Mears Regulatory News (MER)

Mears Group PLC

("Mears" or "the Group")

Final Results

For the Year Ended 31 December 2012

Mears Group PLC, the provider of services to the Social Housing and Care sectors in the UK, is pleased to announce record results for the year ended 31 December 2012.

*Stated before amortisation of acquisition intangibles, non-recurring and exceptional costs

** Stated before amortisation of acquisition intangibles, exceptional costs and the losses generated by Morrison following its acquisition together with an adjustment to reflect a full tax charge

Summary of Operations and Outlook

Financial:

·; New contract wins total £443m: Social Housing awards in excess of £380m with a conversion rate of 32% and Care awards of £63m with a conversion rate of 57%

·; Record revenue of £679.5m (2011: £589.0m), growth of 15%, following the acquisition of Morrison in November 2012

·; Excellent profit to cash conversion at 118% (2011: 85%)

·; Strong balance sheet with average net debt of £57.0m (2011: £58.5m), and net debt at 31 December of £12.4m (2011: £13.4m)

·; Progressive dividend policy, increasing by 7%, in line with earnings, to 8.00p per share (2011: 7.50p)

Social Housing Division:

·; Transformational acquisition of Morrison

·; Record revenue of £504.7m (2011: £415.0m), growth of 22%

·; Core maintenance revenue up 32%, including organic growth of 19% (2011: 14%)

·; Continuing high levels of customer satisfaction

·; Operating margin (before losses from Morrison) at market leading levels of 5.7% (2011: 5.8%) during a period of significant new contract mobilisations

Care Division:

·; Revenue increased by 4% to £112.6m (2011: £108.5m)

·; Operating margin increased to 8.3% (2011: 8.0%)

·; Continued very strong regulatory compliance

Outlook:

·; Order book at £3.8 billion (2011: £2.9 billion)

·; Significant pipeline of new bidding opportunities over the next 12 months

·; Visibility of 88% of consensus forecast revenue for 2013 and 66% for 2014

David Miles, Chief Executive, Mears Group said:

"2012 has been the most successful in the Group's 17 year history. We delivered record revenue and achieved significant growth. The first half year saw an intense period of new contract mobilisations. In the second half, we reinforced our market leading position in Social Housing with the transformational acquisition of our most significant competitor, Morrison. Since the acquisition, we have received positive feedback across Morrison's customer base and we are at an advanced stage in restructuring the acquired business. As anticipated, integrating Morrison is realising valuable synergies, as the best practices from both businesses are combined to benefit customers and tenants alike.

"I am delighted that we continue to achieve high levels of service delivery and customer satisfaction. The quality of our service continues to be a fundamental differentiator, which underpins our contract bidding success. We have taken a large number of mobilisations and a major acquisition in our stride this year; we have maintained the record levels of satisfaction achieved in 2011 and this is testament to the strength of our business model, operational discipline and commitment to customers and their tenants.

"I believe that the opportunities for us in social housing are stronger today than at any time since I joined the business. In Care, as a robust high quality provider at the forefront of change in the sector, we remain very well placed strategically as the current changes in the market play out."

 A presentation for analysts will be held at 9.30 a.m. today at the offices of Investec, 2 Gresham Street, London, EC2V 7QP.

About Mears www.mearsgroup.co.uk (tickers: MER.L MER.LN MER.PL)

Mears is a leading social housing repairs and maintenance service provider to Local Authorities and Registered Social Landlords in the UK and now commands a leading position in the UK Local Authorities' outsourced care market, providing personal care services to people in their own homes.

Mears employs in excess of 14,000 people and provides maintenance and repairs services to in excess of 10% of the UK social housing stock. Mears also provides over 160,000 hours of care to 20,000 service users each week.

Chairman's Statement

I am delighted to report record results with revenues of £679.5m (2011: £589.0m) which comprises growth in Social Housing and Care of 22% and 4% respectively. Profit before tax prior to inclusion of Morrison increased to £33.6m* (2011: £31.5m). The normalised diluted earnings per share on the same basis increased by 7% to 27.75p* (2011: 26.01p). The Board is recommending a final dividend of 5.70p per share (2011: 5.35p) making 8.00p per share for the year, an increase of 7%.

* Before acquired intangible amortisation, exceptional costs and the trading loss of the recently acquired Morrison

I am particularly pleased with our continuing strong working capital management, with cash generated from operations as a proportion of EBITA amounting to 118% (2011: 85%). Cash management continues to be a key focus within the Group.

