Mears Regulatory News (MER)

Mears Group PLC

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

Final Results

For the year ended 31 December 2018

Strategic developments and positive earnings progress

Mears Group PLC, a leading provider of services to the Housing and Care sectors in the UK, announces its financial results for the year ended 31 December 2018.

Financial Highlights

* On continuing activities, stated before exceptional costs and amortisation of acquisition intangibles. The normalised diluted EPS amount is further adjusted to reflect a full tax charge.

Key highlights 

· Solid financial performance

· Order book increasing to £3.2bn (2017: £2.6bn)

· Integration of recently acquired Mitie Property Services ('MPS') is proceeding well and remains on-track

· Mears well placed to secure further placemaking opportunities

· Active steps being taken to allocate capital to core areas of the business and reduce net debt

· Total dividend increased by 3% reflecting the Board's confidence in the underlying performance and the long term prospects of the Group.

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

"I am pleased by the progress made by Mears in 2018. Over recent years, the significant strategic evolution of the business has provided access to opportunities that would previously have been out of our reach. This is clearly demonstrated by our recent award by the Home Office of three Asylum Accommodation and Support Contracts. This is the largest award secured in our history and valued at over £1 billion over the next 10 years.

"Notwithstanding the progress made to ensure that Mears is well placed to benefit as our markets develop, I equally realise that the financial benefits have taken longer to come through than expected and that shareholders would like to see active steps taken to address this, particularly in respect of net debt, capital allocation and cash generation. Whilst we will never lose our long-term approach, the Board is considering how Mears can ensure that it retains its competitive advantage, as well as placing greater emphasis on working capital requirements and implications for the Group balance sheet. I expect further progress in 2019."

A presentation for analysts will be held at 9.00am today at the offices of Buchanan, 107 Cheapside, London, EC2V 6DN.

For further information, contact:

Mears Group PLC

Buchanan

Mark Court/Sophie Wills/Catriona Flint Tel: +44(0)20 7466 5000

www.buchanan.uk.com

About Mears

Mears employs over 10,000 people and provides services in every region of the UK. In partnership with our Housing clients, we maintain, repair and upgrade the homes of hundreds of thousands of people in communities from remote rural villages to large inner city estates. Mears has extended its activities to provide broader housing solutions to solve the challenge posed by the lack of affordable housing. Our Care teams provide support to over 15,000 people a year, enabling the elderly and those living with disabilities to continue living in their own homes.

We focus on long-term outcomes for people rather than short-term solutions, and invest in innovations that make a positive impact on people's quality of life and on their communities' social, economic and environmental wellbeing.

Chairman's Statement

Overview

I am delighted to deliver my first Chairman's Statement, having joined the Board on 2 January 2019. Whilst I am only in my third month at Mears, it has been an exciting early period. It was tremendous to see the Group awarded three new long-term contracts by the Home Office to provide accommodation and support for asylum seekers. The contracts are estimated to deliver revenues in excess of £1 billion over their 10 year term. Their scale reflects the progress that Mears has made over a number of years in transforming itself from a small-ticket maintenance contractor towards being a specialist provider of housing-related services to the public sector. Winning and, more importantly, delivering this contract to the standards that Mears sets itself required, and will continue to require, high quality dedicated effort from teams across the Group. I look forward to seeing this dedication resulting in effective delivery.

Another highlight of the past 12 months was the acquisition of certain business assets and contracts from Mitie's property services division ('MPS'). The period since completion has progressed to plan, and the respective senior teams are combining well. The system migrations, which underpin the synergies and improvements to service delivery, are underway. Moreover, it was pleasing that MPS was successful in securing a contract with Home Group within a short time following the acquisition. This contract, valued at £200m over a 10 year term, will see the Group deliver maintenance and planned works to 10,000 homes in the South East. We expect MPS to continue to win new business opportunities as the months unfold.

During the course of the past few weeks, I have held a series of individual meetings with shareholders who between them represent over two-thirds of the Company's equity base by value. I am grateful to each of them for taking the time to meet with me, for their welcome and for the views that they expressed. It was encouraging to hear a number of very positive messages about the Group's core business and the enthusiasm for its continued success. However, the performance of the Company's share price over the past six months has been a source of understandable disappointment. It is also clear that shareholders, and the market collectively, are taking a much more cautious view about indebtedness, again understandably in the light of events elsewhere in the sector. It is appropriate that the Company should take account of this in its plans for the current year and into 2020. Accordingly, the Board will work with management to take a number of active steps to reduce debt progressively over this period.

Results

Group revenue for the year ended 31 December 2018 was £869.8m, a small reduction on the previous year (2017: £900.2m). However, operating profit before amortisation of acquisition intangibles, exceptional costs and long-term incentives rose to £40.8m (2017: £39.2m). Operating margins similarly increased to 4.7% (2017: 4.3%). Normalised diluted earnings per share increased to 29.06p (2017: 28.05p), an increase of 3.6%. The average net debt for the year was narrowly behind our target of £110m at £113.2m.

Dividend

The Board remains confident in the Group's long term potential and in its progressive dividend policy. The Board is therefore recommending a final dividend of 8.85p per share, having paid an interim dividend of 3.55p per share in November 2018, giving 12.40p per share for the year as a whole. This represents a 3.3% increase over the total of 12.00p per share paid in respect of 2017. The final dividend will be payable, subject to shareholder approval, on 4 July 2019 to shareholders on the register on 14 June 2019.

Board developments

In July 2018, as part of the continuing evolution of the Board, the then Chairman, Bob Holt, indicated his intention not to stand for re-election at the 2019 Annual General Meeting. The Board undertook a competitive and structured process for the recruitment of the new Chairman and I was delighted to be offered the position in December 2018. I should place on record the thanks of the entire Group to Bob Holt for his 23 years of service, which was instrumental in taking the Group on its journey from a small privately owned business with annual turnover of £12m, through flotation on AIM and from there to the Main Market, leading to the national player and market leader that it is today.

In June 2018, the Company became one of the first listed companies in the UK to appoint an Employee Director, Amanda Hillerby, underlining the Company's commitment to progressive corporate governance. Mears understands the vital role that our workforce plays in the success of the Group. We intend that this role will help the Board to receive full, open and honest insight and views from its workforce on how strategic initiatives are being implemented. It should also help to provide the wider workforce with a better understanding of how the Board operates. We will keep under review how best to use Amanda's skills to further these objectives.

It is essential to ensure that Mears, in common with all listed companies, is equipped with a Board that can provide a wide range of views, skills and experience to work with and challenge the management team to further the effective development of the Group. I will keep under review the balance of capabilities around the Board table so as to ensure that the Group has what it needs for effective leadership.

Our people

In my short time with the Group, I have taken the opportunity where possible to meet a broad cross section of colleagues to better understand the culture and values that underpin the Group's success. I will continue to undertake a programme of visits throughout the business during the course of the coming year. I attended the Group's annual conference in February 2019, which acknowledges and celebrates those members of staff who have delivered exceptional levels of service to our customers. I have been impressed by the professionalism and commitment of our employees and I thank them for their dedication and hard work.

