Mears Regulatory News (MER)

Mears Group PLC

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

Final Results

For the year to 31 December 2013

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 2013.

Financial Highlights

· Record revenue of £898.2m (2012: £679.5m), growth of 32%

· Profit before tax of £36.6m (2012: £29.0m), growth of 26%

· Excellent EBITDA cash conversion of 103% (2012: 108%)

· New contract wins in excess of £500m: Social Housing awards of £420m with a conversion rate of 32% (2012: £380m and 32%) and Care awards of £96m with a conversion rate of 69% (2012: £63m and 57%)

· Strong balance sheet with average net debt of £70.0m (2012: £75.0m), and net debt at 31 December of £0.5m (2012: £12.4m)

· Progressive dividend policy, increasing by 10%, in line with earnings, to 8.80p per share (2012: 8.00p)

· Loss on disposal (non-cash item) from M&E business of £18.5m in line with expectations.

* Stated before amortisation of acquisition intangibles, exceptional costs and the initial losses (in 2012) generated by Morrison following its acquisition. The normalised diluted EPS measure is further adjusted to reflect a full tax charge.

Operational Highlights

· Disposal of Mechanical and Electrical business ("Haydon") during the period in line with our strategy to focus entirely on Social Housing and Care

Social Housing Division:

· Record revenue of £742.5m (2012: £504.7m), growth of 47%

· Operating margin of 4.5% ahead of 4.3% target (2012: 4.7%); reflecting a blend of our existing operations and the Morrison activities

· Continuing high levels of customer satisfaction

· Integration of Morrison complete and exceeding expectations

· Two new infill acquisitions completed during the period to develop our housing management offering further

Care Division:

· Revenue increased by 9% to £123.1m (2012: £112.6m)

· Operating margin eased to 7.8% (2012: 8.3%)

· Continued strong regulatory compliance

· Acquisition and full integration of ILS Group Limited ("ILS") has significantly enhanced our higher acuity care offering

Outlook:

· Order book at £3.8 billion (2012: £3.8 billion). Solid pipeline of new opportunities

· Visibility of 92% of consensus forecast revenue for 2014 and 70% for 2015 (2012: being 88% and 66% respectively)

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

"I am delighted with the progress Mears has made in 2013. Revenue visibility, order book and the bid pipeline all remain strong.

"Our Social Housing business has long been recognised as the market leader in terms of operational performance and customer satisfaction.  I believe that the opportunities for us in Social Housing remain very strong.

"In Care, as a robust high quality provider at the forefront of change in the sector, we remain very well placed strategically to take advantage of the long term opportunities. The ageing population and the fundamental desire of people to stay in their own homes remain the foundations for this sector. Economic necessity is, of course, the third driver, which has led to significant political activity.

"With Mears now focused solely on Social Housing and Care, I am delighted to report that we continue to achieve high levels of service delivery and customer satisfaction. The quality of our service delivery continues to be our key differentiator and underpins our success in bidding new contracts in both of our core growth sectors.

"Since the turn of the year, trading remains in line with expectations."

 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/ Helen Greenwood Tel: +44(0)20 7466 5000

www.buchanan.uk.com

Notes for editors

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 15,000 people and provides maintenance and repairs services to in excess of 10% of the UK social housing stock. Mears also provides care to over 20,000 service users.

Chairman's statement

I am delighted at the excellent progress that has been made in 2013. The integration of the Morrison acquisition proceeded better than I could ever have anticipated. The acquisition of ILS increased our capabilities in higher acuity care whilst enhancing the offering in our existing Care business. Finally, the disposal of our non-core Mechanical & Electrical business removed a significant financial challenge for the Group and has allowed the senior team to refocus its attentions upon our two growth divisions.

Strategy

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 outstanding customer service and proposition innovations developed in partnership with our customers, combined with robust finances.

The acquisition of ILS was in line with Mears' strategic objective for its Care business which is to increase the level of work in higher acuity services. These activities have made strong progress since the acquisition and we will continue to look to extend both the scope of our capabilities and our geographical coverage.