The year 2012 saw the transformational acquisition of Morrison, our most significant social housing competitor. Mears identified significant strategic and operational synergy benefits from the acquisition of Morrison. This acquisition reinforces Mears' position as the leading Social Housing repairs and maintenance provider in the UK and sees the Group's order book increase to £3.8bn (2011: £2.9bn). Mears has an excellent track record in terms of service delivery and profitability alongside a strong track record of turning around, integrating and extracting substantial value from acquired businesses.

In our Care business, the focus has been to balance delivering high quality service at sustainable margins with service innovation. In 2012, this approach continued to resonate with both our existing and new customers. Moreover, we are starting to see new contracts emerge which reflect the fundamental challenges in care. Whilst this evolution has been slower than we and many of our stakeholders would like, it does appear to have gathered momentum in 2012. Through the course of the year, we have been at the forefront of change in the sector and remain strategically well placed to take advantage of the current and long term trends in care.

Record Order Book

It should be remembered that Mears brought about a significant change in how Social Housing work is procured through a partnership arrangement. Including Morrison, these partnerships now underpin an order book at £3.8 billion. The demand for our services continues to be very strong, with a bid pipeline in excess of £3.0bn and with immediate bidding opportunities for contracts due to start within twelve months in the region of £1.7bn. We enter the current year with visibility of 88% of the £902m consensus revenue forecast for 2013. Moreover, we have visibility over 66% of the £955m consensus revenue forecast for 2014 which demonstrates our strong position and the long-term nature of our business.

We are well placed to benefit from the immediate bid pipeline and the wider contracting opportunities in our core markets. Our relationship with our customers continues to be strong and our partnering ethos is recognised and appreciated widely. We are delighted that customers choose Mears in awarding, as well as renewing, contracts to the Group across an array of activities.

Committed employees

I commend our employees for their commitment and energy throughout another significant year for the Group. I continue to be impressed by the quality, professionalism and loyalty displayed by our people. We will return this commitment with appropriate investment in their development. Given we work in some of the most deprived communities in the UK, we take our responsibilities regarding employment extremely seriously.

We currently have almost 400 people enrolled in Apprenticeship and Job Experience programmes within Mears. We are proud of the many practical and local opportunities we are able to create in these challenging times.

Positive outlook

We operate in robust and defensive markets where spend is largely non-discretionary. We continue to place great emphasis on winning good quality contracts that can provide clear and sustainable margins, whilst at the same time providing a first class service and value offering for our clients. We will continue to differentiate ourselves through, tenant-centric customer service and proposition innovations developed in partnership with our customers, combined with robust finances.

We expect our Social Housing business to continue to grow through further contract wins, underpinned by our market leading service delivery and, where appropriate, regional in-fill acquisitions. In our Care business, we will continue to move further up the acuity chain, principally through acquisition. This will increase our ability to respond to growing opportunities from health and social care outsourcing and the implementation of new localised commissioning models. We will look to enhance and broaden our offering through partnerships and acquisitions.

I look forward to bringing you news of further successes during the coming year.

Bob Holtbob.holt@mearsgroup.co.ukChairman

Chief Executive's Review

Group performance

This has been another year of significant progress. We have seen the Group reinforce and further consolidate its market leading position in the Social Housing sector with the transformational acquisition of Morrison, our most significant competitor. The acquisition of Morrison enhances Mears' order book in terms of both volumes and contract profile and strengthens our ability to secure larger tenders. The continued focus on providing first class, value for money customer service through our partnership ethos has ensured a better than expected retention rate on the acquired Morrison business as well as driving further new contract bidding success.   

Morrison had encountered significant operational challenges having pursued an aggressive growth strategy at the expense of operating margin and service delivery. Whilst in aggregate the Morrison contracts that we acquired are currently generating an operating loss, we are making good progress in moving towards extracting value from these contracts. Mears has a strong track record of turning around, integrating and extracting substantial value from acquired businesses, along with an excellent track record in terms of service delivery and profitability. Mears identified significant strategic and operational synergy benefits from the acquisition of Morrison. The period since acquisition has seen a positive reaction to the transaction across the Morrison client base. We are now at an advanced stage in restructuring the senior operational management and social housing support functions. Whilst this has, as anticipated, realised significant financial synergies, it has also provided an opportunity to combine the strengths of both organisations and enhance operational delivery and control. Our operational, financial and development platforms are stronger than ever.

