Mears Regulatory News (MER)

Mears Group PLC

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

Interim Results for the six months ended 30 June 2019

Continued strategic progress and solid operational performance

Mears Group PLC (LSE: MER), a leading provider of services to the Housing and Care sectors in the UK, announces its financial results for the period ended 30 June 2019.

Key highlights

·; Interim results are in line with management expectations and previous guidance.

·; Group revenues were up 10% at £480.8m (2018: £435.3m), growth driven by the MPS business, acquired in November 2018.

·; Normalised diluted EPS as expected reduced to 12.27p (2018: 15.04p) impacted by a reduction in profitability in Development where the Group is scaling back its activity, an increase in shares issued in the equity placing funding MPS acquisition and the impact of IFRS 16.

·; Strong working capital performance with average daily net debt marginally better than expectations at £110.7m. (2018 H1: £112.1m, 2018 FY: £113.2m)

·; Strong period of new contract bidding, securing 60% of the value of opportunities bid.

·; Order book up 43% to £3.0bn (2018: £2.1bn) reflecting a successful period of bidding wins, including the one-off impact of the Asylum Accommodation and Support Services Contract ('AASC'), augmented by the acquisition of MPS.

·; The Board has declared an increased interim dividend of 3.65p per share (2018: 3.55p).

Financial highlights

Note: The 2019 figures reflect the impact of IFRS 16; earlier periods have not been restated

* Stated before amortisation of acquisition intangibles and exceptional costs. The normalised diluted EPS measure is further adjusted to reflect a full tax charge.

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

"I am satisfied with the progress made in the first half of 2019. Our financial and market position is robust as we seek to build on existing strengths and take advantage of new opportunities. The Board is confident of making further progress for the full year and over the longer-term.

"A significant amount of time and focused effort has been directed towards the integration of MPS and the mobilisation of AASC. I am confident that the Group is well placed to benefit from this up-front investment.

"The Group will accelerate the evolution of its Care business, placing increasing emphasis on Housing with Care. We will also continue the unwinding of the working capital absorbed within Development activities, reducing the Group's indebtedness whilst ensuring that we contribute to the housing development needs of our customers.

"The Board remains confident of delivering its expectations for the full year, in line with previous guidance."

Analyst presentation

A presentation for analysts will be held at 9.30am today at the offices of Buchanan, 107 Cheapside, London, EC2V 6DN. Please contact Buchanan on 020 7466 5000 or e-mail mears@buchanan.uk.com.

For further information, contact:

Mears Group PLC

Buchanan

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

mears@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 and to provide accommodation for the most vulnerable. 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 have a positive impact on people's quality of life and on their communities' social, economic and environmental wellbeing. Our innovative approaches and market leading positions are intended to create value for our customers and the people they serve while also driving sustainable financial returns for our providers of capital, especially our shareholders.

Introduction

Mears has delivered a solid performance in the first half of 2019. Trading in the core Housing division has been in line with expectations and these operations have been strengthened by the mobilisation of the new Asylum Accommodation and Support contract ('AASC') and the integration of the business acquired from Mitie in November 2018 ('MPS').

Group revenue for the six months to 30 June 2019 increased to £480.8m (2018: £435.3m) with operating profit before the amortisation of acquisition intangibles, exceptional costs and before the impact of the new leasing accounting standard ('IFRS 16'), reducing to £19.3m (2018: £20.5m). This is in line with expectations and reflects some margin dilution from the newly acquired MPS business as well as a reduction in profitability in Development where the Group is scaling back its activity. Pre-tax profits, before the amortisation of acquisition intangibles and exceptional costs reduced to £17.1m (2019: £19.0m), which is stated after the impact of IFRS 16. The normalised diluted EPS, on a similar basis reduced to 12.27p (2018: 15.04p) also impacted by the increase in shares following the equity placing to fund the MPS acquisition. Both profit and EPS are in line with expectations. The MPS acquisition was profitable in the period and, in line with guidance, is expected to be EPS neutral for the full 2019 financial year with our programme for driving improvements and realising synergies improving its performance further in the second half of 2019, reversing its loss making position on acquisition.