I was pleased that Mears was recognised recently by the Sunday Times annual survey as one of the best 25 big companies to work for in the UK in 2019. While this reflects well on our investment in culture and people, it speaks volumes about the people who work for us. It was also pleasing that the Group achieved a very high rating from FTSE4Good, which assesses listed company policies and procedures on their social and environmental impact and governance.

Summary

I am very much at the start of my journey at Mears. I sense the strong commitment throughout the Group to do the best for all our stakeholders, be they our shareholders, our public sector customers or our clients who receive our services day in and day out. That commitment to excellence will serve the Group well in the years to come and I look forward to being a part of the team that will continue to deliver it.

Chief Executive Review

Introduction

I am pleased at the progress made by the business in 2018, although the year has not been without its challenges. I am naturally disappointed at our share price performance and this dissatisfaction is mirrored by a number of our major shareholders.

Mears has made significant progress over recent years in evolving its business. My focus has been on a range of stakeholders including clients, service users, employees, communities and shareholders. I believe that much of the Board's strategy has delivered successful outcomes, although the full financial benefits in certain areas have taken longer to come through. The success of our investment into Housing Management is evidenced through the Key Worker and AASC bidding successes while our investment in Housing Development is demonstrated by our success at Milton Keynes. The success of our joint venture in the Planning Portal highlights the investment made in Planning Solutions. Even our investment in Care, which from a return on investment perspective has been very disappointing, played a significant part in securing the recent AASC contract. Finally, it is also pleasing that much of our strategic progress has delivered good outcomes in terms of social value, client confidence and Mears' reputation.

The negativity surrounding outsourcing has been unhelpful, especially when so many of the issues have been specific to other companies in the sector. Unlike other providers in the sector, Mears has remained highly focused on a single area, providing services to tenants in and around their homes. We are specialists in providing housing solutions and we understand the needs of our service users, many of whom are vulnerable.

Notwithstanding the above, the Board is mindful of its responsibilities to shareholders. We recognise shareholders are seeking better financial outcomes, particularly in respect of cash generation, and the Board is clear that it must take action to refocus the Group's main activities to those of a specialist Housing provider with maintenance and management being fundamental to this. Those Group activities that are peripheral to this core activity, especially where they absorb working capital, will be reviewed in terms of how we can deliver the best financial return for shareholders including cessation, downscaling or disposal if appropriate. Investor appetite for gearing has gone full circle. We must now direct our capital resources to those areas which deliver the best financial returns, whilst always ensuring that we do not lose our long-term approach to how we run the business. Going forward, we will review how Mears can best contribute to the housing development needs of our customers but in ways which do not place undue strain on the Group balance sheet. This is covered in further detail later in this review.

Notable highlights for 2018 include:

· Our success in securing three regions under the AASC was a significant achievement for the Group. With a contract value estimated at £1 billion over a ten year term, this is the largest contract ever awarded to Mears and exemplifies the significant progress made by the Group since extending our services into Housing Management in 2014.

· The acquisition of certain business assets and contracts of the property services division of Mitie ('MPS') followed a long period of negotiation and due diligence. Since completion, the integration of MPS has gone according to plan.

· Once again, Mears has delivered high levels of customer service with our customer service excellence rating increasing to 93%. Our dedication to deliver a first class service to our clients is central to our culture and underpins our success.

· The Group restructured its central support structures to reflect the changing nature of the business and differing support requirements. The Group delivered the planned annual savings of approximately £5m with a low disturbance to day-to-day performance.

· The Group has positioned itself well in the MoD bidding opportunities. The MoD is a key client of the Group and the new tender provides Mears the opportunity to deliver management and maintenance services to improve the quality of housing for the UK's Armed Forces and their families.

There will always be areas where the Group can improve:

· The Housing Maintenance division's new contract win rate has, for the second year running, been below our historical norm. We are confident that there has been no lack of good quality opportunities to bid, the quality of our tender submissions has been high and we continue to demonstrate our value for money proposition. Interestingly some lost opportunities are now representing themselves to us.

· We chose to exit a small number of maintenance contracts, with an annual value approaching £30m, as the balance between risk and reward was not considered favourable to the Group.

· The operational performance in some parts of our Housing Management business was below par owing to the AASC tender requiring considerable resource together with the significant emphasis that the business has placed on enhancing the internal controls and governance required in a fast growing regulated business. While this resulted in some loss of focus in the existing business, this was an important priority and is now behind us.

· Our Housing development activities experienced a challenging final quarter to the year, with a slowdown in sales impacting upon both revenues and working capital.

Financial performance

The Group reported revenues for the year of £869.8m, a reduction of 3% on 2017. However, encouragingly, taking half year by half year, this shows revenues have stabilised since the sharp reduction in the second half of 2017.

The profit for the year before tax, exceptional costs and amortisation of acquisition intangibles of £38.5m (2017: £37.1m) was a small improvement and saw a solid increase in operating margins to 4.4% (2017: 4.1%). Normalised diluted earnings per share of 29.06p (2017: 28.05p) reflected this increase in profits, increasing by 4%.

As reported previously, the Group has carried out a review of its central support structures to ensure they reflect the changing nature of the business and that they are efficient and deliver value. This was particularly relevant given the changing sales mix that brings a differing support requirement. The review identified annualised savings of approximately £5.0m and these have been secured in the year. The Group will continue to keep on top of its central support costs. The Group has a long-term target to maintain central overheads at around 3.0% of revenue. While this may appear a high percentage, the Board views this strong centralisation principle as being crucial to deliver consistency and better control across the Group. Over recent years, the central overhead percentage has edged towards 4.0%, however the additional revenues secured with the MPS acquisition and the AASC contract will lower this level and it is a key Group target to reduce central overheads back to 3.0% and to then maintain them at that level. The Group is also carrying out a review of its regional support functions, a process which is being aligned with the MPS integration.

The Board recognises that the Group's net debt and operating cash performance need to improve. The broader activities delivered by the Group carry significantly different working capital requirements, and a single EBITDA to operating cash conversion measure, which for many years the Group delivered at close to 100%, does not provide an accurate reflection of the Group's cash performance. The Group has consistently reported an average daily net debt, rather than focusing on the balance on a single day at the period end, and further detail is included in the Finance Review. In addition, below we provide analysis in respect of the working capital absorbed against the different Group activities which demonstrates a solid performance other than in Development.

Average daily net debt for the year, excluding the property acquisition facility, was £113.2m, narrowly behind the target set at the start of the year of £110.0m. The level of average debt was broadly comparable to that in 2017 (£96.4m) when allowing for the timing of the cash out flows late in that year of £8.2m relating to discontinued activities and a deferred consideration payment of £11.1m in early 2018.

