Mears Regulatory News (MER)

22 Mar 2005 07:00

Mears Group PLC22 March 2005 MEARS GROUP PLC Chairman's Statement Once again Mears has produced an excellent set of figures. The strategy forfurther growth is clear and the spirit within the Group is better than ever. Look at our performance this year: • Profit before tax and goodwill amortisation up 41.9%• Turnover up 54.7%• Cash inflow of £0.9m after absorbing strong growth• Contract wins valued at £526m• Order book up by £265m• Normalised earnings per share pre goodwill amortisation up 39.7%• Dividend up 40.7%. These are the results we have achieved with a group of talented people who arecommitted to Improving Homes, Improving Neighbourhoods, Improving Lives. Ourteam is consistently delivering results that stand out in our sector. Why?Because we are passionate about what we do and where we can take this Group.This applies not only in social housing but across all the divisions of Mears. Clarity and AmbitionWe are the market leader in social housing. What defines 'leadership' in thissector? For me it's about excellent and sustainable financial performance;consistent, high quality, tenant-focused services, delivered in closepartnership with good clients; and a genuinely innovative approach that makes areal difference to people's lives. I believe our job is to make tenants smile. The Opportunity Has Never Been BiggerSocial housing is clearly the right market for us. It is a fragmented sectorwith relatively few large service providers. Yet the outsourcing argument hasbeen won. More and more Local Government clients are exploring the benefits tobe gained by working with private sector providers and in developing long-termpartnerships with a smaller number of large service providers. We see anaddressable market opportunity in recurring repairs and maintenance of around£5bn a year. The available spend from Central Government is also very healthy, with at least£3.5bn to be committed annually to the Decent Homes Standard. Although due toend in 2010, we believe the Decent Homes commitment is likely to last until2015. It's not just about the numbers though. There is a strong client commitment toquality and to community in this sector and that plays to our strengths. Clientsrecognise that Mears people work extremely hard to meet their needs and theneeds of their tenants. We are problem-solvers: We are always looking to findbetter ways to do things and to create long-term benefits and that approachresonates with those who care about the local community. Our work with Wigan & Leigh Housing is a great example of how our approachachieves satisfaction and savings. We've been working with this client for 6years now and in 2003 we were awarded a £5 million a year contract for repairsand maintenance, and refurbishment with these services to be provided until2020. Last year the scheme reduced overall repair costs by 15% and tenantsatisfaction with work quality was at 98%. We're working on the 2%. Community - At The Heart Of EverythingPhysical repairs and refurbishments are just one part of what makes a goodneighbourhood tick. Communities are about people and I believe our work shouldset out to improve daily life in the neighbourhoods we serve. Our apprenticeshipschemes demonstrate what can be achieved when service providers think beyond theobvious and really put the community at the heart of what they do. Through theseschemes we employ and train people so they can manage and maintain housing intheir area. This gives a boost to local employment and makes Mears part of thefabric of everyday life. We are always looking for new ways to support the local community. Take oursponsorship of breakfast clubs in Hackney. Our teams open schools buildings upat 7am and help to serve a meal to pupils. This is improving school attendanceand the general wellbeing of children for the benefit of the entire community.Visiting these clubs was definitely one of the highlights of my year. Everyoneat Mears has the opportunity to contribute to schemes such as this in theirday-to-day work. Through our 100 Days In The Community programme they can alsocontribute time and resource to any locally based community initiative. Doing Things The Right WayAs Mears grows it is increasingly important for us to recruit, develop andmanage people to a consistently high standard. Our services are delivered at alocal level and we must ensure that everyone within Mears is committed toproviding truly excellent service. The One Mears Way plays an effective role in enabling current and new employeesto understand and follow the right way to do things. We have built our successon these principles and everyone within the management team is dedicated toensuring that our passion and standards