07:00 Thu 05 Mar 2020
Franchise Brands PLC - Final Results
("
Final results for the year ended
A strong performance, driven by accelerating Metro Rod system sales
and acquisition of Willow Pumps
Financial highlights
· Revenue increased by 24% to
· Fee and direct labour income increased by 35% to
· Adjusted EBITDA* increased by 29% to
· Statutory profit after tax increased by 17% to
· Cash conversion rate against Adjusted EBITDA of 90% (2018: 79%).
· Adjusted net debt** of
· Basic EPS increased by 16% to 3.48p (2018: 2.99p).
· Adjusted EPS*** increased by 29% to 4.34p (2018: 3.36p).
· Final dividend of 0.65p per share proposed (2018: 0.46p per share), giving a 42% increase in the total dividend for the year of 0.95p per share (2017: 0.67p per share), 4.6 times covered by adjusted profit after tax (2018: 5.0x).
*Adjusted EBITDA is earnings before interest, tax, depreciation, amortisation, the share-based payment expense, and acquisition-related costs.
** Adjusted net debt is net debt before the effect of IFRS 16.
*** Adjusted EPS is earnings per share before amortisation of acquired intangibles, the share-based payment expense, and acquisition-related costs.
Operational highlights
· Metro Rod's Vision 2023 strategy continues to drive our organic growth:
· System sales growth accelerated to 14% in 2019 (2018: 8%).
· 45% of franchisees achieved annual sales above
· Over 30% of franchisees have grown their sales by over 20% in 2019 (2018: 22% of franchisees).
· Continued investment in capacity, including 44 additional vehicles and 55 additional engineers.
· Launch of our ITOL-accredited apprenticeship scheme to support the long-term increase in capacity.
· Acquisition of Willow Pumps and integration into the Group to create a business-to-business ("B2B") division with Metro Rod and Metro Plumb.
· Willow Pumps trading exceeded our expectations in its first three months of ownership.
· The Willow Pumps Discovery Days have successfully introduced the franchisees to the substantial opportunities in the pumps sector that will allow them to expand their range of "Water in. Waste out." services.
· Creation of a business-to-consumer ("B2C") division, under one management team, to facilitate future acquisitions and maximise overhead efficiency.
· Improved franchise recruitment to 65 (2018: 57) growing the combined B2C networks to 404 franchisees (2018: 387 franchisees).
· Continued strong cash generation from the B2C brands.
"2019 has seen us successfully build the business both organically and by acquisition, with an acceleration in system sales growth at Metro Rod and Metro Plumb, and a recovery in franchise recruitment in the newly formed B2C division, complemented by the acquisition of Willow Pumps which has expanded Metro Rod's range of services.
"Trading in 2020 has started well, with job intake at Metro Rod, Metro Plumb and Willow Pumps up on the same period in 2019 and a strong start to the year for franchisee recruitment in the B2C division.
"Whilst we have not yet seen any impact from the Covid-19 virus, we will continue to monitor the situation over the coming weeks. We have put in place plans which seek to mitigate any impact that the virus may have on our employees, franchisees, customers and suppliers.
"Overall, we look forward to 2020 with considerable confidence given the Group's strong start to the current year and the clear opportunities for growth we see across both our B2B and B2C divisions, particularly as we increasingly realise the benefits of our Vision 2023 strategy and our investment in new capabilities, capacity and a broader range of services at Metro Rod."
Enquiries:
| + 44 (0) 1562 826705 |
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| +44 (0) 20 3328 5656 |
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| +44 (0) 20 3903 7715 |
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| +44 (0) 7884 494112 |
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About
The Group is organised into a B2B division comprised of Metro Rod, Metro Plumb and Willow Pumps, and a B2C division incorporates
Each of our brands are leaders in their respective markets and each brand has a long trading history. The combined trading history of all the Group's brands is over 125 years.
For further information, visit www.franchisebrands.co.uk
Chairman's Statement
2019 has seen us successfully build the business both organically and by acquisition. Organic growth has been driven by an acceleration in the rate of system sales growth at Metro Rod and Metro Plumb and a recovery in the rate of franchise recruitment in the newly formed B2C division. We are also very pleased to have acquired Willow Pumps, which has allowed us to begin expanding the range of services that we offer to both Metro Rod and Metro Plumb's commercial customers, and thereby take an important step in servicing their complete "Water in. Waste out." requirements.
