Mears : Preliminary results for the year ended 31 December 2021

31 March 2022

MEARS GROUP PLC

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

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2021

Operating excellence delivers strong financial performance with positive trading outlook

Mears Group PLC, the leading provider of services to the Housing sector in the UK, announces its preliminary financial results for the year ended 31 December 2021 ("FY 2021").

Financial highlights

• • Strong revenue recovery with Group revenues up 9.0% year-on-year to £878.4m (FY 2020: £805.8m)

• • Adjusted profit before tax1 at the top end of market expectations at £25.6m (FY 2020: £3.4m loss)

  • o Operating margins continue to strengthen in H2 to 3.7%2 (H1: 3.1%)

• • Excellent cash performance with average daily adjusted net cash of £0.4m (FY 2020: £97.3m adjusted net debt)3

  • o 2-year cash conversion at 117% of EBITDA including continued unwind of Development4

  • o Adjusted net cash3 at 31 December 2021 of £54.6m (2020: £56.9m)

• • Board is recommending a final dividend of 5.50p, bringing the full year dividend FY 2021to 8.00p (2020: nil) reflecting continued strong cash performance and positive outlook

Operating highlights

• • Excellent customer satisfaction, contract KPIs and employee engagement despite Covid-19 challenges

• • Continued investment in Mears' in-house IT operating platform which remains a key differentiator

• • Successful financial and operational management of inflationary, supply chain and labour market pressures

• • Net Zero targets set (Scope 1 and 2 by 2030) to complement our market-leading Social and Governance framework

Strategic highlights

• • Positive momentum in pipeline conversion underpins organic growth strategy

  • o Awarded the Residential Living Accommodation Project ("RLAP") contract providing a wide range of housing services to the Defence Infrastructure Organisation ("DIO" or "MOD")

  • o Ministry of Justice ("MOJ") transitional housing contract award successfully mobilised and extended

  • o Order book now stands at £2.4bn5 (2020: £2.6bn), reflecting the good progress on contract retentions and extensions

• • Strong cash generation facilitates modest increases in growth investment, particularly

  • o Technology and digital solutions that drive operational efficiency and develop the Group's business lines

  • o Small bolt-on acquisitions which enhance the Group's capabilities (eg. decarbonisation)

Financial summary

Continuing operations

Revenue (£m)	FY827082.41	FY820052.80
Statutory profit / (loss) before tax (£m)	16.3	(15.2)
Adjusted profit / (loss) before tax1 (£m)	25.6	(3.4)
Statutory diluted EPS (p)	11.50	(10.66p)
Adjusted diluted EPS5 (p)	18.23	(2.29p)
Dividend per share (p)	8.00	-
Average daily adjusted net cash / (debt)3 (£m)	0.4	(97.3)

Current trading and outlook

• • Mears has made a positive start to 2022 with current trading in-line with the Board's expectations

• • Excellent revenue and profit visibility for current financial year from

  • o a strong start in management-led contracts, including continuing elevated activity levels on Asylum Accommodation and Support Contract ("AASC"), and extensions to the MOD and MOJ contracts

  • o maintenance-led activities returning to normal levels, augmented by progress in securing decarbonisation works

• • Cash and working capital management has remained strong, reporting a daily adjusted net cash3 balance for every day of the first quarter

• • Mears is generally well-positioned in respect of sector-wide inflationary pressures, with the majority of contracts enjoying annual indexation. However, given recent price volatility, particularly in energy prices, the Group is managing its cost base continuously, in line with contractual mechanisms

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

"These results are testament to the strength of the Group's high-quality operations, trusted customer relationships and collaborative approach. The positive trading performance across revenues, profits and cash was driven by good pipeline conversion, successful cost management and long-term investment in our people and our systems. The year has started well and Mears is well-positioned to manage the sector-wide inflationary cost pressures.

"We are trusted partners to our Local and Central Government clients who increasingly recognise the need for a high quality, housing specialist to help them provide a broad range of housing solutions. With the fundamentals of our business in such good shape and the long-term challenges of affordable housing, public health and climate change high on the political agenda, we believe we are the housing partner of choice and look to the future with confidence."

