Mears Regulatory News (MER)

10 November 2011

Mears Group PLC

("Mears" or "the Group")

Interim Management Statement

Mears has today brought forward the release of its Interim Management Statement ("IMS") for the period from 1 July 2011 to date.

Key Highlights since 1 July 2011:

·; The Group is continuing to experience solid trading within the activities of both its core divisions of Social Housing and Care.

·; Group order book of £2.7 billion with secured revenues of 95% of current consensus forecast revenues for 2011, 85% for 2012 and 70% for 2013.

·; New contracts awarded and announced today in respect of the Group's Social Housing Division to the value of £109 million (£180 million including extensions). This increases the value of social housing new contracts awarded in the last eight months to £350 million (£423 million including extensions). The Group continues to achieve high new tender conversion rates of 47% and 62% in Social Housing and Care respectively

·; Group bid pipeline remains in excess of £3.0 billion, and with an immediate bidding opportunity of £1.6 billion, continues to underpin the Board's confidence in the future.

·; The Government announced their decision on the 31 October 2011 to halve the solar Photovoltaic (PV) Feed-in Tariff (FIT) subsidy from 12 December 2011, which came as a surprise to many participants in the PV space. Since the decision to substantially reduce the PV FIT, and more importantly to bring forward the effective date, the Board has been evaluating the business case for PV and conclude that the prudent course of action is to cease these activities immediately, as the commercial attractions that led us to explore the PV space, in the short term, no longer exist. As a direct result, Operating Profit is likely to fall short of our previous expectations in the region of £2.8 million for the current year. In addition we believe it appropriate to write-off costs relating to the site set-up, system design and installation amounting to approximately £2.0 million which are now considered irrecoverable. The latter amount will be treated as a non-recurring item and excluded from the Group's normalised earnings calculations in the full year results.

·; In September the Group completed a refinancing of its banking facilities and signed a new £120 million unsecured facility maturing in July 2016. This new arrangement replaces the previous £85 million secured facility and includes lower debt pricing and higher operational flexibility.

·; The Group completed the acquisition of the Supported Living division of Choices Care Community Services Limited ('Choices') as the first step in our strategy to develop a broader care offering to our clients. The period since acquisition has proceeded well and the Group anticipates the acquisition being earnings enhancing for the year ending 31 December 2012.

·; Mears has signed a strategic partnering arrangement with the Tunstall Group. The partnership has already secured a contract with Birmingham Council, which has a large programme to roll out telecare and telehealth systems across the City. The partnership is well placed to benefit further from these opportunities.

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

"Putting to one side the short term effect of the PV announcement made by the Government, we are pleased with the progress that Mears has made in recent months. Our market leading positions in both our core markets have been enhanced. We have maintained our new contract bidding success and we have good visibility of a further pipeline of new bidding opportunities.

"Whilst PV forms a very small part of our social housing activities, the Government's recent proposals to reduce the PV feed in tariff are disappointing. Whilst I still consider the Group to be extremely well placed to benefit from the opportunities relating to fuel poverty, it is unfortunate that we have wasted both time and resource in this area over the past six months.

"It is essential that solutions are found for the significant number of people living in fuel poverty within the social housing environment. The recent consultation proposal misses a tremendous opportunity to assist the most vulnerable; specifically, it disadvantages those individuals living in social homes. We will continue to strive to provide solutions to our customers and clients to address the challenges of fuel poverty. Mears remains well placed to make a difference in this important area.

"We are delighted to have successfully completed the debt refinancing which sees both an increase in the facility size and term whilst significantly lowering the Group's debt pricing in the process. Our ability to achieve such a refinancing in the current economic environment is a testament to the continued strong performance of the business and the strength of the long standing relationship we share with both Barclays and HSBC."

Mears is a leading social housing repairs and maintenance service provider to Local Authorities and Registered Social Landlords in the UK and, following the acquisitions of Supporta and Choices Care, 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 care to over 20,000 service users each week.

Interim Management Statement

Trading Update

The Group is continuing to experience solid trading within the activities of both its core divisions of Social Housing and Care.

The bid pipeline remains in excess of £3.0 billion and with an immediate bidding opportunity of £1.6 billion continues to underpin the Board's confidence in the future. The order book stands at £2.7 billion, with secured revenues of 95% of current consensus forecast revenues for 2011, 85% for 2012 and 70% for 2013. Following the cessation of our solar photovoltaic operations, and the resultant reduction in forecast revenues, secured revenues for the year ending 31 December 2011, are 100% of adjusted management expectations.

Update in respect of the Group's Solar Photovoltaic (PV) activities

The Group has been developing its strategy to address the challenges that its customers face in respect of fuel poverty. The Group has developed its model with a number of its existing clients which has involved a detailed survey of their housing stock to consider a variety of solutions, including solar technology, high efficiency boilers, insulation and draught proofing. We consider the Group to be well placed to take advantage as this market develops further.

