Final Results

RNS Number : 0559F

Franchise Brands PLC

05 March 2020

 

5 March 2020

FRANCHISE BRANDS PLC

("Franchise Brands", the "Group" or the "Company")

Final results for the year ended 31 December 2019 

A strong performance, driven by accelerating Metro Rod system sales

and acquisition of Willow Pumps

Franchise Brands plc (AIM: FRAN), a multi-brand franchise business, is pleased to announce its full year audited results for the year ended 31 December 2019.

Financial highlights

· Revenue increased by 24% to £44.0m (2018: £35.5m).

· Fee and direct labour income increased by 35% to £24.4m ( 2018: £18.1m).

· Adjusted EBITDA* increased by 29% to £5.2m (2018: £4.0m).

· Statutory profit after tax increased by 17% to £2.7m ( 2018 : £2.3m).

· Cash conversion rate against Adjusted EBITDA of 90% (2018: 79%).

·   Adjusted net debt** of £9.2m at 31 December 2019 (2018: £5.0m), after the £4m initial cash consideration for Willow Pumps.

· 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 £1m (2018: 34%).  

· 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.

Stephen Hemsley, Executive Chairman, commented:

"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:

Franchise Brands plc	+ 44 (0) 1562 826705
Stephen Hemsley, Executive Chairman
Chris Dent, Chief Financial Officer Julia Choudhury, Corporate Development Director
Allenby Capital Limited (Nominated Adviser and Joint Broker)	[phone]
Jeremy Porter / Liz Kirchner
Dowgate Capital Limited (Joint Broker)	[phone]
James Serjeant / Colin Climie
MHP Communications (Financial PR)	[phone]
Katie Hunt

About Franchise Brands plc

Franchise Brands is focused on building market-leading businesses in selected customer segments using primarily a franchise model. The Group currently has a combined network of over 450 franchisees across five franchise brands. Our focus is on established brands which can benefit from our shared support services, specialist sector expertise, management experience and group resources.

Franchise Brands' portfolio of market-leading service businesses grew in 2019 with the acquisition of Willow Pumps. The addition of Willow Pumps, a direct labour organisation, represented an important step in expanding Metro Rod and Metro Plumb's range of services to the commercial market.

The Group is organised into a B2B division comprised of Metro Rod, Metro Plumb and Willow Pumps, and a B2C division incorporates ChipsAway, Ovenclean and Barking Mad. This divisional organisation of our brands is designed to provide a greater focus and structure to support the strategic development of our B2B and B2C brands.

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.

Franchise Brands plc employs some 250 people across three principal locations in Macclesfield, Kidderminster and Aylesford.

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 Peter Molloy, the Managing Director of Metro Rod and Metro Plumb, have developed a more entrepreneurial approach to growing their businesses. This has resulted in almost half of the franchisees achieving annual turnover of more than £1 million in 2019, which we believe is the critical threshold that facilitates the investment in people and equipment that will further accelerate their growth. 

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 Cumbria and Northern Ireland where we previously had to sub-contract work won from national accounts. These new and driven franchisees will be one of the key engines for growth in 2020.

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 October 2019. It has subsequently exceeded our expectations in its first three months of ownership. There was a strong strategic rationale for the acquisition, as it furthers Metro Rod's Vision 2023 ambition of expanding its range of services to the commercial market, to provide a full range of drainage, pump and plumbing-related services on a national basis.

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 Ian Lawrence, to work with Metro Rod and Metro Plumb franchisees to develop this aspect of their business whilst continuing to grow Willow Pumps as a complementary DLO within the Group.

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 Kent towards the end of 2019. Practical demonstrations of above and below-ground pump installation and maintenance were provided, as well as opportunities to informally meet with Willow Pumps' excellent management team and discuss ways of working together. The opportunity was enthusiastically embraced by our franchisees and already around 20% of their engineers have been trained in the basic skills they will need to safely work on pump maintenance.

B2C Division

In order to facilitate future acquisitions and to ensure maximum overhead and operational efficiency, the B2C brands - ChipsAway, Ovenclean and Barking Mad - have been formed into an integrated division of the Group, the B2C division. As a result, the overheads of these businesses will no longer be separately attributed to the individual brands, and henceforth our reporting KPIs for this division will be franchisee recruitment, gross profit generated from each brand and EBITDA after divisional overhead. Tim Harris has been appointed Managing Director of this division and Rachel Stewart, Deputy Managing Director.

