Mears Grp PLC - Interim Results
RNS Number : 2879W
Mears Group PLC
18 August 2015
 

 

 

18 August 2015

 

Mears Group PLC

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

Interim Results

For the six months to 30 June 2015

 

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 2015.

 

Financial Highlights                  

·      Profit before tax* of £19.2m (2014: £18.7m), growth of 3%

·      Improved operating margins of 4.9% (2014: 4.7%) driven by Social Housing

·      Excellent EBITDA cash conversion for the twelve months to June 2015 of 92% (2014: 100%)

·      New contract wins in excess of £220m (2014: 201m):

Social Housing awards of £185m with a win rate on competitively tendered works of 33% (2014: £135m and 35%)

Care awards of £35m with a win rate of 60% (2014: £66m and 63%)

·      Strong balance sheet with net debt at 30 June 2015 of £4.2m (2014: net cash £2.7m); average net debt of £69.0m (2014: £63.0m)

 

 

2015

2014

Change

Total Group Revenue - continuing operations

£430.0m

£428.1m

-

Profit before tax*

£19.2m

£18.7m

+3%

Diluted earnings per share

11.16p

9.75p

+14%

Normalised diluted EPS*

14.62p

14.34p

+2%

Interim dividend per share

3.10p

2.85p

+9%

 

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

 

Social Housing Division:

·      Revenue of £366.5m (2014: £364.9m)

·      Operating margin of 5.0% (2014: 4.2%), reflecting continued margin improvement driven by efficiencies from former Morrison contracts and sales mix moving towards higher margin Housing Management activities

·      Continuing high levels of customer satisfaction

·      Strong period of business development  in Housing Management

·      Hiatus in maintenance contract opportunities coming to an end

 

Care Division:

·      Revenue of £63.5m (2014: £63.2m)

·      Operating margin, before the impact of the Care UK Care at Home business ('CAH'), of 5.8% (2014: 7.8%) reflecting significant investment in carer pay and impact of new contract mobilisations

·      Continued strong regulatory compliance

·      The acquisition of CAH significantly increases the scale of Mears within the domiciliary care market, now the second biggest provider in the UK

Outlook:

·      Order book at £3.2 billion (2014: £3.7 billion) reflecting the short-term delay in new bidding opportunities over the last 12 months

·      Bidding opportunities into the longer term expected to remain at historical levels

·      Visibility of 96% of consensus forecast revenue for 2015 and 85% for 2016 (2014: being 95% and 85% respectively)

 

 

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

 

"I am pleased with the progress Mears has made in the first half of 2015.

 

"Our Social Housing business has delivered a solid performance; our revenue growth has been constrained temporarily by a hiatus in new bidding opportunities for maintenance work. During this quieter period, we have built upon our leadership position in traditional Social Housing maintenance work by addressing the broader Housing Management challenge.  We believe we are starting to come out of this quiet period and we expect that the quality and quantity of opportunities will accelerate significantly as well.

 

"Our Care business has delivered a solid performance in a market that has been challenging. There is a significant disparity between the short and long-term Care opportunity. In the short-term, the position appears negative.  The Government's decision to delay reforms to social care funding would appear to leave it with no plan for Social Care, with funding reform having gone backwards five years.  The recent Budget announcement regarding the National Living Wage has further increased pressures on Councils, Trusts and Care Providers. The sector has reached breaking point with a number of our competitors looking for the exit. However, in the long-term, we continue to see significant opportunity in the Care sector. We remain confident that we have the right strategy and we believe Mears is well placed strategically to take advantage of industry evolution.

 

 "We have had a good first half year and we look forward to updating you with further successes 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 Executive

Tel: +44(0)7778 220 185

Andrew Smith, Finance Director

Tel: +44(0)7712 866 461

Bob Holt, Chairman            

Tel: +44(0)7778 798 816

Alan Long, Executive Director           

Tel: +44(0)7979 966 453

www.mearsgroup.co.uk

 

 

Buchanan

 

Richard Darby/ Sophie McNulty/ 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.

 

 

Mears Group PLC

Interim Statement

 

We are pleased to announce solid interim results for the six months ended 30 June 2015.

 

The headline financials, which are in line with our expectations, are detailed below; 

 

·      Revenues show a small increase to £430.0m (2014: £428.1m) which reflects the quiet period of new contract bidding in Social Housing, combined with a Care sector where revenues, in the short-term, continue to be constrained by client budgets together with the challenge of recruitment. The momentum in both our core sectors is increasingly positive and will be discussed in greater detail in this interim statement.

·      Operating margins at a Group level reflect continued improvement, increasing to 4.9% (2014: 4.7%).

The Social Housing operating margin increased to 5.0% (2014: 4.2%) driven primarily by the improving contract margins being generated from the ex-Morrison business together with a changing sales mix towards higher margin Housing Management services. The margin in both 2015 and 2014 is also assisted by a reduced number of new contract mobilisations which are typically loss making in their first six months. We remain on target to achieve a full-year Social Housing margin of around 5.3% (2014 FY: 4.8%).

The Care operating margin was reduced to 4.6% (2014: 7.8%). The underlying Care operating margin reduced from 7.8% to 5.8% reflecting the diluting impact from organic reduction in revenues and a continued investment in our Care workforce combined with an intensive period of new contract mobilisations. In addition, the result from the newly acquired Care UK Homecare Limited ('CAH') was an operating loss of £0.5m which was in line with our expectations.

