Material ('ACM'). These events have prompted Mears to review its contract delivery register to ensure a high level of detail around product specification continues to be captured and can be easily retrieved. As part of this process, an initial review of the types of facade systems installed in dwellings over the past five years has been undertaken with no instances identified of Mears utilising ACM cladding.

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 13,000 staff including 400 apprentices; the vast majority of our employees live in the areas in which they work. Diversity and respect for all remains core to our induction, recruitment and customer care programmes.

At the heart of Mears lies a strong sense of responsibility towards improving people's lives. We aim to lead the way in terms of social value in the markets where we operate, delivering lasting and meaningful outcomes. Social mobility is about creating opportunities for young people from disadvantaged backgrounds. At Mears, we aim to ensure that jobs and opportunities are open to everyone.

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.

Housing

We are pleased with the progress made by the Group which has been underpinned by our strategy to broaden our service offering in Housing. This has created a significant sustainable competitive advantage for Mears.

Following the recent tragic events at Grenfell Tower, the Board has reassessed its previous guidance for full year Housing revenues from GBP830m to GBP800m. This shortfall in revenues will mean both a loss of profit and, more significantly, lower overhead recovery. As a result, the Board anticipates Housing margins in 2017 to be in the range of 5.3-5.5% rather than the previous expectation of 5.6-5.8%. The Board will continue to monitor this situation closely as a number of key clients complete their compliance reviews over the next few months.

Notwithstanding this, the Board remains confident in the future prospects for Housing. Notably:

-- In the traditional contracting partnerships, which comprises circa 80% of Housing revenues, Mears anticipates a consistent level of new bidding opportunities. Positively, Mears has few significant contract renewals in the period leading up to 2020. Moreover, Mears has become increasingly selective towards the opportunities it chooses to tender. Whilst we are the market leader, delivering services to around 15% of the UK's social housing market, the market still provides headroom for growth.

-- Increasingly, the Group's focus is towards developing placemaking partnerships, which comprises circa 20% of Housing revenues. Mears is increasingly being asked by clients and other stakeholders to take a greater involvement in helping clients deliver appropriate housing outcomes for a range of tenants, utilising a broader range of services. Consequently, the Mears addressable market is becoming much larger than it was previously and more complex. Mears is in a very strong position to maximise opportunities in this area, building on the ground-breaking joint venture with Milton Keynes Council. We have an established integrated offering combining our traditional maintenance contracting with a full suite of housing management and asset management services including financing, development and management of multi-tenure solutions. We would expect to achieve higher annual growth in respect of this new, faster growing part of the extended housing market.

Our medium-term growth expectations for Housing remain unchanged with a blended annual revenue growth rate of 5% per annum and a margin returning to our historic normalised range of 5.6-5.9%.

Over recent years, the Group has, through a combination of acquisition and recruitment, developed a full service offering to address increasingly complex housing challenges. Where appropriate, we will continue to make acquisitions to develop the breadth and depth of our services and to build further on our market leading, innovative housing solutions.

Care

We firmly believe in our long-term Care strategy and that Mears is best placed to benefit from the inevitable market evolution. The restructuring announced last year allows the business to focus on operational quality and switch focus to those strategically important clients which we believe have the 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 has impacted 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. We expect Care to report an improved second-half year performance, resulting in a small profit for the full year, and in the future, to deliver operating margins in the low to middle single-digit range.

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 change their procurement practices, 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.

David Miles

david.miles@mearsgroup.co.uk

Chief Executive Officer

15 August 2017

Half year condensed consolidated income statement