The strong franchise recruitment performance at ChipsAway combined with a reduced number of leavers resulted in net franchisee growth of 17 across the B2C division (2018: net 10 reduction). This resulted in growth of the combined B2C networks to 404 franchisees (2018: 387). With 205 franchisees, ChipsAway continues to be the largest B2C brand, generating 74% of the B2C gross profit before divisional overhead (2018: 70%).

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 Franchise Brands is a tribute to the hard work of both our franchisees and the employees of the Group. I would like to thank them for their support and continuing passion for our business and emphasise that this is just the start of what I hope will be a long and successful journey for us all.

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.

Stephen Hemsley

Executive Chairman

CHIEF FINANCIAL OFFICER'S REVIEW

The results for the year ended 31 December 2019 include our newly-acquired business, Willow Pumps, for the three months since acquisition on 7 October 2019. The 2018 numbers have been re-stated following accounting changes to leases as a result of our adoption of IFRS16, details of which can be found in the notes to the Financial Statements.

	2019	2018 Restated	Change	Change %
	£'000	£'000	£'000
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 £44.0m (2018: £35.5m) with the additional revenue coming from Metro Rod and our DLOs, including £3.8m from Willow Pumps. Statutory revenue is made up of several different income streams that have different accounting policies and is not, therefore, a KPI that management tracks on a consolidated basis.

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 £24.4m in 2019 (2018: £18.1m).

£'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 Labour	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 £41.3m in the year (2018: £36.4m). This drove a 15% increase in MSF from these brands. The size and scale of our Metro Rod franchisees' businesses continues to evolve as they invest in new capacity and capabilities, such as increasing the number of tankers in the network from 30 to 49. 

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 Franchise Brands to recruit new, motivated franchisees to grow the territories more actively.

DLO sales increased by 99% in the current year to £9.1m (2018: £4.6m). DLO sales arise from three principal areas: Willow Pumps, the Metro Rod corporate businesses (Kemac, Metro Rod Exeter and Metro Rod Kent & Sussex) and the ChipsAway Car Care Centre. Much of this growth (£3.8m) has been derived from the addition of Willow Pumps to the Group for the last three months of the year.

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%
A djusted 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 £3.2m in the year (2018: £2.7m) principally driven by the increase in the Metro Rod MSF income.

Adjusted EBITDA at B2B-DLO was £0.5m (2018: £nil) and arose exclusively from Willow Pumps in the three months of our ownership, post acquisition. The business enjoyed particularly strong trading at the end of the year, a performance that exceeded expectations at the time of the acquisition.

Adjusted EBITDA at our B2C division (ChipsAway, Ovenclean and Barking Mad) increased 7% in the year to £2.5m (2018: £2.4m) due to improved franchisee recruitment. The B2C division continues to be strongly cash generative, supporting the Group's debt-servicing capacity.

Group overheads remained prudently controlled at £1.0m and, as a result, Adjusted EBITDA for the Group increased by 29% to £5.2m (2018: £4.0m).

Earnings

Depreciation and amortisation costs increased 53% to £1.0m (2018: £0.7m) as a result of our investment at our DLOs, the addition of the assets at Willow Pumps, and continuing software development at Metro Rod. The share-based payment charge increased 71% to £0.2m (2018: £0.1m) as a result of the new share options granted at the end of 2018 and during 2019, including share options granted at the time of the acquisition of Willow Pumps.

The finance charge of £0.4m increased 5% in the year (2018: £0.3m) as a result of the higher net debt position following the largely debt funded acquisition of Willow Pumps. The finance charge does not solely represent bank interest, but also includes interest on leases. Interest cover remains strong, with the interest charge being 14.5 times covered by Adjusted EBITDA (2018: 12.0 times).

Statutory profit before tax increased 14% to £3.3m (2018: £2.9m). The tax charge for the year at 17% (2018: 19%) was lower than the statutory rate of 19% due to the tax relief on the exercise of share options during the year.  As a result, the statutory profit after tax increased by 17% to £2.7m in the year (2018: £2.3m).

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 £268,000, taking the total number of shares in treasury to 538,700. 513,700 of these treasury shares were then used to satisfy the exercise of share options, resulting in a balance of 25,000 Ordinary Shares in treasury at 31 December 2019 (2018: 200,000). We issued a further 569,633 Ordinary Shares to satisfy share option exercises and 1,212,121 as part of the consideration for the acquisition of Willow Pumps. This resulted in the total number of Ordinary Shares in issue increasing to 79,513,787 at 31 December 2019 (2018: 77,732,033) and a basic weighted average number of Ordinary Shares in issue and not in treasury of 77,948,178 (2018: 77,687,101).

