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 £466.2m (2015: £430.0m), 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 £420m of new work. The order book has increased to £3.5bn (2015: £3.2bn) 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 £18.2m (2015: £19.2m).  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 £75m (2015: £69m), 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 £389.6m (2015: £366.5m), 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 £259m, with a new contract win rate on competitively tendered works well ahead  of its historical average of 33% (by value) (2015: £185m 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
	£m	£m
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 £299.4m (2015: £294.0m). 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 £250m 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 £35m.

 

·      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 £45m, 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 £110m 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 £49.2m (2015: £50.5m). 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 £5.6m 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 £11m. 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 £41.0m (2015: £22.0m). This business stream is seeing significant growth opportunities with an annual revenue run-rate now exceeding £100m. 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 £190m 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 £50m. 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 £76.6m (2015: £63.5m), 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 £100m. 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 £9.40 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 £165m of contract wins at a win rate of 77% by value (2015: £35m 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 £195.1m (2015: £202.1m). The carrying value of goodwill is £193.1m (2015: £192.5m) 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 £5.2m (2015: £1.8m) 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 £167.4m (2015: £168.0m), which reflects good working capital management within a growing business. Trade payables rose to £183.2m (2015: £173.6m), 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 £14.1m (2015: £4.2m) 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 £75.0m (2015: £69.0m), which is pleasing given the Group incurred outflows of £16.1m 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 £120m to £140m. 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 £4m 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

For the six months ended 30 June 2016

 

 

		Six months ended		Six months ended
		30 June 2016		30 June 2015
	Note	£'000	£'000	£'000	£'000
Sales revenue	3		466,153		430,022
Cost of sales			(346,667)		(318,011)
Gross profit			119,486		112,011
Other administration expenses		(100,105)		(91,601)
Operating result before intangible amortisation	3	19,381		20,410
Amortisation of acquisition intangibles		(5,419)		(4,519)
Total administration expenses			(105,524)		(96,120)
Operating profit	3		13,962		15,891
Net finance charge	4		(1,226)		(1,199)
Profit for the period before tax			12,736		14,692
Tax expense	5		(1,536)		(2,487)
Profit for the period			11,200		12,205
Attributable to:
Equity holders of the Company			10,266		11,460
Non-controlling interests			934		745
Profit for period			11,200		12,205
Earnings per share
Basic	7		10.08p		11.28p
Diluted	7		9.97p		11.16p
Normalised diluted	7		13.55p		14.62p

 

 

 

Half year condensed consolidated statement of comprehensive income

For the six months ended 30 June 2016

 

	Six months	Six months
	ended	ended
	30 June	30 June
	2016	2015
	£'000	£'000
Net result for the period	11,200	12,205
Other comprehensive income for the period
Which will be subsequently reclassified to the Income Statement:
Cash flow hedges:
- gains/(losses) arising in the period	(126)	151
- reclassification to Income Statement	260	243
Decrease in deferred tax asset in respect of cash flow hedges	(22)	(72)
Which will not be subsequently reclassified to the Income Statement:
Actuarial gain on defined benefit pension scheme	-	-
Other comprehensive income for the period	112	322
Total comprehensive income for the period	11,312	12,527
Attributable to:
Equity holders of the parent	10,378	11,782
Non-controlling interests	934	745
Total comprehensive income for the period	11,312	12,527

 

 

Half year condensed consolidated balance sheet

As at 30 June 2016

 

		As at	As at	As at
		30 June	31 December	30 June
		2016	2015	2015
	Note	£'000	£'000	£'000
Assets
Non-current
Goodwill		193,058	193,058	192,470
Intangible assets		30,019	31,851	34,299
Property, plant and equipment		19,468	18,436	16,841
Pensions and other employee benefits		8,272	8,272	15,131
Financing assets		650	-	-
Deferred tax asset		6,617	6,584	9,499
		258,084	258,201	268,240
Current
Assets included in disposal group classified as held for sale		-	13,255	-
Inventories		8,368	9,021	9,341
Trade and other receivables		158,995	146,879	158,651
Financing assets		553	-	-
Cash at bank and in hand		53,668	68,612	63,606
		221,584	237,767	231,598
Total assets		479,668	495,968	499,838
Equity
Equity attributable to the shareholders of Mears Group PLC
Called up share capital	9	1,025	1,019	1,019
Share premium account		58,248	58,124	58,086
Share-based payment reserve		1,651	1,651	2,353
Hedging reserve		(460)	(572)	(640)
Merger reserve		46,214	46,214	46,214
Retained earnings		88,754	86,438	96,353
Total equity shareholders' funds		195,432	192,874	203,385
Non-controlling interest		(312)	(1,246)	(1,259)
Total equity		195,120	191,628	202,126
Liabilities
Non-current
Long-term borrowing and overdrafts		57,500	57,500	57,500
Pension and other employee benefits		4,224	4,224	8,372
Deferred tax liabilities		5,906	6,970	9,039
Financing liabilities		1,346	368	451
Other liabilities		9,929	15,396	26,392
		78,905	84,458	101,754
Current
Liabilities included in disposal group classified as held for sale		-	13,255	-
Short-term borrowings and overdrafts		10,284	10,290	10,291
Trade and other payables		183,179	194,103	173,608
Financing liabilities		626	510	533
Current tax liabilities		3,454	1,724	4,240
Dividend payable		8,100	-	7,286
Current liabilities		205,643	219,882	195,958
Total liabilities		284,548	304,340	297,712
Total equity and liabilities		479,668	495,968	499,838

