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20 March 2018 |
("Mears" or "the Group" or "the Company")
Mears Group PLC, the provider of services to the Housing and Care sectors in the UK, announces its financial results for the year ended 31 December 2017.
Financial Highlights
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2017 |
2016 |
Change |
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Group revenue |
£900.2m |
£940.1m |
-4% |
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Housing revenue |
£766.1m |
£787.5m |
-3% |
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Care revenue |
£134.1m |
£152.6m |
-12% |
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Profit for the year before tax* |
£37.1m |
£40.1m |
-7% |
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Profit for the year before tax from continuing activities |
£26.5m |
£29.4m |
-10% |
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Diluted EPS** |
20.10p |
23.41p |
-14% |
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Normalised diluted EPS* |
28.05p |
30.36p |
-8% |
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Dividend per share |
12.00p |
11.70p |
+3% |
* On continuing activities, stated before amortisation of acquisition intangibles. The normalised diluted EPS amount is further adjusted to reflect a full tax charge.
** On continuing activities
Key highlights
· Group revenue of £900.2m (2016: £940.1m), impacted by both delays to the timing of planned workloads following the tragic events at Grenfell Tower and a slow period in securing new contract revenues in Housing, combined with the planned rationalisation of Care contracts.
· Group profit before tax and before amortisation of acquisition intangibles reduced to £37.1m (2016: £40.1m), with the diluted EPS reducing by 8% to 28.05p (2016: 30.36p).
· Housing operating margins reduced to 5.2% (2016: 5.6%), reflecting the revenue reduction and a resulting lower overhead recovery.
· Service quality remains our key differentiator; the proportion of customers rating our service as 'excellent' showed further improvement at 92% (2016: 91%).
· Care revenue decreased by 12% to £134.1m (2016: £152.6m), reflecting the restructuring of the Care contract portfolio following the closure of branches accounting for around 27% of Care revenues. The restructuring is now complete and our remaining Care contracts have a much improved mix of longevity, certainty of spend and price.
· The Care division returned to profit as planned, delivering an operating profit for the full year of £0.5m (2016: loss £1.2m), representing an operating margin for the second half of 2.3%.
· Exceptional loss of £16.5m reported in discontinued activities relating to the full provision against performance guarantees in the legacy M&E division.
· EBITDA to cash conversion of 61% (2016: 70%) is below our historical norm reflecting the changing sales mix.
· Reported net debt position of £25.8m (2016: £12.4m) at the year end. The average net debt over the year was £96.4m (2016: £85.0m), in part reflecting the changing sales mix and after funding of both the deferred consideration on earlier acquisitions and the cash outflow included within the loss on discontinued activities.
· New separate debt facility of £30m to fund short-term purchase of properties as part of the Group's development of longer-term homelessness solutions.
· Total dividend increased by 3% to 12.00p (2016: 11.70p), reflecting the Board's confidence in the underlying performance and the long term prospects of the Group.
· Order book at £2.6 billion (2016: £3.1 billion). The current bidding pipeline is in excess of £2 billion for 2018, which is well in excess of normal bidding levels. The strategic evolution of Mears means greater access to opportunities previously out of our reach.
Commenting, David Miles, Chief Executive Officer, Mears, said:
" Whilst 2017 proved to be a challenging year, we have made solid operational progress. The decline in housing revenues following the tragic events at Grenfell Tower has stabilised although there still remains some uncertainty as to the speed at which these revenues will recover.
"The performance of the Care division has been a highlight, returning to profitability as planned following a period of restructuring, putting the Care division on a stable footing.
"On a positive note, the current pipeline of opportunities for Mears has never been greater. We anticipate competitively bidding contract values in excess of £2 billion during the course of 2018. The strategic evolution of our business means we are gaining access to opportunities that previously would have been out of our reach. While the Board has decided to adopt a more conservative approach in how it guides the market on its expectations, the Mears operation is performing very well and I am encouraged that our excellent service delivery is putting us in a good position to secure new opportunities. "
A presentation for analysts will be held at 9.00 a.m. today at the offices of Buchanan, 107 Cheapside, London, EC2V 6DN.
For further information, contact:
Mears Group PLC
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David Miles, Chief Executive Officer |
Tel: +44(0)7778 220 185 |
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Andrew Smith, Finance Director |
Tel: +44(0)7712 866 461 |
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Alan Long, Executive Director |
Tel: +44(0)7979 966 453 |
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www.mearsgroup.co.uk |
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Buchanan
Mark Court/Sophie Wills/Catriona Flint Tel: +44(0)20 7466 5000
www.buchanan.uk.com
About Mears
Mears employs around 12,000 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. Our Care teams provide support to over 15,000 people a year, enabling older and disabled people 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 make a positive impact on people's quality of life and on their communities' social, economic and environmental wellbeing.
While it has been a challenging year, I am pleased to report a year of operational progress and that the Group is very well positioned to benefit as our core markets continue to develop. During the year, Housing and Care have been at the top of the political agenda and we believe our differentiated offering has never been more relevant. The events seen in the wider outsourcing sector have been frustrating, where company-specific issues have been perceived to have wider sector implications. We have, over recent months, needed to remind stakeholders of how Mears is different from the competition.
Mears is a very simple business. Our focus has always been on a single service user, namely the individual in their home. Whilst the end service users are at the centre of our business model, the services themselves are primarily funded by the public sector. The benefit of having this narrow focus is that we understand our markets, we understand the challenges faced by our clients and we are well placed to provide innovative solutions to address those challenges. We have a strict and continuing discipline when bidding new contract opportunities: we are highly selective and we never change our bidding model to meet a short-term growth aspiration. This has been most evident recently where we have seen a lower rate than normal in the conversion of new contract opportunities. However, I remain extremely confident in the quality of our tender submissions. We have missed some opportunities on price, having scored well on all the quality measures. We are very confident that our conversion rate over the medium term will continue to be in line with our historical norms. We will continue to take a long-term approach to how we run the business, reflected in the well-established leadership team that thoroughly understands the strategy and operational workings of the business. As leaders in our core markets, we will continue to innovate and demonstrate our value for money proposition.
I am satisfied with the financial performance for the year to 31 December 2017, but I am also mindful that our financial results were short of our aspirations at the start of the year. While our focus is on sustainable growth in the medium to long term, I understand the importance of delivering against our financial targets in the short term too. The tragic events of Grenfell Tower, and the resulting impact on our Housing revenues, could not have been anticipated. Group revenue was £900.2m (2016: £940.1m). Our second half revenues of £429.4m (2016: £473.9m) showed a significant reduction versus those delivered in the first half of £470.8m (2016: £466.2m) reflecting the delays in the timing of our planned workload as clients' attention was diverted towards ensuring that their housing portfolios were safe and fully compliant. We supported our clients in postponing this planned work, knowing that it will return once they have confirmed their housing is fully compliant. The revenue reduction, together with the associated impact upon overhead recovery, saw Group profit before tax and before acquired intangible amortisation reduce by 7% to £37.1m (2016: £40.1m) and a margin of 4.1% (2016: 4.3%). Normalised diluted earnings mirrored the profit reduction, decreasing by 8% to 28.05p (2016: 30.36p). Our performance by operating division is discussed in greater detail in the Review of operations.
The Group reacted quickly to the reduction in Housing revenues. Whilst the reduction is expected to be temporary given the contractual nature of the work, it has prompted the Group to carry out a more detailed review of its operational and central support structures to ensure that they deliver the best value. This is particularly relevant given the evolution towards a broader service offering with a changing support requirement. The Board expects annual savings in excess of £5m to be delivered in the 2018 financial year.
The order book is £2.6 billion (2016: £3.1 billion), reflecting the quiet period of new contract awards. Previously, Mears has reported secured revenue as a key performance metric. Due to the evolving nature of our business, secured revenue over recent years has been found to be a less robust metric than it was historically. This became increasingly evident following the challenges encountered in 2017, where secured revenues reduced over the course of the year. The Board has reassessed how we guide the market and, going forward, we will set our expectations for the next twelve months in line with our 'firm and probable order book', providing market updates to those expectations when new orders are secured whilst also giving us an increased ability to absorb unforeseen challenges. The 'firm and probable order book' for 2018 currently stands at £900m.
