Mears Regulatory News (MER)

14 August 2012

Mears Group PLC

("Mears" or "the Group")

Interim Results

For the six months to 30 June 2012

£50 million of new annualised social housing revenues fuel future growth

Mears Group PLC, the support services group to the Social Housing and Care sectors in the UK, is pleased to announce interim results for the six months to 30 June 2012.

* Adjusted measure is stated before amortisation of acquisition intangibles

** Normalised EPS is stated before amortisation of acquisition intangibles and adjusted to reflect a full tax charge

Summary of Operations and Outlook

Financial:

·; Revenue increased by 5%, with strong performance anticipated in the second half year

·; Profit to cash conversion at 100% (2011: 87%) for the 12 month period to June 2012

·; Strong balance sheet, net debt reduced to £6.2 million (December 2011: £13.4 million)

Social Housing Division:

·; Core maintenance revenues (after excluding Decent Homes) reported organic growth of 12%

·; Operating margin delivered at 5.0% after expensing the costs of a record number of new contract mobilisations in the first half

Care Division:

·; Revenue increased by 8% to £56.1m (2011: £51.7m)

·; Operating margin increased to 8.1%

·; White Paper on Health and Social Care tracks Mears' strategic approach

Group Outlook:

·; Order book of £2.7 billion (2011: £2.7 billion)

·; 99% visibility of consensus forecast revenue for 2012 and approaching 85% for 2013

·; Social Housing - bid pipeline in excess of £3.0 billion, of which £1.7 billion of new tender opportunities relate to contracts with a start date up to April 2013.

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

"I am delighted at the progress made by the Group in recent months particularly with very strong cash management and new contract mobilisations resulting in a 12% like for like organic growth in our core social housing repair and maintenance operation which is a clear market leader in the UK.

"The first half of 2012 has seen the most intense period of new contract mobilisation in our history with seven significant new contracts commencing in this period with an annual value of in excess of £50 million. The quality of these mobilisations and the subsequent service delivery has exceeded our high expectations. As anticipated, the large volume of new works has diluted the social housing operating margin in the short term as we expense the cost of this range of new work directly during the period and we will see the benefits of this significant growth as we progress through each contract. The pipeline is strong with our key target opportunities falling in the second half of the year with over £1.1 billion of new contracts at PQQ or tender stage and we remain on target to tender £2.0 billion of new contract opportunities in 2012. 

"Our Social Housing business has long been recognised as the market leader in terms of operational performance and tenant satisfaction. Our differentiated offering focused on value for money and on higher quality of service is accelerating and reinforcing our leadership position.

"I am proud of our achievements in the care sector. Our commitment and ability to meet the needs of some of society's most vulnerable people has been second to none. Moreover, we are achieving solid margins in what remains a complex politically-led market. I remain positive of our ability to shape and prosper in this market."

"It is pleasing to see in the release of the Health and Social Care White Paper that the Government's thinking on how the wider care sector can be transformed mirrors our thoughts. However, it is clear that a significant funding increase will be required to deliver high quality care; consequently, we look forward to some equally clear thinking on the scale and sources of the necessary additional future funding.

"We continue to seek acquisitions to increase the depth and breadth of our social care offering where we can make a difference, particularly as the care market evolves in line with the thrust of the Government's ambitions."

A presentation for analysts will be held at 9.45 a.m. today at the offices of Canaccord Genuity, 88 Wood Street, London EC2V 7QR

Mears is a leading social housing repairs and maintenance service provider to Local Authorities and Registered Social Landlords in the UK and, following the acquisition of Careforce, Supporta and Choices, 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 12,000 people and provides maintenance and repairs services to in excess of 10% of the UK social housing stock. Mears also provides over 160,000 hours of care to 20,000 service users each week.

Mears Group PLC

Interim Statement

We are pleased to announce another set of solid interim results for the six months ended 30 June 2012. Revenue was up 5% to £307.2m. Profit before tax and amortisation was up 2% to £14.3m with the underlying diluted earnings per share up 6% to 12.07p. We have 99% visibility of consensus forecast revenue for the current year and approaching 85% for 2013.

The first half of 2012 has seen the most intense period of new contract mobilisation in our history with seven significant new contracts commencing in this period with an annual value of in excess of £50 million. The quality of the mobilisations and the subsequent service delivery has exceeded our high expectations. As anticipated, the large volume of new works has diluted the social housing operating margin in the first half, as mobilisation costs are expensed upfront, and we expect to see the benefits of these new works as we progress through each contract.

