Mears Group PLC

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

Preliminary Results for the year ended 31 December 2024

Excellent performance with confident outlook

Mears Group PLC, the leading provider of services to the Housing sector in the UK, announces its preliminary financial results for the year ended 31 December 2024 ("FY24").

Financial Highlights

·      Group revenues up 4% year-on-year to £1,132.5m (FY23: £1,089.3m).

·      Profit before tax increased by 37% to £64.1m (FY23: £46.9m).

o  Adjusted operating margin strengthened further to 5.6%² (FY23: 4.7%) reflecting strong commercial and operation performance.

·      Excellent cash performance with average daily adjusted net cash of £59.6m (FY23: £76.5m)¹ after £40m of share buybacks were completed in FY24.

o  Cash conversion at 101% of EBITDA (FY23: 123%, last 5-years: 115%).

o  Adjusted net cash¹ at 31 December 2024 of £91.4m (FY23: £109.1m).

·      The Board is recommending a final dividend of 11.25p, increasing the full year dividend by 23% to 16.00p (FY23: 13.00p) reflecting continued strong cash performance and the Board's confidence in the positive outlook.

Operational Highlights

·      Award of a significant new contract with North Lanarkshire Council ('NLC') in May 2024 reflected the strength of the Group's partnership with NLC over many years.

·      Secured a contract with Moat, a large Housing Association, covering c.22,000 homes in the South East of England, stepping in at short-notice as a replacement provider.

·      The Group secured aggregate new contract awards of around £220m during FY24 (excluding NLC), at a bid conversion rate of c.41% (by value).

·      Order book has increased to £3.0bn (2023: £2.5bn).

·      The Central Government Management-led activities reported growth, driven by new works delivered for the Ministry of Defence to provide housing and support to those travelling to the UK under the Afghan Relocation and Assistance Policy.

·      The Group was proud of the positive feedback received through the Sunday Times Best Big Companies to Work For survey reflecting Mears' commitment to improving conditions and career development for employees.

Strategic update

·      During the year, the Board carried out a full strategic update, and the key objectives identified within the new 5-year plan include:

o  Strengthening Mears' position as the leading provider of services to the Housing sector in the UK

o  Delivering organic growth within our Local Government maintenance-led activities, to deliver high quality, cash backed earnings.

o  Becoming a leader in Compliance, focusing on building safety, compliance, and quality standards, which have growing regulatory drivers.

o  Developing Mears' operational and commercial expertise to deliver standalone planned works, including decarbonisation and retrofit, to our existing and new clients.

o  Delivering additional services to our key Central Government clients, whilst ensuring that the business is well-positioned for the next round of procurement in 2027-2029.

Current trading and outlook

·      Mears has made a strong start to 2025 and, at this relatively early stage, is increasing its guidance and expects to be modestly ahead of market expectations with expected revenue of no less than £1,050m³ and adjusted profit before tax of no less than £50m³.

Lucas Critchley, Chief Executive Officer of the Group, commented:

"I am pleased to report on another strong year for the Group. The strategic update completed during the period has provided fresh impetus, refining our approach to maximise the addressable opportunity. A strong period of contract retention has bolstered the order book and provides improved revenue visibility over the medium term. An increased operational focus has delivered improved service metrics and is also evident in the continued progress in operating margin. The Group is recognised as a housing specialist with a track record of delivering reliable and innovative solutions across our range of services and will continue to develop its service offering to address new and evolving challenges faced by our clients."

1.     Adjusted net cash excludes IFRS 16 lease obligations of £297.5m (2023: £254.4m) and includes treasury deposits of £nil (FY23: £7.1m) as detailed in the Financial Review

2.     Adjusted operating margin is stated before the impact of IFRS 16, as detailed in the Financial Review

3.     The Board consider the current consensus analyst forecasts for FY24, prior to this announcement, to be revenues of £992m and adjusted profit before tax of £47.3m. Adjusted profit before tax is reported before non-underlying items.

About Mears

Mears is a leading provider of services to the Housing sector, providing a range of services to individuals within their homes. We manage and maintain around 450,000 homes across the UK and work predominantly with Central Government and Local Government, typically through long-term contracts. We equally consider the residents of the homes that we manage and maintain to be our customers, and we take pride in the high levels of customer satisfaction that we achieve.

Mears currently employs over 5,000 people and provides services in every region of the UK. In partnership with our Housing clients, we provide property management and maintenance services. 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.

Chair's Statement

Introduction

I am delighted to report a period of strong operational and commercial progress that underpins an outstanding set of financial results. Our strong performance owes much to three factors in particular.

The first, and most important, is the quality of our staff. I have seen many examples of dedication, empathy and a determination to deliver a good experience for customers, not simply to execute a piece of work. The second is the strength of our client relationships, fostered by our belief that excellent customer service is the key to effective cooperative working between client and provider. Finally, our information technology platform has been integral to the delivery of our high quality, responsive service and will remain critical as we seek to broaden our services in the future. I am proud of the progress made by Mears in 2024.

We were pleased to have been recognised again in the top 10 of the Sunday Times Best Big Companies survey, achieving our highest ever position of 7th. Mears has a diverse workforce of over 5,000 staff. We have also seen increasing representation of women and ethnic minorities across the Group as our inclusive recruitment and employee development programmes progress. Training and investment in our workforce remain a priority, with our Emerge and Embed management development programmes creating our future leaders and our apprenticeship programme was again significantly over-subscribed.