The Group has positioned itself to provide a broader service offering to the increasingly complex challenges faced by our clients. The pipeline of traditional contracting opportunities continues to flow through at a consistent level and the innovative nature of our Housing Management solutions means that much of that work can be secured without the requirement for an extended, competitive and expensive tender process. Moreover, I do wish to highlight that the Group is currently working on two opportunities that are very significant and, until recently, would have been beyond the reach of the Group. While significantly bigger in scale than the Group's previous bids, they remain true to our core approach of focusing on services around a tenant, funded by public money.
We continue to have good dialogue with our shareholders and one topic which prompts discussion more than any other is in respect of our Care activities. We need to communicate more clearly the fundamental role played by Care within our Housing business, and the extent to which it underpins the success of that part of the Group. We do see an increasing number of opportunities where clients are seeking a seamless service to provide both care and housing to vulnerable people. The Group will increasingly focus its Care bidding activity towards those clients where there are opportunities to provide Housing services. The Board remains aware of its obligations to shareholders, and it will continue to target better returns from the Care business. A particular highlight for me was the significant improvement in the performance of the Care division which returned to profitability in the second half of 2017.
Dividend
The Board remains confident in the Group's future opportunities and consequently it expects to continue following a progressive dividend policy. The Board is therefore recommending a final dividend of 8.55p (2016: 8.40p) per share which, when combined with the interim dividend, gives a total dividend for the year of 12.00p (2016: 11.70p), a 3% increase, reflecting the Board's confidence in the underlying performance of the Group. The dividend is payable, subject to shareholder approval, on 5 July 2018 to shareholders on the register on 15 June 2018. The Board regularly reviews the Group's dividend policy to maximise returns to shareholders whilst maintaining a prudent capital structure and retaining the ability to invest for growth.
Our people
During the second half year, the Group carried out its annual staff survey, 'Say What You See'. I was delighted to see an exceptional response rate of 83% across our 12,000 employees which is all the more pleasing considering much of the Mears workforce is mobile and therefore engagement is naturally harder. Staff feedback showed continued improvement from the already good levels in 2016. Areas that scored particularly highly in the survey were our commitment to customer service and to people development, both of which are fundamental to delivering our strategic priorities.
I commend our employees for their commitment and energy throughout a challenging period for the Group and I continue to be impressed by their quality, professionalism and loyalty. Mears has a diverse workforce including several hundred apprentices. The vast majority of our employees live in the areas in which they work. Diversity and respect for all remains core to our induction, recruitment and customer care programmes.
Corporate governance and risk management
During the year, a number of our Non-Executive Directors reached nine years' service and did not therefore offer themselves for re-election. Accordingly, the Board was delighted to welcome Roy Irwin and Jason Burt as Non-Executive Directors, whose appointments were confirmed at the 2017 AGM. Both Roy and Jason have brought skills and experience that have added considerably to the Board. I was also delighted to welcome Elizabeth Corrado to the Board in September 2017 who further enhanced the breadth of skills and balance of the Board.
Peter Dicks will not be offering himself for re-election at the 2018 AGM and will step down from the Board in June 2018. I would like to thank Peter for the significant contribution that he has made to the Group.
The Board continues to set itself high standards of corporate governance. Our Corporate Governance Report, issued within our Annual Report, details how we approach governance and the areas of focus for the Board in 2017 and into the future. In line with good practice, we have reviewed and updated the Group's risk register. The Senior Management Team play a central role in reviewing and mitigating the Group's risks. The Group risk team presented risk management training modules to all levels of management via the Group development programme, to reinforce our strong risk management ethos.
Board evaluation and effectiveness
Performance evaluation of the Board, its Committees and individual Directors takes place on an annual basis. An externally facilitated performance evaluation was conducted during the year covering a broad range of areas including Group strategy, independence, experience and effectiveness and the interaction between Board members. It confirmed that the Board is functioning well. It is vital that as a Board we have the right mix of skills, experience and diversity, whilst ensuring that Board members have sufficient knowledge of the Company and maintain their independence and objectivity. I am fortunate as Chairman to be able to call upon a Board with a broad range of expertise and specialist knowledge.
Employee Director
We understand the vital role that our workforce plays in the success of the Group. To further increase engagement between the Board and our employees, we are looking to appoint an Employee Director to the Board. This role will ensure that the Board receives full, open and honest insight and views from its workforce on how strategic initiatives are being implemented and will provide the wider workforce with a better understanding of how the Board operates. We are currently managing the recruitment process, with applications open to all employees. The role will be restricted to a two-year term and we hope that the appointment of the successful applicant will be confirmed at the 2018 AGM.
Gender pay
Mears will shortly be issuing its first report based on the UK's new gender pay reporting requirements.
Mears' gender pay gap is strongly influenced by the salaries and gender makeup of its Care division, which accounts for around two thirds of employees. The Care division is predominantly female and within a sector which is poorly funded, with many employees paid at levels tracking the National Living Wage. The Housing division comprising the remaining one third of employees, is predominantly male. The Housing sector is significantly better funded and pay rates reflect this. We are determined to continue to lead the way in encouraging more women to pursue a career in housing and indeed take every opportunity to highlight the need for Central Government and Local Authorities to raise the funding and status of roles in the Care sector.
Social value
At the heart of Mears lies a strong sense of responsibility towards improving people's lives. We aim to lead the way with social value in the markets where we operate, delivering lasting and meaningful outcomes. During the year we conducted a review of our social value strategy, identifying our key priorities to ensure that we effectively engage with communities and deliver social value on the ground throughout the business, with an effective measurement of the social impact that is created.
We continued to secure Social Mobility Champion status from the Department of Business, Energy and Industrial Strategy. Social mobility is about creating opportunities for young people from disadvantaged backgrounds. At Mears, we aim to make sure jobs and opportunities are open to everyone.
Summary
From a personal perspective, I am incredibly proud of the progress the Group has made since its IPO in 1996. Our revenues have grown from £10m to £900m, a significant part of which has been delivered organically. Profits have grown from a few hundred thousand pounds to tens of millions. We employ around 12,000 people and support wider stakeholders in the communities where we operate. These achievements should not be forgotten in what has been a difficult political and trading environment. We will continue to play a leading role in shaping our core markets. The Executive team has an outstanding track record and I am proud to be associated with the Group. I look forward to reporting on further progress during the coming year.
Our highly focused strategy in the Housing and Care markets, built on service leadership and sustainable pricing, continues to give me great confidence for the future.
Our financial performance in 2017 was disappointing and I understand the importance of delivering against our financial targets. Whilst some of the short-term challenges in Housing could not have been anticipated, it was frustrating that a number of other opportunities, which could have helped mitigate these challenges, did not develop quickly enough. Nonetheless, I am pleased with the progress made over the last year across the entire Mears business and on a range of important indicators.
I am particularly excited by the prospects for the Mears Housing offering over a medium-term time horizon. The Mears operations are performing very well and I am encouraged that this excellent performance is putting us in a good position to secure new opportunities. The pipeline of opportunities for Mears has never been greater. Given the nature of the type of work for which we are bidding, the contracts we secure are increasingly of longer duration, with multiple work tasks. Some of the most significant of these current bidding opportunities will be awarded in 2018, although commencement dates may not be until 2019.
In 2017, the value of new contracts secured was below our expectations. This was due to two particular factors: firstly, we did experience a reduced level of some traditional repairs and maintenance work coming to market and secondly, we have seen some competitors being very aggressive on price. Mears will continue to focus on bidding only at sustainable pricing levels.
The market has seen some reductions in capital discretionary expenditure levels in the last two years. This is due to a number of factors and we have in most circumstances been very supportive of our clients' approach to these reduced spending levels. In the same period, social housing landlords have been focusing more on new-build activity to address the significant housing shortage, a clear Government priority.
The Government has already announced major commitments to housing, meaning investment will grow over the coming years, with the removal of the rent cap in 2020 giving additional confidence to our clients. The strategic evolution of our business means we can now access opportunities that previously would have been out of our reach. Mears has evolved its strategic focus towards Housing Management and Placemaking activities. In line with this, Mears is also building new homes as part of managing the regeneration and delivery of affordable housing for clients, to support their overall asset management plans. The Group has become a leading housing management business in the UK, directly addressing the issues resulting from rising levels of homelessness.
