Final Results

RNS Number : 6665S

Empresaria Group PLC

13 March 2019

 

13 March 2019

Empresaria Group plc

("Empresaria" or the "Group")

Results for the year ended 31 December 2018

Record adjusted profit before tax with a 52% increase in final dividend

Empresaria, the international specialist staffing group, is pleased to report its final results, showing continued delivery on its growth strategy with record adjusted profit before tax and a 52% increase in its dividend.

Financial Highlights	2018	2017	% change	% change (constant currency)
Revenue	£366.8m	£357.1m	+3%	+5%
Net fee income	£72.3m	£69.4m	+4%	+6%
Operating profit	£10.3m	£8.7m	+18%	+21%
Adjusted operating profit*	£12.3m	£11.6m	+6%	+8%
Profit before tax	£9.4m	£8.1m	+16%	+18%
Adjusted profit before tax*	£11.4m	£11.0m	+4%	+6%
Earnings per share (diluted)	9.1p	7.9p	+15%
Adjusted diluted earnings per share*	12.1p	12.5p	-3%
Final dividend	2.0p	1.32p	+52%

·    Net fee income of £72.3m up 4%, 6% in constant currency

·    Conversion ratio increased to 17.0% (2017: 16.7%)

·    Adjusted diluted earnings per share of 12.1p, down 3% due to profit mix

·    Proposed final dividend increased by 52% to 2.0p (2017: 1.32p)

·    Adjusted net debt reduced to £17.1m (2017: £19.5m)

Operational highlights

·    Continued to build scale in key target sectors and geographies

-  Investment in Peru finalised in July 2018, to strengthen presence in high potential Latin American market

-  Two new offices opened in Asia Pacific region in January 2019

·    Invested in building strength and depth in the central team, including appointment of Chief Operating Officer in November 2018

·    More focused strategy with central support bolstered in areas of technology, training, and marketing to improve productivity of brands

·    Strong profit growth from IMS (India), Alternattiva (Chile), LMA (UK), ConSol Partners (UK & USA) and Rishworth (New Zealand)

·    Strong platform in place for next phase of growth

* adjusted to exclude amortisation of intangible assets identified in business combinations, exceptional items, gain or loss on disposal of businesses, fair value charges on acquisition of non-controlling shares and, in the case of earnings, any related tax.

Chief Executive Officer Spencer Wreford said:

"We are pleased to be reporting a fourth consecutive year of record adjusted profit before tax.  We have also reduced the net debt in the Group which, combined with the strength of our balance sheet and the Board's confidence in the Group's prospects, has allowed us to increase our annual dividend by 52%.

In line with our strategy we continue to invest in the Group, with a new brand in Peru joining in July 2018, as we strengthen our presence in the high potential Latin American market.  We have also invested in our central team, to provide more support to the growth plans of our brands, with a new Chief Operating Officer, Rhona Driggs, and Group Finance Director, Tim Anderson, joining the board, as well as new staff with responsibilities for technology, training and marketing.  Rhona brings with her 28 years of staffing industry experience, while Tim brings significant listed company finance experience.  With a strong platform in place, these investments will help us to be more focused in our approach and work more closely with our brands to fully deliver the benefits of being in a Group and to deliver the next phase of growth.

Our focus in 2019 is to deliver organic growth and strengthen our core brands.  With the quality of the brands in our Group and a more focused strategy, we see good opportunities to generate profitable growth, but we remain mindful of the increasing economic uncertainty arising from political risks."

A video overview of the full year results from Chief Executive Officer Spencer Wreford and Group Finance Director Tim Anderson is available to watch here: http://bit.ly/EMR_FY18

 - Ends -

Enquiries:

Empresaria Group plc Spencer Wreford, Chief Executive Officer Tim Anderson, Group Finance Director	via Alma
Arden Partners (Nominated Adviser and Broker) John Llewellyn-Lloyd / Ciaran Walsh	020 7614 5900
Alma PR (Financial PR) Rebecca Sanders-Hewett Sam Modlin Hilary Buchanan	020 3405 0205 [e-mail]

Notes for editors:

·    Empresaria Group plc is an international specialist staffing group with 20 brands operating in 21 countries across the globe being the UK, Germany, Japan, India, UAE, Indonesia, Chile, Australia, Thailand, Singapore, Finland, USA, New Zealand, China, Malaysia, Vietnam, Austria, Hong Kong, Mexico, Philippines and Peru.

·    Empresaria offers temporary/contract and permanent staffing solutions as well as Offshore Recruitment Services in seven key sectors: Technical & Industrial, Aviation services, IT & Design, Professional services, Healthcare, Executive search and Retail.

·    Empresaria applies a multi-brand, management equity philosophy and business model, with group company management teams holding significant equity in their own business.

·    Empresaria is listed on AIM under ticker EMR. For more information: empresaria.com

Chairman's statement

We are pleased to report our full year results which deliver another year of profitable growth and increased dividend. We have made good progress in the year and have invested in key areas of the central support function of the Group to maximise future organic growth across our brands. We have a focused strategy in place to deliver the next phase of growth and are confident in the Group's prospects for the future.

Our purpose and what makes us different

As an international specialist staffing Group, we have the privilege of being able to help people realise their potential through work.  It is a rewarding activity, helping candidates to progress their careers so they can realise their potential and helping clients find the best candidates so their business can realise its potential. 

Our strategic priorities are building leading brands and improving productivity. We have invested in strengthening our central management team over the last year to ensure we are supporting our staff, helping them to develop their skills and experience, and helping our brands to grow.

Our business model is a key differentiator for us in the market: 

·      Multi-branded with niche sector experts: Local expertise and market knowledge ensures our brands understand the needs of clients and candidates alike.  We currently have 20 brands across the Group.

·      Management equity philosophy: Senior managers hold shares in their operating companies, so aligning their interests with those of our shareholders.  This helps us to attract and then retain key management and encourages them to take a long-term view on business opportunities.  At the end of 2018 we had 57 managers holding shares in the operating companies they are responsible for.

·      Diversified by geography and sector: We currently operate in 21 countries and this spread of operations reduces our reliance on any single market and mitigates ongoing economic and political risks.  We have a good balance of operations in both the largest staffing markets as well as the high potential markets of Latin America and Asia.

·      Range of staffing services: Provision of permanent, temporary and contract, RPO/offshore recruitment services with a bias towards temporary recruitment.

The market

The economic growth forecasts are currently positive across our geographies, although we have seen a general weakening of these growth rates over the last few months.  Political risks remain high, in particular with the uncertainty over the UK's exit from the European Union weighing on business confidence in the UK and Germany and the increased trade tariffs between the US and China impacting on global growth rates.

We continue to see candidate shortages across our largest markets, as well as skills shortages due to the advance of technology with demand increasing for skills that are not widely available. This creates opportunities for our brands who, as experts in their markets, are well placed to find the candidates with the right skills and can then place these more quickly.

The current prospects for the staffing sector remain positive and we see good opportunities for our brands, but with the increasing risks and levels of business uncertainty, we remain vigilant to any change in conditions.  According to "Staffing Industry Analysts" forecasts ("Global Staffing Industry Market Estimates and Forecast", November 2018), the global staffing market is expected to grow by 6% in 2019, through a mix of higher growth rates expected in China and India, offset by low growth rates in the UK, US and Australia.  Our spread of operations helps us to manage the impact of localised issues and make the most of positive market conditions.  We have seen the benefit of this diversified model over the last two years in the face of regulatory changes in Germany and Japan, the impact of which are now fully reflected, and it continues to be a core part of our business model.

People & culture

There have been a number of changes to the executive team during 2018.  In May Joost Kreulen stepped down as Chief Executive Officer.  He continues to assist the Group, working as a part-time consultant in Germany, supporting our Headway brands.  The Board would like to thank Joost for his commitment and success since he joined Empresaria, helping to stabilise and then turn around the business, leaving a solid platform for the next phase of growth and development.

Spencer Wreford took over as CEO, having been with the Group for eight years, most recently as the Chief Operating Officer and previously as Group Finance Director. 

In March 2018 we welcomed Tim Anderson as the new Group Finance Director and in November 2018 we appointed Rhona Driggs as Chief Operating Officer.  Rhona brings with her 28 years of staffing industry experience, while Tim brings significant listed company finance experience.  These appointments have strengthened our executive management team, providing the expertise needed to take the business forward.

The average number of staff across the Group increased to 1,625 (2017: 1,367).  The success of the Group is down to the hard work and commitment of every one of them and the Board would like to thank them for their contribution to our continued success.