Dividend

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 6.30p per share which, combined with the interim dividend, gives a total dividend for the year of 8.80p (2012: 8.00p), a 10.0% increase. The dividend is payable on 3 July 2014 to shareholders on the register on 13 June 2014. The dividend is covered over three times by the normalised diluted earnings per share.

Reg Pomphrett

The end of December brought the news of the passing of Reg Pomphrett, the Company Secretary and a former Non-Executive Director of the Group. Reg was instrumental in the growth of the Group and his wisdom and wit will be sorely missed. I had personally worked with Reg for a number of years and am proud to have known him.

Our people

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. During 2013 we have implemented our Corporate Learning and Development Strategy which has promoted a number of key initiatives with a view to investing in management trainees, skills academies and apprenticeship schemes to ensure there is a constant inflow of new talent. We currently have 650 people enrolled in apprenticeship and job experience programmes. We are proud of the many practical and local opportunities we are able to create.

At the senior end of the business we have increased our focus on succession planning and increased our investment in senior management development. During 2013 we commenced a Senior Leadership Programme which has identified a cross section of the Group's brightest talent that we would envisage will play central roles in our future business. Our management teams continue to be recognised as industry leading.

Management incentive plan

The Mears Remuneration Committee identified the need for a new structure which better reflects the Group's future business strategy and provides a stronger link between reward and corporate performance in order to appropriately retain and motivate the Executive Directors and senior management who are critical to executing the business strategy. The revised incentive structure delivers in my view an appropriate mix of cash and shares dependent on financial and strategic performance and will be subject to both forfeiture and a longer holding period than the previous arrangement. This approach will ensure that strong year-on-year corporate performance is rewarded. The primary focus on annual performance will also ensure that the Committee retains the flexibility to select targets which drive shareholder value in a highly uncertain and challenging economic and business environment.

Positive outlook

We expect our Social Housing business to continue to grow through further contract wins, underpinned by our market-leading service delivery. We will look to build a significant housing management offering to our prime market in Social Housing, making Mears even more relevant to customers and tenants. where appropriate, we will continue to increase our geographical coverage.

In our Care business, we will continue to move further up the acuity chain. The acquisition of the higher acuity activities of ILS will allow us to follow an organic growth strategy. We will also look to small bolt-on acquisitions to fill gaps in our capability. This will increase our ability to respond to growing opportunities from health and Social Care outsourcing and the implementation of new localised services.

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

Chief Executive's Review

*Before amortisation of acquisition intangibles and exceptional items.

This has been a year of significant progress. Revenues increased by 32% to £898.2m (2012: £679.5m) and delivered a profit before tax and before amortisation of acquisition intangibles and exceptional items of £36.6m (2012: £29.0m), an increase of 26%. The normalised diluted earnings per share on the same basis increased by 17% to 28.06p (2012: 23.91p). Given the losses generated by Morrison in 2012, a better indicator of performance is to utilise the pre‑Morrison normalised diluted earnings per share in 2012 of 25.60p. This results in an increase in earnings per share in 2013 of 10% which represents an outstanding achievement and better reflects the performance of the business and management. In line with the Company's progressive dividend policy, the Board is recommending a final dividend of 6.30p per share (2012: 5.70p) making 8.80p per share for the year (2012: 8.00p), an increase of 10%, reflecting the Board's confidence and ongoing strong cash performance.

We continue to place great emphasis on cash collection and to develop further the cash culture within the Group. I am delighted with our continuing strong working capital management, with cash generated from continuing operations as a proportion of EBITDA amounting to 103% (2012: 108%).

The disposal of our non-core Mechanical & Electrical business has allowed the Board to focus fully on our core operations of Social Housing and Care. Revenues from continuing operations increased by 40% to £865.6m (2012: £617.2m) with operating profit on continuing operations before the amortisation of acquired intangibles and exceptional items increasing to £41.1m (2012: £32.8m). The non-core Mechanical & Electrical business delivered an operating loss of £2.7m in the period leading up to its disposal in November 2013 (2012: loss £1.6m).