·      The net finance charge increase to £1.2m (2014 £0.5m) reflects reduced finance income following tightening pension assumptions. The underlying interest charge on overdraft and loans is unchanged.

·      The margin improvement delivered an increased profit before tax and amortisation of 3% to £19.2m (2014: £18.7m). Diluted earnings per share increased 14% to 11.16p (2014: 9.75p). Normalised diluted earnings per share, which shows earnings before amortisation of acquisition intangibles and reflecting an 18% tax charge,  was up 2% to 14.62p (2014: 14.34p).

·      The integration of CAH, following its acquisition in late May 2015, remains in-line with our original plan.

·      We have continued to deliver solid cash flows with cash generated as a proportion of EBITDA at 92% for the rolling twelve month period to 30 June 2015 (2014: 100%).  Average net debt for the half year period was £69m (2014 H1: £63m, 2014 FY: £70m) demonstrating continuing solid cash management.

·      The Group has reported all transactions within normal trading. In particular, the trading losses and the costs of integration following the acquisition of CAH have been presented within the Group's headline financial measures. It remains the Board's strong preference to keep normalising adjustments to a minimum, notwithstanding the short-term impact to earnings.

·      We have 96% visibility of consensus forecast revenue for the current year and in excess of 85% for 2016.

 

The Board is declaring an interim dividend of 3.10p per share payable on 3 November 2015 to shareholders on the register of members on 16 October 2015. This represents an increase of 9% (2014: 2.85p) and reflects the Board's ongoing confidence in the Group's future prospects.

 

Social Housing

 

Service quality remains a key differentiator; we are pleased that our Social Housing division continues to achieve high standards of service delivery.

 

The Social Housing business has continued to deliver a solid performance with revenues of £366.5m (2014: £364.9m). Whilst the performance at an aggregate level appears relatively flat, the movements within the individual components are relevant and detailed below:

 

 

Revenue stream

Commentary

Maintenance

 

Day to day, Housing Revenue Account (HRA) funded, non-discretionary, maintenance spend

H1 2015 revenue £294m

(H1 2014 £309m, H2 2014 £288m)

The changes to Housing finance in 2012 had a positive impact on the level of funding within the ring-fenced Housing Revenue Accounts of Registered Social Landlords (RSLs), providing additional opportunities to generate income. A large proportion of RSLs are reporting large surpluses which we see as positive. As previously reported, these changes resulted in a short-term delay in bidding opportunities with activity at a low level in both 2014 and 2015. This has resulted in a reduced number of new contract mobilisations during this time. The expiration of a number of contracts during 2014 which have not, at the half year stage, been fully replaced in 2015, resulted in a small reduction in revenues when comparing H1 2015 with H1 2014. On a sequential basis, H1 2015 delivered 2% growth on H2 2014. On a positive note, it was previously anticipated that three of the Group's flagship maintenance contracts would come up for rebid during 2015; all three have been similarly impacted by these delays and have been extended.

 

Whilst the recent announcement to reduce social rents by 1% per annum for the next four years will have an impact on the income of RSLs, this change should be considered together with other measures that provide opportunities to increase income; overall the changes to Housing finance over the last three years have been positive for RSLs.  The recent change will inevitably require RSLs to review their business plans, however we do not anticipate any overall negative impact to our revenues.

 

We believe we are starting to come out of the quiet period for bidding with a number of new opportunities now at an advanced stage. We expect the bidding opportunities over the long-term to remain at historical levels and our organic growth aspiration remains at 5-10% per annum.

Capital works, predominantly HRA funded

H1 2015 revenue £49m

(H1 2014 £46m, H2 2014 £48m)

 

The benefits enjoyed by RSLs following the changes to Housing finance similarly impact positively in respect of capital works opportunities.  Whilst our main focus remains maintenance, we look to augment this with capital works opportunities. Our organic growth aspiration in this area is 5% per annum.

Fuel Poverty

H1 2015 revenue £2m

(H1 2014 £5m, H2 2014 £4m)

 

The Government continues to look for solutions to tackle fuel poverty and carbon reduction challenges in housing. However, since the Government's decision to spread the ECO funding over more years, this area has reported reduced activity. Mears maintains a small team typically targeting fuel poverty opportunities within our existing client relationships. For the avoidance of doubt, there is no impact to Mears in respect of the scrapping of the Green Deal; as we stated at the time of its introduction, this was never a solution for fuel poverty within Social Housing.

 

Housing Management

 

Housing and property management

H1 2015 revenue £17m

(H1 2014 £2m, H2 2014 £6m)

 

There are currently over 64,000 households, the vast majority housing families, who are legally homeless and being supported by Local Authorities. It is predicted that these numbers will increase over the next few years as more people become homeless and the supply of suitable accommodation reduces. The shortage of safe and secure housing is a significant challenge faced by Mears' clients today. We anticipate Local Authorities having increased responsibility to provide more social homes and remove the reliance upon those private landlords who provide properties which are not of a uniformly high standard. Mears provides a range of options for local authorities.

 

The acquisition of Omega in October 2014 was a logical extension to the services provided within our Social Housing division and has materially enhanced our ability to work with housing providers to improve the delivery of housing and property management services. Through Omega, we acquired a business with annual revenues of circa £20 million. This area of the business is likely to deliver growth in excess of 50% during its first year and provides the Group with significant growth opportunity over the short and medium-term. Over time, we see Housing Management becoming entwined with our traditional Social Housing maintenance activities. Our conservative organic growth target in this area is to double this part of the business within the next three years.