• 1. Adjusted profit/(loss) before tax stated on continuing activities before non-underlying items of £1,627k (2020: £2,279k) and before the amortisation of acquired intangibles of £7,655k (2020: £9,525k).

• 2. Operating profit (pre-IFRS 16) before non-underlying items and before the amortisation of acquired intangibles.

• 3. Adjusted Net cash / (debt) excludes IFRS 16 lease obligations.

• 4. Cash inflows from operating activities to EBITDA conversion on a two-year view to eliminate the distorting impact of the Covid-19 pandemic on working capital balances

• 5. Group order book as 31 December 2021 adjusted for £0.3bn of RLAP contract confirmed in February 2022 (delayed from 2021)

• 6. The adjusted diluted EPS measure is further adjusted to reflect a full tax charge.

For further information, contact:

Mears Group PLC

David Miles, Chief Executive Officer Andrew Smith, Finance Director Alan Long, Executive Director

Joe Thompson, Investor Relations

Tel: [phone]

Novella Communications

Tim Robertson

Tel: [phone]

Claire de Grootwww.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.

CHAIRMAN'S LETTER

Introduction

The most obvious theme for 2021 was the gradual and progressive return to normal working across most of Mears' activities. At the start of the year, a version of lockdown was still in place, our repair and maintenance activities were restricted and a number of contracts continued, as they had for much of 2020, to repay our costs but eliminated the scope for profit generation. By the half year, we had returned to almost normal operations and contractual conditions. Activity continued to build throughout the second half of the year with growing work volumes and a more active bidding process. The resilience of our markets and our operations was underlined by the fact that the appearance late in the year of the Omicron Covid variant, while creating some operational challenges, had very little impact on activity levels, service quality or financial performance. We entered 2022 with a strong trading and financial position, a good pipeline of work and continued high levels of customer service.

This resilience in performance owes much to three factors. The first, and most important, is the quality of our staff. I have seen many examples of extraordinary dedication and resilience in the face of difficult circumstances and a determination to deliver a good experience for customers, not simply to execute a piece of work. The second is the strength of our customer relationships, fostered by our belief that excellent customer service is the key to effective cooperative working between client and provider. Finally, our information technology platform has been integral to the delivery of our high quality, responsive service. Mears' people have much to be proud of in the way they navigated 2021.

Mears in 2022 is a financially strong group whose business is to fulfil contracts from UK Local and Central Government bodies to provide essential services to customers in need. No UK company will be entirely immune from the consequences of the current deterioration in the world geopolitical climate, but Mears' financial stability and increasing certainty of revenue provides the Group with strong defensive qualities and confidence in our sustainable future.

Results

Mears' results for the year reflect this pattern of underlying activity, with activity and profitability growing as the year progressed. Full year revenue from continuing activities reached £878.4m, very close to that achieved in 2019 (£881.5m) and a significant increase on 2020 (£805.8m). Adjusted profit before tax reached £25.6m (2020: £3.4m loss). Cash generation throughout the year was particularly strong both in the core operations and in proceeds from realisations in the residual development business. The year-end adjusted net cash balance was £54.6m but, more importantly, average daily adjusted net debt for the year was effectively zero. Underlying cash conversion of over 100% in the last two years, (as defined and detailed in the Finance Review), has, along with strategic disposals, transformed the Group's financial position and created the current balance sheet strength which Mears is determined to retain into the future.

The value of new contracts bid and secured in the year was relatively low given the delay caused by Covid. The Group was pleased to develop a new Central Government client relationship with the Ministry of Justice ("MOJ") to provide housing services, supporting low and medium risk prisoners upon their release into initial accommodation and then providing a clear pathway to a settled home. While the initial value of the contract is modest, there is scope to extend the longevity and geographic coverage of this work as we become familiar with the requirements of a new and different customer base and a new client.

We were delighted that in early 2022, the Ministry of Defence ("MOD") notified Mears that it had been successful in its bid to continue to provide housing services to military personnel in the community under the new Rented Living Accommodation Project (RLAP). This is an extremely important client and contract for the Group, and we look forward to continuing to provide a very high-quality service to our military customers for a number of years. Including this successful retention, the Company's order book remains strong at some £2.4bn (2020: £2.6bn).