Metro Rod
In 2018 we launched our Vision 2023 strategy for Metro Rod, which centres on the development of franchisees as entrepreneurs and the corresponding systems they needed to grow their businesses. The essence is to return the franchisees to the front and centre of their businesses, help them grow local sales, reduce their reliance on over-complicated manual systems and lessen the intervention from the Support Centre.
The initiatives that we put in place to help deliver our Vision 2023 strategy have been embraced by our franchisees and the Support Centre team and have resulted in system sales growth in 2019 of 14% (2018: 8%). This represents a compound annual growth of system sales of 12% during the nearly three years that we have owned the business. The franchisees have become less reliant on the Support Centre and under the guidance of
Investment has been a significant feature of 2019 with our franchisees investing in both people and equipment, including 20 additional sales and marketing executives, 55 additional engineers and 44 additional vehicles. I am also particularly pleased to welcome our first eight apprentices who joined our newly launched ITOL-accredited apprenticeship scheme. Our apprentices will be key to growing our capacity in the coming years.
As anticipated, some franchisees were not willing, or indeed able, to embrace the challenge of Vision 2023 and we have agreed amicable exits whereby these businesses have been sold to new, ambitious franchisees who see the opportunities we are creating. This has resulted in four businesses changing hands during 2019. We have also recruited franchisees for the two vacant territories in
In 2019, the Group began operating two Metro Rod territories as direct labour organisations ("DLOs"). Following the acquisition of Willow Pumps, it was decided to transfer responsibility for the Kent & Sussex territory to their field service team, both to improve the local management of this business and also to give Willow Pumps a direct insight into the operations of a Metro Rod territory.
While there are still a number of strategic and operational improvements to be made to expand our service offering and achieve our Vision 2023 strategy, one of the most important milestones in 2020 will be the full roll-out of the new works management system ("WMS"). Although this project is three to six months behind our initial schedule, good progress was nevertheless made in 2019 in relation to the practical completion of the software development and the successful roll-out of the system to seven of the smaller Metro Rod and Metro Plumb franchisees. We expect to have completed the roll-out of the new WMS by the end of 2020, with improvements in efficiency and productivity expected to become apparent in the second half of 2020.
Metro Plumb & Kemac
Metro Plumb's sales continued to grow in 2019 but it remains reliant on one principal customer. The franchised territories are also predominantly operated by Metro Rod franchisees, or as DLOs under Kemac. There remains a significant opportunity to create a national plumbing business to service the needs of commercial customers, but our current structure is not ideally suited to the development of this. We have therefore decided to begin franchising Metro Plumb separately from Metro Rod and invite any Metro Rod franchisees who wish to exit the Metro Plumb business the opportunity to sell that franchise to new franchisees. This will enable new ambitious franchisees to have a single focus on developing the Metro Plumb business and expanding the customer base more actively, whilst our Metro Rod franchisees can focus on the significant opportunity to grow their businesses.
Willow Pumps
We acquired Willow Pumps, a leading pump supply, installation and servicing business with an above and below-ground capability, in
Pumps are an engineered solution and the acquisition of this high-quality well-established business represents an optimal way for the Group to enter this specialist market at scale. The deal structure incentivises the Willow Pumps management team, which continues to be led by
To introduce Metro Rod and Metro Plumb franchisees to the substantial opportunities in the pump sector, three "Discovery Days" were held at the Willow Pumps premises in
B2C Division
In order to facilitate future acquisitions and to ensure maximum overhead and operational efficiency, the B2C brands -
The strong franchise recruitment performance at
The creation of strong functional teams within this division, for example in the areas of marketing and franchise recruitment, will facilitate future complementary acquisitions. In considering such acquisitions we will focus on the incremental gross profit that such opportunities offer, and take a view on the existing overhead that we will need to retain. This will be particularly relevant when considering the large number of smaller opportunities that we are presented with in the B2C franchise environment where the founder often wishes to retire.
People and Incentivisation
The strong progress being made by
In a business where we are asking our team to help build our franchisees' businesses and wealth, it is important that we reward colleagues with both attractive remuneration packages and a stake in our business. In 2019 we have continued to grant share options but have now reached the limits available under the attractive EMI Share Option Scheme. These options include those granted to key team members at Willow Pumps, where the performance criteria are the same as those of the earn-out element of the acquisition consideration. Therefore, we will be introducing new share incentive schemes in 2020 that will not only allow us to continue granting options, but also incentivise team members to purchase shares in the Company with their own money. In this way, we will ensure our team really has "skin in the game", just like our franchisees.