We firmly believe in our long-term Care strategy and that Mears is well placed to benefit as the market evolves. We have concluded the restructuring of our Care business, exiting those contracts where low pricing, lack of longevity and uncertainty of spend did not allow us to deliver a high quality service at sustainable margins. We will continue to be highly selective going forward.
Looking ahead, we need to communicate more clearly the fundamental role played by Care within our Housing business. To understand the link between Housing and Care, one needs to understand the demographics of our social housing customers. Almost half of social housing is occupied by a single resident, with a very high proportion of people aged 65 or older. In addition, where single residents are below 65 years old, there is a disproportionately high number of people who are disabled and/or living with multiple conditions that require care support. Almost one quarter of social housing is occupied by two people; however, a significant proportion of these are single parents. Whilst very few contract opportunities have our Housing and Care services being tendered together, it is vital in Housing that we can show that we have a deep understanding of the needs of our service users. This has become even more important as we have developed our housing management services, where tenancy management and care provision are increasingly directly linked. A significant proportion of our Housing customers have personal challenges and needs, and it is our capability and awareness of this which has underpinned our success. I envisage that the Group will increasingly focus its Care bidding activity towards those clients where there are likely to be opportunities to provide a complete Housing service.
We continue to see interest from Local Authorities to procure new care accommodation for supported living and extra care services which, in the majority of instances, involves a combination of funding, build, property management and care provision which is seen as a compelling service offering. We are currently on site in respect of three such schemes and there is a good pipeline developing.
Our dedication to providing our clients with first class service and value remains undiminished and is key to how we manage the business. Our unique strategy leaves us better placed than ever to achieve long-term success.
Review of operations
The Board is mindful that many of the readers of our Annual Report are focused particularly on the financial performance of the individual divisions and the wider Group. This Review of operations will naturally address this. We are aware that a number of the financial results delivered in 2017 were below our high standards. However, of equal importance to our business is the quality of our operations and the progress made in positioning the business for future long-term opportunities. In this regard, the Board is pleased with the progress made last year in both divisions and it is this that will, over the longer term, underpin stronger financial performance and future success.
Housing
We are increasingly involved in managing properties in a more holistic fashion over and above simply scheduling and delivering maintenance and repairs. We are often being asked by clients and other stakeholders to have greater involvement in helping them deliver appropriate housing outcomes for a range of tenants.
Housing revenues have historically been analysed between the reactive and planned nature of housing maintenance, whilst separately disclosing Housing Management activity. This allocation has become less relevant as we have broadened our service offering and we are increasingly providing a full asset management service. This evolution in our focus is extending our activities to all rented housing, in line with our clients' and the wider community's needs.
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2017 |
2016 |
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H1 |
H2 |
FY |
H1 |
H2 |
FY |
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Revenue £m |
402.0 |
364.1 |
766.1 |
389.6 |
397.9 |
787.5 |
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Operating profit £m |
20.8 |
18.7 |
39.5 |
18.9 |
25.2 |
44.1 |
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Operating profit margin % |
5.2% |
5.1% |
5.2% |
4.9% |
6.3% |
5.6% |
The financial performance of the Housing division has been disappointing but there is merit in reviewing the results between the first half and the second half year of the year. The first half of 2017 reported both revenues and margins increasing from the comparative period in 2016, primarily driven by the full-year impact of the previous year's new contract mobilisations. Mears Housing revenues are predominantly non-discretionary, which provides the Group with protection from significant workload fluctuation. This is underpinned by an individual tenant's right to repair, which places an obligation on our Registered Provider clients and removes their ability to defer spend on essential maintenance. Certain planned maintenance expenditure, whilst non-discretionary, does provide clients with scope to defer spending over the short term. Historically, around 15% of Housing revenues are of a discretionary nature, providing clients with an ability to extend that spending over a longer time horizon.
The tragic events at Grenfell Tower impacted upon second half year activity with reported revenues 9% lower versus the first half. This terrible event affected the timing of our planned maintenance workloads as clients' attentions have naturally been diverted towards ensuring that their housing portfolios are safe and fully compliant. This was highlighted in our half-year statement and we saw this trend continue throughout the second half year. In addition, the Group had a particularly slow period in securing new work opportunities which one would typically have expected to have gone some way to making up the revenue shortfall. The division reported full-year revenues of £766.1m (2016: £787.5m), a reduction of 3%. The shortfall in revenues resulted in both a reduction in gross profit and, more significantly, lower overhead recovery, with operating margins reflecting this dilution at 5.2% (2016: 5.6%).
The Housing division has historically sourced new contract opportunities through a competitive public procurement tender process. Mears has always been highly selective and maintains a disciplined approach to bidding new contract opportunities. Mears typically tenders for contracts with a value of between £1 billion to £1.5 billion each year. A bid conversion rate (by value) of around 33% has been consistently achieved, although within that blended measure there are other factors such as the proportion of reactive versus planned maintenance, and whether the opportunity is with an existing or new customer relationship. Mears secured new contracts of £150m in the year, representing a contract win rate on competitively tendered works of 16% (by value) (2016: £250m and 39%). This is our lowest bid conversion rate for many years and was partly driven by the mix of the bidding opportunities being skewed towards works of a capital nature and a high number of opportunities coming from new client relationships. Notwithstanding this, we are disappointed at missing out on a number of key bidding targets where we scored well in terms of quality but fell short in respect of pricing compared with the winning tender. We will not change our bidding model which has served us well over many years. We have always tried to make decisions based on a longer time horizon and not short-term opportunism.
Encouragingly, the current pipeline of opportunities for Mears has never been greater. We would anticipate competitively bidding for in excess of £2 billion of work during the course of 2018. Some of the most significant current bidding opportunities will be awarded in 2018 although will not deliver revenue until 2019. The strategic evolution of our business means we are gaining access to opportunities that previously would have been out of our reach. Our long-term bid conversion target rate remains at 33%. In addition, an increasing number of opportunities can now be secured without the requirement for an extended, competitive tender process.
Care
The return to profitability is a clear positive for the Care division in the year. The Care division secured solid charge rate increases from existing contracts through the annual price review, and also enjoyed improved pricing when securing new contract opportunities. These increases have broadly matched the increases in the cost base, driven by an increase in the National Living Wage and introduction of the Apprenticeship Levy. The division reported a small loss for the first half year, however, in line with our expectations, improved performance in the second half delivered a profit for the full year of £0.5m (2016: loss £1.2m), implying an operating margin for the second half of 2.3%. We are confident that we can deliver further margin improvement in 2018. We are looking to achieve this through maintaining a high level of selectivity on bidding new works, further operational improvements and support function efficiencies flowing from improved processes.
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2017 |
2016 |
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H1 |
H2 |
FY |
H1 |
H2 |
FY |
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Revenue £m |
68.7 |
65.4 |
134.1 |
76.6 |
76.0 |
152.6 |
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Operating profit £m |
(1.0) |
1.5 |
0.5 |
1.0 |
(2.2) |
(1.2) |
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Operating profit margin % |
(1.4%) |
2.3% |
0.4% |
1.3% |
(2.9%) |
(0.8%) |
We continue to place significant emphasis on maintaining a portfolio of contracts that can provide clear and sustainable margins. We completed a significant restructuring in 2016, which saw a reduction of around 20% of our branches, primarily in the North of England where a number of care commissioners were unwilling to recognise the underlying cost of delivering care. During the first half of 2017, we revisited our previous assessment, exiting additional contracts predominantly in the Midlands and London region, covering a further 7% of revenues. The restructuring is now complete and our remaining Care contracts have a much improved mix of longevity, certainty of spend and price, with very few branches that are not now delivering a profit contribution. Revenues for the Care division were £134.1m (2016: £152.6m), a reduction of 12% reflecting this planned rebalancing of the Care contract portfolio.
A summary of the changing volumes and charge rates as a result of the restructuring of our Care activities is detailed below. This reflects excellent progress, with the blended charge rate increasing by 8% across the Care portfolio driven by contractual uplifts and an improving sales mix.