At Group level, revenues increased by 15% to £679.5m (2011: £589.0m), with organic growth of 7%. Operating profit before the acquisition of Morrison increased to £33.7m** (2011: £33.6m**) with operating margin reducing to 5.3%** (2011: 5.7%**), predominantly impacted by the operating losses of £1.6m (2011: profit £1.3m) of the Other Services division.

** Before acquired intangible amortisation, exceptional costs and share based payments.

Divisional performance

Social Housing

The 2012 financial year has seen the most intense period of new contract mobilisations in the Group's history with the commencement of nine new Social Housing contracts. Each mobilisation brought the additional challenge of a new customer relationship. The mobilisation phase of each of these contracts is now complete. Typically the Group anticipates a low margin from a new contract during its mobilisation phase, this being a time when it is critical that the necessary processes are put in place, whilst at the same time focusing on excellent customer service. Whilst these mobilisations gave a reduced margin in the first half of the year, operating margins bounced back in the second half of the year and the blended full year margin was in line with normal levels.

The Social Housing business has continued to perform well. The Decent Homes programme is now substantially complete. Mears has seen over £90.0m of annualised Decent Homes revenues drop away over the last three years, with 2012 being the final drop-off with a reduction of £32.1m in revenues.  Capital works, including Decent Homes, now contributes less than 10% of Social Housing revenues. It is pleasing that over the period in which the Decent Homes revenue has fallen away, the Group has successfully replaced this revenue with higher quality, non-discretionary maintenance revenues. Our core Social Housing maintenance operations reported organic growth of 19%.

The Social Housing bid pipeline remains robust which further supports our confidence that we can continue to deliver solid organic growth in both the short and medium term. The impact of the acquisition of Morrison added revenues of £45.0m in the year. The Group has been delighted at the positive reaction of Morrison customers to the acquisition. Annual revenues from Morrison in the future are now anticipated to be in excess of £200m. The Operating loss of £2.3m generated by Morrison in the period between 7 November 2012 and the year end was in line with expectations. The Group is optimistic that it can deliver synergies in excess of the £8.0m originally forecast as a result of combining the Social Housing divisional support functions. Furthermore, the Group anticipates increased profitability through enhanced operational delivery, migration to the Group's social housing IT platform and better procurement.

I am delighted that our Social Housing division continues to report improving service delivery notwithstanding the high standards already being achieved. The proportion of customers rating our service as excellent stands at 80%. (2011: 80%). Typically others in the sector measure only satisfaction whereas our drive has always been for excellence. We have also seen the lowest ever level of complaints as a percentage of work carried out across all work types, in the period, at 0.29% (2011: 0.30%). Service quality remains our key differentiator. Whilst the Group is delighted at the strong performance delivered in terms of both new contract bidding and ultimately the financial outputs, it is important to remember that it is service quality that has always underpinned our success. I want to particularly highlight that the repairs and maintenance arm of Mears became the first major private sector contractor in the housing industry to win the highly accredited Government Customer Service Excellence standard. The accreditation covers all of our repairs and maintenance branches in the UK.

Care

The Board is pleased with the performance of the Care division in terms of both the quality of service delivery and its solid financial performance. The Care division reported growth of 4% with revenues increasing to £112.6m (2011: £108.5m). This growth in Care revenues includes the full year impact of the acquisition of Choices Community Care (in administration) which came into the Group in August 2011. The underlying organic growth was 1%. We had 100% contract retention in 2012 and over half our new work was procured from new customers. At the same time, we increased our already impressive operating margin to 8.3% (2011: 8.0%), a tremendous achievement given that the Care sector remains a challenging environment. The growth in margin has been achieved through identifying and delivering additional synergies, together with a change in sales mix as the division delivers some higher acuity and higher margin services.

2012 has seen us respond to, and in some cases lead, industry change and service innovation. We have leveraged our Choices acquisition to address supported living work, for instance, helping people with learning disabilities. We have led the way on the development of the first care contracts where vendor payments are based on the quality of the outcome for the recipient rather than the quantum of the inputs; clearly, these arrangements favour a high quality service delivery focused business such as ours. This has been a key area of focus for Mears given our experience within Social Housing of this type of commissioning, which is much better suited to rewarding quality. Whilst still very much in the minority as a form of commissioning, it is pleasing to see that the door has now been opened. We have secured work directly from the NHS in 2012 in complex areas, such as coordinated hospital discharge programmes. This reflects the trend towards the joint commissioning of NHS and Local Authority services. We believe that a market leading approach to service quality and innovation through the application of technology puts the Group in a strong position. Whilst the immediate budget pressures and structural change have stalled short term market growth, we continue to see this sector as providing significant medium and long term growth opportunities.