On behalf of the Board, I thank all the Group's employees for the significant part they played during another successful year for the Group. I continue to be hugely impressed by the commitment, hard work, professionalism and loyalty of our employees.

Results

Group revenues increased by 4% to £1,133m. It is particularly pleasing that the Group reported good progress across both strands of its housing business. Securing the award of the new North Lanarkshire Council ('NLC') contract for a minimum of eight years and with an expected annual revenue of £125m, was a particular highlight. The Central Government management activities reported growth, primarily driven by new works delivered for the Ministry of Defence to provide housing and support to those travelling to the UK under the Afghan Relocation and Assistance Policy. The Group is recognised by Central Government as a Housing specialist, and we are increasingly seeing opportunities to extend our service offering in this area which bodes well for the future. As reported previously, the Group has experienced elevated revenues within its Asylum services. The Group saw some revenue reduction in this workstream during the second half and anticipates that these revenues will continue to normalise, although the timing is uncertain.

Profit before tax increased by 37% to £64.1m (2023: £46.9m), predominantly driven by an improving adjusted operating margin to 5.6% (2023: 4.7%). Notwithstanding the Group's ambitions to deliver growth, a primary financial target for the business over recent years has been to see the margin return to above 5%, which is seen as the Group's historical norm. The operational and commercial review process at a contract level has seen increased intensity, driving improvement in a number of operational measures and also, pleasingly, pushing up the operating margin.

The Group continued to deliver strong cash generation, with operating cash conversion at 101% of EBITDA, reflecting the high quality of the Group's earnings. Strong working capital management remains central to our business model. The increase in profit, combined with the impact of a reducing share count resulting from the buyback, delivered diluted earnings per share of 48.9p, an increase of 53% (2023: 31.9p).

Strategic update

During the year, the Board completed a strategic update which has unequivocally focused the Group on being the leader in the UK in providing quality housing services to the public sector. The review identified an increasing addressable market in our core housing activity and showed the Group is very well-placed to deliver against those opportunities. The drivers of change going through the sector are arguably as great as at any point in recent history. The housing market continues to present opportunities for Mears to support clients both in its traditional areas and some emerging ones.

Our disciplined approach to M&A is well considered and driven by the opportunities that are available to deliver good quality sustainable growth. Whilst the Board will continue to consider acquisitions which increase operational scale or augment the Group's service offering, we are also fortunate to have other organic growth opportunities which will preserve the current strong cash position and deliver a higher return on invested capital and quality of earnings.

The Board recognises that to deliver the plan, it is essential to continue investing in our people and systems. The Group has recruited a number of new senior roles adding to our capability and bandwidth and the Board approved a significant increase in IT headcount to deliver an ambitious programme of developments to our in-house operating systems.

Dividend and capital allocation

Our capital allocation policy remains consistent and prioritises the allocation of capital to support our organic growth strategy, augmented by modest strategic bolt-on acquisitions to further enhance our service offering and accelerate the delivery of our plan. Positively, the capital expenditure and working capital requirements of the business model are low. The strong ensuing cash generation underpins a progressive dividend, the market purchase of shares to the Employee Benefit Trust, and the return of surplus funds to shareholders. The Board recognises that our key stakeholders take comfort from the Group's strong balance sheet and Mears maintaining a modest net cash position.

Given the excellent trading performance of the Group, the continued strong cash performance and the confident outlook, the Board is pleased to propose a final dividend of 11.25p per share, bringing the total for the year to 16.00p, an increase of 23% (2023: 13.00p). It is an added benefit of the Group's share buyback activity that, whilst the Board has increased the dividend per share by 52% over the last 2-years, the cash cost of the dividend has only reported a modest increase of 17% over that time. The Board continues to believe that a capital allocation policy combining a progressively growing dividend within a cover range of 2.0-2.5x, with the return of any excess capital via on-market buyback purchases of shares, remains appropriate. In the short-term, cognisant of the current elevated level of earnings, the Board intends to allow dividend cover to increase beyond the Board's stated range outlined above, allowing for progressive dividend payments within the Board's targeted cover over the medium term.

During FY24, the Board approved a return of surplus capital of £40m to shareholders, that was implemented through a third and fourth buyback programme of on-market purchases. This resulted in the purchase and cancellation of 10.9m ordinary shares of 1p each at an average price of 366p. Consistent with our capital allocation strategy, and reflecting the strength of our balance sheet, the Board announced a fifth buyback in January 2025 and this concluded on 28 March 2025 having completed the purchase of a further 4.3m shares, at an average price of 371p and a total consideration of £16.0m.

Over the last two years, buybacks have reduced the Group's ordinary share count by 27.4m shares at an average price of 325p and a total cash cost of £89m, representing a reduction of c.25% of the Group's issued share capital over that time. Together with dividends paid during this period, returns to shareholders have totalled £114m. In addition, during that same period, the Employee Benefit Trust ('EBT') purchased a further 5.1m ordinary shares at an average price of 330p and a total cash cost of £16.7m.

Corporate Governance and Board development

Following the significant changes to the Board in recent years, 2024 was a period of stability and an opportunity to reset the way the Board operates and interfaces with the business. I believe we have made strong progress on the effectiveness of the Board, and it was encouraging that this was confirmed in a review by an external facilitator.