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Hours |
Annualised |
Charge rate |
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per week |
revenue £m |
per hour £ |
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As at 1 January 2016 |
216,000 |
148.1 |
13.19 |
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Net volume decrease |
(54,600) |
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As at 31 December 2016 |
161,400 |
126.2 |
15.04 |
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Net volume decrease |
(22,200) |
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As at 31 December 2017 |
139,200 |
117.9 |
16.29 |
Whilst we have become increasingly selective in new contract bidding, it is pleasing that there continues to be a solid pipeline of good quality bidding opportunities. During the year, we secured £140m of new contracts at a win rate of 59% by value (2016: £200m and 74%). More importantly, the quality of the new orders secured continues to improve, together with a significantly higher charge rate which enables us to reflect this within our carer pay and conditions. The average contract lengths of these latest awards is approaching five years and the number of providers has reduced significantly; this reflects the trends we anticipated and should, in the future, result in a better quality of earnings from our Care activities. It is envisaged that the Group will increasingly focus its Care bidding activity towards those clients where there are likely to be opportunities to provide a complete housing service, with less focus on those opportunities which provide singular care services in isolation.
The main limitation to achieving growth in Care and to delivering a consistent, good quality service remains the sourcing and retention of sufficient care workers of good quality. Whilst we have experienced some improvement in carer turnover during the year, with attrition rates reducing from 44% to 42%, this still remains at an unsustainable level. We remain committed to driving improvement to the terms and conditions of care workers, including better financial rewards and incentives and a more formalised career pathway.
This section provides further key information in respect of the financial performance and financial position of the Group to the extent not already covered within the Review of operations.
Acquisitions
Having been relatively acquisitive over a number of years, this was the second consecutive year of no acquisitions. The primary focus for the business is organic growth however we regularly consider potential bolt-on acquisitions to our Housing business, where they could enhance our existing service capabilities.
Contingent consideration of £5.0m was paid during the year relating to the previous acquisition of Omega. A further payment of £11.1m has been paid in the early part of 2018 which has now settled all outstanding deferred and contingent consideration.
Property acquisition funding
As Mears has broadened its services, an increasingly important component of our offering has been to identify funding solutions to sit beside our housing maintenance and management solutions. An early example of this was our contract with the London Borough of Bromley, with Mears engaged to arrange the purchase and refurbishment of 400 homes from private ownership whilst identifying a long-term funding partner. Since then, Mears has developed a pipeline of similar opportunities and expects several of these to complete in the coming year.
The Group has historically followed a strict and disciplined approach to keeping capital expenditure low and, linked to this, a conservative debt structure. This principle still holds. However, on occasions it should be recognised that opportunities can often be more easily facilitated through utilising a small amount of leverage to acquire and build portfolios of properties. The period for carrying property assets on the balance sheet will typically be a few weeks, extending to perhaps six months on rare occasions, prior to their disposal to a long-term funding partner. To support this activity the Group has put in place a £30m revolving credit facility for an initial two-year term. At 31 December 2017, £13.9m of this funding line had been drawn with the associated asset disclosed within assets held for resale.
Discontinued activities
In 2013, the Group completed the disposal of its Mechanical and Electrical division, which included an entity operating in the United Arab Emirates (UAE). As part of that disposal, the Group ultimately retained a beneficial interest of 1% of the share capital of this UAE company due to the Group still carrying a number of performance guarantees, which unwind as the underlying contracts reach the end of their defects liability period.
At 31 December 2016, a balance of £3.4m was due from the UAE entity to the Group, together with outstanding performance guarantees of £13.7m. Disappointingly, a number of those performance guarantees have been called and the Group was required to settle funds against those contingent liabilities. This resulted in a cash outflow during the year of £9.4m.
Mears has taken legal advice and believes there is a realistic expectation that these funds will be recovered in due course. However given the inherent uncertainty, a full provision has been made in respect of this as an exceptional item within the 2017 results. The exceptional item of £16.5m includes full provision against all outstanding performance guarantees.
Amortisation of acquisition intangibles
A charge for amortisation of acquisition intangibles of £10.6m (2016: £10.7m) arose in the year. This charge relates to a number of acquisitions in both Housing and Care over recent years. The remaining unamortised value of £9.6m (2016: £19.8m), relating to order book and customer relationships, will be written off over their estimated lives.
Net finance charge
A net finance charge of £2.0m has been recognised in the year (2016: £1.8m). The finance cost in respect of bank borrowings was £2.7m (2016: £2.8m), reflecting a lower blended interest rate on the Group's interest rate hedging arrangements.
The Group held two interest rate swaps covering 2017. The first fixed a rate of 1.85% on £30.0m of borrowings and expires in August 2018. The second, which ran throughout the year, fixed a rate of 0.83% on £40.0m of borrowings, expires in December 2020. The remaining debt bore a variable LIBOR rate. The Group pays a margin of 120-220bps over and above LIBOR, subject to a ratchet mechanism.
The net finance costs also includes a net credit generated from defined benefit pension accounting of £0.3m (2016: £0.9m).
Tax expense
|
|
2017 |
2016 |
|
|
£m |
£m |
|
Current tax on continuing activities recognised in income statement |
5.3 |
4.7 |
|
Deferred tax on continuing activities recognised in income statement |
(1.0) |
(1.0) |
|
Current tax on discontinued activities recognised in income statement |
(3.2) |
- |
|
Total tax expenses recognised in income statement |
1.1 |
3.7 |
|
Profit before tax and before amortisation of acquired intangibles |
37.1 |
40.1 |
|
Profit before tax on continuing activities |
26.5 |
29.4 |
|
Effective current tax rate on continuing activities |
20.1% |
16.0% |
The headline UK corporation tax rate for the year was 19.3% (2016: 20.0%). The total tax charge for the year relating to continuing operations was £4.3m (2016: £3.7m) resulting in an effective total tax rate of 16.3% (2016: 12.5%). The key reconciling items to the headline rate were the utilisation of brought forward losses relating to previous acquisitions, an annual corporation tax deduction in respect of share options and adjustments in respect of the prior year estimated tax charge. The current tax charge for the year on continuing operations was £5.3m (2016: £4.7m), which represents an effective tax rate of 20.1% (2016: 16.0%).
Mears does not engage in inappropriate tax planning arrangements. Where appropriate, the Group takes advantage of available tax reliefs. The tax position in any transaction is aligned with the commercial reality and any tax planning undertaken is consistent with the spirit as well as the letter of tax law. In situations where material uncertainty exists around a given tax position, the Group engages with expert advisers and, where appropriate, advance clearance is sought from HMRC in order to establish the most appropriate treatment.
We value our low risk assessment from HMRC and will continue to work to maintain this status through continual review of our controls and processes.
Earnings per share (EPS)
|
|
2017 |
2016 |
Change |
|
|
p |
p |
% |
|
Diluted earnings per share - all activities |
7.29 |
20.91 |
-65% |
|
Normalised diluted earnings per share - continuing activities* |
28.05 |
30.36 |
-8% |
|
|
|
|
|
* Before amortisation of acquisition intangibles with an adjustment to reflect a full tax charge.
The statutory diluted EPS measure allows for the potential dilutive impact of outstanding share options and reflects the exceptional loss reported through discontinued activities. The normalised diluted EPS decreased by 8% to 28.05p (2016: 30.36p). Normalised earnings are based upon continuing activities before the amortisation of acquisition intangibles together with an adjustment to reflect a full tax charge of 18% (2016: 18%). We believe that this normalised diluted EPS 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.
Cash and net debt
|
|
2017 |
2016 |
|
|
£m |
£m |
|
Operating profit before amortisation of acquisition intangibles |
39.2 |
41.9 |
|
Depreciation and amortisation |
8.2 |
7.4 |
|
EBITDA |
47.4 |
49.3 |
|
Cash inflow from operating activities |
28.7 |
34.5 |
|
EBITDA to cash conversion |
61% |
70% |
|
Net debt at balance sheet date |
25.8 |
12.4 |
|
Average daily net debt |
96.4 |
85.0 |
The efficiency with which the Group manages working capital remains a cornerstone of our business. The Group's conversion of EBITDA to cash over the last two years has been well below target, being 61% (2016: 70%). Whilst our conversion record over the previous five years of 95% should provide comfort, this result warrants further explanation.
Whilst our year end EBITDA to cash conversion measure has historically been reported as a key performance indicator for the Group, we have always highlighted the Group's average daily net debt as being of greater importance. The year end position is significantly lower than the average net debt, given the efforts that the Group makes to maximise its cash balances at the year end. In addition, Mears has seen a significant shift in its sales mix towards housing management. Whilst the working capital required to fund housing management activities is typically lower than that required for traditional maintenance activities, it provides no scope for advancing cash inflows at the year end. Hence, part of the explanation for our lowering EBITDA to cash conversion metric over the last two years is the unwinding of this effect.