Whilst we have delivered record revenues, it is pleasing that we have also maintained the order book at £3.8bn. The demand for our services continues to be strong with a bid pipeline in excess of £3.0bn. We enter the current year with a visibility of 92% of the £908m consensus revenue forecast for 2014. Moreover, we have a visibility of 70% of the consensus revenue forecast for 2015, which demonstrates both the long term nature of our business and our leading market position.

We are well placed to benefit from the immediate bid pipeline and the wider opportunities in our core markets. Our relationship with our customers continues to be strong and our partnering ethos is recognised widely. This is demonstrated by the number of customers awarding, as well as renewing, contracts to the Group across a wide array of their activities.

Social Housing

The Social Housing division made excellent progress in 2013, with the integration of Morrison exceeding our expectations in terms of contract retention, service delivery and financial turnaround. The existing Social Housing business also benefited from a period of consolidation, following the previous year's particularly intensive period of new contract mobilisations.

The Social Housing division, prior to the inclusion of Morrison, reported revenues of £507.5m (2012: £459.7m), reflecting organic growth of 10%. This growth was primarily generated from the full year effect of the 2012 mobilisations. The new contracts are now at an advanced stage of their mobilisation cycle and are generally performing well. I was particularly pleased to see our contract with London Borough of Southwark, which was initially the subject of a single year award under emergency measures, be re-awarded on a long term basis. This is typical of our approach to provide solutions for our clients and is reward for our significant early investment.

The Social Housing division, with the inclusion of Morrison, reported revenues of £742.5m (2012: £504.7m), growth of 47%. Morrison itself delivered revenues in the year of circa £235.0m (2012: £45.0m) which was higher than anticipated, driven by the backlog of works that had accumulated in the period leading up to the acquisition. Moving forward, we expect a run-rate flowing from the Morrison contract estate of circa £210m per annum. The Group has been delighted at the strong retention rate of Morrison contracts.

Our Social Housing activities delivered an operating margin of 4.5% (2012: 4.7%). Our target for the year was an operating margin of 4.3%, which was derived from a blend of a normalised margin within our existing business of 5.7% combined with a Morrison margin of 1.0%. It is pleasing to have met our margin aspirations, given the significant losses being generated by Morrison at the time of the acquisition.

Following the acquisition of Morrison we restructured the senior operational management and support functions servicing the combined Social Housing division. As anticipated, this realised significant financial synergies. Whilst the cost of this restructure amounted to £8.5m across the two accounting periods, this unlocked a synergy saving in excess of £10m per annum and has underpinned Morrison returning to profitability. It also provided an opportunity to combine the strengths of both organisations and enhance operational delivery and control. The migration of all Morrison contracts across to the Mears IT platform is now complete. All Social Housing contracts are run from our contact management system, which will inevitably drive better service delivery and more robust financial control. The strong cash performance during the period, and the reduction in trade receivables, was driven in part by the better visibility provided as to the financial position of the Morrison contracts following these system migrations. The key focus is now at an individual contract level to maintain the improved service delivery whilst continuing to resolve the remaining financial challenges.

The Decent Homes programme is now in the past and 2013 was the first time for a number of years where the revenue figures are not impacted by that revenue decline. As anticipated, the changes over recent years in housing finance combined with annual rent rises has increased the funding available to our clients to invest in their housing stock.

A number of our clients have reported strong surpluses on their ring-fenced Housing Revenue Account (HRA) and we have seen an increasing number of opportunities flowing from this. Whilst these opportunities are HRA funded, they are typically of a more discretionary nature. We would expect this trend to continue.

