Final Results
Evolution Group PLC
02 April 2007
Embargoed until 7.00am 2 April 2007
The Evolution Group Plc
(the "Evolution Group", the "Group", the "Company")
Preliminary results for the year ended 31 December 2006
Evolution Group, the listed investment bank and private client fund management
group, today announces its preliminary results for the year ended 31 December
2006.
Operational highlights
• Evolution Securities - business model re-balanced and improving
operational performance.
• Williams de Broe - strong performance; 175% increase in assets under
management to £2.2 billion; and strong organic growth in 2007.
• Group restructuring and integration of acquired businesses complete.
• Excellent start to 2007.
Financial highlights
• Total Group income (before fee and commission expenses) increased by 15%
to £84.7million (2005: £73.5 million).
• Clean profit before tax of £25.1 million (2005: £30.4 million) 1, in
line with trading update in October 2006.
• Profit before tax of £15.8million (2005: £63.6 million, including £39.4m
one-off gain).
• Strong balance sheet restored following agreement with ING on 27 March
2007.
• Increase in annual dividend of 25% with a final dividend proposed of
1.00p (2005: 0.80p) following the dividend of 0.50p paid in October 2006
(2005: 0.40p).
• Purchase of own shares for £17.3 million (2005: £49.6 million).
Commenting on the results and the Group's outlook, Martin Gray, Chairman, said:
"2006 was a year of significant change for the Evolution Group (the "Group" or
the "Company"). This occurred because of significant acquisitions, which
impacted all our operating subsidiaries, and the process of integrating those
businesses into the Group. I can report that we have made very good progress
with both the integration and in developing each of the businesses in line with
the strategy we have set for them.
In financial terms, I am pleased to report continued growth in our total Group
income (before fee and commission expenses) from £73.5m to £84.7m, an increase
of 15%. We have now achieved significant headline income growth for the past six
years.
2007 has started well. The integration of the Williams de Broe Plc acquisition
is virtually complete and the resultant merged businesses are materially
different and stronger. The re-development of Evolution Securities is gathering
pace, is on track and in line with objectives. We are continuing to experience
strong growth in our private client fund management business, which has been
re-branded Williams de Broe, and Evolution Securities China remains well placed
to benefit from the substantial opportunities that China offers. With our strong
balance sheet and a talented and committed team of people, we believe we are
very well positioned to benefit from the increased scale of our restructured
businesses and ready to move to the next stage of the Group's development."
1 Clean profit before tax clean earnings and adjusted operating profit are
defined in the Financial Review section below.
-Ends-
For further information, please contact:
The Evolution Group Plc 020 7071 4300
Alex Snow, Chief Executive Officer
Graeme Dell, Finance Director
Bell Pottinger Corporate and Financial 020 7861 3232
Charles Cook
Angus Prentice
Notes to Editors:
The Evolution Group Plc
The Evolution Group is the holding company of Evolution Securities Limited,
Williams de Broe Limited and Evolution Securities China Limited. Founded in
April 2001 and originally listed on the AIM, the Evolution Group joined the
Official List in 2003 and now has a market capitalisation of over £325 million.
Evolution Securities Limited is a leading investment bank focused on mid-cap UK
public companies. It provides a full range of investment banking services
including equity research, institutional sales and trading, market making and
corporate finance advice. Evolution Securities Limited has approximately 100
retained corporate clients. It is authorised and regulated by the Financial
Services Authority.
Williams de Broe Limited is a leading private client fund manager, with offices
in Bath, Birmingham, Bournemouth, Exeter, Guildford and London. Williams de Broe
is authorised and regulated by the Financial Services Authority.
Evolution Securities China Limited is a specialist Chinese investment banking
business with offices in London, Hong Kong and Shanghai. It offers UK based
institutional clients research and trading in listed Chinese stocks and Chinese
corporates access to the markets in London and Hong Kong.