Acquisition of certain business assets and contracts from the property services division of Mitie

In November 2018, Mears completed the acquisition of certain business assets and contracts from the property maintenance business of Mitie; the acquired business is branded as MPS Housing. The initial consideration was £22.5m together with contingent consideration payable, up to a cap of £12.5m, based upon the future profitability of the business over a 24 month period following completion. The initial consideration was funded through a placing of c.6.8m new ordinary shares.

The business comprising 14 branches, circa 30 customer relationships and approaching 1,000 employees, is expected to contribute annualised revenue in excess of £100.0m during the current financial year. Mears has a strong track record for driving improvements in previous acquisitions as evidenced by the successful turnaround of the Morrison business following its acquisition in 2012. The MPS business has strong similarities to that business, and Mears is approaching this transformation plan in a similar way.

Whilst it is still only a short period since completion, the Board is encouraged by the progress made. The reaction from MPS customers has been positive and the MPS team have welcomed the change. We are still at a relatively early stage in the integration process, with the key driver being the migration of MPS' three operating systems onto the single Mears Contract Management platform.

Housing

The Housing division reported revenues of £753.2m, a slight reduction against the previous year. Encouragingly the half year on half year progress shows revenues increasing following the sharp reduction in the second half of 2017. As expected, it was a quiet period for new contract mobilisations, following the slow period of new bidding success in 2017. The recently acquired business of MPS contributed revenues of £9.0m in the one month that it was part of the Group.

The division generated an operating margin of 5.0%, with the second half margin (4.9%) reflecting both the initial impact of MPS together with costs expensed in respect of the AASC bidding and mobilisation.

The Housing division comprises three core activities: Maintenance, Management and Development. Increasingly there have been opportunities to deliver a combination of these services which we term as 'placemaking'. It is critical to the Group's success that Housing is operated and managed as a single division, with the different specialisms combining to deliver the optimal outcome. However, in broadening our Housing activities, it has become harder to explain the underlying performance, and, importantly, provide stakeholders with a better understanding of the growth expectations and risks attached to each area and, particularly in the current environment, the related working capital requirements.

It must be recognised that, increasingly, opportunities are being secured that require a full asset management service that does not slot easily into a single category. Rather than artificially allocating revenues and profit across each category, all revenues and profit are assigned to the predominant category. Given that the Housing Management activities incorporate an element of maintenance, whilst the maintenance growth in isolation may appear low, at times this will simply reflect a change in allocation more than a change in activity.

The revenue for the full year was slightly lower than our expectations at the start of the year of a firm and probable revenue of £770m. In maintenance, some revenues expected to be delivered in 2018 were re-phased and will be delivered into 2019 in agreement with our partners, Milton Keynes being the most significant example. Our development activities experienced a challenging last quarter - whilst the primary focus has been working in partnership with Housing Associations, and the development of affordable homes, this activity does incorporate an element of private sales, which most Housing Associations require to make the overall scheme viable. The Development business experienced a significant slowdown in private sales in the lead-in to the year end, negatively impacting on both revenues and working capital.

Historically the Group has pursued a strategy focusing on earnings growth whilst keeping within the strict confines of Housing. Whilst good working capital management has been a cornerstone of the Group, equally cash has not been allowed to constrain the Group's evolution. However, as the Group's Housing business has evolved, it should be recognised that the different activities within Housing have significantly different working capital requirements:

Ø Maintenance (representing 77% of divisional revenue in 2018) is a high volume and low value activity. Given the requirement to measure, review, inspect and value a large number of works orders, the invoicing cycle cannot be rushed or short cuts taken. Accordingly, it is not unusual for a period of 90 days between completion of work and receipt of income although the average is closer to 70 days. On the positive, the measurement of revenues is very secure and there is minimal bad debt risk. The cost base includes specialist subcontractors and merchant suppliers with varying payment terms averaging 40 days. As a result, typically around 30 days' work is absorbed in working capital.

Ø Management (representing 18% of divisional revenue in 2018) is lower volume with the most significant transactions being linked to collecting and paying property rentals. Typically both rental receipts and payments are paid monthly in arrears such that the business operates on a low working capital requirement.

Ø Development (representing 5% of divisional revenue in 2018) is based on low volume but high value transactions. Where developments are being built under a simple contracting relationship, work can be invoiced during the course of construction although typically as projects approach their conclusion, the receipts become slower. Some mixed tenure developments include units that are subject to private sale and Mears funds the build cost of those units until their sale. The direct works are entirely subcontracted, being paid in around 30 days from invoicing and as a result, this area of our Housing activities can absorb high levels of working capital.

The working capital allocation and returns of each activity are set out below:

\* Trade receivables less trade payables

Looking ahead into 2019, there will be a change of priorities for Mears. We will refocus our capital allocation on those areas which deliver the best returns whilst being mindful of the strategic impact such changes may have upon the Group's future opportunities. The relatively modest working capital requirements of our core maintenance and management activities, combined with their attractive returns on capital, indicate that these are two core areas where the Group should focus its attention.

The property acquisition facility of £30m was introduced in 2017 to enable the Group to acquire and build portfolios of properties prior to disposal to a long term funding partner. This provided the Group with an ability to accelerate the flow of properties into its Housing Management operations together with an additional profit opportunity at the point of transfer. The funding requirement is high, relative to our resources, and the flow of profits irregular. Whilst the property acquisition facility has been useful, its cancellation over the course of 2019 will have a low strategic impact.

The Group has broadened its service capability in recent years to include the provision of Housing Development, primarily targeting existing clients, as part of the holistic service offering to them. However, the working capital absorbed in this area has been higher than expected, and whilst the financial returns could be considerably higher than their current levels, the working capital currently allocated to this area could be better deployed elsewhere or used to reduce current net debt levels. The Board will keep this area under close review going forwards. The current pipeline of works will unwind over the coming three years although the Group will endeavor to accelerate that process, especially for those contracts which have the highest working capital intensity. The reasons for offering a development capability were compelling and remain so. The Group will continue to explore ways in which it can contribute to its clients' housing development needs, but in a way which creates value for both parties without significant working capital consequences for Mears.

Care

The performance of the Care division over the last 18 months has been pleasing with a return to profitability and margin improvement in line with the challenging target set by the Board. Management remains highly selective in bidding for any new work and regularly revisits its existing activities, focusing on delivering good quality care at a sustainable margin rather than placing emphasis upon top-line growth. In that regard, revenues reduced to £116.6m (2017: £134.1m) while operating margins increased to 3.2% (2017: 0.4%), marginally ahead of expectation.

The Care division secured charge rate increases which broadly allowed us to match the increasing cost base driven by an increase in the National Living Wage and increase in the pension auto-enrolment contribution rate. The main challenge in Care remains the sourcing and retention of sufficient care workers of good quality and this is an area that continues to receive significant attention. It is achieving success in this area of operations which underpins the Group's target of a 5.0% margin in Care.

The Group is increasingly directing its Care bidding activity towards those clients where there are likely to be opportunities to provide a complete Housing service and, consequently, there is less focus on those opportunities which provide care services in isolation.