Other Services

Mears' Other Services predominantly comprises its Mechanical & Electrical (M&E) operation. This division has experienced particularly challenging trading conditions during the second half of 2012 which show no signs of abating in 2013. The M&E environment is currently highly competitive and pricing is keen. The Group will not change its pricing model in response to the current challenges; instead the division is being down-sized to match the orders currently secured. Notwithstanding this, the M&E pipeline continues to include a number of significant opportunities. The M&E division reported an operating loss of £1.6m (2011: profit £1.3m). Whilst the financial performance of the M&E division is disappointing, the Group is responding to these challenges to ensure that this division does not continue to trade at a loss for an extended period.

Social Housing - new contract bidding

The Group has continued to experience significant success in winning new contracts. In Social Housing we have won 32% (by value) of all contracts bid, with a total value in excess of £380 million. The most significant awards include:

New contract bidding - Care

In Domiciliary Care, contract bidding success rate (by value) of all contracts bid was 57% of all contracts bid, amounting to a total value of £63 million, including:

We have continued to develop our partnership thinking into new areas. Our work with Tunstall on the implementation of the largest Telecare project in the UK has gone very well and is attracting interest from other Councils following the Government's stated intent to drive the use of Assistive Technology.

We have also secured a contract with Allianz Global Assistance who is looking to add Personal Care at Home onto Personal Accident Plans, so in the event of an accident, not only will the customer receive a cash pay-out, they will also receive physical support with a Personal Care at Home package to support them through their rehabilitation period. Whilst we have not placed a value upon this within our order book, it is potentially a significant new opportunity.

Energy Saving and Environmental Opportunities

The Government continues to look for solutions to tackle Fuel Poverty and Carbon reduction challenges in housing. The flagship policy for this is the Green Deal, launched in January 2013, which includes a new Energy Company Obligation (ECO), to replace the existing CESP and CERT schemes.

January 2013 saw us completing one of the largest Fuel Poverty schemes in the UK within the Charlton Triangle in London. This £15m scheme has reduced the average fuel bill of a tenant by between £300 and £660 per year. Large schemes are also being conducted in Preston and Glasgow, where Mears has obtained funding for the benefit of our clients in these two cities.

We have already obtained the key accreditations needed for us to participate fully in this growing opportunity, particularly around ECO and are forging strong relationships with Energy providers to ensure our Clients get the maximum benefit possible from this new funding source. Given our scale and reach, we are well placed to fulfil our ambition to become the leading provider of ECO based solutions to the Social Housing Sector.

Sector Developments

Social Housing

In 2012 those Local Authorities which have retained their council housing function saw the finance of their operations being brought onto a similar footing to that of housing associations. This new decentralised decision making has put local authorities in the driving seat for determining the future of the direct local housing offer they can make to their communities. This may, in 2013 and beyond, lead to an increasing level of new housing. Housing associations together with the Government's Homes and Communities Agency have been acclimatising to the new affordable rent regime. This hybrid rental approach, which bridges the social rent to private rent gap, is a challenge to their business plans. It is the private rental sector that currently promises to respond to the future housing needs of the country in the most flexible way. Mears will continue its active exploration of this dynamic area of the housing market building on the arrangements we have in place servicing Fizzy Living - Thames Valley Housing's private renting programme.

Both Local Authorities and Housing Associations will be preparing for the impact of the Welfare Reform which will in many cases change the relationship between tenants and landlords. We will be looking at how we can assist in making the new arrangements work for both parties. As in previous years we will be very careful with regards to which opportunities we pursue to ensure that we maintain our commitment to high quality, reliable services to both clients and tenants alike.

Care

Across the group we continue to see both the advantages of joined up service provision that pulls agencies and partners together across the health, care and housing sectors and the shortfalls when this approach is absent. We appreciate that the Government, and many progressive agencies, share this objective but it is not yet a common reality.