Our clients are looking to consolidate and transform an array of housing management activities, such as planning and asset management, income optimisation, lettings and the operation of related call centre infrastructure. The market for these types of white collar activities is significant at circa £4 billion per year and is largely untouched by the private sector. An evolving Social Housing market, following recent changes in the welfare system and tenancy arrangements, over and above the ongoing pressure on budgets generally, has increased the pressure on our clients to rethink how best to meet the needs of not only existing tenants but also the three million potential tenants on long Social Housing waiting lists. Recognising how Mears has worked in partnership with them in the past to tackle more broad-based blue collar challenges, we have been encouraged to collaborate to tackle the sector's housing management issues.

During the year, we were pleased to announce two acquisitions which together will accelerate our capabilities and increase our credibility to help tackle a wider range of clients' white collar housing management challenges. Both acquisitions were made for nominal considerations and will enhance Mears' ability to build workable solutions to meet our clients' evolving needs.

· The acquisition of the entire issued share capital of Plexus UK (First Project) Limited ('Plexus'). Plexus is a registered Social Landlord with a portfolio of circa 400 properties within Central London. Plexus acts as a conduit between private Landlords and Social Housing providers, helping Local Authorities to address homelessness issues by procuring decent affordable homes for their customers.

· The acquisition of a 50% interest in the trade and assets of JustCall 24/7 Limited, a provider of call centre services to a large number of Social Housing providers. This acquisition also brings expertise that includes the management of direct labour organisations, void lettings and rent collection.

In both cases, the acquired capabilities and credibility will be leveraged using Mears' unique service offering of a national customer base, differentiated partnering ethos and market leading levels of customer service and innovation. These two businesses will provide the opportunity to build a significant broad based offering to our prime market in Social Housing, making Mears even more relevant to customers and tenants.

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. As we look to broaden the services we offer across the sphere of Social Housing, we will look to make further acquisitions to reinforce our market leading position.

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.

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 has improved to 82% (2012: 80%). Typically others in the sector measure only satisfaction whereas our drive has always been for excellence. Service quality remains our key differentiator although we continually strive for better.

New contract bidding

The Group has continued to experience success in winning new contracts. In Social Housing we have won 33% (by value) of all contracts bid, with a total value in excess of £420m. The most significant awards are detailed below.

Care

I am delighted by the advances made within our Care business during the year. The improvements made within both the wider Care sector and our own Care business, together with the significant shift now being witnessed in respect of the commissioning of Care, underpins our confidence for the medium and long term.

We entered the Care market in 2007 with a clear strategic vision that the market would develop in a way similar to that of Social Housing. Notably, we expected to see a shift towards output-based contracts, where vendor payments are based on the quality of the outcome for the recipient rather than simply based on the time spent in delivering the service. We also expected to see a consolidation where contracts are awarded for the longer term to fewer providers who could provide a broader service to clients and also assist those clients in driving efficiencies within their own cost base. We have positioned ourselves as a high quality business focused upon service delivery in readiness for the market change. The speed of change prior to 2013 was extremely slow; however, the changes seen during 2013 and the head of steam that has now built up vindicates our strategy. The award by Wiltshire of an innovative partnering contract to Mears represents our most important milestone since entering into the Care sector and an important development in the Care market in the UK. In a move away from traditional 'task and time' based contracts, Mears will be paid by results, based upon meeting desired outcomes that have been agreed directly with service users. That Mears was awarded this landmark contract demonstrates Mears' leading position in the Care market. The contract, which mobilised in September 2013, has started positively.

While still early days, there are indications now that a number of other Local Authorities are looking to follow the lead of Wiltshire. It will be particularly beneficial to Mears that Wiltshire is a strong reference site to support the Group securing other similar opportunities.

In April 2013, Mears acquired the entire issued share capital of ILS Group Limited (ILS), a leading homecare company. ILS provides high quality community based care services to approximately 3,400 service users in Scotland and has contracts with 20 Local Authorities, employing over 1,600 staff. The acquisition was in line with Mears' strategic objective for its Care business, which is to increase the level of work in higher acuity services. An important reason for acquiring ILS was for its greater proportion of work in higher acuity activities, which are delivered through the Nurseplus brand. These activities have made strong progress with an increase in volume of over 25% since acquisition, driven from securing new high acuity packages with the existing Mears customer base which had not been served previously. The business has now been fully integrated and the structure of the Care business has been further enhanced under two divisional managers covering the north and south of the UK.