Outlook
The Board is pleased to report that trading in 2020 has started well, with job intake at Metro Rod, Metro Plumb and Willow Pumps up on the same period in 2019, and a strong start to the year for franchisee recruitment in the B2C division.
We continue to selectively seek acquisitions that expand the range of services that Metro Rod, Metro Plumb and Willow Pumps can offer to the commercial sector, in pursuit of our ambition to offer a "Water in. Waste out" service. This may involve further acquisitions of DLOs where these can be used to profitably expand the offering of Willow Pumps, Metro Rod and Metro Plumb.
The B2C division will focus on the acquisition of franchise businesses which are complementary to our existing brands and customer base, and where we can leverage our existing B2C divisional structure.
We also continue to consider the acquisition of entirely new franchise systems, however, we are not anticipating being competitive in the market for larger businesses at a time when private equity is willing to pay very full multiples and gear such purchases to levels that are not acceptable for a publicly-quoted company. We will selectively consider opportunities for smaller or underperforming franchise systems which have the potential to be earnings enhancing and where we consider we have the management resources and expertise to grow such businesses to a meaningful size and scale.
Whilst we have not seen any impact from the Covid-19 virus, we will continue to monitor the situation over the coming weeks. We have put in place plans which seek to mitigate the risk of any impact that the virus may have on our employees, franchisees, customers and suppliers.
Overall, we look forward to 2020 with considerable confidence, given the Group's strong start to the current year and the clear opportunities for growth we see across both our B2B and B2C divisions. In particular, we look forward to increasingly realising the benefits of our Vision 2023 strategy and our investment in new capabilities, capacity and a broader range of services for our commercial customers.
Executive Chairman
CHIEF FINANCIAL OFFICER'S REVIEW
The results for the year ended
| 2019 | 2018 Restated | Change | Change % |
| £'000 | £'000 | £'000 |
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Statutory revenue | 44,013 | 35,470 | 8,543 | 24% |
Franchisee payments | (19,612) | (17,330) | (2,282) | 13% |
Fee income | 24,401 | 18,140 | 6,261 | 35% |
Other cost of sales | (8,019) | (5,011) | (3,008) | 60% |
Gross profit | 16,382 | 13,129 | 3,253 | 25% |
Other administrative expenses | (11,200) | (9,126) | (2,074) | 23% |
Adjusted EBITDA | 5,182 | 4,003 | 1,179 | 29% |
Depreciation & amortisation of software | (755) | (447) | (308) | 69% |
Finance expense | (357) | (340) | (17) | 5% |
Adjusted profit before tax | 4,070 | 3,216 | 854 | 27% |
Tax expense | (687) | (604) | (83) | 14% |
Adjusted profit after tax | 3,383 | 2,612 | 771 | 30% |
Amortisation of acquired intangibles | (260) | (216) | (44) | 20% |
Share based payment | (238) | (139) | (99) | 71% |
Acquisition-related costs | (296) | - | (296) | 100% |
Tax on adjusting items | 121 | 68 | 53 | 78% |
Statutory profit | 2,710 | 2,325 | 385 | 17% |
Statutory revenue
Statutory consolidated revenue increased 24% to
Fee and direct labour income
Fee and direct labour income are one of the KPIs used by management to track the business, and, as shown in the table below, this increased by 35% to
£'000s | 2019 | % of total fee income | 2018 | % of total fee income | Change | Change % |
MSF Income | 11,207 | 46% | 10,107 | 56% | 1,100 | 11% |
Area Sales | 2,006 | 8% | 1,513 | 8% | 493 | 33% |
Product Sales | 912 | 4% | 894 | 5% | 18 | 2% |
Direct | 9,097 | 37% | 4,564 | 25% | 4,533 | 99% |
NAF | 1,179 | 5% | 1,062 | 6% | 117 | 11% |
Fee Income | 24,401 | 100% | 18,140 | 100% | 6,261 | 35% |
Management Service Fee ("MSF") income received from our franchisees is based on fixed monthly fees or a percentage of the franchisees' sales. Our strategy is to increase sales-related MSF income to improve the quality of our earnings and align ourselves with the interests of our franchisee communities so that both parties benefit from the growth in system sales. We continue to incentivise Metro Rod franchisees to grow their own businesses through a series of MSF discounts and schemes designed to encourage sales growth and investment in a wider range of equipment and people.
