Mears : Interim results for 6 months ended 30 June 2021

Mears Group PLC

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

Interim Results for the 6 months ended 30 June 2021

Mears Group PLC, the leading provider of services to the Housing sector in the UK, announces its interim financial results for the 6 months ended 30 June 2021 ("H1 2021").

Return to normal trading, strong cash performance and re-instated dividend

• Restoration of dividend payments given the return to normal trading arrangements, continued strong cash performance and positive pipeline outlook

• 1. Board is recommending an interim dividend of 2.50p per share (FY 2020: nil)
• Strong revenue recovery as Covid-19 restrictions eased with Group revenues up 11.8% year-on-year to £443.7m (H1 2020: £396.7m)
• 1. Maintenance-ledrevenues of £286.5m (H1 2020: £266.9m) up 7.3%

• 1. Management-ledrevenues of £139.5m (H1 2020: £121.2m) up 15.1%
• Resilient trading performance and successful transition back to normal commercial mechanisms
• Profitability strengthened towards normal levels in the first half, delivering £11.1m adjusted profit before tax1 (H1 2020: £8.1m loss).
• Excellent cash performance continued with net cash at 30 June 2021 of £47.6m (31 December 2020: £56.9m net cash) and
  average daily net debt of £8.2m (FY 2020: £97.3m net debt)2
• Good sell-through in Development portfolio with 41unit sales and working capital utilisation down by £10.4m to £15.9m as at 30 June 2021
• Solid pipeline conversion with over £150m of contract wins year-to date
• 1. 60% success rate (by value) in Maintenance-led contract bidding

• 1. Ministry of Justice transitional housing contract award providing further evidence that central Government view housing as a specialist service
• Group order book stands at £2.5bn (2020: £2.6bn), reflecting the timing of contract renewals

Financial summary
	Continuing operations4	H1 2021	H1 2020
	Revenue	£443.7m	£396.7m
	Statutory profit / (loss) before tax	£5.7m	£(13.8)m
	Adjusted profit / (loss) before tax1	£11.1m	£(8.1)m
	Statutory diluted EPS	4.13p	(10.86)p
	Adjusted diluted EPS1	8.01p	(5.83)p
	Dividend per share	2.50p	-
	Average daily net debt2	£8.2m	£121.2m

Current trading and outlook

• The Board is pleased with the resilient trading and liquidity performance of the Group during FY 2021 to date and as lockdown restrictions are finally lifted is confident that this will be reflected in the Group's financial performance in the second half of the year.

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• Cash and working capital management remains very strong and accordingly the Group is updating its guidance for full year average daily net debt to £25m3 down from £50m.
• While Management and Development revenues are expected to normalise in the second half from their current elevated levels, the Board updates its previous guidance for the full year FY 20213 to revenue of c. £840m and adjusted profit before tax in the range of £23.0-25.5m.

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

"The Group has performed well and traded resiliently through another lock-down impacted reporting period. With the cash performance continuing to exceed expectations as trading conditions normalise, we are delighted to be able to restore Mears' long history of sustainable, progressive dividend payments.

"The business is in good shape and with the long-term challenges of affordable housing, public health and climate change high on the political agenda at local and central Government, we look forward to future growth with confidence."

1. Adjusted profit/(loss) before tax stated on continuing activities before non-underlying items (being £1.6m in H1 2021 relating to the repayment of furlough monies received) and before the amortisation of acquired intangibles. The adjusted diluted EPS measure is further adjusted to reflect a full tax charge.
2. Net cash / (debt) excludes IFRS 16 lease obligations.
3. Mears previously provided guidance on 12/05/21 for full year FY 2021 showied revenues ranging from £770m - £820m, adjusted profit before tax in the range of £21.3m - £25.5m and average adjusted daily net debt of c.£50m.
4. All comparatives are stated after adjusting for continuing operations.

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

For further information, contact:

Mears Group PLC
David Miles, Chief Executive Officer	Tel: [phone]
Andrew Smith, Finance Director	Tel: [phone]
Alan Long, Executive Director	Tel: [phone]
Joe Thompson, Investor Relations	Tel: [phone]
www.mearsgroup.co.uk

About Mears

Mears currently employs around 6,000 people and provides services in every region of the UK. In partnership with our Housing clients, we maintain, repair and upgrade the homes of hundreds of thousands of people in communities from remote rural villages to large inner- city estates. Mears has extended its activities to provide broader housing solutions to solve the challenge posed by the lack of affordable housing and to provide accommodation 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.

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CHIEF EXECUTIVE OFFICER'S REVIEW

INTRODUCTION

The Group maintained its high standards of operational delivery across its contract portfolio and traded resiliently through another period heavily impacted by Covid-19 restrictions. The Group's success was again built upon the 'extra-mile' commitment and engagement of its workforce and the strength of our trusted client relationships established over many years. As trading conditions return to normal, the Board is 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.