The evolution in strategic focus towards Housing Management and Placemaking activities has seen Mears starting to build new homes as part of managing the regeneration and delivery of affordable housing for clients to support their overall asset management plans. Whilst this is an area which provides significant opportunity for the Group, we have equally looked to keep tight control over the working capital requirement. Mears is not a property developer but having good capabilities in this area is very positive when linked to our homelessness solutions for clients. As at 31 December 2017, the working capital invested in new development projects amounted to £10.5m (2016: £5.7m). This is expected to peak at £15.0m in June 2018. We are developing opportunities in this area that look to not require any forward funding which is our natural preference and better fits the Mears' model.
Our reported net debt position at 31 December 2017 was £25.8m (2016: £12.4m). The Group seeks to minimise its trade receivables at both its June and December period ends, resulting in period end net debt balances which don't reflect the underlying balance sheet position. A far more important metric is the Group's average daily net debt balance. The average net debt over the year increased to £96.4m (2016: £85.0m), reflecting the lower EBITDA to cash conversion due in part to the changing sales mix, and the funding of both the deferred consideration on earlier acquisitions and the cash outflow arising from the loss on discontinued activities.
As detailed above, the Group has arranged a £30m revolving credit facility to fund the purchase of properties before being sold on to longer-term funding partners. At 31 December 2017, £13.9m of this funding line had been drawn, with the associated asset disclosed within assets held for resale. Mears will report the net debt balances in respect of this property acquisition facility separately from the Group's operating net debt to ensure that this new facility does not mask underlying working capital performance.
During the year, the Group completed an extension to its revolving capital facility from July 2020 to November 2022. This has been well-timed as we have been surprised by the nervousness within the banking community following a number of recent corporate failures from entities within the outsourcing sector. The Group continues to maintain a strong relationship with its bankers.
Balance sheet
|
|
2017 |
2016 |
|
|
£m |
£m |
|
Goodwill and intangible assets |
210.9 |
219.6 |
|
Property, plant and equipment |
22.0 |
20.3 |
|
Inventories |
18.7 |
11.2 |
|
Trade receivables |
153.9 |
157.2 |
|
Property assets held for resale |
13.9 |
- |
|
Trade payables |
(178.3) |
(186.6) |
|
Operating net debt |
(25.8) |
(12.4) |
|
Property acquisition facility |
(13.9) |
- |
|
Deferred consideration |
(11.1) |
(16.5) |
|
Cash flow hedge |
(0.3) |
0.4 |
|
Pension |
22.3 |
8.5 |
|
Taxation |
(2.7) |
(3.0) |
|
Net assets |
209.6 |
198.7 |
Goodwill and intangible assets
The carrying value of identifiable acquisition intangibles at 31 December 2017 was £9.6m (2016: £19.8m), which predominantly relates to order book and customer relationships valued on acquisition. The carrying value will be amortised over its useful economic life, over half of which will be expensed over the next two years.
The carrying value of goodwill of £193.6m (2016: £193.7m) is not amortised but is reviewed for impairment on an annual basis or more frequently where there is an indication of impairment. The headroom between the carrying value of the Care asset and anticipated future value that will be delivered by the Care division has been low over a number of years. The Board has carried out a detailed impairment review and, for the second year running, this has shown an increase in the headroom which reflects the improvements made in the Care business. This is a key area of judgement and remains under continual review.
In addition, intangible assets includes the capitalisation of expenditure incurred in developing our in-house IT platform. Additions in the year amounted to £3.7m (2016: £2.9m) with a carrying value of £7.7m (2016: £6.1m), which is amortised over five years. Having made significant investment in our IT systems over a number of years, we would expect to see a reduction in our development expenditure moving forward.
Tangible fixed assets
The Group capital expenditure of £8.1m (2016: £7.4m) relates to IT hardware, other office equipment and the refurbishment of new office premises. The level of capital expenditure in respect of property, plant and equipment in any single year has a close correlation to the number of new contracts mobilised in that period. The majority of plant utilised by our operational teams is subject to short-term hire arrangements and motor vehicles are subject to operating leases and hence neither are included within capital expenditure or recognised as an asset within the balance sheet. Similarly, the Housing Management business has a large number of short-term property leases which are similarly not carried on the balance sheet. The new accounting standard IFRS 16 Leases will impact upon this treatment and is discussed in greater detail below.
Current assets and current liabilities
Trade receivables and inventories increased to £172.6m (2016: £168.4m) and trade payables reported a reduction to £178.3m (2016: £186.6m), both reflecting the changing sales mix and the associated impact on cash and net debt detailed above.
As detailed above, the Group secured a property acquisition credit facility of £30m to acquire and build portfolios for resale. These assets are separately identified on the balance sheet as an asset held for resale.
Pensions
The Group participates in two principal Group pension schemes (2016: two) together with a further 28 (2016: 33) individual defined benefit schemes where the Group has received Admitted Body status in a Local Government Pension Scheme (LGPS).
Given recent well publicised corporate failures, there has been increased attention given to pensions by a number of our stakeholders. It is unfortunate that the accounting standard we are required to follow for defined benefit pension schemes does not present the commercial reality for a number of our LGPS arrangements, where the Group holds back-to-back indemnities from its clients in respect of both its exposure to changes in pension contribution rates and to future deficit risk. For the remaining LGPS arrangements where the Group does not benefit from indemnities, the risks attaching to these schemes matches the time horizon of the underlying contract which, whilst not removing all risks, does reduce the period over which a deficit can arise.
|
|
Group |
LGPS |
|
|
|
|
schemes |
schemes |
LGPS |
|
|
|
(no indemnity) |
(no indemnity) |
(indemnified) |
|
|
|
long term |
medium-term |
limited-risk |
Total |
|
Number of schemes |
2 |
11 |
17 |
30 |
|
Assets £m |
157.3 |
46.1 |
276.4 |
479.8 |
|
Liabilities £m |
(132.6) |
(47.5) |
(277.4) |
(457.5) |
|
Net surplus/(deficit) £m |
24.8 |
(1.4) |
(1.0) |
22.3 |
It is pleasing that, despite the increasingly volatile macro-economic environment that has resulted in a downward move in the net discount rate and increased scheme liabilities, the Group has reported an increase in its pension net asset from £8.5m to £22.3m.
Guidance for 2018
We are disappointed that our financial results over recent years have not met our expectations. Whilst some of these adjustments have been outside of the control of management, it is frustrating that it has tarnished Mears' strong track record.
Previously, Mears has reported forward revenue visibility as a key performance metric. This has been expressed as the percentage of secured revenue as a proportion of consensus forecast revenues. Typically, consensus forecasts have been driven by an expectation that secured revenues at the turn of the year represents at least 95% of forecast revenue for the forthcoming year. Due to the evolving nature of our business, secured revenue over recent years has been found to be a less robust metric than it was historically. This became increasingly evident following the challenges encountered in 2017, where secured revenues reduced over the course of the year. The Board has reassessed how we guide the market and, going forward, we will set our expectations for the next twelve months in line with our 'firm and probable order book' , providing market updates to those expectations when new orders are secured whilst also giving us an increased ability to absorb unforeseen challenges. The 'firm and probable order book' for 2018 currently stands at £900m. This change to a more conservative approach is particularly relevant given the shape of the Group's bid pipeline, which includes two opportunities that are bigger in scale but harder to forecast given the binary nature of the possible outcomes.
Changes to accounting standards
A new accounting standard, IFRS 15 Revenue from Contracts with Customers, becomes effective for annual periods beginning on or after 1 January 2018. The implementation of IFRS 15 can impact on the timing of recognising revenue and costs in respect of long-term contracts. The Group has completed its review of the impact of this new standard across all contracts. In the case of the large majority of our contracts, the accounting methodology will be unchanged.
Mears does not capitalise mobilisation costs and typically looks to recognise revenue and cost at the individual works order level, whether that be a singular maintenance order or care visit. This ensures that the valuation of working capital balances is straightforward and contains few areas for judgment.
However, there are a small number of occurrences where the Group has accounted for multiple service contracts by treating them as a single supply of a service. This has been the case where there is a mismatch between the works being delivered and the payment mechanism for reimbursement. The new accounting standard will require Mears to now identify the distinct services provided within a multiple service contract and to allocate a stand-alone selling price against each of those services. The impact of this change in 2018 will see a reduction in opening reserves in the range of £13m to £20m.