CHAIRMAN'S STATEMENT
2006 was a year of significant change for the Evolution Group (the "Group" or
the "Company"). This occurred because of significant acquisitions, which
impacted all our operating subsidiaries, and the process of integrating those
businesses into the Group. I can report that we have made very good progress
with both the integration and in developing each of the businesses in line with
the strategy we have set for them.
In financial terms, I am pleased to report continued growth in our total Group
income (before fee and commission expenses) from £73.5m to £84.7m, an increase
of 15%. We have now achieved significant headline income growth for the past six
years.
Whilst statutory operating profit last year declined to £11.9m (2005: £58.6m),
this is due both to the prior year's figures benefiting from significant profit
arising upon disposals of assets totalling £40.0m and the presence of
exceptional costs related to the acquisition and restructuring of Williams de
Broe.
We are refocusing Evolution Securities Limited to a more stable and, we believe,
more sustainable model. As we do that, the business has continued to make a
significant contribution to the Group, achieving total income (before fee and
commission expenses) of £60m (2005: £59.9m). Achieving a better balance between
primary and secondary market activities has been a priority for this business.
We have made very real progress towards meeting this objective in the second
half of 2006.
Williams de Broe Limited (formerly Christows Limited), the private client fund
management business, completed the year with a record quarter for total income
and profitability. This was the result of the combined value of funds under
management totalling £2.2bn, up 175% from £0.8bn at the end of 2005 following
the integration of the business onto a common platform. This contributed to the
overall increase in total income (before fee and commission expenses) from
£11.5m in 2005 to £20.6m in 2006, a growth of 79%. The re-branding to the
Williams de Broe name was completed smoothly, and has been well received by
clients, business partners, commentators and staff.
Evolution Securities China Limited completed an excellent year in 2006 with
total income increasing by 96% to £4.1m compared with £2.1m for 2005. The
business was strengthened both by the acquisition of Watterson Asia, a Hong Kong
based regulated corporate finance and securities dealing business, and by the
Company being granted separate regulatory status by the FSA for the London
business.
Update on acquisition of Williams de Broe
As reported previously, on 3 June 2006 the Group acquired 100% of the equity of
Williams de Broe Plc and its wholly-owned subsidiaries together with its sister
company Williams de Broe Administration Limited (together "the Acquired
Entities") from ING Belgium SA and Williams de Broe Holdings Limited
respectively (collectively "ING") (referred to as "the Acquisition").
Following the legal completion of the Acquisition we have worked to complete the
migration of that business into our existing operating businesses. After we had
done that, we have had an intense period of activity centred on finalising
residual client asset transfers, resolving legacy reconciliation issues,
completing clean up and realisation activities and preparing completion accounts
in preparation for the ultimate closedown of the resultant shell entities by
Members Voluntary Liquidation ("MVL").
These matters are now very nearly completed, and I believe that central to this
achievement has been the agreement of final transaction terms. When we announced
the transaction last year, recording that the Acquisition was ultimately to be
priced at net asset value seemed a simple enough objective. However, completing
a realisation process, necessary to determine the assets and liabilities
acquired, and documenting this to allow for two very thorough audits, by our own
and the sellers' independent accountants, has been a huge task.
The final transaction terms have now been agreed with ING and the amount of
£15.0m which we originally placed into escrow has been returned and payment of
£5.4m from ING has been received by the Group in compensation for the net
liabilities. Overall, the Acquisition has resulted in negative goodwill arising
of £11.3m which has been taken as a credit to the income statement. In addition,
we have received financial contributions toward extinguishing legacy issues and
the clean up process. Over the last ten months we have liaised extensively with
ING and this co-operation has contributed to the successful completion of the
transaction.
We remain confident of resolving all outstanding issues and ultimately
completing the final closedown and achieving the MVL of the acquired legal
entities in line with our objectives in the very near future.
I am very satisfied that the completion of this transaction on the terms agreed
contributes significant value to the Group.