Governance

We operate with a decentralised structure, with local management responsible for running their businesses but with clear governance and control oversight from the centre.  We believe in a strong and clear governance approach and expect high standards and compliance across the Group.  Our culture is based on shared ownership and reward.  We are a group of like-minded people with a passion for helping others realise their potential.

We take stakeholder engagement seriously.  We have regular communication with Group companies and staff, we present to investors, both private and institutional, to explain our strategy and results, and we engage with regulators and Government agencies directly in response to consultations or proposals and through our membership of worldwide trade associations.

During 2018, we chose to adopt the QCA Corporate Governance Code 2018, which we consider is most appropriate for our size, the regulatory framework that applies to AIM companies and is best aligned to the expectations of our stakeholders.

Investments

In July 2018 we finalised our investment in 60% of the equity shares in Grupo Solimano, an established provider of outsourced and temporary staffing services in Peru.  This strengthens our presence in the high potential Latin American staffing market, alongside existing brands in Chile and Mexico.

Shareholder returns

The Group has delivered adjusted diluted earnings per share of 12.1p (2017: 12.5p), with the slight reduction in the year largely due to the mix of profits, with higher returns coming from those brands with a larger non-controlling interest share.  We use an adjusted measure to exclude amortisation of intangible assets identified in business combinations, exceptional items, gain or loss on disposal of businesses, fair value charges on acquisition of non-controlling shares and related tax.  We feel this is more reflective of the underlying trading results and is the measure typically adopted by the investor and analyst community.  The reported diluted earnings per share was 9.1p (2017: 7.9p).

The Board has reviewed the dividend in line with our progressive dividend policy and for the year ended 31 December 2018 we propose a dividend of 2.0p, up 52% on the prior year, demonstrating the strength of the balance sheet and the Board's confidence in the Group's prospects.  Subject to shareholder approval at the Annual General meeting, the dividend will be paid on 31 May 2019 to shareholders on the register on 10 May 2019.

We have also returned cash to shareholders through a share buy-back programme with 479,704 shares acquired during the year.  The total cost of these shares was £0.4m.  These shares are held in the Empresaria Employee Benefit Trust to cover potential exercises of vested share options to reduce the dilutive effect of issuing new shares.

Outlook

We have created a strong platform for the Group in recent years, bolstered by the investments made in the central management team, and we are well positioned to deliver the next phase of growth and to continue to create long-term value for shareholders.  As we start 2019 we are focused on delivering organic growth and strengthening our core brands.  The economic environment remains broadly positive and whilst we remain cautious on the political risks, we see good opportunities for the Group in the year ahead.

Tony Martin
Chairman
12 March 2019

Chief Executive's Review

Group performance in the year

Empresaria has delivered a 4% increase in adjusted profit before tax to £11.4m, representing a fourth consecutive year of record profits.  Our diversified business has delivered on opportunities to mitigate the effect of some challenging markets and the Group's continued growth supports this approach.  We have made further investments during the year, including the addition of Grupo Solimano to the Group to strengthen our presence in Latin America and building a stronger central team to provide enhanced support to our operating companies.  While this has resulted in an increase in our central staff costs, we believe it will generate a far greater value in the coming years.

Group revenue increased by 3% to £366.8m (2017: £357.1m), with net fee income up 4% to £72.3m (2017: £69.4m). Currency movements had a dampening impact in the year, with constant currency increases of 5% in revenue and 6% in net fee income.

Net fee income (£m)	UK	Continental Europe	Asia Pacific	Americas	Intercompany	Total
2017	23.4	16.5	22.2	7.3	-	69.4
Movement	0.3	(1.1)	3.6	0.9	(0.4)	3.3
Investments/ (divestments)	-	-	(0.3)	0.9	-	0.6
Currency	-	0.2	(1.0)	(0.2)	-	(1.0)
2018	23.7	15.6	24.5	8.9	(0.4)	72.3

The split of net fee income was 37% from permanent sales (2017: 36%), 58% from temporary & contract (2017: 60%) and 5% from RPO and Offshore Recruitment Services (ORS) (2017: 4%).  The temp margin percentage was 12.5%, down from 12.7% in the prior year, mainly due to the addition of Grupo Solimano with a margin of 10.7% and reduced margins in both Germany and Japan.  The Group generated 67% of its net fee income from outside the UK (2017: 66%).

There was a mix of results across the Group, with three out of four regions delivering growth in operating profit.  With a diversified spread of operations across geographies and sectors, we are not reliant on any single market or brand and this remains a core strength.

There were particularly strong results from IMS (RPO & Offshore Recruitment Services in India), Alternattiva (outsourcing, perm and temporary business in Chile), LMA (professional services) and the recent investments in ConSol Partners (IT) and Rishworth (aviation):

·      IMS was a start-up in 2006 and has seen 50% growth in net fee income in the year.  With the launch of a second city location in Jaipur, India and a move into a newly built office space in early 2019, there is space to expand into and we see good opportunities across their core UK and US markets.

·      Alternattiva has consistently grown in recent years and with the new investment in Peru, we have increased our scale and depth in this high potential region.

·      LMA has successfully integrated the previously standalone insurance business and is developing depth across its service lines in the UK and Singapore.

·      In ConSol Partners we have seen growth from both the UK and US offices, but the growth was particularly strong in the US which is now delivering on our expectations following a difficult 2017.

·      In Rishworth they have seen the benefit from the investment in new bases made in 2017, however we see a more challenging market for 2019.

As we have previously highlighted, we have been impacted by changes to regulations in Germany and Japan, limiting how long temporary workers can work in a non-permanent position and the equal pay rates in Germany.  We have seen profits decline in the logistics part of our Headway business in Germany and in Skillhouse (IT) in Japan, both of which have a high proportion of temporary sales.  With the regulatory changes now stabilised, the impact has been fully reflected with no further impact expected, however we start 2019 with a lower number of temporary workers than this time a year ago in both businesses.  We expect to see the level of temporary workers increase through the year and we remain confident about the long-term prospects for these large staffing markets.

2018 was the last year in our five year plan, which targeted average annual net fee income growth of 10%, a conversion ratio of 20% and a debt to debtors ratio of 25%.

	2018	2017	2016	2015	2014
Net fee income growth (%)	4%	18%	20%	10%	5%
Conversion ratio (%)	17.0%	16.7%	16.6%	16.3%	14.7%
Debt to debtors ratio	36%	45%	38%	23%	32%

We have made good progress across the five year period, although not all targets have been met.  The net fee income growth was 4% in 2018, with the five year average annual growth being 11%.  We have delivered incremental improvements in the conversion ratio, with the current year of 17.0% a record level for the Group.  Having met the debt to debtors target in 2015, we made the decision to use debt to finance the investments in ConSol Partners and Rishworth in 2016.  We are pleased that the ratio has reduced, as expected, in 2018 to 36%.  We remain focused on these KPIs going forwards but are not setting new five year targets.

A focused strategy

We have a unique business model for the sector, with our multi-brand approach, management equity philosophy and diversified operations.  We operate with a decentralised structure, with autonomy given to local brand management to run their business on a day to day basis and these principles are core to our purpose of helping people realise their potential.  These are an important part of our DNA and we are not going to change this. In the current market and with the size of our Group, we need to be more focused in our approach and work more closely with our brands to fully deliver the benefits of being in a group and to be able to react quickly and effectively to the changes impacting the staffing sector, from increased automation and digital disruption, to candidate shortages and regulatory changes.

To address this need we have grown the central management team, with the appointment of Rhona Driggs as Chief Operating Officer in November 2018 and key hires covering technology, learning & development and marketing.  Rhona brings a wealth of experience from large international staffing companies and is recognised as one of the Staffing Industry Analysts "Global Power 150 Women in Staffing".  Rhona has responsibility for the Group's overall operations and, together with her new team, is supporting the brands to identify new business opportunities and to share best practice across the Group.

Our strategic priority in 2019 is based on a more focused approach in our core markets and is designed to deliver organic growth in net fee income and productivity gains to drive profit growth.  This will be delivered through a two-pronged strategy: Building size and scale in key sectors and geographies through leading brands, and improving productivity to generate better returns.

·      Building size and scale in key sectors and geographies through leading brands

With our multi-branded model we want to create leading brands in each of our niche sectors and we believe there is a clear opportunity to drive a significant increase in profitability from our existing brands.  The focus on size and scale is important because it helps create a stronger business with more depth and synergies than a smaller brand.  We are focused on growing our presence in our core sectors and will look for opportunities to expand our main brands across our key geographies, utilising our knowledge of operating in these important markets.

