Mears Group PLC

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

Interim Results for the 6 months ended 30 June 2024

Excellent first half performance and positive outlook

Mears Group PLC, the leading provider of services to the Affordable Housing sector in the UK, announces its interim financial results for the six months ended 30 June 2024 ("H1 2024").

Financial Highlights

·      Revenues up 10% year-on-year to £580.0m (2023: £525.6m)

·      Profit before tax increased by 44% to £30.5m (2023: £21.2m)

·      Operating margin (pre-IFRS 16) continues to strengthen to 5.2% (2023: 4.0%)

·      Strong conversion of EBITDA to Operating cash reflecting quality of earnings

·      Cash conversion at 119% of EBITDA (2023: 117%)

·      Average daily net cash of £66.4m (2023: £57.4m)

·      Normalised diluted EPS up 68% to 22.84p (2023: 13.63p) driven by profit growth and augmented by a 12% reduction in the shares in issue over the last twelve months

·      Interim dividend of 4.75p (2023: 3.70p), an increase of 28%, reflecting continued strong cash performance and Board's confidence in future prospects

·      Completed third share buyback programme; £20.0m cash consideration, 5.6m shares at an average price of 359p, bringing the total of cash returned via buybacks to £53m since May 2023

·      Further Employee Benefit Trust ('EBT') purchases; £6.2m of cash consideration, 1.7m shares at an average price of 365p

* - see Alternative Performance Measures for definitions and reconciliation to statutory measures

Operational Highlights

·    Sustained high levels of customer satisfaction 90% (FY23: 90%)

·    Further progress in employee engagement and workforce retention

·    Positive momentum in bidding pipeline underpins organic growth strategy

o  Securing the award of the new North Lanarkshire Council ('NLC') contract. The new contract opportunity is for a minimum of eight years and is expected to deliver annual revenues of over £125m, a significant increase on the previous contract

·      Solid progress in supporting clients in securing grants through the Social Housing Decarbonisation Fund ('SHDF'). To date, the Group has secured over £50m of funding through Waves 1 and 2, including £10m of funding secured during the first half. The Group is currently submitting applications in respect of Wave 3 and is well positioned

Current trading and outlook

·    The positive momentum achieved in the first six months of 2024 has continued into the second half. The Board now anticipates revenue for the full year of approximately £1.1bn, with adjusted profit before tax in a range of £53m-£55m, ahead of current market expectations.

·    Whilst the Board remains cautious around the expected normalisation of Management-led activities, the enhanced operational and commercial focus is driving improvements to the underlying business to mitigate the profit impact from any revenue reduction in FY25 and beyond.

Lucas Critchley, Chief Executive Officer of the Group, commented:

"Trading in the first half has been excellent across the Group and is reflected in a strong set of interim numbers.  We have made good progress in the first half, with a focus on developing and broadening the range of services we offer to clients. In addition, an increased operational focus, making fuller use of the Group's IT system capabilities, is resulting in operational and commercial improvements, and is evident in the continued progress in operating margins."

Certain information contained in this announcement would have constituted inside information (as defined by Article 7 of Regulation (EU) No 596/2014) ("MAR") prior to its release as part of this announcement and is disclosed in accordance with the Company's obligations under Article 17 of those Regulations.

About Mears

Mears is a leading provider of services to the Housing sector, providing a range of services to individuals within their homes. We manage and maintain around 450,000 homes across the UK and work predominantly with Central Government and Local Government, typically through long-term contracts. We equally consider the residents of the homes that we manage and maintain to be our customers, and we take pride in the high levels of customer satisfaction that we achieve.

Mears currently employs over 5,000 people and provides services in every region of the UK. In partnership with our Housing clients, we provide property management and maintenance services. Mears has extended its activities to provide broader housing solutions to solve the challenge posed by the lack of affordable housing and to provide accommodation and support for the most vulnerable.

We focus on long-term outcomes for people rather than short-term solutions and invest in innovations that have a positive impact on people's quality of life and on their communities' social, economic, and environmental wellbeing. Our innovative approaches and market leading positions are intended to create value for our customers and the people they serve while also driving sustainable financial returns for our providers of capital, especially our shareholders.