The 11% increase in MSF income has been driven primarily by a 14% increase in system sales (the gross sales made by our franchisees) at Metro Rod and Metro Plumb, to
Fees generated from the sale (or re-sale) of franchise territories have seen a strong upturn in 2019 compared with 2018, growing by 33%. This increase was not only due to improved franchisee recruitment at our B2C division with 65 new franchisees recruited (2018: 57), but also as a result of the successful launch of the franchise re-sale activity at Metro Rod and Metro Plumb. This increased re-sale activity allows exiting franchisees to realise value from their business, and
DLO sales increased by 99% in the current year to
Franchisees pay a monthly contribution into their respective National Advertising Funds. These funds are used exclusively to promote the system sales of those brands. The Group does not make any profit from these activities. Any surplus or shortfall within an accounting period is carried forward on our balance sheet.
Trading results - Adjusted EBITDA
With the creation of our B2B and B2C divisions, the Board reviews the numbers on the following basis:
| 2019 | 2018 | Change | Change |
| £'000 | £'000 | £'000 | % |
B2B - Franchisor | 3,184 | 2,683 | 501 | 19% |
B2B - DLO | 492 | - | 492 | 100% |
B2C | 2,533 | 2,368 | 165 | 7% |
Group overheads | (1,027) | (1,048) | 21 | 2% |
Adjusted EBITDA | 5,182 | 4,003 | 1,179 | 29% |
Our B2B division consists of operations where we are primarily operating as a franchisor (Metro Rod and Metro Plumb), and operations where we are operating as a DLO (Willow Pumps). As the margins of these two types of operations are fundamentally different, we show them separately, although strategically they form one division.
Adjusted Earnings before interest, tax, depreciation, amortisation and share-based payments ("Adjusted EBITDA") at B2B-Franchisor increased by 19% to
Adjusted EBITDA at B2B-DLO was
Adjusted EBITDA at our B2C division (
Group overheads remained prudently controlled at
Earnings
Depreciation and amortisation costs increased 53% to
The finance charge of
Statutory profit before tax increased 14% to
Basic earnings per share increased by 16% to 3.48p (2018: 2.99p) and diluted earnings per share increased by 16% to 3.42p (2018: 2.95p). During 2019, we repurchased 338,700 Ordinary Shares for a total consideration of
Adjusted earnings per share (EPS), adjusted for the acquisition-related items and the share-based payment charge, increased by 29% to 4.34p in the year (2018: 3.36p), as set out in the table below:
| 2019 | EPS | 2018 | EPS |
| £'000 | p | £'000 | p |
Statutory profit after tax | 2,710 | 3.48 | 2,325 | 2.99 |
Amortisation of acquired intangibles | 260 | 0.33 | 216 | 0.28 |
Share-based payment charge | 238 | 0.31 | 139 | 0.18 |
Acquisition-related costs | 296 | 0.38 | - | - |
Tax effect of adjusting items | (121) | (0.69) | (68) | (0.09) |
Adjusted profit after tax | 3,383 | 4.34 | 2,612 | 3.36 |
Financing and cash flow
The Group generated cash from operating activities of
Expenditure on new equipment for the DLOs (
During the year we repaid
| 2019 | 2018 | Change |
| £'000 | £'000 | £'000 |
Cash | 1,682 | 2,940 | (1,258) |
Term loan | (6,401) | (5,435) | (966) |
RCF | (3,002) | (2,514) | (488) |
Loan fee | 129 | 110 | 19 |
Hire purchase debt | (1,588) | (72) | (1,516) |
Adjusted net debt | (9,180) | (4,971) | (4,209) |
Other lease debt | (1,899) | (936) | (963) |
Net debt | (11,079) | (5,907) | (5,172) |
The acquisition of Willow Pumps has introduced a significant level of hire purchase debt onto the Group balance sheet, as Willow Pumps has financed the recent expansion of their tanker fleet using hire purchase facilities. In addition, the Group, as part of the new accounting standard on leasing, has recognised obligations in relation to operating leases. As our banking arrangements determine our interest rate margin and covenant compliance using net debt before operating lease obligations, we use adjusted net debt as our KPI, as shown in the table above.