 

Mears In-sourcing solutions

H1 2015 revenue £5m

(H1 2014 £3m, H2 2014 £4m)

 

Our in-sourcing offering was developed in anticipation of an increase in the level of outsourced work being taken back in-house by Housing Associations following the VAT rate being increased to 20% and given the restriction they suffer upon the recovery of input VAT. Whilst the sector has seen a number of such transfers, they have typically been contracts of a small size.  We see any further increase in the number of in-sourced solutions as an opportunity. This provides the opportunity to deliver higher margins with a low revenue and working capital requirement. In addition we provide a stand-alone 24/7 call centre service to a number of RSLs and we have recently extended this white collar offering to income management and planning application administration.

 

 

Business Development

The Social Housing division has secured new contracts of £185m, with a new contract win rate on competitively tendered works at its historical average of 33% (by value) (2014: £135m and 35%).  Key to our success, now more than ever, is our ability to develop and deliver innovative solutions for our customers.

 

Whilst the quantum of new contract wins is relatively low, the short-term delay in new bidding opportunities has been widely communicated over the last twelve months.   The bidding opportunities available to the Group over the longer term remain at historical levels. Our service delivery remains strong and we feel well positioned to benefit now that we are seeing the market improve.  

Since the Group extended its services to Housing Management, accelerated by the acquisition of Omega in 2014, the Group has successfully grown the business with some 3,500 homes now under management across the country.

Our key offering is to work with RSLs, private landlords, investors and developers to create structures to provide and manage housing. Our not-for-profit Registered Provider enables us to offer our partners a regulated body which provides security and good governance.  Mears is not a property developer or asset holder and will focus on managing assets for the benefit of owners, client public sector bodies and residents.

The Private Rented Sector (PRS) in the UK has over nine million households renting as home ownership reduces. Many people are now choosing the PRS either because mortgages are seen as unaffordable or to provide the flexibility people require in a mobile employment market. Mears is seeking to provide high quality tenancy and asset management giving tenants' security and stable rents without punitive and unnecessary fees. Working with Local Authorities, Housing Associations and institutional investors we are seeking to develop portfolios of good quality homes. In May 2015, working with a Local Government Pension Scheme, Mears coordinated the acquisition of 305 rented homes in the East Midlands. Rents will be kept below the full market with any increases protecting this affordability gap. Mears is engaged to provide marketing, lettings and housing management services over a period of 20 years. This is typical of a large number of opportunities and we anticipate strong organic growth in our portfolio over the next 12 months.

 

In parallel with growing homelessness, there is a national need to build new homes for social, affordable rent. Mears, through its Registered Provider, is working with house builders and investors to bring forward stalled development sites where the affordable housing elements can be funded without grants to provide rented and shared ownership tenures.

 

This is an exciting, immature market with a significant disparity between supply and demand. Given the urgency for our clients to find solutions to ease the homelessness issue, the current opportunity pipeline is particularly buoyant. In the short-term our bid pipeline comprises a small number of strategically important bids.

Care

 

The Board is pleased with the progression of the Care division, mindful that the financial results do not properly reflect the momentum that is building in this area.

 

Prospects for the UK Care market over the long-term remain very strong given the underlying growth drivers of an ageing population and the need to look after people in their own homes rather than in hospital or other residential settings. Domiciliary care will also benefit from greater integration of health and social care. The challenges facing the health and social care system are significant and require a change in the relationship with providers. Scale and capability are increasingly important. Scale is important as innovative commissioners look to partner providers around joint achievement of outcomes and a level of financial risk sharing - this is an approach Mears adopts within its Social Housing market and one which is now developing within Care, such as its contracts with Torbay and Wiltshire.  Capability is important in terms of maximising the opportunities around looking after people with more complex conditions, often funded directly by the NHS and increasingly from pooled NHS and Social Care budgets.

 

The acquisition of CAH in May 2015 significantly increases the scale of Mears within the domiciliary care market, making Mears the second biggest provider in the UK. CAH provides an excellent geographic fit with Mears' existing Care business with limited cross-over.  Moreover, the acquisition strengthens the Group's position with a number of strategically important client relationships which we believe have potential to develop into output based contracts on re-tender. CAH has historically held one of the best track records of compliance with regulatory ratings amongst the national providers.  While initial investment in CAH will be needed, the combination of capability and scale will make Mears a more attractive partner for the emerging, larger partnering orientated contracts such as those already held by Mears in Torbay and Wiltshire.

 

The Care division reported revenues of £63.5m (2014: £63.2m), including £5.0m in respect of CAH. The underlying organic revenues reflect an 8% reduction compared to the comparable period in 2014 and a 4% reduction on a sequential basis when comparing to H2 2014. The primary reason for the revenue reduction remains the shortage of care workers and not a shortage of care work.

 

Social Care has seen a significant reduction in funding over the last few years, but these pressures have in turn created a momentum for change which is starting to support Mears' long-term vision for a more integrated and better commissioned range of services, delivered by a sustainable workforce. The recent Budget announcement regarding the new National Living Wage, while creating immediate financial pressures on Councils and Trusts, will also continue to encourage the development of a more outcome orientated system that fits well with Mears' capabilities.