In line with the working capital and returns analysis provided in Housing, the Care division delivers a good return on working capital employed as set out below:

\* Trade receivables less trade payables

Contract awards

Mears continues to see existing and target clients demanding a broader Housing offering. The Group is operating very well and our excellent service delivery is putting Mears in a good position to secure new business opportunities, notwithstanding the discussion above as to Group strategy and capital allocation going forward.

Mears was delighted to secure its primary bidding target for 2018, the AASC, being awarded three regions with an estimated contract value of £100m per year over a ten year period. Mears could never previously have been in a position to have bid such a large and complex contract and it reflects the significant strategic and operational progress that the Group has made over recent years in extending and developing its capabilities. It also reflects a change in Central Government attitude, with a realisation that such contracts require providers who are specialist at providing Housing services together with a capability for dealing with vulnerable people. The tender itself was very intensive in terms of the time and resource required and at times was a distraction from the day to day business, however we are delighted at the positive result. The new contract will require a similar level of intensive support from across the Group through its mobilisation period, with the soft-start in April 2019 and a full go-live due in September 2019.

The year was also busy in terms of new Housing maintenance contracts with the Group bidding in the region of £1 billion of new opportunities. It was disappointing that our new contract win rate in this area was low with a contract win rate on competitively tendered works of 15%. The Group missed out on a number of key maintenance contract targets, typically scoring well on quality but missing out on price. Whilst this win rate is disappointing, the Group has a long track record of taking a disciplined approach to bidding and will never be tempted to secure work at a price which is sub-optimal. Interestingly a few of those lost opportunities are now representing themselves to us as a result of service levels not being met by the winning parties.

Other notable new contract awards in 2018 include:

Ø A contract to deliver repairs and maintenance services to Riverside Housing Association for an initial period of five years, valued at £62m. There is an option to extend the contract for a further five years, taking the total opportunity to £125m. The contract covers over 11,500 homes across the Midlands, East Anglia and the South of England. The service requires Mears to work alongside Riverside's own in-house maintenance provider and commenced in July 2018.

Ø A contract with Octavia Housing valued at £75m over 10 years, will see our existing contract with Octavia double in size. Mears will now be delivering planned works in addition to response and void maintenance services.

Ø Since the year end, and not reflected within the 15% contract win rate,  a contract with Home Group, to deliver maintenance and planned works to 10,000 homes in the South East. The contract, which commences in April 2019, is valued at £200m over a 10 year term. In addition, a contract with London Borough of Hammersmith and Fulham to deliver response and void maintenance services. The contract has been awarded for a twelve month period and is valued at £6m. Whilst unusual for the Group to tender for a contract with such a short duration, the Group sees this as a key client relationship and is delighted to have secured this engagement.

The increasingly innovative nature of our Housing Management solutions means that work can often be secured without the requirement for an extended, competitive and expensive tender process. These opportunities are not valued in the Group's pipeline or in the contract win rate but are increasingly material to the Group. New orders secured during the year through this negotiated route include:

Ø A partnership with the London Borough of Waltham Forest (LBWF) to arrange the purchase and refurbishment on their behalf of 365 homes currently under private ownership. The key aim is to provide LBWF with an alternative, affordable housing supply to reduce the significant bed and breakfast accommodation cost currently being incurred. Mears has engaged funding partners to finance the purchase of properties on behalf of the client, while it will carry out refurbishment works and act as managing agent for the portfolio. The contract will be operated by LBWF and Mears for 40 years and the arrangement is valued at circa £75m. Whilst the contract did not go live until August 2018, the property acquisition facility enabled the Group to start purchasing properties in March 2018 and by the year end, the Group was ahead of schedule having completed the purchase of 65 properties with a strong acquisition pipeline.

Ø A partnership with CBRE Global Investors and 'Step Forward', a property company established by former service personnel who are seeking to provide affordable homes for ex-service personnel and enable Local Authorities to meet their duty under the Armed Forces Covenant. The proposal is that, under a nomination agreement, a Local Authority agrees that for each s106 affordable housing unit, priority will be given to former and current service people. CBRE has created an investment fund of around £250m and anticipate acquiring 2,000 properties over the next two years to place into this arrangement. Mears, through its Registered Provider, manages the housing, assuming responsibility for rent collection, occupancy and asset management over a 22 year period, whilst ensuring that the conditions of the s106 planning consent are met. Based on property numbers of 2,000 this would equate to revenues of in excess of £100m over the contract term.

Order book

The order book stands at £3.2bn (2017: £2.6bn). The order book increases as the Group secures new work and reduces as works are delivered. The increase of £600m reflects new orders secured of £1.3bn together with the order book of £200m acquired on the acquisition of MPS before deducting revenues delivered during 2018.

Bid pipeline and contract expiries

Having concluded on the AASC tender, our bid team have moved their focus towards the Group's other major bidding opportunity with the Ministry of Defence (MoD). The provision of quality, affordable housing for the Armed Forces and their families is integral to the Armed Forces Covenant. With the current contract due for renewal and the procurement methodology being significantly different from past MoD tenders, Mears views this as an exciting opportunity to become a key provider of management, maintenance, repairs and upgrades to the UK Armed Forces' housing in the UK. A total of 5 housing-focused lots are up for tender of which any bidder can win a maximum of three. All lots are being let for an initial 7 year period with an extension option for a further 3 years. The lots include one national housing management lot and 4 regional repairs and upgrade lots. The bidding process will last for much of 2019 and the MoD proposes to announce successful bids in the Spring of 2020 with contracts due to commence in the Autumn of 2020.

Elsewhere across the Group, the pipeline of traditional opportunities continues to flow at a consistent level with around £1 billion of new work expected to be tendered this year. The Group is well placed on a number of these and expects to deliver a contract win rate, by value, in line with historical norms of one in three.

The Group has enjoyed a recent period where few existing contracts having been up for renewal. As announced previously, 2019 will be a very busy period for re-bidding existing contracts with an annual value of £115m up for renewal in both 2020 and 2021. This represents some risk over the medium term, though a number of these retenders also provide an opportunity to secure increased revenues and better terms.

Guidance and outlook

As discussed above, the Board expects 2019 to see a change of priorities for Mears. We will reallocate our capital to those areas of the business which deliver the best financial returns or use it to reduce debt levels.

The Group expects to deliver strong growth in revenues for 2019 and may exceed £1bn for the first time ever. Within this, Housing Maintenance revenue will grow, bolstered by the acquisition of MPS, however we will take the opportunity to exit a number of contracts which are not delivering their anticipated margins. We expect to see growth in Housing Management revenue across a number of areas, predominantly through the new AASC contract which will start to make a significant revenue contribution during the second-half. The Group will continue to explore ways in which it can contribute to its clients Housing Development needs but in a manner that creates value for both parties without placing a strain on the Group's balance sheet. The decision to reposition the Development activities will result in some reduction in the rate of revenue growth previously expected from this activity in 2019. The Care division may see a further reduction in revenue as we continue to focus on service delivery and profitability rather than revenue growth.

