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Mears Group PLC

11 April 2024

Mears Group PLC

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

Preliminary Results for the year ended 31 December 2023

Strong financial and operational performance with positive trading outlook

Mears Group PLC, the leading provider of services to the Housing sector in the UK, announces its preliminary financial results for the year ended 31 December 2023 ("FY23").

Financial Highlights


	FY 2023	FY 2022	Change
Revenue (£m)	1,089.3	959.6	+14%
Profit before tax (£m)	46.9	34.9	+34%
Statutory diluted EPS (p)	31.94	24.51	+30%
Adjusted diluted EPS1 (p)	31.24	24.69	+27%
Dividend per share (p)	13.00	10.50	+24%
Adjusted net cash2 £m	109.1	100.1	+9%
Average daily adjusted net cash2 (£m)	76.5	42.9	+78%

· Group revenues up 14% year-on-year to £1,089.3m (FY22: £959.6m).

· Profit before tax increased by 34% to £46.9m (FY22: £34.9m).

o Adjusted operating margin continues to strengthen to 4.7%3 (FY22: 3.7%).

· Excellent cash performance with average daily adjusted net cash of £76.5m (FY22: £42.9m)2

o Cash conversion at 123% of EBITDA (FY22: 122%).

o Adjusted net cash 2 at 31 December 2023 of £109.1m (FY22: £100.1m).

· The Board is recommending a final dividend of 9.30p, bringing the full year dividend for 2023 to 13.00p (FY22: 10.50p) reflecting continued strong cash performance and the Board's confidence in the Group's prospects.

· The Board has e xecuted a number of buyback programmes of on-market share purchases .

o £33m of share buybacks were completed in FY23; 12.2m Ordinary shares representing c11.0% of the Group's issued share capital at the start of FY23 were bought and cancelled.

o A third buyback programme totaling up to £20m is on-going.

· Mears has made a strong start to 2024. The Board continues to anticipate a reduction in management-led revenues as the elevated activity level seen across FY23 normalises, although the timing remains uncertain. Adjusted profit before tax in FY24 is expected to be of a similar quantum to FY23.

Strategic Highlights

· The Group secured aggregate new contract awards of around £175m during FY23, at a bid conversion rate of over 70% (by value), reflecting an increasingly focused approach when bidding for new contract opportunities.

· The Social Housing Decarbonisation Fund ('SHDF') Wave 2 saw Mears submit successful grant applications of c.£40m on behalf of clients. This will contribute a total works value of around £120m to be delivered over the course of 2024 and 2025.

· The Group remains well-placed in bidding a new contract with North Lanarkshire Council ('NLC') to provide reactive maintenance, compliance, servicing, and planned works. The contract would commence in July 2024 for a period of up to 12 years, with an annual value in the region of £125m and a total contract sum of over £1.5 billion, doubling the existing work with this key client.

· 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.

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

" We are delighted to have delivered strong growth in revenues, profits and cash generation in 2023. The Group is recognised as a leading housing specialist, and we continually look to evolve our capabilities to further strengthen our market position. The Board believe that the Group is well-positioned for the future and is pleased that the strong trading momentum built in 2023 has continued into 2024."

1. The adjusted diluted EPS measure is adjusted to reflect a full tax charge at 23.5% (FY22: 19.0%).

2. Adjusted net cash excludes IFRS 16 lease obligations of £ 254.4m (2022: £ 225. 4m ) and includes treasury deposits of £ 7.1m (FY22: £ 2.0 m).

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


For further information, contact:

Mears Group PLC	Tel: +44(0)1452 634 600
Andrew Smith
Lucas Critchley

Deutsche Numis	Tel: +44(0)207 260 1000
Julian Cater
Kevin Cruickshank

Panmure Gordon	Tel: +44(0)207 886 2500
Tom Scrivens
James Sinclair-Ford

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.

CHAIRMAN'S STATEMENT

Introduction

I am delighted to present my first statement as Chairman, and it is pleasing to be able to report a year of excellent progress against our strategic objectives. The continued strong trading performance is evidence that the strategic actions of recent years, the investment in our operating platforms, and our market leadership are delivering positively and position the Group well for the future.

Results

Revenue has reached £1,089m, an increase of 14% over 2022. Profit before tax was £46.9m, an increase of 34% over that achieved in 2022. Adjusted diluted earnings per share rose by 27% to 31.24p. It is an important milestone for the Group to see earnings per share move back above 30p, and this has been an key factor in delivering the strong returns to shareholders in the last 12-months.

It is reassuring that cash generation was once again very strong. The adjusted year-end net cash balance reached £109.1m and average net cash throughout the year was £76.5m. This is the result of a fourth consecutive year of over 100% conversion of profits to cash, while growing the business: a tremendous achievement by the management team and staff across the Group. It reflects the quality of the business and its underlying earnings.

During the period, the Group mobilised new works under our Rented Living Accommodation Project ('RLAP') for the Ministry of Defence, providing housing and support to those travelling to the UK under the Afghan Relocation and Assistance Policy. This is further evidence of Central Government increasingly looking to Mears to provide specialist housing support.

Our people

Mears has invested in its workforce over many years, and I was delighted to see that the Group was listed in the top 10 of the Sunday Times Best Big Companies to Work For. The commitment to our workforce starts at Board level, evidenced by the appointment several years ago of an Employee Director who works closely with a Deputy Employee Director and Trade Representative to ensure that our people are at the forefront of our decision making and that the Board has a good understanding of our employees' views. It is pleasing to see that this is also reflected in a further reduction in staff turnover.

It was immensely satisfying to see a successful conclusion to the Group's 2020 Sharesave scheme which reached maturity in December 2023. The scheme, with an exercise price of 93p, was granted at the end of a year that had been greatly impacted by the Covid-19 pandemic and a period in which the Group was even more dependent upon the hard work and commitment of our colleagues. The grant at that time gave the Board the opportunity to show its gratitude for the commitment shown through that period. The recent maturity saw over £7m of value shared across 500 of our colleagues which was a tremendous outcome.

Dividend and capital allocation

Given the excellent trading performance of the Group, the continued strong cash performance and the positive outlook, the Board is pleased to propose a final dividend of 9.30p per share, bringing the total for the year to 13.00p, an increase of 24% on 2022 and an increase of over 60% against 2021. Our policy remains to progressively grow the dividend, keeping cover at between 2 - 2.5 times adjusted earnings.

The Group's capital allocation policy has been consistently communicated and remains robust. The Board currently seeks to maintain an appropriate net cash position. The Board continues to keep under review its capital allocation priorities, which extends to small-scale M&A opportunities that could enhance its service capabilities.

During FY23, the Board approved a return of surplus capital of c.£33m to shareholders, that was implemented through a buyback programme of on-market purchases. The 2023 buyback, which was delivered over two programmes during an eight-month period, saw the purchase and cancellation of 12.2m ordinary shares of 1p each at an average price of 272.7p, representing c.11.0% of the Group's issued share capital at the start of the year. The strong momentum reported in FY23 has continued into FY24 and, following the receipt of authority from shareholders at a General Meeting held in February 2024, the Board announced its intention to purchase up to a further £20m of shares, and this third buyback programme is on-going.

As reported previously, the Group has utilised its balance sheet strength to fund property acquisitions to support the urgent requirement for additional properties within the Asylum Accommodation and Support Contract ('AASC'). At the end of 2023, the Group had invested £22m in this area. Whilst it is not the Group's long-term strategy to carry property assets on the Group's balance sheet, this has been an important step in meeting the requirement for additional capacity, to fulfil our client's needs.

ESG

I thank the ESG Board for its diligent work over the year. Mears takes good governance seriously. Alongside our resident led Your Voice Scrutiny Board, the ESG Board adds an extra layer of professional advice and assurance. The Board's guidance is imperative, ensuring that we are driving forward on both our legal and ethical obligations to reach our Net Zero targets.

Board developments and succession planning

During 2023, Kieran Murphy and Chris Loughlin stepped down from the Board. Kieran reshaped the Mears' Board during his time as Chairman and provided wise counsel and stewardship through a period impacted by the pandemic. Chris brought considerable commercial and operational input to the Board. On behalf of the Board, I would like to take the opportunity to thank Kieran and Chris for their service to Mears and wish them both well for the future.

In December 2023, the Board welcomed the arrival of Nick Wharton as a Non-Executive Director and Chair of the Audit and Risk Committee. Nick is a Chartered Accountant with extensive finance and corporate governance experience gained both in the UK and internationally, through executive and non-executive positions under both public and private equity ownership, and further improves the balance of skills and capabilities held by the Board.

During 2023, the Group's Employee Director, Hema Nar, elected for her position to become a non-statutory appointment. This will enable Hema to solely focus on being an effective link between the Board and the workforce. During 2023, the Group has greatly enhanced this function, with the addition of both a Deputy Employee Director and a Trade Representative. These three individuals perform regular branch visits, are highly visible and are in frequent contact with the Executive team. This has become an increasingly valuable channel of communication. Hema will continue to attend and present at every Board meeting. The change to a non-statutory position will not dilute the importance or significance of the role.

Succession planning has been a key area of focus for the Board in recent years. The transition of the CEO role from David Miles to Lucas Critchley has been well-communicated and this changeover has gone smoothly. The Board recognises the pivotal role that David played in driving the culture of the business and Mears' brand. The transition of the CEO duties to Lucas is now complete, and David stepped off the PLC Board at the end of 2023. David remains a key member of the senior management team and has committed to continue to provide support to the business with particular focus on client engagement, customer service and driving commercial performance at a local branch level over the medium-term.

Although the current Board is smaller in terms of headcount, I believe there is a strong cultural alignment with the business and the Board has the requisite skills and experience to operate effectively in the coming years.

The Board and Nominations Committee will continue to focus on succession planning across the senior executive team. I am continually impressed by the quality and strength of our senior management team operating across the business in support of the Executive. The Group has a strong track-record of developing talent internally, evidenced by both Lucas and Andrew Smith (CFO) having developed within the business prior to their Board appointments. I can already see a number of the senior team who will, in time, have the opportunity to develop further as leaders of the business over the long-term.

Looking forward

The Board is delighted with the strong trading performance reported in FY23, and this momentum has continued into FY24. We anticipate another strong trading result in FY24 and communicated a significant upgrade to market expectations in January 2024.

The Group is well positioned for the longer term, but management remains conservative when providing guidance for later years. The Board has consistently referred to elevated revenues within its management-led activities and it is expected that this position will normalise, although the timing is unclear. The Board is increasingly confident that the Group is well positioned to deliver further improvements in operating margins, which it expects will contribute to mitigating the profit impact from this reduction in revenues.

The Group is delivering well against the strategic goals set within the extensive business planning process concluded in 2021. The Board is now challenging the Executive team to carry out a further detailed refresh. The housing market continues to present significant opportunities for Mears. The Board is also challenging the Executive team to consider opportunities within adjacent markets and continue to identify emerging opportunities created through innovation and changes in technology. The strength of the Group's balance sheet and net cash position provides the opportunity to pursue a number of options to deliver shareholder value.

CHIEF EXECUTIVE'S REVIEW

Introduction

It is pleasing to report another strong trading performance in FY23. The Group has benefitted from the strategic redirection of the business over the last five years, having exited from a number of non-core activities and applying a rigorous approach to improving operating margins. The Group is recognised as a leading housing specialist to the public sector. There is an increasing reliance upon Mears by our Local and Central Government clients and Housing Associations for the Group's expertise and problem-solving capabilities. We will continually look to evolve our capabilities in this area to further strengthen our market position and believe that the Group is well placed to do so.

Operational Review


	2023 £m	2022 £m	Change
Revenue
Maintenance-led	543.3	535.3	+1%
Management-led	543.3	405.8	+34%
Development	2.7	18.5
Total	1,089.3	959.6	+14%

Operating profit before tax measures:
Statutory operating profit1	52.2	41.3	+26%
Adjusted operating profit (pre-IFRS 16)2	51.4	35.9	+43%
Adjusted operating margin (pre-IFRS 16)	4.7%	3.7%

Profit before tax measure
Statutory profit before tax	46.9	34.9	+34%

1. Operating profit includes share of profit in associates.

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

Revenues increased by 14% to £1.09bn. Our maintenance-led activities reported an increase of 1% to £543.3m which was impacted by the full-year effect of a number of contract losses in 2022, which were reported previously. It is reassuring that the Group has absorbed these losses and still delivered revenue growth. The Executive team believes that, following a number of years which have seen a reduction in maintenance-led revenues, this has plateaued. Moving forward, the Executive team believes that the current market dynamics and our continually developing offering to clients can deliver modest growth in the traditional maintenance-led activities, supported by additional spending in respect of decarbonisation.

Management-led activities have reported strong growth, with revenues growing by 34% to £543.3m. It is a tremendous achievement that an area of the business which the Group entered less than 10-years ago, and has been grown almost entirely organically, now comprises half the Group's revenues. As reported previously, the Group has experienced elevated revenues within the Group's asylum services with volumes being significantly higher than originally envisaged. The Executive team anticipates these revenues will normalise, although the timing is uncertain. It is positive that the Group has seen increased activity in both the Ministry of Defence and Ministry of Justice contracts ('RLAP' and 'CAS3' respectively), and the Group sees further opportunities to provide additional services to both of these important clients.

It is particularly important that the business has continued to report strong progress in adjusted operating margin, with the headline measure increasing to 4.7% (2022: 3.8%). Notwithstanding the Group's strategic ambitions to deliver revenue growth, the primary focus of the senior team over recent years has been to see the operating margin return towards its historical level of 5.0%. As previously reported, the actions taken to exit non-core activities, prune the contract estate to remove suboptimal arrangements, drive efficiencies at a contract level, and maintain a disciplined approach to securing new works, all continue to drive improvement to the operating margin.

One area of the business where trading has been unacceptable, is in respect of the Community Housing business. This is only a small part of the Group's operations, reporting revenues of c.£35m in 2023, in which the challenging regulatory and operational environment has resulted in an operating loss in the period. The Executive team will continue to focus on improving trading in this area. Some of the contractual obligations in this part of the Group mean it will not be a quick fix. The result for the period includes an impairment to right of use assets of £6.2m and onerous contract provisioning of £4.2m relating to these Community Housing activities. This is detailed within the notes to the preliminary results.

The Executive team is mindful that the elevated revenues within the management-led activities have delivered additional economies of scale and an increased overhead recovery, which is a further factor behind an increasing operating margin. However, the Executive team is confident that, as the management-led revenues normalise, and some of this increased overhead recovery diminishes, that this will be mitigated by efficiency improvements within the business which will continue to drive improvement to margin.

Business development

We have seen a shift among some client organisations towards large, long-term relationships that are broad in scope. We believe that these types of opportunities play to Mears' strengths and present future opportunities. Clients are increasingly seeking the competence and confidence from dealing with a market leader, while the regulatory environment, and the detailed compliance process around elements of work such as decarbonisation, serve to further reduce the pool of serious competitors. This makes the comprehensive Mears offer attractive to clients that are looking to package contracts in this way.

Mears has successfully provided housing maintenance works to NLC since 2012, with an annual value of c. £60m, delivering high service levels together with excellent engagement with all stakeholders. Accordingly, the Group remains well-placed in the tender by North Lanarkshire Council ('NLC') of the Housing and Corporate Maintenance and Investment Services Contract, a bidding process that commenced in 2022. The new contract would see Mears providing reactive maintenance, statutory compliance, servicing, and inspection services, as well as programmes of planned works to the Council's housing assets (approximately 37,000 homes) and corporate assets (approximately 1,200 buildings). The contract is for a period of up to 12 years, with an annual value in the region of £125m and a total contract sum of over £1.5bn.

With the exception of the NLC tender, the last 12-months has been a relatively quiet period of new contract bidding. Positively, the Group secured both of its key bidding targets contributing to an aggregate new contract awards of around £175m, at a bid conversion rate of over 70% (by value). This reflects an increasingly focused approach when bidding for new contract opportunities. The Executive team anticipates that the total value of bids submitted in the future will be lower than historical levels, but the proportion of successful outcomes is anticipated to be higher. Importantly, both the contracts secured in FY23 represent new work to the Group:

Ø London Borough of Croydon ('Croydon') has awarded to Mears a 10-year contract with an estimated annual value of £6m. The contract is to deliver responsive repairs, voids refurbishments, and planned maintenance works. Mears was selected as one of two providers, and the Group is delighted to be working in the Borough again, after a period of absence. The new contract commenced on 1 August 2023.

Ø A2Dominion ('A2D'): the Group has been awarded a contract with an estimated annual value of c.£10m for a base period of 10 years with the potential for this to be extended up to a total of 26 years. This contract award builds upon an existing long-term relationship with A2D for repairs and maintenance services to the housing stock outside of London, meaning that the Group will now be delivering services across A2D's entire 38,000-unit portfolio. The new contract commenced in October 2023. The contract will deliver services through a pre-existing joint venture with A2D, in which the Group holds a 30% interest. Therefore, whilst the A2D relationship is very significant for the Group, the revenue is not included within the Group's consolidated revenue. The profit contribution is introduced as a share of profit in an associate, the Group's margin expectation against the notional revenue, is consistent with other housing contracts.

FY24 is again expected to be a period of focused bidding activity with the Group targeting a small number of new bidding opportunities where the mix of quality, price, size, longevity, supply chain and cultural fit meets the Group's bidding criteria. This highly qualified pipeline contains some exciting opportunities. The Executive team is mindful that FY25 is likely to be a busy period of rebidding, as a number of existing contracts are approaching expiry and contractual extensions have been previously utilised. A total annual contract value of c.£100m is expected to be re-bid during that calendar year. Whilst the Group has an excellent record of retentions, rebids naturally bring some risk and can distract from bidding for incremental revenue opportunities with new and existing clients.

Decarbonisation

Over recent years, Mears has created an end-to-end decarbonisation service through investment in expertise and technology to support our clients with the huge challenge of improving social housing stock. In 2023, Central Government committed £3.8bn of Social Housing Decarbonisation Funding (SHDF) to be allocated in England and Wales over a 10-year period. The Group secured three successful bids in respect of the first wave of SHDF applications, securing grant funding on behalf of clients of £5m which doubled-up when combined with client funding. The bulk of this value was delivered by the end of FY23. The SHDF Wave 2 saw Mears submit successful grant applications of c.£40m, which will contribute to a total works value of around £120m to be delivered over the course of 2024 and 2025. 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 interim Wave 2.2, and Waves 3 and 4 of the SHDF funding applications.

Our market environment

The housing market continues to present opportunity for Mears to support clients both in its traditional areas and some emerging new ones.