An important focus for the Board during 2024 was to support Lucas Critchley in his first year as Chief Executive Officer following a smooth and well managed transition from his predecessor. The strategic review was well timed, providing Lucas with an opportunity to evaluate the Group's performance and incorporate refinements and modifications in setting the Group's strategic priorities.

Following the changes to the Employee Director arrangements during 2023, I am pleased to report continued progress in this area. This team, under the guidance of Hema Nar, has firmly established its role and purpose within the business and provides an invaluable link between the Board and the wider workforce. The development of the roles of the Deputy Employee Director and the Trade Representative have further enhanced the effectiveness of this team.

As required by Governance guidelines, Dame Julia Unwin's tenure on the Board came to an end on 2 January 2025. Julia has been a key contributor to the Board for the best part of a decade and brought a unique perspective to many debates and discussions. The Board has benefited from Julia's extensive and varied experience and her contribution will be missed. On behalf of the Board, I would like to thank Julia for her many years of service and wish her well for the future.

We plan to recruit an additional Non-Executive Director during 2025 to ensure that we continue to maintain a strong independent Board with the required skills and experience.

Chief Executive Officer's Business Review

Introduction

I am pleased to report on another strong year for the Group. The strategic update completed during the period has provided fresh impetus, refining our approach to maximise the addressable opportunity. A strong period of contract retention has bolstered the order book and provides improved revenue visibility over the medium term. An increased operational focus has delivered improved service metrics and is also evident in the continued progress in operating margin. The Group is recognised as a housing specialist with a track record of delivering reliable and innovative solutions across our range of services and will continue to develop its service offering to address new and evolving challenges faced by our clients.

Operational Review

1.   Adjusted measures are defined in the Alternative Performance Measures section of the Financial Review.

The Group delivered strong financial performance in the year; revenues increased by 4% to £1.13bn. (2023: £1.09bn), operating profit increased by 39% to £72.6m (2023: £52.2m) and diluted EPS increased by 53% to 48.9p (2023: 31.9p).

It is particularly pleasing to report further strengthening in operating margins given the emphasis that the senior management team has placed on this since the pandemic. The statutory operating margin increased to 6.4% (2023:4.8%). The Group also reports an adjusted operating margin, stated before the impact of IFRS 16, of 5.6% (2023: 4.7%) which is considered to be more closely aligned with how contracts are priced at tender, and reflects how operational performance is analysed. A key factor in the improved operating margins is the reinvigorated commercial review process which undertakes a detailed monthly review of operational performance, demanding strict adherence to business systems and processes. Whilst the primary focus of these reviews is not financial, the impact upon margin and working capital has been particularly pleasing. The Executive team is also mindful that the elevated Management-led revenues have delivered additional economies of scale and an increased level of overhead recovery, which has been a further factor behind an increasing operating margin across recent periods. The Executive team is confident that, as the elevated management-led revenues normalise, and some of this increased overhead recovery diminishes, that this will be mitigated by efficiency improvements within the business.

Maintenance-led revenues delivered growth of 2% to £555.8m (2023: £543.3m). A key highlight of the year was the successful mobilisation of the new North Lanarkshire Council ('NLC') contract which is discussed in greater detail below. The new NLC contract, which is significantly larger than the previous contract, mobilised in July 2024 and all the workstreams are due to move across over a two-year period. The gas compliance work was the first new service to transfer across. Given the phasing of the transition, the new contract only delivered a small increase in revenues in the period to £66m. The year also saw increased decarbonisation revenues, as works linked to supporting clients in securing grant funding through SHDF Wave 2 became active projects on-site. Whilst the Executive team is pleased with the strong underlying progress made within the Maintenance-led activities, this is masked by the full year impact of some residual contract attrition from 2023. The Group has seen 100% retention on contracts subject to re-bid during the period which provides the business excellent revenue visibility for the coming year and beyond.

Management-led activities saw revenues grow by 6% to £576.7m, primarily driven by new works delivered for the Ministry of Defence to provide housing and support to those travelling to the UK under the Afghan Relocation and Assistance Policy. In addition, the Group secured an additional contract area to deliver temporary accommodation for prison leavers on behalf of the Ministry of Justice. The Group sees further opportunities to provide additional services to both of these important clients. The Asylum Accommodation and Support Contract ('AASC') contract delivered revenues at a level consistent with the prior year. The run-rate reached a peak during the first half of 2024, but this has reduced significantly during the course of the second half and the annual run-rate upon exiting 2024 is c.£60m below its peak level. The focus remains upon securing sufficient residential property to remove the requirement for short-term contingent solutions. The Executive team anticipates that AASC revenues will continue to normalise, although the timing is uncertain.

Strategic update

During the year, the business carried out a full strategic update and it is pleasing to see an immediate impact of this, even at an early stage. Our new 5-year plan (FY24-FY28) will strengthen Mears' position as the leading provider of housing service in the UK. We remain committed to Mears delivering these services in a way that enhances our reputation as a highly responsible partner that our stakeholders can trust to do business the right way.

We continue to see significant opportunities within the affordable housing sector. Whilst the Senior Executive team, supported by external industry expertise, considered a number of adjacencies and new markets, it is really pleasing to identify significant untapped opportunities in our existing sector, with some expansion of capability to reflect current and emerging opportunities.