 

 

 

Half year condensed consolidated cash flow statement

For the six months ended 30 June 2016

 

			Twelve
		Six months	months	Six months
		ended	ended	ended
		30 June	30 June	30 June
		2016	2016	2015
	Note	£'000	£'000	£'000
Operating activities
Result for the period before tax		12,736	23,963	14,692
Adjustments	10	10,462	21,443	8,905
Change in inventories and operating receivables		(11,655)	(2,823)	(2,717)
Change in operating payables		(7,226)	(2,350)	(12,330)
Cash inflow from continuing operating activities before taxes paid		4,317	40,233	8,550
Taxes paid		(924)	(5,147)	(1,665)
Net cash inflow from operating activities of continuing operations		3,393	35,086	6,885
Net cash outflow from operating activities of discontinued operations		-	(4,503)	-
Net cash inflow from operating activities		3,393	30,583	6,885
Investing activities
Additions to property, plant and equipment		(5,165)	(6,225)	(1,809)
Additions to other intangible assets		(1,538)	(3,061)	(1,454)
Proceeds from disposals of property, plant and equipment		-	86	-
Acquisition of subsidiary undertaking, net of cash		(10,019)	(17,618)	(11,421)
Interest received		10	90	78
Net cash outflow from investing activities		(16,712)	(26,728)	(14,606)
Financing activities
Proceeds from share issue		130	169	1,380
Finance lease payments		(320)	(621)	(244)
Interest paid		(1,429)	(2,761)	(1,434)
Dividends paid - Mears Group shareholders		-	(10,445)	-
Dividends paid - non controlling interests		-	(128)	-
Net cash outflow from financing activities		(1,619)	(13,786)	(298)
Cash and cash equivalents at beginning of period		822	(4,185)	3,834
Net (decrease)/increase in cash and cash equivalents		(14,938)	(9,931)	(8,019)
Cash and cash equivalents at end of period		(14,116)	(14,116)	(4,185)
Cash and cash equivalents is comprised as follows:
- cash at bank and in hand		53,668	53,668	63,606
- borrowings and overdrafts		(67,784)	(67,784)	(67,791)
Cash and cash equivalents		(14,116)	(14,116)	(4,185)
Cash conversion key performance indicator
Cash inflow from operating activities		4,317	40,233	8,550
EBITDA		20,675	44,366	23,447
Conversion (%)		20.9%	90.7%	36.4%

 

 

 

Half year condensed consolidated statement of changes in equity

For the six months ended 30 June 2016

 

 

	Attributable to equity shareholders of the Company
		Share	Share-based				Non-
	Share	premium	payment	Hedging	Merger	Retained	controlling	Total
	capital	account	reserve	reserve	reserve	earnings	interests	equity
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 January 2015	1,011	56,714	1,653	(962)	46,214	92,179	(2,347)	194,462
Net result for the period	-	-	-	-	-	11,460	745	12,205
Other comprehensive income	-	-	-	322	-	-	-	322
Total comprehensive income for the period	-	-	-	322	-	11,460	745	12,527
Issue of shares	8	1,372	-	-	-	-	-	1,380
Share option charges	-	-	700	-	-	-	-	700
On acquisition	-	-	-	-	-	-	343	343
Dividends	-	-	-	-	-	(7,286)	-	(7,286)
At 30 June 2015	1,019	58,086	2,353	(640)	46,214	96,353	(1,259)	202,126
At 1 January 2016	1,019	58,124	1,651	(572)	46,214	86,438	(1,246)	191,628
Net result for the period	-	-	-	-	-	10,266	934	11,200
Other comprehensive income	-	-	-	112	-	-	-	112
Total comprehensive income for the period	-	-	-	112	-	10,266	934	11,312
Issue of shares	6	124	-	-	-	-	-	130
Share option charges	-	-	150	-	-	-	-	150
Exercise of share options	-	-	(150)	-	-	150	-	-
Dividends	-	-	-	-	-	(8,100)	-	(8,100)
At 30 June 2016	1,025	58,248	1,651	(460)	46,214	88,754	(312)	195,120