The demand for social housing, temporary accommodation and care provision continued through 2023 and provided a solid market for innovation, partnership working and outsourced services and capabilities.

The changes going through the sector are arguably as great as at any point in recent history and follow a period of significant macro-economic challenges. Our optimism about the future growth is based on the developments we see in our markets, which are summarised below.


Political and regulatory	· The Social Housing (Regulation) Act 2023 received Royal Assent. New consumer standards and a new regulatory regime will come into force. · £3.8bn has been allocated to the Social Housing Decarbonisation fund with similar schemes in devolved nations. Data on the energy efficiency of housing in England and Wales shows that most of the Local Authorities have less than half of their dwellings achieving EPC band C or higher. The Government is targeting social homes to reach band C by 2035 · The Decent Homes and Minimum Energy Efficiency standards (MEES) are under review. Both are expected to set higher standards for the sector and a transition period will be agreed for this improvement. · The Regulator's review of damp and mould has demanded better information on stock condition and faster resolution of the issue. · The Procurement Act 2023 will bring with it an enhanced focus on social value within the supply chain. · The Building Safety Act 2022 has raised standards, in particular within high rise buildings, especially in relation to fire safety. · The compliance environment is tightening further, creating opportunities.
Economic	· The period of high interest rates has challenged a number of social housing providers, with high debt burdens. · The 7% rent increase cap imposed in 2023/24 put pressure on providers but this cap has been removed in 2024/25, which should provide financial improvement to the sector. · The cost-of-living crisis has affected customers and colleagues.
Skills	· UK-wide skills shortage in trade related roles, particularly those with the right skills to undertake new Net Zero works. This requires a long-term commitment to workforce development to resolve.
Technology	· Data and cyber security issues have increased in the sector with several landlords reporting issues. The Transparency, Influence and Accountability Standards in relation to the diverse needs of tenants, come into force in 2024. · There is increased use of data, analytics, automation, and AI in the housing sector. Many tenants are feeling "left behind" by some of these developments.
Customer expectations	· The newly regulated consumer standards in 2024, will further raise expectations and require high quality service solutions and data management.

Our Pathway to Net Zero

We have launched Our Pathway to Net Zero and made this available via our website. We have recruited a Net Zero Manager to co-ordinate our pathway going forward.

The primary focus for 2023 was the development of detailed plans to transition our fleet of company vehicles to electric alternatives by 2030 - this is important to the success of our strategy as 96% (2021 baseline) of our Scope 1 emissions (and 91% when combining Scope 1 and 2) are from our vehicle fleet. Mears has completed a comprehensive fleet infrastructure and transition planning project to gain a deeper understanding of the detailed steps we need to undertake to transition 85% our fleet to zero carbon alternatives by 2030. We have created a clear transition plan to decarbonise our fleet within the trajectory set out within Our Pathway to Net Zero for implementation from 2024 onwards.

Workforce

We are proud of our achievement of being in the top 10 of the Sunday Times Best Big Companies to Work For survey. This reflects years of commitment to improving conditions and career development for our staff. We see the benefits in low staff turnover, low vacancies, and the ability to grow the skills of our people, to meet the need of changing client requirements. We also recognise the strong correlation between staff satisfaction, customer satisfaction and financial performance.

We value the fact that we have an Employee Director, a Deputy Employee Director focused on supporting people with disabilities, a Trade Representative and a Group wide employee forum. They enable the Board to stay close to our front-line staff and to ensure that decisions are made with the impact on the workforce fully understood.

Customer and client engagement

We monitor our success with customers and clients through a number of measures including the ability to win and retain work, as well as directly measuring the satisfaction of clients and tenants/ service users.

We maintain an independently chaired Customer Scrutiny Board, which produces a report on its findings which is published openly. All our key service changes are reviewed and optimised as well as investigating areas that require improvement.

Our main areas of focus in 2023 were around enhancing the ways that customers could interact with us digitally. While we recognise that this is important to many people, we have not lost sight of the need to maintain the more personal ways of contact that many of our customers still prefer.

FINANCE 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 and form the basis of the performance measures for remuneration.

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

The APMs used by the Group are detailed below with an explanation as to why management considers the APM to be useful in helping users to have a better understanding as to the Group's underlying performance. A reconciliation is also provided to map each non-IFRS measure to its IFRS equivalent.

A reconciliation between the statutory profit measures and the alternative adjusted measures for both 2023 and 2022 is detailed below.


	Note	2023 £'000	2022 £'000
Profit before tax	Statutory	46,918	34,944
IFRS 16 profit impact	See below	9,093	2,201
Finance income (non-IFRS 16)	Note 5	(4,655)	(1,268)
Operating profit pre-IFRS 161	APM	51,356	35,877
Amortisation of software and acquisition intangibles	Note 13	1,879	2,300
Depreciation and loss on disposal (non-IFRS 16)3	Note 14	7,385	8,023
EBITDA pre-IFRS 161	APM	60,620	46,200
IFRS 16 profit impact	See below	(9,093)	(2,201)
Finance costs (IFRS 16)	Note 5	9,898	7,610
Depreciation, loss on disposal and impairment (IFRS 16)2	Note 15	56,951	43,259
EBITDA post-IFRS 161	APM	118,375	94,868
Amortisation of software and acquisition intangibles	Note 13	(1,879)	(2,300)
Depreciation, loss on disposal and impairment (IFRS 16)2	Note 15	(56,951)	(43,259)
Depreciation and loss on disposal (non-IFRS 16)3	Note 14	(7,385)	(8,023)
Operating profit post-IFRS 161	APM	52,161	41,286

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

2 Includes profit on disposal of £180,000 (2022: £228,000) and impairment of £6,223,000 (2022: £nil)

3 Includes loss on disposal of £80,000 (2022: £2,000).


	Note	2023 £'000	2022 £'000
Revenue	Statutory	1,089,327	959,613
Adjusted operating profit pre-IFRS 16	APM	51,356	35,877
Adjusted operating margin %	APM	4.7%	3.7%

The Group's adjusted PBT measure has historically been reported before charges for the amortisation of acquisition intangibles. The Directors consistently explained their rationale for adjusting for this charge, which is a treatment understood and supported by the Group's investors. This charge has historically been significant; for instance, in 2021 it was £7.7m. However, in the absence of significant recent acquisitions, the amortisation charge has reduced to £0.2m per annum and, at this level, is considered de minimis. As indicated in the previous year, this adjustment has not been applied in 2023 and the comparative measure for 2022 has been adjusted.

The Group provides an APM which reports results before the impact of lease accounting under IFRS 16. The Directors use the 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 and is also more aligned to cash generation. Management has also provided this alternative measure at the request of several shareholders and market analysts to allow those stakeholders to properly assess the results of the Group over time. In addition, this is the measure used for the purposes of assessing the Group's compliance with its banking covenants.

EARNINGS PER SHARE (EPS)

The alternative earnings measure is adjusted to reflect a full corporation tax charge of 23.5% (2022: 19.0%), which will increase to 25.0% in 2024. The Directors believe this aids consistency when comparing to historical results and provides less incentive for the Group to participate in artificial schemes where the primary intention is to reduce the tax charge. A reconciliation between the statutory measure for profit for the year attributable to shareholders before and after adjustments for both basic and diluted EPS is:


	Diluted (continuing)		Diluted (discontinued)		Diluted (continuing and discontinued)
	2023 p	2022 p	2023 p	2022 p	2023 p	2022 p
Earnings per share	31.94	24.51	0.00	0.44	31.94	24.95
Effect of full tax charge adjustment	(0.70)	(0.22)	-	(0.05)	(0.70)	(0.26)
Normalised earnings per share	31.24	24.29	-	0.39	31.24	24.68


	Continuing		Discontinued		Continuing and discontinued
	2023 £'000	2022 £'000	2023 £'000	2022 £'000	2023 £'000	2022 £'000
Profit attributable to shareholders	35,204	27,813	-	494	35,204	28,307
Full tax adjustment	(768)	(245)	-	(55)	(768)	(300)
Normalised earnings	34,436	27,568	-	439	34,436	28,007

NET CASH/(DEBT)

The Group excludes the financial impact of IFRS 16 from its adjusted net cash/(debt) measure. This adjusted net cash/(debt) 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 reported net cash/(debt) and the adjusted measure is detailed below:


	Note	2023 £'000	2022 £'000
Cash and cash equivalents		138,756	98,138
Short-term financial assets		7,090	1,963
Overdrafts and other credit facilities		(36,699)	-
Adjusted net cash	APM	109,147	100,101
Lease liabilities (current)	Note 20	(54,492)	(44,376)
Lease liabilities (non-current)	Note 20	(199,948)	(181,045)
Net debt (including IFRS 16 lease obligations)	Statutory	(145,293)	(125,320)

IFRS 16 - LEASE ACCOUNTING

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


	2023 £'000	2022 £'000
Charge to income statement on a post-IFRS 16 basis	(60,626)	(50,869)
Charge to income statement on a pre-IFRS 16 basis	(57,756)	(48,668)
Profit impact from the adoption of IFRS 16 and before impairment	(2,870)	(2,201)
Impairment of right of use assets	(6,223)	-
Profit impact from the adoption of IFRS 16	(9,093)	(2,201)

Leasing properties has become an integral part of the Group's service offering. The Group delivers a number of contracts to Central Government which include the provision of over 10,000 individual residential properties as part of a wider service offering. In addition, the Group provides over 2,000 property units for rental as part of the Group's Community Housing activities to address Local Authority demand for temporary housing. The associated customer contracts are typically long-term, and the underlying commercial pricing mechanism applies a margin to the annual lease payment. Revenue is broadly consistent over time, increasing by an annual indexation adjustment with the associated lease payments following a similar mechanism.

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 lease 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.

IFRS 16 and IAS 36; depreciation and impairment of right of use asset

Under IAS 36, the Directors are required to carry out an impairment review at 31 December 2023, for each asset or group of assets with separately identifiable cash inflows, if there is considered to be an indication of impairment. The Directors recognise that for each Community Housing scheme, the relevant group of right of use assets has identifiable cash inflows and therefore the Directors are required to assess whether there are any indicators of impairment for each of these housing schemes. Notably, the Directors recognise that:

· Property yields have increased during FY23. This measure is closely correlated to discount rates, and an increasing discount rate will result in a reduction in the Value in Use.

· The Directors also note that property maintenance costs have increased during FY23, impacted by increasing regulation attached to affordable housing. An increase in the costs attached to property leasing, to the extent that it cannot be passed onto the customer or recovered through other mechanisms mentioned above, will reduce the Value in Use. Property costs are not expected to reduce, and the Directors recognise that an ageing asset may incur further cost over time.

· Largely as a result of the above, a number of the Community Housing schemes have delivered shortfalls against previous forecasts.

IFRS 16 carrying values

The Directors identified indicators of impairment on a number of Community Housing scheme assets and the future cash flows were modelled on those assets in order to derive a measurement for the Value in Use which was compared to the carrying value of the respective assets; the significant majority of the carrying value relates to right of use assets and, to a much lesser extent, some leasehold improvements in tangible assets. In aggregate, an impairment charge of £6.2m was applied in the year. The additional charge applied to FY23 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.

The table below highlights the acceleration of the recognition of cost through the adoption of IFRS 16; the right of use asset is being charged on a straight-line basis whilst the interest element is charged on the remaining balance outstanding. This position would be expected to reverse over the remaining lease terms, resulting in a reduced charge to the income statement:


	Note	2023 £'000	2022 £'000
Lease obligations at 31 December	20	254,440	225,421
Right of use asset at 31 December	15	233,649	213,432
Future lifetime profit impact as at the balance sheet date, from the adoption of IFRS 16 compared to the future lease payment		20,791	11,989

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. Mears has a low appetite for risk and, when making decisions regarding tax, reputational and commercial as well as financial risks are considered. 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 Group normalises its headline EPS measure to reflect a full tax charge. In so doing, the Board has removed from its primary performance measure any potentially positive impact that could be achieved through reducing the Group's Corporation Tax charge.

Further detail in respect of the taxes paid during 2023 are detailed below:


	Taxes borne £m	Tax collected £m	Total £m
Corporation Tax	10.9	0.0	10.9
VAT and Insurance Premium Tax1	0.6	117.9	118.5
Construction Industry Scheme	0.0	6.2	6.2
Income taxes	0.9	26.6	27.5
National Insurance	17.8	11.8	29.6
Total	30.2	162.5	192.7

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

BALANCE SHEET

The Group reported a reduction in net assets from £213.8m to £200.6m. The significant distribution to shareholders through both ordinary dividend 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:


	£m
Net assets at 1 January 2023	213.8
Profit after tax	36.7
Dividends	(11.8)
Share buybacks including purchases by EBT	( 38 .2)
Reduction in pension net surplus	(4. 4 )
Other equity movements	4.5
Net assets at 31 December 2023	200.6

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

Assets


	2023 £m	2022 £m
Goodwill	121.9	121.9
Intangible assets	7.0	7.5
Property, plant and equipment ('PPE')	38.5	20.2
Right of use assets	233.6	213.4
Investments and loan notes	5.1	5.3
Pension assets	19.8	26.8
Total non-current assets	426.0	395.1
Inventories	1.5	6.9
Trade receivables	126.7	128.3
Corporation tax asset	-	0.5
Bank, cash and short-term financial assets	145.8	100.1
Total current assets	274.0	235.8
Total assets	700.0	630.8

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

· Intangible assets primarily relate to in-house developments to the key operational IT platforms and are amortised over their useful economic life of c.5 years.

· PPE additions are typically low given the Mears operating model is not capital intensive. During FY23, the Group made property additions of £22.1m to support the requirements of the AASC.

· 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.

· Loan notes of £4.5m were received on the disposal of Terraquest in 2020 and include interest accruing annually at 10%.

· Investments relate primarily to our A2 Dominion partnership over which the Group has significant influence but which it does not control.

· Pension accounting is covered in detail below.

· Working capital balances include trade receivables and inventories; further explanation is provided below. The net cash balance is also detailed below, combining the Bank, Cash and short-term financial assets with the overdraft and other credit facilities.

Liabilities


	2023 £m	2022 £m
Overdraft and other credit facilities	(36.7)	-
Trade payables	(187.0)	(171.0)
Current lease liabilities	(54.5)	(44.4)
Provisions	(8.4)	(8.8)
Total current liabilities	( 286.6 )	(224.2)
Pension liabilities	(0.2)	(3.1)
Deferred tax liability	(2.9)	(4.9)
Non-current lease liabilities	(199.9)	(181.0)
Other non-current liabilities	-	(0.7)
Non-current provisions	(9.8)	(3.1)
Total non-current liabilities	( 212.8 )	(192.9)
Total liabilities	(499.4)	(417.0)
Total net assets	200.6	213.8

· 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 23.5% (2022: 19.0%), which increases to 25% for 2024.. The Group is required to make quarterly payments, meaning any creditor outstanding at the period end is relatively 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 £8.8m predominantly relates to a number of legal claims. The closing provision predominantly relates to onerous contract provisioning where the Directors have made an assessment as to the likely future loss. Additional detail is provided within note 21 to the preliminary results.

· Non-current provision relates to insurance losses which the Group chooses to self-insure.

· A deferred tax liability of £2.9m (2022: £4.9m) 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, which removes 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; whilst not removing risk, it reduces the period over which deficit can arise, and therefore the Group is fully at 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 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 are really pleased with the performance of the scheme managers and trustees who have managed this pension risk so well over many years to reach the position reported today.

The pension disclosure is split on the face of the balance sheet between non-current assets and non-current liabilities. In addition, the pension guarantee assets in respect of the four indemnified schemes are reported separately from their associated liabilities.


	2023 Group £'000	2023 Guarantee £'000	2023 Other £'000	2023 Total £'000
Total scheme assets	129,494	54,137	57,426	241,057
Total obligations	(109,659)	(40,890)	(42,452)	(193,001)
Funded status	19,835	13,247	14,974	48,056
Surpluses not recognised as assets	-	(13,247)	(15,146)	(28,393)
Pension surplus / (liability)	19,835	-	(172)	19,663

CASH FLOW AND WORKING CAPITAL MANAGEMENT

The Group has delivered excellent operating cash flows over recent years with strong underlying EBITDA to operating cash conversion. 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. The impact of the increase in provisioning, which by its nature is a non-cash item in the period, has driven a further increase in the reported cash conversion measure. However, without this enhancement, the Group would still have delivered EBITDA to operating cash of c.110%.


	2023 £'000	2022 £'000
Profit before tax	46,918	34,944
Net finance costs	5,242	6,341
Depreciation and amortisation	9,264	10,323
Right of use asset depreciation and impairment	56,951	43,259
EBITDA	118,375	94,868
Other adjustments	(204)	376
Change in inventories	5,416	15,991
Change in operating receivables	1,290	13,855
Change in operating payables and provisions	20,346	(9,760)
Operating cash flow	145,224	115,330
EBITDA to operating cash conversion	123%	122%

The Group reported an adjusted net cash position at the year-end of £109.1m (2022: £100.1m). 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 is also mirrored in the average daily adjusted net cash for the year at £76.5m (2022: £42.9m). During FY23, the Group implemented a share buyback programme of on-market purchases which resulted in the purchase and cancellation of 12.2m ordinary shares of 1p each at an average price of 272.7p, a cash outflow of c.£33m. In addition, the Group acquired 1.7m shares for a cash consideration of £4.7m on behalf of the Employee Benefit Trust. The average daily net cash, adjusted for a full year impact of the share buyback, was £50.3m, which the Board consider to be a better indication of the opening liquidity position moving into FY24.


	2023 £'000	2022 £'000
Average daily adjusted net cash	76,515	42,880
Adjusted net cash at 31 December	109,147	100,101

SHARE BUYBACKS

During FY23, the Board approved and completed a return of surplus capital of c.£33m to shareholders, being implemented through a buyback programme of on-market purchases. The buyback saw the purchase and cancellation of 12.2m ordinary shares over an eight-month period, representing c11.0% of the Group's issued share capital at the start of the year. Whilst the Board was pleased to have delivered a significant buyback over a relatively short period, the majority of purchases were during the second-half and, as such, much of the EPS accretion will not be seen until FY24. This is shown in the table below:


	Number '000
Number of shares in issue at 1 January 2023	111,001
Part year impact of share buybacks and cancellations	(3,922)
Part-year impact of option exercises	300
Weighted average number of shares in issue in FY23 for calculating earnings per share in FY23	107,379
Full year impact of share movements in 2023	(5,828)
Number of shares in issue at 31 December 2023 which will form the basis for calculating earnings per share in FY24	101,551

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 an overdraft facility 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 2023, 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 given several downside scenarios.