While noting the expected trends in revenue highlighted above, Mears expects to make satisfactory progress in profitability for 2019. Underlying margins across the Housing Maintenance activity will be broadly unchanged. Similarly, the underlying margin in Housing Management will also be maintained at the level of the previous year. However, while costs relating to the mobilisation of the AASC contract are recoverable, any material profit contribution from this contract may not arise before 2020. The actions being taken in respect of Development activities may result in a small loss in 2019. Meanwhile, the focus in Care will be to continue to deliver the solid margin progression delivered in the previous year.

For 2020, Group revenue is expected to show strong growth as the full year impact of the AASC contract comes through and more than offsets the reduction in activity from Development. The Group expects to deliver growth in Maintenance although the number of contracts to be rebid may provide a headwind in this area. Profit growth will be driven by the full year contribution of the AASC contract which is expected to reach a typical Housing margin during that year. It is expected that this profit growth will be augmented by the continuing improvement in MPS as its integration progresses.

The Board expects the actions being taken to result in a reduction in average net debt in 2019. We will look to continue this downward trajectory through 2020 with a target average net debt for a 12 month period, whose midpoint is no later than December 2020, to be below EBITDA for the same period.

Financial review

This section provides further key information in respect of the financial performance and financial position of the Group to the extent not already covered within the Chief Executive Review.

Alternative performance measures ('APM')

APMs used by the Group are detailed below to provide a reconciliation for each non-IFRS measure to its IFRS equivalent and an explanation as to why management considers the APM to provide a better understanding as to the Group's underlying performance. The APMs are used externally to meet investor requirements and also used when reporting financial performance internally.

The Group defines normalised results as excluding the amortisation of acquisition intangibles and exceptional costs and adjusted to reflect a full tax charge and uses these results are used for reporting profit and EPS measures. This aids consistency when comparing to historical results and enables performance to be evaluated before non-recurring items. Investors typically require results to be reported before the amortisation of acquired intangibles and the Group's adjusted earnings measure reflects this.

Acquisitions

(i) Certain business assets and contracts from the property services division of Mitie

In November 2018, Mears completed the acquisition of certain business assets and contracts from the property maintenance business of Mitie, with the acquired business branded as MPS Housing ('MPS'), as detailed in the Chief Executive Review. The initial cash consideration was £22.5m and was funded through an issue of approximately 6.8m new ordinary shares. The business was acquired on a cash free, debt free basis, with a target net asset value, based on the sellers' accounting policies, of £12.3m.

Whilst the acquisition was a share transaction, there was a business transfer into a newly incorporated vehicle immediately prior to completion. This transaction structure added a layer of complexity but positively reduced the Group's exposure to risks associated with share capital transactions, such as pensions, taxation and legacy activities.

The fair value of the net assets acquired, based upon Mears accounting policies is estimated to be £7.1m and after recognising intangible assets of £17.4m and deferred tax of £3.3m, goodwill of £3.3m was recorded. Given the proximity of the acquisition to the year end, the Directors have not concluded their assessment of the assets and liabilities acquired and this estimate remains provisional and will be finalised during 2019. Inevitably there will be both positive and negative variances as judgements and estimates are revised in light of changing circumstances.

Contingent consideration is payable in 2021, up to a maximum of £12.5m, based upon a multiple of three times applied to the total net profits generated by the acquired business during the 24 months following completion, and after deducting the initial consideration of £22.5m. Based upon the forecasts prepared for the earn-out period, the Directors have estimated that further consideration will be payable of £2.0m and which would become payable in 2021.

(ii) Omega Group of companies

In January 2018, deferred consideration of £11.1m was paid in full and final settlement of all deferred consideration relating to the 2014 acquisition of Omega.

Exceptional items

Exceptional items are items which are considered outside normal operations. They are material to the results of the Group either through their size or nature. These items have been disclosed separately on the face of the Income Statement to provide a better understanding as to the underlying performance of the Group.

The Group has carried out a review of its central support structures to ensure they reflect the changing nature of the business and that they are efficient and deliver value. The review identified annualised savings of approximately £5.0m and these have been secured in the year. The costs associated with this restructure of £3.5m have been accounted for within exceptional items.

The legal costs relate to two matters. Firstly, the Group committed to enter into a lease on a property in the course of construction. The property required completion by September 2018. Mears has incurred litigation costs of £1.8m as the construction of the property was not complete by the contractual date and is not compliant with fire safety regulations leaving the Group no option but to defend its position robustly. The Group will not compromise the safety of tenants for any reason. The Directors are very confident as to a successful outcome to this litigation and a proportion of these fees would be recoverable in such an event. Given the size of this single item, and the unique circumstances of the matter in dispute, the Directors believe it should be accounted for as an exceptional item. Costs of £0.4m relating to the acquisition of MPS are also included as exceptional on the basis they are non-trading.

Amortisation of acquisition intangibles

A charge for amortisation of acquisition intangibles of £4.4m (2017: £10.6m) arose in the year. The charge has reduced significantly on the prior year reflecting few acquisitions over the last three-year period and the subsequent reduction in carrying value of acquired intangibles. The acquisition of MPS in late 2018 will result in an increase in amortisation in 2019 to 2021. The remaining unamortised value of £23.2m (2017: £9.6m), predominantly relating to order book and customer relationships, will be written off over their estimated lives.

Net finance charge

A net finance charge of £2.3m has been recognised in the year (2017: £2.0m). The finance cost in respect of bank borrowings was £3.5m (2017: £2.8m), reflecting a higher level of average debt.

The Group held two interest rate swaps covering 2018. The first, which ran throughout the year, fixed a rate of 0.84% on £40.0m of borrowings and expires in December 2020. The second, which commenced in August 2018, fixed a rate of 0.96% on £30.0m of borrowings. The remaining debt bore a variable LIBOR rate. The Group pays a margin of 120-220bps over and above LIBOR, subject to a ratchet mechanism.

The net finance costs also includes a net credit generated from defined benefit pension accounting of £0.8m (2017: £0.5m).

Tax expense

The headline UK corporation tax rate for the year was 19.0% (2017: 19.3%). The total tax charge for the year relating to continuing operations was £3.6m (2017: £4.3m) resulting in an effective total tax rate of 12.7% (2017: 16.3%). The key reconciling items to the headline rate were the utilisation of brought forward losses where the deferred tax impact had not previously been recognised, an annual corporation tax deduction in respect of share options and adjustments in respect of the prior year estimated tax charge. The current tax credit for the year on continuing operations was £1.2m (2017: £5.3m charge), which represents an effective tax rate of (4.1%) (2017: 20.1%). The current tax credit was generated through the impact of IFRS 15, resulting in a large credit in the current year, offset against the unwinding of the deferred tax balance recognised on transition to the new standard.