continue to unite us as we grow. Management Team StrengthenedThe quality of our management team was recognised by a number of industry bodiesin 2004. In the Quoted Company Awards, for example, David Robertson was namedFinance Director of the Year. David deserves this recognition for his excellentwork. We made a number of significant new appointments in 2004 to further strengthenthe business, including the appointment of Stuart Black as Chief OperatingOfficer in November. Stuart is highly experienced and will really help thebusiness to meet its operational challenges over the next few years. We havealso appointed talented individuals to the jobs of Group HR Director and GroupIT Director. With these additional specialists in place we have a well-balancedexecutive team with real strength in depth. Looking AheadI would like to thank everyone at Mears for their hard work in 2004 and tocongratulate them on the success they have achieved. The excellent figuresreported are down to them and they should also take great satisfaction from theway their work has helped to improve the lives of others. Many of you will know that I sold two million Mears shares recently and maywonder what this signifies. I did this to satisfy demand from a number ofinstitutional investors. I remain absolutely committed to Mears and intend toplay a central role in the team that will take this Group to the next stage andbeyond. There is a fantastic opportunity for everyone at Mears to be part of somethingspecial. If we can all rise to the challenges ahead we can achieve an enormousamount - together. This is a very exciting time; I hope everyone at Mears willjoin me in working to strengthen our position as an outstanding leader in thesocial housing sector. Bob HoltChairman21 March 2005 Operating and Financial Review 2004 was all about delivering excellent services and maintaining exceptionallevels of growth, while bringing even greater focus to what we do and how we doit. We believe our performance underlines that Mears is the strongest company in thesocial housing sector and is able to deliver impressive and sustainable growth. TurnoverIn 2004 we grew turnover to £173.7m (2003: £112.3m), an increase of 54.7%.Organic growth was the main driver. This significant growth reflects our abilityto win, retain and extend major contracts in a very active social housingmarket. Profit Before Taxation and Goodwill AmortisationWe achieved profit before taxation and goodwill amortisation of £7.4m (2003:£5.2m), a 41.9% increase. Operating margins in our social housing activitiesheld up well at 4.9%, despite major growth in new work from contracts secured inlate 2003 and 2004. United Fleet Distribution (UFD) achieved a 4.2% operatingmargin, unchanged from 2003. Scion's operating margin was 1.0%, as anticipated. We believe there is room for further margin improvement where we share thepotential risks and benefits of service performance with our clients. We arealso able to find operational efficiencies as contracts mature. Our investmentsin infrastructure - particularly Group-wide improvements in IT - provide scopefor better margins and even greater customer satisfaction. AcquisitionsWe are pleased to confirm that we have completed the turnaround of Scion GroupLimited, the multi-disciplinary facility services group we acquired in 2003.This business is now focused on growing its margin. We are continuing to build a national painting and decorating business byacquisition. The businesses we have acquired are now integrated and are focusedon developing significant growth opportunities in the public sector. Goodwill amortisation at £0.7m (2003: £0.4m) reflects the full year effect ofacquisitions in 2003 and two small painting business acquisitions in 2004. Excellent market opportunities in social housing mean that organic growth islikely to maintain our momentum. Having said that, we are able and willing tomake significant acquisitions that further our strategic ends and enable us toimprove or broaden our services. InterestThis year's modest charge of £0.07m (2003: £0.08m receipt) reflects our broadlyneutral cash position throughout the year. Our constant emphasis on improvingthe management of working capital has paid off and has been particularlyvaluable given the scale of growth we achieved in the year. Earnings Per Share and DividendBasic earnings per share (EPS) before goodwill increased 49.8% to 9.69p (2003:6.47p). Tax was lower at 27.4% (2003: 32.6%) due mainly to a tax deduction forshare option exercises and utilisation of tax losses. Even after applying a fulltax charge, EPS is still up 39.7% at 9.04p (2003: 6.47p). The dividend increase is in line with our earnings growth. A final dividend of1.4p per share is