The nature of our nation's ageing population means that the Government's role in the provision of Care services will always be core to its success. There are currently 10,000 people aged over 100 in the UK. This figure is estimated to grow to in excess of one million by 2070. Although this is recognised across the political spectrum we are still some way away from the new financial policy framework that the Dillnot review advocated in late 2010.

We are acutely aware that public spending is being necessarily constrained and that Local Authorities are in a tough position, faced with demand from their communities, yet having increasingly constrained resources. Despite this we have seen signs of real and active consideration of value for money, as opposed to just unit cost, through outcome based care commissioning and we have witnessed the positive impact this has had on individual clients.

These enlightened approaches are still not commonplace. In this regard we were pleased to support the Local Government Information Unit (LGIU) on a joint study, published in the autumn, on this topic - Outcomes Matter: Effective Commissioning in Domiciliary Care. This research re-affirmed that, although there is increasing awareness of the benefits of outcome focused care packages, day to day practices are still input dominated.

In these constrained times we expect Care and Repair services to become more valuable as they intervene early, are highly cost effective and are a simple and straightforward way of enabling vulnerable and older people to be assisted to either remain comfortably in their own homes or sensibly move to more appropriate housing.

An example of this approach is the innovative housing options service Mears delivers across Dorset in association with the County Council, the six District Councils and in partnership with the NHS and Adult Social Care. We provide support, information and advocacy to help people make an informed decision on their future accommodation needs. Should this result in them deciding not to move we can often help them to stay within their own homes by installing aids and adaptations to make their current home more manageable for the future.

Safety, health and environment (SHE)

2012 not only proved to be a safer year than 2011 but we also trained more operatives and managers, improved our re-cycling rates and reduced our waste costs. In 2012 we introduced new systems and procedures in response to new legislation and raised the KPI targets for all SHE staff. We achieved the RoSPA Presidents Award for 10 consecutive gold medals. Whilst the number of employees increased, our accidents have reduced by around 8%.

Through our partnership with Network Waste, we have improved our recycling rates to over 90%.

Through development of in-house courses, not only are we now bringing more specific courses to our workforce but also reducing our training costs. We have continued to increase our focus on safety within our Care division thorough enhanced training together with new procedures and monitoring systems. Over the course of the year, the SHE department has delivered over 19,000 hours of Safety training to both Mears' employees and clients' staff.

Training and people development

In 2012 we cemented our commitment to developing our people by establishing a new corporate learning & development strategy and central team. As we continue to grow, the strategy will ensure that best practice is shared across the business, that activity represents value for money and that we have structured plans in place that will support the needs and future growth of the Group.

We will continue to invest in the future generation of success. At the beginning of 2013, Mears employed almost 400 apprentices, boosted by the acquisition of Morrison. As the 2012 graduate trainees prepare to complete their programme, we have committed to a 2013 intake of high potential people who will benefit from two years of intensive development to prepare them for roles as future leaders of our business. In addition, our corporate strategy includes the establishment of an internal talent scheme which will recognise the potential of our existing workforce, and maximise the retention of our most promising people.

We are delighted to have been awarded National Skills Academy Status by the Construction Industry Training Board in five regions of the UK. This will attract significant additional funding each year for three years through a programme of planned skills development. This includes supporting our supply chain to develop their capability to support the Group through formal qualifications and improved leadership and management skills. It also complements our existing comprehensive programme of community investment by recognising the value of work experience, apprenticeships and support for school and college students.

In early 2013 we will re-launch our technical training centre from a Welwyn base. The centre provides up-skilling across a wide range of trade disciplines in a cost-effective way, helping to increase productivity, quality and efficiency.

We are also introducing a 'Future Leaders scheme' to encourage the stars of the future whether they are graduates or non-graduates to join the Mears family. They will spend time in various areas of the business, be mentored by existing leaders and this will form part of our commitment to succession planning and talent development within the Group.

Our communities

We have operations throughout the UK and all our branches are dedicated to helping to improve people's lives. We work in some of the most socially deprived areas of the country and so we feel a strong sense of responsibility toward the wider community. Helping a community to thrive increases the quality of life for residents and supports community cohesion and development. Commitment to local communities is seen at every level of the organisation and during 2012 our staff volunteered over 22,000 hours and supported around 650 community projects across the UK.

David Milesdavid.miles@mearsgroup.co.ukChief Executive Officer

Financial Review

Financial performance

This Financial Review provides further key information in respect of the financial performance and financial position of the Group, to the extent that this is not already covered within the Chief Executive's Review.