Dividend

The Board is proposing a final dividend of 5.50 pence per share, bringing the total dividend for the year to 8.00 pence per share. We are pleased to have been able to reinstate dividend payments as our trading returned towards normal during 2021 and it is the Board's policy to pay a progressively growing dividend, keeping cover at between 2x and 2.5x of 3 normalized earnings.

Strategy

For much of the last two years, Mears' strategy has been to streamline and refocus its activities on the core provision of low capital intensity housing services to public sector clients and in doing so has realised value from non-core activities to reduce its indebtedness. This has now been achieved. During the last year, the Board has invested considerable time in working with the management team, supported by external advisers, to assess the scope for the Group's future development.

The backdrop is encouraging. Demographic trends are increasing the demand for affordable housing and more sophisticated retirement living solutions. Social housing waiting lists remain long and there is growing pressure on local authorities and housingassociations to find, service and maintain homes to a high standard. Finally, the Government's commitment to national carbon reduction targets cannot be achieved without both a very substantial investment in the quality of the existing housing stock as well as significant changes in the way houses are heated.

Mears is positioned to benefit from all of these trends. We expect to use our position as the market leader in housing maintenance to win new business at good margin and to progressively extend our range of services to clients. We will explore ways in which we might be able to operate profitably with private sector clients. We will grow our capabilities, especially in relation to the 'greening' of housing and, once effective funding mechanisms are found to pay for this work, expect to be a market leader in this transformation of the country's social housing stock. We will maintain a strong financial position and our focus on excellent cash generation.

Our commitment to all of our stakeholders will remain at the forefront of our development. We will continue to support customers and communities, both in how we undertake our core work and in the social value projects we support. We will invest in our business to generate incremental opportunity and quality improvements in the service we can provide customers and clients. Our commitment to our staff's welfare and their personal and career development will also be strengthened. We will institute a programme to eliminate our own carbon footprint by 2030. We will maintain close relationships with our bank lenders, although our facilities will be smaller than in past years. And we will keep a close eye on the need to balance retained financial strength for the group with a steady and growing return of value to our shareholders.

Board developments

As foreshadowed in last year's report, both Roy Irwin and Geraint Davies stood down from the Board at the 2021 AGM. The Board is grateful for their services. At that time, the Board proposed to add one new non-executive director during 2022.

Much work was undertaken in Nominations Committee to identify both what skills and experience would be of most value in recruiting a new director and in examining our need for a continued effort to reflect at Board level the Group's overall commitment to diversity. This work is discussed further in the report of the Nominations Committee. Following an extensive process, the board was pleased to announce the appointment of Angela Lockwood as its new non-executive director with effect from 1 January 2022. Angela has held senior roles in the Affordable Housing sector for many years and her in-depth understanding of that community will be of immense value to Mears as it continues to develop its business.

Relationships with shareholders

For a number of years, Mears' largest shareholder was Primestone Capital, which held over 12% of the Company's shares. Over the last 12-months, Primestone progressively reduced its holding and, by the end of 2021, it was no longer a shareholder. Mears' current shareholder base is dominated by a small number of funds with significant holdings, most of whom have been substantial and supportive owners of the company for many years.

While day-to-day dialogue with shareholders is led by the senior management team, it is important for me as Chairman to have the opportunity to talk with shareholders from time to time so that I can understand the key issues which underpin their support for Mears. During 2021, I held discussions on at least one occasion with most of the largest 15 shareholders in the group which allowed them to question me about the position and prospects for the Group and facilitated my understanding of what matters for them in their continuing support for the Company. I intend to continue that dialogue, both reactively and proactively, through 2022.

ESG

I referred above to the importance of the 'carbon zero agenda' in the future development of the Mears' business, and this is discussed further in the CEO's review. Mears is developing its plan to eliminate its own carbon footprint by 2030. This plan will be closely monitored by the Board as it is rolled out across the group to ensure that the changes we make are sustainable, effective, and permanent.