This is illustrated by some of our recent activity:

·      At the end of 2018 ConSol Partners launched 4ward Talent, a new brand to focus on higher volume IT markets using a lower cost delivery solution, allowing ConSol Partners to continue to focus on their niche sectors.

·      In the beginning of 2019 we have opened two new offices for the become brand, in Brisbane, Australia and Auckland, New Zealand.  These offices are managed by the existing Australian team, providing a more complete coverage of the local creative & digital market.

We will continue to look at other opportunities to expand our brands' presence and geographic coverage. We also anticipate more bolt-on investments over the next few years, to accelerate the entry into new service lines or regions for existing brands.

·      Improving productivity to generate better returns

We have identified three core areas where we can provide central support to our brands to help them drive improvements in productivity, being technology, learning & development and marketing.  The central team is there to help shape strategy, to avoid duplication of effort and to ensure best practice is shared and implemented across the Group.  A key part of improving productivity is to create more time for our consultants to engage directly with clients and candidates. To ensure we are delivering a "best in class" service we need to be constantly challenging and improving our approach.

Investing in technology will help to automate certain processes, increase efficiencies and free up time for consultants to spend engaging directly with candidates and clients.  By providing a continuous learning & development culture, we are investing in our own staff to help them deliver to their potential and to be the best that they can. As our markets are generally seeing candidate and skills shortages, the need to meaningfully engage with candidates increases.  This requires clear strategies for the use of social media and other marketing channels.

We measure productivity by the conversion ratio (adjusted operating profit divided by net fee income) and staff productivity ratio (net fee income divided by total staff costs). With the increase in central staff costs in 2018 and 2019, we expect to see these ratios challenged in the short term before we start seeing the benefits coming through from this investment.

Focus into 2019

Our focus for this year is simple: to improve the effectiveness of our services; to identify ways to work smarter and harder; and so deliver growth in both net fee income and profit across our Group.  Market forecasts are generally positive, albeit with increasing geo-political risks already reducing business confidence, in particular in the UK and Europe due to concerns over Brexit. However, with the quality of our brands we are confident about our ability to generate profitable growth and will continue to invest for the long term.

Operating review

United Kingdom

£m	2018	2017	2016	2015	2014
Revenue	85.7	86.7	70.1	62.7	65.8
Net fee income	23.7	23.4	19.0	18.4	15.9
Adjusted operating profit	2.9	2.6	2.1	3.1	3.1
% of Group net fee income	33%	34%	32%	37%	35%
Average number of employees	269	279	247	209	183

Countries - UK

Brands - 4ward Talent, Ball & Hoolahan, Become, ConSol Partners, FastTrack, Greycoat, LMA, McCall, Teamsales

Revenue reduced by 1% but net fee income was up 1% and adjusted operating profit increased by 12% reflecting a mix of performances across the UK businesses.

In professional services, LMA had a strong year, particularly in the first half, with the successful integration of our previously separate insurance brand in January. Headcount has continued to grow and they have expanded their offering by moving into new areas such as audit and change.

In IT, digital and design, ConSol Partners had a strong year.  The London office covers both the UK and Europe and in 2018 the diversification into Europe has continued with UK placements accounting for less than 30% of their business.  At the end of 2018 they launched a new brand, 4ward Talent, to focus on the higher volume IT markets using a lower cost delivery model to take advantage of the opportunities we see there.  In digital and design both brands had a challenging year in the UK.   However, action has been taken to reduce costs and restructure the businesses which has delivered improvements in the second half of the year and they are well positioned for a more positive 2019.

In technical & industrial, FastTrack saw reduced net fee income and profit after a weaker second half performance.  While we have seen some positive signs from investments made in new staff and training programmes, further investments will be needed to return to growth.

In domestic services, Greycoat delivered an improved second half performance with higher productivity resulting in full year operating profit growth ahead of the prior year.  In retail (new house sales), Teamsales had another solid year, although the start of 2019 has been slow with Brexit uncertainties impacting on the UK property market.

The uncertainty around the UK's exit from the European Union has impacted on UK business confidence as we moved through 2018.  Until now we have seen limited direct impact on our business, but we remain at risk from any UK economic slowdown or prolonged hiring processes due to fears over Brexit uncertainty.

Continental Europe

£m	2018	2017	2016	2015	2014
Revenue	96.1	98.8	92.0	75.2	76.8
Net fee income	15.6	16.5	16.8	14.5	15.0
Adjusted operating profit	4.7	6.1	6.6	5.7	5.0
% of Group net fee income	22%	23%	28%	30%	34%
Average number of employees	141	125	127	123	132

Countries - Austria, Finland, Germany

Brands - Headway, Medikumppani

Revenue reduced by 3% and net fee income was down by 5% with adjusted operating profit 23% lower, reflecting the impact of regulation changes in Germany.

The region is dominated by the Headway businesses in Germany and Austria.  The Austrian business had another solid year but the German businesses have been impacted by the regulatory changes that applied during the year.

The German temporary staffing business saw the benefit from investments made last year in training and marketing, with revenue up 3% on prior year, however margins reduced due to the client mix and new regulations. Cost reductions helped offset the margin decline, so profit was in line with prior year.  In the logistics business the main impact has been from the equal pay regulations which apply to temporary workers after nine months of assignment.  In line with client demand, workers have been transitioned ahead of the equal pay limit and this increased the churn of workers.  A number of clients also took over higher numbers of workers as permanent staff than normal, in response to the new regulations that place an 18 month time limit on how long a worker can be on a temporary contract with the same company. 

The impact of these regulatory changes has now been fully reflected with no further impact expected and the business is well positioned to move forward in 2019, albeit with temporary staffing numbers at the start of the 2019 lower than at the start of 2018. The German staffing market is the fifth largest in the world and remains highly attractive into the long term.

Our Finnish healthcare business, Medikumppani, performed in line with the prior year.  Their market remains challenging due to candidate shortages.

The increase in the overall employee numbers reflects certain staff moving onto Headway's payroll from client companies.  This has led to an increase in the recognised head count and net fee income but is neutral at the operating profit level.

Asia Pacific

£m	2018	2017	2016	2015	2014
Revenue	136.8	132.7	77.3	29.2	27.7
Net fee income	24.5	22.2	18.6	14.2	12.3
Adjusted operating profit	6.1	4.5	3.3	2.4	1.8
% of Group net fee income	34%	33%	32%	29%	28%
Average number of employees	1,023	816	795	673	545

Countries - Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Philippines, Singapore, Thailand, UAE, Vietnam

Brands - Become, BW&P, FINES, IMS, LMA, Monroe Consulting, Rishworth Aviation, Skillhouse

Revenue grew by 3%, net fee income by 10% and adjusted operating profit by 36%.  This was primarily driven by Rishworth (aviation) and IMS (offshore recruitment services) which both had strong years, along with the turnaround from prior year losses at BW&P (technical & industrial).

The Rishworth business has contributed strongly in the year, benefitting from the investment in new bases made in 2017.  However, we see a more challenging market for 2019.

IMS, our RPO and offshore recruitment services business in India, delivered strong growth with net fee income up by over 50% on the prior year, primarily driven by clients in the UK and US.  They successfully opened an office in a new location in Jaipur in the second half of the year, giving them a presence in a second city and an enlarged talent pool to recruit from.  In early 2019 they are moving three separate offices in Ahmedabad to a newly built modern office, providing high quality space to expand into.

In professional services, the LMA business in Singapore grew net fee income again and with a strong second half performance is well positioned for 2019.

In the IT, digital and design sector, Skillhouse in Japan was negatively impacted by previously highlighted regulatory changes which led to a reduction in its number of temporary workers.  These regulatory changes limit the amount of time workers can be on a temporary contract with clients.  The impact of these has now been fully reflected and with no further impact expected the business is well placed to rebuild in 2019, but from a lower starting point.  The become brand had a solid year, performing well in Australia and Hong Kong.  In January 2019 they opened two new offices in Brisbane, Australia and Auckland, New Zealand.

In executive search, Monroe Consulting delivered mixed results across South East Asia with an increase in net fee income but an overall drop in operating profit.  We were pleased to see an improved second half performance and we remain confident in the opportunities for this brand.