Mears does not engage in inappropriate or aggressive tax planning arrangements. Where appropriate, the Group takes advantage of available statutory tax reliefs. The tax position in any transaction is aligned with the commercial reality and any tax planning undertaken is consistent with the spirit as well as the letter of tax law. In situations where material uncertainty exists around a given tax position, the Group engages with expert advisers and, where appropriate, advance clearance is sought from HMRC in order to establish the most appropriate treatment.

We value our low risk assessment from HMRC and will continue to work to maintain this status through continual review of our controls and processes.

Discontinued activities

The results for the previous year reported a loss from discontinued activities of £16.5m. This was in relation to the Mechanical and Electrical division which was the subject of a disposal in 2013 and included an entity operating in the United Arab Emirates (UAE). As part of that disposal, the Group ultimately retained a beneficial interest in 1% of the share capital of this UAE Company due to the Group still carrying a number of performance guarantees, which unwind as the underlying contracts reach the end of their defects liability period. In 2017, a number of the performance guarantees were called, and the Group made a provision against the outstanding performance guarantees.

A balance is owed by the UAE company to the Group in excess of £14m however this balance is fully provided against. During the year, the Group has incurred cash costs of £1.6m in respect of the costs of litigation associated with the performance guarantees. The Group is carrying a remaining provision of £2.2m in respect of the two outstanding performance guarantees amounting to £3.9m, resulting in a residual contingent liability of £1.7m. Mears does not believe that there is any justification for the guarantee holders making a call on these guarantees, given that the contracts to which they are attached were concluded several years ago. However Mears is also mindful of the challenges in managing this process in a country that follows very different legal and business practices. Mears believes the current position is sufficiently conservative, however if both bonds were to be called, and in the event that Mears recovered none of the debtor balance owed, this would result in a further loss to be recognised of £1.7m. This provision of £2.2m is reported within other creditors. The £1.7m is disclosed as a contingent liability.

Earnings per share (EPS)

*continuing activities

The weighted average number of shares for EPS purposes was 105.1m (2017: 104.0m). The increase is predominantly due to the issue of c. 6.8 million shares in November 2018 in relation to the acquisition of MPS, the effect of which is pro-rated for the part-year following issue.

The statutory diluted EPS measure allows for the potential dilutive impact of outstanding share options and reflects the exceptional loss reported in through discontinued activities. The normalised diluted EPS increased by 4% to 29.06p (2017: 28.05p). Normalised earnings are based upon continuing activities before the amortisation of acquisition intangibles together with an adjustment to reflect a full tax charge of 19.0% (2017: 19.3%). 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.

Cash flow and net debt

As referenced in the Chief Executive Review, the Board recognises that operating cash performance is an area which requires improvement. When the business was simply Housing Maintenance and Care, cash movements were relatively predictable and whilst the focus on the cash balance on any single day was perhaps simplistic, nevertheless the position at the interim and year end date was viewed as a key performance metric.

As the business has evolved, this single day position has become less appropriate and relevant. The Housing Development activities do not generate uniform cash flows and the timing of payments can also have a significant impact upon the period end metric. Accordingly, this is why the Group has consistently ensured that its daily average debt measure is also disclosed. The average daily net debt will be used as the primary performance measure going forwards.

The average daily net debt for the year, excluding the property acquisition facility, was £113.2m, narrowly behind the target of £110.0m set at the start of the year. The net debt at the year end was £65.9m (2017: £25.8m). The property acquisition debt at the year end was £15.0m (2017: £13.9m), with an average balance of £24.0m (2017: £1.2m) in the year.

Mears has always fostered a strong 'cash culture', whereby the Group operations understand that invoicing and cash collection are intrinsically linked and that works are not complete until the sales cycle is completed. While the headline cash metrics in recent periods have not been as good as the business would like, our core activities continue to utilise working capital at relatively low levels. It is pleasing that the average receivables outstanding through 2018 showed a reduction in the three high volume activities of Maintenance, Management and Care. This demonstrates our operations have good controls and robust disciplines, supported by excellent IT systems. As discussed in the Chief Executive Review, the working capital absorbed within the Development activity has been a challenge in the year with average receivables increasing to £21.2m (2017: £9.5m). The Development receivables balance outstanding at 31 December 2018 was £33.3m which was much of the cause for the average debt being narrowly higher than target and the cash flow generated from operating activities being low.

A summary of the consolidated cash flow is detailed below together with explanations in respect of the major movements:

The major movements in the year are:

1. Depreciation of £5.8m, amortisation of other intangible assets of £2.4m and share based payments of £0.6m

2. The outflow in respect of inventories is entirely due to working capital absorbed in Housing Development activities

3. The change in operating payables reflects both the changing sales mix and good payment practices.

4. Relates to the corporation tax deduction in respect of IFRS 15, resulting in a refund of corporation tax previously paid

5. Legal and other professional costs incurred in the year in relation to the discontinued M&E activity based in the UAE. There was no impact to the income statement due to the release of a provision attached to the performance guarantee

6. Tangible fixed asset additions of £8.7m (2017: £8.1m) and IT development costs of £3.1m (2017: £3.7m) however the cash flow statement only reports the cash flows attached to this expenditure and therefore differs from the balance sheet additions which are recognised on an accruals basis

7. Initial consideration of £22.5m in respect of the acquisition of MPS, £4.2m of net debt acquired with MPS and deferred consideration of £11.1m in respect of Omega

8. Primarily the equity placing associated with the acquisition of MPS; £22.5m was raised less costs and a small number of share options exercised during the period

9. The £12.5m paid to Mears shareholders and £0.6m paid in respect of non-controlling interests

10. Property assets held for resale, loans to other entities, and discharges of finance lease liabilities

Balance sheet

A summary of the Group Balance Sheet is detailed below together with explanations in respect of the most significant balances and the major movements:

The major movements in the year were:

1. The carrying value of goodwill of £197.1m (2017: £193.6m) is not amortised but is reviewed for impairment on an annual basis or more frequently where there is an indication of impairment. The headroom between the carrying value of the Care asset and anticipated future value that will be delivered by the Care division has been low over a number of years. The increase in goodwill during the period relates to the acquisition of MPS.

The carrying value of identifiable acquisition intangibles at 31 December 2018 was £23.2m (2017: £9.6m), which relates to order book and customer relationships valued on acquisition. The increase in the year relates to the acquisition of MPS. The carrying value will be amortised over its useful economic life, typically 3-5 years.

2. Group capital expenditure of £8.7m (2017: £8.1m) includes an addition during the year of £3.6m (2017: £nil) relating to the development of 70 modular homes which are currently under construction which, upon completion, will be used to deliver a homelessness solution within our Housing Management activities. The homes are expected to be completed in November 2019 at a total cost of £5.8m. Mears is looking for a long term funder to acquire these properties upon completion. A further £2.0m is expected to be capitalised during 2019. Excluding the investment in modular homes, the remaining expenditure of £5.1m (2017: £8.1m) relates to IT hardware, other office equipment and the refurbishment of new office premises. The level of capital expenditure in respect of property, plant and equipment in any single year has a close correlation to the number of new contracts mobilised in that period. The low level of investment in 2018 reflects a quiet period of new contract mobilisations.