Our cash position continues to improve with cash generated from operations as a proportion of EBITA at 100% for the rolling 12 month period to 30 June 2012. This is a tremendous achievement given the significant number of new contracts mobilised in the period.

The Directors are declaring an interim dividend of 2.30p per share payable on 5 November 2012 to shareholders on the register of members on 19 October 2012. This represents an increase of 7% (2011: 2.15p.).

New contract bidding - Social Housing

We have recently been successful in securing a significant contract with Southwark Council following the early termination with the incumbent contractor. This is for an initial one-year period to provide responsive repairs and void maintenance to over 20,000 properties within the London Borough of Southwark. This contract is valued at £11 million and commences in October 2012. Whilst delivering a high quality service necessitates a significant upfront investment for the Group given the initial short contract term, the Group anticipates developing a long term relationship with this key target client.

We have also been successful in securing works with Notting Hill Housing Trust where, similar to Southwark, the opportunity arose as a result of an early termination of a previous contract. Mears had tendered for this contract during the previous twelve months and had been unsuccessful at that time. Mears will deliver responsive repairs and void maintenance to the value of £3 million over the coming year. The contract is due to commence during the second half of 2012.

It is a continuing theme over the last two years that we have witnessed a number of early contract terminations for our competitors within the Social Housing sector on the back of poor operational performance. Mears has been, and will continue to be, a major beneficiary of this. In this context also, Mears became the first Social Housing Contractor to be awarded Customer Service Excellence Accreditation. This is a Government Standard awarded by the Cabinet Office. We have also made good progress in Mears Scotland with a number of smaller wins worth over £13 million in total.

The pipeline is strong with our key target opportunities falling in the second half of the year. Our new contract win rate over the last twelve months was 35% and there is currently over £1.3 billion of new contracts at pre-qualification or tender stage and we remain on target to tender £2.0 billion of new contract opportunities in 2012.

New contract bidding - Care

Mears Care has secured contracts worth approaching £20 million in the first half of the year with an average contract term of approaching three years. These include new client wins at Stoke-on-Trent, worth £2.4 million over three years and at Newham, worth £4.1 million over two years. We have also more than doubled our existing work in Brighton following a further contract win worth £3.7 million over three years. Our new contract win rate over the last twelve months was 60%.

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

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

Environmental opportunity

The Government continues to look for solutions to tackle Fuel Poverty and Carbon reduction challenges in housing. Their flagship policy for this is the Green Deal, which will include a new Energy Company Obligation (ECO), to replace the existing CESP and CERT schemes. Mears is looking closely at developing opportunities that flow from this.

The launch of Mears Energy in June 2012 gives us a solid platform to benefit from the carbon reduction/fuel poverty tenders that are now entering the pipeline. Mears Energy provides an end to end service, able to assist clients to access funding, survey stock, install measures and carry out aftercare and maintenance programmes. Mears Energy will deliver some CESP work for Clients prior to this scheme being replaced by the ECO at the end of 2012. Our strategy is not linked to any one specific product type but to being able to provide an Energy solution for every home.

Operations

Since 1 January 2012, we have seen the most intense period of new contract mobilisation in the Group's history with the commencement of seven new social housing contracts. These had the additional challenge of all being new customer relationships. These new contracts have started well, and as stated in the March preliminary announcement, they generated additional costs in the early mobilisation phase which were all expensed in the period. The impact of the cost of new contract starts in the six months to June, compared to the comparable period in 2011, is to reduce profits by circa £1.5 million. As a result, operating margin has reduced in line with our expectations to 5.0% (2011: 5.5%). Adding back the £1.5 million of costs associated with the new contracts would have seen an operating margin in line with historical levels. The second half of 2012 is likely to see a reduced number of new contract starts and as such margins are expected to normalise. The quality of service delivered by Mears has been exceptionally good in respect of the new contracts. Across the UK, almost 80% of tenants regard our service as excellent, a statistic that would be leading in most markets.

The social housing business has continued to perform well. The current financial year will see the final material reduction in our capital works revenues as the Decent Homes programme comes to a natural conclusion. This has resulted in a £14 million reduction in first half year revenues and it is anticipated to be in the region of £30 million for the full year. Mears has seen approximately £90 million of annualised Decent Homes revenues drop away over the last three years. Our forward planning has ensured that this revenue reduction has been more than replaced by new maintenance revenues, after adjusting for the impact of Decent Homes, it is pleasing to report organic growth of 12% in our core Social Housing maintenance operations.