The change to IFRS 15 has no impact on the lifetime profitability of the contracts and there are no cash flow impacts, although the change will drive further alignment between the timing of profit recognition and its associated cash flow. Moving forward, we would expect the change to have a positive impact in respect of operating profit from 2018 through to 2027 as the reserves adjustment unwinds.
In respect of more complex contracts, where Mears may be required at times to forward fund some initial work streams, the underlying contractual arrangements will need to be structured to be in line with the new accounting treatment.
A second new accounting standard, IFRS 16 Leases, becomes effective for annual periods beginning on or after 1 January 2019. It is not currently Mears' intention to adopt this standard early, however it is likely to be very material to the Group and, as such, stakeholders will be kept informed as the impact becomes clear. The new standard aligns the treatment of operating leases and finance leases and will require Mears to recognise all leases on the balance sheet which will reflect the right to use an asset for a period of time, together with its associated liability. Given that Mears currently has operating leases in respect of 3,200 vehicles (with an average lease term of 4.5 years) and 5,000 properties (with an average lease term of 2.5 years), this is a significant change. The expected balance sheet impact will increase assets and liabilities by in the range of £80m to £140m. In terms of the income statement, EBITDA will increase but we anticipate a neutral impact at a PBT level given that the reduction in administrative expenses is expected to broadly match the increase in depreciation and financing costs.
The Group has historically followed a strict and disciplined approach to keep capital expenditure low and, linked to this, a conservative debt structure. Whilst this core principle is still central to the Group's philosophy, the changes to operating lease accounting does potentially reduce the attractiveness of leasing. On a positive note, the increased transparency over leases may drive more economic lease decisions and so deliver cost savings.
IFRS 16 will affect a large number of commonly used financial ratios and performance metrics including gearing, interest cover, EBITDA, EBIT, operating profit and ROCE. The Group's banking covenants will not be 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.
For the year ended 31 December 2017
|
|
|
2017 |
2016 |
|
|
Note |
£'000 |
£'000 |
|
Continuing operations |
|
|
|
|
Sales revenue |
1 |
900,184 |
940,100 |
|
Cost of sales |
|
(676,482) |
(695,206) |
|
Gross profit |
|
223,702 |
244,894 |
|
Other administrative expenses |
|
(184,551) |
(203,044) |
|
Amortisation of acquisition intangibles |
|
(10,638) |
(10,690) |
|
Total administrative costs |
|
(195,189) |
(213,734) |
|
Operating profit before amortisation of acquisition intangibles |
1 |
39,151 |
41,850 |
|
Operating profit |
|
28,513 |
31,160 |
|
Finance income |
2 |
751 |
1,152 |
|
Finance costs |
2 |
(2,780) |
(2,940) |
|
Profit for the year before tax and the amortisation of acquisition intangibles |
|
37,122 |
40,062 |
|
Profit for the year before tax |
|
26,484 |
29,372 |
|
Tax expense |
3 |
(4,315) |
(3,676) |
|
Profit for the year from continuing operations |
|
22,169 |
25,696 |
|
Discontinued operations |
|
|
|
|
Exceptional loss from discontinued operations |
4 |
(16,500) |
- |
|
Tax income from discontinued operations |
|
3,176 |
- |
|
Loss for the year after tax from discontinued operations |
|
(13,324) |
- |
|
Profit for the year from continuing and discontinued operations |
|
8,845 |
25,696 |
|
Attributable to: |
|
|
|
|
Owners of the Parent |
|
7,582 |
21,526 |
|
Non-controlling interest |
|
1,263 |
4,170 |
|
Profit for the year |
|
8,845 |
25,696 |
|
Earnings per share - from continuing operations |
|
|
|
|
Basic |
6 |
20.28p |
23.54p |
|
Diluted |
6 |
20.10p |
23.41p |
|
Earnings per share - from continuing and discontinued operations |
|
|
|
|
Basic |
6 |
7.35p |
21.03p |
|
Diluted |
6 |
7.29p |
20.91p |
The accompanying accounting policies and notes form an integral part of the preliminary announcement
For the year ended 31 December 2017
|
|
|
2017 |
2016 |
|
|
Note |
£'000 |
£'000 |
|
Profit for the year |
|
8,845 |
25,696 |
|
Other comprehensive income/(expense): |
|
|
|
|
Which will be subsequently reclassified to the Income Statement: |
|
|
|
|
Cash flow hedges: |
|
|
|
|
- losses arising in the year |
|
(54) |
(884) |
|
- reclassification to the Income Statement |
|
645 |
643 |
|
Increase/(decrease) in deferred tax asset in respect of cash flow hedges |
|
(143) |
39 |
|
Which will not be subsequently reclassified to the Income Statement: |
|
|
|
|
Actuarial gain/(loss) on defined benefit pension scheme |
|
13,879 |
3,676 |
|
(Decrease)/increase in deferred tax asset in respect of defined benefit pension schemes |
|
(2,637) |
(804) |
|
Other comprehensive income/(expense) for the year |
|
11,690 |
2,670 |
|
Total comprehensive income for the year |
|
20,535 |
28,366 |
|
Attributable to: |
|
|
|
|
Owners of the Parent |
|
19,272 |
24,196 |
|
Non-controlling interest |
|
1,263 |
4,170 |
|
Total comprehensive income for the year |
|
20,535 |
28,366 |
The accompanying accounting policies and notes form an integral part of the preliminary announcement
As at 31 December 2017
|
|
|
2017 |
2016 |
|
|
|
£'000 |
£'000 |
|
Assets |
|
|
|
|
Non-current |
|
|
|
|
Goodwill |
|
193,642 |
193,712 |
|
Intangible assets |
|
17,266 |
25,913 |
|
Property, plant and equipment |
|
22,037 |
20,265 |
|
Pension and other employee benefits |
|
27,308 |
15,992 |
|
Financial assets |
|
- |
677 |
|
Deferred tax asset |
|
4,314 |
5,704 |
|
|
|
264,567 |
262,263 |
|
Current |
|
|
|
|
Assets classified as held for sale |
|
13,941 |
- |
|
Inventories |
|
18,705 |
11,234 |
|
Trade and other receivables |
|
153,912 |
157,181 |
|
Financial assets |
|
- |
839 |
|
Current tax assets |
|
111 |
- |
|
Cash at bank and in hand |
|
24,770 |
52,904 |
|
|
|
211,439 |
222,158 |
|
Total assets |
|
476,006 |
484,421 |
|
Equity |
|
|
|
|
Equity attributable to the shareholders of Mears Group PLC |
|
|
|
|
Called up share capital |
|
1,036 |
1,026 |
|
Share premium account |
|
60,204 |
58,320 |
|
Share-based payment reserve |
|
1,469 |
1,975 |
|
Hedging reserve |
|
(326) |
(774) |
|
Merger reserve |
|
46,214 |
46,214 |
|
Retained earnings |
|
100,897 |
92,555 |
|
Total equity attributable to the shareholders of Mears Group PLC |
|
209,494 |
199,316 |
|
Non-controlling interest |
|
96 |
(642) |
|
Total equity |
|
209,590 |
198,674 |
|
Liabilities |
|
|
|
|
Non-current |
|
|
|
|
Long-term borrowing and overdrafts |
|
50,559 |
60,000 |
|
Pension and other employee benefits |
|
4,966 |
7,498 |
|
Deferred tax liabilities |
|
7,098 |
7,120 |
|
Financial liabilities |
|
79 |
612 |
|
Other payables |
|
5,036 |
15,950 |
|
|
|
67,738 |
91,180 |
|
Current |
|
|
|
|
Borrowings related to assets classified for sale |
|
13,941 |
- |
|
Short-term borrowings and overdrafts |
|
- |
5,278 |
|
Trade and other payables |
|
184,484 |
187,264 |
|
Financial liabilities |
|
253 |
478 |
|
Current tax liabilities |
|
- |
1,547 |
|
Current liabilities |