Covenant	Formulae	Covenant ratio
Leverage	Consolidated net borrowing divided by adjusted consolidated EBITDA*	3.00x
Interest cover	Adjusted consolidated EBITDA* divided by consolidated net finance charges**	3.50x

* 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 2024 to be at the bottom end of the range.

Consolidated statement of profit or loss

For the year ended 31 December 2023


	Note	2023 £'000	2022 £'000
Continuing operations
Sales revenue	2	1,089,327	959,613
Cost of sales		(870,557)	(763,927)
Gross profit		218,770	195,686
Administrative expenses		(167,096)	(155,259)
Operating profit	4	51,674	40,427
Share of profits of associates	16	486	858
Finance income	5	5,939	2,033
Finance costs	5	(11,181)	(8,374)
Profit for the year before tax		46,918	34,944
Tax expense	8	(10,258)	(6,441)
Profit for the year from continuing operations		36,660	28,503
Discontinued operations
Profit from discontinued operations	9	-	542
Tax charge on discontinued operations	8	-	(48)
Profit for the year after tax from discontinued operations		-	494
Profit for the year from continuing and discontinued operations		36,660	28,997
Attributable to:
Owners of Mears Group PLC		35,204	28,307
Non-controlling interest		1,456	690
Profit for the year		36,660	28,997
Earnings per share - from continuing operations
Basic	11	32.90p	25.07p
Diluted	11	31.94p	24.51p
Earnings per share - from continuing and discontinued operations
Basic	11	32.90p	25.51p
Diluted	11	31.94p	24.94p

The accompanying accounting policies and notes form an integral part of these preliminary results.

Consolidated statement of comprehensive income

For the year ended 31 December 2023


	Note	2023 £'000	2022 £'000
Profit for the year		36,660	28,997
Other comprehensive income that will not be subsequently reclassified to the Consolidated Statement of Profit or Loss:
Actuarial loss on defined benefit pension schemes	26	(5,521)	(3,041)
Pension guarantee asset movements in respect of actuarial gain	26	(408)	(6,754)
Deferred tax credit in respect of defined benefit pension schemes	23	1,482	2,449
Other comprehensive income for the year		(4,447)	(7,346)
Total comprehensive income for the year		32,213	21,651

Attributable to:
Owners of Mears Group PLC		30,757	20,961
Non-controlling interest		1,456	690
Total comprehensive income for the year		32,213	21,651

Total comprehensive income for the year attributable to owners of Mears Group PLC arises from:
Continuing operations		30,757	20,467
Discontinued operations		-	494
Total comprehensive income for the year attributable to owners of Mears Group PLC		30,757	20,961

The accompanying accounting policies and notes form an integral part of these preliminary results.

Consolidated balance sheet

As at 31 December 2023


	Note	2023 £'000	2022 £'000
Assets
Non-current
Goodwill	12	121,868	121,868
Intangible assets	13	7,046	7,452
Property, plant and equipment	14	38,533	20,188
Right of use assets	15	233,649	213,432
Investments	16	622	1,271
Loan notes and other non-current receivables	22	4,458	4,073
Pension and other employee benefits	26	19,835	23,672
Pension guarantee assets	26	-	3,136
		426,011	395,092
Current
Inventories	17	1,463	6,879
Trade and other receivables	18	126,690	128,334
Current tax assets		-	459
Short-term financial assets	22	7,090	1,963
Cash and cash equivalents	22	138,756	98,138
		273,999	235,773
Total assets		700,010	630,865
Equity
Equity attributable to the shareholders of Mears Group PLC
Called up share capital	24	1,016	1,110
Share premium account	24	2,332	82,351
Share-based payment reserve		1,883	1,801
Treasury shares	24	(5,122)	-
Merger reserve		7,971	7,971
Retained earnings		189,428	119,100
Total equity attributable to the shareholders of Mears Group PLC		197,508	212,333
Non-controlling interest		2,948	1,492
Total equity		200,456	213,825
Liabilities
Non-current
Pension and other employee benefits	26	172	3,136
Deferred tax liabilities	23	2,905	4,898
Lease liabilities	20	199,948	181,045
Other non-current liabilities		-	682
Non-current provisions	21	9,785	3,110
		212,810	192,871
Current
Overdraft and other short-term borrowings	22	36,699	-
Trade and other payables	19	187,035	171,013
Lease liabilities	20	54,492	44,376
Provisions	21	8,406	8,780
Current tax liabilities		112	-
Current liabilities		286,744	224,169
Total liabilities		499,554	417,040
Total equity and liabilities		700,010	630,865

The preliminary results were approved and authorised for issue by the Board of Directors and were signed on its behalf on 10 April 2024.

L J CRITCHLEY A C M SMITH

DIRECTOR DIRECTOR

Company number: 03232863

The accompanying accounting policies and notes form an integral part of these preliminary results.

Consolidated cash flow statement

For the year ended 31 December 2023


	Note	2023 £'000	2022 £'000
Operating activities
Result for the year before tax		46,918	34,944
Adjustments	25	71,253	60,524
Change in inventories		5,416	15,991
Change in trade and other receivables		1,290	13,855
Change in trade, other payables and provisions		20,346	(9,760)
Cash inflow from operating activities of continuing operations before taxation		145,223	115,554
Taxes paid		(9,330)	(4,128)
Net cash inflow from operating activities of continuing operations		135,893	111,426
Net cash outflow from operating activities of discontinued operations	9	-	(494)
Net cash inflow from operating activities		135,893	110,932
Investing activities
Additions to property, plant and equipment		(24,347)	(8,052)
Additions to other intangible assets		(1,499)	(1,364)
Proceeds from disposals of property, plant and equipment		17	-
Expenditure on acquisition of subsidiary, net of cash acquired		-	(2,928)
Distributions from associates	16	1,135	300
Movement in short-term cash deposits held for investment purposes	22	(5,127)	(1,963)
Interest received		4,167	764
Net cash outflow from investing activities of continuing operations		(25,654)	(13,243)
Net cash inflow from investing activities of discontinued operations	9	-	7,333
Net cash outflow from investing activities		(25,654)	(5,910)
Financing activities
Proceeds from share issue		2,557	87
Purchase of own shares		(37,887)	-
Net cash inflow from other credit facilities	25	11,244	-
Loans provided to other entities (non-controlled)		-	(225)
Repayment of loan acquired with subsidiary		-	(37)
Discharge of lease liabilities		(48,149)	(43,169)
Interest paid		(11,081)	(8,425)
Dividends paid - Mears Group shareholders	10	(11,760)	(9,692)
Net cash outflow from financing activities of continuing operations		(95,076)	(61,461)
Net cash outflow from financing activities of discontinued operations	9	-	(55)
Net cash outflow from financing activities		(95,076)	(61,516)
Cash and cash equivalents, beginning of year	25	98,138	54,632
Net increase in cash and cash equivalents		15,163	43,506
Cash and cash equivalents, end of year	25	113,301	98,138

Consolidated statement of changes in equity

For the year ended 31 December 2023


	Attributable to equity shareholders of the Company						Non- controlling interest £'000	Total equity £'000
Share capital £'000	Share premium account £'000	Share- based payment reserve £'000	Treasury reserve £'000	Merger reserve £'000	Retained earnings £'000
At 1 January 2022	1,109	82,265	1,313	-	7,971	107,578	802	201,038
Net result for the year	-	-	-	-	-	28,307	690	28,997
Other comprehensive income	-	-	-	-	-	(7,346)	-	(7,346)
Total comprehensive income for the year	-	-	-	-	-	20,961	690	21,651
Tax charge on share-based payments	-	-	-	-	-	142	-	142
Issue of shares	1	86	-	-	-	-	-	87
Share options - value of employee services	-	-	599	-	-	-	-	599
Share options - exercised or lapsed	-	-	(111)	-	-	111	-	-
Dividends	-	-	-	-	-	(9,692)	-	(9,692)
At 1 January 2023	1,110	82,351	1,801	-	7,971	119,100	1,492	213,825
Net result for the year	-	-	-	-	-	35,204	1,456	36,660
Other comprehensive income	-	-	-	-	-	(4,447)	-	(4,447)
Total comprehensive income for the year	-	-	-	-	-	30,757	1,456	32,213
Tax credit on share-based payments	-	-	-	-	-	867	-	867
Issue of shares	27	2,530	-	-	-	-	-	2,557
Purchase of treasury shares	-	-	-	(5,122)	-	-	-	(5,122)
Cancellation of shares	(121)	-	-	-	-	(33,043)	-	(33,164)
Capital reduction	-	(82,549)	-	-	-	82,549	-	-
Share options - value of employee services	-	-	1,040	-	-	-	-	1,040
Share options - exercised or lapsed	-	-	(958)	-	-	958	-	-
Dividends	-	-	-	-	-	(11,760)	-	(11,760)
At 31 December 2023	1,016	2,332	1,883	(5,122)	7,971	189,428	2,948	200,456

The accompanying accounting policies and notes form an integral part of these preliminary results.

Notes to the preliminary results - Group

For the year ended 31 December 2023

1. ACCOUNTING POLICIES

Accounting policies are detailed in their respective notes, where relevant. Policies that are not specific to a particular note are detailed below.

Basis of preparation

The financial information in this announcement does not constitute the Group's or the Company's statutory accounts as defined in section 434 of the Companies Act 2006 for the years ended 31 December 2023 or 2022 but is derived from those accounts. Statutory accounts for 2022 have been delivered to the registrar of companies, and those for 2023 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The preliminary results of the Group have been prepared in accordance with United Kingdom adopted International Accounting Standards. The preliminary results are prepared under the historical cost convention as modified by the revaluation of contingent consideration and assets in the Group's defined benefit pension schemes. They are presented in Sterling and all values are rounded to the nearest thousand (£'000).

Mears Group PLC is the ultimate parent company of the Group. It is incorporated and resident in England and Wales (registration number 03232863). Its registered office and principal place of business is 1390 Montpellier Court, Gloucester Business Park, Brockworth, Gloucester GL3 4AH. Mears Group PLC's shares are listed on the Main Market of the London Stock Exchange.

Basis of consolidation

The Consolidated Balance Sheet includes the assets and liabilities of the Company and its subsidiaries and is made up to 31 December 2023. Entities for which the Group has the ability to exercise control over financial and operating policies are accounted for as subsidiaries. Control is achieved where the Company has existing rights that give it the current ability to direct the activities that affect the Company's returns and exposure or rights to variable returns from the entity. Interests acquired in entities are consolidated from the effective date of acquisition and interests sold are consolidated up to the date of disposal.

All significant intercompany transactions and balances between Group enterprises, including unrealised profits arising from intra-group transactions, are eliminated on consolidation; no profit is taken on sales between Group companies.

Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling shareholders' share of changes in equity since the date of the combination.

A joint venture is a joint arrangement whereby the parties that have joint control have the rights to the net assets of the arrangement. Associates are entities over which the Group does not have control, but has significant influence. Investments in joint ventures and associates are accounted for using the equity method of accounting. Under this method, the Group's share of post-acquisition profits or losses is recognised in the Consolidated Statement of Profit or Loss; the cost of the investment in a given joint venture or associate, together with the Group's share of that entity's post-acquisition changes to shareholders' funds, is included in investments within the Consolidated Balance Sheet.

Going concern

The Directors do not consider going concern to be a critical accounting judgement. In reaching this determination, the Directors have taken account of the Group's trading for 2023 and the budget for 2024.

The Group reported a net cash position of £109.1m on 31 December 2023, but the Directors believe that the average daily net cash, after adjusting for the full year impact of the share buybacks, averaged £50m during 2023, provides a better indication of the underlying position and is a better indicator of the Group's liquidity. The Group has modelled its cash flow outlook for the period to 30 June 2025 and the base forecast indicates significant liquidity headroom will be maintained above the Group's borrowing facilities and that financial covenants will be met throughout the period, including the covenant tests on 30 June 2024, 31 December 2024 and 30 June 2025.

The Board approved a budget for 2024 which reflects margin and profit growth compared to the prior year. The 2024 budget is considered to be the base case projection for assessing Going Concern and is based on the following assumptions:

· Forecast built up on a contract-by-contract basis for the next twelve months and rolled forward. The forecast for 2024 is based upon revenues generated from existing customer relationships, and a business that is generating contract margins that are in-line with recent run-rates.

· The forecast assumes no new work is secured. The base case assumes that contracts are resecured on retender, but reflects some revenue reduction from existing clients, when it is currently anticipated that there may be no further opportunity upon expiry of the current contract.

· The model also reflects the normalisation of the Asylum (AASC) contract, with revenues reducing to a level closer to the original expectation.

· The model assumes no significant changes in working capital performance.

· The model assumes small scale property purchases to augment the delivery of the AASC contract.

· Future dividends continue in line with current policy.

· A share buyback programme is assumed to be completed equating to 10% of the issued share capital at the start of the current financial year. No further buybacks have been assumed beyond the current shareholder authority.

The Group is well positioned, underpinned by the non-discretionary nature of the Group's activities and public sector client group. The Board has communicated its capital allocation policy to stakeholders, and a key pillar of this policy is to maintain a net cash position on a daily basis.

In making its going concern assessment, the Directors are required to consider as to whether there is a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for at least 12 months following the signing of these financial statements. The Board has adopted a going concern period for this purpose up to 30 June 2025. This assessment considers whether the Group will be able to maintain adequate liquidity headroom above the level of its borrowing facilities and to operate within the financial covenants applicable to those facilities which will be measured on 30 June 2024, 31 December 2024 and 30 June 2025. On 31 December 2023, the Group held £70m of committed borrowing facilities, maturing in December 2026. The principal borrowing facilities are subject to covenants as detailed within the banking and financial covenants sub-section of the Finance Review section of the Strategic Report. The Strategic Report also details the principal risks and uncertainties and how the Group manages its risks.

In making its assessment of Going Concern, the Board has confirmed that there have been no post balance sheet changes that have a material impact on the business or affect liquidity.

A range of scenarios that encompass the principal risks have been applied to the base case and are set out below. These downside cases were prepared by management to illustrate the impact of adverse changes in key variables used within the base case forecast and projections. These downside cases were intended to illustrate a reasonable worst-case scenario that could affect solvency or liquidity in "severe but plausible" scenarios.

The Directors have considered three scenarios and the following sensitivities have been applied to each downside case:

· Downside case 1: a significant reduction of 50% in revenue relating to the Group's largest contract (AASC).

· Downside case 2: a significant margin dilution event, possibly caused by significant operational failure, labour shortages or supply chain disruption. The downside scenario modelled a 1.5% reduction in operating margin. Given the low-margin nature of the business, a small increase in the cost base which is not recovered in charge rate increases can cause significant margin dilution.

· Downside case 3: an event linked to a Cyber breach, impacting upon lead operating systems causing an additional 20-days revenue tied up in working capital.

No mitigating actions were included within any of these downside scenarios which was considered conservative and unrealistic. Before applying mitigations, none of the three downside cases detailed above resulted in the Group exhausting its liquidity or breaching covenants. Mitigating actions that would be available to management include a reduction in central overheads, a reduction in discretionary capital expenditure, changes to capital allocation policy (including the ordinary dividend) and more robust working capital management around covenant test dates. In addition, upsides that are available to the base case includes generating an improved margin at a local contract level over and above the current run-rate and securing new contract awards.

The Viability Review concluded that climate-related risks would not have a significant impact on the business within the five-year viability review period. As such, climate was not modelled in respect of the shorter Going Concern review period.

The Group has carried out stress tests against the base case to determine the performance levels that would result in a breach of covenants or a reduction of headroom against its borrowing facilities to £nil. The Directors carried out reverse stress testing, increasing the severity of the assumptions to measure the trigger points at which the going concern of the Group could be impacted. A reverse stress test was conducted to identify the magnitude of trading profit decline required before the Group breaches its debt covenants. All stress test scenarios would require a very severe deterioration compared to the base case forecasts.

In the most extreme reverse stress test:

· The Directors modelled a reduction in profit which would trigger a breach in covenants. The base case annualised profit of c.£40m would need to decline to an annualised loss in excess of £40m. This profit reduction is considered to be remote given Mears' long-term historical performance. During a Covid-impacted year ended 31 December 2020, Mears reported a loss before tax of c.£15m.

· The Directors modelled a reduction in revenue which would trigger a breach is covenants. Revenue would need to decline by in excess of 40% when compared to the base case, to result in a breach of covenants. This revenue reduction is considered to be remote given the high proportion of Mears' revenue that is attached to long-term contractual arrangements. During a Covid-impacted year ended 31 December 2020, Mears' revenue declined by less than 10%.

After making these assessments, the Directors consider any scenario or combination of scenarios which could cause the business to be no longer a going concern to be remote. The Directors have a reasonable expectation that the Company and its subsidiaries have adequate resources to continue in operational existence until 30 June 2025. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts.

Fair value

The Group measures certain assets and liabilities at fair value on a recurring basis, including contingent consideration and assets in the Group's defined benefit pension schemes.

Trade and other receivables, trade and other payables and other loans are initially measured at fair value and are subsequently held at amortised cost. Other assets are measured at fair value when they are assessed for impairment or on classification as held for sale.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Group uses valuation techniques that maximise the use of relevant observable inputs using the following valuation hierarchy, ordered from highest to lowest priority:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included in level 1 that are observable either directly or indirectly.

Level 3 - Unobservable inputs, typically derived from the Group's own information with any necessary adjustments to eliminate factors specific to the Group.

For assets and liabilities measured at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by assessing the lowest level input that is significant to the most recent measurement.

Details of the particular valuation techniques used by the Group are provided in the relevant notes for each type of asset or liability measured at fair value.

Use of judgements and estimates

The preparation of financial statements requires management to make estimates and judgements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenditure during the reported period. The estimates and associated judgements are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources.

The estimates and underlying judgements are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

In the preparation of these preliminary results, key estimates and judgements have been made by management concerning the following:

- provisions necessary for certain liabilities, including discount rates used in estimating such provisions;

- estimates used in forecasts used to assess future profitability;

- discount rates used when conducting impairment reviews;

- the discounts used and other judgements involved in the recognition of right of use assets for lease accounting;

- the timing of revenue recognition;

- the recoverability of contract assets; and

- actuarial estimates in respect of defined benefit pension schemes.

Actual amounts could differ from those estimates. Further details of key estimates and judgements are provided in the appropriate notes.