Most branches have now transitioned back from the interim financial arrangements and we look forward to normal trading conditions and performance in the second half year. All employees are now returned from furlough and the Mears self-delivery model and strong relationships with our supply chain partners is helping mitigate the impact of labour and material shortages seen across the industry.

Longer term, the demand for the services the Group provides is undiminished by Covid-19 and a back-log of lower priority maintenance- led jobs now requires resolution. The health inequalities that the pandemic exposed, and urgent action required by climate change will only add further political pressure to increase and upgrade the affordable and social housing stock in the UK.

FINANCIAL PERFORMANCE

Group

The financial performance of the Group continued to strengthen in the period, particularly as lock-down restrictions eased through the second quarter.

Continuing activities	H1 2021	H2 2020	H1 2020*
	£m	£m	£m
Revenue
Maintenance-led	286.5	270.0	266.9
Management-led	139.5	132.6	121.2
Development	17.7	6.5	8.6
Total	443.7	409.1	396.7
Operating profit measures:
Statutory operating profit / (loss)	9.7	2.7	(9.0)
Adjusted operating profit / (loss) (pre-IFRS 16)1	13.7	6.2	(5.6)
Adjusted operating profit / (loss) (post-IFRS 16)1	15.6	9.6	(3.0)
Profit before tax measures:
Statutory profit / (loss) before tax	5.6	(1.4)	(13.8)
Adjusted profit / (loss) before tax1	11.1	4.7	(8.1)

*restated as detailed in note 17 to the Interim Results

1.Adjusted operating profit / (loss) and adjusted profit / (loss) before tax is on continuing activities before non-underlying items, the amortisation of acquired intangibles but inclusive of share of profit from associates. Operating profit measures are stated on both a pre and post-IFRS16 basis. See Finance Review for a reconciliation of alternative performance measure

The Group recorded H1 revenues of £443.7m, up 11.8% year-on-year, and normalised operating profits (pre-IFRS 16) of £13.7m (H1 2020: £5.6m loss). Adjusted profit before tax was £11.1m against a first half loss in FY 2020 of £8.1m.

OPERATING REVIEW

Maintenance-led contracts

The Group's Maintenance-led contracts saw an improving volume and revenue performance through the first half as restrictions eased and more normalised trading conditions returned to most branches. By the end of June 2021, almost all contracts were back to their original commercial mechanisms.

In some areas we are seeing a backlog of lower priority maintenance jobs, delayed by lockdowns, which we are working through with clients and customers. However, social tenants 'Right to Repair' is yet to be fully restored so a national trend remains hard to discern at this stage. Whilst there is focus on addressing the backlog in maintenance, it is apparent that planned maintenance works will be slower to return in some areas and we expect activity to build-up through the second half of 2021 and running into 2022.

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In common with other construction sector companies, we have experienced some input price inflation in the period, impacting upon both materials and labour. However, the significant majority of the Group's customer contracts include price uplifts to negate much of this risk and which will protect operating margins over the medium term. The Mears model has always been to invest in and retain our own staff as much as possible, with lesser reliance than peers on sub-contracted and other short-term labour. Our employee turnover remains low relative to the industry and accordingly, we are better protected from the shortages and accompanying price inflation seen in the broader construction labour markets.

Energy efficiency

We continued to invest in growing our Sustainability team and developing our offering to help clients with the enormous task of decarbonising the UK's social housing stock. While the funding challenges for the sector are evident, this remains a key focus and opportunity for the Group.

Mears is already helping design and implement a number of carbon reduction schemes, such as in Aberdeenshire where 75% of the Council's 30-year Housing Improvement Plan is currently being spent on energy saving measures such as Photovoltaic systems, wall insulation, energy efficient electric heating systems and replacement windows and doors. Future plans include moving away from Gas Heating installations in favour of lower carbon alternatives. Mears integrate such programmes within on-going maintenance programmes. Mears also provides advice to customers on maximising the energy efficiency benefit of these carbon reduction schemes and advise clients on accessing appropriate funding, where available.

Discussions continue with many Maintenance-led clients as to how these critical retrofit and energy efficiency programmes can be integrated into existing work schedules.

Management-led contracts

Our contracts in the Management-led category continued to perform strongly in the first half, with revenues up 15% year-on-year and 5% from H2 2020. This was largely driven by the Asylum Accommodation and Support Contract ('AASC') which continued to experience elevated volumes across the entire process, with new service users entering the system and few exiting. The process of supporting these vulnerable people into dispersed accommodation has commenced where it is safe to do so. Accordingly, revenues are expected to reduce towards normal levels during the second half. Mears' priority throughout and going forward, will be the safety of staff and the service users.