Exceptional costs

Costs of £2.9m (2011: £3.1m) were considered to be non-recurring and exceptional in nature. Notably:

·; During the year, the Group completed the acquisition of Morrison Facilities Services Limited. Transaction costs associated with this acquisition amounted to £0.8m and were expensed in the period. The costs relating to the acquisition would previously have been capitalised and included within goodwill.

·; The Group incurred integration and restructuring costs of £2.0m relating to the acquisition. The Group identified significant synergies from the combination of two leading Social Housing maintenance providers. The majority of the efficiencies are expected to be generated from the combination of the two support service functions. The costs incurred relate to redundancy costs together with office closure costs. Given the acquisition was completed late in 2012, much of the cost of integration will be incurred in 2013. As previously signalled, we anticipate the final cost of integration across both years will be in the region of £8.0m

Amortisation of acquisition intangibles

A charge for amortisation of acquisition intangibles of £8.0m (2011: £7.8m) arose in the period. This charge relates to a number of acquisitions in both Social Housing and Care over recent years. . The acquisition of Morrison has resulted in the identification of acquisition intangibles of £20.3m. This resulted in a small increase in amortisation in the period given that the acquisition was completed late in the year. The charge in 2013 will increase significantly reflecting a full year effect.

Net Finance income (charge)

Net finance income of £0.2m has been recognised in the year (2011: £2.1m charge).

The finance cost in respect of bank borrowings was £2.7m of which £2.6m related to existing activities (2011: £2.4m). Whilst the Group has provided debt funding to complete the acquisitions of Choices Community Care in August 2011 and Morrison Facilities Services in November 2012, together with the additional working capital required to fund the organic growth achieved during the period, it is pleasing that the average net debt has reduced to £57.0m (2011: £58.5m). Whilst the Group has reported a small increase in the cost of bank borrowing, this charge represents a positive variance of £0.5m to management original forecasts and is reward for the strong working capital performance through the period.

The net finance income in respect of the defined benefit pension scheme was £3.0m of which £2.5m related to existing activities (2011: £0.3m). This income is broadly in line with expectations. The Group reported an income of £0.8m at the half year and this income has increased further during the second half year reflecting the increasing number of defined benefit pension schemes to which the Group is participating following the high number of new contract start-ups.

A finance cost in respect of bank borrowings was £0.1m and finance income in respect of defined benefit pension scheme was £0.5m in the period since 7 November 2012 relating to the acquired Morrison activities.

In 2013, with the adoption of the revised pension accounting standard (IAS19R), the Group will be required to restate the 2012 income statement which will result in a reduction in the net finance income in respect of defined benefit pension schemes from by £2.3m to £0.7m. The net finance income will reduce from £0.2m to a charge of £2.1m.

Tax expense

A tax charge of £1.5m has been provided (2011: £3.7m). The effective current corporation tax rate recognised in the income statement before adjustments for deferred tax is 15.3% (2011: 22.1%). The effective current corporation tax rate is significantly lower than the headline rate due to a deferred tax credit in respect of the amortisation of acquisition intangibles of £1.1m, a non-taxable pension benefit of £3.0m and a corporation tax deduction in respect of the exercise of share options of £7.5m.

Earnings per share (EPS)

The normalised diluted EPS, which allows for the potential diluting impact of outstanding share options, before the impact of the Morrison acquisition, increased by 6.7% to 27.75p (2011: 26.01p). The normalised diluted EPS after the impact of the Morrison acquisition increased to 26.06p (2011: 26.01p). Normalised earnings are stated before exceptional costs and exclude the amortisation of acquisition intangibles together with an adjustment to reflect a full tax charge of 24.5% (2011: 26.5%). We believe that this normalised diluted EPS 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.

Dividend policy

The Board remains confident in the future opportunities in its growth markets and consequently expects to be able to continue to follow a progressive dividend policy. The Board has recommended a final dividend of 5.70p per share which, combined with the interim dividend, gives a total dividend for the year of 8.00p (2011: 7.50p), a 6.7% increase. The dividend is payable on 2 July 2013 to shareholders on the register on 14 June 2013. The dividend is covered 3.25 times by normalised diluted earnings per share.