The Group delivered a good cash performance in the first six months, with daily net debt slightly better than expected with the daily average reducing to £110.7m (2018 H1: £112.1m, 2018 FY: £113.2m).

The Board is declaring an increased dividend of 3.65p (2018: 3.55p) which reflects the Board's confidence in the future whilst being mindful of the importance of maintaining a prudent capital structure. The interim dividend will be payable, on 24 October 2019, to shareholders on the register on 4 October 2019.

Operations

Housing

*before the impact of IFRS 16 and share based payments.

Maintenance

Maintenance revenue increased by 10% to £323.3m (2018: £292.9m), with the newly acquired MPS business delivering revenues of £57.5m. The core Mears Maintenance business saw revenues reduce following our previously stated decision to exit a small number of contracts during the second half of 2018. A number of new mobilisations secured in the first half should reverse this trend.

Operating margins reduced from 4.9% to 4.5%, due to margin dilution from the newly acquired MPS business including the costs of integration which were absorbed within normal trading. Underlying margins from Maintenance remain within the historic 5-6% range.

MPS has made good progress since acquisition in respect of customer contract retention and operational performance. An intensive integration programme, migrating all operations onto the front-line Mears Contract Management system, has now reached an advanced stage. Each contract migration brings an alignment of back office processes and controls. A high level of synergy has already been secured and the Group is confident about the underlying profitability of the significant majority of contracts within the business.

The first six months of 2019 has delivered new wins with a total contract value in excess of £250m, an annual value of £35m, and a success rate by value of 60%. Notable wins include Home Group (South West), London Borough of Hammersmith & Fulham and Longhurst Group. It is becoming an increasing trend that new opportunities are created through the early termination of an incumbent's contract. All three of these new wins have been secured through this route, rewarding Mears' strict and disciplined bid approach during the original tender process.

Service delivery remains our key differentiator and our performance over the last six months has been maintained at excellent levels.

Management

Management revenues reported an increase in activity, growing from £67.9m to £78.7m, partly driven by the new AASC contract which reported revenues of £5.0m in the first half, reflecting the services delivered in respect of the new contract mobilisation. The mobilisation of the AASC contract has been the focus of the Management team.

This new contract adds significant scale to the Group's Management operation and has also encouraged the Group to carry out a wider review of its Management activities to ensure that this area is sufficiently selective when developing new opportunities. This will lead to an increasing focus on margin, working capital requirement and risk.

The first half has been a strong period for the Group's partnership with The Ministry of Housing, Communities and Local Government in running the National Planning Portal. This service commenced in 2015 and while it generated operating losses for the initial period, the Group is now seeing a positive return on its investment.

Development

The Group made a clear strategic decision to reduce its exposure to this area of activity and exit from those new build activities which require the Group to invest significant working capital. Nevertheless, the revenues within this area have almost doubled in the period to £27.7m, reflecting the phasing of the Group's existing contractual commitments. As a result of the decision to reduce our exposure to Development activities, the Group incurred a small loss in the first half and a similar outcome is expected in the second half of the year, as stated in previous guidance.

The Group's Development business is relatively small. There were 36 completed units unsold at 30 June 2019, compared with 25 units at 31 December 2018 and 7 units at 30 June 2018, with a corresponding increase in working capital absorbed in this area over the last twelve months. The Group has secured an exit from two sites where works were due to commence in late 2019. This brings forward the final unwind of funded development to the first half of 2021. Whilst the number of unsold units is higher than planned, the absolute numbers are of a sufficiently low level to allow the Company to continue to withdraw from this activity through a controlled unwinding of revenue and working capital as sites are completed and sold.

Whilst the Group is committed to reducing its exposure to this business, it remains important for the Group to retain a development capability. Therefore, and as indicated, the Group will continue to deliver solutions incorporating development where funding is being provided by a third party. Milton Keynes represents the best example of this model.