2. REVENUE

Accounting policy

Revenue is recognised in accordance with IFRS 15 'Revenue from Contracts with Customers'. IFRS 15 provides a single, principles-based, five-step model to be applied to all sales contracts. It is based on the transfer of control of goods and services to customers. The detail below sets out the principal types of contract and how the revenue is recognised in accordance with IFRS 15.

Repair and maintenance contracts

For contracts in this category, the customer raises orders on demand, for example to carry out responsive repairs. Revenue is derived from a mixture of lump-sum periodic payments and task-based payments depending on the terms of the individual contract.

Where a lump-sum payment is in place it may cover the administrative element of the contract or may cover the majority of the tasks undertaken within that contract with exclusions to this being charged in addition to the lump-sum charge. For the works covered by the lump-sum payment, the performance obligation is being available to deliver the goods and services in the scope of the contract, not the performance of the individual works orders themselves. Revenue is recognised on a straight-line basis as performance obligations are being met over time.

For works orders not covered by a lump-sum payment, each works order represents a distinct performance obligation and, as the customer controls the asset being enhanced through the works, the performance obligation is satisfied over time. Each works order can be broken down into one or more distinct tasks which are either complete or not complete. The stage of completion of the works order is assessed by looking at which tasks are complete. The transaction price for partly completed works orders is recognised as cost plus expected margin. The transaction price for completed works orders is the invoice value, which is typically determined by a pricing schedule referred to as a Schedule of Rates that provides a transaction price for each particular task.

Some contracts may include an element of variable revenue based on certain key performance indicators (KPIs). These are recognised either at a point in time or over time, depending on the nature of the KPI and the contractual agreement in which it is contained. Where there is uncertainty in the measurement of variable consideration, at both the start of the contract and subsequently, management will consider the facts and circumstances of the contract in determining either the most likely amount of variable consideration when the outcome is binary, or the expected value based on a range of possible considerations. Included within this assessment will be the extent to which there is a high probability that a significant reversal in variable consideration revenues will not occur once the uncertainty is subsequently resolved. This assessment will include consideration of the following factors: the total amount of the variable consideration; the proportion of consideration susceptible to judgements of customers or third parties, for example KPIs; the length of time expected before resolution of the uncertainty; and the Group's previous experience of similar contracts.

Contracting projects

For contracting projects, the contract states the scope and specification of the construction works to be carried out, for a fixed price. Mears is continuously satisfying this single performance obligation as cost is incurred, determining progress against the performance obligation on either an input or an output basis. The customer controls the site or output as the work is being performed on it and therefore revenue is recognised over time where there is an enforceable right to payment for works completed to date and the work completed does not create an asset with an alternative use to the Group. An assessment is made of costs incurred to date and the costs required to complete the project. If a project is not deemed to be profitable, the unavoidable costs of fulfilling the contract are provided for immediately. This category also includes construction contracts where an end customer has not yet been identified and the revenue is recognised at the point of sale of the property, rather than over time.

Property income

Where the Group is acting as principal, lessor operating lease revenue is recognised in revenue on a straight-line basis over the tenancy.

Where the Group is providing a management service, Mears recognises revenue as an agent (the net management fee) on a straight-line basis. Where significant initial costs are required to make good the housing to perform Housing Management activities, the costs directly attributable to the initial upgrade will be recognised as costs incurred to fulfil a contract and held within current assets, to the extent that it is determined that costs are recoverable.

Where the Group is providing an accommodation and support service, revenue is recognised at a point in time for each night that the accommodation is occupied.

Some contracts may include an element of variable revenue based on certain KPIs. This is recognised on the same basis as above.

Where the Group enters into arrangements with customers for the provision of housing, an assessment is made as to whether this income is recognised under IFRS 15 or IFRS 16. The contract between the Group and the customer is deemed to contain a lease where the contract conveys the right to control an identified asset for a period of time in exchange for consideration. In this instance, the rental income is recognised on a straight-line basis over the life of the lease. All such sub-leased residential property leases are classified as operating leases. Revenue in respect of sub-leased residential property is disclosed separately.

Care services

The standalone selling prices for providing care are overtly stated in the contract, and the method of application of the rate of charge is on a unit of time basis, usually expressed as a rate per visit. Revenue will be recognised in respect of this single performance obligation, by reference to the chargeable rate and time for completed care visits in the period.

From time to time, care contracts with customers include a fixed fee per period for performing a consistent scope of care services. For these contract types, the revenue recognition is consistent with lump-sum payments included in repair and maintenance contracts, as described above.

Other

From time to time, the Group receives revenue that does not fall within any of the categories above but is not individually significant enough to require a specific policy. In these cases, the revenue is considered separately and recognised in accordance with IFRS 15.

Key sources of estimation uncertainty

Contract recoverability

Determining future contract profitability requires estimates of future revenues and costs to complete. In making these assessments there is a degree of inherent uncertainty. The Group utilises the appropriate expertise in determining these estimates and has well-established internal controls to assess and review the expected outcome.

Critical judgements in applying the Group's accounting policies

Revenue recognition

The estimation techniques used for revenue and profit recognition in respect of contracting and variable consideration contracts require judgements to be made about the stage of completion of certain contracts and the recovery of contract assets. Each contract is treated on its merits and subject to a regular review of the revenue and costs to complete that contract.

The Group's revenue disaggregated by pattern of revenue recognition is as follows:


	2023 £'000	2022 £'000
Revenue from contracts with customers
Repairs and maintenance	453,981	451,063
Contracting	70,980	83,463
Property income	516,769	376,296
Care services	20,058	19,544
Other	1,005	345
	1,062,793	930,711
Lease income	26,534	28,902
	1,089,327	959,613

Repairs and maintenance and care service revenue is typically invoiced between 1 and 30 days from completion of the performance obligation. Contracting revenue is typically invoiced based on the stage of completion of the overall contract. Property income is typically invoiced monthly in advance. Payment terms for revenue invoiced are typically 30 to 60 days from the date of invoice.

A maturity analysis of future minimum lessor income as at 31 December is shown in the table below:


	2023 £'000	2022 £'000
Less than 1 year	4,591	3,245
Between 1 and 2 years	2,871	1,537
Between 2 and 3 years	2,871	1,531
Between 3 and 4 years	2,163	1,531
Between 4 and 5 years	1,282	1,150
Over 5 years	5,178	393
	18,956	9,387

3. SEGMENT REPORTING

Accounting policy

Segment information is presented in respect of the Group's operating segments based on the format that the Group reports to its chief operating decision maker for the purpose of allocating resources and assessing performance.

The Group considers that the chief operating decision maker comprises the Executive Directors of the business.

The Executive Directors manage the group as a single Housing business, but information provided to the Board and historically to stakeholders has included a split between Maintenance, Management and Development. Therefore, management has concluded that providing segmental information along the same lines would be helpful to the users of the preliminary results.


	2023				2022
Maintenance £'000	Management £'000	Development £'000	Total £'000	Maintenance £'000	Management £'000	Development £'000	Total £'000
Revenue	543,279	543,345	2,703	1,089,327	535,336	405,776	18,501	959,613
Impairments of right of use assets	-	6,223	-	6,223	-	-	-	-
Profit/(loss) before tax	22,061	25,711	(854)	46,918	11,777	24,281	(1,114)	34,944
Tax expense				(10,258)				(6,441)
Profit for the year				36,660				28,503

All revenue and all non-current assets arise within the United Kingdom. All of the revenue reported is external to the Group. The Group's largest single customer relationship is in respect of the Asylum Accommodation and Support Contract (AASC) with the Home Office, included within the Management segment. At the time that this contract was won, the Group expected to report annual revenues of around £120m, which would, under normal conditions, amount to around 15% of Group revenues. The AASC has experienced elevated volumes as a result of a backlog linked to the challenges of the Covid-19 pandemic. As a result, this customer relationship accounted for over 40% of Group revenues in 2023 and this elevated position has continued into 2024. In the longer term, this contract is expected to reduce back to a normal level. No other customer comprises more than 10% of reported revenue.

For the purposes of the disaggregation of revenue in note 2, all property income and lease income is included within the Management segment and the Development segment contains only contracting revenue. All other revenue is included within the Maintenance segment.

4. OPERATING COSTS

Operating costs, relating to continuing activities, include the following:


	Note	2023 £'000	2022 £'000
Share-based payments	7	1,040	599
Depreciation of property, plant and equipment	14	7,305	8,021
Depreciation of right of use assets	15	50,908	43,486
Impairment of right of use assets	15	6,223	-
Amortisation of acquisition intangibles	13	244	245
Amortisation of other intangibles	13	1,635	2,055
Loss on disposal of property, plant and equipment		54	2
Loss on disposal of intangibles		26	-
Profit on disposal of right of use assets		(180)	(227)
Increase in onerous contract provisions	21	8,784	-
Increase in other provisions	21	5,738	3,617

Fees payable for audit and non-audit services during the year were as follows:


	2023 £'000	2022 £'000
In respect of continuing activities:
Fees payable to the auditor for the audit of the Group's financial statements	457	416
Other fees payable to the auditor in respect of:
· auditing of accounts of subsidiary undertakings pursuant to legislation	550	500
· additional fees in respect of the prior year audit	145	65
Total auditor's remuneration	1,152	981

5. FINANCE INCOME AND FINANCE COSTS


	2023 £'000	2022 £'000
Interest charge on overdrafts and loans	(638)	(625)
Interest on lease obligations	(9,899)	(7,617)
Finance costs on bank loans, overdrafts and leases	(10,537)	(8,242)
Other interest	(642)	(58)
Interest charge on defined benefit pension obligation	(2)	(74)
Total finance costs	(11,181)	(8,374)
Interest income resulting from short-term deposits	4,360	870
Interest income resulting from defined benefit pension asset	1,164	769
Other interest income	415	394
Finance income	5,939	2,033
Net finance charge	(5,242)	(6,341)

6. EMPLOYEES

Staff costs during the year were as follows:


	2023 £'000	2022 £'000
Wages and salaries	176,226	165,348
Social security costs	18,666	16,795
Other pension costs	6,963	8,797
	201,855	190,940

The average number of employees of the Group during the year was:


	2023	2022
Site workers	2,443	2,482
Carers	559	558
Office and management	2,134	1,950
	5,136	4,990

7. SHARE-BASED EMPLOYEE REMUNERATION

Accounting policy

All share-based payment arrangements are recognised in the preliminary results in accordance with IFRS 2.

The Group operates equity-settled share-based remuneration plans for its employees. All employee services received in exchange for the grant of any share-based remuneration are measured at their fair values. These are indirectly determined by reference to the fair value (excluding the effect of non-market-based vesting conditions) of the share options awarded. Their value is determined at the date of grant and is not subsequently remeasured unless the conditions on which the award was granted are modified. The fair value at the date of the grant is calculated using the Monte Carlo option pricing model and the cost is recognised on a straight-line basis over the vesting period. Adjustments are made to reflect expected and actual forfeitures during the vesting period. For Save As You Earn (SAYE) plans, employees are required to contribute towards the plan. This non-vesting condition is taken into account in calculating the fair value of the option at the grant date.

All share-based remuneration is ultimately recognised as an expense in the Consolidated Statement of Profit or Loss. For equity-settled share-based payments there is a corresponding credit to the share-based payment reserve.

Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value of the shares issued are allocated to share capital, with any excess being recorded as share premium.

As at 31 December 2023 the Group maintained four (2022: three) active share-based payment schemes for employee remuneration.

Details of the share options outstanding and movement during the year are as follows:


	2023		2022
Number '000	Weighted average exercise price p	Number '000	Weighted average exercise price p
Outstanding at 1 January	4,552	99	4,827	110
Granted	1,132	1	442	1
Forfeited or lapsed	(418)	177	(643)	108
Exercised	(2,713)	94	(74)	116
Outstanding at 31 December	2,553	48	4,552	99

The weighted average share price at the date of exercise for share options exercised during the period was 279p. At 31 December 2023, 0.5m options had vested and were still exercisable at prices between 1p and 429p. These options had a weighted average exercise price of 238p and a weighted average remaining contractual life of 4.5 years.

The fair values of options granted were determined using the Monte Carlo option pricing model. Significant inputs into the calculation include the market price at the date of grant, the exercise price and share price volatility. Furthermore, the calculation incorporates an estimate of the future dividend yield and the risk-free interest rate. The share price volatility was determined from the daily log-normal distributions of the Company share price over a period commensurate with the expected life as calculated back from the date of grant. The risk-free interest rate utilised the zero-coupon bond yield derived from UK Government bonds as at the date of calculation for a life commensurate with the expected life. Adjustments are made to reflect expected and actual forfeitures during the vesting period due to failure to satisfy service conditions.

There were 1.13m options granted during the year and 0.42m options that lapsed during the year. The market price at 31 December 2023 was 310p and the range during 2023 was 195p to 311p.

All share-based employee remuneration will be settled in equity. The Group has no legal obligation to repurchase or settle the options.

The Group recognised the following expenses related to share-based payments:


	2023 £'000	2022 £'000
Giving rise to share-based payment reserve:
All-employee schemes	188	165
Executive schemes	852	434
	1,040	599

The Group is currently running four active schemes, detailed below:

Sharesave plan (All-employee scheme)

Options are available to all employees. Options are granted for a period of three years. Options are exercisable at a price based on the quoted market price of the Company's shares at the time of invitation, discounted by up to 20%. Options are forfeited if the employee leaves Mears Group before the options vest, which impacts the number of options expected to vest. If an employee stops saving but continues in employment, this is treated as a cancellation, which results in an acceleration of the share-based payment charge.

Company Share Option Plan (Executive scheme)

The Company operates a discretionary unapproved share plan and a Company Share Option Plan. Options are exercisable at a price below market value at the date of grant and often at nominal value. The vesting period is three years. If the options remain unexercised after a period of 10 years from the date of grant, the options expire. Options are forfeited if the employee leaves Mears Group before the options vest. No awards to Executive Directors are proposed under these plans.

Long-Term Incentive Plan (Executive scheme)

The Long-Term Incentive Plan provides for awards of free shares (i.e. either conditional shares or nominal cost options) normally on an annual basis which are eligible to vest after three years subject to continued service and the achievement of challenging performance conditions. The first award under this scheme was made during 2021. Options are granted under this scheme to key senior management subject to performance conditions as detailed on page 92 of the Remuneration Report.

Deferred Share Bonus Plan (Executive scheme)

The Deferred Share Bonus Plan relates to annual bonus payments where typically 33% are deferred into shares and vest subject to continued employment. Individuals may be able to receive a dividend equivalent payment on deferred bonus shares at the time of vesting equal to the value of dividends that would have accrued during the vesting period. The dividend equivalent payment may assume the reinvestment of dividends on a cumulative basis. Clawback provisions may apply for three years from the date of payment of any bonus or the grant of any deferred bonus share award.

8. TAX EXPENSE

Accounting policy

Current tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities that are unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws applicable to the accounting periods to which they relate, based on the taxable profit for the year.

Where an item of income or expense is recognised in the Consolidated Statement of Profit or Loss, any related tax generated is recognised as a component of tax expense in the Consolidated Statement of Profit or Loss. Where an item is recognised directly to equity or presented within the Consolidated Statement of Comprehensive Income, any related tax generated is treated similarly.

Deferred taxation is the tax expected to be repayable or recoverable on differences between the carrying amounts of assets and liabilities and corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method.

Deferred taxation liabilities are generally recognised on all taxable temporary differences in full with no discounting. Deferred taxation assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability, unless the related transaction is a business combination or affects tax or accounting profit.

Deferred taxation is calculated using the tax rates and laws that are expected to apply in the period when the liability is settled or the asset is realised, provided they are enacted or substantively enacted at the balance sheet date. The carrying value of deferred taxation assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available against which taxable temporary differences can be utilised. Deferred tax is charged or credited to either the Consolidated Statement of Profit or Loss, the Consolidated Statement of Comprehensive Income or equity to the extent that it relates to items charged or credited. Deferred tax relating to items charged or credited directly to equity is also credited or charged to equity.

Tax recognised in the Consolidated Statement of Profit or Loss:


	2023 £'000	2022 £'000
United Kingdom corporation tax	10,854	6,449
Adjustment in respect of previous periods	39	(675)
Total current tax charge recognised in Consolidated Statement of Profit or Loss	10,893	5,774
Deferred taxation charge:
· on defined benefit pension obligations	480	(41)
· on share-based payments	(119)	27
· on capital allowances	(483)	65
· on amortisation of acquisition intangibles	(75)	(65)
· on short-term temporary timing differences	-	149
· on corporate tax losses	-	264
· other timing differences	57	18
Adjustment in respect of previous periods	(495)	250
Total deferred taxation recognised in Consolidated Statement of Profit or Loss	(635)	667
Total tax charge recognised in Consolidated Statement of Profit or Loss on continuing operations	10,258	6,441
Total tax charge recognised in Consolidated Statement of Profit or Loss on discontinued operations	-	48
Total tax charge recognised in Consolidated Statement of Profit or Loss	10,258	6,489

The charge for the year can be reconciled to the result for the year as follows:


	2023 £'000	2022 £'000
Profit for the year on continuing operations before tax	46,918	34,944
Profit for the year on discontinued operations before tax	-	542
Result for the year before tax	46,918	35,486
Result for the year multiplied by standard rate of corporation tax in the United Kingdom for the period of 23.5% (2022: 19.0%)	11,039	6,742
Effect of:
· expenses not deductible for tax purposes	88	362
· income not subject to tax	(352)	(264)
· tax impact of employee share schemes	(61)	129
· adjustment in respect of prior periods	(456)	(480)
Actual tax charge	10,258	6,489

Deferred tax is recognised on temporary differences between the treatment of items for both tax and accounting purposes. Deferred tax on the amortisation of acquisition intangibles is a temporary difference and arises because no tax relief is due on this kind of amortisation.

Tax losses generated in previous years which are expected to be utilised against future profits are recognised as a deferred tax asset and a subsequent charge arises as those losses are utilised. No deferred tax asset is recognised in respect of losses of £1.4m (2022: £25.5m) across several entities in the Group as it is not expected that they will be eligible to be utilised against profits in the future. The reduction in unrecognised losses during the year is due to those in respect of two dormant Group entities being written off, as there was no prospect of them being utilised in future.

Capital allowances represent tax relief on the acquisition of property, plant and equipment and are spread over several years at rates set by legislation. These differ from depreciation, which is an estimate of the use of an item of property, plant and equipment over its useful life. Deferred tax is recognised on the difference between the remaining value of such an asset for tax purposes and its carrying value in the accounts.