We expect to deliver growth in our Local Government work (including Housing Associations) in terms of both revenue and margin. Whilst we will continue to be highly selective and disciplined in terms of what we tender for, the strategic update highlighted that we were, at times, being too risk averse, and that there were significant opportunities that we were not addressing. It is worth remembering that at the time of the previous business planning process, a key focus of the business was pruning the contract estate, removing suboptimal arrangements and driving efficiencies at the contract level. The Group delivered strongly against that plan. This strategic update showed that we were only previously active in around one-third of the total market, and regulatory drivers in the areas of Compliance and Retrofit are expected to increase the market size further. In addition, over half of responsive repairs and maintenance are delivered through Direct Labour Organisations ("DLO's") with whom we had not previously identified a meaningful way to partner.

We intend to become leaders in Compliance and develop a full Asset Management capability. The social housing sector, despite its vital role, faces a multitude of challenges. A lack of affordable housing and declining government funding have led to inconsistent asset investment and have contributed to a deteriorating stock condition. Recent and proposed regulatory amendments focusing on building safety, compliance, and quality standards, place greater financial and reputational risk upon Registered Providers. The sector traditionally has a fragmented approach to this area, which can lead to an inconsistent service and customer experience, and also impedes data capture, making it difficult to record, analyse, and use the data effectively. Mears recognises these challenges and the limitations of the current approach. Our proposed solution is to develop a fully integrated housing compliance and asset management strategy and address these issues head-on. Mears has a clear vision for this strategic plan, recognising the need to invest additional resources in people and technology.

Over recent years, Mears has looked to create an end-to-end decarbonisation service to support our clients with the huge challenge of improving social housing stock. The Group has performed well in supporting clients secure grants through the Social Housing Decarbonisation Fund ('SHDF'). The original Government commitment was to provide £3.8bn of funding over a 10-year period, to be released in 'waves' over that period. To date, funding of c.£2.25bn has been awarded across the first three waves. Since the launch of SHDF in 2023, the Group has secured grant funding for its clients of £85m, leveraging a clear end to end capability developed post the acquisition of IRT. There are additional opportunities under the ECO funding stream that we intend to address going forward through the internal development of our Net Zero team. Under the new plan, the Group intends to develop its operational and commercial expertise to deliver standalone planned works, including retrofit, to non-existing clients; both of these areas were excluded from the previous plan.

Over the next five years, we intend to deliver additional services to our key Central Government clients: the Home Office ('AASC'), Ministry of Defence ('RLAP') and Ministry of Justice ('CAS3'). Whilst the elevated revenues being delivered on the AASC contract mean that we may see a reduction in revenue over the course of the five-year plan, there are a number of significant new bidding opportunities with each of those clients which would allow the Group to broaden and extend its service offer. We place emphasis on ensuring we are performing at a high level and understanding the developing needs and requirements of Ministers and Central Government, working in partnership to achieve agreed outcomes. We are ensuring that our positive contribution is known and understood. The Mears team recognise that our existing work will, over the course of this next strategic cycle, become the subject of a new round of procurement. We believe that we are well-positioned to secure work through the next iteration of those contracts.

Notwithstanding our stated desire to grow the business, Mears will remain highly selective and disciplined in approaching new opportunities and operating margin will remain paramount. Maintaining a sustainable operating margin in the 5.0-6.0% range (on an adjusted pre-IFRS 16 basis) or 5.9%-6.9% (on a post-IFRS 16 basis), remains central to the new plan.

Historically, our approach to change and project management has not been as effective as we would have liked. Our new plan requires a more disciplined approach to change management, without wishing to lose the flexibility and ability to react that has played an important part in our success. During 2024, the Group formed a Group-wide Change Management Steering Group with a newly appointed senior hire to lead on this area and who will put in place clear change and project management procedures, with an emphasis given to IT projects. Through 2025 onwards, we will look to cascade solid change management procedures down to a local level, thereby increasing the overall capability of the Group. Success will be measured by our ability to achieve designated outcomes, on time and to budget.

Business Development

As we entered 2024, the Group faced the prospect of around one-third of the Group's Maintenance-led contracts being subject to a rebid during a single calendar year, as a number of long-term and flagship customer relationships were approaching expiry. The Group has a strong record of retaining contracts, but rebids naturally bring some risk and require a shift in focus from bidding new works. It is therefore extremely significant that the Group was able to celebrate new long-term contracts with our North Lanarkshire, Medway, Folkestone, Thanet and Dover clients, whilst securing contract extensions in the case of Rotherham, Islington and Thurrock. The quality of our service delivery and client satisfaction is reflected in our ability to retain work on rebid. To report 100% retention on such a high number of contracts that were subject to re-bid in 2024 reflects exceptional performance and positions the Group strongly for the year ahead. There remains a single material contract still subject to rebid that could impact upon 2025, which is Milton Keynes.

The award of the new contract with North Lanarkshire Council ('NLC') was a key highlight and an indication of both the strength of the Group's partnership with NLC over many years, a shared commitment to deliver excellent services to residents, and the quality of our service offering. The contract covers a wide range of services including reactive and planned maintenance, compliance and gas servicing for 37,000 homes and 1,200 Council buildings, with an annual value of more than £125m over up to 12 years. The mobilisation phase of this new contract has gone well.

Late in the year, the Group secured an emergency contract with Moat, covering c.22,000 homes in the South East of England. This new contract is for a period of 18 months, with an estimated contract value of £12m, under which Mears will deliver responsive and voids maintenance services. The Mears relationship with Moat dates back to 2009, and the Board was disappointed when the Group was unsuccessful in the procurement process in 2022. It is a clear example that maintaining a disciplined bidding approach does not disadvantage the Group over the longer-term. The Group will invest in this contract to ensure that Mears is well-positioned to secure works beyond the initial period.