Care

*before the impact of IFRS 16 and share based payments.

Care revenues reported a reduction of 15% to £51.0m (2018: £60.3m) as planned. Operating margins rose slightly, reflecting the Group's disciplined policy to prioritise service quality and margin ahead of revenue growth. The Group remains highly selective in respect of bidding for new work but the availability of good quality careworkers continues to constrain the business, and as a result, carer retention and recruitment remain key areas of focus.

Disappointingly, there has been little change in how standalone care is procured, and even some potential deterioration in commissioning methods. Continued underfunding and lack of progress in Central Government policy development has led to short-term decision making which is rarely positive for commissioners, providers or service users.

In 2016, Mears took the decision to exit a large number of Care contracts where Care commissioners had been unwilling to recognise the cost of delivering excellent care. The Group directed its activities towards those clients that were like-minded and wanted to address the challenges being faced by Care providers, and those whom we believed over time would make further improvements in how Care is commissioned. This allowed Mears to offer improved pay and working conditions to its care workers. In particular, the Group focussed on opportunities to provide a full housing service with much less focus on those opportunities which provide singular care services in isolation. Our ability to deliver all elements of that requirement is seen as a compelling offering.

Three years on, the tough decisions that we have taken have been shown to be correct, with a smaller, better quality and profitable Care business that has also played a part in offering an enhanced Housing proposition and facilitating recent Group tender wins. The Group continues to see a good pipeline of opportunities from customers to procure new care services with accommodation, in the majority of cases to build, manage, maintain and care for those service users.

Mears continues to review its options around stand-alone care, whilst extending its capability in housing with care services such as Extra Care and the Group expects to make further progress over the second half year. The Group's ability to support vulnerable customers, many of whom have a Care requirement, has been central to its success in Housing, and most recently in the Group securing its Asylum housing contract. This continued bespoke skill set with a deep understanding of the challenges faced by our service users will underpin future success.

Business Development and Order Book

The order book stands at £3.0bn (2018: £2.1bn), having been bolstered in the last twelve months by securing the AASC contract, valued in excess of £1bn, together with the acquired MPS order book of circa £200m and new orders secured during the first half adding a further £350m.

As previously stated, the next two years are very significant for the Group's Housing business as a number of existing contracts come up for renewal, representing around £115m of annual revenue in both 2020 and 2021. The Group has a good track record of resecuring contracts on re-bid, and is well positioned on all material opportunities.

The Group has a significant pipeline of new bidding opportunities, in addition to our existing contracts that are subject to renewal. A key strategy for the Group is to become a provider of housing management, maintenance, repairs and upgrades to the Ministry of Defence (MoD) and within this pipeline are five housing-focused lots of which any bidder can win a maximum of three. All lots are being let for an initial seven year period with an extension option for a further three years. The bidding process has commenced and is likely to be awarded in the first half of 2020.

Working capital

The Group has reported a reduction in its average net debt, key to which is the tight control that the Group maintains over its working capital balances. The working capital allocation of each activity are set out below:

*Excludes MPS to assist comparability with 2018.

The Maintenance, Management and Care activities are predominantly high volume and low value and cashflows are typically uniform. Working capital balances in these three areas have been maintained at consistent levels and are in line with previous guidance with only small changes to reflect activity levels.

As highlighted at the 2018 year end, the Group reported a spike in the working capital balances absorbed by the Development activities in the second half of 2018. The net working capital position within Development in the first half of 2019 is broadly unchanged compared with the opening position, with average working capital increasing to £22.7m compared with the opening spot position of £21.4m. As detailed above, the Directors have committed to delivering a controlled unwinding of working capital allocated to this area over the next eighteen months. Cash flows resulting from realisation of developments are by their nature not uniform and are thus harder to predict but the expectation for the full-year is to see a reduction in working capital utilisation, with a more significant reduction in 2020.

Net debt

The Group has delivered a daily average net debt slightly better than target and it is pleasing that all parts of the business have reported solid working capital metrics to underpinning this. The Group anticipates delivering improvements in the working capital absorbed within the newly acquired MPS business, once it benefits from the improved Mears IT systems and associated processes.