Cash performance

The efficiency with which the Group manages working capital remains a cornerstone of our business. The Group's conversion of operating profit for the year before tax and pre amortisation to cash in the period was 118% (2011: 85%). The Group has consistently set high standards of working capital management and high levels of conversion of profit into cash. During a period which has delivered significant organic growth, the cash performance has been excellent.

Our net debt position at 31 December 2012 was £12.4m (2011: £13.4m). Whilst the year end cash position was pleasing, typically the accounting period end reports 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. The average net debt over the year, adjusted for the impact of Morrison, amounted to £57.0m (2011: £58.5m). The acquisition of Morrison utilised £16m in respect of consideration and a further £4m in respect of working capital. Given the timing of the non-trading outflows, a better indicator of core debt at the year-end is in the region of £75m (2011: £60m). We have always been, and remain, conservative in respect of our appetite for debt.

The Group has a £120m unsecured revolving credit facility and an additional accordion mechanism allowing the facility to be increased to a maximum of £160m. This facility, which runs to July 2016, provides sufficient funding headroom for the Group. The Group continues to enjoy a strong relationship with both its bankers, Barclays and HSBC.

Balance sheet

Acquisitions and intangible assets 

The value of goodwill and other identified intangibles carried within the balance sheet is £163.6m (2011: £127.5m). The significant increase during the period was as a result of the acquisition of Morrison with consideration of £24.0m being paid in return for tangible net liabilities of £14.6m. The Morrison intangible asset was recognised, net of deferred tax, at £15.6m with the remaining excess of £23.1m recognised within goodwill. A total of £8.0m (2011: £7.8m) of amortisation was charged to the income statement during the period.

Other trading balances

The Group capital expenditure of £3.9m (2011: £4.0m) relates to IT hardware, other office equipment and the refurbishment of new office premises. Predominantly, all our plant and machinery is hired and motor vehicles are subject to operating leases and hence are not included within capital expenditure or recognised as an asset within the balance sheet. In addition, development expenditure was incurred in developing the in-house IT platform of £1.1m (2011: £1.4m).

A balance of £2.8m (2011: £2.4m) is included within non-current trade and other receivables. This relates to sales retentions in relation to our M&E activities within our Other Services division. This is normal practice within that sector, where a small percentage of the contract sum is withheld for a short period. This is typically settled twelve months after the completion of works.

Trade receivables and inventories increased to £194.9m (2011: £140.0m) and trade payables have increased to £199.0m (2011: £104.0m). Both these increases are driven predominantly by the acquisition of Morrison. Excluding the impact of Morrison, trade receivables and trade payables increased by 8% and 12% respectively which have increased as a result of the organic growth achieved by the Group.

Total shareholders' equity rose by £17.0m to £168.8m at 31 December 2012. The increase in net assets is the result of a combination of retained profits together with the issue of 3.4m shares on the exercise of share options and a further 2.8m shares to part-fund the acquisition of Morrison.

Pensions

The Group participates in two principal Group pension schemes (2011: one) together with a further 28 (2011: 14) individual defined benefit schemes where the Group has received Admitted Body Status in a Local Government Pension Scheme. At the point of tendering for new contract opportunities, the Group seeks to minimise its exposure to future changes in the required pension contribution rates and to future liabilities resulting from scheme deficits.

The increase in the asset in respect of the defined benefit pension schemes relates to the asset acquired as a result of the acquisition of Morrison Facilities Services Limited. The IAS19 actuarial valuations for the other schemes as at 31 December 2012 reported a reduction in the pension liability by £0.1m.

The Group continues to comply with a repayment plan with the trustees of the Mears Group scheme at £0.9m per annum for a period of nine years with a view to the scheme being fully funded by 2020.

Corporate Governance

Mears has reported strong growth over its 17 years as a listed company. Fundamental to this success has been our ability to identify and manage both risks and opportunities in a constantly changing environment. Over the course of 2012, significant resource has been directed towards corporate governance, with particular focus being given to significantly enhancing the Group risk management process that will ensure a uniform approach across all our business to identify and mitigate risk.Andrew Smithandrew.smith@mearsgroup.co.ukFinance Director

The 2012 'Total' column represents the IFRS reported results.

The accompanying notes form an integral part of this preliminary announcement.

The accompanying notes form an integral part of this preliminary announcement.

The accompanying notes form an integral part of this preliminary announcement.

The accompanying notes form an integral part of this preliminary announcement.