The Government's decision to delay reforms to Social Care funding demonstrates the apparent inability of successive governments to make headway on this issue.  The postponement to the end of this parliament makes it almost certain that these reforms will not happen. The most critical consequence is that the money the Coalition Government had committed to find to pay for the reforms has been lost. There is no commitment to reinvest this money in social care; some £6 billion in total over the next five years. As things stand, the postponement adds not a penny to beleaguered Council care budgets. Instead the case for additional money for Social Care will have to start all over again in the Autumn spending review.  So, while the Government has set out a clear agenda and £8 billion of new investment for the NHS, its decision leaves it with no plan for Social Care. It underlines the compelling case for a single ring-fenced settlement for both the NHS and Social Care that recognises the inter-dependency of these services and the needs they meet. Social Care is one of the main areas of spend for Councils and we have seen five years of spending reduction. While homecare has received more protection than most areas of Council spending, it has seen real reductions and a concentration of spend on those service users with the highest need.

Within this framework of financial pressure we have seen some significant change:

·      We have continued to win two out of three of the Care tenders we bid for, however these bids have predominantly been for a single lead provider for a particular zone, as opposed to a previous practice of multi-provider, framework contracts. The most advanced example of this being at Torbay, where we are the single provider for the whole geography, on a contract expected to grow to revenues of £10m per annum. We are extremely pleased with the positive start that we have had with this contract and see significant opportunity for future development. Following the positive start, we were almost immediately asked to take over a contract by the neighbouring Devon Council, giving us our first work with this commissioner. The pipeline of opportunities is also characterised by significantly fewer providers with longer term contracts now typically three to five years in length. We have even seen a return to block contracting with some commissioners, notably with wins in Norfolk and Lincolnshire in the first half of 2015.

 

·      Commissioners are now recognising the need to improve pay and conditions for staff. We have already seen charge rates over the last 18 months on our winning tenders rise by over 10% and we expect this trend to continue with the introduction of the National Living Wage. Mears has taken a long-term approach to this by investing significantly in care worker pay rates and developing more sustainable contracts, which is creating the workforce we need to deliver to long-term opportunities in the sector.

 

·      Provider consolidation continues, including our own recent acquisition of CAH. In an increasingly regulated environment and the new requirements of the Care Act to more actively consider provider financial stability, scale and diversity of service is continuing to rise in importance. This is evidenced by the significant reduction in number of providers per let contract. The initial mobilisation of CAH into Mears has begun well and has been well received by clients. While as indicated, we will need to invest in improving some of the services and, in particular, carer pay and conditions, we are confident that this will prove to be an excellent acquisition for the Group. We also continue to look at other acquisitions that can further strengthen the Group.

 

·      Greater integration between the NHS and Social Care is now an absolute necessity and is gathering pace, although we would still prefer this to be faster. The £5.3 billion Better Care Fund, which is the leading Government initiative to support NHS investment in community services, is felt by many to have not yet reached front line service delivery in the way intended. However, we do see an increasing range of opportunities here and have secured complex care/continuing health wins in locations such as Southampton, North Tyneside and Suffolk in the first half of 2015. Our Mears Nurseplus capability, offering a range of nursing led services, has positioned us well here.

Looking at the first half of the year as a whole, we have secured £35m of contract wins at a win rate of 60% by value (2014: £66m and 63%).

In summary, the immediate environment for our Care services remains challenging but we continue to strongly believe we are the best placed provider to support and deliver the change needed in the sector and we remain very optimistic over the medium to longer term.

 

Balance Sheet

 

Strong working capital management has always been and remains a cornerstone of our business. Our internally developed IT systems have a strong financial focus and this is a driving force behind efficient cash management. The IT system is also central to the valuation of work in progress and amounts recoverable on contracts ensuring that valuations are robust.

 

We are pleased to report a net debt position at 30 June 2015 of £4.2m (2014: net cash £2.7m) following conversion of 92% of EBITDA from continuing operations into cash over the rolling twelve month period to June 2015 (2014: 100%). Whilst we are delighted with our good profit to cash conversion, a more important indicator remains the average daily net debt for the six month period of £69.0m (2014: £63.0m). This small increase is pleasing given the Group incurred outflows of £20.0m in October 2014 in respect of the acquisition of Omega together with a further £11.3m in May 2015 in respect of the acquisition of CAH. The average daily debt level gives a better indicator of our underlying requirement, as does the £1.4m (2014: £1.4m) bank interest (including the interest charge on interest rate swap) charged to the income statement.

 

Total shareholders' equity rose from £194.5m at 31 December 2014 to £202.1m at 30 June 2015. The increase in net assets is driven by retained profits.

 

Corporate governance and risk management

The Board continues to set itself high standards of corporate governance. Our Corporate Governance Report issued within our Annual Report 2014 detailed how we approach governance.

We have reviewed and updated the Group's risk register. The senior management teams play a central role in reviewing and challenging the Group's risks. The Group risk team presented risk management training modules to all levels of management via the Group development programme to further increase our strong risk management ethos.

The key risks of the Group as at 30 June 2015 are those detailed within the Annual Report and Accounts for the year to December 2014 and remain unchanged.

 

Our people

We commend our employees for their commitment and energy throughout another significant period for the Group. We continue to be impressed by their quality, professionalism and loyalty.

Mears has a diverse workforce of over 17,000 staff and almost 400 apprentices; the vast majority live in the areas that they work.  Diversity and respect for all is core to our induction programme and our training on recruitment and customer care.