The property acquisition facility of £30m was introduced in 2017 to enable the Group to acquire and build portfolios of properties prior to their disposal to long term funding partners. The Board previously indicated its intention to unwind and cancel this facility during the course of 2019. Good progress has been made in this area with the facility being reduced to £15m during the first half and there is visibility of a further reduction in the second half.

The business is on track to deliver its targeted full year daily average net debt of £105m and the Group continues to target a pre-IFRS 16 average net debt to EBITDA of 1x ratio by the end of 2020.

New accounting standards; IFRS 16 'Leases'

IFRS 16 is a significant change in accounting standards and is effective for all accounting periods beginning on or after 1 January 2019, meaning that the new standard applies for the 2019 financial year. This has introduced a single, on Balance Sheet accounting model for leases and whilst there is no pre-tax cash impact, it does have a significant impact on the Balance Sheet, Income Statement and classification of cash flows.

Under IFRS 16, a lessee will recognise its right to use a leased asset along with 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 overall 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 impact on pre-tax cash flows.

The impact of IFRS 16 on the Group resulted in the recognition of a right of use asset and an associated lease obligation of £163.1m and £169.7m respectively at 1 January 2019, being the point of transition. The Group adopted the modified retrospective approach, meaning that the Group does not restate its comparative figures, but recognises the cumulative effect of adopting IFRS 16 as an adjustment to equity at the beginning of the current period as detailed in note 4. The application of IFRS 16 is complex and sensitive to relatively small changes in the incremental borrowing rate attached to each class of leased asset. The Group will continue to review its application of this standard over the second half year. Any revisions to the transitional adjustments would not be expected to be material to the Income Statement.

The net debt measure excludes lease obligations which principally relate to the Group's Housing Management activities, where properties are a key service provision. Typically, the Group enjoys nominations and other contractual agreements with its customers which ensures a high level of occupancy. The Group will often retain an option to cancel the lease and the Group follows a disciplined approach to mitigate other associated risks such as indexation, market rent levels, void properties and end of lease obligations. Whilst the commitment is measurable under IFRS 16, it is not appropriate to consider this in the same way as other debt instruments.

The Group has identified significant growth opportunities through the provision of Housing. The Group's Key Worker contract involves the provision of circa 3,500 properties secured on short term leases. The Group's recent success in securing three areas of the AASC contract will see a further 4,500 properties secured through leases with terms of between three and ten years although a significant proportion of these will allow Mears the ability to trigger an early break. One cannot estimate the Balance Sheet impact without an accurate assessment of the mix of lease lengths, but an increase in right of use assets and associated lease obligations could be in the region of £150m.

IFRS 16 has impacted upon a number of commonly used financial ratios and performance metrics including gearing, interest cover, EBITDA, EBIT, operating profit and ROCE. The Group's banking covenants are not affected by this accounting change as these are 'frozen' and are based on accounting standards at the time the facility agreements came into force. The Group's bank facility runs to 2022 which provides ample time for the banking community to properly digest the impact of IFRS 16 on our performance metrics.

Corporate Governance

The Chairman's statement in the 2018 Annual Report said that Mears must be equipped with a Board that can provide a wide range of views, skills and experience to work with and challenge the Management team and accordingly that the balance of capabilities around the Board table would be kept under review so as to ensure that the Group had what it needed for effective leadership. The Chairman's letter accompanying the notice of this year's AGM recorded that the Board had acknowledged observations made by shareholders in conversation with the Chairman early this year and accordingly that searches had commenced to identify two new Non-Executive Directors to add skills and experience in finance, investor relations and commercial and general management.

The tabling by one of the Company's shareholders of resolutions to appoint two individuals to the Board afforded the Chairman the opportunity for further detailed conversations throughout May 2019 with almost all of the company's largest shareholders, representing between them over 80% of the Company's share capital. Those discussions were a very valuable interaction. They resulted in shareholders collectively agreeing that the Board should continue with its process to select new Non-Executive Directors with the qualities and experience that Mears requires.