The accompanying notes form an integral part of this preliminary announcement

Notes to the preliminary announcement

1. Corporate information

Mears Group PLC is a public limited company incorporated in England and Wales whose shares are publicly traded. The preliminary announcement of the company and its subsidiaries ('the Group') for the year ended 31 December 2012 was authorised for issue in accordance with a resolution of the Directors on 12 March 2013.

2. Basis of preparation and accounting principles

(a) Basis of preparation

The preliminary announcement contains extracts from the full financial statements.

The full financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The financial statements are prepared under the historical cost convention.

(b) Significant accounting policies

The accounting policies remain unchanged from the previous year except for the adoption of amendments to IFRS7 'Financial Instruments Disclosures' which has not had a material impact on the financial statements of the Group.

3. Segment reporting

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

The Group operated three operating segments during the year:

• Social Housing - services within this sector comprise a full repairs and maintenance service to Local Authorities and other Registered Social Landlords;

• Care - services within this sector comprise personal care services to people in their own homes; and

• Other - services within this sector comprise provision of design and build M&E services.

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

The principal financial measures used by the chief operating decision maker and the Board to review the performance of the operating segments is that of revenue growth and operating margins in both the core divisions of Social Housing and Care. The operating result utilised within the key performance measures is stated before amortisation of acquisition intangibles, exceptional costs and share-based payments.

All revenue and all non-current assets arise within the United Kingdom. All of the revenue reported is external to the Group. No revenue in respect of a single customer comprises more than 10% of the total revenue reported.

Reconciliation to the Consolidated Income Statement

4. Profit for the year before tax

Profit for the year before tax is stated after:

5. Finance income and finance costs

6. Exceptional costs

Exceptional costs incurred in the period which are considered non-trading or non-recurring in nature are detailed below:

The costs of integration in the period relate to the integration of the Morrison and Mears Social Housing businesses.

7. Tax expense

Tax recognised in the Income Statement:

8. Dividends

The following dividends were paid on ordinary shares in the year:

The proposed final 2012 dividend of 5.70p per share has not been included within the consolidated financial statements as no obligation existed at 31 December 2012.

9. Earnings per share

A normalised EPS is disclosed in order to show performance undistorted by amortisation of intangibles. The Group defines normalised earnings as excluding the amortisation of acquisition intangibles, exceptional costs and adjusted to reflect a full tax charge of 24.5%. The profit attributable to shareholders before and after adjustments for both basic and diluted EPS is:

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.

The weighted average number of shares in issue excluding those issued in respect of the acquisition of Morrison was 87.73m and the weighted average number of shares for calculating diluted earnings per share excluding those issued in respect of the acquisition of Morrison was 91.29m.

10. Acquisitions

On 7 November 2012 the Group acquired the entire issued share capital of Morrison Facilities Services Limited for a total consideration of £24.1m which was satisfied by £16.1m in cash and the issue of 2,833,489 ordinary 1p shares. The fair value of shares issued was determined using the closing price on the acquisition date of 282.3p. The effect of the acquisition on the Group's assets was as follows:

The Morrison Facilities Services Limited intangible asset is recognised and valued at £20.3m. This represents the expected value to be derived from the acquired customer related contracts and associated relationships. The value placed on these customer relationships is based on the expected cash inflows over the estimated remaining life or each contract. The cash flows are discounted using a rate of 14.1% which the Directors consider is commensurate with the risks associated with capturing returns from the customer relationships. The estimated life is assumed to be the average remaining period of the contracts over which earnings from the customer relationships are expected to be generated.

11. Publication of Non Statutory Accounts

The financial information set out in the announcement does not constitute the group's statutory accounts for the years ended 31 December 2012 or 2011. The financial information for the year ended 31 December 2011 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under s498 of the Companies Act 2006. The statutory accounts for the year ended 31 December 2012 will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies.

The Listing Rules of the UK Listing Authority (LR 9.7A.1) require that preliminary unaudited statements of annual results must be agreed with the listed company's auditor prior to publication, even though an audit opinion has not yet been issued. In addition, the Listing Rules require such statements to give details of the nature of any likely modification that may be contained in the auditor's report to be included with the annual report and accounts. Mears Group PLC confirms that it has agreed this preliminary statement of annual results with Grant Thornton UK LLP and that the Board of Directors has not been made aware of any likely modification to the auditor's report required to be included with the annual report and accounts for the year ended 31 December 2012.