INTERIM STATEMENT

INTRODUCTION

The Board is delighted to report another strong period of trading. The Group has continued to deliver strong operational performance, and it is pleasing to see this evident in excellent financial results. Our singular focus on Housing, underpinned by an extensive knowledge and understanding of the market, and a strong empathy for our service users and tenants, is a positive and enables the Group to continue developing its services. The Group has benefited over many years from its market-leading, proprietary IT system and this is an area where we are continuing to invest, recognising that enhancement of the system's functionality is required to support a broader service offering to our clients and to increase the addressable market opportunity.

OPERATING REVIEW

* - see Alternative Performance Measures for definitions and reconciliation to statutory measures

It is particularly encouraging to see strong financial performance in all areas of the business.  Group revenues increased to £580m, an increase of 10%, all organic. Operating margin (pre IFRS 16) was also up strongly at 5.2% (2023: 4.0%) and profit before tax was £30.5m, an increase of 44% (2023: £21.2m).  

The Group continues to see an elevated level of revenue in its Management-led activities, predominantly driven by immigration-related services. As expected, the run-rate stepped down late in the first half, which will be fully reflected in the second-half trading. However, revenues remain at levels that are above those originally envisaged and it remains hard to predict when this will reduce to a normalised level. The normalisation has been slower than expected and the Group is focussed on maintaining operating margins through a period where it will be rebalancing the property portfolio used to house service users.

The Group has seen an extension to the services that it delivers to the MOD, with a new workstream linked to the Afghan Resettlement Accommodation Programme, aiding those individuals and their families who assisted the UK Government, supporting them in their relocation and with accommodation. The mobilisation commenced late in FY23 and went live at the start of FY24 and it is expected that Mears will deliver this service over the next three years.

Securing the award of the new North Lanarkshire Council ('NLC') contract was a particular highlight of the first half. The previous contract was already the Group's largest Maintenance-led contract and, as such, a key contract retention target for the Group. Mears has worked closely with NLC since 2012, with a shared commitment to deliver excellent services to residents. Contract performance had been consistently high. Mears, following a tender process which ran for over two years, was identified as the only viable bidder that could deliver against the Council's ambitious vision. The new contract opportunity is expected to deliver annual revenues of over £125m, doubling the revenues delivered under the former contract. The contract runs for a minimum of eight years, plus a further four years subject to extensions. The new contract will see the Group providing reactive maintenance, statutory compliance, servicing and inspection services, as well as programmes of planned works to the Council's housing assets (approximately 37,000 homes) and corporate assets (approximately 1,200 buildings).

With the exception of the NLC tender, the first half has been a quiet period for new contract bidding. The Group was pleased to renew its contract with Medway Council, a relationship held since 2010. The new contract will see the Group providing reactive maintenance, voids, planned and energy works to the Council's housing stock of over 3,000 units. The new contract, with a base contract length of six years (and up to 12 years subject to extension), carries an increased annual value of £7m.

The Group has previously stated that it expected 2025 to be a busy period of re-bidding, with several existing contracts expiring during that year. It is positive therefore that a number of these contracts have now been extended beyond 2025, reducing the potential distraction from such a high number of rebids in a single period.

There was one new bidding opportunity where the Group had considered itself to be well placed, which was not converted; whilst the Group scored well in terms of its quality submission, the pricing was at a level which was not acceptable. The Group will continue to maintain a disciplined bidding approach and will not compromise on pricing, remaining focused on delivering an operating margin of over 5%.

Management has stated its ambition to see the Group operating margin return to its historical level and has previously detailed the various steps taken to deliver margin improvements, including exiting certain low margin contracts, adopting an increasingly disciplined approach to new contract bidding, and driving commercial improvements. This enabled the headline pre-IFRS 16 operating profit margin to pass through the 5.0% level in the period.  Whilst the underlying performance of the business has strengthened over recent years, the elevated Management-led revenues naturally bring economies of scale and high overhead absorption. The focus of the Board is to maintain the operating margin at this higher level once the current Management-led revenues have normalised.