For the first such appointment, the Group sought an individual with strong finance skills and a good understanding of effective investor relations, gained as the Finance Director of a UK listed company. The Board was pleased to announce on 2 July 2019 the appointment of Jim Clarke as Non-Executive Director. Jim has spent much of his career in senior finance roles in consumer facing industries, having been Group Chief Financial Officer of Countrywide plc for many years and, prior to that, Finance Director at JD Wetherspoon and David Lloyd Leisure. Jim is also audit committee Chair at Hansteen Holdings.

For the next appointment, we are seeking strong commercial and senior general management experience gained from a role as the Chief Executive of a business of scale. This search is proceeding well and is now at a very advanced stage. We would expect to be able to complete it around the end of this month.

Board development is a continuous process and the composition of the Mears Board will be kept under review in the coming months and into 2020. The objective remains to ensure that the Board maintains an optimal balance of skills and experience to ensure effective leadership and also that it continues to play a leading role in demonstrating good corporate governance.

Results of AGM

Following the results of the Group's AGM in May 2019, the Group is required to provide an update in accordance with the 2018 UK Corporate Governance Code. The Board noted that Resolution 2 (concerning the approval of the remuneration report); Resolutions 6 to 15 (concerning the election or re-election of each of the Directors); Resolution 17 (concerning the general authority to allot relevant securities); Resolution 18 to 19 (concerning the authority to issue ordinary shares without a pre-emptive offer), Resolution 20 (concerning the holding of General Meetings on 14 days' clear notice); and Resolutions 21 and 22 (which were requisitioned by PrimeStone Capital Irish Holdco DAC concerning the appointment of two additional Non-Executive Directors), received 20% or more votes against the Board's recommendation.

The Board recognises that a number of shareholders are dissatisfied with the performance of the Company and its share price. Their concerns were acknowledged by the Board in the full year results announcement and it was made clear that the composition of the Board would be kept under review to ensure that it continues to provide effective leadership. Progress on the appointment of two new Non-Executive Directors has been described above.

The Board notes that Resolutions 17 to 20 also received 20% or more votes against the Board's recommendation, despite engagement with shareholders during the previous year on these matters. These Resolutions are consistent with the latest investor guidelines and with the Resolutions approved in previous years. Following shareholder discussions during the previous year, the Board understands that some shareholders vote against these resolutions as a matter of policy. In addition, this year, a small number of significant shareholders also voted against these Resolutions and, as a result, they did not reach the threshold required to pass as special resolutions. The Company is continuing to consult with shareholders voting against these resolutions to understand their views in relation to the specific authorities sought.

Social Value

Investing in local communities and our workforce has been fundamental to Mears for over 25 years. There is increasing evidence that satisfied customers and strongly motivated staff are vital success factors for all businesses. For Mears, it is especially important to demonstrate that it is a responsible and trusted partner to its increasingly wide ranging public sector customers. Mears' reputation for excellent service delivery combined with a strong emphasis on social value is critical to our business success and to delivering the outputs that create consistent and long term shareholder value.

The Group's achievements have been recognised by numerous accolades over the last six months, including:

·; Sunday Times Top 25 Big Companies to work for.

·; One of the highest scoring companies on FTSE4Good demonstrating our approach to governance and transparency.

·; Achieving Institute of Customer Service (ICS) ServiceMark & TrainingMark accreditations for our leading approach to service delivery and colleague development.

·; Achieving Royal Society for the Prevention of Accidents (ROSPA) Gold Award (16 consecutive years) for our health and safety standards and training.

·; Achieving a high level of Housing Diversity Network Accreditation for our work on inclusivity.

The first half of 2019 has seen many notable achievements but most importantly Mears' ongoing commitment to local communities has been shown to deliver £15.3m of social value across almost 400 activities. Recognising Mears' commitment and best practice, the Group is delighted to have been invited by Central Government to be the Social Mobility Pledge Champion for the 'Services' sector.