 

 

 

Notes to the half year condensed consolidated statements

For the six months ended 30 June 2016

 

1. Corporate information

Mears Group PLC is a public limited company incorporated in England and Wales whose shares are publicly traded. The half year condensed consolidated financial statements of the Company and its subsidiaries for the six months ended 30 June 2016 were authorised for issue in accordance with a resolution of the Directors on 16 August 2016.

2. Basis of preparation and accounting principles

(a) Basis of preparation

The half year condensed consolidated financial statements for the six months ended 30 June 2016 have been prepared in accordance with the Disclosure and Transparency Rules (DTR) of the Financial Services Authority and with IAS 34 'Interim Financial Reporting'. The half year condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements as at 31 December 2015, which have been prepared in accordance with IFRS as adopted by the European Union.

This half year condensed consolidated financial information does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2015 were approved by the Board of Directors on 18 March 2016. These accounts, which contained an unqualified audit report under Section 495 of the Companies Act 2006 and which did not make any statements under Section 498 of the Companies Act 2006, have been delivered to the Registrar of Companies in accordance with Section 441 of the Companies Act 2006.

The half year condensed consolidated financial statements for the six months ended 30 June 2016 have not been audited or reviewed by an auditor pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.

There have been no significant changes to estimates of amounts reported in prior financial years.

(b) Significant accounting policies

The accounting policies adopted in the preparation of the half year condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2015 with the exception of the adoption of amendments to IAS 16 and IAS 38 relating to the clarification of acceptable methods of depreciation and amortisation, and the disclosure initiative amendments to IAS 1 'Presentation of financial statements'. These revisions to standards did not materially affect the financial statements.

3. Segment reporting

Segment information is presented in respect of the Group's business segments. Segments are determined by reference to the internal reports reviewed by the chief operating decision maker.

The Group operated two business segments during the period:

·      Housing - services within this segment comprise a full housing management service predominately to Local Authorities and other Registered Social Housing Landlords; and

·      Care - services within this segment comprise personal care services for people in their own homes.

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

The principal measures utilised by the chief operating decision maker to review the performance of the operating segments are that of revenue growth and operating margins in both core divisions of Housing and Care. The operating result utilised within the key performance measures is stated before amortisation of acquisition intangibles and share-based payments. There is a small cyclical element to the Group's activities, which, combined with organic growth, results in the second half of the year traditionally showing increased margins over and above the first half of the year.

	Six months ended		Six months ended
	30 June 2016		30 June 2015
		Operating		Operating
	Revenue	result	Revenue	result
	£'000	£'000	£'000	£'000
Social Housing	389,588	18,873	366,545	18,203
Care	76,565	1,008	63,477	2,907
	466,153	19,881	430,022	21,110
Long-term incentive plans		(500)		(700)
Operating result before intangible amortisation		19,381		20,410
Amortisation of acquisition intangibles		(5,419)		(4,519)
		13,962		15,891
Finance costs, net		(1,226)		(1,199)
Tax expense		(1,536)		(2,487)
Profit for the period		11,200		12,205

 

4. Net finance charge

	Six months	Six months
	ended	ended
	30 June	30 June
	2016	2015
	£'000	£'000
Interest charge on overdrafts and short-term loans	(1,151)	(1,041)
Interest charge on interest rate swap (effective hedges)	(260)	(243)
Interest charge on interest rate swap (ineffective hedges)	-	(143)
Interest charge on defined benefit obligation	(150)	(225)
Finance costs	(1,561)	(1,652)
Interest income resulting from short-term bank deposits	10	78
Interest income resulting from defined benefit obligation	325	375
Net finance charge	(1,226)	(1,199)

 

5. Tax expense

The tax charge for the six months ended 30 June 2016 has been based on the estimated tax rate for the full year.