Shareholders' funds at
Dividend
The Board is pleased to propose a final dividend of
Subject to shareholder approval at the AGM on
Chief Financial Officer
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended
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| 2018 |
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| 2019 | Restated |
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| £'000 | £'000 |
Revenue |
| 44,013 | 35,470 |
Cost of sales |
| (27,631) | (22,341) |
Gross profit |
| 16,382 | 13,129 |
Adjusted earnings before interest, tax, depreciation, amortisation, share-based payments & acquisition-related costs ("Adjusted EBITDA") |
| 5,182 | 4,003 |
Depreciation |
| (635) | (410) |
Amortisation of software |
| (120) | (37) |
Amortisation of acquired intangibles |
| (260) | (216) |
Share-based payment expense |
| (238) | (139) |
Costs of acquisition of subsidiaries |
| (270) | - |
Total administrative expenses |
| (12,723) | (9,928) |
Operating profit |
| 3,659 | 3,201 |
Other gains and losses |
| (26) | - |
Finance expense |
| (357) | (340) |
Profit before tax |
| 3,276 | 2,861 |
Tax expense |
| (566) | (536) |
Profit for the year and total comprehensive income attributable to equity holders of the Parent Company |
| 2,710 | 2,325 |
All amounts relate to continuing operations |
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Earnings per share |
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Basic |
| 3.48 | 2.99 |
Diluted |
| 3.42 | 2.95 |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At
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| 2018 | 2017 |
| 2019 | Restated | Restated |
| £'000 | £'000 | £'000 |
Assets |
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Non-current assets |
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Intangible assets | 35,057 | 27,232 | 27,025 |
Property, plant and equipment | 1,242 | 339 | 115 |
Right-of-use assets | 3,538 | 947 | 1,133 |
Total non-current assets | 39,837 | 28,518 | 28,273 |
Current assets |
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Inventories | 594 | 245 | 252 |
Trade and other receivables | 16,935 | 11,048 | 8,144 |
Cash and cash equivalents | 1,682 | 2,940 | 3,245 |
Total current assets | 19,211 | 14,233 | 11,641 |
Total assets | 59,048 | 42,751 | 39,914 |
Liabilities |
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Current liabilities |
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Trade and other payables | 12,684 | 8,595 | 6,404 |
Loans and borrowings | 4,074 | 3,439 | 4,164 |
Obligations under leases | 924 | 335 | 326 |
Current tax liability | 594 | 196 | - |
Total current liabilities | 18,276 | 12,565 | 10,894 |
Non-current liabilities |
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Loans and borrowings | 5,200 | 4,400 | 5,255 |
Obligations under leases | 2,563 | 673 | 872 |
Provisions | 3,606 | - | - |
Deferred tax liability | 1,544 | 702 | 374 |
Total non-current liabilities | 12,913 | 5,775 | 6,501 |
Total liabilities | 31,189 | 18,340 | 17,395 |
Total net assets | 27,859 | 24,411 | 22,519 |
Issued capital and reserves attributable to owners of the Parent |
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Share capital | 398 | 388 | 388 |
Share premium | 22,806 | 22,621 | 22,621 |
Share-based payment reserve | 316 | 226 | 88 |
Merger reserve | 1,390 | 396 | 396 |
| (21) | (151) | - |
Retained earnings | 2,970 | 931 | (974) |
Total equity attributable to equity holders | 27,859 | 24,411 | 22,519 |
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended
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| 2018 |
| 2019 | Restated |
| £'000 | £'000 |
Cash flows from operating activities |
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Profit for the year | 2,710 | 2,325 |
Adjustments for: |
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Depreciation of property, plant and equipment | 183 | 131 |
Depreciation of right-of-use assets | 452 | 279 |
Amortisation of software | 120 | 37 |
Amortisation of acquired intangibles | 260 | 216 |
Acquisition-related costs | 270 | - |
Share-based payment expense | 238 | 138 |
Other gains and losses | 26 | - |
Finance expense | 357 | 340 |
Income tax expense | 566 | 536 |
Operating cash flow before movements in working capital | 5,182 | 4,002 |
Increase in trade and other receivables | (1,523) | (2,952) |
Decrease in inventories | 5 | 7 |