Over recent months the Feed-in Tariffs Scheme (FIT) for Solar Photovoltaic (PV) energy provided Registered Social Landlords with a valuable source of funding to not only address the fuel poverty issues for a proportion of their tenants, but also to provide an additional funding stream that could fund alternative Green solutions for those tenants where PV is not a suitable option.

However, on 31 October 2011, the Department of Energy & Climate Change issued a Consultation Document which proposes a significant reduction in the FIT rate with effect from 12 December 2011. Whilst this remains a consultative document, the effect of the proposals contained therein, would, in the short term, make solar PV installations within the social housing environment economically unviable. The Group anticipates a hiatus within the social housing environment until the cost of PV systems can fall significantly from their current levels.

Whilst PV forms a very small part of our social housing activities, the timescale proposed by the government provides no ability to properly manage the completion of works and the redirection of overheads.  We believe that the prudent course of action is to cease these activities and not add further to the considerable spend already incurred in setting up the infrastructure for these operations which were budgeted to add some £30m of revenue to our 2011 figures.

As a direct result of suspending these activities, Operating Profit is likely to fall short of our expectations in the region of £2.8 million for the current year. In addition we consider it appropriate to write-off costs relating to the site set-up, system design and installation amounting to approximately £2.0 million which are now considered irrecoverable. The latter amount will be treated as a non-recurring item and excluded from the Group's normalised earnings calculations in the full year results.

We still await a final decision from the Government once the consultation process has come to an end. If there is a more favourable outcome to the consultation, the operations can be remobilised relatively quickly although this would have little impact on the adverse effect on the 2011 results.

Whilst the short term opportunity within PV is significantly reduced, the challenges around fuel poverty continue to increase and we expect to see real opportunities towards the end of 2012 under the Green Deal and the new Energy Company Obligation (ECO). The Group will continue to work with its clients to identify alternative solutions to address their fuel poverty challenges.

New contract awards

The Group has continued to experience a successful period of new contract bidding. In social housing we have won 47% (by value) of all contracts bid in the last eight months amounting to a total value of £423 million (including extensions).

We are pleased to announce further Social Housing contract successes since our interim results on 17 August 2011 including:

·; A 7-year contract with Waverley Borough Council ('Waverley') valued at £52 million over the initial 7-year period to provide responsive repairs, voids, capital works, aids and adaptations services. There is an option to extend the contract for a further 7 years, taking the total opportunity to £104 million. Waverley own and manage in excess of 5,000 properties in Surrey. The award is subject to contract and leaseholder consultation and is due to commence in January 2012.

·; A 7-year contract with Home Group to cover properties in their South West region. The contract is worth £35 million for the initial 7-year term and there is an option to extend for a further 2 years. We will be providing responsive repairs, voids, gas servicing and planned maintenance services. Home Group own and manage circa 3,200 properties in their South West region. The contract is expected to commence in February 2012.

·; An 18 month contract with Midland Heart Housing Association. Mears already has an existing contract with this client servicing around 8,000 homes in the West Midlands. This new award relates to the provision of response and void maintenance services to a further 9,300 social units. These additional works are valued in the region of £10 million and have been procured on an emergency basis. The new contract has been mobilised with a lead time of around one week.

·; We have been awarded a 5 year contract with South Cambridgeshire District Council. The contract is worth £9.5 million over the initial 5 year period. The contract is for the provision of responsive repairs and voids services to 5,500 properties across South Cambridgeshire. There is an option to extend the contract for a further 5 years, taking the total opportunity to £19 million. The award is subject to contract and leaseholder consultation.

·; We have been awarded an 11 month interim contract with Central Bedfordshire Council for their properties in Bedfordshire. The contract is worth £1.9 million per annum (pro-rata) for the term. We will be providing responsive repairs and voids services to a stock of circa 5,400 dwellings.

Other new contract successes since 1 July 2011 that have been previously announced include:

·; A 10 year contract with Barnet Homes. The contract is valued at £69 million over the 10 year period to provide responsive repairs, void maintenance and cleaning services to approximately 11,100 properties. This was due to commence in October 2011 however the contract commencement has been moved back and it is now anticipated to commence in April 2012.

·; A 4 to 10 year contract with Notting Hill Housing. The contract is valued at £11 million (£28 million with extension) over the initial 4 year period to provide external maintenance and component renewal. There is an option to extend the contract for up to a maximum period of 10 years. The contract commenced in September 2011.

·; A 3 to 10 year contract with Arun District Council. The contract is valued at £8 million (£25 million with extension) over the initial 3 year period to provide responsive repairs and void maintenance services to approximately 3,400 properties. There is an option to extend the contract for up to a maximum period of 10 years. The contract commenced in August 2011.

