Mears : FY2022 Interim Results

Mears Group PLC

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

Interim Results for the 6 months ended 30 June 2022

Mears Group PLC, the leading provider of services to the Housing sector in the UK, announces its interim financial results for the 6 months ended 30 June 2022 ("H1 2022").

Strong first half performance with an improved full year trading outlook

Financial summary

Continuing operations	H1 2022	H1 2021	Change %
Revenue	£485.0m	£443.7m	+9.3%
Statutory profit before tax	£17.9m	£5.6m
Adjusted profit before tax	£18.1m	£11.1m	+62.7%
Statutory diluted EPS	12.70p	4.13p
Adjusted diluted EPS	12.70p	8.01p	+58.6%
Dividend per share	3.25p	2.50p	+30.0%
Average daily net cash / (debt)	£28.4m	(£8.1m)

Note - see Alternative Performance Measures for definitions and reconciliation to statutory measures

Financial highlights

• Trading in the first half has been excellent across the Group with good growth in revenues, margins, profits, and cash
• Group revenues up 9.3% year-on-year to £485.0m (H1 2021: £443.7m)
• Adjusted profit before tax up 62.7% at £18.1m (H1 2021: £11.1m)

• 1. Operating margins strengthened further to 3.9% (H1 2021: 3.1%)
• Average daily adjusted net cash of £28.4m (H1 2021: £8.1m adjusted net debt)
• 1. Cash conversion at 134% of EBITDA

• 1. Adjusted net cash (pre-IFRS 16) at 30 June 2022 of £89.9m (31 December 2021: £54.6m)
• Board is declaring an interim dividend of 3.25p per share, an increase of 30% (H1 2021: 2.50p) in line with its progressive dividend policy

Operating and strategic highlights

• Mears benefits from the increasing regulatory drivers and operational complexity in clients' housing needs
• Contractual indexation mechanisms and a collaborative approach with clients has helped to mitigate the supply chain, inflationary and labour market challenges during the period
• Positive momentum in pipeline conversion underpins organic growth strategy

1. Strong win-rate of tenders in H1 of 40% has contributed £165m to the current order book of £2.3bn (FY 2021: £2.4bn), reflecting successful contract retentions and extensions

1. Good progress on North Lanarkshire bid (estimated at £1.8bn) and MoJ (8 additional regions), provides additional upside potential

• 1. A further £0.75bn of target opportunities identified for contracts to be awarded in 2023
• Launch of Mears' ESG Strategic Approach 2022-2030

Current trading, outlook, and full year guidance

• The trading momentum experienced in the first half has continued into H2 2022

• Whilst mindful of the well-publicised macroeconomic headwinds many businesses are facing, the Board is confident in its outlook for the second half of the year, and is upwardly revising its expectations for the full year
• Revenues for the full year are now expected to be materially ahead of current market consensus, being in excess of £910m, with adjusted profit before tax to be at least £32m, representing 25% growth versus the prior year

David Miles, Chief Executive Officer of the Group, commented:

"I'm delighted to report that the trading and operational performance in the first half has been excellent across the Group and is reflected in this strong set of interim results. Our continued momentum is evidence that our core strategy and resilient operating platform is yielding a market leadership position, which is key to delivering incremental results and positions the Group for further sustainable growth.

"Mears' market leadership and long track-record for quality and operating excellence ensures that we are seen as a trusted partner to Local and Central Government as they seek to address or alleviate the challenges within the UK's affordable housing sector."

Certain information contained in this announcement would have constituted inside information (as defined by Article 7 of Regulation (EU) No 596/2014) ("MAR") prior to its release as part of this announcement and is disclosed in accordance with the Company's obligations under Article 17 of those Regulations.

For further information, contact:

Mears Group PLC

David Miles

Lucas Critchley

Andrew Smith

Joe Thompson, Investor Relations

Tel: [phone]

www.mearsgroup.co.uk

About Mears

Mears is the leading provider of services to the Affordable Housing sector in the UK: responsible for the maintenance of c.10% of the UK's social housing stock; and managing over 10,000 homes for local and central government.

Mears currently employs around 5,500 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 and support for the most vulnerable.

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.

CHIEF EXECUTIVE OFFICER REVIEW

INTRODUCTION

Trading and operational performance in the first half has been excellent across the Group and is reflected in this strong set of interim results. The strong trading performance is evidence that the strategic actions of recent years and our resilient operating platform are delivering positive results and has positioned the Group well for sustainable growth.

The long-term structural challenge of the UK's aging social and affordable housing stock has been compounded by the more recent pressures of the pandemic, de-carbonisation commitments and fuel poverty. Meanwhile, political pressure and legislation are increasing regulation and scrutiny to drive higher standards across the sector. Mears' market leadership and long track-record for quality and operating excellence ensures that we are seen as a trusted partner to Local and Central Government as they seek to address and alleviate these challenges.

OPERATING REVIEW

The financial performance across the Group was strong throughout the period.