The Board is delighted at the performance of our Care division in terms of both the quality of service delivery and its strong financial performance. The Care division has successfully mobilised a number of new contracts during the first six months of 2012. The operating margin has once again increased, fuelled by the delivery of higher acuity services on the back of the acquisition of Choices. The underlying margin of the core Domiciliary Care activities remains unchanged and at a market leading level, which is a tremendous achievement in what is a challenging environment but one in which our market leading approach to service quality and innovation through the application of technology puts us in a strong position in this market..

Other Services predominantly comprises the M&E operation. As reported previously, the M&E environment is currently highly competitive and pricing is keen. The division reported an operating loss of £0.4m during the first six months (2011: profit £0.3m). The division is likely to see further cost reductions during the second half of the year. We do not anticipate a profit contribution from this division in the current year.

Sector developments

Social Housing has several key growth drivers including the continued consolidation both in terms of the number of contractors and in the number of Registered Social Landlords. These factors are recognised within Housing Associations and Councils and in turn lead to increasing opportunities for organisations such as Mears who operate at a local level but who bring the economies of a national player. In addition, there is a clear flight to quality by those procuring our services, which can only benefit Mears and its high levels of service quality.

The long-term opportunities for Mears within Care and Support continue to look excellent. The ageing population and the fundamental desire of people to stay in their own home remain the foundations for this sector. Economic necessity is of course the third driver, which has led to significant political activity culminating in the publication in the spring of 2012 of the Government's White Paper on the future of Health and Social Care.

We are pleased with the direction of the White Paper, which reflects the fundamental aspects of the strategic approach being taken by Mears. Indeed it is a great testament to the services we provide that the Bill refers to the Mears approach to Care and Repair as an example of best practice. The following elements are of particular importance to Mears:

·; The further transfer of £300m of NHS funds into Social Services.

·; The continued drive towards greater use of Assistive technology which will benefit our Tunstall partnership

·; The overall focus on quality, as typified by the ruling out of "contracting by the minute" and a new code of conduct and minimum training standards for care workers

·; The improved information that will be provided to Service users to enable them to distinguish one care provider from another.

·; The specific endorsement of the role of Home Improvement Agencies in undertaking home adaptation work

In summary, the Care and Support system as well as the whole Healthcare system, is going through a period of change, the likes of which have never been seen before. This does of course present short term challenges to Mears but we have strategically built a capability that is unique in the market and one that is very well placed to meet the longer term opportunities.

Balance Sheet

Strong working capital management has always been and remains a cornerstone of our business. Our internally developed IT systems have a strong financial focus and this is a driving force behind efficient cash management. The IT system is also central to the valuation of work in progress and amounts recoverable on contracts and ensures that valuations are robust and are less reliant upon significant estimates or judgments. Consistent with past practice, we maintain a conservative balance sheet. All costs relating to tender, contract set-up and the initial inefficiencies during the period of contract mobilisation are written off as they are incurred, reflecting our prudent accounting policies.

The net debt at 30 June 2012 was £6.2m following conversion of 100% of EBITA into cash over the rolling twelve month period to June 2012.The average net debt for the six month period was £65.5 million. (2011: £59.5 million)

Total shareholders' equity rose from £151.8m to £156.8m at 30 June 2012. The increase in net assets is primarily driven by retained profits.

People

We strive to have the best-trained and equipped workforce and are committed to a policy of providing enhanced career opportunities for all of our staff. We commend our workforce at all levels for their commitment, endeavor and resilience. Given the difficult economic climate, we are particularly keen to support Apprenticeships and have 200 people in such schemes at the present time, the majority of whom come from the Communities in which we work.

The management team has been further strengthened in the period. Our customer service levels reached new heights of excellence and we have seen further reductions in accident rates, complemented with improved training and a committed management team. This has once again been recognised by RoSPA with 2012 being the 10th consecutive year in which Mears has been awarded the Gold Award and the achievement of the 18001 accreditation.

Our Communities

The Group works throughout the UK and our regional offices are dedicated towards helping to improve people's lives. We do work in some of the most socially deprived areas of the country so we feel a strong sense of responsibility towards the wider community. Helping a community to thrive increases the quality of life for residents and supports community cohesion and development. Once again, the first half of 2012 has seen Mears undertake hundreds of projects designed to help tackle key issues such as unemployment and social isolation. This is an investment we are happy to make as a key part of building long term relationships. Our excellent Contract retention rate is a testament to our approach.