We were delighted to be named as a Social Mobility Business Champion in recognition of the work that we do to actively promote opportunities to people living in areas of above average levels of disadvantage.  Throughout 2015, we will be working with the Government and 11 of the UKs most high profile companies to develop a new benchmark for social mobility which builds on our existing work.

We continue to invest in the future generation. During the first half, Mears opened its new national training academy in Rotherham which will oversee the delivery of the Group's Learning and Development programme.  The capability of Mears' existing in-house training function has been further enhanced through developing external partnerships with training providers. The Group is committed to providing the best technical training for our people, as well as creating training and career development opportunities, particularly for young people and the unemployed, within the communities in which we serve.

Our corporate strategy includes the establishment of an internal talent scheme which recognises the potential of our existing workforce and maximises the likelihood of retaining our most promising people. We have broadened this management development to cover senior leadership, branch manager and supervisory levels. These bespoke programmes call on internal experts and external specialists in order to create an effective scheme, combining the best of Mears with the latest in leadership thinking and wider-industry best practice. We focus on enhancing and strengthening skills in order to improve performance, as well as stretching delegates who have the potential to take on more senior roles in the future.

 

Positive outlook for the Group

We operate in robust and defensive markets where spend is largely non-discretionary. We continue to place great emphasis on winning high quality contracts that provide clear and sustainable margins with good cash flow dynamics.  Our dedication to providing our clients with first class service and value remains undiminished.

We expect our Social Housing business to continue to grow through further contract wins. Whilst we are market leader, we deliver services to circa 15% of the UK Social Housing stock which leaves us significant further growth opportunities given our differentiated market-leading position.

We see the development of our Housing Management services as an important extension of our Social Housing offering. The demand for affordable housing will provide opportunities to work with housing providers to improve the delivery of housing and property management services and to increase the supply and management of housing through innovation and partnership. Currently, this area is highly fragmented and under-developed. We believe the Group is well positioned to progress and deliver strong organic growth. Where appropriate, we will make acquisitions to develop the breadth of our services and enhance our scale.

We are confident that further opportunities in Care will grow from health and social care outsourcing and the implementation of new localised commissioning models. Consequently, we will continue to move further up the acuity chain, with an increased focus on organic growth, extending our Nurseplus model across our clients with this growth being supported by in-fill acquisitions.

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

 

David Miles

david.miles@mearsgroup.co.uk

Chief Executive Officer

 

Bob Holt

bob.holt@mearsgroup.co.uk

Chairman

17 August 2015
 

 

Half year condensed consolidated income statement

For the six months ended 30 June 2015

 

 

 

Six months ended

Six months ended

 

 

30 June 2014

 

Note

£'000

£'000

£'000

£'000

Sales revenue

3

 

430,022

 

428,071

Cost of sales

 

 

(318,011)

 

(315,781)

Gross profit

 

 

112,011

 

112,290

Other administration expenses

 

(91,601)

 

(93,071)

 

Operating result before intangible amortisation

3

20,410

 

19,219

 

Amortisation of acquisition intangibles

 

(4,519)

 

(4,750)

 

Total administration expenses

 

 

(96,120)

 

(97,821)

Operating profit

3

 

15,891

 

14,469

Net finance charge

4

 

(1,199)

 

(512)

Profit for the period before tax

 

 

14,692

 

13,957

Tax expense

5

 

(2,487)

 

(3,976)

Profit for the period

 

 

12,205

 

9,981

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

Equity holders of the Company

 

 

11,460

 

10,185

Non-controlling interests

 

 

745

 

(204)

Profit for period

 

 

12,205

 

9,981

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

Basic

7

 

11.28p

 

9.89p

Diluted

7

 

11.16p

 

9.75p

 

 

Half year condensed consolidated statement of comprehensive income

For the six months ended 30 June 2015

 

Six months

Six months

 

ended

ended

 

30 June

30 June

 

2015

2014

 

£'000

£'000

Net result for the period

12,205

9,981

Other comprehensive income for the period

 

 

Which will be subsequently reclassified to the Income Statement:

 

 

     Cash flow hedges:

 

 

     - (losses)/gains arising in the period

151

(43)

     - reclassification to Income Statement

243

387

     Decrease in deferred tax asset in respect of cash flow hedges

(72)

(79)

Which will not be subsequently reclassified to the Income Statement:

 

 

     Actuarial gain on defined benefit pension scheme

-

-

Other comprehensive income for the period

322

265

Total comprehensive income for the period

12,527

10,246

 

 

 

Attributable to:

 

 

Equity holders of the parent

11,782

10,450

Non-controlling interests

745

(204)

Total comprehensive income for the period

12,527

10,246

 

 

Half year condensed consolidated balance sheet

As at 30 June 2015

 

 

As at

As at

As at

 

 

30 June

31 December

30 June

 

 

2015

2014

2014

 

Note

£'000

£'000

£'000

Assets

 

 

 

 

Non-current

 

 

 

 

Goodwill

 

192,470

192,003

158,786

Intangible assets

 

34,299

35,375

31,918

Share of net assets of joint ventures

 

-

1,856

-

Property, plant and equipment

 

16,841

15,880

14,778

Pensions and other employee benefits

 

15,131

15,131

14,731

Deferred tax asset

 

9,499

8,573

9,848

 

 

268,240

268,818

230,061

Current

 

 

 

 

Inventories

 

9,341

8,468

10,771

Trade and other receivables

 