The Care division reported growth of 9% with revenues increasing to £123.1m (2012: £112.6m). This growth in Care revenues is driven by the acquisition of ILS. Whilst we anticipate low organic growth in Care in 2014, we continue to anticipate this sector providing significant medium-term growth opportunities.

The Care operating margin was 7.8% (2012: 8.3%). The Care division has, over recent years, continuously looked to drive efficiencies in overhead whilst keeping tight control on direct costs. In an environment which continues to see pricing pressure, we have looked to invest further in our infrastructure and processes to support future development and growth. Whilst this investment has resulted in some short term margin dilution, we believe it leaves the division on a firmer footing.

The Board is pleased with the performance of the Care division in terms of the quality of service and market positioning. We continue to see 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.

New contract bidding

In Care, contract bidding success rate (by value) of all contracts bid was 69%, amounting to a total value of £96.3m, including the amounts shown in the table below.

We have continued to develop our partnership thinking into new areas such as assistive technology. We have been awarded a contract to monitor the telecare alarms for around 10,000 vulnerable people across Lincolnshire. This is the first monitoring contract won by Mears. When an alarm is triggered, Mears will contact the service user and initiate a response dependent on the severity of the situation. We would hope to win more contracts of this type in 2014.

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 customers. We will continue to differentiate ourselves through outstanding customer service.

In Social Housing, we expect to broaden the services we offer to our clients across a wider range of housing related services. We will continue to grow through further contract wins, underpinned by our market leading service delivery. We will look to enhance and broaden our offering through partnerships and acquisitions.

In Care, we will continue to move further up the acuity chain through acquisition and organic growth, extending the Mears Nurseplus model across our national client base. This will increase our ability to respond to growing opportunities from Health and Social Care outsourcing and the implementation of new localised commissioning models.

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.

Disposal of Mechanical & Electrical business (Haydon)

Haydon had been running at a loss for a number of years and was non-core as the major focus of the Group is in respect of developing our two core divisions. The Board had explored a number of options to address the underperformance and reached the conclusion that it was in the interests of all stakeholders of the Group to sell Haydon. This decision had been well communicated to our stakeholders over the period leading up to its disposal.

On 4 November 2013, the Company entered into an agreement to sell Haydon to a special purpose vehicle owned by the Haydon senior management team. Under the terms of the transaction, Mears sold the entire issued share capital of Haydon for a nominal consideration. In addition, Mears will receive a 50% share of any sales proceeds from a subsequent sale of Haydon, capped at £7m.

An intercompany loan of £9.0m owed to Mears by Haydon was left in place and on completion was converted into a £2.0m secured loan and a £7.0m working capital loan:

· The £2.0m loan is repayable immediately upon a subsequent sale of the business or, at the latest, the fifth anniversary of completion.

· A £7.0m working capital loan is repayable from working capital inflows in respect of a number of legacy contracts which had a recoverable sum at the time of the transaction together with a profit share on future profits. Any outstanding balance on this loan falls away on the fifth anniversary of completion.

Given the uncertainty as to the future outcome, the Board has taken a conservative stance in respect of the transaction. The anticipated recovery, based on management expectations, and the maximum recovery are detailed in the table below.

As a result of the transaction, Mears incurred a loss on disposal of £18.5m. This loss is a non-cash item and is reflected within exceptional costs within the income statement. Based on the anticipated recovery, the transaction is expected to provide a cash upside of circa £4m within the next twelve months from a combination of payments received from Haydon and a tax benefit as a consequence of the transaction.

Acquisition of ILS Group Limited (ILS)

In April 2013, Mears acquired the entire share capital of ILS, a leading homecare company operating solely in Scotland, for a total consideration of £22.5m on a debt-free, cash-free basis. ILS, with a large proportion of its work in higher acuity services, was an attractive addition to Mears' existing care proposition, improving Mears' offering in more complex homecare and developing the capability to offer longer-term continuing healthcare in the home, an area in which Mears did not currently operate.