proposed, making 1.9p for the full year - up 40.7% on 2003.The final dividend is payable on 1 July 2005 to shareholders on the register on10 June 2005. Cash FlowOnce again, the cash flow position underlines our strength as a business. A netcash inflow of £0.9m was achieved in 2004 (2003: £3.7m outflow). The Groupconverted 77.6% of EBITDA into operating cash flow (2003: 80.1%). This wasachieved against a backdrop of 41.0% organic growth, which was contained at£3.9m of additional working capital. Some £2.5m was invested in new technologyand operational bases, with 12 new sites opened in the year. Acquisitionsabsorbed £1.1m of cash. Order BookThe visibility of our earnings has never been better. £526m of new work wassecured in 2004 from 18 contracts. Our order book now stands at £815m. Theelement of consensus forecast turnover secured for 2005 is 81%, with some 60% of2006 and 48% of 2007. We take a conservative approach to quantifying our order book and place greatemphasis on winning good quality contracts that can provide clear andsustainable margins. We also hold a healthy mix of Decent Homes and repairs andmaintenance work, giving us a balanced position in the social housing marketthat is not reliant on clients' future discretionary spending. Net AssetsAsset value had risen from £12.3m to £16.4m at year-end. Net current assetswithin this improved by £2.3m to £4.5m. Major Contract WinsWe achieved a number of major successes, winning contracts valued at £526m intotal. Highlights included: • SheffieldA one-fifth share of the largest contract placed to date. In total £1bn is to bespent over seven years to service 55,000 houses.• EalingA five-year, £27m partnership contract to provide response maintenance services,void repairs and decoration services to 7,500 homes.• NewcastleA six-year, £60m Decent Homes Standard contract covering 32,000 homes. Theclient's total spend is £500m for all service providers, so we have secured morethan 10% of the total contract value.• LeedsA five-year, £3m a year contract to carry out responsive repairs and voids workfor 3,300 houses.• CrawleyA five-year, £2m a year contract to undertake responsive repairs and voids workin 8,500 homes.• HackneyA five-year £7.5m a year contract covering responsive repairs, void propertiesand planned maintenance for 6,000 homes. RisksWe believe the most significant risk we face is damage to our reputation as aresult of a service failure. We mitigate this through our very strong focus onservice delivery and a constant emphasis on innovation. The One Mears Wayapproach helps to ensure that the standards we - and our customers - expect areclear to everyone within Mears and are part of everything we do. We also recognise that a significant skills shortage would represent a risk togrowth. We are mitigating this risk through investment in innovative recruitmentand development programmes, such as our highly successful apprenticeshipschemes. We intend to further strengthen our reputation as a highly attractiveemployer that offers rewarding jobs, good rates, consistent income,opportunities for career and personal development and a great working culture. Market OutlookThe social housing market provides us with excellent opportunities in bothDecent Homes and repairs and maintenance work. The Government's Decent Homes Standard capital programme is likely to beextended to 2015 and is yet to address 1.2 million homes that still do not meetthe Decent Homes Standard. We expect continued Decent Homes-related expenditureof around £3.5bn a year. The repairs and maintenance market is also thriving and we believe expenditureof around £5bn a year through to 2020 is likely. Despite the substantial budgets of local authorities, social housing is afragmented market. The ten largest service providers currently account for just13% of the total market. We believe this will change, with the larger serviceproviders increasing their share. Market consolidation is being driven by widerclient recognition of the benefits of outsourcing. An increasing number ofclients also prefer to work with a smaller number of service providers for alonger period of time. We expect these market developments to increase theaddressable opportunities for large, proven service providers such as Mears. Our StrategySocial housing offers the biggest and best long-term growth opportunities forMears and our focus is now firmly on this sector. In other words, our work isall about Improving Homes, Improving Neighbourhoods, Improving Lives. There aretwo particularly important aspects of our strategy: • InnovationWe are constantly searching for new and better ways to support clients and helptenants. For example, our mobile show homes enable tenants to see the optionsavailable