Corporate governance and board development
These two areas have remained very much in focus through 2006 following the
initiatives I described at this time last year. Against a background of
significant change brought about by the acquisitions we have made we have
endeavoured to increase the effectiveness and accountability of our subsidiary
company boards, control functions and committees, and once again have made very
positive progress.
Last May, I announced the retirement of Oliver Vaughan after nine years of
service with the Group. Since then we have made both executive and non-executive
appointments. In June, Andrew Umbers was appointed to the Board, having joined
the Group as Chief Executive Officer of Evolution Securities in the previous
month. Andrew has brought to this role a clear strategic understanding of the
business opportunity and adds considerable strength to the executive team and
the Board.
In September, Mark Nicholls was appointed as a non-executive director and has
already made a valuable contribution to the Board bringing, as he does,
significant senior corporate finance executive and non-executive director
experience. These appointments have maintained our strategy of strengthening the
Board. We intend to continue that strategy.
Dividend
The Board recommends the payment of a final dividend of 1.0p per share (2005:
0.8p). This follows the interim dividend payment of 0.5p per share announced in
September and paid in October (2005: 0.4p). This increase in the overall
dividend is in line with our stated progressive dividend policy and is an
acknowledgement of our continued confidence in the Group's operating businesses.
Share buyback
During 2006 the Company undertook a share buyback programme purchasing 9,912,152
shares for cancellation at a total cost of £12.4m. We may continue with this
programme during the remainder of 2007 and to facilitate this we will be seeking
approval from shareholders for this at this year's Annual General Meeting.
Shares purchased by the Employee Trust
The Trust purchased 3,159,465 shares during the year (2005: 5,310,443) for total
consideration of £4.9 m (2005: £7.1m) through the Group's share incentive trust
to meet share incentive awards made to staff. The Company will continue this
process in 2007.
Balance sheet strength and cash balances
At the year-end, the Group had net assets of £153.1m (2005: £156.7m) and, of
this, the Group's cash balances were £88.6m (2005: £138.0m). Maintaining a
strong balance sheet is core Group policy. We pursue that strategy through the
management of these two values. The final adjusting settlement relating to the
acquisition of Williams de Broe, straddling as it does the balance sheet date
has temporarily reduced the Group's cash reserves. Greater levels of working
capital in trading portfolio assets and net trade receivables have also
influenced the Group's cash position, as has the purchase of the Group's own
shares.
The Group Employees
The entire Group is underpinned by the continued exceptional performance of our
employees. In a year of such dramatic change to the Group where, through
acquisitions and growth, we have welcomed 100 new colleagues to the Group, this
more than ever is the case. I have been hugely impressed at the manner, speed
and efficiency with which our teams have completed the physical integration of
the businesses which have been acquired and the way in which the combined units
have then performed. I am confident that this will develop further in the
future. I should like to thank each and every one of our colleagues for their
contribution towards the Group's financial performance and other achievements
last year.
Outlook
2007 has started well. The integration of the Williams de Broe Plc acquisition
is complete and the resultant merged businesses are materially different and
stronger. The re-development of Evolution Securities is gathering pace, is on
track and in line with objectives. We are continuing to experience strong growth
in our private client fund management business, which has been re-branded
Williams de Broe, and Evolution Securities China remains well placed to benefit
from the substantial opportunities that China offers. With our strong balance
sheet and a talented and committed team of people, we believe we are very well
positioned to benefit from the increased scale of our restructured businesses
and ready to move to the next stage of the Group's development.
Martin Gray
Chairman
31 March 2007
Chief Executive's Report
The Group has made good progress during 2006 towards its stated goal of
achieving greater balance across its business units and by revenue type. This
significant rebalancing was achieved through undertaking strategic change in
2006, which has had a negative impact on last year's overall profitability.
However, I am confident that this approach was absolutely the right one in
respect of the creation of long-term shareholder value.
Income breakdown
The detailed income analysis by segment and by operating company is shown below.