Americas

£m	2018	2017	2016	2015	2014
Revenue	48.6	38.9	31.0	20.2	17.6
Net fee income	8.9	7.3	4.6	2.1	1.4
Adjusted operating profit	2.3	1.0	0.8	0.4	0.1
% of Group net fee income	12%	10%	8%	4%	3%
Average number of employees	175	132	98	76	68

Countries - Chile, Mexico, Peru, USA

Brands - Alternattiva, ConSol Partners, Grupo Solimano, Monroe Consulting, Pharmaceutical Strategies

Revenue grew by 25%, with net fee income up by 22% and adjusted operating profit more than doubling.  This reflects both a strong performance by ConSol Partners in the US and the investment in Grupo Solimano in July, which has strengthened our presence in Latin America.

In the IT, digital and design sector, ConSol Partners saw a strong rebound in the US, following a slow first half of 2017.  Demand continues to be positive in their niche markets and we are looking at opportunities to expand our presence.

In Chile, Alternattiva recorded another year of growth as they continue to develop their permanent and temporary businesses alongside their core outsourcing operation.

In Peru, Grupo Solimano joined the Group in July and performed in line with our expectations.  This investment increases our presence in Latin America and we see good opportunities for our businesses in the region to work together to drive growth.

In Healthcare, Pharmaceutical Strategies in the US delivered a stable year-on-year performance, but phasing issues in the last quarter offset a stronger first half result.  We continue to see good potential for growth in this business and sector.

In Executive Search our Monroe Consulting business in Chile saw good growth and continues to develop positively.  In Mexico, business was challenging and there was an increased loss.  We are taking the necessary measures to turn the business around and continue to see good opportunities in the market.

Spencer Wreford

Chief Executive Officer

12 March 2019

Finance review

Overview

The Group has delivered another year of record profits with adjusted profit before tax increasing 4% to £11.4m and reported profit before tax increasing by 16% to £9.4m.

We have continued to make progress on reducing our debt levels with adjusted net debt down to £17.1m (2017: £19.5m) and our debt to debtors ratio reducing to 36% (2017: 45%), while also continuing to invest in the business, including the investment in Grupo Solimano in July 2018.

Income statement

	2018	2017	% change	% change constant currency**
Revenue (£m)	366.8	357.1	+3%	+5%
Net fee income (£m)	72.3	69.4	+4%	+6%
Operating profit (£m)	10.3	8.7	+18%	+21%
Adjusted operating profit (£m)*	12.3	11.6	+6%	+8%
Profit before tax (£m)	9.4	8.1	+16%	+18%
Adjusted profit before tax (£m)*	11.4	11.0	+4%	+6%
Diluted earnings per share (p)	9.1	7.9	+15%
Adjusted diluted earnings per share (p)*	12.1	12.5	-3%

* Adjusted to exclude amortisation of intangible assets identified in business combinations, exceptional items, gain or loss on disposal of businesses, fair value charges on acquisition of non-controlling shares and in the case of earnings also adjusted for any related tax.  See note 7 for a reconciliation between profit before tax and adjusted profit before tax.

** The constant currency movement is calculated by translating the 2017 results at the 2018 exchange rates

Net fee income increased by 4%, 6% in constant currency.  Adjusted operating profit increased by 6%, 8% in constant currency, reflecting growth across three of our four regions. A detailed analysis by region is provided in the operating review. In order to improve transparency we have shown central costs separately rather than allocating these across the regions. Central costs have increased to £3.7m (2017: £2.6m) reflecting investments in central staff, including the appointment of Rhona Driggs as Chief Operating Officer, increased consultancy costs for project work around new technology, increased bonus provisions reflecting the lower levels paid for 2017, and the inclusion in 2017 of a credit for share based payments.

Adjusted profit before tax has increased by 4%, 6% in constant currency, to £11.4m with the increase in operating profit being partly offset by an increase in the net interest cost including interest payable on tax charges following tax audits.  Reported profit before tax shows a greater increase of 16%, 18% in constant currency, as the 2017 figure included a loss on the disposal of businesses not repeated in 2018.

Adjusted, diluted earnings per share have fallen by 3% to 12.1p.  This reflects an increase in the allocation of profits to non-controlling interests.  Those businesses with higher non-controlling ownership have performed strongly relative to the rest of the Group in 2018 resulting in this increased allocation. Reported diluted earnings per share increased by 15% to 9.1p.

Taxation

The total tax charge for the year is £3.6m (2017: £3.6m), representing an effective tax rate of 38% (2017:44%).  On an adjusted basis, the effective rate is 34% (2017: 37%).  Based on the tax rates in the countries in which we operate, an average tax rate of 30% (2017: 32%) would be expected. The effective rate is higher than this due to a number of factors:

·      The level of non-deductible expenses in the year (£0.3m).

·      Withholding and dividend taxes resulting from overseas operations (£0.2m).

·      Deferred tax assets not recognised for certain tax losses around the Group (£0.3m).

Balance sheet

	2018	2017
	£m	£m
Goodwill and intangible assets	54.8	54.1
Trade and other receivables	57.3	53.1
Cash and cash equivalents	25.4	25.9
Other assets	3.6	2.4
Assets	141.1	135.5
Trade and other payables	(41.9)	(42.0)
Borrowings	(37.2)	(37.9)
Other liabilities	(7.4)	(6.7)
Liabilities	(86.5)	(86.6)
Net assets	54.6	48.9

Goodwill and intangible assets represent the largest assets on the balance sheet and arise from the investments the Group has made. As at 31 December 2018 the balance was £54.8m (2017: £54.1m). The movements in the year were £2.0m arising on the acquisition of Grupo Solimano (see note 9), £1.8m of amortisation of intangible assets (2017: £1.8m), foreign exchange gains of £0.6m (2017: loss of £1.0m), software additions of £0.2m (£2017: £0.1m) and an impairment charge of £0.3m (2017: £nil). 

Trade and other receivables includes trade receivables of £48.1m (2017: £43.2m), the increase being mainly due to the investment in Grupo Solimano and the growth in revenue in the year.  Average debtor days for the Group in 2018 were 42 (2017: 41), with debtor days at 31 December 2018 of 44 (2017: 40).  The bad debt expense during the year was £0.7m (2017: £0.8m).

Cash and borrowings are discussed in the financing section below.

Cash flow

The Group is highly cash generative with a strong correlation between pre-tax profits and cash flows.  The Group measures its free cash flow as a key performance indicator, and defines this as net cash from operating activities per the cash flow statement excluding cash flows related to pilot bond liabilities (see financing section below).

	2018	2017
	£m	£m
Net cash from operating activities per cash flow statement	4.5	6.4
Cash flows related to pilot bonds	2.2	(2.3)
Free cash flow	6.7	4.1
Free cash flow (pre-tax)	9.6	9.6

The increase in free cash flow in 2018 compared to 2017 reflects lower tax payments in the year. As an international business the Group's tax cash flows can be more volatile but as can be seen from the table, pre-tax the Group's free cash flows are much more stable.  Free cash flow (pre-tax) for 2018 equates to 84% of adjusted profit before tax (2017: 87%) demonstrating the Group's ability to convert profits into cash. 

In 2018 the Group utilised its free cash flow as follows:

	2018	2017
	£m	£m
Free cash flow	6.7	4.1
Acquisition of businesses (net of net funds acquired)	(1.9)	(5.6)
Capital expenditure	(1.5)	(0.9)
Dividends paid to shareholders	(0.6)	(0.6)
Dividends paid to non-controlling interests	(0.4)	(0.1)
Purchase of own shares	(0.4)	(0.1)
Other	0.5	(0.6)
Reduction/(increase) in adjusted net debt	2.4	(3.8)

Acquisition of businesses principally relates to the investment in Grupo Solimano (see below for more details) with cash outflows of £2m offset by £0.2m of net funds within the acquired business.

Capital expenditure increased to £1.5m reflecting investments in offices in India.  Dividends paid to non-controlling interests were £0.4m and there was a cash outflow of £0.4m for the purchase of own shares which were subsequently transferred to the Empresaria Employee Benefit Trust (EBT).  As at 31 December 2018 a total of 576,204 shares are held in the EBT to be used to satisfy the exercise of options vested under the Company's long term incentive plans.  As at 31 December 2018, 2.0m options had vested but not been exercised.

Financing

The Group's treasury function is managed centrally and the Group's financial risk management policies are set out in note 24 of the annual report.

