Mears : Annual Report 31 Dec 2023

Strategic report

1. Highlights
2. Chairman's statement

4 A Q&A with our Chief Executive Officer, Lucas Critchley

1. Chief Executive Officer's review

1. Our strategy

1. Strategy in action

1. Our value creation model

1. Key performance indicators

1. Stakeholder engagement

1. Section 172 statement
2. Sustainability

26 Task Force on Climate-related Financial Disclosures (TCFD)

36 Financial review

43 Financial viability review

1. Non-financialinformation and sustainability statement
2. Risk management

50 Principal risks and uncertainties

Corporate governance

1. Chairman's introduction

1. Board of Directors

1. Roles and responsibilities

1. Our corporate governance compliance statement
2. Corporate governance framework
3. Board activities

1. Stakeholder engagement
2. Board composition, development and evaluation
3. Induction in focus
4. Report of the Nominations Committee

68 Report of the Audit and Risk Committee

76 Report of the Remuneration Committee

97 Report of the Directors

100 Statement of Directors' responsibilities

Financial statements

1. Consolidated statement of profit or loss
2. Consolidated statement of comprehensive income
3. Consolidated balance sheet
4. Consolidated cash flow statement
5. Consolidated statement of changes in equity
6. Notes to the financial statements
   - Group

1. Parent Company balance sheet
2. Parent Company statement of changes in equity
3. Notes to the financial statements
   - Company

1. Independent auditor's report

1. Five-yearrecord (unaudited)

Shareholder information

IBC Shareholder and corporate information

Financial and strategic highlights

Reconciliations between the statutory figures and the alternative performance measures are detailed on pages 36-38 of the Financial Review.

• Revenues increased by 14% to a record level of £1.09bn
• Continued strong progression in the adjusted operating margin increasing to 4.7% compared to 3.7% in the prior year
• Final dividend proposed will bring the total for the year to 13.00p, an increase of 24%
• During FY23, the Board returned surplus capital of c.£33m to shareholders, through a buyback programme of on-market purchases
• New bidding targets secured with an aggregate contract value of around £175m, at a bid conversion rate of over 70%
• Successful SHDF Wave 2 grant applications of £40m, which will contribute to a total works value of around £120m to be delivered over the course of 2024 and 2025. There will be additional opportunities for the Group in the interim Wave 2.2 and Waves 3 and 4 of the SHDF funding applications
• Listed in the top 10 of the Sunday Times Best Big Companies to Work For
• The Group was awarded its 7th RoSPA Order of Distinction and its 21st consecutive Gold Award

Healthy planet

• 97.3% of waste diverted from landfill
• 3% reduction in Scope 1 and
  2 CO2 emissions
• We maintained an impressive SHDF win rate, supporting nine clients to deliver domestic retrofit solutions to 3,500 homes by the end of 2025
• Delivery of 59 green space social value projects within the communities we serve

Improving lives

• We delivered £108m of economic and social value, as measured by the Social Value Portal, which equates to £20,000 per employee
• The Mears Foundation supported over 100 community projects in the year with £200k plus of funding allocated. These projects included work to support digital inclusion and improve the welfare of asylum seekers

Good governance

• We achieved Cyber Essentials and Cyber Essentials Plus, the first security accreditation for the entire Group
• We launched our sustainable procurement strategy

Read about ESG on pages 23-25

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

1. 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.

Jim Clarke

Chairman

10 April 2024

The Group is recognised as a leading housing specialist to the public sector, and there is an increasing reliance upon Mears by our Local and Central Government clients

for the Group's expertise and problem-solving capabilities."

Lucas Critchley

Chief Executive Officer

Q. There have been several changes to the Board over the past year - what can we expect from Mears under this

new leadership?

I have been fortunate to have the opportunity to work closely with the pre-existing and long-standing Directors for many years. As such, I have already played a significant part in establishing our strategy and maintaining our culture. I am clear on what is needed to continue the successful progression of Mears and I am lucky that I take on the Chief Executive Officer role at a time where the Group is so well placed, and I remain completely behind our established and focused strategy. The management team working alongside me is also strong, and I can look with pride at the strength of our business at all levels from grass roots upwards. In terms of changes to the Non-Executive Board members,

I am delighted to have an experienced and settled Board, chaired by Jim Clarke, who was previously Chair of the Audit and Risk Committee, and the continuity that brings will be important to our future success.

Q. What progress has Mears made on its commitment to be the most socially responsible business in the public sector by 2025?

I am very pleased with progress here. We are increasingly recognised for our huge commitment to all ESG matters. This is covered fully within the ESG section of this report. The ultimate test is the willingness of clients to award us work and to retain the work we have. Again, this report demonstrates excellent progress, and we simply would not have been successful without the increasingly positive reputation that the business has built over many years. Our workforce outcomes are stronger than ever, and we have a clear path to reduce our carbon emissions. We are proud of how clients have entrusted us in supporting them to reduce the carbon within their own housing stock. There is undoubtedly a shift in our core markets towards ESG playing a greater role in procurement processes and this can only be positive for Mears.

Q. Accommodation provision for those seeking asylum in the UK continues to present challenges - how do you see the future developing?

As mentioned in an earlier question, this is difficult to predict given current and future Government policy as well as the continuing political and economic uncertainty we see in so many parts of the world. Mears also supports people who have entitlement to settle in the UK such as under the Afghan resettlement scheme. Overall, we are taking a cautious approach to demand, as indeed we have done throughout 2023. Having said that we again did see greater numbers than expected in 2023 and despite this we have maintained a good level of service under challenging circumstances.

Q. How are you planning to improve on your current position in the Sunday Times' top 25 Best Big Companies to Work For?

Finishing 8th in 2023 Best Companies across the UK was our best ever performance. During 2023, we have seen a reduction in staff turnover and are benefiting from a low number of current vacancies across the Group which brings stability. We recognise that having a skilled, motivated and well led workforce is the best single way to ensure positive customer service and strong financial outcomes. As such the development of our workforce will remain at the top of my priorities. We have a comprehensive programme for 2024 across staff development, equality, diversity and inclusion, health and wellbeing and benefit improvements. Continued investment in leadership skills development remains

a priority, as we will ensure that we have the right people for today and for tomorrow.

Q. There seems to be increasing focus on regulation and compliance. Is this a threat or an opportunity?

Our clients are under pressure to improve compliance, not only in traditional areas such as gas, electrical and fire safety but also in new focus areas such as around damp and mould and carbon reduction and monitoring. We are already supporting clients in this area, helping them quickly resolve any damp and mould cases that are identified but we believe there may be opportunity to do more. We are also using new in-home technology to give early warning and address risk. 2024 will see Mears fully investigate the compliance opportunity and establish whether further investment would be beneficial.

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 financial statements.

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:

• 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.
• 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 £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.

Mears Group PLC Annual Report and Accounts 2023 - 7

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 combined with 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.

Lucas Critchley

Chief Executive Officer

10 April 2024