The strong contract retention performance, combined with the new workstreams secured through NLC and Moat which will come online during 2025 provides a strong organic tailwind over the coming year.

The SHDF Wave 3 saw Mears submit applications on behalf of clients which has secured £30m of grant funding, contributing to a total works value of over £60m to be delivered over the course of 2026 and 2027. It is the grant funded element that represents new value to the Group's order book. There will be additional opportunities for the Group in the next Wave 4 of the SHDF funding applications.

As reported previously, the Group used its Balance Sheet strength to fund property acquisitions, providing an additional source of good quality accommodation to support the urgent requirements of the Asylum Accommodation contract. Leveraging the Group's strong balance sheet position in this way was a short-term step and it was pleasing to complete the sale and leaseback of the first tranche of properties, enabling those monies to be recycled to acquire further properties. This approach has played a critical role in delivering against the objectives of one of our key clients.

Property Compliance Services

Since launching the Integrated Property Compliance strategy, we have focused on establishing an in-house capability to deliver core compliance activities, securing essential third-party certification, and enhancing business intelligence. We are on track to establish a high-quality, self-sufficient Compliance function. Our initial service offer has focused on core compliance workstreams, including gas servicing, electrical testing, fire safety, and damp and mould compliance and asset condition surveys. This phased approach ensures that the Group is laying a strong foundation for operational efficiency and growth. Over time, the Group will broaden its service offer.

The development of Mears Contract Management, the proprietary IT front-line system, is critical to success in this area. Phase One is now complete, having focused on addressing the core compliance workstreams, establishing a robust foundation for consistent delivery. Phase Two will look to broaden the platform's capabilities to further enhance operational efficiency and introduce advanced automation features ensuring streamlined workflows and adherence to high service standards.

Outlook

Our focus in 2025 remains on strengthening Mears' position as the leading provider of housing services. The demand for our services remains strong. We continue to place emphasis on winning good quality contracts that can achieve sustainable margins whilst at the same time providing a first-class service.

The Group has made a strong start to FY25. We anticipate delivering solid growth in our Local Government maintenance work, following a strong period of contract retention and further augmented by additional Compliance services and through extending our focus to planned and retrofit activities. We remain well-positioned to deliver additional services to our Central Government clients whilst recognising that over the short term, we may see a reduction in revenues in the management-led division reflecting some normalisation in AASC revenues, although the reduction so far in 2025 has been slower than previously expected.

We remain confident that the Group is well-positioned to maintain adjusted pre-IFRS 16 operating margins within the range of 5-6% (post-IFRS 16 operating margin 5.9%-6.9%) underpinned by a disciplined approach to new contract bidding, and a strict approach to operational and commercial management.

We expect to continue to deliver strong underlying cash generation, reflecting the quality of earnings and the low capital intensity nature of our operating model.

Financial review

This section provides further key information in respect of the financial performance and financial position of the Group to the extent not already covered in detail within the Chief Executive Officer's Review.

Alternative performance measures (APMs)

The Strategic Report includes both statutory and adjusted performance measures. APMs are considered useful to stakeholders in assessing the underlying performance of the business, adjusting for items which could distort the understanding of performance in the year and between periods, and when comparing the financial outputs to those of our peers. The APMs have been set considering the requirements and views of the Group's investors and debt funders among other stakeholders. The APMs and KPIs are aligned to the Group's strategy.

Reflecting the steady state of the business and the quality of the earnings, the Group has used a pure unadjusted profit before tax and earnings per share as its headline profit measures. The Group makes regular reference throughout the Strategic Report to an adjusted operating profit, measured before the impact of IFRS 16, and stated both in pounds (£) and as a percentage margin (%). This adjusted measure is a key metric for the senior executive team when assessing new contract opportunities and existing branch performance.

The Group also uses an adjusted net cash measure which excludes IFRS 16 lease obligations from the statutory net debt measure. This is referenced in both a spot measure (on 31 December) and in a 365-day average.

These APMs should not be considered as a substitute for or superior to International Financial Reporting Standards (IFRS) measures, and the Board has reported both statutory and alternative measures with equal prominence throughout the Strategic Report and financial statements.

The method of calculation and a reconciliation between each APM and the relevant statutory measure are detailed below, together with an explanation as to why management considers the APM to be useful in helping users to have a better understanding of the Group's underlying performance. This section of the Strategic Report also provides additional analysis to give the user an easier route to understand underlying performance and deriving their own profit and EBITDA measures.

1     Operating profit and EBITDA measures include share of profits of associates.

2     Includes loss on disposal of £508,000 (2023: £80,000) and loss on sale and leaseback of £283,000 (2023: £nil).

3     Includes profit on disposal of £150,000 (2023: £180,000) and impairment of £633,000 (2023: £6,223,000).

The Directors use the Operating profit pre-IFRS 16 measure to generate the Group's headline operating margin. Whilst this generates a lower operating margin, it reflects how the underlying contracts have been tendered, how the senior executive team assess performance, and is also more aligned to the underlying cash generation. In addition, this measure is also used for the purposes of assessing the Group's compliance with its banking covenants which utilise pre-IFRS 16 measures.