	2018	2017
	£m	£m
Cash and cash equivalents	25.4	25.9
Pilot bonds	(5.3)	(7.5)
Adjusted cash	20.1	18.4
Overdraft facilities	(22.0)	(20.4)
Invoice financing	(9.7)	(9.7)
Bank loans	(5.5)	(7.8)
Total borrowings	(37.2)	(37.9)
Adjusted net debt	(17.1)	(19.5)

Adjusted net debt at 31 December 2018 reduced to £17.1m (2017: £19.5m).  Adjusted net debt excludes cash of £5.3m (2017: £7.5m) held to match pilot bonds within the Rishworth Aviation business.  Where required by the client, pilot bonds are taken at the start of the pilot's contract and are repayable to the pilot or the client during the course of the contract or if it ends early.  There is no legal restriction over this cash, but given the requirement to repay it over a three year period, and that to hold these is a client requirement, we exclude cash equal to the amount of the bonds when calculating our adjusted net debt measure.  At the start of 2019 a major client has removed the requirement to hold bonds and as a result an additional £1.9m of bonds will be repaid in 2019.  This has no impact on our adjusted net debt measure.

During 2018 the month end average adjusted net debt position was £19.0m (2017: £21.3m) with a high of £21.2m at 28 February (2017: £25.4m at 31 May) and a low of £17.1m at 31 December (2017: £18.8m at 31 January).

Our debt to debtors ratio (adjusted net debt as a percentage of trade receivables) has reduced to 36% (2017: 45%) reflecting the reduction in the levels of debt in the year.

We continue to be focused on reducing our debt levels with the medium term aim of reducing the debt to debtor ratio to 25%.  In the short term we expect to see our adjusted net debt reduce and currently do not plan to make any significant investments that would increase this.

Total borrowings were £37.2m (2017: £37.9m) being mostly bank overdrafts (£22.0m) and invoice financing (£9.7m). The Group's borrowings are principally held to fund working capital requirements and are predominantly current borrowings due within one year.  As at 31 December 2018, £5.2m of borrowings are shown as non-current, the majority of which is the amount drawn under the Group's revolving credit facility.

Adjusted cash totalled £20.1m excluding £5.3m held respect of pilot bonds.  Under IFRS it is a requirement to show overdraft and cash balances gross, even where they are part of a formal pooling arrangement.  The adjusted cash balance of £20.1m includes £5.1m in respect of such arrangements where the net position is overdrawn.

The Group maintains a range of facilities to manage its working capital and financing requirements.  At 31 December 2018 the Group had facilities totalling £49.4m (2017: £50.5m).

	2018	2017
	£m	£m
UK facilities
- Overdrafts	7.5	8.6
- Revolving credit facility	10.0	10.0
- Term loan	-	2.0
- Invoice financing facility	13.0	13.0
Total UK facilities	30.5	33.6
Continental Europe facilities	12.9	12.7
Asia Pacific facilities	1.5	1.3
Americas facilities	4.5	2.9
	49.4	50.5
Undrawn facility (excluding invoice financing)	16.7	19.1

An additional £5.0m accordion arrangement, connected to the revolving credit facility, has been agreed in principle with the bank, but would need new credit approval for any draw down.

During the year a German term loan of €5m, which was due to be repaid in 2018, was refinanced by extending the German overdraft by €5m, and the Group's $1.5m UK overdraft facility was cancelled following the implementation of a local $2m facility in the US in 2017.  The UK term loan was fully repaid in the year in line with its payment schedule. The invoice financing facilities in Chile have been increased reflecting their business growth.

As part of the revolving credit facility we need to meet bank covenant tests on a quarterly basis.  All tests have been met during the year.  The covenants and our performance against them as at 31 December 2018 are as follows:

Covenant	Target	Actual
Net debt: EBITDA	< 2.5 times	0.6
Interest cover	> 5.0 times	17.0
Debt service cover	> 1.25 times	4.4

Management equity

The management equity philosophy is a key part of our business model.  The model typically operates as follows:

Acquisition of shares

At least 51% of shares are held by Empresaria with the balance being held by management, either having been retained when Empresaria initially invested, or subsequently acquired by them at fair value.  Shares retained by management upon initial investment typically have no material changes to their rights and are termed first generation shares.  Shares subsequently sold to management, either because first generation shares have been acquired by Empresaria or where issued to incentivise the next tier of management, are termed second generation shares.  Second generation shares are acquired by management at a fair value which is reduced to make it more affordable by setting a profit threshold level such that these shares only create value once that threshold is exceeded.  Second generation shares typically have restrictions such as limited or no entitlement to dividends.

Holding period

Shares can be offered for sale after a specified holding period, typically four or five years.  Shares cannot all be sold in one year requiring a minimum of two or three years for full disposal.  While management can choose to offer their shares for sale, the decision to purchase these is solely at the discretion of Empresaria and there are no put or call options in place.  Empresaria's decision to buy shares is based on each specific situation, with consideration given to management succession plans, recent trading performance and the potential of the business in the next few years.

Valuation

The valuation basis is agreed up front and documented in the shareholders' agreements.  The valuation is typically based on the average profit after tax for the previous three years using Empresaria's trading multiple (share price divided by adjusted EPS) less 0.5 with a cap of 10, to ensure that it is earnings accretive to Empresaria's shareholders.

Based on the Group's results for the year ended 31 December 2018, and using the valuation mechanisms in shareholders' agreement but ignoring holding period requirements, the potential payment to acquire non-controlling interests in full in 2019 would be £11.0m based on Empresaria's share price at close on 8 March 2019, and could be up to a maximum of £14.4m using the maximum multiple that could be applied.  There is no legal obligation on the Group to acquire the shares held by management at any time.

In some situations the consideration payable under the shareholders' agreement for second generation equity may be greater than the fair value of the shares under IFRS 13 such as where there are restrictions over the rights of the shares, typically over dividends.  The valuation mechanism in the majority of shareholders' agreements uses an earnings multiple, which does not differentiate between shares with restricted rights and those without restrictions.  If the price paid for the shares is in excess of this fair value, this additional amount paid is recognised as a charge in the income statement.  These charges are treated as adjusting items when presenting our adjusted profit and earnings measures.

During the period the Group increased its investment in LMA Singapore from 60% to 75%, in Teamsales from 95% to 96.7% in IMS from 71% to 71.4%, in Monroe Indonesia from 90% to 100% and in BW&P from 88.4% to 98.5%.  Total consideration was less than £0.1m.

Investment in Grupo Solimano

In July the Group invested in 60% of the shares in Grupo Solimano, an established provider of outsourced and temporary staffing services in Peru. Total consideration is £2.2m, comprising cash payments of £2.0m in 2018 and a further £0.2m expected to be paid in 2019. The remaining 40% interest is held by senior management in line with our management equity philosophy.  Management have entered into our standard shareholders' agreement with shares expected to be held for a minimum holding period of four years before they can be offered for sale over a minimum of 3 years with no obligation on the Group to acquire them.

On acquisition, goodwill and intangible assets totalling £2.0m have been recognised.  More details are provided in note 9.

Dividend

During the year, the Group paid a dividend of 1.32p per share in respect of the year ended 31 December 2017.  For the year ended 31 December 2018, the Board is proposing a dividend of 2.0p per share, an increase of 52% and demonstrating the strength of the Group's balance sheet and the Board's confidence in the Group's prospects.   Subject to shareholder approval at the Annual General Meeting, the dividend will be paid on 31 May 2019 to shareholders on the register on 10 May 2019.

Going concern

The Board has undertaken a recent and thorough review of the Group's budget, forecasts and associated risks and sensitivities.  Given the business forecasts and early trading performance, the Group is expected to be able to continue in operational existence for the foreseeable future, being a period of at least 12 months from the date of approval of the accounts. As a result, the going concern basis continues to be appropriate in preparing the financial statements.