Continuing activities	H1 2022	H2 2021	H1 2021
	£m	£m	£m
Revenue
Maintenance-led	272.5	257.9	286.5
Management-led	200.2	168.9	139.5
Development	12.3	7.9	17.7
Total	485.0	434.7	443.7
Operating profit measures:
Statutory operating profit	20.7	14.7	9.7
Adjusted operating profit (pre-IFRS 16)	19.1	15.9	13.7
Operating profit margin (pre-IFRS 16)	3.9%	3.7%	3.1%
Profit before tax measures:
Statutory profit before tax	17.9	10.7	5.6
Adjusted profit before tax	18.1	14.5	11.1

Note - see Alternative Performance Measures for definitions and reconciliation to statutory measures

Maintenance-led activities

The Group's Maintenance-led contracts made good progress in the first half, delivering revenues of £272.5m, up 5.7% on H2 2021. Reactive maintenance activities have returned to normal levels, and Mears has been focussed on working through the order backlog which built up as a result of the Covid pandemic.

Planned maintenance activities remain below pre-pandemic levels, as clients' primary focus has been on day-to-day maintenance activities. While the return of planned works has been slower than expected, and timing remains uncertain, this spend is non- discretionary over the longer-term and remains a relatively small component of the Group's maintenance-led revenues (<10%).

The first half saw the start of a new 10-year contract with London Borough of Havering, delivering repairs and maintenance to around 12,000 homes with an estimated annual value of £5m. This new contract mobilisation went well, with additional resource applied through the centralised 'Task Team', ensuring that the Group delivered a high level of customer service from day one. This is an excellent achievement given the current backdrop of supply chain pressures and skill shortages and reflects the strength of the Mears operating model.

Management-led activities

The Group's management-led activities continued to perform strongly in the first half, with revenues up 44% year-on-year and 19% from H2 2021. This was driven by the Asylum Accommodation and Support Contract ('AASC') which experienced further increases to volumes across the entire process, with a net increase of service users during the period. The Group had expected some degree of normalisation in service user numbers during FY 2022, but this has not occurred and looks less likely in the short-term. The Mears operational teams have done an incredible job in supporting such large numbers of vulnerable people, including those requiring dispersal accommodation.

As reported previously, Mears was successful in extending the term of its contract with the Ministry of Justice (MoJ) to provide transitional housing services for low and medium risk prisoners on release. This pilot contract was in respect of two geographical regions. As a result of the success of the pilot, the MoJ has launched a tender process to extend the service nationally and Mears is bidding on a further eight regions with an aggregate annual value of approximately £35m.

As both AASC and MOJ contracts expand in terms of user numbers and regional coverage, the Group is reviewing selective property purchases on a small scale in certain areas where suitable leasehold accommodation is in short supply, thereby maintaining appropriate service levels.

The Group's Residential Living Accommodation Project contract ("RLAP") with the Defence Infrastructure Organisation mobilised on 1 April. Under the contract, Mears will provide a wide range of accommodation and property services to service personnel and their families across the UK. Services include property search, selection and leasing, relocation services, tenancy management, responsive repairs and maintenance. Mears has been successfully providing similar services since 2016 under the predecessor Substitute Service Accommodation contract. The new contract is for a period of up to 7 years and has an annual value of around £50m. The new contract has started well with both operational and financial metrics showing good progress.

Supply chain

The Group has deployed significant resource in managing the current inflationary headwinds and availability of materials within its supply chain. The Group benefits from annual price adjustment mechanisms which are structured within all customer contracts, and are typically benchmarked against RPI, CPI or other bespoke maintenance related indices. Most contractual increases are effective in April of each year, being aligned to our clients' financial years. However, the Group is not immune to the accelerating cost pressures being widely experienced across the UK. Only through careful planning, strong financial management and a collaborative approach with our clients, were cost pressures able to be managed without impacting on operating margins.

Our procurement procedures have meant that we have not experienced significant problems with material supply. Where lead times have lengthened, we manage and plan for this in our operational delivery. There are early signs that these supply issues appear to be easing.

The Mears model has always been to prioritise the investment in, and retention of, our own staff, with lesser reliance on sub-contracted and other short-term labour, especially relative to our peers. The Group made several improvements during the period to employee remuneration, holiday and sick pay entitlements and other terms and conditions. We have always been proud of our track record on employee welfare and engagement, and this has been recognised in Mears again being voted one of the Top 25 Big Companies in the UK to work for (Sunday Times). In line with national trends, our employee turnover has slightly increased in recent months but remains low relative to the industry. In common with the rest of the industry, the recruitment of skilled staff remains difficult and lead times are increasing. These labour shortages are proving a constraint on our ability to pursue certain new opportunities. We continue to invest and innovate to attract the best talent.

Customer satisfaction

Mears conducts several thousand surveys each month and has an independently Chaired Customer Scrutiny Board, that reports both to the Board and externally on our performance. Key developments are tried and tested with this group which has customer representation both from our maintenance and management services

In the first half of 2022, overall customer satisfaction was 87% (2021: 86%) and we are pleased to see complaint levels remaining low across the Group. Those complaints that we do have are also being resolved efficiently and quickly, with all learnings being transferred into revised operational practices. We continue to enhance the ability for tenants to interact with us digitally while recognising that for many tenants, the more traditional routes are still preferred.