Relief is provided from UK Corporation Tax on the difference between the exercise price of share options exercised by employees and their market value at the point of exercise. During 2023, an all-employee share scheme vested that had been granted in 2020 when the Group's share price was significantly lower. This resulted in significant relief on the exercise of the share options that is not anticipated to reoccur.

The following tax has been charged to other comprehensive income or equity during the year:


	2023 £'000	2022 £'000
Deferred tax credit recognised in other comprehensive income
· on defined benefit pension obligations	(1,482)	(2,449)
Total deferred tax credit recognised in other comprehensive income	(1,482)	(2,449)
Current tax credit recognised directly in equity
· on share-based payments	(991)	-
Total current tax credit recognised in equity	(991)	-
Deferred tax charge/(credit) recognised directly in equity
· on share-based payments	124	(142)
Total deferred tax charge/(credit) recognised in equity	124	(142)

BEPS Pillar Two

Pillar Two legislation has been enacted in the UK and will be effective for the Group's financial year beginning 1 January 2024. The Group has performed an assessment of its potential exposure to Pillar Two income taxes based on the most recent information available regarding the financial performance of the constituent entities in the Group. Based on the assessment performed, the Pillar Two effective tax rate is above 15% and management is not currently aware of any circumstances under which this might change. Therefore, the Group does not expect a potential exposure to Pillar Two top-up taxes.

9. DISCONTINUED ACTIVITIES

During 2020, the Group completed the disposal of its Domiciliary Care business and disposed of its Planning Solutions business. The 2022 financial statements recognised profit after tax and operating cash outflows of £0.5m in respect of discontinued activities, as well as a £7.3m cash inflow representing the final receipt of contingent consideration in respect of the Planning Solutions business. There are no amounts recognised in 2023 and further details of the disposals are available in the prior year financial statements.

10. DIVIDENDS

Accounting policy

Dividend distributions payable to equity shareholders are included in 'Current financial liabilities' when the dividends are approved in a general meeting prior to the balance sheet date.

The following dividends were paid on ordinary shares in the year:


	2023 £'000	2022 £'000
Final 2022 dividend of 7.25p (2022: final 2021 dividend of 5.50p) per share	7,932	6,092
Interim 2023 dividend of 3.70p (2022: interim 2022 dividend of 3.25p) per share	3,828	3,600
	11,760	9,692

The Directors recommend a final dividend of 9.30p per share. This has not been recognised within the preliminary results as no obligation existed at 31 December 2023.

11. EARNINGS PER SHARE


	Continuing		Discontinued		Continuing and discontinued
2023 p	2022 p	2023 p	2022 p	2023 p	2022 p
Earnings per share	32.90	25.07	-	0.44	32.90	25.51
Diluted earnings per share	31.94	24.51	-	0.43	31.94	24.94

For the purpose of calculating earnings per share (EPS), earnings have been calculated as follows:


	Continuing		Discontinued		Continuing and discontinued
2023 £'000	2022 £'000	2023 £'000	2022 £'000	2023 £'000	2022 £'000
Profit for the year	36,660	28,503	-	494	36,660	28,997
Attributable to non-controlling interests	(1,456)	(690)	-	-	(1,456)	(690)
Earnings	35,204	27,813	-	494	35,204	28,307

The calculation of EPS is based on a weighted average of ordinary shares in issue during the year. The diluted EPS is based on a weighted average of ordinary shares calculated in accordance with IAS 33 'Earnings per Share', which assumes that all dilutive options will be exercised. IAS 33 defines dilutive options as those whose exercise would decrease earnings per share or increase loss per share from continuing operations.


	2023 Millions	2022 Millions
Weighted average number of shares in issue:	106.99	110.96
Dilutive effect of share options	3.23	2.52
Weighted average number of shares for calculating diluted earnings per share	110.22	113.48

The opening number of shares in issue for 2024 is shown below:


		2024 Millions
Opening number of shares in issue		101.55
Treasury shares to exclude		(1.89)
Opening number of shares in issue for calculating earnings per share		99.66

12. GOODWILL

Accounting policy

Goodwill arises on the acquisition of subsidiaries and represents any excess of the cost of the acquired entity over the Group's interest in the fair value of the entity's identifiable assets and liabilities acquired, and is capitalised as a separate item. Goodwill is recognised as an intangible asset.

Under the business combinations exemption of IFRS 1, goodwill previously written off directly to reserves under UK Generally Accepted Accounting Practice (GAAP) is not recycled to the Consolidated Statement of Profit or Loss on calculating a gain or loss on disposal.

Impairment

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows: Cash Generating Units (CGUs). Goodwill is allocated to those groups of CGUs, that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which goodwill is monitored for internal management purposes.

Goodwill or groups of CGUs that include goodwill and those intangible assets not yet available for use are tested for impairment at least annually. All other individual assets or CGUs are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment loss is recognised in the Consolidated Statement of Profit or Loss for the amount by which the asset's or CGU's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow evaluation. Impairment losses recognised for groups of CGUs, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro-rata to the other assets in the group of CGUs. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist.


	Goodwill arising on consolidation £'000	Purchased goodwill £'000	Total £'000
Gross carrying amount
At 1 January 2022	114,831	4,042	118,873
Acquisition of subsidiary	2,995	-	2,995
At 1 January 2023 and 31 December 2023	117,826	4,042	121,868
Accumulated impairment losses
At 1 January 2022, 1 January 2023 and 31 December 2023	-	-	-
Carrying amount
At 31 December 2023	117,826	4,042	121,868
At 31 December 2022	117,826	4,042	121,868

Goodwill on consolidation arises on the excess of cost of acquisition over the fair value of the net assets acquired on purchase of a company.

Purchased goodwill arises on the excess of cost of acquisition over the fair value of the net assets acquired on the purchase of the trade and assets of a business by the Group.

Goodwill is not amortised but is reviewed for impairment on an annual basis or more frequently if there are any indications that goodwill may be impaired. Goodwill acquired in a business combination is allocated to groups of CGUs according to the level at which management monitors that goodwill. Goodwill is carried at cost less accumulated impairment losses.

The carrying value of goodwill is allocated to the following groups of CGUs:


		Goodwill arising on consolidation		Purchased goodwill		Total
	2023 £'000		2022 £'000	2023 £'000	2022 £'000	2023 £'000	2022 £'000
Maintenance (excluding Housing with Care)	65,290		65,290	4,042	4,042	69,332	69,332
Management	33,447		33,447	-	-	33,447	33,447
Housing with Care	19,089		19,089	-	-	19,089	19,089
	117,826		117,826	4,042	4,042	121,868	121,868

The Group's cash inflows are largely independent at the individual branch level and each branch is therefore considered a CGU. However, the goodwill of the Group contributes to the cash inflows of multiple CGUs. It is therefore allocated to groups of CGUs and monitored for internal management purposes primarily at the operating segment level. The goodwill of Housing with Care is separately monitored and therefore allocated to a separate group of CGUs to which it relates.

An asset is impaired if the carrying value exceeds the CGU's recoverable amount, which is based on value in use. At 30 September 2023 impairment reviews were performed by comparing the carrying value with the value in use for the groups of CGUs to which goodwill has been allocated.

The value in use for each group of CGUs is calculated from the Board-approved one-year budgeted cash flows and extrapolated cash flows for the next four years discounted at a post-tax discount rate over a five-year period with a terminal value. The impairment reviews incorporated a terminal growth assumption, which is conservative when compared with the UK long-term growth rate and the underlying demographics, which will be positive for the Group's core markets.

The estimated growth rates are based on knowledge of the relevant sector and market and represent management's base level expectations for future growth. Changes to revenue and direct costs are based on past experience and expectation of future changes within the markets of the CGUs. All CGUs have the same access to the Group's treasury function and borrowing arrangements to finance their operations.

Management considers that reasonably possible changes in these assumptions would not cause the carrying amount of a group of CGUs to exceed its recoverable amount.

The rates used were as follows:


	Post-tax discount rate	Pre-tax discount rate	Volume growth rate (years 1-5)	Terminal growth rate
Maintenance	10.90%	14.93%	2.00%	1.50%
Management	10.90%	13.21%	2.00%	1.50%
Housing with Care	10.90%	15.00%	3.00%	1.50%

13. OTHER INTANGIBLE ASSETS

Accounting policy

In accordance with IFRS 3 (Revised) 'Business Combinations', an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Group. Where an intangible asset might be separable, but only together with a related tangible or intangible asset, the group of assets is recognised as a single asset separately from goodwill where the individual fair values of the assets in the group are not reliably measurable. Intangible assets are amortised over the useful economic life of those assets.

Development costs incurred on software development are capitalised when all the following conditions are satisfied:

· Completion of the software module is technically feasible so that it will be available for use.

· The Group intends to complete the development of the module and use it.

· The software will be used in generating probable future economic benefits.

· There are adequate technical, financial and other resources to complete the development and to use the software.

· The expenditure attributable to the software during its development can be measured reliably.

Development costs not meeting the criteria for capitalisation are expensed as incurred. Careful judgement by management is applied when deciding whether the recognition requirements for development costs have been met. This is necessary as the economic success of any development is uncertain and may be subject to future technical problems at the time of recognition. Judgements are based on the information available at each balance sheet date. In addition, all internal activities related to the research and development of new software are continually monitored by management.

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. Directly attributable costs include employee costs incurred on software development.

Amortisation commences upon completion of the asset and is shown within other administrative expenses. Until the asset is available for use on completion of the project, the assets are subject to impairment testing only. Development expenditure is amortised over the period expected to benefit.

The identifiable intangible assets and associated periods of amortisation are as follows:


Order book	over the period of the order book
Client relationships	over the period expected to benefit
Supplier relationships	over the period expected to benefit
Development expenditure	over the useful life of the resulting software, typically five to ten years
Software	25% p.a., reducing balance

The useful economic lives of intangible assets are reviewed annually and amended if appropriate.


	Acquisition intangibles				Development expenditure £'000	Software £'000	Total intangibles £'000
Client relationships £'000	Order book £'000	Supplier relationships £'000	Total acquisition intangibles £'000
Gross carrying amount
At 1 January 2022	65,987	17,770	2,172	85,929	21,142	-	107,071
Reclassification	-	-	-	-	-	6,087	6,087
Additions	-	-	-	-	1,090	274	1,364
Acquired with subsidiary	-	-	-	-	1,117	-	1,117
Disposals	(61,097)	(17,770)	(2,172)	(81,039)	-	(85)	(81,124)
At 1 January 2023	4,890	-	-	4,890	23,349	6,276	34,515
Additions	-	-	-	-	1,041	458	1,499
Disposals	-	-	-	-	(5,996)	(4,012)	(10,008)
At 31 December 2023	4,890	-	-	4,890	18,394	2,722	26,006
Amortisation
At 1 January 2022	63,338	17,770	2,172	83,280	17,181	-	100,461
Reclassification	-	-	-	-	-	5,426	5,426
Provided in the year	245	-	-	245	1,849	206	2,300
Eliminated on disposal	(61,097)	(17,770)	(2,172)	(81,039)	-	(85)	(81,124)
At 1 January 2023	2,486	-	-	2,486	19,030	5,547	27,063
Provided in the year	244	-	-	244	1,415	220	1,879
Eliminated on disposal	-	-	-	-	(5,996)	(3,986)	(9,982)
At 31 December 2023	2,730	-	-	2,730	14,449	1,781	18,960
Carrying amount
At 31 December 2023	2,160	-	-	2,160	3,945	941	7,046
At 31 December 2022	2,404	-	-	2,404	4,319	729	7,452

Development expenditure is an internally developed intangible asset and relates to the development of the Group's Housing job management system and decarbonisation assessment software.

Development expenditure is amortised over its useful economic life of either five or ten years, depending on the resulting software. The weighted average remaining economic life of the asset is 3.8 years (2022: 3.9 years).

All amortisation is included within other administrative expenses.

14. PROPERTY, PLANT AND EQUIPMENT

Accounting policy

Items of property, plant and equipment are stated at historical cost, net of depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow into the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Consolidated Statement of Profit or Loss during the financial period in which they are incurred.

Freehold land is not depreciated. Depreciation on other assets is calculated to write down the cost less estimated residual value over their estimated useful economic lives. The rates generally applicable are:


Freehold buildings	2% p.a., straight line
Leasehold improvements	over the period of the lease or expected useful life of the improvements, straight line
Plant and machinery	20% p.a., straight line
Equipment	20% p.a., straight line
Fixtures and fittings	50% p.a., straight line
Motor vehicles	25% p.a., reducing balance

Residual values are reviewed annually and updated if appropriate. The carrying value is reviewed for impairment in the period if events or changes in circumstances indicate the carrying value may not be recoverable. An asset's carrying value is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within 'Administrative expenses' in the Consolidated Statement of Profit or Loss.

Identifying whether there are indicators of impairment in respect of property, plant and equipment involves some judgement and a good understanding of the drivers of value behind the asset. At each reporting period an assessment is performed in order to determine whether there are any such indicators, which involves considering the performance at both a contract and business level, and any significant changes to the markets in which we operate. This is not considered to be a critical judgement or an area of significant uncertainty.


	Freehold property £'000	Leasehold improvements £'000	Plant and machinery £'000	Fixtures, fittings and equipment £'000	Motor vehicles £'000	Total £'000
Gross carrying amount
At 1 January 2022	1,027	24,395	1,558	29,355	984	57,319
Reclassification	-	-	-	(6,087)	-	(6,087)
Additions	1,635	4,508	-	1,988	-	8,131
Acquired with subsidiary	-	-	-	10	19	29
Disposals	-	(2)	(1,166)	(10,386)	(488)	(12,042)
At 1 January 2023	2,662	28,901	392	14,880	515	47,350
Additions	22,126	682	-	2,893	44	25,745
Disposals	-	(2,839)	(209)	(2,375)	-	(5,423)
At 31 December 2023	24,788	26,744	183	15,398	559	67,672
Depreciation
At 1 January 2022	98	12,129	1,243	22,166	971	36,607
Reclassification	-	-	-	(5,426)	-	(5,426)
Provided in the year	17	3,914	227	3,856	7	8,021
Eliminated on disposals	-	(2)	(1,166)	(10,384)	(488)	(12,040)
At 1 January 2023	115	16,041	304	10,212	490	27,162
Provided in the year	220	5,172	40	1,850	23	7,305
Eliminated on disposals	-	(2,839)	(200)	(2,289)	-	(5,328)
At 31 December 2023	335	18,374	144	9,773	513	29,139
Carrying amount
At 31 December 2023	24,453	8,370	39	5,625	46	38,533
At 31 December 2022	2,547	12,860	88	4,668	25	20,188

15. RIGHT OF USE ASSETS

Accounting policy

Where an asset is subject to a lease, the Group recognises a right of use asset and a lease liability on the balance sheet. The right of use asset is measured at cost, which matches the initial measurement of the lease liability and any costs expected at the end of the lease, and then depreciated on a straight-line basis over the lease term.

The lease liability is measured at the present value of the future lease payments discounted using the Group's incremental borrowing rate. Lease payments include fixed payments, variable payments based on an index and payments arising from options reasonably certain to be exercised.

The Group has elected to account for short-term leases and leases of low value assets using the practical expedients. Instead of recognising a right of use asset and a lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term.

In the statement of financial position, right of use assets and lease liabilities are presented separately.

Critical judgements in applying the Group's accounting policies

The Group holds more than 15,000 leases across its portfolio of residential properties, offices and vehicles. Whilst the Group endeavours to standardise the form of leases, operational demands dictate that many leases have specific wording to address particular operational needs and also to manage the associated operational and financial risks. As such, each lease requires individual assessment and the Group is required to make key judgements which include:

· the identification of a lease;

· assessing the right to direct the use of the underlying asset;

· determining the lease term; and

· an assessment as to the level of future lease payments, including fixed and variable payments.

The most typical challenges encountered and which form the key judgements are:

· where the lease contains a one-way no-fault break in Mears' favour, the Group measures the obligation based on the Group's best estimate of its future intentions;

· where the lessor has a right of substitution meaning that the lessor can swap one property for another without Mears' approval;

· where Mears does not in practice have the right to control the use of the asset and the key decision making rights are retained by the supplier;

· where a wider agreement for a supply of services includes a lease component which meets the definition of a lease under IFRS 16; and

· the assessment of the fixed lease payments where the lease obligation to the landlord is based on a pass-through arrangement in which Mears only makes lease payments to the owner to the extent that the property is occupied and to the extent that rents are received from the tenant.

Key sources of estimation uncertainty

Additions and remeasurements to right of use assets in respect of lease agreements are equivalent to the present value (or change in present value) of the relevant lease obligation. Unless there is an interest rate implicit in the lease itself, the Group's Incremental Borrowing Rate (IBR) is used to calculate the present value of future lease payments. Estimation is required in deriving an appropriate IBR. Management believe that the best approximation for IBR is the currently applicable margin from the grid contained within the Group's rolling credit facility (RCF) agreement, added to an appropriate base rate. The Group's RCF is linked to SONIA so that is considered the most appropriate base rate to use.

The sensitivity of the lease liability to the assumption used in these estimations is indicated in note 20.

Investment property

Included within right of use assets are certain properties classified as investment properties in accordance with IAS 40. These properties are leased primarily in order to earn rentals from sub-leasing. The Group has chosen to apply the cost model to all investment property and therefore measurement is in line with IFRS 16 as described above.


	Investment property	Assets that are used directly within the business			Total £'000
	Residential property £'000	Residential property £'000	Offices £'000	Motor vehicles £'000
Gross carrying amount
At 1 January 2022	141,134	103,466	11,428	31,040	287,068
Additions*	5,631	38,441	608	8,008	52,688
Disposals	(3,019)	(5,921)	(1,529)	(1,491)	(11,960)
At 1 January 2023	143,746	135,986	10,507	37,557	327,796
Additions*	8,816	59,148	869	10,073	78,906
Disposals	(998)	(4,877)	(992)	(2,956)	(9,823)
At 31 December 2023	151,564	190,257	10,384	44,674	396,879
Depreciation
At 1 January 2022	26,203	40,406	5,399	10,111	82,119
Provided in the year	9,043	25,422	1,799	7,222	43,486
Eliminated on disposals	(2,901)	(5,516)	(1,529)	(1,295)	(11,241)
At 1 January 2023	32,345	60,312	5,669	16,038	114,364
Provided in the year	8,747	32,183	1,710	8,268	50,908
Impairments	6,223	-	-	-	6,223
Eliminated on disposals	(930)	(3,960)	(992)	(2,383)	(8,265)
At 31 December 2023	46,385	88,535	6,387	21,923	163,230
Carrying amount
At 31 December 2023	105,179	101,722	3,997	22,751	233,649
At 31 December 2022	111,401	75,674	4,838	21,519	213,432

* Additions includes both new underlying assets and remeasurement of the right of use asset for changes in the lease terms.