Tim Anderson

Group Finance Director

12 March 2019

Consolidated income statement 

		2018	2017
	Note	£m	£m
Revenue	2	366.8	357.1
Cost of sales		(294.5)	(287.7)
Net fee income	2	72.3	69.4
Administrative costs (including £0.7m (2017: £0.8m) in respect of trade receivable impairment losses)		(60.0)	(57.8)
Adjusted operating profit	2	12.3	11.6
Exceptional items	3	(0.3)	-
Fair value charge on acquisition of non-controlling shares	4	-	(0.3)
Loss on business disposal		-	(0.9)
Amortisation of intangible assets identified in business combinations		(1.7)	(1.7)
Operating profit	2	10.3	8.7
Finance income	5	0.2	0.1
Finance costs	5	(1.1)	(0.7)
Net finance costs	5	(0.9)	(0.6)
Profit before tax		9.4	8.1
Taxation	6	(3.6)	(3.6)
Profit for the year		5.8	4.5
Attributable to:
Owners of Empresaria Group plc		4.6	4.1
Non-controlling interests		1.2	0.4
		5.8	4.5
Earnings per share:
Earnings per share (pence):
Basic		9.2	8.0
Diluted	8	9.1	7.9
Adjusted earnings per share (pence):
Basic		12.2	12.6
Diluted	8	12.1	12.5

Consolidated statement of comprehensive income

	2018	2017
	£m	£m
Profit for the year	5.8	4.5
Other comprehensive income
Items that may be reclassified subsequently to the income statement:
Exchange differences on translation of foreign operations	0.8	(1.2)
Items that will not be reclassified to the income statement:
Exchange differences on translation of non-controlling interests in foreign operations	(0.1)	(0.1)
Other comprehensive income/(loss) for the year	0.7	(1.3)
Total comprehensive income for the year	6.5	3.2
Attributable to:
Owners of Empresaria Group plc	5.4	2.9
Non-controlling interests	1.1	0.3
	6.5	3.2

Consolidated balance sheet

		2018	2017
	Note	£m	£m
ASSETS
Non-current assets
Property, plant and equipment		2.1	1.4
Goodwill	10	37.1	35.9
Other intangible assets		17.7	18.2
Deferred tax assets		1.5	1.0
		58.4	56.5
Current assets
Trade and other receivables	13	57.3	53.1
Cash and cash equivalents	12	25.4	25.9
		82.7	79.0
Total assets		141.1	135.5
LIABILITIES
Current liabilities
Trade and other payables	14	41.9	42.0
Current tax liabilities		3.2	2.6
Borrowings	11,12	32.0	36.6
		77.1	81.2
Non-current liabilities
Borrowings	11,12	5.2	1.3
Deferred tax liabilities		4.2	4.1
		9.4	5.4
Total liabilities		86.5	86.6
Net assets		54.6	48.9
EQUITY
Share capital		2.4	2.4
Share premium account		22.4	22.4
Merger reserve		0.9	0.9
Retranslation reserve		5.8	5.0
Equity reserve		(7.7)	(7.5)
Other reserves		(0.7)	(0.7)
Retained earnings		23.2	19.6
Equity attributable to owners of Empresaria Group plc		46.3	42.1
Non-controlling interests		8.3	6.8
Total equity		54.6	48.9

Consolidated statement of changes in equity

	Equity attributable to owners of Empresaria Group plc
	Share capital	Share premium account	Merger reserve	Retranslation reserve	Equity reserve	Other reserves	Retained earnings	Total	Non-controlling interests	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Balance at 31 December 2016	2.4	22.4	0.9	6.1	(7.3)	(0.4)	16.2	40.3	6.4	46.7
Profit for the year	-	-	-	-	-	-	4.1	4.1	0.4	4.5
Exchange differences on translation of foreign operations	-	-	-	(1.1)	-	(0.1)	-	(1.2)	(0.1)	(1.3)
Total comprehensive income for the year	-	-	-	(1.1)	-	(0.1)	4.1	2.9	0.3	3.2
Dividend paid to owners of Empresaria Group plc	-	-	-	-	-	-	(0.6)	(0.6)	-	(0.6)
Dividend paid to non-controlling interests	-	-	-	-	-	-	-	-	(0.1)	(0.1)
Acquisition of non-controlling shares	-	-	-	-	(0.2)	-	-	(0.2)	0.2	-
Purchases of own shares in Employee Benefit Trust	-	-	-	-	-	-	(0.1)	(0.1)	-	(0.1)
Share-based payments	-	-	-	-	-	(0.2)	-	(0.2)	-	(0.2)
Balance at 31 December 2017	2.4	22.4	0.9	5.0	(7.5)	(0.7)	19.6	42.1	6.8	48.9
Profit for the year	-	-	-	-	-	-	4.6	4.6	1.2	5.8
Exchange differences on translation of foreign operations	-	-	-	0.8	-	-	-	0.8	(0.1)	0.7
Total comprehensive income for the year	-	-	-	0.8	-	-	4.6	5.4	1.1	6.5
Dividend paid to owners of Empresaria Group plc	-	-	-	-	-	-	(0.6)	(0.6)	-	(0.6)
Dividend paid to non-controlling interests	-	-	-	-	-	-	-	-	(0.4)	(0.4)
Acquisition of non-controlling shares	-	-	-	-	(0.2)	-	-	(0.2)	0.2	-
Purchases of own shares in Employee Benefit Trust	-	-	-	-	-	-	(0.4)	(0.4)	-	(0.4)
Business combination (see note 9)	-	-	-	-	-	-	-	-	0.6	0.6
Share-based payments	-	-	-	-	-	-	-	-	-	-
Balance at 31 December 2018	2.4	22.4	0.9	5.8	(7.7)	(0.7)	23.2	46.3	8.3	54.6

Consolidated cash flow statement

	2018	2017
	£m	£m
Profit for the year	5.8	4.5
Adjustments for:
Depreciation and software amortisation	1.0	1.0
Amortisation of intangible assets identified in business combinations	1.7	1.7
Exceptional items (non-cash)	0.3	-
Loss on business disposal	-	0.9
Share-based payments	-	(0.2)
Taxation charge	3.6	3.6
Net finance costs	0.9	0.6
	13.3	12.1
Increase in trade and other receivables	(2.2)	(2.8)
(Decrease)/increase in trade and other payables (including pilot bonds outflow of £2.2m (2017: inflow of £2.3m))	(2.7)	3.3
Cash generated from operations	8.4	12.6
Interest paid	(1.0)	(0.7)
Income taxes paid	(2.9)	(5.5)
Net cash from operating activities	4.5	6.4
Cash flows from investing activities
Consideration paid for business acquisitions (net of cash acquired)	(1.7)	(5.6)
Consideration received for business disposals	0.1	0.1
Purchase of property, plant and equipment, and software	(1.5)	(0.9)
Finance income	0.2	0.1
Net cash used in investing activities	(2.9)	(6.3)
Cash flows from financing activities
Increase in overdrafts	1.5	15.3
Proceeds from bank loans	4.0	0.1
Repayment of bank loans	(6.4)	(9.2)
Increase in invoice discounting	0.1	0.7
Purchase of own shares in Employee Benefit Trust	(0.4)	(0.1)
Dividends paid to owners of Empresaria Group plc	(0.6)	(0.6)
Dividends paid to non-controlling interests	(0.4)	(0.1)
Net cash (outflow)/inflow from financing activities	(2.2)	6.1
Net (decrease)/increase in cash and cash equivalents	(0.6)	6.2
Effect of foreign exchange movement	0.1	(0.6)
Cash and cash equivalents at beginning of the year	25.9	20.3
Cash and cash equivalents at end of the year	25.4	25.9

	2018	2017
	£m	£m
Bank overdrafts at beginning of the year	(20.4)	(5.1)
Increase in the year	(1.5)	(15.3)
Effect of foreign exchange movement	(0.1)	-
Bank overdrafts at end of the year	(22.0)	(20.4)
Cash, cash equivalents and bank overdrafts at end of the year	3.4	5.5

1    Basis of preparation and general information

The financial information has been abridged from the audited financial information for the year ended 31 December 2018.

The financial information set out above does not constitute the Company's consolidated statutory accounts for the years ended 31 December 2018 or 2017, but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered following the Company's Annual General Meeting. The Auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their reports and did not contain statements under s498(2) or (3) Companies Act 2006 or equivalent preceding legislation.

Accounting policies have been consistently applied throughout 2017 and 2018, as amended when relevant to reflect the adoption of new standards, amendments and interpretations which became effective in the year.  New standards include IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers. These changes have not had a significant impact on the financial statements.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ('IFRS'), this announcement does not itself contain sufficient financial information to comply with IFRS. The Group will be publishing full financial statements that comply with IFRS in April 2018.

2    Segment and revenue analysis

Information reported to the Group's Executive Committee, considered to be the chief operating decision maker of the Group for the purpose of resource allocation and assessment of segment performance, is based on geographic region. The Group's business is segmented into four regions, UK, Continental Europe, Asia Pacific and the Americas.

The Group has one principal activity, the provision of staffing and recruitment services. Each business unit is managed separately with local management responsible for implementing local strategy.

The analysis of the Group's business by geographical origin is set out below:

Year ended 31 December 2018
	UK	Continental Europe	Asia Pacific	Americas	Central costs	Intragroup eliminations	Total
	£m	£m	£m	£m			£m
Revenue	85.7	96.1	136.8	48.6	-	(0.4)	366.8
Net fee income	23.7	15.6	24.5	8.9	-	(0.4)	72.3
Adjusted operating profit*	2.9	4.7	6.1	2.3	(3.7)	-	12.3
Operating profit	2.4	4.5	5.4	1.7	(3.7)	-	10.3

* Adjusted operating profit is stated before amortisation of intangible assets identified in business combinations, exceptional items, gain or loss on disposal of businesses and fair value charge on acquisition of non-controlling shares.