De-carbonisation

We have an end-to-end carbon reduction service in place for our clients' housing stock. This starts with the ability to help measure existing carbon efficiency, enables us to design a programme to cost effectively deliver improvements and then to measure success. In the short term, the cost-of-living crisis has given further urgency to this work, as have energy availability concerns brought on by the situation in the Ukraine.

We have already secured three pieces of work for our clients through the Social Housing Decarbonisation Fund ("SHDF") first wave, which will be delivered from Q3 2022. The second wave of funding will be available in the Autumn, and we are confident that we will secure additional work at this point. Further SHDF funding waves will follow in future years and the forthcoming ECO 4 pot will also bring opportunity. While we recognise that the level of overall funding currently available does not allow this opportunity to be delivered in full, we will work with our clients to ensure that the maximum possible is achieved within whatever funding constraints exist.

We have made the commitment to achieve Net Zero on Scope 1 and 2 emissions by 2030. This means the electrification of our fleet and enabling further efficiencies in our working practices.

Development

The Group remains on track to complete its exit from Development by the end of FY 2022. A further 22 units were sold in the first half, generating £12.3m of revenues (H1 FY2021: £17.7m). As of 30 June 2022, there remains 12 completed units and 2 units under construction. Cashflow was positive in the period, with the spot working capital utilisation as at 30 June 2022 reducing to £4.3m (31 December 2021: £12.0m). Realised pricing has been in-line with carrying values.

CASH FLOW AND WORKING CAPITAL MANAGEMENT

Mears has always fostered a strong 'cash culture', whereby the Group's front-line operations understand that invoicing and cash collection are intrinsically linked, and that a works order is not complete until cash is collected in full. This culture has underpinned strong cash performance over many years. The Group has delivered strong cash generation in the first half, with EBITDA to operating cash conversion of 134%. The reported cash conversion has been enhanced further as the working capital absorbed within the Group's Development activities, which have been in run-off phase for the past 2-years, has delivered a permanent release of around £5.3m in the half. In addition, the Group has continued to benefit from payments received on account from customers, increasing in the period by approximately £5.5m to £33.3m at 30 June 2022. After adjusting for these two items, which could be considered non-underlying in nature, the Group has delivered EBITDA to operating cash conversion of 108%.

Whilst it is pleasing to report a strong cash position within the period end balance sheet, of much greater significance is the daily cash performance over the 181-day period. The healthy period end balance is a reflection of the average daily net cash figure during the first half year of £28.4m, which represents a significant improvement from the prior year, where the Group had a daily net debt position of £8.1m.

	H1 2022	H1 2021	FY 2021
	£'000	£'000	£'000
Average daily adjusted net cash / (debt)	28,365	(8,082)	400
Adjusted net cash/ (debt) at period end	89,859	47,591	54,632

ORDER BOOK AND PIPELINE

The order book stands at £2.3bn (31 December 2021: £2.4bn), reflecting the timing of contract renewals over the last twelve months. The Group secured contracts in 2022 YTD valued at over £165m with a win rate (by value) of 40%. The key orders secured are detailed below:

Contracts awarded in 2022 to date	Type	Base	Extension	Annual	Base	New /
		term	option	value	contract	Retention /
		(years)	(years)	£m	value	Extension
					£m
Tower Hamlets Homes	Maintenance	5	5	15	75	Retention
South Cambridgeshire District Council	Maintenance	5	-	7	37	Retention
London Borough of Havering	Maintenance	10	-	5	50	New
SHDF (various)	Maintenance	1	-	15	15	New
Ministry of Justice	Management	2	-	10	10	Extension

Over the course of the past eighteen months, the Group has seen a high number of existing contracts approaching re-bid. Positively through this period, the Group has enjoyed several contract extensions (Orbit, Livin and MoJ) and a number of retentions (RLAP, Tower Hamlets, Redbridge and South Cambridgeshire). The Board is pleased with its contract retention rate, but it is inevitable that a busy period of re-bids will result in some loss of work. Consequently, the Group will see its work with Welwyn Hatfield Borough Council, with an annual value of circa £15m, come to an end in October 2022, after more than 20-years' service. Looking forward, the Group expects the coming eighteen months to be weighted towards new bidding opportunities. We are seeing an increase in the levels of bid activity after two years of reduced volume as a result of Covid. The Group's current bid pipeline for contracts to be awarded in 2023 is currently standing at approximately £750m. The bid pipeline comprises contracts which meet the Group's key bidding criteria such as size, quality, and margin opportunity. Furthermore, in the coming 12-months, there are few rebids meaning much of the business development focus can be directed towards supporting the Group's organic growth ambitions.

This reported pipeline excludes the following larger contract bid opportunities:

• North Lanarkshire Housing and Corporate Maintenance and Investment Services contract estimated to generate more than £1.8bn of revenues over 12 years - to provide reactive maintenance, compliance, servicing as well as programmes of works to the Authority's approximately 37,000 homes and c.1,200 other buildings.
• Ministry of Justice CAS 3 temporary accommodation programme in a further eight regions estimated at annual revenues of £35m.