158,651

142,616

160,977

Cash at bank and in hand

 

63,606

66,634

72,664

 

 

231,598

217,718

244,412

Total assets

 

499,838

486,536

474,473

Equity

 

 

 

 

Equity attributable to the shareholders of Mears Group PLC

 

 

 

 

Called up share capital

9

1,019

1,011

1,011

Share premium account

 

58,086

56,714

56,656

Share-based payment reserve

 

2,353

1,653

1,350

Hedging reserve

 

(640)

(962)

(583)

Merger reserve

 

46,214

46,214

46,214

Retained earnings

 

96,353

92,179

81,182

Total equity shareholders' funds

 

203,385

196,809

185,830

Non-controlling interest

 

(1,259)

(2,347)

(774)

Total equity

 

202,126

194,462

185,056

Liabilities

 

 

 

 

Non-current

 

 

 

 

Long-term borrowing and overdrafts

 

57,500

57,500

55,000

Pension and other employee benefits

 

8,372

8,372

6,107

Deferred tax liabilities

 

9,039

9,418

9,265

Financing liabilities

 

451

788

420

Other liabilities

 

26,392

25,956

1,253

 

 

101,754

102,034

72,045

Current

 

 

 

 

Short-term borrowings and overdrafts

 

10,291

5,300

15,000

Trade and other payables

 

173,608

182,098

193,130

Financing liabilities

 

533

580

409

Current tax liabilities

 

4,240

2,062

2,464

Dividend payable

 

7,286

-

6,369

Current liabilities

 

195,958

190,040

217,372

Total liabilities

 

297,712

292,074

289,417

Total equity and liabilities

 

499,838

486,536

474,473

 

 

Half year condensed consolidated cash flow statement

For the six months ended 30 June 2015

 

 

Six months

Twelve months

Six months

 

 

ended

ended

ended

 

 

30 June

30 June

30 June

 

 

2015

2015

2014

 

Note

£'000

£'000

£'000

Operating activities

 

 

 

 

Result for the period before tax

 

14,692

30,413

13,957

Adjustments

10

8,905

20,402

8,694

Change in inventories and operating receivables

 

(2,717)

21,371

(9,925)

Change in operating payables

 

(12,330)

(26,736)

(3,189)

Cash inflow from continuing operating activities before taxes paid

 

8,550

45,450

9,537

Taxes paid

 

(1,665)

(2,939)

(1,011)

Net cash inflow from operating activities

 

6,885

42,511

8,526

Investing activities

 

 

 

 

Additions to property, plant and equipment

 

(1,809)

(3,214)

(2,557)

Additions to other intangible assets

 

(1,454)

(2,297)

(642)

Proceeds from disposals of property, plant and equipment

 

-

106

-

Acquisition of subsidiary undertaking, net of cash

 

(11,421)

(32,744)

(897)

Interest received

 

78

148

6

Net cash outflow from investing activities

 

(14,606)

(38,001)

(4,090)

Financing activities

 

 

 

 

Proceeds from share issue

 

1,380

1,438

578

Finance lease payments

 

(244)

(305)

 

Interest paid

 

(1,434)

(3,240)

(1,902)

Dividends paid

 

-

(9,252)

-

Net cash outflow from financing activities

 

(298)

(11,359)

(1,324)

Cash and cash equivalents at beginning of period

 

3,834

2,664

(448)

Net (decrease)/increase in cash and cash equivalents

 

(8,019)

(6,849)

3,112

Cash and cash equivalents at end of period

 

(4,185)

(4,185)

2,664

 

 

 

 

 

Cash and cash equivalents is comprised as follows:

 

 

 

 

- cash at bank and in hand

 

63,606

63,606

72,664

- borrowings and overdrafts

 

(67,791)

(67,791)

(70,000)

Cash and cash equivalents

 

(4,185)

(4,185)

2,664

 

 

 

 

 

Cash conversion key performance indicator

 

 

 

 

Cash inflow from operating activities

 

8,550

45,450

9,537

EBITDA

 

23,447

49,611

22,351

Conversion (%)

 

36.4%

91.6%

42.7%

 

 

Half year condensed consolidated statement of changes in equity

For the six months ended 30 June 2015

 

Attributable to equity shareholders of the Company

 

 

 

 

Share

Share-based

 

 

 

 

 

 

Share

premium

payment

Merger

Hedging

Retained

Non-controlling

Total

 

capital

account

reserve

reserve

reserve

earnings

interests

equity

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

£'000

At 1 January 2014

1,007

56,082

1,050

46,214

(848)

77,366

(570)

180,301

Net result for the period

-

-

-

-

-

10,185

(204)

9,981

Other comprehensive income

-

-

-

-

265

-

-

265

Total comprehensive income/(expense) for the period

-

-

-

-

265

10,185

(204)

10,246

Issue of shares

4

574

-

-

-

-

-

578

Share option charges

-

-

300

-

-

-

-

300

Dividends

-

-

-

-

-

(6,369)

-

(6,369)

At 30 June 2014

1,011

56,656

1,350

46,214

(583)

81,182

(774)

185,056

At 1 January 2015

1,011

56,714

1,653

46,214

(962)

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

46,214

(640)

96,353

(1,259)

202,126

 

 

Notes to the half year condensed consolidated statements

For the six months ended 30 June 2015

 

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 2015 were authorised for issue in accordance with a resolution of the Directors on 16 August 2015.