Revenue of Continental Europe includes £79.9m from Germany and revenue of Asia Pacific includes £100.8m from New Zealand.

The analysis of the Group's revenue and net fee income by client destination is set out below:

Year ended 31 December 2018
	UK	Continental Europe	Asia Pacific	Americas	Rest of World	Intragroup eliminations	Total
	£m	£m	£m	£m	£m	£m	£m
Revenue	108.6	124.6	74.0	52.6	7.4	(0.4)	366.8
Net fee income	23.5	20.9	16.3	11.3	0.7	(0.4)	72.3

The analysis of the Group's business by geographic origin is set out below:

Year ended 31 December 2017
	UK	Continental Europe	Asia Pacific	Americas	Central costs	Total
	£m	£m	£m	£m	£m	£m
Revenue	86.7	98.8	132.7	38.9	-	357.1
Net fee income	23.4	16.5	22.2	7.3	-	69.4
Adjusted operating profit*	2.6	6.1	4.5	1.0	(2.6)	11.6
Operating profit	2.1	5.9	2.8	0.5	(2.6)	8.7

* Adjusted operating profit is stated before amortisation of intangible assets identified in business combinations, exceptional items, gain or loss on disposal of businesses and fair value charge on acquisition of non-controlling shares.

Revenue of Continental Europe includes £83.9m from Germany and revenue of Asia Pacific includes £97.5m from New Zealand.

The analysis of the Group's revenue and net fee income by client destination is set out below:

Year ended 31 December 2017
	UK	Continental Europe	Asia Pacific	Americas	Total
	£m	£m	£m	£m	£m
Revenue	107.8	129.8	78.7	40.8	357.1
Net fee income	20.8	22.9	17.0	8.7	69.4

3          Exceptional items

Exceptional items are those which, in management's judgement, need to be disclosed separately by virtue of their size or incidence in order for the reader to obtain a proper understanding of the financial information.

	2018	2017
	£m	£m
Impairment of goodwill	0.3	-
	0.3	-

An impairment charge of £0.3m related to a business in the Asia Pacific region has been recognised in 2018. Further details can be found in note 10.

4          Fair value charge on acquisition of non-controlling shares

In line with the Group's accounting policies, where amounts paid for non-controlling interest shares exceed the fair value of the equity acquired, the excess is charged to the income statement.  This typically occurs where there are restrictions over the rights of the shares as is often the case for second generation equity.  The Group's management equity philosophy is described in more detail in the finance review.

	2018	2017
	£m	£m
Fair value on acquisition of non-controlling shares	-	0.3
	-	0.3

Further details on the non-controlling shares acquired in the year are provided in the finance review.

5          Finance income and costs

	2018	2017
	£m	£m
Finance income
Bank interest receivable	0.2	0.1
	0.2	0.1
Finance costs
Invoice financing	(0.2)	(0.2)
Bank loans and overdrafts	(0.7)	(0.5)
Interest on tax payments	(0.2)	-
	(1.1)	(0.7)
Net finance cost	(0.9)	(0.6)

6          Taxation

The tax expense for the year is as follows:

	2018	2017
	£m	£m
Current tax
Current year income tax expense	4.3	3.8
Adjustment in respect of prior years	(0.1)	-
Total current tax expense	4.2	(3.8)
Deferred tax
Deferred tax credit - on origination and reversal of temporary differences	(0.6)	(0.2)
Total income tax expense in the income statement	3.6	3.6

7          Reconciliation of adjusted profit before tax to Profit before tax

	2018	2017
	£m	£m
Profit before tax	9.4	8.1
Exceptional items	0.3	-
Fair value on acquisition of non-controlling shares	-	0.3
Loss on business disposal	-	0.9
Amortisation of intangible assets identified in business combinations	1.7	1.7
Adjusted profit before tax	11.4	11.0

8          Earnings per share

Basic earnings per share is assessed by dividing the earnings attributable to the owners of Empresaria Group plc by the weighted average number of shares in issue during the year.  Diluted earnings per share is calculated as for basic earnings per share but adjusting the weighted average number of shares for the diluting impact of shares that could potentially be issued.  For 2018 and 2017 these are all related to share options.  Reconciliations between basic and diluted measures are given below.

The Group also presents adjusted earnings per share which it considers to be a key measure of the Group's performance.  A reconciliation of earnings to adjusted earnings is provided below.

	2018	2017
	£m	£m
Earnings
Earnings attributable to equity holders of the parent	4.6	4.1
Adjustments:
Exceptional items	0.3	-
Fair value charge on acquisition of non-controlling shares	-	0.3
Loss on business disposal	-	0.9
Amortisation of intangible assets identified in business combinations	1.7	1.7
Tax on the above	(0.3)	(0.4)
Non-controlling interests in respect of all the above	(0.1)	(0.2)
Adjusted earnings	6.2	6.4
Number of shares	Millions	Millions
Weighted average number of shares- basic	50.6	50.9
Dilution effect of share options	0.4	0.5
Weighted average number of shares- diluted	51.0	51.4
Earnings per share	Pence	Pence
Basic	9.2	8.0
Dilution effect of share options	(0.1)	(0.1)
Diluted	9.1	7.9
Adjusted earnings per share	Pence	Pence
Basic	12.2	12.6
Dilution effect of share options	(0.1)	(0.1)
Diluted	12.1	12.5

The weighted average number of shares (basic) has been calculated as the weighted average number of shares in issue during the year plus the number of share options already vested less the weighted average number of shares held by the Empresaria Employee Benefit Trust. The Trustees have waived their rights to dividends on the shares held by the Empresaria Employee Benefit Trust.

9          Business combination

On 11 July 2018 the Group invested in 60% of the shares in Grupo Solimano S. A. C., an established provider of outsourced and temporary staffing services in Peru.  This acquisition strengthens the Group's presence in the high-potential Latin American staffing market.  The remaining 40% of shares have been retained by management in line with the Group's management equity philosophy.

The total fair value of consideration is expected to be £2.2m, including cash paid during 2018 of £2.0m and £0.2m of additional cash consideration expected to be paid in 2019, subject to the audit of Grupo Solimano's results for the year ended 31 December 2018.

The fair value of assets and liabilities, at 100%, as at the date of the business combination are set out in the table below:

		Fair value
		£m
Intangible assets recognised on acquisition
Customer relations		0.6
Trade name and brands		0.2
		0.8
Property, plant and equipment		0.1
Trade and other receivables		2.4
Cash at bank		0.4
Trade and other payables		(1.8)
Bank Loan		(0.2)
Deferred tax liability recognised on intangible assets		(0.2)
Deferred tax assets		0.1
Net assets		1.6
Non-controlling interest (at 40%)		(0.6)
Goodwill		1.2
Total		2.2

The non-controlling interest at acquisition is assessed as the proportionate share in the recognised amounts of the acquiree's identifiable net assets.

Acquisition related costs of £0.1m have been incurred and are recognised directly in the income statement within administrative costs.

Goodwill comprises unrecognised intangible assets in respect of its employees and their close understanding of their client's requirements which are of great importance in the recruitment business . The subsidiaries of Grupo Solimano S. A. C. are run as one operating unit and the goodwill on acquisition has therefore been allocated to the business as a whole and not to a lower level.  None of the goodwill is deductible for tax purposes.

All payments made for the shares are considered to be part of the acquisition consideration. There are no contingent payments which meet the requirements to be assessed as a separate transaction, including in respect of post-acquisition employment services.

In 2018 the investment has contributed £7.6m to the Group's revenue, and £0.1m to the Group's profit.  If the investment had been completed on 1 January 2018 the Group's revenue for the year would have been £375.1m and the Group's profit for the year would have been £6.0m.

10        Goodwill

	2018	2017
	£m	£m
At 1 January	35.9	36.0
Business combinations (see note 9)	1.2	-
Impairment charge	(0.3)	-
Foreign exchange movement	0.3	(0.1)
At 31 December	37.1	35.9

Goodwill is reviewed and tested for impairment on an annual basis or more frequently if there is an indication that goodwill might be impaired. Goodwill has been tested for impairment by comparing the carrying amount of the group of cash generating units (CGUs) the goodwill has been allocated to, with the recoverable amount of those CGUs. The recoverable amounts of the CGUs are considered to be their value in use.