The consideration represented a multiple of 7.8 times EBITDA against historic trading. To fund the acquisition, Mears issued 6.4m new ordinary shares at a price of 310p per share, raising a sum of £19.1 after the costs relating to the transaction. The balance of £3.4m was funded through our existing debt facility. ILS has performed well since the acquisition and is now fully integrated into the Mears Care business.

Restatement of 2012

The adoption of IAS 19 'Employee Benefits' (revised) resulted in the restatement of the Income Statement and the Statement of Comprehensive Income. The most significant change to the Group's reported figures is that the expected returns on plan assets will no longer be recognised in profit or loss. Expected returns on pension fund assets are now replaced by recording interest income which is calculated using the discount rate used to measure the pension obligation. This has reduced the previously reported figures for operating profit, net finance charge and profit before tax by £0.4m, £2.3m and £2.6m respectively. The respective earnings per share measures for 2012 have been adjusted to reflect this restatement.

Exceptional costs

Costs of £25.5m (2012: £2.9m) were considered to be non-recurring and exceptional in nature. Notably:

· The disposal of the non-core Mechanical & Electrical business resulted in a loss on disposal of £18.5m together with professional fees in respect of the disposal of £0.3m;

· The Group incurred integration and restructuring costs of £6.5m following the acquisition of Morrison Facilities Services Limited in late 2012. This brings the total exceptional costs expensed in respect of the Morrison integration to £8.5m. It is estimated that synergies have been realised amounting to in excess of £10.0m per annum. At the time of the transaction, the Board estimated final integration costs of £8.0m in order to unlock synergies of circa £8.0m per annum. The majority of the efficiencies were generated from the combination of the two support service functions. The costs incurred relate primarily to redundancy costs together with other non-recurring items; and

· The professional fees expensed in respect of the ILS acquisition amounted to £0.2m.

Amortisation of acquisition intangibles

A charge for amortisation of acquisition intangibles of £10.9m (2012: £8.0m) arose in the period. This charge relates to a number of acquisitions in both Social Housing and Care over recent years. The increase in the period is principally driven from the acquisition of Morrison in late 2012 which created a balance of identified intangibles of £20.3m, the bulk of which will be amortised over a period of five years. The acquisition of ILS generated an identified intangible of £4.6m which is to be amortised over a period of three years.

Net finance charge

A net finance charge of £1.8m has been recognised in the year (2012: £2.1m as restated).

The finance cost in respect of bank borrowings was £3.2m (2012: £2.7m). The increase is due to utilising debt to part-fund the acquisitions of Morrison in 2012 and ILS in 2013. The Group has previously entered into an interest rate swap which has fixed LIBOR of 1.95% on the first £55m of its borrowing. The remaining debt suffers a variable LIBOR rate that has been consistently in the region of 0.5% throughout the period. The Group pays a margin over and above the LIBOR which is subject to a ratchet mechanism but which is typically in the range of 1.5 to 2.0%.

The finance costs also include other interest of £0.40m (2012: £0.04m) relating to the discounting of trade receivables and provisions to properly reflect the time value of money.

The net finance income in respect of the defined benefit pension scheme was £1.7m (2012: £0.6m as restated). The increase reflects the increasing number of defined benefit pension schemes in which the Group is participating following the acquisition of Morrison, together with new contract start-ups.

Tax expense

The tax charge for the year is £1.5m (2012: £0.9m). The large majority of this charge related to deferred tax. The current tax charge of £0.03m (2012: £4.4m) reflects the low profit for the year after accounting for the significant exceptional costs. The exceptional costs of £6.4m, relating to the restructure and integration of the Social Housing division following the acquisition of Morrison, are fully tax deductible. The Group will enjoy a tax deduction of around £13 million compared to the reported exceptional loss of £18.5 million following the disposal of Haydon. Given the disposal of Haydon took place at a late stage of 2013, the Group had already made quarterly instalment payments in respect of corporation tax for the 2013 year of £1.4m, the bulk of which will be recoverable in 2014.