The business has introduced a reinvigorated commercial review process across the core business which places increased emphasis upon fully utilising the Mears Contract Management ('MCM') frontline system and ensuring strict adherence to business processes, measured by a focussed set of key performance measures. Whilst the commercial review process has enforced a strict regime of compliance with business processes, it has been very pleasing to see the extent to which this process has been embraced by local branch managers. Visible improvements, both financial and non-financial, are being delivered across every branch, while sustaining key elements of local autonomy.

Over recent years, Mears created an end-to-end decarbonisation service to support clients with the huge challenge of improving social housing stock. The Group has continued to perform well in supporting clients in securing grants through the SHDF. The original Government commitment was to provide £3.8bn of funding over a 10-year period and is released in 'waves' over that period. To date, c. £1.0bn of funding has been awarded, of which Mears has secured over £50m of matched funding for its clients, which typically makes-up around 40% of the project value. Mears will deliver around £120m of decarbonisation and retrofit works through 2024 and 2025.  The figures quoted include works secured with Eastbourne Homes, Thurrock Borough Council and Gentoo during the first half, accounting for in excess of £20m of retrofit works. The next tranche of SHDF funding, Wave 3, is estimated to be £1.25bn, and will underpin the Group's decarbonisation activity in 2026 to 2028. The acquisition of IRT in 2022 has been a significant factor in the excellent progress made in securing opportunities in this area.

DELIVERING OUR STRATEGY

During the first half, the Group has placed particular emphasis towards delivering long-term growth to its Maintenance-led activities which has been one area where the Group has fallen short of its previously stated ambitions. The Group is extending its service capabilities to areas such as asset management and compliance where there is a significant and growing market opportunity, driven by increasing regulation. In addition, the Group is also expanding its capacity to support the increasing opportunities around retrofit and other associated planned works. The first half has seen an acceleration of investment in the Group's front-line IT platform, MCM, to support this expansion in services.

During the first half, there has been significant focus placed on updating the Group's long-term Strategic Plan. This review is ongoing and whilst it is too early to communicate the finer detail, the focus thus far has been upon evolving the business to strengthen Mears' capability to deliver revenue and margin growth within our core business, underpinned by the capabilities and resilience of the Group's best-in-class IT system.

No strategic plan can be successfully delivered without a team with both the right skills and capabilities, and a cultural alignment to Mears' values. The focus and investment that the Group has placed in its workforce over several years is vital now, and the Group will continue to invest in this area.

The senior team at Mears have engaged over many years with a greater number of MPs (including prospective MPs) representing the communities in which we serve. A change in Central Government does not detract from this open and transparent way of supporting, listening and communicating with our communities. Relationships do not get created on the back of a singular event or change. The Group recognises that a change of Government will bring new ideas and policies which may impact on the services provided by the Group, however importantly, Mears already holds many positive relationships within the new Government, which has a good understanding of Mears' service capability and values.

CASH FLOW AND WORKING CAPITAL MANAGEMENT

The Group has continued to deliver a strong cash performance, with conversion of EBITDA to operating cash in the first six months of 119% (2023: 117%), a closing adjusted net cash balance of £107.3m (H1 2023: £117.1m, FY23: £109.1m) and, of most significance, an average daily net cash balance of £66.4m (H1 2023: £57.4m, FY23: £76.5m). The strength of the Group's operating cash flows reflects both the underlying quality of the earnings, and the Group's operating systems which underpin a strong cash culture.

DIVIDEND AND CAPITAL ALLOCATION

Given the excellent trading performance of the Group in the first half, coupled with continued strong cash performance, the Board is pleased to declare an interim dividend of 4.75p (H1 2023: 3.70p; FY23 full year: 13.00p) reflecting its confidence in the prospects of the Company. This interim dividend is in line with the Board's stated progressive dividend policy.

As reported previously, the Group has utilised its Balance Sheet strength to fund property acquisitions to support the urgent requirement for additional properties within the Asylum Accommodation and Support Contract ('AASC') contract. The Group purchased properties in FY23 for a cash cost of £22.1m. At 30 June, the Group had invested a further £15.6m. The Board anticipates selling the bulk of properties purchased in 2023 as part of a sale and leaseback transaction, enabling the Group to recycle those monies to acquire further properties. Whilst it is not the Board's long-term desire to carry property assets on the Group's Balance Sheet, this has been an important step in delivering strong performance under the AASC contract and provides shareholders with a solid return when taking a balanced view of the AASC contract and a vital support for a key client.