The key assumptions in assessing value in use are as follows:

Operating profit and pre-tax cash flows

The operating profit and pre-tax cash flow is based on the 2019 budgets approved by the Group's Board.  These budgets are extrapolated using short-term industry growth rate forecasts and long-term growth rates and margins that are consistent with the business plans approved by the Group's Board.  These cash flows are discounted to present value to assess the value in use.

Discount rates

The pre-tax, country specific rates used to discount the forecast cash flows range from 8% to 16% (2017: 8% to 15%) reflecting current local market assessments of the time value of money and the risks specific to the relevant business. These discount rates reflect the estimated industry weighted average cost of capital in each market and are based on the Groups weighted average cost of capital adjusted for local factors.

Pre-tax discount rates used by operating segment are as follows:

UK: 9.4%

Continental Europe: 8.3% to 8.6% Asia Pacific:  8% to 16%

Americas: 11% to 13%

Growth rates

The growth rates used to extrapolate beyond the most recent budgets and forecasts and to determine terminal values are based upon long term average GDP growth forecasts for the relevant country. Growth rates are capped at 6% for the purposes of this calculation and range from 0.5% to 6.0%.  GDP growth is a key driver of our business, and is therefore an appropriate assumption in developing long-term forecasts.

Growth rates used for various cash generating units in operating segments are as follows:

UK: 1.6%

Continental Europe: 1.3% to 1.4%

Asia Pacific: 0.5% to 6.0% (capped)

Americas:  1.6% to 5.0%

As a result of the impairment reviews carried out at 31 December 2018, an impairment charge of £0.3m has been recognised for a business in the Asia Pacific region.

As part of the impairment review reasonably possible changes in the growth rate and discount rate assumptions have been considered to assess the impact on the recoverable amount of each business. Were the long-term growth rate to reduce to nil no impairment charge would be recorded, while if the discount rate were to increase by 2% an impairment charge of £0.9m would be recorded in respect of one business in the Americas region.

Goodwill acquired in a business combination is allocated, at acquisition, to the groups of CGUs that are expected to benefit from that business combination.

The carrying amount of goodwill is allocated across the Group's operating segments as follows:

	2018	2017
	£m	£m
Goodwill by region
UK	11.9	11.9
Continental Europe	14.6	14.5
Asia Pacific	6.0	6.3
Americas	4.6	3.2
	37.1	35.9

Included within the above at 31 December 2018 are significant goodwill balances as set out in the table below along with the relevant discount rate and growth rate assumptions:

	Goodwill	Discount rate	Growth rate
	£m	%	%
Headway	13.1	8.3	1.4
ConSol Partners	4.2	9.4	3.0
Rishworth Aviation	3.8	11.0	3.6

11        Borrowings

	2018	2017
	£m	£m
Current
Bank overdrafts	22.0	20.4
Amounts related to invoice financing	9.7	9.7
Bank loans	0.3	6.5
	32.0	36.6
Non-current
Bank loans	5.2	1.3
	5.2	1.3
Borrowings	37.2	37.9

The following key bank facilities are in place at 31 December 2018:

A revolving credit facility of £10.0m, expiring in June 2021. As at 31 December 2018 the amount outstanding is £5.0m (2017: £1.0m). Interest is payable at 1.5% plus LIBOR or EURIBOR.

A UK term loan of £2.0m was repaid during the year (2017: £2.0m). Interest was payable at 1.5% above the UK base rate.

A German term loan of €5.0m expired in February 2018 (2017: €5.0m) and was replaced by an overdraft facility. Interest was payable at 3% above EURIBOR.

Overdraft facilities are in place in the UK with a limit of £7.5m. The balance on this facility as at 31 December 2018 was £3.9m (2017: £4.1m). The interest rate was fixed at 1% above applicable currency base rates. A $2.0m overdraft facility to provide working capital funding to Pharmaceutical Strategies had a balance as at 31 December 2018 of $0.8m (2017: $1.0m). Interest on this USD facility is payable at 2% over LIBOR. A €13m (2017: €8.0m) overdraft facility is also in place in Germany. This overdraft facility increased by €5m on the expiration of the term loan. The balance at 31 December 2018 was €7.8m (2017: €4.8m). Interest is payable at EURIBOR plus 2.3%.

The UK facilities are secured by a first fixed charge over all book and other debts given by the Company and certain of its UK subsidiaries, Headway in Germany and Rishworth Aviation in New Zealand.

There is an invoice financing facility in the UK of £13.0m (2017: £13.0m). As at 31 December 2018 the amount outstanding was £8.4m (2017: £8.2m). Interest is payable at 1.47% over UK base rate. There are also invoice financing facilities in Chile of £2.5m (2017: £1.5m). As at 31 December 2018 the amount outstanding was £1.3m  (2017: £1.5m). Interest is payable at approximately 6%.

Other overseas overdraft and loans had interest rates of between 1.0% and 7.4%.

12        Net debt

a)  Net debt

	2018	2017
	£m	£m
Borrowings	(37.2)	(37.9)
Cash and cash equivalents	25.4	25.9
Net debt	(11.8)	(12.0)

Cash and cash equivalents at 31 December 2018 includes cash of £380,000 (2017: £253,000) held by a subsidiary in China which is subject to currency exchange restrictions.

b) Adjusted net debt

	2018	2017
	£m	£m
Cash and cash equivalents	25.4	25.9
Less cash held in respect of pilot bonds	(5.3)	(7.5)
Adjusted cash	20.1	18.4
Borrowings	(37.2)	(37.9)
Adjusted net debt	(17.1)	(19.5)

The Group presents adjusted net debt as its principle debt measure.  Adjusted net debt is equal to net debt excluding cash held in respect of pilot bonds within the Rishworth Aviation business.  Where required by the client, pilot bonds are taken at the start of the pilot's contract and are repayable to the pilot or the client during the course of the contract or if it ends early.  There is no legal restriction over this cash, but given the requirement to repay it over a three year period, and that to hold these is a client requirement, cash equal to the amount of the bonds is excluded in calculating adjusted net debt.

c)  Movement in adjusted net debt

	2018	2017
	£m	£m
As at 1 January	(19.5)	(15.7)
Net (decrease)/increase in cash and cash equivalents per consolidated cash flow statement	(0.6)	6.2
Borrowings in business acquired	(0.2)	-
Increase in overdrafts and loans	0.9	(6.2)
Increase in invoice financing	(0.1)	(0.7)
Foreign exchange movement	0.2	(0.8)
Adjusted for decrease/(increase) in cash held in respect of pilot bonds	2.2	(2.3)
As at 31 December	(17.1)	(19.5)

13        Trade and other receivables

		2018	2017
		£m	£m
Current
Gross trade receivables		49.2	44.0
Less provision for impairment of trade receivables		(1.1)	(0.8)
Trade receivables		48.1	43.2
Prepayments		1.9	1.5
Accrued income		3.3	3.1
Corporation tax receivable		1.2	1.8
Other receivables		2.8	3.5
		57.3	53.1

Trade receivables include £34.8m (2017: £31.7m) on which security has been given as part of bank facilities.

14        Trade and other payables

		2018	2017
		£m	£m
Current
Trade payables		2.2	2.1
Other tax and social security		8.1	8.4
Pilot bonds		5.3	7.5
Client deposits		0.9	0.7
Temporary recruitment worker wages		3.9	3.9
Other payables		1.9	2.0
Accruals		19.4	17.4
Deferred consideration		0.2	-
		41.9	42.0

The pilot bonds represent unrestricted funds held by Rishworth Aviation at the request of clients that are repayable to the pilot over the course of a contract, typically between three and five years. If the pilot terminates their contract early, the outstanding bond is payable to the client. For this reason the bonds are shown as a current liability. As at 31 December 2018, if the bonds were to be repaid in line with existing contracts, £2.9m (2017: £4.5m) would be repayable in more than one year.  In 2019, one of Rishworth's largest clients has confirmed that it will no longer require bonds to be held.  As a result an additional £1.9m of the bonds outstanding as at 31 December 2018 are expected to be repaid in 2019.

15        Dividends

	2018	2017
	£000	£000
Amount recognised as distribution to equity holders in the year:
Final dividend for the year ended 31 December 2017 of 1.32p (2016: 1.15p) per share	644	564
Proposed final dividend for the year ended 31 December 2018 is 2.0p (2017: 1.32p) per share	969	644

The proposed dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

 

END

 

 

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