2006 2005
£'000 % £'000 %
Investment banking and markets
Evolution Securities1 60,049 71 59,888 82
Evolution Securities China2 4,077 5 2,082 3
-------- --------
Sub-total 64,126 61,970
Investment Management
Williams de Broe3 20,621 24 11,502 15
Other
Other income (58) - 3 -
-------- ----- -------- -----
84,689 100 73,475 100
Commissions paid away (1,788) (1,500)
-------- --------
Total income 82,901 71,975
-------- --------
Note
1The results of Evolution Securities are defined as those arising from Evolution
Securities Limited ("ESL") and its subsidiary Evolution Securities (US) Inc.
("ESUS") and the investment banking business of the Acquired Entities since
acquisition.
2The results of Evolution Securities China are defined as those arising from
Evolution Securites China Limited ("ESCL") and its subsidiary Evolution
Watterson Securities Limited ("EWSL").
3The results of Williams de Broe are defined as those arising from Williams de
Broe Limited (formerly Christows Limited) ("WdB") and the private client fund
management business of the Aquired Entities since acquisition.
Evolution Securities
Within ESL, the core strategic objective is to become a better balanced business
through increasing our secondary market focus and penetration while naturally
reducing our reliance on primary market income.
In 2006, we started to achieve this by the addition of the Acquired Entities'
institutional business, the introduction of new leadership for ESL and the
setting and communication of the strategic vision for the future direction of
the business to become a leading UK investment bank.
Secondary markets
Research
Strength in equity research lies at the heart of any secondary market business.
ESL's origins lay in the small and mid-cap sectors, and we recognised that
coverage and expertise in large cap stocks was a pre-requisite to the
development of a successful secondary market franchise. The Acquired Entities's
research team was recognised for the quality of its large cap coverage. In
bringing the two research teams together, establishing sector teams, improving
working practices and introducing new leadership we have made a step change
towards our strategic goals. At the end of 2006 we had 24 analysts covering over
270 small, mid and large cap stocks.
Institutional Sales & Sales Trading
Institutional sales remain the focal route for communicating research ideas to
our institutional client base. Our enlarged sales presence can support the
increased research capability, and has good coverage of the UK, US and
Continental European client base.
The sales trading team of six people is aligned with the institutional dealing
desks in the UK, Europe and the US in line with the sales team structure. This
ensures the successful execution of business generated by the sales team
together with other orders generated by the increased market share across all UK
market indices.
Equity Market Making
Our market making strength has continued to assist our increased secondary
market activities. The market place is changing dramatically and ESL has
recognised this. We have taken a lead in a number of initiatives with the London
Stock Exchange, historically embracing the introduction of the SETSmm order book
and more recently being one of the first designated Large Size Market Makers.
In 2006 ESL expanded the number of stocks in which we make markets to include
the entire FTSE250 and FTSE100, which matches the increased research and sales
coverage. ESL now makes markets in a total of 1,214 stocks.
During the year ESL traded profitability. These revenues came from transacting
via both traditional voice based method and increasingly through further
penetration in the Retail Service Provider ("RSP") market providing direct
access to the retail clients of other member firms. In 2006 our total RSP volume
was 217,000 trades (2005: 130,000) representing 18% of the total business (2005:
31%).
In aggregate in 2006 ESL has experienced significant gains in market shares and
presence in both agency business and total transactional share across all UK
indices. This strategy requires a co-ordinated improvement across research,
sales and market-making. This strategy will continue in 2007.
Primary market activities
In 2006 our overall fundraising activities from IPOs and fundraisings from
existing listed clients raised £659m (2005: £864m). This was achieved through 42
transactions (2005: 51 transactions) of which 12 were IPOs (2005: 11). The
primary activities of the business are principally conducted within the
corporate finance and corporate broking areas.