IFRS 16 profit impact

The profit impact in respect of IFRS 16, which was included within the APM analysis above, is detailed below:

Accounting standards require that, where a contract is identified as a lease under the rules of IFRS 16, the Group recognises its right to use a leased asset and a lease liability representing its obligation to make lease payments. The depreciation cost of the leased asset is typically charged to profit within cost of sales, whilst the interest cost of the newly recognised lease liability is charged to finance costs. On the basis that depreciation is required to be charged on a straight-line basis, whilst the interest element is charged on an amortised cost basis, this results in a higher charge being applied to the income statement in the early years of a lease, with this impact reversing over the later years. Ultimately, IFRS 16 has no impact on the lifetime profitability of the contracts and there are no cash flow impacts, but the standard alters the phasing over time, front-loading the cost.

Where leasing arrangements are over the long-term, the differential in the charge applied to the income statement under IFRS 16 compared to the lease payment can be significant, whilst the revenue recognition associated with these leases remains at a consistent level, aligned to the respective lease payment. It is for this reason that the Group has consistently utilised an APM to report profits on a pre-IFRS 16 basis. In doing so, the mismatch between the recognition of revenue and the associated cost is addressed. The table below highlights the acceleration of the recognition of cost through the adoption of IFRS 16. This position will ultimately reverse in time, although the differential between right of use asset and the corresponding lease obligation is likely to diverge further in the near term:

Net cash/(debt)

The Group excludes the financial impact of IFRS 16 from its adjusted net cash measure. This adjusted net cash measure has been introduced to align the net borrowing definition to the Group's banking covenants, which are required to be stated before the impact of IFRS 16.

The Group does not recognise lease obligations as traditional debt instruments given a significant proportion of these leases have break provisions which allow the Group to cancel the associated lease obligation with minimal associated cost. A reconciliation between the net debt and the adjusted measure is detailed below:

Statutory profit before tax

The Board believes that the statutory Profit before tax measure is a true reflection of the underlying performance of the business, and no alternative measure is considered necessary or appropriate. The Board recognises that any reported profit will include singular components which, in isolation, may be considered unusual, infrequent, non-recurring or non-underlying. Additional detail is disclosed separately within the notes to the financial statements, and these are signposted below to assist the user in accessing these and to better understand the underlying performance in the period.

IFRS 16 and IAS 36: Impairment of Right of use asset

Under IAS 36, the Directors are required to consider for each asset or group of assets with separately identifiable cash flows if there are indicators of impairment at the year end. Where such indicators are present, a full impairment review must be carried out, comparing the carrying value of the assets to their value in use (or fair value less costs of disposal, if that is higher). In particular, the Directors consider that for each Community Housing scheme, the relevant group of right of use assets has identifiable cash inflows and therefore they must assess whether there are any indicators of impairment for each of these housing schemes. Certain Community Housing assets were the subject of a significant impairment in FY23, which means that those affected assets are more sensitive to further changes in the assumptions underlying their value in use.

Property yields for residential properties similar to those used in the Community Housing business have been broadly consistent during FY24, following a sharper increase in FY23. This measure is closely correlated to discount rates, and an increasing discount rate would result in a reduction in the value in use. Property maintenance costs have also been broadly consistent during FY24, having stabilised since the rising costs experienced in FY22 and FY23. The increasing regulation attached to affordable housing brings some additional cost pressure, especially in respect of fire risk. An increase in the costs of maintaining these property schemes, to the extent that they cannot be passed onto the customer or recovered through other mechanisms, will reduce the value in use.

The reassessment of cash flows and other key assumptions resulted in an additional impairment charge of £0.6m (2023: £6.2m) to align the carrying value of the right of use assets to their value in use. This additional charge applied to FY24 will be mirrored by a reduction in depreciation in future periods and ultimately has no impact on the lifetime profitability of any of the underlying contracts.

Sale and leaseback

The Group has utilised its balance sheet strength to fund property acquisitions to support the requirement for additional properties within the Asylum Accommodation and Support Contract ('AASC'). This approach has played a critical role in enhancing the service offering and delivering against client expectations. The Group purchased 221 properties in 2023 and in the early part of 2024 across the North-East of England for a cash cost of £22.7m. In December 2024, these properties were the subject of a sale and leaseback, by which point the carrying value of the portfolio was £22.2m. The properties will continue to be used to support the delivery of the AASC until the contract expiry. This transaction saw the Group receive £16.3m in cash on completion, with the balance taking the form of a £5.3m interest-bearing loan, combined with a continuing 25% equity interest in this investment vehicle. The transaction crystallised a small loss on disposal of £0.3m. The Group remains committed to securing good quality accommodation across a wide dispersal area and has continued to purchase additional properties through FY24, which the Board anticipates will be the subject of a later sale and leaseback.

Taxation

Mears does not engage in artificial tax planning arrangements but takes advantage of available tax reliefs. The tax position in any transaction is aligned with the commercial reality and any tax planning is consistent with the spirit as well as the letter of tax law. During the period, HMRC completed a Group-wide Business Risk Review which covered all lines of taxation and awarded the Group a low-risk status in respect of the three review headings: Systems and delivery, Governance, and Approach to tax compliance. Given the Group's activities are largely involved in servicing public sector clients, the risk of reputational damage flowing from a tax compliance failure is higher than in other sectors. This leads the Group to take a risk averse approach if there is an element of uncertainty regarding a particular treatment.