Mears' commitment to responsible business and the creation of social value is an integral part of the fabric of the Group. We are pleased that it continues to be recognised by a wide range of outside observers. We were delighted to be awarded the Order of Distinction by RoSPA (the Royal Society for the Prevention of Accidents), having achieved Gold Award standard in our safety record for 19 consecutive years. We remain one of the Best Big companies to work for in the annual Sunday Times survey. We have continued to develop a range of programs to support staff from apprentices through to middle management in their career development. Our commitment to customer service was reflected in the retention of the Institute of Customer Service Mark Accreditation for Housing.

We remain in the forefront of the development of good business practice with the production of our report on Ethical Procurement and in the development of our Scottish Business Charter.

Further details of other initiatives are included in the ESG section of the Strategic Report.

Conclusion and outlook

Much has been achieved by Mears over the last three years to optimise its position and prospects, despite the strong headwinds of the Covid pandemic for much of that period. Credit for this must go to the management team and the workforce generally and it is a pleasure, on behalf of the Board, to acknowledge the hard and effective work which has been put in over this period. We are confident in our capabilities, our ability to add value and our capacity to generate sustainable profitable growth.

CHIEF EXECUTIVE OFFICER'S REVIEW

Introduction

2021 was a strong year for the Group, characterised by high quality operations and customer service, a robust financial position and trading outperformance. Our track record of operational excellence underpins everything we do; from winning new work, attracting and retaining the best staff, delivering a strong and sustainable financial performance. The pandemic again placed additional operating challenges this year. Prior long-term investment in client relationships, our people and systems ensured the business continued to perform well relative to its peers.

We are a trusted partner to our Local and Central Government clients who increasingly recognise the need for a high quality housing specialist to help them provide a wide range of accommodation and related services to often vulnerable service users.

I am keen to put on record its appreciation for the on-going dedication and commitment shown by all staff and the co-operation and support received from our clients and customers.

Group Overview

The trading performance of the Group continued to recover strongly over the course of the year as the financial impacts of the Covid-19 pandemic receded. The recovery in revenue in the continuing operations to near 2019 levels in 2021, and the rise in operating margins, especially in the second half, were very positive.

Continuing activities	H1 2021	H2 2021	2021	2020
£m	£m	£m	£m
Revenue
Maintenance-led	286.5	257.9	544.4	536.9
Management-led	139.5	168.9	308.4	253.8
Development	17.7	7.9	25.6	15.1
Total	443.7	434.7	878.4	805.8
Operating profit before tax measures:
Statutory operating profit / (loss) )1	9.7	14.7	24.4	(6.3)
Adjusted operating profit / (loss) (post-IFRS 16)2	15.6	18.1	33.7	6.6
Adjusted operating profit / (loss) (pre-IFRS 16) 2	13.7	15.9	29.6	0.6
Adjusted operating margin (pre-IFRS 16)	3.1%	3.7%	3.4%	0.1%
Profit before tax measures
Statutory profit / (loss) before tax	5.6	10.7	16.3	(15.2)
Adjusted profit / (loss) before tax2	11.1	14.5	25.6	(3.4)

• 1. Statutory operating profit / (loss) includes share of profit in associates

• 2. Adjusted measures are defined in the Alternative Performance Measures section of the Finance Review

Group revenues for the year were £878.4m (2020: £805.8m), a 9% increase on the prior year, driven by elevated volumes across the Management-led contracts, repair volumes returning to pre-pandemic levels within responsive Maintenance and a good sell-through in Development, especially in the first half of 2021.

Operating profits and margins continued to strengthen over the course of the year as lockdown restrictions eased, volumes increased, and the business reverted to its original commercial mechanisms with clients. Pre-IFRS 16 adjusted operating profit for the year was £29.5m (2020: £0.6m), with pre-IFRS 16 adjusted operating margins recovering from 3.1% in the first half to 3.6% by the second half.

Adjusted profit before tax for the year was £25.6m (2020: £3.4m loss), benefitting from the improved trading performance and lower interest costs given the Group's much improved debt position throughout 2021.

OPERATING REVIEW

Maintenance-led

Through its portfolio of Maintenance-led contracts Mears is responsible for the upkeep, repair, and maintenance of social housing across the UK, on behalf of around 50 local authorities and housing associations.