in terms of new colour schemes and fixtures and fittings and todiscuss their preferences with us before any work is carried out. We alsoprovide mobile comfort homes when work is in progress and we give tenants avideo to explain how the repairs process might affect them. • PartnershipWe are committed to developing close relationships with clients and communitiesand delivering tangible, long-term improvements. We have discontinued bids wherewe felt the client did not share our commitment to partnership. We believe thismakes good business sense, as strong client relationships enable us to do betterwork, increase the scale and scope of existing contracts and achieve sustainablemargins and clear visibility of future earnings. We are now broadening our service offerings with key clients. In Richmond, forexample, we are working very closely with our client to jointly offer white andblue-collar services. Our collaborative approach also enables us to workeffectively with our peers. In Sheffield, for example, we are developing acommon supply chain with the four other partners. Group StructureWe have a lean corporate centre that is efficient, agile and flexible. We try toavoid bureaucracy whenever and wherever we can. The centre of the Group drivesstrategy, best practice and controls; the individual businesses drive delivery,client relationships and local innovation. We are not yet achieving the right levels of synergy between our businesses andthat is an area we are addressing. Our investment in a Group-wide IT system is amajor step forward and will offer an excellent return on investment as we grow. Our focus on social housing has driven the development of our core businesses.Haydon, for example, has developed from a largely private sector mechanical andelectrical services contractor into a more dedicated social housing contractor. UFD is clearly outside the scope of our focus on housing and we expect thismature business to become less significant in terms of Group turnover and profitover time. We are happy to have UFD within the Group, however. It is aprofitable, well-managed business with highly motivated people and leads itssector in terms of service delivery and market share. People - Our Greatest DifferentiatorWhat really sets us apart as a business is the quality and spirit of our people.As we grow we must give our employees the support they need to do a fantasticjob for clients and tenants. In 2004 we further strengthened our management teamto ensure this happens, appointing a Chief Operating Officer and making seniorappointments in human resources, finance, IT and marketing. We also invested in attracting a strong mix of new employees and put particularemphasis on recruiting local people. Local recruitment is an effective way tocompete for talent and ensure we can grow quickly to meet clients' needs. Wehave innovative local recruitment initiatives in place to attract the besttalent available. Many Mears people don't just serve the local community, theylive in the area and are part of it. These close connections between Mears andlocal neighbourhoods are invaluable, not least because they help us tounderstand the real needs of the people we serve. Retention of good people is very important and our excellent Save As You Earn(SAYE) schemes underline our belief that employees should have the opportunityto share in the Group's success. Currently, 229 employees are involved in SAYEschemes. At our Group Management Conference in January 2005 we spent time discussing thevalues that have made Mears successful and will help us to thrive in the future.The values we agreed are: Commitment; Customer focus; Teamwork; Reliability;Integrity; and Innovation. These values will become a central part of the OneMears Way and will guide everything we do. If we are to succeed in realising our ambitions for the Group we will need torecruit many new people over the next few years. It is absolutely vital thatthose who join - at all levels - share the same spirit, values and drive asMears people today. The entire management team is dedicated to making thishappen. We know that the passion and commitment that has taken Mears to thispoint can take us a very long way indeed. David Robertson, Finance DirectorStuart Black, Chief Operating Officer21 March 2005 Consolidated Profit and Loss Accountfor the year ended 31 December 2004 2004 2004 2003 2003 Note £'000 £'000 £'000 £'000 ------ -------- -------- -------- --------TurnoverContinuing operations 2 172,078 112,271Acquisitions 1,607 - ------ -------- -------- -------- -------- 173,685 112,271Cost of salesContinuing operations (127,456) (83,268)Acquisitions (1,310) - ------ -------- -------- -------- -------- (128,766) (83,268)Gross profitContinuing