In February 2024, the Board approved a return of surplus capital of up to £20 million to shareholders, and this was implemented through a buyback programme of on-market purchases. This resulted in the purchase and cancellation of 5.58m ordinary 1p shares at an average price of 359p. Buybacks have reduced the Group's ordinary share count over the last 18 months from 110.9m to 96.1m, a reduction of 13%. In addition, during the first half year, the Directors authorised the Employee Benefit Trust ('EBT') to purchase a further 1.70m ordinary shares at an average price of 365p, for a total cash cost of £6.2m. Since the half year end the EBT purchased a further 1.47m ordinary shares at an average price of 369p, for a total cash cost of £5.4m. The EBT currently holds 4.5m shares eliminating the need to issue new shares in respect of the future exercise of share options.

WORKFORCE

The development of our workforce remains a strategic priority for the Group. As such, we were pleased to maintain our position in the Best Companies survey as one of the Best Big Companies to work for in the UK. The first half of the year has also seen high levels of staff retention and where there are vacancies, we have been successful in attracting high quality applicants to the Group. We put particular emphasis on the recruitment of apprentices and receive thousands of applications for the wide range of roles we have across the Group. We continue to pay apprentices more than the required minimum levels and we are investing towards making the overall apprentice programme best-in-class in our industry.

We are proud of the progress we have made in supporting our workforce around mental health and wellbeing. We benchmarked our workforce with the mental health charity MIND in the first half of 2024 and were pleased to receive a Silver Award, despite this being the first year we have had this important and independent verification. This is obviously helpful to the Group, given the often stressful and difficult challenges faced by Mears staff in delivering our services.

We continue to evolve our structure to support the delivery of the Strategic Plan. We envisage a significant further investment in staff at all levels. We are confident this will further strengthen the Group and support the broadening of our service offer, ensuring that we have the expertise and capacity to support business development and operational delivery.

ESG

We have a very clear ESG plan, which reflects our ambition to be seen as the responsible partner to the public sector. The first half of 2024 has seen the development of the transition plan for our vehicle fleet to EV by 2030. As the Fleet accounts for around 90% of our carbon emissions, this is obviously an important focus of our carbon reduction strategy.

We remain proud of the fantastic work our people do in our communities every day. While we commit to all our staff having two days of volunteering per year, many of our staff do much more, for which we remain very grateful.

OUTLOOK AND GUIDANCE

The Board is pleased with the strong trading performance and this momentum has continued into the second half.

As anticipated, the elevated level of revenue in the Management-led segment has already seen a reduction in the second half, although this remains at levels above the Board's original expectations. The Board has a high level of visibility for the remainder of 2024, anticipating revenue for the full year of around £1.1bn and, given the strong first half performance and continuing momentum, a profit before tax for the full year in a range of £53m-£55m. It remains challenging for the Board to forecast beyond the current year as it is hard to predict when the elevated Management-led activities will return to a normal volume and property mix. The Group is working hard to address the imbalance between the use of short-term contingency accommodation and the use of long-term residential accommodation which will drive this reduction in revenues.

In the Group's Maintenance-led activities, Mears is well positioned. The success in securing the new North Lanarkshire contract will deliver growth in the short-term. The political and economic drivers in the Social Housing market play to Mears' strengths, and the Group continues to develop its service offering to adapt to the changing demands and requirements of its clients. This broader service offering will drive growth over the medium and long-term.

A key focus for the senior management team has been the operating margin, and the first half margin of 5.2% is a significant milestone. It is important that the Group can continue to deliver an underlying margin of 5% (or higher) for the long-term. Notwithstanding this, the Group's Balance Sheet strength provides the business with the freedom to make additional investment to deliver improvements to the business which will bring benefit over the long-term, whilst recognising such operating expenditure can at times bring some short-term margin dilution.