The tax charge for the year was £17.2m (2023: £10.3m), at an effective tax rate of 26.8% (2023: 21.9%). This is the first time that the effective tax rate has been higher than the standard corporation tax rate of 25.0% (2023: 23.5%) and is predominantly caused by depreciation charges on assets that are ineligible for corporation tax relief (£0.8m / 1.2%), expenses not deductible for tax purposes (£0.2m / 0.3%) and adjustments in respect of prior periods (£0.8m / 1.3%) combined with a number of favourable variances. The Group expects the effective tax rate in future periods to be at a similar level to the standard rate of corporation tax.

Mears is a significant contributor of revenues to the UK Exchequer, paying £203.3m of taxes in the year (2023: £192.7m). This relates to taxes borne by Mears (principally corporation tax and Employer's National Insurance) and taxes collected by Mears (being VAT, Income tax under PAYE and Employee's National Insurance). Further detail in respect of the taxes paid during 2024 are provided below:

1     VAT excludes the disallowance of input tax recovery on the Group's exempt supplies.

Earnings per share ('EPS')

Diluted earnings per share increased by 53% to 48.9p (FY23: 31.9p). The 17.0p improvement is driven by the increase in profit after tax in the year (+13.2p), the reduction in the weighted average number of shares as a result of the share buyback programme (+5.1p), a decrease in the non-controlling interest as a result of the new North Lanarkshire contract now sitting within a wholly owned subsidiary (1.1p) and an increase in the effective tax rate (-2.4p).

The share buyback programmes have been significant in driving the increase in earnings per share. Positively, the full impact on EPS flowing from the 2024 buybacks will not be fully realised until 2025, and the fifth programme which was completed during the first quarter of 2025 will augment this further. The latest estimate for the weighted average number of shares to calculate the diluted EPS for FY25 is 85.8m shares which in isolation will drive a further 7% increase to this measure in that year.

Balance sheet

The Group reported a reduction in net assets from £200.5m to £187.5m. The significant distribution to shareholders through both ordinary dividends and share buybacks has reduced the net asset position in the year, but the strong profit generation has ensured a robust position has been maintained. The key movements are detailed below:

The key balance sheet categories are reported below together with a brief note to provide further explanation:

Assets

·      Goodwill was generated from previous acquisitions and is tested annually for impairment.

·      Intangible assets primarily relate to in-house developments to the Group's key operational IT platforms and are amortised over their useful economic life, typically 5 years. The net book value reduced in the year, with amortisation of £1.9m exceeding the value of new additions of £1.4m. To deliver the broader service offering set out in the new strategic plan, the Board has approved a significant increase in IT development. Once the new resource is in place, the board anticipates an annual development spend of around £3m.

·      PPE additions are typically low given the Mears operating model carries a low capital intensity. Notwithstanding this, the Board has allocated additional capital to support the urgent requirement for additional residential housing to support the requirements of the Group's AASC contract. During FY24, the Group made property additions of £26.4m to support the requirements of the AASC. In the same period, the Group disposed of properties with a base cost of £22.7m through a sale and leaseback transaction meaning the net movement was only a modest increase to the carrying value of freehold property. Excluding property additions, capital expenditure in the period was just £3.5m.

·      As detailed above, leasing properties has become an integral part of the Group's service offering. The Group recognises its right to use a leased asset in accordance with IFRS 16. The new leases taken on in the period predominantly relate to the AASC contract, given the requirement to increase the number of residential bedspaces available. The additions in the period relate to both new leases, and also inflationary increases to lease payments on existing properties.

·      Loan notes of £4.7m were received on the disposal of Terraquest in 2020 and include interest accruing annually at 10%. Aside from this interest accrual, the loan note balance has increased by £5.3m in the period as a result of a new loan note acquired as part of the sale and leaseback transaction, where the Group also retained a 25% interest in the entity which was the subject of the disposal.

·      Investments have historically related almost entirely to our A2 Dominion partnership which is equity accounted. A small balance of £0.1m in FY23 related to a minority interest stake retained following the disposal of Terraquest in 2020. Accounting standards require this investment to be stated at fair value. The Terraquest business has performed strongly for the new buyer of this business, and the Directors increased the fair value of this investment to £0.9m at the FY24 year end.

·      Pension accounting is covered in detail below.

·      Trade receivables includes trade debtors and contract assets. The small increase is broadly in line with the growth in revenues.

·      The net cash balance is detailed above, combining the bank, cash and short-term financial assets. The cash balance in isolation is not comparable to the prior year. The overdraft and other credit facilities of £36.7m reported in the prior period was simply a timing difference which inflated the cash balance at that point in time. The adjusted net cash net balance of £91.4m is a reduction from the prior year (2023: £109.1m), reflecting strong cash generation, reduced by property acquisitions on the AASC contract and shareholder distributions.

Liabilities

·      Working capital balances include trade creditors, contract liabilities and accruals and the modest increase is broadly in line with the growth in revenues.

·      As detailed above, leasing properties has become an integral part of the Group's service offering. Where a contract is identified as a lease under the rules of IFRS 16, the Group recognises a lease liability representing its obligation to make lease payments. Liabilities falling due within 12 months are categorised as current, with the remainder non-current.

·      All Group profits are chargeable to corporation tax at the headline rate of 25.0% (2023: 23.5%). The Group is required to make quarterly payments, meaning any creditor outstanding at the period end is typically low.