The Group follows a non-aggressive policy in respect of taxation and this behaviour, combined with an excellent record of tax compliance, continues to provide the Group the benefit of an HMRC low risk status.

Earnings per share (EPS)

The normalised diluted EPS, which allows for the potential diluting impact of outstanding share options increased by 10% to 28.06p (2012: 25.60p). 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 23.3% (2012: 24.5%). 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.

* Before acquired intangible amortisation, exceptional costs and the initial trading loss (2012) of Morrison, with an adjustment to reflect a full tax charge.

Dividend

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 6.30p per share which, combined with the interim dividend, gives a total dividend for the year of 8.80p (2012: 8.00p), a 10% increase. The dividend is payable on 3 July 2014 to shareholders on the register on 13 June 2014.

Cash performance

*Before amortisation of acquisition intangibles and exceptional items

**Before non-cash exceptional items

** Average debt in 2012 has been adjusted to reflect the debt funded acquisition of Morrison

The efficiency with which the Group manages working capital remains a cornerstone of our business. The Group's conversion of EBITDA to cash in the period was 103% (2012: 108%). The Group has consistently set high standards of working capital management and high levels of conversion of profit into cash. The outcome for 2013 is particularly pleasing given the anticipated outflow following the relaxation in payments to Morrison suppliers.

Our net debt position at 31 December 2013 was £0.5m (2012: £12.4m). Whilst the year end cash position was pleasing, typically the accounting period end has a low debt balance when compared to the rest of the year. A far more important metric is the Group's daily net debt balances which provide a better indication of working capital management. The average net debt over the year showed a reduction to £70.0m compared to core debt in the previous year of £75.0m. 

The Group has agreed a two year extension to its £120m unsecured revolving credit facility, with the new expiry date being July 2018. This also provided an opportunity to enjoy a small reduction in pricing together with increased flexibility. The Group continues to maintain 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 £193.6m (2012: £177.7m). The significant increase during the period was due to the acquisition of ILS which created an intangible asset of £23.6m.

A total of £10.9m (2012: £8.0m) of amortisation was charged to the Income Statement during the period.

Other trading balances

The Group capital expenditure of £4.2m (2012: £3.9m) 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 £1.2m (2012: £1.1m).

Trade receivables and inventories decreased to £162.1m (2012: £165.8m on continuing activities). To register a decrease in trade receivables in a year that has seen solid organic growth and the acquisition of ILS is a tremendous achievement and has underpinned our terrific cash conversion statistics. Trade payables increased to £197.0m (2012: £192.5m on continuing activities) following the relaxation in the payment terms with the Morrison supply chain.

Total equity rose by £11.5m to £180.3m at 31 December 2013. The increase in net assets is driven by the issue of 2.4m shares on the exercise of share options and a further 6.4m shares to part-fund the acquisition of ILS. The full impact from these share issues on net assets was reduced by the reduction in retained earnings following the exceptional costs incurred in the year.

Pensions

The Group participates in two principal Group pension schemes (2012: two) together with a further 32 (2012: 28) 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 significant pension scheme asset of £14.7m (2012: £14.0m) relates to the Morrison Facilities Services Limited defined benefit scheme. Whilst a small increase in the carrying value of the asset is pleasing, the scheme is the largest held by the Group and the Board is mindful that valuations can fluctuate. Importantly, based on the latest triennial valuation, dated April 2012, the scheme reported a surplus of £4.8m utilising a more prudent set of assumptions based on the statutory funding principles. The IAS 19 actuarial valuations for the other schemes as at December 2013 reported a small increase in the pension liability by £0.4m to £6.1m.

The Group continues to comply with a repayment plan agreed with the trustees of the Mears Group scheme which will see an increase in 2014 from £0.9m to £1.0m per annum for a period of seven years with a view to the scheme being fully funded by 2020.