In addition, intangible assets includes the capitalisation of expenditure incurred on developing our in-house IT platform. Additions in the year amounted to £3.1m (2017: £3.7m) with a carrying value of £8.4m (2017: £7.7m), which is amortised over five years. Having made significant investment in our IT systems over a number of years, we are starting to see a reduction in our development expenditure moving forward and this is reflected in the 2018 amounts.

The majority of plant utilised by our operational teams is subject to short-term hire arrangements and motor vehicles are subject to operating leases, hence neither are included within capital expenditure or recognised as an asset within the balance sheet. Similarly, the Housing Management business has a large number of short-term property leases which are similarly not carried on the balance sheet. The new accounting standard, IFRS 16 Leases, will impact upon this treatment as discussed below.

3. Trade receivables and inventories increased to £208.0m (2017: £172.3m). This predominantly relates to an increase in working capital associated with the Housing Development activities which accounts for an increase of £20.7m. The IFRS15 adjustment resulted in a reduction of £31.4m whilst balances acquired on the acquisition of MPS resulted in an increase of £37.6m

4. Trade payables reported an increase to £180.4m (2017: £167.8m), however the acquisition of MPS brought a balance of £27.7m. As such, there was an underlying reduction in payables by £16.2m reflecting changing sales mix and good payment practice.

5. The Group has a property acquisition credit facility of £30m to acquire and build portfolios for resale. At 31 December 2018, assets held for resale utilising this facility amounted to £12.4m (2017: £13.9m). At 31 December 2018, the associated draw-down for these acquisitions was £15.0m (2017: £13.9m), funding both these assets for re-sale together with also part-funding the modular homes included within fixed assets as discussed above.

6. In January 2018, deferred consideration of £11.1m was paid in full and final settlement of all deferred consideration relating to the acquisition of Omega in 2014. The balance at 31 December 2018 relates to the contingent consideration in respect of the acquisition of MPS and, subject to performance, would be due for settlement in 2021.

7. Other payables predominantly relates to provision for expected losses in relation to the insurance captive which manages the Group's insurance risks. Finance lease liabilities are also included within this category.

8. The Group participates in two principal Group pension schemes (2017: two) together with a further 28 (2017: 28) individual defined benefit schemes where the Group has received Admitted Body status in a Local Government Pension Scheme (LGPS).

The Group holds a number of pension arrangements with Local Government Pension Schemes. The accounting treatment for these schemes follows the guidelines set for defined benefit schemes. This does not present the commercial reality for a number of our LGPS arrangements, where the Group holds back-to-back indemnities from its clients in respect of both its exposure to changes in pension contribution rates and to future deficit risk. These have been identified in the table below as 'limited risk'. For the remaining LGPS arrangements where the Group does not benefit from indemnities, the risks attaching to these schemes matches the time horizon of the underlying contract which, whilst not removing all risks, does reduce the period over which a deficit can arise. This second category has been identified in the table below as 'medium term'. The Group schemes are typical defined benefit arrangements where the Group is ultimately responsible for any deficit resulting from movements in discount rates, interest rates, mortality rates and investment performance. This last category has been classified as 'long-term'.

Changes to accounting standards

IFRS 9 'Financial Instruments' 

In respect of IFRS 9, Mears does not hold complex financial instruments and the impact of this standard on its hedging instruments is not material. However, included within financial assets are trade and other receivables. From 1 January 2018, Mears is required to recognise a loss allowance for expected credit losses on these financial assets. The new standard states that if the credit risk on a financial instrument has significantly increased since initial recognition, the loss allowance must be measured using the lifetime expected credit loss.

Given the significant majority of our invoicing is to public sector clients, assessed to have a very low credit risk, expected credit losses to this customer type are deemed to be negligible. However, Mears provides regulated services to private individuals in both its Housing and Care businesses and, as such, services cannot immediately be withdrawn when the Group becomes aware of an increased credit risk. Mears has both a moral and legal obligation to continue to provide services whilst alternative arrangements are being made for these service users.

The difference between the previous carrying amount and the carrying amount at the beginning of the reporting period under IFRS 9 is recognised as an adjustment to the opening balance of equity. The impact of this change at 1 January 2018 is a reduction in the opening balance of equity of £1.7m.

IFRS 15 'Revenue from Contracts with Customers'

IFRS 15 changes the timing of recognising revenue and costs in respect of certain long-term contracts. In the case of the large majority of our contracts, the accounting methodology will be unchanged. Mears has typically looked to recognise revenue and cost at the individual works order level, whether that be a singular maintenance order or care visit. This has ensured that the valuation of working capital balances is straightforward and contains fewer areas of significant judgment.

However, there are a small number of arrangements where the Group has accounted for multiple service contracts by treating them as a single supply of a service. This occurs where local contract mechanics were not easily aligned with the commercial framework of the contract. The new accounting standard requires Mears to allocate the total transaction price to each distinct performance obligation. In addition, a number of contracts include variable consideration, where revenue and profit are linked to the achievement of performance targets and milestones. The new standard requires more detailed analysis in determining the appropriate timing of recognising this revenue.

IFRS 15 has been applied using the modified retrospective approach on transition which results in an adjustment to the opening balance of equity at 1 January 2018 and no restatement of the prior period. The impact of this change in 2018 will see a reduction in the opening balance of equity of £23.9m. The change to IFRS 15 has no impact on the lifetime profitability of the contracts and there are no cash flow impacts, although the change will drive better alignment between the timing of profit recognition and its associated cash flow. Moving forward, it is expected to have a positive impact in respect of operating profit from 2018 through to 2027, as performance obligations are satisfied. The impact of adopting IFRS 15 has been to increase the operating result for 2018 by £0.9m.

IFRS 16 'Leases'

The new leasing standard, IFRS 16 Leases, is effective from 1 January 2019 and will have a significant impact on the Group's Balance Sheet, principally due to the use of leased vehicles and residential property for the operational delivery of Housing Maintenance and Housing Management. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is under 12 months or the underlying asset is of a low value.

The Group will use the modified retrospective transition method on adoption. Under this method, the asset is calculated as if IFRS 16 had always been applied, however the liability is calculated as if all leases start on 1 January 2019, which will result in no change to comparative numbers but an adjustment within the reserves of the Group.

Under IFRS 16, a lessee will recognise its right to use a leased asset and a lease liability representing its obligation to make lease payments. The depreciation cost of the newly recognised 'right of use' lease asset will be charged to profit within administrative costs, whilst the interest cost of the newly recognised lease liability will be charged to net finance costs. On the basis that depreciation is required to be charged on a straight-line basis, whilst the interest element is charged on a reducing balance basis, this results in a higher charge being applied to the income statement in the early years of a lease, with this impact reversing over the later years. The profit impact over the life of a lease is neutral and IFRS 16 has no cash impact.