operations 44,622 29,003Acquisitions 297 - ------ -------- -------- -------- -------- 44,919 29,003Administrative expenses (38,081) (24,276)Operating profit Continuing operations 6,747 4,727Acquisitions 91 - ------ -------- -------- -------- -------- 6,838 4,727Share of operating profit in 4 9associate ------ -------- -------- -------- -------- 6,842 4,736Net interest (68) 78 ------ -------- -------- -------- --------Profit on ordinary activitiesbefore taxation 2 6,774 4,814Tax on profit on ordinary 3 (1,855) (1,571)activities ------ -------- -------- -------- -------- Profit on ordinary activitiesafter taxation 4,919 3,243 Equity minority interests (5) 7 ------ -------- -------- -------- --------Profit for the financial year 4,914 3,250Dividends 4 (1,105) (773) ------ -------- -------- -------- --------Profit retained 3,809 2,477 ------ -------- -------- -------- --------Earnings per shareBasic 5 8.54p 5.72p ------ -------- -------- -------- --------Basic - normalised, 5 9.04p 6.47ppre-amortisation ------ -------- -------- -------- -------- Diluted 5 7.98p 5.48p ------ -------- -------- -------- --------Diluted - normalised, 5 8.45p 6.20ppre-amortisation ------ -------- -------- -------- -------- There were no recognised gains or losses other than the profit for the financialyear.All activities are continuing. Consolidated Balance Sheetat 31 December 2004 2004 2004 2003 2003 £'000 £'000 £'000 £'000 ------ ------ ------ ------Fixed assetsIntangible assets 10,406 12,273Tangible assets 4,450 3,093Investments - associates 48 45Investments - other - 62 ------ ------ ------ ------ 14,904 15,473 ------ ------ ------ ------Current assetsStocks 4,628 2,487Debtors 30,410 24,875Cash at bank and in hand 8,078 3,408 ------ ------ ------ ------ 43,116 30,770Creditors: amounts falling due within one (38,624) (28,600)year ------ ------ ------ ------ Net current assets 4,492 2,170 ------ ------ ------ ------Total assets less current liabilities 19,396 17,643Creditors: amounts falling due after morethan one year (2,960) (5,351) ------ ------ ------ ------ 16,436 12,292 ------ ------ ------ ------ Capital and reservesCalled up share capital 579 570Share premium account 3,362 3,041Shares to be issued 90 90Profit and loss account 12,310 8,501 ------ ------ ------ ------Equity shareholders' funds 16,341 12,202Equity minority interests 95 90 ------ ------ ------ ------ 16,436 12,292 ------ ------ ------ ------ The financial statements were approved by the Board of Directors on 21 March2005. R Holt D J RobertsonDirector Director Consolidated Cash Flow StatementFor the year ended 31 December 2004 2004 2003 Note £'000 £'000 ----- -------- --------Net cash inflow from operating activities 6 6,661 4,691 Returns on investments and servicing of finance Interest received 16 103Interest paid (61) (8)Finance lease interest paid (26) (14) ----- -------- --------Net cash (outflow)/inflow from returns on investmentsand servicing of finance (71) 81 ----- -------- --------Taxation paid (1,312) (1,543) Capital expenditure Purchase of tangible fixed assets (2,540) (829)Sale of tangible fixed assets 11 3 ----- -------- --------Net cash outflow from capital expenditure (2,529) (826) ----- -------- --------Acquisitions Purchase of subsidiary undertakings (1,176) (2,037)Net cash acquired with subsidiary undertakings 88 (3,351) ----- -------- --------Net cash outflow from acquisitions (1,088) (5,388) ----- -------- --------Equity dividends paid (864) (623) Financing Issue of shares 330 76 Capital element of finance lease rentals (210) (97) Repayment of borrowings - (36) ----- -------- --------Net cash inflow/(outflow) from financing 120 (57) ----- -------- --------Increase/(decrease) in cash 7 917 (3,665) ----- -------- -------- Notes to the preliminary announcementfor the year ended 31 December 2004 1. Basis of preparationThe financial information set out in the announcement does not constitute theCompany's statutory accounts for the years ended 31 December 2004 or 2003. Thefinancial information for the year ended 31 December 2003 is derived from thestatutory accounts for that year which have been delivered to the Registrar ofCompanies. The auditors reported on those accounts; their report was unqualifiedand did not contain a statement under s237(2) or (3) Companies Act 1985. Thestatutory accounts for the year ended 31 December 2004 will be finalised on thebasis of the financial information presented by the Directors in thispreliminary announcement and will be delivered to the Registrar of Companiesfollowing the Company's annual general meeting. 