Mears is pleased to have been awarded a contract with the Ministry of Justice (MoJ) to provide transitional housing services, where we will be supporting low and medium risk prisoners upon their release, from initial accommodation into a settled home. A key aim of this contract is to ensure that no one leaves prison without the offer of a good quality place to live from their first night in the community, and then a clear pathway to a settled long-term home. This is a new customer for Mears who will provide an integrated service including the provision of the property, maintenance, management, and welfare support. The initial interim contract value with the MoJ is circa £10m, but there is a significant opportunity to extend the longevity and scale of this relationship. The contract covers the North East and North West regions. This is a further example of central Government recognising the importance of Housing as a particular specialism and trusting Mears to deliver services to a vulnerable service user group.

Development

Our few remaining development sites achieved a strong sell-through in the first half benefitting from the positive housing market and stamp-duty exemptions. Of the 49 completed units as at 31 December 2020, 41 were sold in the first half (FY 2020: 29). A further 8 units were completed in the period, meaning that as at 30 June 2021 the Group held 16 completed units and a further 35 units are in the course of construction. Cashflow was also positive in the period, with the spot working capital utilisation as at 30 June 2021 reducing to £15.9m (31 December 2020: £26.3m). Realised pricing has been in-line with carrying values. The Group expects continued de- leveraging and unit sales in the second half, albeit at a slightly slower rate reflecting lower completed units and as the stamp duty relief tapers.

ESG

Environment

We continued to invest in our Sustainability Team with a number of new hires during the period. This dedicated team of experienced sustainability professionals are refining and enhancing our full-service client offering to help them de-carbonise the social housing sector. The Social Housing White Paper put the challenge at £105bn of retrofit activity required over the next 30 years to meet the Government's own energy efficiency targets. Most Local Authorities and Housing Associations recognise the importance of this long-term challenge.

Our growing Sustainability Team will also bring forward the detailed plans required to de-carbonise our own housing portfolio and our own operations to meet the Board's stated ambition to be carbon net zero by 2030.

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Social

Our Social Value and Diversity Impact Report (now in its sixth year) was published in May 2021 detailing the Group's huge commitment to social value and diversity within the communities we serve. A copy of which can be found on the Group's website.

Independent industry accreditations received during the first half demonstrate how strongly positioned Mears is to benefit from the many opportunities (and challenges) across the UK Affordable Housing sector in the UK. For the 19th consecutive year, the Royal Society for the Prevention of Accidents (RoSPA), has awarded Mears Group the RoSPA Order of Distinction, Gold Award, for its commitment to continuous improvement to health and safety performance. We are accredited as an Investor in People, awarded the Diversity Network Accreditation and are again listed in the Top 75 Social Mobility Index.

The Group is also exceptionally proud that our traditionally high levels of employee engagement, diversity, support and satisfaction have been reflected in no less than six independent 'Best Company to work for' awards, including national (The Sunday Times), regional and industry-specific.

Governance

The first annual report of the Mears Scrutiny Board, our customer engagement forum (independently supported and verified by the Centre for Governance and Scrutiny) was published in May 2021 and is available on the Company website. This initial assessment recognised: (i) the desire and commitment throughout the organisation to listen, understand and improve the customer experience; (ii) a wealth of positive examples and stories of Mears staff building excellent relationships with tenants and tenant groups; and (iii) that Mears' response to Covid-19 reflected the organisation's flexibility and commitment to protecting vital services and maintaining customer service standards.

STRATEGY

The Board completed its strategic review during the period and has a clear programme for growth across both its Maintenance-led and Management-led Housing activities. We are a leader in the affordable housing market, for which the future demand profile remains positive.

External drivers for change

• Increased government investment in the Affordable Housing sector given expanding social housing waiting lists and renewed political focus on housing post-Covid-19
• Social Housing White Paper and Government policy towards higher standards for safety and customer engagement
• The commitment to raise the carbon efficiency of all social housing stock by one EPC band by 2030, presents significant investment requirements
• Increasing Local Authority spend on long-term,cost-effective homelessness solutions
• On-goingdemographic pressure on the UK housing shortage particularly in affordable rental and specialist retirement living

Key Enablers for Mears

• Leverage our market leading position in housing maintenance to maximise share of wallet through more effective client planning
• Continue to evolve our affordable rental, temporary accommodation, and integrated housing offer to meet increasing market demands
• Participate in larger, integrated housing contracts, across local and central Government
• Assist new and existing clients to meet their targets for the de-carbonisation of housing stock
• Continued digital innovation to increase agility of frontline operations whilst continuing to drive operational efficiencies and improvements to the customers experience
• Operational consistency across the Group

Mears 2025 Operating Ambitions

• To have strengthened our leadership positions in our core housing maintenance and management sectors
• To be delivering growth across these core markets
• To be the trusted partner to local and central Government in affordable housing solutions
• To be supporting our clients carbon reduction programmes
• To be the most socially responsible business operating in the affordable and social housing sector in the UK

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