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 2015 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 2014, 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 2014 were approved by the Board of Directors on 17 March 2015. 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 2015 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 2014 with the exception of the adoption of Improvements to IFRS 2011-2013 Cycle which was effective from 1 January 2015. 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:

Social Housing - services within this segment comprise a full repairs and maintenance service to Local Authorities and other Registered Social Housing Landlords in the UK; 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 Social Housing and Care. The operating result utilised within the key performance measures is stated before amortisation of acquisition intangibles, exceptional items and share-based payments. 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 2015

30 June 2014

 

 

Operating

 

Operating

 

Revenue

result

Revenue

result

 

£'000

£'000

£'000

£'000

Social Housing

366,545

18,203

364,865

15,257

Care

63,477

2,907

63,206

4,912

 

430,022

21,110

428,071

20,169

Long-term incentive plans

-

(700)

-

(950)

Operating result before intangible amortisation

-

20,410

-

19,219

Amortisation of acquisition intangibles

-

(4,519)

-

(4,750)

 

-

15,891

-

14,469

Finance costs, net

 

(1,199)

 

(512)

Tax expense

 

(2,487)

 

(3,976)

 

 

12,205

 

9,981

 

 

 

 

4. Net finance charge

 

Six months

Six months

 

ended

ended

 

30 June

30 June

 

2015

2014

 

£'000

£'000

Interest charge on overdrafts and short-term loans

(1,041)

(1,061)

Interest charge on interest rate swap (effective hedges)

(243)

(387)

Interest charge on interest rate swap (ineffective hedges)

(143)

-

Interest charge on defined benefit obligation

(225)

(300)

Finance costs

(1,652)

(1,748)

Interest income resulting from short-term bank deposits

78

6

Interest income resulting from defined benefit obligation

375

1,230

Net finance charge

(1,199)

(512)

 

5. Tax expense

The tax charge for the six months ended 30 June 2015 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

 

2015

2014

 

£'000

£'000

United Kingdom corporation tax effective rate 17.6% (2014: 20.5%)
and total current tax recognised in Income Statement

3,391

3,833

Adjustment in respect of previous periods

-

-

Total current tax recognised in Income Statement

3,391

3,833

Total deferred taxation recognised in Income Statement

(904)

143

Total tax expense recognised in Income Statement

2,487

3,976

 

6. Dividends

The interim dividend of 3.10p (2014: 2.85p) per share is not recognised as a liability at 30 June 2015 and will be payable on 3 November 2015 to shareholders on the register at the close of business on 16 October 2015. The dividend disclosed within the half-year Condensed Consolidated Statement of Changes in Equity represents the final dividend of 7.15p (2014: 6.30p) per share proposed in the 31 December 2014 financial statements and approved at the Group's Annual General Meeting on 3 June 2015 (not recognised as a liability at 31 December 2014).

 

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

 

2015

2014

2015

2014

 

p

p

p

p

Earnings per share

11.28

9.89

11.16

9.75

Effect of amortisation of acquisition intangibles

4.45

4.71

4.40

4.63

Effect of full tax adjustment

(0.96)

(0.05)

(0.94)

(0.04)

Normalised earnings per share

14.77

14.55

14.62

14.34

 

 

 

 

 

A normalised EPS is disclosed in order to show performance undistorted by amortisation of intangibles and exceptional costs. The Group defines normalised earnings as excluding the amortisation of acquisition 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

 

 

2015

2014

 

 

£'000

£'000

Profit attributable to shareholders:

 

11,460

9,981

- amortisation of acquisition intangibles

 

4,519

4,750

- full tax adjustment

 

(971)

(46)

Normalised earnings

 

15,008

14,685

 

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

 

2015

2014

 

Millions

Millions

Weighted average number of shares in issue:

101.62

100.90

- dilutive effect of share options

1.03

1.50

Weighted average number of shares for calculating diluted earnings per share

102.65

102.40

 

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 2015, 31 December 2014 and 30 June 2014:

 

As at

As at

As at

 

30 June

31 December

30 June

 

2015

2014

2014

 

£'000

£'000

£'000

Financial liabilities

 

 

 

Fair value (Level 2)

 

 

 

Interest rate swaps - effective

(544)

-

(829)

Interest rate swaps - ineffective

(440)

(1,368)

-

Fair value (Level 3)

 

 

 

Contingent consideration in respect of acquisitions

(21,055)

(21,045)

(1,574)

 

(22,039)

(22,413)

(2,403)

 

The fair values of interest rate swaps 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 2015 or the year to 31 December 2014.

The reconciliation of the carrying values of financial instruments classified within Level 3 is as follows:

 

As at

As at

As at

 

30 June

31 December

30 June

 

2015

2014

2014

 

£'000

£'000

£'000

Balance, beginning of period

21,045

1,836

1,836

Increase due to new acquisitions in the period

-

20,000

-

Paid in respect of acquisitions

-

(387)

(282)

Released on re-assessment

-

(424)

-

Unwinding of discounting

10

20

20

Balance, end of period

21,055

21,045

1,574

 

Contingent consideration represents an estimate of future consideration likely to be payable in respect of acquisitions. Contingent consideration is discounted for the likelihood of payment and for the time value of money. Contingent consideration becomes payable based upon the profitability of acquired businesses.

The carrying value of the following financial assets and liabilities is considered a reasonable approximation of fair value:

·   trade and other receivables;

·   cash and cash equivalents; and

·   trade and other payables.