·      A provision is a liability of uncertain timing or amount. Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. The opening provision of £18.2m increased to £20.6m. Additional detail is provided within note 20 to the financial statements which details amounts provided, utilised and released in the year.

·      A deferred tax liability of £3.5m (2023: £2.9m) is recognised on temporary differences between the treatment of items for tax and accounting purposes.

Defined benefit pension arrangements

The Group's defined benefit pension arrangement can be categorised three ways:

·      Two principal Group pension schemes, where the Group is fully at risk over the long term.

·      Four schemes where the Group has received Admitted Body status in a Local Government Pension Scheme ('LGPS'), but where the Group holds a back-to-back indemnity under the associated customer contract, removing the Group's exposure to changes in pension contributions and any future deficit risk.

·      Nine other schemes, the majority of which are LGPS, but where there is no indemnity in place. However, the risk attached to these schemes matches the time horizon of the underlying contract, which whilst not removing risk, reduces the period over which deficits can arise. The Group is therefore only carrying the pension risk over the medium term.

The Directors are comfortable with the position on both the guaranteed and other schemes. The Group enjoys a significant surplus on many of these schemes, but these are largely not recognised as assets as there is uncertainty around the ability to recover a surplus.

The two principal Group schemes enjoy a strong financial position and have done consistently over the last 10 years. Both schemes are relatively mature, and most assets held are matched to the underlying obligations. It was pleasing to reach a position where both Group schemes can be considered largely self-sufficient. The Directors acknowledge the robust and disciplined performance of the scheme managers and trustees who have managed this pension risk so well over many years to reach the position reported today.

Cash flow and working capital management

The Group reported an adjusted net cash position at the year-end of £91.4m (2023: £109.1m). Whilst it is pleasing to report a strong cash position within the year-end balance sheet, of much greater significance is the performance over the 365-day period. Positively, the strong year end performance was also mirrored in the average daily adjusted net cash for the year at £59.6m (2023: £76.5m).

Mears fosters a strong "cash culture", whereby the Group's front-line operations understand that invoicing and cash collection are intrinsically linked, and that a works order is not complete until the monies are banked. This culture has underpinned strong cash performance over many years. A key performance measure for the Group is the percentage of EBITDA that is converted into operating cash flow. The ability of the Group to bank its profits over multiple periods provides a strong indication of the quality of the earnings.

The Group has consistently delivered operating cash flows in excess of EBITDA over the last 5-years reporting the conversion of 115% of EBITDA into operating cash flows over that period as detailed below. Whilst the surplus cash generated in excess of the reported EBITDA reflects the high quality of earnings, combined with strong working capital management, the Group has enjoyed a timing benefit in respect of certain contractual mechanisms linked to payments on account and gainshares which are reflected in an elevated Contract Liabilities balance. The Board anticipates some unwind in Contract liabilities during 2025, whilst anticipating continued strong cash generation.

1     Cash performance in 2020 and 2021 should be combined to reflect abnormal cash flows through the pandemic.

Over the last two completed financial years, the Group has purchased c.£30m in properties to provide additional support to the AASC contract, purchased its own shares at a cost of c.£90m, and paid out c.£25m in ordinary dividends, whilst registering only a small reduction in the adjusted net cash balance over that period.

Shareholder distributions

During FY24, the Board approved a return of surplus capital of £40m to shareholders, that was implemented through a third and fourth buyback programme of on-market purchases, resulting in the purchase and cancellation of 10.9m ordinary shares of 1p each at an average price of 366p before transaction costs. In addition, the Employee Benefit Trust ('EBT') purchased a further 3.2m ordinary shares at an average price of 367p and a total cash cost of £11.7m.

The Board has proposed a final dividend of 11.25p per share, bringing the total for the year to 16.00p, an increase of 23% (2023: 13.00p). It is an added benefit of the buyback, together with the shares acquired through the EBT, that whilst the Board has increased the dividend by 52% over the last two years, the cash cost of the dividend has only reported a modest increase by 17% over that time. A full year dividend of 16.00p is expected to come at a cash cost of £13.5m, dependent upon the completion of the fifth buyback programme, which is ongoing.

Banking and financial covenants

The Group has a simple approach to its debt funding arrangements, holding a single revolving credit facility (RCF) which provides a total commitment of £70m but allows the Group to draw down monies as required, mirroring an overdraft facility. The Group also has a traditional overdraft which is carved out from this facility to provide additional flexibility. The Board is grateful for the tremendous support that has been provided to the Group by its banking partners over several decades.

The financial covenants included within the RCF, which are tested twice-yearly on 30 June and 31 December, are detailed below. Given the Group traded on a net cash basis throughout 2024, and enjoyed an associated finance credit, there is significant headroom. Nevertheless, the Directors have completed a Viability Review and stress tested the Group's resilience across several downside scenarios.

*     Adjusted EBITDA on a rolling 12-month basis, pre IFRS 16, and stated before non-underlying items and share-based payments.

**    Net finance charges are stated on a pre-IFRS 16 basis and comprise all commission, fees, and other finance charges payable in respect of financial indebtedness. This excludes income/costs relating to Group pension arrangements.

A margin ratchet ranging from 1.75-2.75% is applied to drawdowns under the RCF, determined by the Group's leverage ratio at each quarter end. This margin is payable in addition to the Sterling Overnight Index Average (SONIA). Given the strong liquidity and cash performance, the Board's expectation would be for the margin payable during 2025 to be at the bottom end of the range.