|
198,678 |
194,567 |
|
Total liabilities |
|
266,416 |
285,747 |
|
Total equity and liabilities |
|
476,006 |
484,421 |
The accompanying accounting policies and notes form an integral part of the preliminary announcement
For the year ended 31 December 2017
|
|
|
2017 |
2016 |
|
|
Note |
£'000 |
£'000 |
|
Operating activities |
|
|
|
|
Result for the year before tax |
|
26,484 |
29,372 |
|
Adjustments |
7 |
21,148 |
20,438 |
|
Change in inventories |
|
(7,471) |
(2,213) |
|
Change in trade and other receivables |
|
(109) |
(8,793) |
|
Change in trade and other payables |
|
(11,381) |
(4,289) |
|
Cash inflow from operating activities of continuing operations before taxation |
|
28,671 |
34,515 |
|
Taxes paid |
|
(3,776) |
(4,877) |
|
Net cash inflow from operating activities of continuing operations |
|
24,895 |
29,638 |
|
Net cash outflow from operating activities of discontinued operations |
|
(9,354) |
(3,925) |
|
Net cash inflow from operating activities |
|
15,541 |
25,713 |
|
Investing activities |
|
|
|
|
Additions to property, plant and equipment |
|
(5,572) |
(10,029) |
|
Additions to other intangible assets |
|
(3,661) |
(2,904) |
|
Proceeds from disposals of property, plant and equipment |
|
204 |
2 |
|
Acquisition of property for resale |
|
(13,941) |
- |
|
Acquisition of subsidiary undertakings, net of cash |
|
(5,000) |
(10,019) |
|
Sale of subsidiary undertaking |
|
1,582 |
- |
|
Net cash disposed of with subsidiary |
|
(1,234) |
- |
|
Loans made to other entities (non-controlled) |
|
(232) |
(211) |
|
Interest received |
|
351 |
35 |
|
Net cash outflow from investing activities |
|
(27,503) |
(23,126) |
|
Financing activities |
|
|
|
|
Proceeds from share issue |
|
1,894 |
202 |
|
Receipts from borrowings related to assets classified for sale |
|
13,941 |
- |
|
Discharge of finance lease liability |
|
(1,954) |
(661) |
|
Interest paid |
|
(2,591) |
(2,822) |
|
Dividends paid - Mears Group shareholders |
|
(12,218) |
(11,483) |
|
Dividends paid - non-controlling interests |
|
(525) |
(1,019) |
|
Net cash outflow from financing activities |
|
(1,453) |
(15,783) |
|
Cash and cash equivalents, beginning of year |
|
(12,374) |
822 |
|
Net decrease in cash and cash equivalents |
|
(13,415) |
(13,196) |
|
Cash and cash equivalents, end of year |
|
(25,789) |
(12,374) |
|
Cash and cash equivalents comprises the following: |
|
|
|
|
- cash at bank and in hand |
|
24,770 |
52,904 |
|
- borrowings and overdrafts |
|
(50,559) |
(65,278) |
|
Cash and cash equivalents |
|
(25,789) |
(12,374) |
|
Cash conversion key performance indicator |
|
|
|
|
Cash inflow from operating activities of continuing operations |
|
28,671 |
34,515 |
|
EBITDA for continuing operations |
|
47,385 |
49,260 |
|
Conversion |
|
60.5% |
70.1% |
The accompanying accounting policies and notes form an integral part of the preliminary announcement
For the year ended 31 December 2017
|
|
Attributable to equity shareholders of the Company |
|
|
|||||
|
|
|
|
Share- |
|
|
|
|
|
|
|
|
Share |
based |
|
|
|
Non- |
|
|
|
Share |
premium |
payment |
Hedging |
Merger |
Retained |
controlling |
Total |
|
|
capital |
account |
reserve |
reserve |
reserve |
earnings |
interest |
equity |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
At 1 January 2016 |
1,019 |
58,124 |
1,651 |
(572) |
46,214 |
86,438 |
(1,246) |
191,628 |
|
Net result for the year |
- |
- |
- |
- |
- |
21,526 |
4,170 |
25,696 |
|
Other comprehensive income |
- |
- |
- |
(202) |
- |
2,872 |
- |
2,670 |
|
Total comprehensive income for the year |
- |
- |
- |
(202) |
- |
24,398 |
4,170 |
28,366 |
|
Deferred tax on share-based payments |
- |
- |
- |
- |
- |
(635) |
- |
(635) |
|
Issue of shares |
7 |
196 |
- |
- |
- |
- |
- |
203 |
|
Share option charges |
- |
- |
324 |
- |
- |
- |
- |
324 |
|
On disposal |
- |
- |
- |
- |
- |
- |
(2,570) |
(2,570) |
|
Transactions with non-controlling interests |
- |
- |
- |
- |
- |
(6,163) |
23 |
(6,140) |
|
Dividends |
- |
- |
- |
- |
- |
(11,483) |
(1,019) |
(12,502) |
|
At 1 January 2017 |
1,026 |
58,320 |
1,975 |
(774) |
46,214 |
92,555 |
(642) |
198,674 |
|
Net result for the year |
- |
- |
- |
- |
- |
7,582 |
1,263 |
8,845 |
|
Other comprehensive income |
- |
- |
- |
448 |
- |
11,242 |
- |
11,690 |
|
Total comprehensive income for the year |
- |
- |
- |
448 |
- |
18,824 |
1,263 |
20,525 |
|
Deferred tax on share-based payments |
- |
- |
- |
- |
- |
404 |
- |
404 |
|
Issue of shares |
10 |
1,884 |
- |
- |
- |
- |
- |
1,894 |
|
Share option charges |
- |
- |
826 |
- |
- |
- |
- |
826 |
|
Share option exercises |
- |
- |
(1,332) |
- |
- |
1,332 |
- |
- |
|
Dividends |
- |
- |
- |
- |
- |
(12,218) |
(525) |
(12,743) |
|
At 31 December 2017 |
1,036 |
60,204 |
1,469 |
(326) |
46,214 |
100,897 |
96 |
209,580 |
The accompanying accounting policies and notes form an integral part of the preliminary announcement
Notes to the preliminary announcement
For the year ended 31 December 2017
1. Segment reporting
Segment information is presented in respect of the Group's operating segments. Segments are determined by reference to the internal reports reviewed by the Board.
The Group had two operating segments during the year:
• Housing - services within this sector comprise a full housing management service predominantly to Local Authorities and other Registered Social Landlords; and
• Care - services within this sector comprise personal care services to people in their own homes.
All of the Group's activities are carried out within the United Kingdom and the Group's principal reporting to its chief operating decision maker is not segmented by geography.
The principal financial measures used by the chief operating decision maker and the Board to review the performance of the operating segments are that of revenue growth and operating margins in both the core divisions of Housing and Care. The operating result utilised within the key performance measures is stated before amortisation of acquisition intangibles and costs relating to the long-term incentive plans.
|
|
2017 |
|
2016 |
||||
|
|
Housing |
Care |
Total |
|
Housing |
Care |
Total |
|
Operating segments |
£'000 |
£'000 |
£'000 |
|
£'000 |
£'000 |
£'000 |
|
Revenue |
766,121 |
134,063 |
900,184 |
|
787,530 |
152,570 |
940,100 |
|
Operating result pre amortisation of acquisition intangibles and long-term incentive plans |
39,478 |
499 |
39,977 |
|
44,057 |
(1,199) |
42,858 |
|
Operating margin pre amortisation of acquisition intangibles and long-term incentive plans |
5.15% |
0.37% |
4.44% |
|
5.60% |
(0.79%) |
4.56% |
|
Long-term incentive plans |
(826) |
- |
(826) |
|
(1,008) |
- |
(1,008) |
|
Operating result pre amortisation of acquisition intangibles |
38,652 |
499 |
39,151 |
|
43,049 |
(1,199) |
41,850 |
|
Amortisation of acquisition intangibles |
|
|
(10,638) |
|
|
|
(10,690) |
|
Operating result |
|
|
28,513 |
|
|
|
31,160 |
|
Net finance costs |
|
|
(2,029) |
|
|
|
(1,788) |
|
Tax expense |
|
|
(4,315) |
|
|
|
(3,676) |
|
Profit for the year from continuing activities |
|
|
22,169 |
|
|
|
25,696 |
All revenue and all non-current assets arise within the United Kingdom. All of the revenue reported is external to the Group. No revenue in respect of a single customer comprises more than 7% of the total revenue reported.