Increase in trade and other payables | 999 | 2,107 |
Cash generated from operations | 4,663 | 3,164 |
Income taxes(paid)/received | (147) | 48 |
Net cash generated from operating activities | 4,516 | 3,212 |
Cash flows from investing activities |
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Purchases of property, plant and equipment | (865) | (222) |
Purchase of software | (837) | (348) |
Acquisition of subsidiary including costs, net of cash acquired | (3,958) | - |
Net cash used in investing activities | (5,660) | (570) |
Cash flows from financing activities |
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Bank loans - repaid | (2,506) | (1,600) |
Bank loans - received | 4,000 | - |
Other loans - made | (5) | (138) |
Capital element of lease liability paid | (716) | (325) |
Interest paid - bank and other loan | (343) | (279) |
Interest paid - leases | (44) | (35) |
Proceed from issue of shares | 358 | - |
Purchase of | (266) | (151) |
Dividends paid | (592) | (420) |
Net cash used in financing activities | (114) | (2,948) |
Net decrease in cash and cash equivalents | (1,258) | (305) |
Cash and cash equivalents at beginning of year | 2,940 | 3,245 |
Cash and cash equivalents at end of year | 1,682 | 2,940 |
CONSOLIDATED AND COMPANY STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2019
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| Share | based |
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| Share | premium | payment | Merger | | Retained |
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| capital | account | reserve | reserve | shares | earnings | Total |
Group | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
At 1 January 2018 (Restated) | 388 | 22,621 | 88 | 396 | - | (974) | 22,519 |
Profit for the year and total comprehensive income | - | - | - | - | - | 2,325 | 2,325 |
Contributions by and distributions to owners |
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Dividend paid | - | - | - | - | - | (420) | (420) |
| - | - | - | - | (151) | - | (151) |
Share-based payment | - | - | 138 | - | - | - | 138 |
At 1 January 2019 (Restated) | 388 | 22,621 | 226 | 396 | (151) | 931 | 24,411 |
Profit for the year and total comprehensive income | - | - | - | - | - | 2,710 | 2,710 |
Contributions by and distributions to owners |
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Shares issued | 10 | 185 | (148) | 994 | 396 | (79) | 1,358 |
Dividend paid | - | - | - | - | - | (592) | (592) |
| - | - | - | - | (266) | - | (266) |
Share-based payment | - | - | 238 | - | - | - | 238 |
At 31 December 2019 | 398 | 22,806 | 316 | 1,390 | (21) | 2,970 | 27,859 |
1 Basis of preparation of financial information
While the financial information included in this annual financial results announcement has been prepared in accordance with the recognition and measurement principles of International Financial Reporting Standards as endorsed for use in the
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2019 or 2018, but is derived from those accounts. Statutory accounts for
The consolidated financial statements present the results of the Company and its subsidiaries ("the Group") as if they formed a single entity. Intercompany transactions and balances between Group companies are therefore eliminated in full. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group.
2 Adoption of New Standards
At the beginning of the period the Group adopted IFRS16 Leases.
IFRS16 replaces IAS17 'Leases' and substantively changes the accounting for operating leases. Where a contract meets IFRS16's definition of a lease, lease agreements will give rise to the recognition of a non-current asset representing the right to use the leased item, and a loan obligation for future lease payables. Lease costs are recognised in the form of depreciation of the right to use asset and interest on the lease liability, which has impacted the phasing of operating profit and profit before tax, compared to previous cost profiles and presentation in the income statement, and has also impacted the classification of associated cash flows. The detailed assessment of the impact on the Group has been completed, and the adoption has had a significant impact on the presentation of the Group's assets and liabilities, mainly relating to property and vehicle leases. As part of this assessment the Group applied the practical expedient allowed and did not reassess contracts which had not previously been identified as a lease. Most materially it has impacted adjusted EBITDA, with the 2018 comparative figure rising from £3.7m to £4m. In respect of IFRS16 we have applied a fully retrospective approach. This means that we have gone back to the accounting at the inception of each of the different leases within the Group. This has resulted in the below adjustments to the previously reported financial statements:
Year Ended 31 December 2018 | Original Numbers | IFRS16 Adjustment | Final Numbers | |
| £'000 | £'000 | £'000 | |
Revenue | 35,470 | - | 35,470 | |
Cost of sales | (22,341) | - | (22,341) | |
Other Admin Expenses | (9,820) | 303 | (9,517) | |
Depreciation | (131) | (279) | (410) | |
Finance expense | (310) | (30) | (340) | |
Tax expense | (536) | - | (536) | |
| 2,332 | (7) | 2,325 | |
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Basic earnings per share (p) | 3.00 | (0.01) | 2.99 | |
Diluted earnings per share (p) | 2.96 | (0.01) | 2.95 | |
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| Original Numbers | IFRS16 Adjustment | Final Numbers | |
| £'000 | £'000 | £'000 | |
Intangible assets | 27,232 | - | 27,232 | |
Property, plant and equipment | 382 | 904 | 1,286 | |
Inventories | 245 | - | 245 | |
Trade and other receivables | 11,048 | - | 11,048 | |
Cash | 2,940 | - | 2,940 | |
Trade and other payables | (8,595) | - | (8,595) | |
Loans and borrowings | (3,439) | - | (3,439) | |
Obligations under finance leases | (21) | (314) | (335) | |
Current tax | (196) | - | (196) | |
Loans and borrowings | (4,400) | - | (4,400) | |
Obligations under finance leases | (51) | (622) | (673) | |
Deferred tax liability | (702) | - | (702) | |
Total net assets | 24,442 | (32) | 24,411 | |
3 Operating Segments
The Group's operating segments are determined based on the Group's internal reporting to the Chief Operating Decision Maker (CODM). The CODM has been determined to be the Executive Chairman, with support from the Executive Committee, as the function primarily responsible for the allocation of resources to segments and assessment of performance of the segments. During the year the business has re-organised itself along the lines of our B2B and B2C brands. However, within the B2B division we have two different principal activities: 1) Franchisor - management of franchisees who trade with businesses and consumers; and 2) Direct labour organisation - trading directly with businesses and consumers.
Therefore, the Board has determined that we now have three different operating segments:
· B2B- Franchisor, which is made up of Metro Rod and Metro Plumb;
· B2B- DLO, which is made up of Willow Pumps; and
· B2C- which is comprised of
Other operations include central administration costs and non-trading companies.
The CODM uses Adjusted EBITDA, as reviewed at monthly Executive Committee meetings, as the key measure of segments' results as it reflects the underlying performance for the financial year under evaluation. The following is an analysis of the Group's revenue and results by reportable segment in 2019:
|
|
|
|
|
|
| B2B- Franchisor | B2B- DLO | B2C | Other | Total |
| £'000 | £'000 | £'000 | £'000 | £'000 |
Continuing operations |
|
|
|
|
|
Revenue | 33,405 | 3,842 | 6,766 | - | 44,013 |
|
|
|
|
|
|
Gross profit | 9,625 | 1,252 | 5,505 | - | 16,382 |
|
|
|
|
|
|
Adjusted EBITDA | 3,184 | 492 | 2,533 | (1,027) | 5,182 |
Depreciation & amortisation of software | (435) | (138) | (182) | - | (755) |
Amortisation of acquired intangibles | - | - | - | (260) | (260) |
Share based payment expense | (101) | (6) | (47) | (84) | (238) |
Acquisition-related costs | - | - | - | (296) | (296) |
Finance expense | (13) | (43) | (12) | (289) | (357) |
Profit before tax | 2,634 | 306 | 2,293 | (1,956) | 3,276 |
Income tax expense | (403) | (50) | (346) | 233 | (566) |
Profit after tax | 2,231 | 255 | 1,946 | (1,723) | 2,710 |
4 Business Combination
Acquisition of WPL Group Holdings Limited (Willow Pumps)
On 7 October 2019, the Group acquired the entire issued share capital of WPL Group Holdings Limited and its subsidiaries, Willow Pumps Limited and Willow Drainage Limited (together, "Willow Pumps") for an initial consideration of £5.0 million (net of non-trading cash of £700,000 in WPL Group Holdings Limited) and a performance-based deferred consideration of up to £7.5 million payable over the next five years.