The Group is in the process of finalising its work in applying the new requirements of IFRS 16. As a result, it is possible that there may be changes to estimates and judgement used in applying this new standard. These will be finalised prior to the release of the Group's 2019 interim results later in the year.

The current estimate of the impact of IFRS 16 to the Group, at the point of transition, is detailed below:

· From a balance sheet perspective, the transitional adjustment will see a right of use asset recognised of c.£118m, and an associated lease liability of c.£125m, being the present value of future lease payments. The net liability being recognised on transition results in an adjustment to opening reserves.

· In terms of the income statement, and based on the existing business at the date of transition, the impact will be an increase to EBITDA by in the region of £35.0m per year, as the operating lease charge previously applied is replaced by a depreciation charge applied on a straight line basis to the right of use asset. The impact to PBT is expected to be broadly neutral as leases reach maturity, however the impact is not linear due to increased lease liability interest cost in earlier years of leases, and this will result in a small reduction in profit in 2019 with this impact unwinding in later periods.

The adoption of IFRS 16 is particularly relevant to the Group's new AASC contract which will see the Group enter into around 4,500 residential property leases. It is not possible to estimate the balance sheet impact without an accurate assessment of the mix of lease lengths. However, as detailed above, the impact of IFRS 16 on profits from a contract of this nature is that profit generated in the early years of the contract will be reduced by a higher interest cost. However IFRS 16 should not be considered in isolation. Securing good quality properties, cost effectively over the long-term is a key element of delivering operational outperformance and increasing the financial return.

Consolidated income statement

For the year ended 31 December 2018

The accompanying accounting policies and notes form an integral part of this preliminary announcement

Consolidated statement of comprehensive income

For the year ended 31 December 2018

The accompanying accounting policies and notes form an integral part of this preliminary announcement

Consolidated balance sheet

As at 31 December 2018

The accompanying accounting policies and notes form an integral part of this preliminary announcement

Consolidated cash flow statement

For the year ended 31 December 2018

The accompanying accounting policies and notes form an integral part of this preliminary announcement

Consolidated statement of changes in equity

For the year ended 31 December 2018

The accompanying accounting policies and notes form an integral part of this preliminary announcement

Notes to the preliminary announcement

For the year ended 31 December 2018

1. 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 had two operating segments during the year:

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

· Care - services within this sector comprise personal care services to people in their own homes.

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.

2. Changes in accounting policies

As detailed in the principal accounting policies, there have been two significant mandatory accounting changes which apply from 1 January 2018: the adoption of IFRS 15 'Revenue from Contracts with Customers' and IFRS 9 'Financial Instruments'. The impact to retained earnings as a result of these changes is detailed below:

The change to IFRS 15 has no impact on the lifetime profitability of the contracts and there are no cash flow impacts. The impact of this standard has been to increase the operating result for 2018 by £0.9m. Moving forward, it is expected to have a positive impact in respect of operating profit as performance obligations are met.

The impact of IFRS 9 has been to increase the operating result for 2018 by £0.2m. Moving forward, this new standard is likely to result in an earlier recognition of credit loss, resulting in an impairment in trade receivables and contract assets. Based upon the current activities of the Group, it is unlikely that this impairment would be material in any single year.

3. Finance income and finance costs

4. Exceptional costs

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

The costs of restructure relate to the rationalisation of the Group's central services and largely comprise non-recurring staff costs.

The costs of acquisition relate to the acquisition of MPM Housing Limited and MPS Housing Limited, as detailed in note 16.

Exceptional legal costs were incurred in respect of a property lease. Given the size of this item and unique circumstance of the dispute, the Directors believe this should be treated as an exceptional item to better reflect the underlying financial performance.

5. Tax expense

Tax recognised in the Consolidated Income Statement

6. Discontinued activities

The Group previously completed the disposal of its Mechanical and Electrical division which included an entity operating in the United Arab Emirates ('Haydon LLC'. As part of that disposal, the Group ultimately retained the beneficial interest in 1% of the share capital of this UAE company due to the Group still carrying a number of performance guarantees in place at the time of the disposal, which unravel as the underlying contracts reach the end of their defects liability period.

 During the year, the Group has incurred cash costs of £1.6m in respect of the costs of litigation associated with the performance guarantees. The Group is carrying a remaining provision of £2.2m in respect of the two outstanding performance guarantees amounting to £3.9m, resulting in a residual contingent liability of £1.7m. Mears does not believe that there is any justification for the guarantee holders making a call on these guarantees, given that the contracts to which they are attached were concluded several years ago. The Directors believe the current position is sufficiently conservative, however if both bonds were to be called, and in the event that Mears recovered none of the debtor balance owed, this would result in a further loss to be recognised of £1.7m. This provision of £2.2m is reported within other creditors. The £1.7m is disclosed as a contingent liability.

7. Dividends

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

The proposed final 2018 dividend of 8.85p per share has not been included within the consolidated financial statements as no obligation existed at 31 December 2018.

8. Earnings per share

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

9. Assets held for sale

During the year, the Group acquired, held and disposed of property assets that are classified as held for sale prior to their disposal to long-term funding partners. These acquisitions were funded by a £15m (2017: £30m) rolling credit facility which is separate from the Group's main facility.

10. Inventories

11. Trade and other receivables

12. Trade and other payables

Included in other creditors is £2.0m (2017: £nil) relating to contingent consideration on acquisitions, £nil (2017: £5.0m) relating to deferred consideration on acquisitions and £nil (2017: £6.2m) relating to a forward purchase agreement in respect of 25% of Tando Property Services Limited, Tando Homes Limited and O&T Developments Limited.

13. Financial liabilities

14. Long-term other liabilities

15. 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:

16. Acquisitions and disposals

On 30 November 2018 the Group acquired certain business assets and contracts from the Mitie property services division. The transaction was facilitated via the purchase of the entire share capital of MPM Housing Limited and MPS Housing Limited for a total consideration of £22.5m. In addition, contingent consideration of a maximum of £12.5m may become payable based on a multiple of profit before tax for the acquired entities. The Directors have assessed the fair value of this contingent consideration as £2.0m.

The acquisition was undertaken in order to strengthen the Group's offering in its Housing segment. It provides access to new clients and has significant synergies with the wider Group.

The effect of the acquisition of MPM and MPS is disclosed below.

In addition to the amounts noted above, the Group acquired £0.6m of liabilities in respect of a further acquisition. This other acquisition resulted in £0.6m of intangibles capitalised, a £0.1m deferred tax liability and £0.1m of goodwill capitalised.

Intangible assets of £18.1m have been recognised in respect of these acquisitions. They represent the expected value to be derived from the existing order books of the acquired businesses. The Directors consider that the value assigned to goodwill represents the benefits to the Group arising from synergies with its existing business.

17. 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 2018 or 2017. The financial information for the year ended 31 December 2017 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 2018 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 2018.