The Group previously sub-divided assets that are sub-leased to customers between investment property and other residential property. Having reviewed the details of other residential properties, management considers that all sub-leased properties meet the definition of investment property.

Investment property included above represents properties held by the Group primarily to earn rentals, rather than for use in the Group's other activities. The amount included in lease income in note 2 in respect of these properties is £26.5m (2022: £28.9m). Direct operating expenses of £24.0m (2022: £25.8m), excluding impairments, arose from investment property that generated rental income during the period. The carrying value of the right of use asset in respect of investment property is considered to be approximately equal to its fair value.

Impairment

In respect of its investment property, the Group has seen a deterioration in trading, predominantly as a result of increased regulation together with above-inflation maintenance and service cost increases. The poor financial performance combined with increasing interest rates were recognised by management as an indicator of impairment on certain portfolios of investment property assets.

In carrying out impairment assessments, management prepared detailed cash flow forecasts for the life of the underlying leases on these properties and discounted them using an appropriate rate, in order to estimate the value in use.

In many cases, the Group's customer contract associated with these portfolios benefits from Nominations Agreements with Local Authorities, which contain income protection clauses. The discount rate for each portfolio of properties was therefore set by reference to publicly available market yield information, adjusted for the relative risk associated with each scheme, taking account of any income protections, as well as other risk factors such as maintenance responsibilities. This resulted in a range of discount rates being applied, from 6.6% to 7.5%.

As a result of management's impairment review, several portfolios were identified where the value in use was lower than the carrying amount of the right of use asset. As such, an impairment has been applied to those properties as detailed in the table above. The impact of the impairment on the Statement of profit or loss has been recognised within cost of sales.

Included within the impairment above were two individually significant properties. The first is due to run until 2041 and its future cash flow forecast was discounted at 6.6%, resulting in an impairment of £3.3m. The second is due to continue until 2038 and its future cash flow forecast was discounted at 7.2%, resulting in an impairment of £1.8m. All other impairments in aggregate totalled £1.1m.

If all discount rates used had been 0.5 percentage points lower, the overall impairment would have been £0.8m lower. If annual net cash inflows were 10% (or £0.3m) higher across all properties, the impairment would have been £2.3m lower.

16. INVESTMENTS

Accounting policy

Investments include those over which the Group has significant influence but which it does not control. These are categorised as associates. It is presumed that the Group has significant influence where it has between 20% and 50% of the voting rights in the investee unless indicated otherwise. The Group also holds investments in joint ventures where the Group and other parties have joint control over their activities.

The basis by which associates and joint ventures are consolidated in the preliminary results is through the equity method, as outlined in the basis of consolidation.

In addition to associates and joint ventures, the Group holds investments in entities over which it does not exert significant influence. These are accounted for at fair value through profit or loss.


	Associates £'000	Other investments £'000	Total £'000
At 1 January 2022	648	65	713
Share of profit	858	-	858
Distributions received	(300)	-	(300)
At 1 January 2023	1,206	65	1,271
Share of profit	486	-	486
Distributions received	(1,135)	-	(1,135)
At 31 December 2023	557	65	622

Other investments represents the Group's 6.16% holding in Mason Topco Limited, which is mandatorily held at fair value through profit or loss. There have been no changes in the fair value of the investment during the year (2022: none).

Associates

Set out below is the investment in an associate as at 31 December 2023, which in management's opinion is significant to the Group:


	Nature of relationship	Proportion held	Country of registration	Carrying value
2023 £'000	2022 £'000
Pyramid Plus South LLP	Associate	30%	England and Wales	557	1,206

Pyramid Plus South LLP is a repairs and maintenance service provider that is central to one of the Group's contracts. The Group's client for the contract holds the remaining 70% interest in the entity.

During the year, the Group received distributions of £1.1m (2022: £0.3m) from Pyramid Plus South LLP. Summarised financial information for Pyramid Plus South LLP for the year is shown below:


	2023 £'000	2022 £'000
Revenue and profits
Revenue	24,802	21,600
Expenses	(23,183)	(18,738)
Profit for the year	1,619	2,862
Other comprehensive income	-	-
Total comprehensive income	1,619	2,862
Share of profit at 30%	486	858
Net assets
Non-current assets	-	-
Current assets	7,497	7,795
Current liabilities	(4,666)	(3,763)
Non-current liabilities	-	-
Total assets less total liabilities	2,831	4,032

Cash and cash equivalents of £1.9m (2022: £2.5m) were included in current assets above.

17. INVENTORIES

Accounting policy

Inventories are stated at the lower of cost and net realisable value. Cost is the actual purchase price of materials.

Work in progress is included in inventories after deducting any foreseeable losses and payments on account not matched with revenue. Work in progress represents costs incurred on new build residential construction projects where the eventual sale will be of the completed property. Work in progress is stated at the lower of cost and net realisable value. Cost comprises materials, direct labour and any subcontracted work that has been incurred in bringing the inventories and work in progress to their present location and condition.


	2023 £'000	2022 £'000
Materials and consumables	1,463	1,329
Work in progress	-	5,550
	1,463	6,879

The Group consumed inventories totalling £86.3m during the year (2022: £93.9m). No items are being carried at fair value less costs to sell (2022: £nil).

18. TRADE AND OTHER RECEIVABLES

Accounting policy

Trade receivables represent amounts due from customers in respect of invoices raised. They are initially measured at their transaction price and subsequently remeasured at amortised cost.

Retention assets represent amounts held by customers for a period following payment of invoices, to cover any potential defects in the work. Retention assets are included in trade receivables and are therefore initially measured at their transaction price.

Contract assets represent revenue recognised in excess of the total of payments on account and amounts invoiced.

Critical judgements and key sources of estimation uncertainty

The estimation techniques used for revenue in respect of contracting require judgements to be made about the stage of completion of certain contracts and the recovery of contract assets. Each contract is treated on its merits and subject to a regular review of the revenue and costs to complete that contract. Contract assets represent revenue recognised in excess of the total of payments on account and amounts invoiced.

However, due to the estimation uncertainty across numerous contracts each with different characteristics, it is not practical to provide a quantitative analysis of the aggregated judgements that are applied, and management does not believe that disclosing a potential range of outcomes on a consolidated basis would provide meaningful information to a reader of the accounts.


	2023 £'000	2022 £'000
Current assets
Trade receivables	23,230	21,483
Contract assets	79,703	84,797
Contract fulfilment costs	768	1,283
Prepayments and accrued income	18,929	13,257
Other debtors	4,060	7,514
Total trade and other receivables	126,690	128,334

Included in trade receivables is £3.4m (2022: £4.3m) in respect of retention payments due in more than one year.

Trade receivables are normally due within 30 to 60 days and do not bear any effective interest rate. All trade receivables and accrued income are subject to credit risk exposure.

The maximum exposure to credit risk in relation to trade receivables and accrued income at the balance sheet date is the fair value of trade receivables and accrued income. The Group's customers are primarily a mix of Local and Central Government and Housing Associations where credit risk is minimal. The Group's customer base is large and unrelated and, accordingly, the Group does not have a significant concentration of credit risk with any one counterparty.

The amounts presented in the balance sheet in relation to the Group's trade receivables and accrued income balances are presented net of loss allowances. The Group measures loss allowances at an amount equal to lifetime expected credit losses using both quantitative and qualitative information and analysis based on the Group's historical experience, and forward-looking information.

The ageing analysis of trade receivables is as follows:


	2023			2022
Gross amount due £'000	Expected credit loss £'000	Carrying value £'000	Gross amount due £'000	Expected credit loss £'000	Carrying value £'000
Not past due	20,110	(158)	19,952	18,661	(986)	17,675
Less than three months past due	2,168	(627)	1,541	3,051	(504)	2,547
More than three months past due	2,674	(937)	1,737	1,946	(685)	1,261
Total trade receivables	24,952	(1,722)	23,230	23,658	(2,175)	21,483

For expected credit losses with large organisations, such as Government bodies or Housing Associations, expected credit losses are calculated on an individual basis, taking account of all the relevant factors applicable to the amount outstanding. The Group has no history of defaults with these types of customers, so expected credit losses relate to specific disputed balances.

For individual tenant customers, expected credit losses are calculated based on the Group's historical experience of default by applying a percentage based on the age of the customer's balance.

The movement in expected credit loss during the year is shown below:


	2023 £'000	2022 £'000
At 1 January	2,175	7,006
Changes in amounts provided	1,482	1,208
Amounts utilised	(1,935)	(6,039)
At 31 December	1,722	2,175

The movement in contract assets during the year is shown below:


	2023 £'000	2022 £'000
At 1 January	84,797	97,680
Recognised on completion of performance obligations	1,050,778	906,415
Invoiced during the year	(1,055,872)	(919,298)
At 31 December	79,703	84,797

Included in other debtors is an amount of £2.3m (2022: £2.9m) recoverable from the Group's fronting insurers. The Group manages its insurance risk through a captive insurance company. Whilst the Group is effectively paying a premium to itself, the premium passes through a third party fronting insurer, which results in a matching other debtor and other creditor.

19. TRADE AND OTHER PAYABLES


	2023 £'000	2022 £'000
Trade payables	58,651	55,854
Accruals	72,147	60,278
Social security and other taxes	22,203	26,343
Contract liabilities	28,491	23,672
Other creditors	5,543	4,866
	187,035	171,013

Due to the short duration of trade payables, management considers the carrying amounts recognised in the Consolidated Balance Sheet to be a reasonable approximation of their fair value.

The movement in contract liabilities during the year is shown below:


	2023 £'000	2022 £'000
At 1 January	23,672	27,843
Revenue recognised in respect of contract liabilities	(12,015)	(24,296)
Payments received in advance of performance obligations being completed	16,834	20,125
At 31 December	28,491	23,672

Contract liabilities relate to payments received from the customer on the contract, and/or amounts invoiced to the customer in advance of the Group performing its obligations on contracts where revenue is recognised either over time or at a point in time. These amounts are expected to be recognised within revenue within one year of the balance sheet date.

Included in other creditors is an amount of £2.3m (2022: £2.9m) payable to the Group's fronting insurers as described in note 18.

20. LEASE LIABILITIES

Lease liabilities are separately presented on the face of the Consolidated Statement of Financial Position as shown below:


	2023 £'000	2022 £'000
Current	54,492	44,376
Non-current	199,948	181,045
	254,440	225,421

The Group had not committed to any leases which had not commenced at 31 December 2023. The majority of the Group's property leases contain variable lease payments that vary annually either by reference to an index, such as the Consumer Prices Index (CPI), or based on market conditions each year. The potential impact of this variation depends on future events and therefore cannot be quantified, but the Group would typically expect commensurate adjustments to income derived from these properties.

A smaller number of property leases contain termination or extension options. Management has assessed whether it is reasonably certain that the extension or termination options will be exercised, which is then reflected in the valuation.. In some cases, a portfolio of leases with similar lease terms is considered together and, where a rolling notice period is available to the Group, an average expected lease life may be applied.

The Group has elected not to recognise a lease liability for short-term leases and leases of low value. Payments made under such leases are expensed on a straight-line basis. Certain leases incorporate variable lease payments that are not included in the measurement of lease liabilities in accordance with IFRS 16. The expense relating to payments not included in the measurement of the lease liability is as follows:


	2023 £'000	2022 £'000
Short-term leases	57,281	46,683
Low value leases	948	1,096
Variable lease payments	979	1,236

The portfolio of short-term leases to which the Group is committed at the end of the reporting period is not dissimilar to the portfolio to which the above disclosure relates.

Other disclosures relating to lease liabilities are provided in the table below:


	Note	2023 £'000	2022 £'000
Depreciation of right of use assets during the year	15	50,908	43,486
Impairment of right of use assets during the year	15	6,223	-
Additions to right of use assets during the year	15	78,906	52,688
Carrying value of right of use assets at the year end	15	233,649	213,432
Interest on lease liabilities during the year	5	9,899	7,617
Total cash outflow in respect of leases during the year	25	58,048	50,827

The Group's lease liabilities are subject to changes in certain key assumptions in estimating the IBRs used to calculate the liabilities. The IBRs used during the year ranged from 5.54% to 7.47%. The impact of an increase in all IBRs applied during 2023 by 0.5 percentage points would be a £0.5m reduction in the lease liability and a £0.1m reduction in profit before tax.

21. PROVISIONS

Critical judgements and key sources of estimation uncertainty

By definition, provisions require estimates to be made of future outcomes and the eventual outflow may differ significantly from the amount recognised at the end of the year. Management have estimated provisions based on all relevant information available to them. For individually material provisions further information has been provided on the maximum likely outflow, in addition to the best estimate.

The carrying value of each class of provisions is shown below:


	2023			2022
Current £'000	Non-current £'000	Total £'000	Current £'000	Non-current £'000	Total £'000
Onerous contract provisions	1,898	6,886	8,784	-	-	-
Property provisions	520	761	1,281	475	360	835
Insurance provisions	2,623	1,388	4,011	2,305	805	3,110
Legal and other provisions	3,365	750	4,115	6,000	1,945	7,945
Total provisions	8,406	9,785	18,191	8,780	3,110	11,890

A summary of the movement in provisions during the year is shown below:


	Onerous contract provisions £'000	Property provisions £'000	Insurance provisions £'000	Legal and other provisions £'000	Total £'000
At 1 January 2023	-	835	3,110	7,945	11,890
Provided during the year	8,784	491	2,227	3,020	14,522
Utilised during the year	-	-	(1,326)	(6,850)	(8,176)
Unused amounts reversed	-	(45)	-	-	(45)
At 31 December 2023	8,784	1,281	4,011	4,115	18,191

Onerous contract provisions

During the year, the Group has identified a small number of contracts, with remaining terms ranging from less than 1 year to 33 years, under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefit expected to be received under it. These unavoidable costs are the lower of the cost of fulfilling the contract and any compensation or penalties of exiting from the contract.

The largest single component within onerous contract provisions is £4.2m relating to a single Community Housing contract which is reported within the Management segment. The remaining balance of £4.6m is attached to the Maintenance segment.

In identifying the excess of costs over expected economic benefits, the Group has prepared cash flow forecasts for the lifetime of each contract, based on management's best estimates. For contracts where the time value of money is material, these cash flow forecasts have then been discounted using an appropriate discount rate. The forecasts have modelled real cash flows and as such, a real discount rate has been applied.

Recognising that by their nature there is variability in future-looking cash flow forecasts, an appropriate risk factor has been applied when selecting the discount rates, resulting in rates that are lower than the real risk-free rate. The range of discount rates used is between 0.3% and 1.5%, depending on the relative uncertainty of the cash flows.

If the discount rates used were 0.5 percentage points higher in each case, the onerous contract provision would have been £0.3m lower.

The provisions recognised are also sensitive to the underlying cash flow forecasts. If the anticipated annual net cash outflow, ranging from £0.2m to £1.3m across the different contracts and forecast years, was 10% lower, the onerous contract provision would have been £0.9m lower.

Property provisions

Property provisions represent the expected costs of reinstating several office properties to their original condition upon termination of the lease.

Insurance provisions

The Group self-insures certain fleet and liability risks. Provisions for claims are recognised in respect of both claims received but not concluded, which are expected to be settled within one year, and claims incurred but not received, which are treated as non-current. The value of these provisions is estimated based on past experience of claims.

Legal and other provisions

Legal and other provisions primarily relate to previously completed customer contracts where management is aware of probable liabilities and future losses associated with work defects. This also includes other supply chain claims.

The opening provision at 1 January 2023 included one abnormally large claim where a former customer asserted that the Group had acted in breach of contract, the Group having previously served a notice of termination. The matter had been referred to adjudication with a total claim value of £9.3m, against which management, having considered a range of possible outcomes, had provided a sum of £5.7m, which was believed to represent the best estimate of the likely outcome. The matter concluded with a final loss of £6.6m plus interest.

The closing provision includes one customer related defects claim which is the subject of active litigation, against which management has provided £1.6m (2022: £1.5m) (against a total claim value of £6.9m). Management has received external technical support and believes this provision represents the best estimate of the likely outcome. A separate supply chain claim relating to the value of works delivered is the subject of litigation, against which management has provided £0.5m (2022: £0.5m) against a claim value of £5.1m, much of which is considered to be without merit and liability denied.

The remaining claims account for a provision of £2.0m, but the range of possible outcomes is narrow and any risk to the downside is not material.

22. FINANCIAL INSTRUMENTS

Accounting policy

The Group uses a limited number of financial instruments comprising cash and liquid resources, borrowings and various items such as trade receivables and trade payables that arise directly from its operations. The main purpose of these financial instruments is to finance the Group's operations. The Group seeks to finance its operations through a combination of retained earnings and borrowings and investing surplus cash on deposit. The Group uses financial instruments to manage the interest rate risks arising from its operations and sources of finance but has no interests in the trade of financial instruments.

Financial assets and liabilities are recognised in the Consolidated Balance Sheet when the Group becomes party to the contractual provisions of the instrument. The principal financial assets and liabilities of the Group are as follows:

Financial assets

Investments in unlisted equities that do not convey control or significant influence over the underlying entity are recognised at fair value. They are subsequently remeasured at fair value with any changes being recognised in the Consolidated Statement of Profit or Loss.

Contingent consideration is held by the Group in order to collect the associated cash flows but until the amount is determined, these are not solely payments of principal and interest and therefore these assets are measured both initially and subsequently at fair value, with any changes being recognised in the Consolidated Statement of Profit or Loss.

Loan notes and other non-current debtors are held by the Group in order to collect the associated cash flows and not for trading. They are therefore initially recognised at fair value and subsequently measured at amortised cost, less any provision for impairment.

Financial assets generated from goods or services transferred to customers are presented as either trade receivables or contract assets. All of the Group's trade receivables are short-term in nature, with payments typically due within 60 days of the works being performed. The Group's contracts with its customers therefore contain no significant financing component.

Mears recognises a loss allowance for expected credit losses on financial assets subsequently measured at amortised cost using the 'simplified approach'. Individually significant balances are reviewed separately for impairment based on the credit terms agreed with the customer. Other balances are grouped into credit risk categories and reviewed in aggregate.

Trade receivables and cash at bank and in hand are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Trade receivables are initially recorded at fair value net of transaction costs, being invoiced value less any provisional estimate for impairment should this be necessary due to a loss event. Trade receivables are subsequently remeasured at invoiced value, less an updated provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the Consolidated Statement of Profit or Loss.