2. Finance income and finance costs
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
Interest charge on overdrafts and short-term loans |
(2,017) |
(2,134) |
|
Interest charge on hedged items (effective hedges) |
(645) |
(643) |
|
Other interest |
(4) |
(26) |
|
Finance costs on bank loans, overdrafts and finance leases |
(2,666) |
(2,803) |
|
Interest charge on defined benefit obligation |
(114) |
(137) |
|
Unwinding of discounting |
- |
- |
|
Total finance costs |
(2,780) |
(2,940) |
|
Interest income resulting from short-term bank deposits |
20 |
19 |
|
Interest income resulting from defined benefit asset |
440 |
1,085 |
|
Unwinding of discounting |
40 |
40 |
|
Other interest income |
251 |
8 |
|
Finance income |
751 |
1,152 |
|
Net finance charge |
(2,029) |
(1,788) |
|
Gains and losses on hedged items recognised in other comprehensive income |
|
|
|
Losses arising in the year |
(54) |
(884) |
|
Reclassification to the Income Statement |
645 |
643 |
|
Changes in mark-to-market of interest rate swaps (effective hedges) |
591 |
(241) |
3. Tax expense
Tax recognised in the Income Statement
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
United Kingdom corporation tax |
5,341 |
5,672 |
|
Adjustment in respect of previous periods |
(18) |
(972) |
|
Total current tax recognised in Income Statement |
5,323 |
4,700 |
|
Deferred taxation charge: |
|
|
|
- on defined benefit pension obligations |
(6) |
146 |
|
- on share-based payments |
240 |
(65) |
|
- on accelerated capital allowances |
(153) |
194 |
|
- on amortisation of acquisition intangibles |
(1,888) |
(2,066) |
|
- on short-term temporary timing differences |
247 |
277 |
|
- on corporate tax losses |
1,122 |
617 |
|
- impact of change in statutory tax rates |
(168) |
(19) |
|
Adjustment in respect of previous periods |
(402) |
(108) |
|
Total deferred taxation recognised in Income Statement |
(1,008) |
(1,024) |
|
Total tax expense recognised in Income Statement on continuing operations |
4,315 |
3,676 |
|
Total tax credit recognised in Income Statement on discontinued operations |
(3,176) |
- |
|
Total tax expense recognised in Income Statement |
1,139 |
3,676 |
4. Discontinued activities
The Group previously completed the disposal of its Mechanical and Electrical division which included an entity operating in the United Arab Emirates ('Haydon LLC'). As part of that disposal, the Group ultimately retained the beneficial interest in 1% of the share capital of this UAE company due to the Group still carrying a number of performance guarantees in place at the time of the disposal which unravel as the underlying contracts reach the end of their defects liability period.
At 31 December 2016, a balance of £3.4m was due from Haydon LLC and £13.7m of performance guarantees were outstanding. During the year, further loans of £3.8m were provided to Haydon LLC, to provide working capital funding to the company so as to mitigate the Group's risk in respect of the performance guarantees. In November 2017, a number of performance guarantees to an aggregate value of £5.5m were called, resulting in a total balance of £12.7m due from Haydon LLC to the Group. After assessing the ability of Haydon LLC to settle this debt, the Group provided against the balance in full, as well as providing in full against the £3.8m of performance guarantees still outstanding at the year end.
The total amount provided of £16.5m (2016: £nil) is reported as a loss arising from discontinued operations in the Income Statement and the £9.3m of related cash outflows have been reported as arising from discontinued operations in the Statement of Cash Flows.
5. Dividends
The following dividends were paid on ordinary shares in the year:
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
Final 2016 dividend of 8.40p (2016: final 2015 dividend of 7.90p) per share |
8,651 |
8,099 |
|
Interim 2017 dividend of 3.45p (2016: interim 2016 dividend of 3.30p) per share |
3,567 |
3,384 |
|
|
12,218 |
11,483 |
The proposed final 2017 dividend of 8.55p per share has not been included within the consolidated financial statements as no obligation existed at 31 December 2017.
6. Earnings per share
|
|
Basic (continuing) |
|
Basic (discontinued) |
|
Basic (continuing and discontinued) |
|||
|
|
2017 |
2016 |
|
2017 |
2016 |
|
2017 |
2016 |
|
|
p |
p |
|
p |
p |
|
p |
p |
|
Earnings per share |
20.28 |
23.54 |
|
(12.91) |
(2.51) |
|
7.35 |
21.03 |
|
Effect of amortisation of acquisition intangibles |
10.32 |
10.44 |
|
- |
- |
|
10.32 |
10.44 |
|
Effect of full tax adjustment |
(2.31) |
(3.45) |
|
(0.19) |
- |
|
(2.50) |
(3.45) |
|
Effect of exceptional costs |
- |
- |
|
13.12 |
- |
|
13.12 |
- |
|
Normalised earnings per share |
28.29 |
30.53 |
|
- |
(2.51) |
|
28.29 |
28.02 |
|
|
Diluted (continuing) |
|
Diluted (discontinued) |
|
Diluted (continuing and discontinued) |
|||
|
|
2017 |
2016 |
|
2017 |
2016 |
|
2017 |
2016 |
|
|
p |
p |
|
p |
p |
|
p |
p |
|
Earnings per share |
20.10 |
23.41 |
|
(12.81) |
(2.50) |
|
7.29 |
20.91 |
|
Effect of amortisation of acquisition intangibles |
10.23 |
10.39 |
|
- |
- |
|
10.23 |
10.39 |
|
Effect of full tax adjustment |
(2.28) |
(3.44) |
|
(0.20) |
- |
|
(2.48) |
(3.44) |
|
Effect of exceptional costs |
- |
- |
|
13.01 |
- |
|
13.01 |
- |
|
Normalised earnings per share |
28.05 |
30.36 |
|
- |
(2.50) |
|
28.05 |
27.86 |
A normalised EPS is disclosed in order to show performance undistorted by amortisation of intangibles. The Group defines normalised earnings as excluding the amortisation of acquisition intangibles and exceptional costs and adjusted to reflect a full tax charge. The profit attributable to shareholders before and after adjustments for both basic and diluted EPS is:
|
|
Normalised (continuing) |
|
Normalised (discontinued) |
|
Normalised (continuing and discontinued) |
|||
|
|
2017 |
2016 |
|
2017 |
2016 |
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
£'000 |
£'000 |
|
£'000 |
£'000 |
|
Profit/(loss) attributable to shareholders: |
20,906 |
24,096 |
|
(13,324) |
(2,570) |
|
7,582 |
21,526 |
|
- amortisation of acquisition intangibles |
10,638 |
10,690 |
|
- |
- |
|
10,638 |
10,690 |
|
- full tax adjustment |
(2,367) |
(3,535) |
|
(206) |
- |
|
(2,573) |
(3,535) |
|
- exceptional costs |
- |
- |
|
13,530 |
- |
|
13,530 |
- |
|
Normalised earnings |
29,177 |
31,251 |
|
- |
(2,570) |
|
29,177 |
28,681 |
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.
|
|
2017 |
2016 |
|
|
Million |
Million |
|
Weighted average number of shares in issue: |
103.10 |
102.35 |
|
- dilutive effect of share options |
0.93 |
0.57 |
|
Weighted average number of shares for calculating diluted earnings per share |
104.03 |
102.92 |
7. Notes to the Consolidated Cash Flow Statement
The following non-operating cash flow adjustments have been made to the result for the year before tax:
|
|
2017 |
2016 |
|
|
£'000 |
£'000 |
|
Depreciation |
6,105 |
5,573 |
|
Loss on disposal of property, plant and equipment |
24 |
48 |
|
Profit on disposal of subsidiary |
(961) |
- |
|
Amortisation |
12,768 |
12,527 |
|
Share-based payments |
826 |
324 |
|
IAS 19 pension movement |
31 |
(770) |
|
Finance income |
(351) |
(67) |
|
Finance cost |
2,706 |
2,803 |
|
Total |
21,148 |
20,438 |
8. Publication of Non Statutory Accounts
The financial information set out in the announcement does not constitute the Group's statutory accounts for the years ended 31 December 2017 or 2016. The financial information for the years ended 31 December 2017 and 2016 is derived from the statutory accounts for those years. The statutory accounts for the year ended 31 December 2016 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 December 2017 will be delivered to the Registrar of Companies in due course. The auditors reported on the accounts for each of those years; their reports were unqualified and did not contain a statement under s498 of the Companies Act 2006.