The Initial Consideration was paid as to £4.7 million (gross of non-trading cash of £700,000 in WPL Group Holdings Limited) in cash and £1.0 million through the issue of 1,212,121 new Ordinary Shares of 0.5p each in the Company at 82.5 pence per share. The Deferred Consideration will be payable in cash, subject to the Company having the right to settle 20 per cent. of the amount due in new Ordinary Shares at the then prevailing share price. The fair value of consideration comprised:
| £'000 |
Cash | 4,700 |
Consideration Shares | 1,000 |
Fair value of deferred consideration | 3,580 |
Fair Value of Consideration | 9,280 |
Performance related deferred consideration of up to £7.5m is payable under the sale and purchase agreement. A £3.6m provision, representing the net present value of the expected payments to be made over the next five years has been established based on the current budgets and longer-term forecasts of the Group.
Acquisition costs relating to this transaction amounted to £270,000 and have been disclosed within the statement of comprehensive income in the Group. There was a further £26,000 charge relating to the fair value movement on the deferred consideration.
Details of the fair value of the identifiable assets and liabilities acquired after adjustment for IFRS 16, purchase consideration and goodwill are as follows:
| Book value | Adjustments | Fair value |
| £'000 | £'000 | £'000 |
Intangible assets | - | 3,640 | 3,640 |
Property, plant and equipment | 374 | - | 374 |
Right-of-use assets | 1,595 | 1,167 | 2,762 |
Inventories | 490 | - | 490 |
Trade and other receivables | 3,942 | - | 3,942 |
Cash | 585 | - | 585 |
Trade and other payables | (4,419) | (1,178) | (5,597) |
Deferred tax liability | (109) | (618) | (728) |
Total | 2,457 | 3,011 | 5,468 |
Fair value of consideration |
|
| 9,280 |
|
|
| 3,812 |
Intangible asset adjustments comprise:
|
|
| £'000 |
Recognise brand |
|
| 2,777 |
Recognise customer relationships |
|
| 863 |
|
|
| 3,640 |
An adjustment has been made to align Willow Pumps with the requirements of IFRS16.
The deferred tax liability has been calculated on the value of the intangible assets acquired at a corporation tax rate of 17% and a corresponding amount has been recognised as goodwill. The amount recognised as goodwill will not be deductible for tax purposes.
Customer relationships have a useful economic life of five years, whereas the brand and goodwill both have indefinite lives.
5 Earnings per share
Basic earnings per share amounts are calculated by dividing profit for the year attributable to Ordinary equity holders of the Parent company by the weighted average number of Ordinary shares outstanding during the year. Diluted earnings per share are calculated by dividing the profit attributable to Ordinary equity holders of the Parent company by the weighted average number of Ordinary shares outstanding during the year plus the weighted average number of Ordinary shares that would have been issued on the conversion of all dilutive potential Ordinary shares into Ordinary shares at the start of the period or, if later, the date of issue. Adjusted earnings per share take the profit for the year attributable to Ordinary equity holders of the Parent company and adjust for certain items as set out in the table below:
|
| 2018 |
| 2019 | Restated |
| £'000 | £'000 |
Profit attributable to owners of the Parent | 2,710 | 2,325 |
Acquisition related costs | 296 | - |
Amortisation of acquired intangibles | 260 | 216 |
Share-based payment expense | 238 | 138 |
Tax on adjusting items | (121) | (67) |
Adjusted profit attributable to owners of the Parent | 3,383 | 2,612 |
| Number | Number |
Basic weighted average number of shares | 77,948,178 | 77,687,101 |
Dilutive effect of share options | 1,190,696 | 1,100,364 |
Diluted weighted average number of shares | 79,138,874 | 78,787,465 |
| Pence | Pence |
Basic earnings per share | 3.48 | 2.99 |
Diluted earnings per share | 3.42 | 2.95 |
Adjusted earnings per share | 4.34 | 3.36 |
Adjusted diluted earnings per share | 4.27 | 3.32 |
6 Dividends
| 2019 | 2018 |
| £'000 | £'000 |
Final 2018 dividend of 0.46p per Ordinary share paid and declared (2017: 0.33p) | 358 | 257 |
Interim dividend of 0.30p per Ordinary share paid and declared (2018: 0.21p) | 234 | 163 |
| 592 | 420 |
A final dividend of 0.65 pence per share is proposed which will cost £517,000.
7 Annual report and accounts
The annual report and accounts for the year ended 31 December 2019 will be posted to shareholders in the week commencing 23 March 2020 and will be available immediately thereafter on the Company's website at www.franchisebrands.co.uk/investor-relations.
8 Annual General Meeting
The Annual General Meeting of
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the
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