Risk Management

We have continued to invest resource towards our corporate governance with particular focus upon further enhancing our risk management process. Over the last twelve months there has been a significant increase in the awareness from our senior management team of the key risks and the controls in place for mitigation. The key risks of the Group as at 30 June 2012 remain unchanged to those detailed within the Annual Report and Accounts for the year to December 2011

Outlook

Our Social Housing business has long been recognised as the market leader in terms of operational performance and tenant satisfaction. Our differentiated offering focused on value for money and on higher quality of service is accelerating and reinforcing our leadership position.

I am proud of our achievements in the care sector. Our commitment and ability to meet the needs of some of society's most vulnerable people has been second to none. Moreover, we are achieving solid margins in what remains a complex politically-led market. I remain positive of our ability to shape and prosper in this market.

It is pleasing to see in the release of the Health and Social Care White Paper that the Government's thinking on how the wider care sector can be transformed mirrors our thoughts. However, it is clear that a significant funding increase will be required to deliver high quality care; consequently, we look forward to some equally clear thinking on the scale and sources of the necessary additional future funding.

We continue to seek acquisitions to increase the depth and breadth of our social care offering where we can make a difference, particularly as the care market evolves in line with the thrust of the Government's ambitions.

David Miles Bob Holt

david.miles@mearsgroup.co.uk bob.holt@mearsgroup.co.uk

Chief Executive Chairman

Half-year condensed consolidated income statement

For the six months ended 30 June 2012

Half-year condensed consolidated statement of comprehensive income

For the six months ended 30 June 2012

Half-year condensed consolidated balance sheet

As at 30 June 2012

Half-year condensed consolidated cash flow statement

For the six months ended 30 June 2012

Half-year condensed consolidated statement of changes in equity

For the six months ended 30 June 2012

Notes to the half-year condensed consolidated statements

For the six months ended 30 June 2012

1. Corporate information

Mears Group PLC is a public limited company incorporated in England and Wales whose shares are publicly traded. The half-year condensed consolidated financial statements of the Company and its subsidiaries for the six months ended 30 June 2012 were authorised for issue in accordance with a resolution of the Directors on 13 August 2012.

2. Basis of preparation and accounting principles

(a) Basis of preparation

The half-year condensed consolidated financial statements for the six months ended 30 June 2012 have been prepared in accordance with the Disclosure and Transparency Rules (DTR) of the Financial Services Authority and with IAS 34 'Interim Financial Reporting'. The half-year condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's annual financial statements as at 31 December 2011, which have been prepared in accordance with IFRS as adopted by the European Union.

This condensed consolidated half-year financial information does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2011 were approved by the Board of Directors on 27 March 2012. These accounts, which contained an unqualified audit report under Section 495 of the Companies Act 2006 and which did not make any statements under Section 498 of the Companies Act 2006, have been delivered to the Registrar of Companies in accordance with Section 441 of the Companies Act 2006.

The half-year condensed consolidated financial statements for the six months ended 30 June 2012 have not been audited or reviewed by auditors pursuant to the Auditing Practices Board guidance on Review of Interim Financial Information.

There have been no significant changes to estimates of amounts reported in prior financial years.

(b) Significant accounting policies

The accounting policies adopted in the preparation of the half-year condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2011.

3. Segment reporting

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

The Group operated three business segments during the period:

·; Social Housing - services within this segment comprise a full repairs and maintenance service to Local Authorities and other Registered Social Housing Landlords in the UK;

·; Care - services within this segment comprise personal care services for people in their own homes; and

·; Other Services - services within this segment comprise provision of design and build M&E.

All of the Group's activities are carried out within the UK and the Group's principal reporting to its chief operating decision maker is not segmented by geography. The principal measures utilised by the chief operating decision maker to review the performance of the operating segments is that of revenue growth and operating margins in both core divisions of Social Housing and Care. The operating result utilised within the key performance measures is stated before amortisation of acquisition intangibles, exceptional items and share-based payments. There is a small cyclical element to the Group's activities, which combined with organic growth results in the second half of the year traditionally showing increased margins over and above the first half of the year.

3. Segment reporting continued

Reconciliation to the Half-year Condensed Consolidated Income Statement:

4. Finance income and finance costs

5. Tax expense

The tax charge for the six months ended 30 June 2012 has been based on the estimated tax rate for the full year.