The Group's workforce commitment is highlighted by the desire to make Mears a great place to work for everyone and thereby ensure that it is able to recruit and retain the talent needed to achieve its ambitious strategic goals. This is signalled by having an Employee Director on the Group's main Board and equally by the commitment of every Mears leader to provide opportunity and positive working conditions for all staff at all levels.

Outlook

The Board commends all employees for their continued commitment and the enormous part they have played in making Mears the business that it is.

A significant amount of time and focused effort has been directed towards the integration of MPS and the mobilisation of AASC. We are confident that the Group is well placed to benefit from this up-front investment.

The Group will accelerate the evolution of its Care business, placing increasing emphasis on Housing with Care. We will also continue the unwinding of the working capital absorbed within Development activities and reducing the Group's indebtedness while continuing to contribute to the housing development needs of our customers.

The Board remains confident of delivering its expectations for the full year, in line with previous guidance.

Half-year condensed consolidated income statement

For the six months ended 30 June 2019

Half-year condensed consolidated statement of comprehensive income

For the six months ended 30 June 2019

Half-year condensed consolidated balance sheet

As at 30 June 2019

Half-year condensed consolidated cash flow statement

For the six months ended 30 June 2019

Half-year condensed consolidated statement of changes in equity

For the six months ended 30 June 2019

* The Group has applied IFRS 16 using the modified retrospective approach on transition. Under this method, the comparative information is not restated (see note 4).

Notes to the half-year condensed consolidated statements

For the six months ended 30 June 2019

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 2019 were authorised for issue in accordance with a resolution of the Directors on 12 August 2019.

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 2019 have been prepared in accordance with the Disclosure and Transparency Rules (DTR) of the Financial Conduct Authority, with IAS 34 'Interim Financial Reporting' and with the Accounting Standards Board's 2017 statement 'Half-yearly financial reports'. 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 2018, which have been prepared in accordance with IFRS as adopted by the European Union.

This half-year condensed consolidated 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 2018 were approved by the Board of Directors on 22 March 2019. Those 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 2019 have not been audited or reviewed by an auditor pursuant to the Auditing Practices Board guidance on the Review of Interim Financial Information.

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

After reviewing the Group's performance against budget for the current financial year, and longer-term plans, the Directors consider that at the date of approving this half-year statement, it is appropriate to adopt the going concern basis in its preparation.

(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 2018, except for the application of IFRS 16 'Leases'.

IFRS 16 'Leases'

IFRS 16 'Leases' (IFRS 16) replaces existing lease guidance, including IAS 17, 'Leases'; IFRIC 4, 'Determining whether an Arrangement Contains a Lease; SIC-15, 'Operating Leases - Incentives'; and SIC-27, 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease' ('the former lease accounting standard'). IFRS 16 is effective for annual periods beginning on or after 1 January 2019. As stated in the Annual Report and Accounts 2018, the Group are adopting the modified retrospective approach to transition. Applying the modified retrospective approach in IFRS 16 on transition, a company:

a) is not required to restate comparative information. Instead opening equity is adjusted;

b) can choose, on a lease by lease basis, between two alternative methods of measuring lease assets. A company can either measure lease assets as if IFRS 16 had always been applied or at an amount based on the lease liability;

c) is not required to recognise lease assets and lease liabilities for leases with a lease term ending within 12 months of the date of initially applying IFRS 16.

The Group has chosen to measure lease assets as if IFRS 16 has always been applied.

In addition, applying either transition approach, a company is not required to reassess whether existing contracts contain a lease based on the revised definition of a lease.

IFRS 16 introduces a single, on-balance sheet accounting model for leases and for the most significant part of our leases, we will recognise a right-of-use asset representing our right to use the underlying asset, and a lease liability representing our obligation to make future lease payments.

For the income statement the nature of expenses related to leases, where the Company leases an asset (lessee), will change as IFRS 16 replaces the operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities.