Cash and cash equivalents include cash at bank and in hand and bank deposits available at short notice that are subject to an insignificant risk of changes in value. Bank overdrafts are presented as current liabilities in the Consolidated Balance Sheet but are included within cash and cash equivalents within the Statement of Cash Flows, as they are used as part of the Group's cash management process and regularly repaid. The Group also considers its revolving credit facility to be an integral part of its cash management, although this facility has not been utilised during 2022 or 2023.

Following initial recognition, financial assets are subsequently remeasured at amortised cost using the effective interest rate method.

Financial liabilities

The Group's financial liabilities are trade payables, lease liabilities, deferred and contingent consideration and other creditors. They are included in the Consolidated Balance Sheet line items 'Trade and other payables', 'Lease liabilities' and 'Other non-current liabilities'.

Bank and other borrowings are initially recognised at fair value net of transaction costs. Gains and losses arising on the repurchase, settlement or cancellation of liabilities are recognised respectively in 'Finance income' and 'Finance costs'. Borrowing costs are recognised as an expense in the period in which they are incurred with the exception of those which are directly attributable to the construction of a qualifying asset, which are capitalised as part of that asset.

Trade payables on normal terms are not interest bearing and are stated at their fair value on initial recognition and subsequently at amortised cost.

Critical judgements

Included within financial liabilities is a credit facility arising from banking arrangements to provide supplier financing. Judgement has been required to determine whether the cash flows arising from this facility are financing or operating in nature, and whether the cash flows from the financial institution are deemed to be cash flows of the Group. Management has determined that this facility is financing in nature, as it allows suppliers to receive cash earlier than they would under our normal payment cycle, and that the cash flows of the financial institution related to these transactions are, in substance, cash flows of the Group and should be reflected in the cash flow statement of the Group (see other credit facilities in note 25).


	2023 £'000	2022 £'000
Non-current assets
Fair value (level 3)
Investments - other investments	65	65
Amortised cost
Loan notes and other non-current debtors	4,458	4,073
Current assets
Amortised cost
Trade receivables	23,230	21,483
Other debtors	4,060	7,514
Short-term financial assets	7,090	1,963
Cash at bank and in hand	138,756	98,138
	173,136	129,098
Non-current liabilities
Fair value (level 3)
Contingent consideration	-	(438)
Amortised cost
Lease liabilities	(199,948)	(181,045)
Deferred consideration	-	(244)
	(199,948)	(181,289)
Current liabilities
Fair value (level 3)
Contingent consideration	(581)	-

Amortised cost
Overdrafts and other short-term borrowings	(36,699)	-
Trade payables	(58,651)	(55,854)
Lease liabilities	(54,492)	(44,376)
Other creditors	(4,710)	(4,614)
Deferred consideration	(252)	(252)
	(154,804)	(105,096)
	(177,674)	(153,587)

The amount recognised as an allowance for expected credit losses on trade receivables during 2023 was £1.5m (2022: £1.2m).

The IFRS 13 hierarchy level categorisation relates to the extent the fair value can be determined by reference to comparable market values. The classifications range from level 1, where instruments are quoted on an active market, through to level 3, where the assumptions used to arrive at fair value do not have comparable market data.

The fair values of investments in unlisted equity instruments are determined by reference to an assessment of the fair value of the entity to which they relate. This is typically based on a multiple of earnings of the underlying business.

There have been no transfers between levels during the year.

Fair value information

The fair value of the Group's financial assets and liabilities approximates to the book value as disclosed above.

Financial risk management

The Group's activities expose it to a variety of financial risks: market risk (including interest rate risk and price risk); credit risk; and liquidity risk. The main risks faced by the Group relate to the availability of funds to meet business needs and the risk of credit default by customers. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.

Risk management is carried out under policies and guidelines approved by the Board of Directors.

Borrowing facilities

The Group's borrowing facilities are drawn on as required to manage its cash needs. Banking facilities are reviewed regularly and extended and replaced in advance of their expiry.

The Group had a revolving credit facility of £70.0m with Barclays Bank PLC, HSBC Bank PLC and Citi. In order to assist with short term day-to-day treasury requirements, this facility includes an overdraft carve out with Barclays Bank PLC of £10m, which was temporarily increased to £22.3m at the year end, leaving £47.7m available to draw on the revolving credit facility.

The Group pays a margin over and above SONIA on bank borrowings when it uses its facility. The margin is based on the ratio of Group consolidated net borrowings to Group consolidated adjusted EBITDA and could have varied between 1.75% and 2.75% during the year .

Details of the Group's banking covenants are provided within the Annual Report.

Overdrafts and other short-term borrowings

At 31 December 2023, the Group had overdrafts of £25.5m (2022: £nil) and other credit facilities of £11.2m (2022: £nil). Overdrafts were utilised alongside highly liquid cash equivalents, such as money market facilities, for the purposes of cash management during the year. For the purpose of the Consolidated Cash Flow Statement overdraft facilities have been included within cash and cash equivalents.

Other credit facilities are short-term borrowings due within no more than 60 days and are also used as part of the Group's cash management process.

The entire balance of overdrafts and other short-term borrowings was repaid in full on 2 January 2024.

Interest rate risk management

The Group finances its operations through a mixture of retained profits and bank borrowings from major banking institutions at floating rates of interest based on SONIA.

The Group's policy is to accept a degree of interest rate risk, provided the effects of the various potential changes in rates remain within certain prescribed parameters.

At 31 December 2023, the Group had minimal exposure to interest rate risk relating to borrowing costs.

Liquidity risk management

The Group seeks to manage liquidity risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably.

Management monitors rolling forecasts of the Group's liquidity reserve (comprising undrawn borrowing facilities and cash and cash equivalents) on the basis of expected cash flows. This is carried out centrally for the Group as a whole in accordance with internal practice and limits.

The quantum of committed borrowing facilities of the Group is regularly reviewed and is designed to exceed forecast peak gross debt levels. For short-term working capital purposes, the Group utilises bank overdrafts as required. These facilities are regularly reviewed and are renegotiated ahead of their expiry date.

The table below shows the undiscounted maturity profile of the Group's financial liabilities:


	Within 1 year £'000	1-2 years £'000	2-5 years £'000	Over 5 years £'000	Total £'000
2023
Non-derivative financial liabilities
Overdrafts and other short-term borrowings	36,699	-	-	-	36,699
Trade payables	58,651	-	-	-	58,651
Lease liabilities	58,492	44,707	88,428	114,418	306,045
Other creditors	4,710	-	-	-	4,710
Deferred and contingent consideration	833	-	-	-	833
2022
Non-derivative financial liabilities
Trade payables	55,854	-	-	-	55,854
Lease liabilities	47,320	37,821	68,502	116,218	269,861
Other creditors	4,614	-	-	-	4,614
Deferred and contingent consideration	260	860	-	-	1,120

Credit risk management

The Group's credit risk is primarily attributable to its trade receivables, contract assets and work in progress.

Trade receivables are normally due within 30 to 60 days. Trade and other receivables included in the Consolidated Balance Sheet are stated net of an expected credit loss provision which has been estimated by management following a review of individual receivable accounts. There is no Group-wide rate of provision and provision made for debts that are overdue is based on prior default experience and known factors at the balance sheet date. Receivables are written off against the expected credit loss provision when management considers that the debt is no longer recoverable.

Housing customers are typically Local and Central Government and Housing Associations. The nature of these customers means that credit risk is minimal. Other trade receivables contain no specific concentration of credit risk as the amounts recognised represent a large number of receivables from various customers.

The Group continually monitors the position of major customers and incorporates this information into its credit risk controls. External credit ratings are obtained where appropriate.

Details of the ageing of trade receivables are shown in note 18.

Loan notes receivable

The loan notes included within non-current assets were received as part of the disposal of the Terraquest Group. They are repayable in December 2028 and accrue interest at 10% per annum. Their carrying value including accumulated interest at 31 December 2023 was £4.2m (2022: £3.8m).

Short-term financial assets

Short-term financial assets are fixed-term deposits with financial institutions held for investment purposes rather than for cash management. All short-term financial assets have a maturity at inception of 12 months or less and are held for the purpose of generating returns.

Contingent consideration receivable

The table below shows the movements in contingent consideration receivable:


			£'000
At 1 January 2022			6,531
Movement in fair value of contingent consideration			802
Received during the year			(7,333)
At 1 January 2023 and 31 December 2023			-

Deferred and contingent consideration payable

The table below shows the movements in deferred and contingent consideration payable:


	Deferred £'000	Contingent £'000	Total £'000
At 1 January 2022	-	-	-
Fair value of deferred and contingent consideration on acquisition of IRT Surveys Limited	496	438	934
At 1 January 2023	496	438	934
Unwinding of discount on deferred consideration	16	-	16
Movement in fair value of contingent consideration	-	143	143
Paid during the year	(260)	-	(260)
At 31 December 2023	252	581	833

Deferred consideration payable is initially measured at fair value by discounting the contractual amount due using a discount rate based on the assessed cost of debt for the Group. It is subsequently measured at amortised cost.

Contingent consideration payable is measured at fair value based on management's expectation of the amount that will be payable. This figure is then discounted at an appropriate rate. The value of contingent consideration could vary by up to £0.6m based on the number of active properties being managed by software developed by the acquired business at the second anniversary of acquisition.

Capital management

The Group's objectives when managing capital are:

· to safeguard the Group's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders;

· to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk; and

· to maintain an optimal capital structure to reduce the cost of capital.

The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

23. DEFERRED TAXATION

Deferred tax is calculated on temporary differences under the liability method.

Deferred tax relates to the following:


	Consolidated Balance Sheet		Consolidated Statement of Profit or Loss		Other movements
At 31 December 2023 £'000	At 31 December 2022 £'000	2023 £'000	2022 £'000	2023 £'000	2022 £'000
Pension schemes	(4,799)	(5,800)	(481)	66	1,482	2,449
Share-based payments	698	704	118	(26)	(124)	142
Tax losses	-	-	-	(249)	-	-
Provisions	-	-	-	(149)	-	-
Acquisition intangibles	(540)	(601)	61	61	-	-
Capital allowances	1,295	317	978	(330)	-	-
Leases	569	625	(56)	(43)	-	-
Fair value of software development	(128)	(143)	15	3	-	(146)
	(2,905)	(4,898)	635	(667)	1,358	2,445

Other movements are recognised in the Consolidated Statement of Comprehensive Income in respect of pension schemes and in the Consolidated Statement of Changes in Equity in respect of share-based payments.

In accordance with IFRS 2 'Share-based Payment', the Group has recognised an expense for the consumption of employee services received as consideration for share options granted. A tax deduction will not arise until the options are exercised. The tax deduction in future periods is dependent on the Company's share price at the date of exercise. The estimated future tax deduction is based on the options' intrinsic value at the balance sheet date.

The cumulative amount credited to the Consolidated Statement of Profit or Loss is limited to the tax effect of the associated cumulative share-based payment expense. The excess has been credited directly to equity. This is presented in the Consolidated Statement of Comprehensive Income.

In addition to those recognised, unused tax losses totalling £1.4m (2022: £25.5m) have not been recognised as management does not consider that it is probable that they will be recovered.

Intangible assets acquired as part of a business combination are capitalised at fair value at the date of the acquisition and amortised over their useful economic lives. The UK tax regime calculates tax using the individual financial statements of the members of the Group and not the consolidated accounts. Hence, the tax base of acquisition intangible assets arising on consolidation is £nil. Furthermore, no UK tax relief is available on the majority of acquisition intangibles within individual entities, so the tax base of these assets is also £nil. The estimated tax effect of this £nil tax base is accounted for as a deferred tax liability which is released over the period of amortisation of the associated acquisition intangible asset.

24. SHARE CAPITAL AND RESERVES

Classes of reserves

Share capital represents the nominal value of shares that have been issued.

Share premium represents the difference between the nominal value of shares issued and the total consideration received.

Treasury shares are equity instruments of the Group that are reacquired. They are recognised at cost and deducted from equity as a separate reserve.

The share-based payment reserve represents employee remuneration which is credited to the share-based payment reserve until the related share options are exercised. Upon exercise the share-based payment reserve is transferred to retained earnings.

The merger reserve relates to the difference between the nominal value and total consideration in respect of acquisitions, where the Company was entitled to the merger relief offered by the Companies Act 2006.

Share capital


	2023 £'000	2022 £'000
Allotted, called up and fully paid
At 1 January: 111,000,889 (2022: 110,926,510) ordinary shares of 1p each	1,110	1,109
Issue of 2,713,031 (2022: 74,379) shares on exercise of share options	27	1
Cancellation of 12,162,838 (2022: nil) shares following share buybacks	(121)	-
At 31 December: 101,551,082 (2022: 111,000,889) ordinary shares of 1p each	1,016	1,110

During the year 2,713,031 (2022: 74,379) ordinary 1p shares were issued in respect of share options exercised. In addition, 12,162,838 (2022: nil) shares were repurchased by the Group and cancelled.

Share premium


			£'000
At 1 January 2022			82,265
Issue of shares on exercise of share options			86
At 1 January 2023			82,351
Issue of shares on exercise of share options			2,530
Capital reduction			(82,549)
At 31 December 2023			2,332

On 11 October 2023, following approval by the High Court, the Group cancelled the entire amount of its share premium account, resulting in an increase in distributable reserves of £82.5m. The balance at 31 December 2023 reflects the excess of the exercise price over the nominal value of shares issued after 11 October 2023.

Treasury shares


	Thousands	£'000
At 1 January 2022 and 1 January 2023	-	-
Acquired by the EBT	1,891	5,122
At 31 December 2023	1,891	5,122

25. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT

The following non-operating cash flow adjustments have been made to the result for the year before tax:


	2023 £'000	2022 £'000
Depreciation	58,213	51,508
Impairment of right of use assets	6,223	-
Profit on disposal of assets	(101)	(224)
Amortisation	1,879	2,299
Share-based payments	1,040	599
IAS 19 pension movement	(758)	859
Share of profits of associates	(486)	(858)
Finance income	(5,939)	(2,033)
Finance cost	11,182	8,374
Total	71,253	60,524

Movements in financing liabilities during the year are as follows:


	Revolving credit facility £'000	Other credit facilities £'000	Lease liabilities £'000	Total £'000
At 1 January 2022	-	-	216,890	216,890
Inception of new leases*	-	-	52,688	52,688
Termination of leases	-	-	(947)	(947)
Interest	424	-	7,617	8,041
Arrangement fees	201	-	-	201
Cash outflows including in respect of capital and interest	(625)	-	(50,827)	(51,452)
At 1 January 2023	-	-	225,421	225,421
Inception of new leases*	-	-	78,907	78,907
Termination of leases	-	-	(1,739)	(1,739)
Increase in facility	-	11,244	-	11,244
Interest	502	-	9,899	10,401
Arrangement fees	38	-	-	38
Cash outflows including in respect of capital and interest	(540)	-	(58,048)	(58,588)
At 31 December 2023	-	11,244	254,440	265,684

* Including modifications to existing leases resulting in a change in lease liabilities.

Cash outflows in respect of lease liabilities include £9.9m (2022: £7.6m) in respect of interest paid and £48.1m (2022: £43.2m) in respect of discharge of the underlying lease liabilities.

Other credit facilities are banking facilities that allow suppliers to receive cash from the financial institution at a date earlier than our normal payment cycle. The increase in the facility is a net movement over the year (see note 22, critical judgements).

For the purpose of the Consolidated Cash Flow Statement, cash and cash equivalents comprise the following at 31 December:


	2023 £'000	2022 £'000
Bank and cash	2,755	98,138
Readily available deposits	136,000	-
	138,755	98,138
Bank overdrafts	(25,454)	-
Cash and cash equivalents	113,301	98,138

26. PENSIONS

Accounting policy

Retirement benefit obligations

The Group operates both defined benefit and defined contribution pension schemes as follows:

Defined contribution pensions

A defined contribution plan is a pension plan under which the Group pays fixed contributions to an independent entity. The Group has no legal obligations to pay further contributions after payment of the fixed contribution.

The contributions recognised in respect of defined contribution plans are expensed as they fall due. Liabilities and assets may be recognised if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short-term nature.

The assets of the schemes are held separately from those of the Group in an independently administered fund.

Defined benefit pensions

The Group contributes to defined benefit schemes which require contributions to be made to separately administered funds.

A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligations for any benefits from this kind of pension plan remain with the Group, even if plan assets for funding the defined benefit plan have been set aside.

Scheme liabilities are measured using the projected unit funding method, applying the principal actuarial assumptions at the balance sheet date. Assets are measured at market value. In accordance with IFRIC 14, the asset that is recognised is restricted to the amount by which the IAS 19 service cost is expected, over the lifetime of the scheme, to exceed funding contributions payable in respect of accruing benefits, or to the amount of any unconditional right to a refund, if greater..

Where the Group has a contractual obligation to make good any deficit in its share of a Local Government Pension Scheme (LGPS) but also has the right to recover the costs of making good any deficit from the Group's client, the fair value of that guarantee asset has been recognised and disclosed. Movements in the guarantee asset are taken to the Consolidated Statement of Profit or Loss and to the Consolidated Statement of Comprehensive Income to match the movement in pension assets and liabilities.

The Group recognises the pension liability and guarantee assets separately on the face of the Consolidated Balance Sheet.

Actuarial gains and losses are taken to the Consolidated Statement of Comprehensive Income as incurred. For this purpose, actuarial gains and losses comprise both the effects of changes in actuarial assumptions and experience adjustments arising because of differences between the previous actuarial assumptions and what has actually occurred.

Other movements in the net surplus or deficit are recognised in the Consolidated Statement of Profit or Loss, including the current service cost, any past service cost and the effect of curtailments or settlements. The net interest cost is also charged to the Consolidated Statement of Profit or Loss. The amount charged to the Consolidated Statement of Profit or Loss in respect of these plans is included within operating costs.

When the Group ceases its participation in a defined benefit pension scheme, the difference between the carrying value of the scheme as calculated on an IAS 19 basis and any deficit payment or surplus receipt due are recognised in the Consolidated Statement of Profit or Loss as a settlement.

The Group's contributions to the scheme are paid in accordance with the rules of the scheme and the recommendations of the scheme actuary.

Defined benefit assets

Assets for Group schemes are based on the latest asset information provided by the scheme administrators.

Scheme assets for Other schemes have been estimated by rolling forward the published asset position from the previous year using market index returns over the period. This is considered to provide a good estimate of the fair value of the scheme assets and the values will be updated to actuals each time a triennial valuation takes place.