The new Strategic Plan will be finalised during the second half. This will include a detailed review of the Group's capital allocation policy and plans for any further additional returns to shareholders, and the Board looks forward to updating the market on this in due course.

ALTERNATIVE PERFORMANCE MEASURES ('APM')

The Strategic Report includes both statutory and adjusted performance measures. APMs are considered useful to stakeholders in assessing the underlying performance of the business, adjusting for items that could distort the understanding of performance in the year and between periods, and when comparing the financial outputs to those of our peers. The APMs have been set considering the requirements and views of the Group's investors and debt funders among other stakeholders. The APMs and KPIs are aligned to the Group's strategy.

These APMs should not be considered as a substitute for or superior to International Financial Reporting Standards (IFRS) measures, and the Board has endeavoured to report both statutory and alternative measures with equal prominence throughout the Strategic Report and financial statements.

The APMs used by the Group are detailed below with an explanation as to why management considers the APM to be useful in helping users to have a better understanding as to the Group's underlying performance. A reconciliation is also provided to map each non-IFRS measure to its IFRS equivalent.

(i)            Alternative profit measures

A reconciliation between the statutory profit measures and the alternative adjusted measures for both 2024 and 2023 is detailed below.

1    Operating profit and EBITDA measures include share of profits of associates.

2    Includes profit on disposal of £262,000 (H1 2023: £nil, FY 2023: £180,000) and impairment of £800,000 (H1 2023: £nil, FY 2023: £6,223,000).

3    Includes profit on disposal of £nil (H1 2023: £80,000, FY 2023: loss of £101,000).

(ii)           Adjusted operating margin (%) measure

A reconciliation detailing the IFRS 16 profit impact is detailed below:

(iii)          Normalised diluted earnings per share (EPS)

The alternative earnings measure is adjusted to reflect a full corporation tax charge of 25.0% (2023: 23.5%). The Directors believe this aids consistency when comparing to historical results and provides less incentive for the Group to participate in artificial schemes where the primary intention is to reduce the tax charge. A reconciliation between the statutory measure for profit for the year attributable to shareholders before and after adjustments for both basic and diluted EPS is:

(iv)          Adjusted net cash measure

The Group excludes the financial impact of IFRS 16 from its adjusted net cash measure. This adjusted net cash measure has been introduced to align the net borrowing definition to the Group's banking covenants, which are required to be stated before the impact of IFRS 16. Whilst it is pleasing to report a strong cash position at the year end, of much greater significance is the performance throughout the period. The average daily adjusted net cash is a simple average utilising the closing adjusted net cash at the end of each day, and divided by the number of calendar days in the period.

The Group does not recognise lease obligations as traditional debt instruments given a significant proportion of these leases have break provisions which allow the Group to cancel the associated lease obligation with minimal associated cost. A reconciliation between the reported net debt and the adjusted measure is detailed below:

(v)           Cash conversion % measure

In addition to the average daily net cash measure, the Group also measures the cash inflow from operating activities as a proportion of EBITDA and this cash conversion percentage is a key performance measure, reflecting the Group's ability to convert profit into cash. The Board targets a measure of more than 90%, and performance that is greater than 100% is considered outstanding. The strength of the Group's operating cash flows reflects both the underlying quality of the earnings, and the Group's operating systems which underpin a strong cash culture.

Half-year condensed consolidated statement of profit or loss

For the six months ended 30 June 2024

All results are in respect of continuing operations.

The accompanying notes form an integral part of these condensed consolidated financial statements.

Half-year condensed consolidated statement of comprehensive income

For the six months ended 30 June 2024

All results are in respect of continuing operations.

The accompanying notes form an integral part of these condensed consolidated financial statements.

Half-year condensed consolidated balance sheet

As at 30 June 2024

The accompanying notes form an integral part of these condensed consolidated financial statements.

Half-year condensed consolidated cash flow statement

For the six months ended 30 June 2024

All results are in respect of continuing operations.

The accompanying notes form an integral part of these condensed consolidated financial statements.

Half-year condensed consolidated statement of changes in equity

For the six months ended 30 June 2024 (unaudited)

The accompanying notes form an integral part of these condensed consolidated financial statements.