Corporate Finance
The corporate finance team consists of 24 professionals arranged into teams with
a predominantly sectoral focus in line with the research structure. This
approach ensures that experienced individuals with relevant specialist knowledge
are in place to advise our corporate clients. Throughout 2006 we continued to
improve our internal controls via committees dealing with new business,
commitment, underwriting and pricing. I believe our procedures remain at the
leading edge of those within our peer group. This is evidenced by the success of
IPOs transacted by ESL in 2006 which registered a weighted average return of
31%.
Corporate Broking
In 2006 we performed a review of the way in which we had traditionally performed
fundraising activities and compared this with the results of an extensive survey
of other investment banks operating in the UK markets on all scales. As a result
of the review we implemented a dedicated corporate broking unit which is
focussed entirely on servicing the day to day requirements of our corporate
clients. In this capacity, it provides significant services in its own right but
also acts to co-ordinate the interaction of other areas of the firm with the
corporate client at appropriate times.
Investment Management
Our private client fund management business saw tremendous change during 2006,
and I believe, has significantly increased its value to the Evolution Group. The
brand name under which this business operates changed to Williams de Broe during
2006. The total income (before fee and commission expenses) increased by 79% to
£20.6m in 2006 (2005: £11.5m).
Clearly, the most obvious characteristic of change to the business is the brand
under which it operates. At the time of the Acquisition we reviewed the two
brand names and concluded that operating the private client fund management
business in the future under the Williams de Broe brand would maximise the
opportunity for growth. We believe the values, heritage and background to the
brand underpins a business servicing private individuals founded on security of
assets and a trusted service ethos. The brand change was completed in October
2006. We have now largely completed a revision of all client documents, and
product brochures. We believe the change of brand has been very well received
internally by all the stakeholders.
Funds under management ("FUM")
Growth in funds under management remains a core focus within our private client
fund management business. On this measurement, I believe 2006 can be
characterised as a period where a fundamental change of scale has occurred
because of a combination of continued strong organic growth of 44% from the 1
January 2006 value together with the acquisition of client funds under
management. At 31 December 2006 the aggregate FUM were £2.2bn (2005 £0.8bn), an
increase of 175%. There are still considerable opportunities for our FUM to
continue to grow further in 2007 and we are on target to achieve our aim of £3bn
of FUM.
Branch network
The combined Williams de Broe business has an excellent geographic spread with
branches in Bath, Bournemouth, Birmingham, Exeter, Guildford and London. Part of
the synergy of the merged entity has been combining the mutual offices in both
London and Birmingham, apart from the cost synergies, these actions have
significantly increased our presence in the larger financial centres which we
believe represent real growth opportunities.
Intermediary distribution
It was clear, looking at the two businesses before they were combined, that they
shared a common strategy based on building a broad distribution for their
products via relationships with various types of professional intermediary
including IFAs, lawyers and accountants. Central to this strategy has been the
extension of the philosophy of a specialist intermediary sales team focusing by
geographic location, which in 2006 won and introduced new funds under management
totalling £152m (2005: £75m) an increase of 103%. We have continued to grow our
intermediary sales capability, in scale and in terms of product offering which
has produced significantly higher FUM sales in 2007.
Products
The Williams de Broe product range is centred on core values of discretionary
fee paying portfolio management with its discretionary service and private
portfolio account service. Additionally, there are a number of specialist funds
and multi-manager services. The Williams de Broe Assetmaster product which has
been successfully performing with top quartile performance in its three years
since launch in all four of its sub funds. Finally, there has been considerable
interest in the specialist tax efficient portfolio services that were launched
at the end of 2005 providing products which have a national reach.
Evolution Securities China
The Group's specialist Chinese investment banking business completed its third
year of operation during the summer of 2006. The year was marked by the
completion of a fundraising round bringing in a small number of external
investors so broadening the shareholder base from the historic combination of an
Evolution Group majority with minority staff shareholders. This marks a
significant stage in the development of the business and comes as the financial
results for the year once again increased significantly. Headline income grew to
£4.1m (2005: £2.1m), an increase of 96%.
