Since providing an initial update on 25 March 2020, Mears has made excellent progress in adjusting the business to address the current challenges whilst ensuring that the Group is well positioned once the UK sees a return towards normality. The Group’s primary focus is the safety and well-being of our customers and staff and to ensure continuity of service as far as possible. The Group has quickly adapted to new working practices, following and often exceeding Government guidelines. This has been enabled by our long established cultural focus on safety, service and social responsibility.
Normally, the Group’s housing maintenance activities would account for around two-thirds of Group revenues. These services are largely non-discretionary and provide a consistent and highly visible revenue stream. However in the current climate, we have worked with Local Authority and Housing Association clients to agree to defer works and only to deliver an emergency service. The Group has secured interim arrangements with the majority of maintenance clients which, together with the use of the Government's furlough scheme, ensure recovery of direct labour and local overheads. This has substantially reduced the financial downside risk. The Group will continue dialogue with each client in respect of transitioning services away from a full lockdown as Government guidance changes and the Board will provide further updates to the market as circumstances change.
The Group’s housing management activities normally amount to around one-quarter of Group revenues. There is no reduction in demand in this area, given the large numbers of vulnerable people, who often need daily support. The challenge is to continue to support vulnerable service users whilst adhering to the strict rules around how our employees can safely interact with colleagues and service users. Indeed, within the Group’s Asylum contract, volume numbers are increasing, with new service users entering the system and few exiting. Whilst the requirement for additional accommodation is challenging in the short-term from an operational perspective, the contractual mechanism reduces much of the financial risk.
The Group’s development activities would normally account for around five per cent. of Group revenue. These activities have been mothballed, and action taken to immediately reduce the fixed cost base. This area is considered low risk from both an operational and financial standpoint. The working capital already absorbed in this area is secure but will unwind over a longer time horizon than originally envisaged.
The Group’s care activities account for the balance of Group revenues and continue to deliver service as normal. The Board is very appreciative of the hard work and professionalism of the Care team where we continue to provide an excellent service to a particularly vulnerable group of service users. The Group has successfully used every avenue possible to ensure our staff have the PPE needed to carry out their work and to support them in every way we can. Feedback from our customers has been exceptionally positive.
David Miles, Chief Executive Officer:
The Group has made excellent progress in taking the necessary steps to address these current challenges. Whilst it is not possible to predict the future with certainty, I am confident as to the financial stability and the long-term wellbeing of the Group. I am extremely proud of the professionalism and hard work shown by the Mears team in the most challenging of circumstances.
Excellent progress has been made in mitigating the financial impact of the operational changes described above. The Group believes that operating losses during the full lockdown period, where an emergency only service is being provided, will be modest, and a small positive free cash flow should be generated.
The Group has taken advantage of a number of reliefs made available by Central Government. The Group has furloughed staff where appropriate and only where staff costs could not be recovered through our customer contracts. The Group has also enjoyed the benefit of the deferral of its VAT liability for the March 2020 quarter, which now becomes payable in March 2021.
Liquidity and funding
The Group reported average daily net debt in 2019 of £114.4m. However, following the mobilisation of the Group’s Asylum contract, average net debt during the last quarter of 2019 was £126.1m which is more reflective of the debt requirement of the business at the start of 2020. Average daily net debt in the first four months of 2020 continued at a similar level. Importantly, cash flow in April was positive, reflecting our clients’ commitment to pay efficiently during this period.
The Company believes that its existing banking facilities, a total commitment of £170m with maturity out to November 2022, will provide sufficient liquidity. However, the Board has considered it prudent to secure additional headroom given these are unique and uncertain times. An increase in facilities totalling circa £22.6m is agreed and paperwork to enable availability of funds will be completed in the next few weeks. The Board remains confident that it will be fully compliant with its banking covenants on 30 June 2020, being the next measurement point.
The Company announced on 25 March 2020 that it believed it inappropriate to declare a final dividend in respect of the 2019 year. However, it remains the Board’s intention to return to a progressive dividend policy once it is confident that activity and working practices have returned to normal and that it would be prudent to do so. For the time being, the Company considers that it should refrain from providing guidance as to likely financial performance for the 2020 year.