Tax recognised in the Income Statement:

	Six months	Six months
	ended	ended
	30 June	30 June
	2016	2015
	£'000	£'000
United Kingdom corporation tax and total current tax recognised in Income Statement	2,654	3,391
Adjustment in respect of previous periods	-	-
Total current tax recognised in Income Statement	2,654	3,391
Total deferred taxation recognised in Income Statement	(1,118)	(904)
Total tax expense recognised in Income Statement	1,536	2,487

 

6. Dividends

The interim dividend of 3.30p (2015: 3.10p) per share is not recognised as a liability at 30 June 2016 and will be payable on 1 November 2016 to shareholders on the register at the close of business on 14 October 2016. The dividend disclosed within the half year Condensed Consolidated Statement of Changes in Equity represents the final dividend of 7.90p (2015: 7.15p) per share proposed in the 31 December 2015 financial statements and approved at the Group's Annual General Meeting on 1 June 2016 (not recognised as a liability at 31 December 2015).

7. Earnings per share

	Basic		Diluted
	Six months	Six months	Six months	Six months
	ended	ended	ended	ended
	30 June	30 June	30 June	30 June
	2016	2015	2016	2015
	p	p	p	p
Earnings per share	10.08	11.28	9.97	11.16
Effect of amortisation of acquisition intangibles	5.32	4.45	5.26	4.40
Effect of full tax adjustment	(1.70)	(0.96)	(1.68)	(0.94)
Normalised earnings per share	13.70	14.77	13.55	14.62

 

A normalised EPS is disclosed in order to show performance undistorted by amortisation of intangibles and adjusted to reflect a full tax charge. The Directors believe that this normalised measure better allows the assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future performance. The profit attributable to shareholders before and after adjustments for both basic and diluted EPS is:

	Six months	Six months
	ended	ended
	30 June	30 June
	2016	2015
	£'000	£'000
Profit attributable to shareholders:	10,266	11,460
- amortisation of acquisition intangibles	5,419	4,519
- full tax adjustment	(1,732)	(971)
Normalised earnings	13,953	15,008

 

The calculation of EPS is based on a weighted average of ordinary shares in issue during the year. The diluted EPS is based on a weighted average of ordinary shares calculated in accordance with IAS 33 'Earnings Per Share', which assumes that all dilutive options will be exercised. The additional normalised basic and diluted EPS use the same weighted average number of shares as the basic and diluted EPS.

	Six months	Six months
	ended	ended
	30 June	30 June
	2016	2015
	Millions	Millions
Weighted average number of shares in issue:	101.84	101.62
- dilutive effect of share options	1.14	1.03
Weighted average number of shares for calculating diluted earnings per share	102.98	102.65

 

8. Fair value measurement of financial instruments

IAS 34 requires that interim financial statements include certain of the disclosures about fair value of financial instruments set out in IFRS 13 and IFRS 7. These disclosures include the classification of fair values within a three-level hierarchy. The three Levels are defined based on the observability of significant inputs to the measurement, as follows:

·      Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

·      Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

·      Level 3: unobservable inputs for the asset or liability.

The following table shows the Levels within the hierarchy of financial assets and liabilities measured at fair value on a recurring basis at 30 June 2016, 31 December 2015 and 30 June 2015:

	As at	As at	As at
	30 June	31 December	30 June
	2016	2015	2015
	£'000	£'000	£'000
Financial assets
Loans and receivables
Trade receivables	54,254	47,364	50,905
Amounts recoverable on contracts	101,250	90,627	100,281
Cash at bank and in hand	53,668	68,612	63,606
Fair value (Level 2)
Forward commodity contracts - effective	1,203	-	-
	210,375	206,603	214,792
Financial liabilities
Fair value (Level 2)
Interest rate swaps - effective	(1,972)	(878)	(544)
Interest rate swaps - ineffective	-	-	(440)
Fair value (Level 3)
Contingent consideration in respect of acquisitions	(10,294)	(20,861)	(21,055)
Amortised cost
Bank borrowings and overdrafts	(67,784)	(67,790)	(67,791)
Trade payables	(114,852)	(100,385)	(113,714)
Accruals and deferred income	(40,997)	(54,945)	(36,589)
Other creditors	(6,803)	(9,113)	(8,276)
	(242,702)	(253,972)	(248,409)
	(32,327)	(47,369)	(33,617)

 

The fair values of interest rate swaps and forward commodity contracts have been calculated by a third party expert discounting estimated future cash flows on the basis of market expectations of future interest rates (Level 2).

The fair values of deferred and contingent consideration have been calculated by the Directors by reference to expected future income and expenditure in respect of the acquired businesses.

There were no transfers between Level 1 and Level 2 during the six-month period to 30 June 2016 or the year to 31 December 2015.