2. Segmental analysisTurnover and profit on ordinary activities before taxation are attributable tothe following activities carried out entirely within the UK: Turnover Profit before taxation Net assets ---------- ---------- ---------- 2004 2003 2004 2003 2004 2003 £'000 £'000 £'000 £'000 £'000 £'000 -----------------------------------------------------------Maintenance,mechanical 162,770 99,574 6,206 4,193 14,702 10,693and electricalservices Vehiclecollection and 10,915 12,697 568 621 1,734 1,599delivery ------- ------- ------- ------- ------ ------- 173,685 112,271 6,774 4,814 16,436 12,292 ------- -------- ------- ------- ------- ------- 3. Tax on profit on ordinary activities The tax charge represents: 2004 2003 £'000 £'000 -------- --------United Kingdom corporation tax at 30% (2003: 30%) 1,855 1,285Share of tax charge of associate - 1 -------- --------Total current tax 1,855 1,286Reversal of timing differences - 285 -------- --------Tax on profit on ordinary activities 1,855 1,571 -------- -------- The tax assessed for the year is lower than the standard rate of corporation taxin the United Kingdom of 30% (2003: 30%). The differences are explained asfollows: 2004 2003 £'000 £'000 -------- --------Profit on ordinary activities before tax 6,774 4,814 -------- --------Profit on ordinary activities multiplied by standard rate ofcorporation tax in the United Kingdom of 30% (2003: 30%) 2,032 1,444Effect of:Expenses not deductible for tax purposes 178 111Depreciation in excess of capital allowances 14 138Tax relief on exercise of share options (237) (106)Utilisation of tax losses (132) (301) -------- --------Current tax for the year 1,855 1,286 -------- -------- 4. Dividends 2004 2003 £'000 £'000 -------- --------Ordinary shares- interim dividend of 0.50p (2003: 0.35p) per share paid 290 200- final dividend of 1.40p (2003: 1.00p) per share proposed 815 573 -------- -------- 1,105 773 -------- -------- 5. Earnings per shareBasic earnings per share is based on equity earnings of £4.91m (2003: £3.25m)and 57.57m (2003: 56.78m) ordinary shares at 1p each, being the average numberof shares in issue during the year. For diluted earnings per share the average number of shares in issue isincreased to 61.56m (2003: 59.29m) to reflect the potential dilution effect ofemployee share schemes. A normalised pre-amortisation earnings per share is disclosed in order to showperformance undistorted by amortisation, the tax effect of the exercise of shareoptions and the utilisation of tax losses acquired. The normalisedpre-amortisation earnings per share is based on equity earnings (after addingback amortisation) of £5.20m (2003: £3.68m). Basic Diluted ---------- ---------- 2004 2003 2004 2003 p p p p -------- -------- ------- --------Earnings per share 8.54 5.72 7.98 5.48Effect of eliminating amortisation 1.15 0.75 1.08 0.72Effect of full tax adjustment (0.65) - (0.61) - --------- -------- --------- --------Normalised, pre-amortisation 9.04 6.47 8.45 6.20earnings per share --------- -------- --------- -------- 6. Net cash inflow from operating activities 2004 2003 £'000 £'000 -------- --------Operating profit 6,838 4,727Depreciation and amortisation 1,746 1,122Loss on disposal of fixed assets 33 39Increase in stocks (2,043) (1,069)Increase in debtors (5,235) (3,461)Increase in creditors 5,322 3,333 -------- --------Net cash inflow from operating activities 6,661 4,691 -------- -------- 7. Reconciliation of net cash flow to movement in net funds 2004 2003 £'000 £'000 ------- -------Increase/(decrease) in cash in the year 917 (3,665)Cash outflow from financing 210 133 ------- -------Change in net funds resulting from cash flows 1,127 (3,532)Loans and finance leases acquired with subsidiaries (30) (434)Net funds at 1 January 2004 1,600 5,566 ------- -------Net funds at 31 December 2004 2,697 1,600 ------- ------- 8. Analysis of changes in net funds At At 1 January Cash 31 December 2004 flow Acquisitions 2004 £'000 £'000 £'000 £'000 -------- -------- -------- --------Cash at bank and in hand 3,408 4,582 88 8,078Overdraft (1,507) (3,753) - (5,260) -------- -------- -------- -------- 1,901 829 88 2,818Finance leases (301) 210 (30) (121) -------- -------- -------- -------- 1,600 1,039 58 2,697 -------- -------- -------- -------- 9 CalendarThe proposed final dividend will be paid on 1 July 2005 to shareholders on theregister on 10 June 2005. The Annual Report will be posted to shareholders on 9 May 2005 and will beavailable from the registered office at The Leaze, Salter Street, Berkeley,Gloucestershire, GL13 9DB. The Annual General Meeting will be held on 1 June 2005 at the offices ofArbuthnot, Arbuthnot House, 20 Ropemaker Street, London EC2Y 9AR. This preliminary announcement of results for the year ended 31 December 2004 wasapproved by the Directors on 21 March 2005. This information is provided by RNS The company news service from the London Stock Exchange