Consolidated income statement

For the year ended 31 December 2013

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

Consolidated statement of comprehensive income

For the year ended 31 December 2013

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

Consolidated balance sheet

As at 31 December 2013

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

Consolidated cash flow statement

For the year ended 31 December 2013

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

Consolidated statement of changes in equity

For the year ended 31 December 2013

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. 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 costs relating to long-term incentive plans.

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 5% of the total revenue reported.

3. Operating costs

Operating costs, which relate to continuing activities, include:

4. Prior period adjustment

IAS 19 (revised) 'Employee Benefits' is applicable for accounting periods beginning on or after 1 January 2013 and so has been applied for the first time. The revised standard combines interest on obligation and expected return on plan assets and requires the disclosure of the net interest on liability; it also requires the separate disclosure of expenses for running the plan. As a result asset returns are based on the discount rate instead of the expected rate of return on assets. This change in accounting standards has resulted in the restatement of the prior year results.

The change has resulted in a lower expected return in the Consolidated Income Statement and a higher gain in the Consolidated Statement of Comprehensive Income. The effect on the Consolidated Income Statement for 2012 is an increase in operating costs of £0.3m and a decrease in finance income of £2.3m. There is a corresponding decrease in the actuarial loss recognised in the Consolidated Statement of Comprehensive Income of £2.6m. There is no change to net assets.

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 acquisition in the current period relate to the acquisition of ILS Group Limited. The costs of acquisition in the previous period relate to the acquisition of Morrison Facilities Services Limited.

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

Exceptional costs on discontinued activities relate to the loss on disposal and associated costs of disposals of Haydon Mechanical & Electrical Limited.

7. Tax expense

8. Discontinued operations

On 5 November 2013 the Group entered into a sale agreement to dispose of Haydon Mechanical & Electrical Limited, which undertook design and build M&E services. The disposal was completed on 21 November 2013. The results of the operations which have been included in the consolidated financial statements are as follows:

Exceptional costs relate to the loss on disposal of £18.5m and costs associated with the disposals of £0.3m.

9. Dividends

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

The proposed final 2013 dividend of 6.30p per share has not been included within the consolidated financial statements as no obligation existed at 31 December 2013.

10. Earnings / (loss) 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. 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 for 2012, 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 for 2012 excluding those issued in respect of the acquisition of Morrison was 91.29m.

11. Notes to the Consolidated Cash Flow Statement

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

12. Acquisitions

On 19 April 2013 the Group acquired the entire issued share capital of ILS Group Limited (ILS) for a total consideration of £8.3m which was satisfied in cash. On 16 May 2013 the Group acquired the entire issued share capital of Helcim Group Limited (Helcim) for a total consideration of £0.5m which was entirely deferred and is payable over the following five years. The effect of the acquisition on the Group's assets was as follows:

ILS was acquired for a headline consideration of £22.5 million on a debt free basis, with a normal level of working capital. The consideration was split on completion as £8.3 million in respect of the equity and £14.2 million to settle loan facilities. The ILS intangible asset is recognised and valued at £4.6m. This represents the expected value to be derived from the acquired customer related contracts and associated relationships and the Nurseplus trademark. The value placed on these customer relationships is based on the expected cash inflows over the estimated remaining life of each contract. The cash flows are discounted using a rate of 12.2% which the Directors consider is commensurate with the risks associated with capturing returns from the customer relationships. The estimated life for customer contracts is assumed to be the average remaining period of the contracts over which earnings from the customer relationships are expected to be generated of three years. The estimated life for the Nurseplus trademark has been based upon the age, history and profile of the trademark and is estimated to be 10 years.

The Directors consider that the value assigned to goodwill represents the workforce acquired and the access to new markets and to additional geographical areas in the UK as a result of this acquisition.

The Helcim Group Limited intangible asset is recognised and valued at £2.4m. This represents the expected value to be derived from the acquired customer related contracts and the acquired contracts with property landlords.

13. 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 2013 or 2012. The financial information for the year ended 31 December 2012 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 2013 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 2013.