The year was also marked with the acquisition in June of Watterson Asia Ltd, a
corporate finance and share distribution business in Hong Kong regulated by the
Securities and Futures Commission, which broadened the reach and capability of
the business. This process was further enhanced by the achievement of separate
regulatory person status for the London business of ESCL, which had previously
operated as an appointed representative of its sister company, ESL.
Infrastructure, culture and employees
During 2006, when all the Group businesses underwent significant change, it was
vital to be able to place confidence in the Group's infrastructure, culture and
staff.
Our infrastructure in its broadest terms incorporates the whole physical, people
and technology based support for the revenue generating activities of the
operating businesses. Under such circumstances a key test is the adaptability
and responsiveness of our people and systems to accommodate change in the
business. Last year, I believe the Group's infrastructure and support teams rose
and met every challenge that occurred as we acquired and integrated our
acquisitions. This would be a significant achievement in its own right, but was
made even more impressive by the pace by which such change was possible, the
limited impact that this had on business carrying on as usual as integration was
undertaken and the fact that the inherited infrastructure within the Acquired
Entities was in considerable disarray before integration. In addition to these
acquisitions we implemented a new trading platform within Evolution Securities
and undertook further initiatives with compliance, operations, IT and risk to
further enhance the control environment in operation within the Group.
The dynamics of employees and culture are never tested as much as at times of
major business integration of predominantly people based businesses. The key
last year in each business was being confident in understanding our cultural
objectives and then ensuring that these remained intact during and after
integration, reinforcing them through the governance structures in place.
This has been the third acquisition and significant restructuring that the Group
has undertaken in the past six years, and in many ways the most complicated. I
have been delighted by application and determination of our team in completing
this task. I am confident that the most recent acquisition of Williams de Broe
will create significant value for all our shareholders.
Outlook
2006 was characterised by a significant acquisition and a rebalancing of the
Group. Early in 2006 we decided that there would be a normalisation of corporate
revenues in UK mid-markets and sought to balance the Group's overall revenues
between large transactional driven and more repeatable earnings streams, yet
continue to demonstrate good growth within the Group. This required some real
change within the organisation, by way of new executive management and
employees, revised financial budgeting, and finally by the acquisition of
Williams de Broe.
I am pleased to report that revenues in the first quarter of 2007 have been very
strong, and there is a real balance in the breakdown of these revenues, which
provide a more stable platform for further growth in both of our business units.
This has been at the core of your Group's strategy.
We are however aware of increased volatility levels within the markets in which
we operate, and there is doubt over the extended credit cycle continuing in both
capital markets and financial products. This may create a more uncertain equity
environment. However these are challenges the Group is well equipped to face. We
believe that we can grow strongly both organically and, as we have recently
proven, through successful further acquisition.
Alex Snow
Chief Executive Officer
31 March 2007
FINANCIAL REVIEW
Adjusted operating profit
The statutory operating profit for the Group is shown below. The Board continues
to believe a truer reflection of the performance of the Group's on-going
operating businesses is afforded by the measure of 'Adjusted operating profit'
that excludes items that are one-off or non-recurring (including items that fall
to be treated as exceptional), are not part of the on-going business
profitability or, in the case of the cost of options and amortisation of
intangible assets which we view in the same manner as goodwill, represent
non-cash items. This measure is therefore used as the principal performance
criteria against which the vesting of stock awards is determined.
In addition, the Board reviews performance against the measure 'Clean profit
before tax', which represents adjusted operating profit plus net interest; and
also the measure 'Clean earnings', which represents clean profit before tax less
tax expense (excluding exceptional tax expense). The analyst community also
follows these measures as benchmarks for the Group's on-going performance.