Tax recognised in the Income Statement:

6. Dividends

The interim dividend of 2.30p (2011: 2.15p) per share is not recognised as liability at 30 June 2012 and will be payable on 5 November 2012 to shareholders on the register at the close of business on 19 October 2012. The dividend disclosed within the Half-year condensed consolidated statement of changes in equity represents the final dividend of 5.35p (2011: 4.85p) per share proposed in the 31 December 2011 financial statements and approved at the Group's Annual General Meeting (not recognised as a liability at 31 December 2011).

7. Earnings per share

Normalised earnings exclude amortisation of acquisition intangibles. A further adjustment is made to reflect a full tax charge, being the headline rate of corporation tax for the period. This normalised measure better allows the assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future performance. The profit attributable to shareholders before and after adjustments for both basic and diluted earnings per share is:

The calculation of earnings per share is based on a weighted average number of ordinary shares in issue during the period. The diluted earnings per share is based on a weighted average number 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 earnings per share use the same weighted average number of shares as the basic and diluted earnings per share.

8. Share capital

2,477,885 (2011: 196,228) ordinary 1p shares were issued in respect of share options exercised. The difference between the nominal value of £0.02m and the total consideration of £0.81m has been credited to the share premium account.

9. Notes to the half-year condensed consolidated cash flow statement

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

10. Half-year condensed consolidated financial statements

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

11. Principal risks and uncertainties

The nature of the principal risks and uncertainties faced by the Group has not changed significantly from those set out on pages 26 and 27 of the 2011 Annual report and accounts. Those risk and uncertainties are separated into nine categories: macroeconomy; people; reputation; liquidity; health and safety; business retention and new business; business continuity; legal and regulatory; and integrity.

12. Forward-looking statements

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

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

The names and functions of the Directors of Mears Group PLC are as listed in the Group's Annual Report for 2011.

By order of the Board

D Miles

Chief Executive

14 August 2012

A C M Smith

Finance Director

14 August 2012

Shareholder and corporate information

Bob Holt

Chairman

David J Miles

Chief Executive Officer

Andrew C M Smith

Finance Director

Alan Long

Executive Director

Peter F Dicks

Non-Executive Deputy Chairman

Michael G Rogers

Non-Executive Director

David L Hosein

Non-Executive Director

Davida Marston

Non-Executive Director

Rory Macnamara

Non-Executive Director

Reginald B Pomphrett

Company Secretary

Registered office

1390 Montpellier CourtGloucester Business ParkBrockworthGloucester GL3 4AHTel: 01452 634600www.mearsgroup.co.uk

Company registration number

3232863

Company secretary

Reginald B Pomphrett

1390 Montpellier CourtGloucester Business ParkBrockworthGloucester GL3 4AHTel: 01452 634600

Bankers

Barclays Bank PLC

Wales and South WestBusiness BankingPO Box 119Park HouseNewbrick RoadStoke GiffordBristol BS34 8TNTel: 01452 365353

HSBC Bank plc

West & Wales Corporate Banking Centre3 RivergateTemple QuayBristol BS1 6ERTel: 0845 583 9796

Solicitors

BPE

St James' HouseSt James' SquareCheltenham GL50 3PRTel: 01242 224433

Auditor

Grant Thornton UK LLP

Registered AuditorChartered AccountantsHartwell House55-61 Victoria StreetBristol BS1 6FTTel: 0117 305 7600

Joint financial advisersand stockbrokers

Investec Bank PLC

2 Gresham StreetLondon EC2V 7QPTel: 020 7597 2000

Canaccord Genuity Limited

88 Wood StreetLondon EC2V 7QRTel: 020 7523 8000

Registrar

Neville Registrars Ltd

Neville House18 Laurel LaneHalesowenWest Midlands B63 3DATel: 0121 585 1131

Investor relations

Gable Communications

34 Lime StreetLondon ECM 7AT

Internet

The Group operates a website which can be found at www.mearsgroup.co.uk. This site is regularly updated to provide information about the Group. In particular all of the Group's press releases and announcements can be found on the site.

Registrar

Any enquiries concerning your shareholding should be addressed to the Company's Registrar. The Registrar should be notified promptly of any change in a shareholder's address or other details.

Investor relations

Requests for further copies of the Annual Report and Accounts, or other investor relations enquiries, should be addressed to the registered office.