·; A contract with an estimated value of £21 million with Neath Port Talbot Homes. The contract relates to Kitchen and Bathroom refurbishment and Central Heating installations and is to be delivered over a 6 year period and is currently being mobilised.

·; A framework contract with Cyntra which has an estimated value of £40 million. This was the former London Area Procurement Network (LAPN) framework, but will now operate on a national basis.

Within our Care division, our new contract bidding success rate (by value) is 62% of all contracts tendered over the last eight months to a total value of £40 million.

We are pleased to announce further contract successes since we announced our interim results on 17 August 2011. Notable successes include:

·; A 3-year contract with Liverpool City Council with an estimated value of £3.5m. Of the eight existing main providers for Liverpool, only three have been retained, including Mears. The estimated volume is 1,900 hours per week, which represents a 10% increase on existing work levels.

·; A contract with South Gloucestershire Council for the provision of Extra Care and Support Services at a newly built extra care scheme which will be home to Older People and those with Learning Disabilities, Physical Disabilities, Mental Health, Sensory Impairment, Dementia, those with Alcohol/Substance Misuse issues and those with HIV. The 5-year contract is valued at £3 million.

Other new Care contract successes since 1 July 2011 that have been previously announced include:

·; The most significant single award has been with Wirral Council. The contract has an expected value of £14 million with a term of five years. Wirral Council is an existing Mears Care client and having retained our existing business we added further specialist services, which is representative of our strategy to increase work in the higher end care areas.

·; The award of a new contract to be a main provider of care for Bolton Council, with an estimated value of £2 million over the 2 year period. This is a new client for Mears, with work including caring for people with physical disabilities, learning disabilities, brain injuries, autism and sensory impairment.

Tunstall partnership

Mears have signed a strategic partnering arrangement with Tunstall Healthcare (UK) to support commissioners through integrated care services

Tunstall is the leading provider of telecare and telehealth solutions which play a pivotal role in supporting older people and those with long-term needs to live independently, by effectively managing their health and well-being. The partnership represents a unique, integrated offer to social care, health and housing commissioners, which consists of reconfiguration of services, needs assessment and service provision.

Tunstall offers a full suite of products and services including hardware, software, installation, service, monitoring, training and consultancy. The partnership allows Mears to support the needs assessment, installation, logistics and mobile response elements of the proposition through experienced domiciliary care teams.

Tunstall, supported by Mears, has already secured a long term contract with Birmingham City Council who have invested in a city wide telecare service which is planned to benefit up to 25,000 people over 3 years.

The Department of Health's Whole Systems Demonstrator Sites, the largest randomised control trial for telehealth and telecare, covering 6,000 people over three sites, is due to report on its evaluation before Christmas. The partnership will be well positioned to respond to the outcomes of this study.

Update on the Acquisition of Choices Care Community Services Limited ("Choices")

On 4 August Mears announced the acquisition of the Supported Living division of Choices, a leading provider of Social Care services in Scotland and the North East of England. This was the first acquisition that enabled the Group to implement its strategy to develop a broader care offering to its clients. The main business of Choices is the provision of a Supported Living Service to adults with learning disabilities, autism and mental health needs. Service recipients tend to have much larger care support packages than is seen in the more traditional domiciliary care area.

The Group acquired the trade and certain assets of the Supported Living division of Choices for a cash consideration of £7.4 million. The consideration includes a refundable deposit of £5.0 million dependent upon the successful novation of the acquired contracts.

The integration of Choices into the Mears Care division has proceeded well. Contract retention has been in line with our original expectations. In line with previous guidance, the Group expects the acquisition to be earnings neutral for the year ending 31 December 2011 after the costs of restructure and earnings enhancing for the year ending 31 December 2012.

Choices is recognised by both Scottish and English authorities for the quality of care it provides. Mears believes that this acquisition will give the Group the scale and platform to win more contracts of this nature across the rest of the UK. We are already bidding on two additional Supported Living opportunities, which would not have been feasible without the expertise that has come with the Choices acquisition.

New Bank Facilities

The Group has completed a refinancing of its banking facilities with a new £120 million unsecured revolving credit facility with an additional accordion mechanism allowing the facility to be increased to a maximum of £160 million. This provides significant additional funding capacity for the Group.

The new facility will mature in July 2016 and its terms include lower debt pricing and higher operational flexibility than under the previous facility. This new arrangement replaces the Group's existing £85 million secured bank facility.

The costs attributed to the arrangement of the new facility of around £1.6 million will be capitalised and amortised over the life of the facility. The exceptional cost of £1.1 million relating to the carrying value of the transaction costs of the previous facility together with the costs relating to its termination will be treated as a non-recurring item and expensed in the current year.