The following table reconciles these measures and demonstrates a reduction in
adjusted operating profit by 17% to £21.2 in 2006 (2005: £25.4m) which is
principally due to duplicated operating costs following the acquisition of
Williams de Broe and the reduction of corporate finance fee income, particularly
within the fourth quarter when market conditions deteriorated. The Clean profit
before tax for 2006 is £25.1m (2005: £30.4m) and Clean earnings are £17.9m
(2005: £25.9m)
2006 2005
£'000 £'000 £'000 £'000
Operating profit 11,914 58,583
Items not included within adjusted
operating profit:
Profit on disposal of
available-for-sale
investments (5) (117)
Profit on part sale of subsidiary (1,087) -
-------- ------- -------- --------
Adjustment for provisions and
profits on investments (1,092) (117)
Amortisation of intangibles 213 128
Share of results of associated
undertakings (1) -
Cost of share options granted to
employees 7,823 6,744
-------- ------- -------- --------
Non-cash items 8,035 6,872
Exceptional items
--------------------------------------------------------------------------------
Exceptional loss/ (gain) arising on
disposal of available-for-sale
investments 437 (39,931)
Goodwill arising on acquisition (11,347) -
Operating expenses 12,488 -
--------------------------------------------------------------------------------
Total exceptional items 1,578 (39,931)
Impairment of intangibles 778 -
-------- ------- -------- --------
Adjustment for items that are one
off or non-recurring 2,356 (39,931)
Adjusted Group operating profit 21,213 25,407
Net interest receivable 3,923 5,007
------- --------
Clean profit before tax 25,136 30,414
Tax expense1 (7,218) (4,524)
------- --------
Clean earnings 17,918 25,890
------- --------
(Restated)
Clean earnings per share 8.14p 11.48p
Clean diluted earnings per share 7.52p 10.68p
1 Excludes the exceptional tax expense of £4,785,000.
Acquisition of Williams de Broe
In line with the structure of the Acquisition as outlined in the Chairman's
Statement the Directors have undertaken a detailed review of the financial
information of the Acquired Entities, including the legacy reconciliation and
accounting issues. The statutory accounts for the years 2004 and 2005 have now
been completed and filed. Finally, the Group has converted the financial
information of the Acquired Entities to the accounting policies adopted by the
Group. These amounts have now been included in the financial statements for the
Group and the fair value of net assets has been recorded in accordance with IFRS
3, 'Business Combinations'.
Following formal agreement between the Company and ING over the final
consideration to be paid for the business we are able to confirm that a receipt
from ING for the net liabilities existing at 3 June 2006 of £5.4m has been
received. Additionally, cash totalling £15.0m, which was placed in escrow on 3
June 2006, was returned in full on 27 March 2007 and has been included in the
balance sheet as cash and the interest receivable accrued since that date has
been taken to the Income Statement. In addition, the provision of working
capital to the Acquired Entities totalling £26m, which was paid to ING on 3 June
2006, in the form of a £5.0m subordinated loan and a £21.0m cash facility has
been included in cost of investment in accordance with IFRS 3.
Further details of the acquisition can be found below. The negative goodwill
arising on acquisition is £11.3m has been taken to the income statement in
accordance with IFRS 3, 'Business Combinations'.
Exceptional items
During 2006 the Group has incurred significant costs and income arising from the
purchase of the Acquired Entities and from its legacy available for sale
investment portfolio, which it considers to be exceptional.
A summary of all exceptional items for 2006, together with management's best
estimate of 2007 exceptional costs is provided below:
Estimated to be
expensed in
2006 2007 Total 2005
Exceptional items £'000 £'000 £'000 £'000
Goodwill arising on acquisition
Negative goodwill 11,347 - 11,347 -
Available for sale investments
Exceptional (loss)/gain arising on
disposal of available
for sale investments (437) - (437) 39,931
Operating expenses
Retention and loyalty bonuses (6,179) (1,319) (7,498) -
Costs to close down business (3,449) (1,000) (4,449) -
Other operating expenses (2,860) (500) (3,360) -
------- --------- ------- -------
(12,488) (2,819) (15,307) -
------- --------- ------- -------
Total Exceptional items (1,578) (2,819) (4,397) 39,931
------- --------- ------- -------
The Group will necessarily incur approximately £2.8m during 2007 in further
costs in closing down the Acquired Entities and in retaining key staff out to
July 2007. The Group considers these to be exceptional.