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 £4.7m (2018: £3.2m) resulting in a cash conversion rate from Adjusted EBITDA of 90% (2018: 79%).

Expenditure on new equipment for the DLOs (£1.0m), the fit-out of our Car Care Centre at Kidderminster (£0.1m), and the capitalised element of our IT investment (£0.7m) totalled £1.8m (2018: £0.6m). This included the purchase of a new tanker for Willow Pumps (£0.3m), which took the number of tankers in the corporate fleet to 12 (2018: 1).

During the year we repaid £2.5m of our loan balances but renegotiated our facilities with our bank at the time of the acquisition of Willow Pumps. At the year-end our term loans totalled £6.3m (2018: £5.4m), we had utilised £3.0m of our £5.0m revolving credit facility ("RCF") (2018: £2.5m) and had cash in hand of £1.7m (2018: £2.9m). We also put in place a £2m overdraft facility for Metro Rod. This resulted in available cash and facilities of £5.7m (2018: £5.4m).

	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 31 December 2019 were £27.8m (31 December 2018: £24.4m) against adjusted net debt of £9.2m (31 December 2018: £5.0m), resulting in capital gearing of 33% (31 December 2018: 20%). On an income statement basis, our ratio of adjusted net debt to Adjusted EBITDA on a statutory basis was 1.77 times (2018: 1.24) and on a pro-forma basis (including Willow Pumps for a full 12 months) was 1.41 times. We consider such ratios to be prudent, giving us the capacity to consider further debt funded acquisitions, although as a policy we would not gear beyond an adjusted net debt to pro-forma Adjusted EBITDA ratio of more than 3 times.

Dividend

The Board is pleased to propose a final dividend of 0.65 pence per share (2018: 0.46 pence per share), taking the total dividend for the year to 0.95 pence per share (2018: 0.67 pence per share), an increase of 42%. The cost of the proposed final dividend is £517,000. The total dividend for the year is 3.7 times covered by statutory profit after tax and 4.6 times covered by adjusted profit after tax. It is the Board's intention to continue with our progressive dividend policy, reducing the cover as we reduce our net debt.

Subject to shareholder approval at the AGM on 28 April 2020, the final dividend will be paid on 25 May 2020 to shareholders on the register at the close of business on 11 May 2020.

Chris Dent

Chief Financial Officer

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2019

			2018
		2019	Restated
		£'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
Earnings per share
Basic		3.48	2.99
Diluted		3.42	2.95

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 31 December 2019

		2018	2017
	2019	Restated	Restated
	£'000	£'000	£'000
Assets
Non-current assets
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
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
Current liabilities
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
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
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
Treasury reserve	(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 31 December 2019

		2018
	2019	Restated
	£'000	£'000
Cash flows from operating activities
Profit for the year	2,710	2,325
Adjustments for:
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
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
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 Treasury shares	(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

			Share-
		Share	based
	Share	premium	payment	Merger	Treasury	Retained
	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
Dividend paid	-	-	-	-	-	(420)	(420)
Treasury shares	-	-	-	-	(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
Shares issued	10	185	(148)	994	396	(79)	1,358
Dividend paid	-	-	-	-	-	(592)	(592)
Treasury shares	-	-	-	-	(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 European Union (IFRSs), this announcement does not contain sufficient information to comply with IFRSs.

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 Franchise Brands plc for the year ended 31 December 2018 have been delivered to the Registrar of Companies and those for the year ended 31 December 2019 will be delivered following the Company's annual general meeting.The auditors have reported on those accounts; their reports were unqualified and did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports.Their reports for the year ended 31 December 2019 and 31 December 2018 did not contain statements under s498 (2) or (3) of the Companies Act 2006.

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
Basic earnings per share (p)		3.00	(0.01)	2.99
Diluted earnings per share (p)		2.96	(0.01)	2.95
	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 ChipsAway, Oven Clean and Barking Mad.

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
Goodwill			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. Goodwill represents the value of the business that does not qualify for separate recognition. The goodwill recognised includes certain intangible assets that cannot be separately identified and measured due to their nature. This includes control over the acquired business, and the scale and the future growth opportunities that it provides to the Group's operations. If the acquisition had occurred on 1 January 2019, Group revenue would have been £56.3m and Group profit before tax would have been £3.6m.

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 Franchise Brands plc will be held on 28 April 2020, notice of which will be sent to shareholders with the annual report and accounts.

 

END

 

 

FR SSUESLESSESD