9. Share capital

 

Six months

Six months

 

ended

ended

 

30 June

30 June

 

2015

2014

 

£'000

£'000

Allotted, called up and fully paid

 

 

At 1 January 101,134,142 (2014: 100,661,649) ordinary shares of 1p each

1,011

1,007

Issue of 770,458 (2014: 440,641) ordinary shares of 1p each on exercise of share options

8

4

At 30 June 2015 101,904,600 (2014: 101,102,290) ordinary shares of 1p each

1,019

1,011

 

770,458 (2014: 440,641) ordinary 1p shares were issued in respect of share options exercised. The difference between the nominal value of £0.08m and the total consideration of £1.4m has been credited to the share premium account.

 

10. Notes to the half year condensed consolidated cash flow statement

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

 

Six months

Year

Six months

 

ended

ended

ended

 

30 June

30 June

30 June

 

2015

2015

2014

 

£'000

£'000

£'000

Depreciation

2,395

4,092

2,667

Profit/(loss) on disposal of property, plant and equipment

-

3

1

Intangible amortisation

5,161

13,427

5,214

Share-based payment charges

700

1,070

300

IAS 19 pension movement

(700)

(1,195)

(930)

Net finance charge

1,349

3,005

1,442

Total

8,905

20,402

8,694

 

11. Acquisitions

On 29 May 2015, the Group acquired 100% of the share capital of Care UK Homecare Limited and Care UK Community Care Agency Limited, the corporate entities comprising the Care at Home division of Care UK Limited ("CAH"). The total consideration was £10.2 million in cash comprising a base payment of £9.0 million together with further payments of £1.2 million made in respect of excess working capital. An additional amount of £1.1 million was paid on completion to settle short term borrowings. CAH provides community based care services to over 10,000 service users in England, Wales and Scotland, and it has contracts with over 90 local authorities and Clinical Commissioning Groups (CCGs), employing circa 6,000 staff. The acquisition of CAH significantly increases the scale of Mears within the domiciliary care market, making Mears the second biggest provider in the UK.

 

The provisional effect of the acquisition on the Group's assets was as follows:

 

 

 

 

 

Provisional book and fair value

 

CAH

Other

Total

 

£'000

£'000

£'000

Assets

 

 

 

Non-current

 

 

 

Property, plant and equipment

893

38

931

Deferred Tax asset

971

28

999

Current

 

 

 

Inventories

37

0

37

Debtors

12,660

1,493

14,153

Cash     

-

383

383

Total assets

14,561

1,942

16,503

Liabilities

 

 

 

Current

 

 

 

Creditors

(5,513)

(1,134)

(6,647)

Short term borrowings      

(1,262)

-

(1,262)

Total Liabilities

(6,775)

(1,134)

(7,909)

 

Net assets acquired

7,786

808

8,594

Intangibles capitalised

2,431

200

2,631

Deferred tax liability recognised in respect of intangibles capitalised

(486)

(40)

(526)

Net assets acquired

9,731

968

10,699

Goodwill capitalised

467

-

467

 

10,198

968

11,166

Satisfied by:

 

 

 

Cash

10,198

344

10,542

Fair value of previously held equity interest

-

281

281

Fair value of non-controlling interest

-

343

343

 

10,198

968

11,166

The fair value of assets acquired is considered to be provisional due to the scale and complexity of the transaction. The full exercise to determine the intangible assets acquired is still to be completed, thus these numbers are also provisional.

The Directors consider the value assigned to goodwill represents the benefits to the Group of improvements in the delivery of Social Housing and Housing management.

In the period, the acquisition of CAH delivered revenue and an operating loss before the amortisation of acquisition intangibles of £5.0m and (£0.49m) respectively. For the period to 30 June 2015, had the acquisitions taken place on 1 January 2015, the combined Group full year revenue for the period is estimated at £455.8m. Given the allocation of area and central overheads within the acquired CAH business, the impact upon Group profits cannot be accurately estimated.

 

12. Half year condensed consolidated financial statements

Further copies of the Interim Report are available from the registered office of Mears Group PLC at 1390 Montpellier Court, Gloucester Business Park, Brockworth, Gloucester GL3 4AH or www.mearsgroup.co.uk.

 

13. Principal risks and uncertainties

The nature of the principal risks and uncertainties faced by the Group has not changed significantly from those set out on pages 22 to 25 of the 2014 Annual Report and Accounts and is not expected to change over the next six months. Those risks and uncertainties are separated into three principal risks and five additional risks. The three principal risks are: reputation; people; and health and safety. The five additional risks are: markets; integrity, ethics, anti-bribery and corruption; taxation, legal and regulatory; business continuity; and liquidity.

 

14. Forward-looking statements

This report contains certain forward-looking statements with respect to the financial condition, results of operations and businesses of Mears Group PLC. These statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements.

The Directors confirm, to the best of their knowledge, that this condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the European Union and that the Interim Report includes a fair review of the information required by Rules 4.2.4, 4.2.7 and 4.2.8 of the Disclosure and Transparency Rules of the UK Financial Services Authority.

The names and functions of the Directors of Mears Group PLC are as listed in the Group's Annual Report for 2014.

By order of the Board

 

D J Miles                                                               A C M Smith

Chief Executive Officer                                    Finance Director
david.miles@mearsgroup.co.uk                      andrew.smith@mearsgroup.co.uk

17 August 2015

 

 


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