Identifying a lease

A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Group has identified four categories of lease:

a) Residential property (pertaining to the Group's Rental Income and AASC activities)

b) Commercial property (pertaining to local and central-service offices)

c) Vehicles

d) Office equipment

Lease term

The non-cancellable period of a lease are considered together with periods covered by an option to extend and terminate the lease, depending on the intention of the Group to enforce its right to extend or terminate. The Group records the date of occupation and expected date of vacation to incorporate the IFRS 16 requirements of lease term. The Group has utilised the practical expedient IFRS 16 C10 (e) which allows the benefit of hindsight in the determining the term of lease.

Measurement of right of use assets and lease liabilities

The lease liability is calculated by identifying, all future lease payments, including variable lease payments, and discounting these at the rate implicit in the lease. If this rate cannot be readily determined, the Group's incremental borrowing rate will be used. The incremental borrowing rate is defined as the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The Group has calculated the incremental borrowing rate using the risk free rate, subsequently adjusted to reflect; entity-specific credit risk, term premium, and asset risk.

The right of use asset is calculated using the lease liability plus, where applicable; any lease payments made before commencement net of incentives, any initial direct costs incurred, an estimate of costs to dismantle and remove the asset. The right of use asset is subsequently measured using the cost model. Depreciation is provided over the term of the lease.

Variable lease payments are defined as the portion of payments made by the lessee for the right to use the underlying asset during the lease term that varies because of changes in facts or circumstances occurring after commencement. Some sub-categories of residential property leases contain indexation clauses. The indexation reference is commonly linked to the Groups ability to increase rental income, such as the prevailing Local Housing Allowance rate. Less commonly, the index reference is inflationary or a pre-determined fixed rate.

Transitional adjustment

Under the modified retrospective approach, the Group does not restate its comparative figures, but recognises the cumulative effect of adopting IFRS 16 as an adjustment to equity at the beginning of the current period, as detailed in note 4.

In calculating the lease liability to be recognised on transition, the Group used a weighted average discount rate of 6.0%. A reconciliation between operating lease commitments as defined by IAS 17 disclosed in the 2018 Annual Report and Accounts, and the opening position reported under IFRS 16 is disclosed below:

Significant judgements in the application of this standard

IFRS16 requires The Directors to include within the future lease payments periods covered by an option to extend and terminate the lease, depending on the intention of the Group to enforce its right to extend or terminate.

IFRS16 requires the Group to measure its general incremental borrowing rate. This is defined as the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. In formulating a methodology to calculate the incremental borrowing rate, the following factors were considered, and the judgements applied were:

a) Market-observed risk-free rate of interest.

b) Mears Group-specific credit spread.

c) Entity-specific credit rating where appropriate.

d) Management have applied an increase to certain asset types to reflect specific circumstances relating to a particular asset

3. Segment reporting

The Group's revenue disaggregated by pattern of revenue recognition is as follows:

All of the above categories fall exclusively within the Housing segment with the exception of Care services, which falls exclusively within the Care segment.

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 two business segments during the period:

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

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

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 are that of revenue growth and operating margins in both core divisions of Housing and Care. The operating result utilised within the key performance measures is stated before amortisation of acquisition intangibles, exceptional costs and costs relating to long-term incentive plans.

There has been no material change in segment assets and segment liabilities to those reported at December 2018 except for the changes as a result of the Group adopting IFRS 16. The right of use asset and associate lease obligation may be almost entirely allocated to the Housing segment.

4. Changes in accounting policies

As detailed in note 2, there has been a significant mandatory accounting change which applies from 1 January 2019: the adoption of IFRS 16 'Leases'. The impact to retained earnings as a result of this change is detailed below:

The effect of the application of IFRS 16 on the six months ended 30 June 2019 is detailed below:

IFRS 16 has impacted upon a number of commonly used performance metrics including PBT, EBIT and EBITDA. The effect of the application of IFRS 16 on the six months ended 30 June 2019 on these measures is detailed below:

The change to IFRS 16 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 reduce the operating result for the first half of 2019 by £0.8m. Moving forward, it is expected to have a negative impact in respect of operating profit in the short term.