Defined benefit liabilities

A number of key estimates have been made, which are given below, and which are largely dependent on factors outside the control of the Group:

· inflation rates;

· mortality;

· discount rate; and

· salary and pension increases.

Details of the particular estimates used are included in this note. Sensitivity analysis for these key estimates is included below.

Where the Group has a contractual obligation to make good any deficit in its share of an LGPS but also has the right to recover the costs of making good any deficit from the Group's client, the fair value of that asset has been recognised and disclosed. The right to recover costs is limited to exclude situations where the Group causes the scheme to incur service costs in excess of those which would have been incurred were the members employed within Local Government. Management has made judgements in respect of whether any of the deficit is as a result of such situations.

The right to recover costs is also limited to situations where any cap on employer contributions to be suffered by the Group is not set so as to contribute to reducing the deficit in the scheme. Management, in conjunction with the scheme actuaries, has made judgements in respect of the predicted future service cost and contributions to the scheme to reflect this in the fair value of the asset recognised.

Key sources of estimation uncertainty

The net position on defined benefit pension schemes is a key source of estimation uncertainty. Given the importance of this area and to ensure appropriate estimates are made based on the most relevant information available, management has continued to engage with third party advisers in assessing each of the underlying assumptions. The discount rate is derived from the return on corporate bond yields, and whilst this is largely observable, any change in discount rates in the future could have a material impact on the carrying value of the defined benefit obligation. Similarly, inflation rates and mortality assumptions impact the defined benefit obligation as they are used to model future salary increases and the duration of pension payments. Whilst current assumptions use projected future inflation rates and the most up to date information available on expected mortality, if these estimates change, the defined benefit obligation could also change materially in future periods.

Defined contribution schemes

The Group operates a defined contribution Group personal pension scheme for the benefit of certain employees. The Group contributes to personal pension schemes of certain Directors and senior employees. The Group operates a stakeholder pension plan available to all employees. During the year, the Group contributed £4.5m (2022: £4.4m) to these schemes.

Defined benefit schemes

The Group participated in 16 (2022: 17) principal defined benefit schemes on behalf of a number of employees which require contributions to be made to separately administered funds.

These pension schemes are operated on behalf of Mears Group PLC, Mears Limited, Morrison Facilities Services Limited, Mears Extra Care Limited and their subsidiary undertakings. The assets of the schemes are administered by trustees in funds independent from the assets of the Group.

The Group schemes are no longer open to new members and have no particular concentration of investments, so expose the Group only to typical risks associated with defined benefit pension schemes including the risk that investments underperform compared with movements in the scheme liabilities. The Group has an unconditional right to a refund of any surplus within the Group schemes and has therefore recognised those surpluses in accordance with IFRIC 14

Management is aware of the High Court ruling in the case of Virgin Media Ltd v NTL Pension Trustees II Ltd & Others, regarding amendments to benefits for contracted out schemes. The Group is waiting for the outcome of an appeal scheduled for June 2024, as well as confirmation from the Government as to whether it intends to issue new regulations in response. The pension scheme administrators and trustees have not as yet carried out a search or review of historical actuarial certification dating back to 1997 and, as such, management is not in a position to assess whether either Group scheme will be impacted, or to quantify any impact. It remains unclear whether this case could have an impact on the Other schemes in which the Group participates.

In certain cases, the Group will participate under Admitted Body status in the LGPS. The Group will contribute for a finite period until the end of the particular contract. The Group is required to pay regular contributions as detailed in the scheme's schedule of contributions. In some cases, these contributions are capped and any excess can be recovered from the body from which the employees originally transferred. Where the Group has a contractual right to recover the costs of making good any deficit in the scheme from the Group's client, the fair value of that asset has been recognised as a separate pension guarantee asset. Certain judgements around the value of this asset have been made and are discussed in the judgements and estimates disclosure within the accounting policies.

Upon exiting an LGPS, the surplus or deficit position of the scheme will be calculated by the Scheme Actuary on a funding basis. This is a different basis from IAS 19 and therefore may result in a different surplus or deficit position. Where the scheme is in surplus on a funding basis on exit, the pension authority has discretion over whether and to what extent the surplus will be distributed to the outgoing employer.

The disclosures in respect of the two (2022: two) Group defined benefit schemes and the 14 (2022: 15) other defined benefit schemes in this note have been aggregated. Details of movements in pension guarantee assets are presented in a separate table.

The costs and liabilities of the schemes are based on actuarial valuations. The latest full actuarial valuations for the schemes were updated to 31 December 2023 by qualified independent actuaries using the projected unit funding method.

The principal actuarial assumptions at the balance sheet date are as follows:


	2023 £'000	2022 £'000
Rate of increase of salaries	2.80%	3.00%
Rate of increase for pensions in payment - based on CPI with a cap of 5%	2.40%	2.55%
Rate of increase for pensions in payment - based on RPI with a cap of 5%	2.70%	2.80%
Rate of increase for pensions in payment - based on CPI with a cap of 3%	2.00%	2.05%
Rate of increase for pensions in payment - based on RPI with a cap of 3%	2.15%	2.20%
Discount rate	4.50%	4.75%
Retail prices inflation	2.80%	3.00%
Consumer prices inflation	2.40%	2.60%
Life expectancy for a 65-year-old male*	21.0 years	21.5 years
Life expectancy for a 65-year-old female*	23.6 years	24.1 years

* This assumption is set on a scheme-by-scheme basis, taking into account the demographics of the relevant members. The figures disclosed are an average across all schemes.

The amounts recognised in the Consolidated Balance Sheet are:


	2023			2022
Group schemes £'000	Other schemes £'000	Total £'000	Group schemes £'000	Other schemes £'000	Total £'000
Quoted assets
Equities	1,473	45,399	46,872	-	59,914	59,914
Bonds	94,184	17,576	111,760	103,829	21,380	125,209
Property	-	520	520	-	957	957
Pooled investment vehicles
Multi-asset funds	20,381	470	20,851	17,417	1,068	18,485
Alternative asset funds	2,724	-	2,724	4,783	78	4,861
Return seeking funds	1,923	784	2,707	2,035	746	2,781
Other assets
Equities	-	14,507	14,507	-	14,447	14,447
Bonds	-	4,121	4,121	-	4,004	4,004
Property	2,008	9,137	11,145	4,193	10,174	14,367
Derivatives	2,790	-	2,790	1,822	291	2,113
Cash and other	6,040	19,049	25,089	6,153	20,639	26,792
Investment liabilities
Derivatives	(2,029)	-	(2,029)	(12,209)	(9)	(12,218)
Group's estimated asset share	129,494	111,563	241,057	128,023	133,689	261,712
Present value of funded scheme liabilities	(109,659)	(83,342)	(193,001)	(104,351)	(98,412)	(202,763)
Pension surplus/deficit	19,835	28,221	48,056	23,672	35,277	58,949
Scheme surpluses not recognised as assets	-	(28,393)	(28,393)	-	(38,413)	(38,413)
Pension asset/(liability) recognised	19,835	(172)	19,663	23,672	(3,136)	20,536
Pension guarantee assets	-	-	-	-	3,136	3,136

The amounts recognised in the Consolidated Statement of Profit or Loss are as follows:


	2023			2022
Group schemes £'000	Other schemes £'000	Total £'000	Group schemes £'000	Other schemes £'000	Total £'000
Current service cost	843	1,595	2,438	1,705	3,553	5,258
Settlement and curtailment	-	58	58	-	(242)	(242)
Administration costs	347	-	347	409	-	409
Total operating charge	1,190	1,653	2,843	2,114	3,311	5,425
Net interest	(1,162)	(1,528)	(2,690)	(769)	(464)	(1,233)
Effects of limitation of recognisable surplus related to net interest	-	1,528	1,528	-	643	643
Total charged to the result for the year	28	1,653	1,681	1,345	3,490	4,835

Actuarial gains and losses recognised in other comprehensive income (OCI) are as follows:


	2023			2022
Group schemes £'000	Other schemes £'000	Total £'000	Group schemes £'000	Other schemes £'000	Total £'000
Return on plan assets in (below)/above that recorded in net interest	(1,877)	7,741	5,864	(70,326)	(25,802)	(96,128)
Actuarial gain/(loss) arising from changes in demographic assumptions	1,840	202	2,042	8	(34)	(26)
Actuarial (loss)/gain arising from changes in financial assumptions	(2,058)	(579)	(2,637)	58,597	86,474	145,071
Actuarial loss arising from liability experience	(3,671)	(11,547)	(15,218)	(2,994)	(737)	(3,731)
Effects of limitation of recognisable surplus related to OCI movements	-	4,428	4,428	-	(48,227)	(48,227)
Total (losses)/gains recognised in OCI	(5,766)	245	(5,521)	(14,715)	11,674	(3,041)

Changes in the present value of the defined benefit obligations are as follows:


	2023			2022
Group schemes £'000	Other schemes £'000	Total £'000	Group schemes £'000	Other schemes £'000	Total £'000
Present value of obligations at 1 January	104,351	98,412	202,763	159,261	275,828	435,089
Current service cost	843	1,595	2,438	1,705	3,553	5,258
Interest on obligations	4,855	3,205	8,060	3,144	4,094	7,238
Plan participants' contributions	201	455	656	210	470	680
Benefits paid	(4,480)	(1,505)	(5,985)	(4,358)	(6,407)	(10,765)
Contract transfer	-	(30,284)	(30,284)	-	(92,419)	(92,419)
Settlements	-	(460)	(460)	-	(1,004)	(1,004)
Actuarial (gain)/loss arising from changes in demographic assumptions	(1,840)	(202)	(2,042)	(8)	34	26
Actuarial loss/(gain) arising from changes in financial assumptions	2,058	579	2,637	(58,597)	(86,474)	(145,071)
Actuarial loss arising from liability experience	3,671	11,547	15,218	2,994	737	3,731
Present value of obligations at 31 December	109,659	83,342	193,001	104,351	98,412	202,763

Changes in the fair value of the plan assets are as follows:


	2023			2022
Group schemes £'000	Other schemes £'000	Total £'000	Group schemes £'000	Other schemes £'000	Total £'000
Fair value of plan assets at 1 January	128,023	133,689	261,712	196,912	296,571	493,483
Expected return on plan assets	6,017	4,733	10,750	3,913	4,558	8,471
Employer's contributions	1,957	1,236	3,193	2,081	1,432	3,513
Plan participants' contributions	201	455	656	210	470	680
Benefits paid	(4,480)	(1,505)	(5,985)	(4,358)	(6,407)	(10,765)
Scheme administration costs	(347)	-	(347)	(409)	-	(409)
Contract transfer	-	(33,782)	(33,782)	-	(136,371)	(136,371)
Settlements	-	(1,004)	(1,004)	-	(762)	(762)
Return on plan assets (below)/above that recorded in net interest	(1,877)	7,741	5,864	(70,326)	(25,802)	(96,128)
Fair value of plan assets at 31 December	129,494	111,563	241,057	128,023	133,689	261,712

Changes in the fair value of guarantee assets are as follows:


	2023 £'000	2022 £'000
Fair value of guarantee assets at 1 January	3,136	12,975
Transferred in on scheme entry	-	525
Transferred out on scheme exit	(3,136)	(4,768)
Recognised in the Consolidated Statement of Profit or Loss
Guarantee asset movement in respect of service cost	408	1,053
Guarantee asset movement in respect of net interest	-	105
Recognised in other comprehensive income
Guarantee asset movement in respect of actuarial losses	(408)	(6,754)
Fair value of guarantee assets at 31 December	-	3,136

Funding arrangements are agreed for each of the Group's defined benefit pension schemes with their respective trustees. The employer's contributions expected to be paid during the financial year ending 31 December 2024 amount to £3.2m.

Each of the schemes manages risks through a variety of methods and strategies to limit downside in falls in equity markets, movement in inflation and movement in interest rates.

The Group's defined benefit obligation is sensitive to changes in certain key assumptions. The sensitivity analysis below, prepared using the same methods and assumptions used above, shows how a reasonably possible increase or decrease in a particular assumption, in isolation, results in an increase or decrease in the present value of the defined benefit obligation as at 31 December 2023. This analysis excludes the impact on pension schemes with a guarantee in place as there would be no net impact on the balance sheet for these schemes.


	£'000	£'000
Rate of inflation - decrease/increase by 0.1%	(1,766)	1,766
Rate of increase in salaries - decrease/increase by 0.1%	(380)	380
Discount rate - decrease/increase by 0.1%	2,110	(2,110)
Life expectancy - decrease/increase by 1 year	(5,480)	5,480

27. CAPITAL COMMITMENTS

The Group had no capital commitments at 31 December 2023 or at 31 December 2022.

28. CONTINGENT LIABILITIES

The Group has guaranteed that it will complete certain Group contracts that it has commenced. At 31 December 2023 these guarantees amounted to £11.1m (2022: £13.1m).

The Group had no other contingent liabilities at 31 December 2023 or at 31 December 2022.

29. RELATED PARTY TRANSACTIONS

Identity of related parties

The Group has a related party relationship with its pension schemes, its subsidiaries and its Directors.

Pension schemes

Details of contributions to pension schemes are set out in note 26.

Subsidiaries

The Group has a central treasury arrangement in which all subsidiaries participate. Management does not consider it meaningful to set out details of transfers made in respect of this treasury arrangement between companies, nor does it consider it meaningful to set out details of interest or dividend payments made within the Group.

Transactions with key management personnel

The Group has identified key management personnel as the Directors of Mears Group PLC.

Key management personnel held the following percentage of voting shares in Mears Group PLC:


	2023 %	2022 %
Directors	0.3	0.5

Key management personnel's compensation is as follows:


	2023 £'000	2022 £'000
Salaries including social security costs	1,783	1,714
Contributions to defined contribution pension schemes	56	134
Share-based payments	694	434
	2,533	2,282

Further details of Directors' remuneration are disclosed within the Remuneration Report.

Dividends totalling £0.04m (2022: £0.06m) were paid to Directors during the year.

Transactions with other related parties

During the year the Group provided maintenance services to Pyramid Plus South LLP, an entity in which the Group is a 30% member, totalling £12.1m (2022: £10.2m). Pyramid Plus South LLP also made recharges of certain staff costs to the Group totalling £0.2m (2022: £0.2m). At 31 December 2023, £1.4m (2022: £1.0m) was due to the Group in respect of these transactions. Pyramid Plus also owed the Group £0.1m (2022: £0.6m) in respect of agreed distributions.

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AI Terminal

MEARS GROUP PLC

4877_10-k_2024-04-11_0db86c2c-83cf-4481-860f-67bb64aca7c2.html

Mears Group PLC

ALTERNATIVE PERFORMANCE MEASURES (APMs)

EARNINGS PER SHARE (EPS)

NET CASH/(DEBT)

IFRS 16 - LEASE ACCOUNTING

TAXATION

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

BALANCE SHEET

DEFINED BENEFIT PENSION ARRANGEMENTS

CASH FLOW AND WORKING CAPITAL MANAGEMENT

SHARE BUYBACKS

BANKING AND FINANCIAL COVENANTS

1. ACCOUNTING POLICIES

Basis of preparation

Basis of consolidation

Going concern

The Directors do not consider going concern to be a critical accounting judgement. In reaching this determination, the Directors have taken account of the Group's trading for 2023 and the budget for 2024.

The Board approved a budget for 2024 which reflects margin and profit growth compared to the prior year. The 2024 budget is considered to be the base case projection for assessing Going Concern and is based on the following assumptions:

· Forecast built up on a contract-by-contract basis for the next twelve months and rolled forward. The forecast for 2024 is based upon revenues generated from existing customer relationships, and a business that is generating contract margins that are in-line with recent run-rates.

· The forecast assumes no new work is secured. The base case assumes that contracts are resecured on retender, but reflects some revenue reduction from existing clients, when it is currently anticipated that there may be no further opportunity upon expiry of the current contract.

· The model also reflects the normalisation of the Asylum (AASC) contract, with revenues reducing to a level closer to the original expectation.

· The model assumes no significant changes in working capital performance.

· The model assumes small scale property purchases to augment the delivery of the AASC contract.

· Future dividends continue in line with current policy.

· A share buyback programme is assumed to be completed equating to 10% of the issued share capital at the start of the current financial year. No further buybacks have been assumed beyond the current shareholder authority.

The Group is well positioned, underpinned by the non-discretionary nature of the Group's activities and public sector client group. The Board has communicated its capital allocation policy to stakeholders, and a key pillar of this policy is to maintain a net cash position on a daily basis.

In making its assessment of Going Concern, the Board has confirmed that there have been no post balance sheet changes that have a material impact on the business or affect liquidity.

The Directors have considered three scenarios and the following sensitivities have been applied to each downside case:

· Downside case 1: a significant reduction of 50% in revenue relating to the Group's largest contract (AASC).

· Downside case 3: an event linked to a Cyber breach, impacting upon lead operating systems causing an additional 20-days revenue tied up in working capital.

The Viability Review concluded that climate-related risks would not have a significant impact on the business within the five-year viability review period. As such, climate was not modelled in respect of the shorter Going Concern review period.

In the most extreme reverse stress test:

Fair value

Use of judgements and estimates

2. REVENUE

Repair and maintenance contracts

Contracting projects

Property income

Care services

Other

Key sources of estimation uncertainty

Critical judgements in applying the Group's accounting policies

3. SEGMENT REPORTING

4. OPERATING COSTS

5. FINANCE INCOME AND FINANCE COSTS

6. EMPLOYEES

7. SHARE-BASED EMPLOYEE REMUNERATION

Sharesave plan (All-employee scheme)

Company Share Option Plan (Executive scheme)

Long-Term Incentive Plan (Executive scheme)

Deferred Share Bonus Plan (Executive scheme)

8. TAX EXPENSE

9. DISCONTINUED ACTIVITIES

10. DIVIDENDS

11. EARNINGS PER SHARE

12. GOODWILL

Impairment

13. OTHER INTANGIBLE ASSETS

14. PROPERTY, PLANT AND EQUIPMENT

15. RIGHT OF USE ASSETS

Critical judgements in applying the Group's accounting policies

Key sources of estimation uncertainty

Investment property

16. INVESTMENTS

Associates

17. INVENTORIES

18. TRADE AND OTHER RECEIVABLES

Critical judgements and key sources of estimation uncertainty

19. TRADE AND OTHER PAYABLES

20. LEASE LIABILITIES

21. PROVISIONS

22. FINANCIAL INSTRUMENTS

Financial assets

Financial liabilities

Critical judgements

Fair value information

Financial risk management