Movement in the right of use asset and lease obligation during the six months to 30 June 2019 is detailed below:

The Lease Obligation at 30 June 2019 is allocated to four categories of leases; residential property £148.3m, commercial property £8.4m, vehicles £17.8m and office equipment £0.3m. An additional lease obligation of £1.1m relating to finance leases is not included in the table above.

5. Finance costs and finance income

6. Tax expense

The tax charge for the six months ended 30 June 2019 has been based on the estimated tax rate for the full year.

Tax recognised in the Income Statement:

7. Dividends

The interim dividend of 3.65p (2018: 3.55p) per share is not recognised as a liability at 30 June 2019 and will be payable on 24 October 2019 to shareholders on the register of members at the close of business on 4 October 2019. The dividend disclosed within the half-year condensed consolidated statement of changes in equity represents the final dividend of 8.85p (2018: 8.55p) per share proposed in the 31 December 2018 financial statements and approved at the Group's Annual General Meeting on 31 May 2019 (not recognised as a liability at 31 December 2018).

8. Earnings per share

A normalised earnings per share (EPS) is disclosed in order to show performance undistorted by amortisation of acquisition intangibles and adjusted to reflect a full tax charge. The Directors believe that 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 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. Fair value measurement of financial instruments

IAS 34 requires that interim financial statements include certain of the disclosures about fair value of financial instruments set out in IFRS 13 and IFRS 7. These disclosures include the classification of fair values within a three-level hierarchy. The three levels are defined, based on the observability of significant inputs to the measurement, as follows:

·; Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

·; Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

·; Level 3: unobservable inputs for the asset or liability.

The following table shows the levels within the hierarchy of financial assets and liabilities measured at fair value on a recurring basis at 30 June 2019, 31 December 2018 and 30 June 2018:

The fair values of interest rate swaps and forward commodity contracts have been calculated by a third party expert discounting estimated future cash flows on the basis of market expectations of future interest rates (Level 2).

The fair values of deferred and contingent consideration have been calculated by the Directors by reference to expected future income and expenditure in respect of the acquired businesses.

There were no transfers between Level 1 and Level 2 during the six-month period to 30 June 2019 or the year to 31 December 2018.

The reconciliation of the carrying values of financial instruments classified within Level 3 is as follows:

Contingent consideration represents an estimate of future consideration likely to be payable in respect of acquisitions. Contingent consideration is discounted for the likelihood of payment and for the time value of money. Contingent consideration becomes payable based upon the profitability of acquired businesses.

The carrying value of the following financial assets and liabilities is considered a reasonable approximation of fair value:

·; trade and other receivables;

·; cash and cash equivalents;

·; trade and other payables; and

·; lease liabilities.

10. Acquisitions

On 30 November 2018 the Group acquired certain business assets and contracts from the Mitie property services division. The estimated fair value of net assets acquired remains provisional and will be finalised before the year end. Adjustments have been made in the first half as the passage of time has increased the accuracy of the original estimate. This has resulted in a reduction in the net assets acquired from £7.1m to £6.8m and a corresponding increase in goodwill from £3.3m to £3.6m.

11. Share capital

2,873 (2018: 54,485) ordinary 1p shares were issued in respect of share options exercised. The difference between the nominal value and the total consideration has been credited to the share premium account.

12. 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:

13. 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.

14. 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 41 to 42 of the 2018 Annual Report and Accounts and is not expected to change over the next six months. The four principal risks identified are: reputation, people, health and safety, and IT and data.

15. 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 Conduct Authority.

The names and functions of the Directors of Mears Group PLC are as listed in the Group's Annual Report for 2018 with the exception of Jim Clark who was appointed as a Non-Executive Director in July 2019.

By order of the Board

D J Miles A C M Smith

Chief Executive Officer Finance Director

david.miles@mearsgroup.co.uk andrew.smith@mearsgroup.co.uk

13 August 2019