Segmental reporting
In accordance with IAS 14, 'Segment Reporting', the primary business segments
are, Investment banking and markets, Private Client fund management, and Other.
Investment banking and markets
2006 2005
£'000 £'000
---------- --------
Income (before fee and commission expenses) 64,126 61,969
Fee and commission expenses (1,259) (1,126)
---------- --------
Total income 62,867 60,843
Operating expenses (51,022) (41,446)
Profit on disposal of available-for-sale investments 5 117
---------- --------
Operating profit 11,850 19,514
Profit on disposal of available-for-sale investments (5) (117)
Exceptional operating expenses 2,443 -
Cost of options 6,440 4,701
---------- --------
Adjusted operating profit 20,728 24,098
========== ========
In line with the analysis presented in the Chief Executive Officer's Report
above, the Investment banking and markets segment is further divided into
Evolution Securities (consisting of ESL, ESUS) and ESCL (consisting of ESCL and
EWSL) together with the institutional investment banking business of the
Acquired Entities. The breakout of revenues and costs for these categories is
detailed below.
Evolution Securities
Within the investment banking business of Evolution Securities the overall level
of income has remained constant from 2005 to 2006. Costs have increased due
principally to the increased scale of the operation following the integration of
the institutional team from the Acquired Entities. Part of this cost increase
occurred when we operated two separate platforms immediately following the
Acquisition and was therefore duplicated.
As a result, and as disclosed below adjusted operating profit has fallen from
£24.0m in 2005 to £19.9m in 2006.
2006 2005
£'000 £'000
--------- ----------
Income (before fee and commission expenses) 60,049 59,887
Fee and commission expenses (1,177) (1,037)
--------- ----------
Total income 58,872 58,850
Operating expenses (47,763) (39,557)
Profit on disposal of available-for-sale investments 5 117
--------- ----------
Operating profit 11,114 19,410
Profit on disposal of available-for-sale investments (5) (117)
Exceptional operating expenses 2,443 -
Cost of options 6,391 4,701
--------- ----------
Adjusted operating profit 19,943 23,994
========= ==========
Evolution Securities' income analysis
Evolution Securities' total income (before fee and commission expenses) has
clearly benefited in 2006 from a stronger secondary income contribution with
reduced levels of primary revenue in line with our stated goals. Sales
commissions have grown in total following the increased market shares and
volumes in larger capitalisation stocks. Equity trading income was up by
approximately 42% in absolute terms, which has therefore had a greater impact on
the balance between primary and secondary income.
2006 2005
--------- ---------
Corporate finance 55% 68%
Sales commissions 21% 16%
Trading 21% 15%
Other 3% 1%
Evolution Securities' cost analysis
With the total income remaining stable in 2006 the cost/income1 ratio for the
Evolution Securities business has increased to 66% (2005: 59%). Non-performance
staff costs this year continue to make up the same proportion of the total cost
base as in 2005. The performance related staff costs have reduced in line with
the reduction in the overall profitability in the Evolution Securities business
as they are directly formulated based upon the profits achieved. The other costs
have increased principally because of the increases in premises, direct
transactions, systems and market data.
2006 2005
--------- ---------
Staff costs - Non performance related 24% 19%
Staff costs - Performance related 17% 35%
Other costs 40% 34%
Cost of options and exceptional staff costs 19% 12%
1 Excludes the impact of the cost of options and exceptional items.
Evolution Securities China
There has been further significant growth in the scale and profitability of this
business resulting in an adjusted operating profit of £0.8m in 2006 from £0.1m
in 2005.
2006 2005
£'000 £'000
---------- ----------
Income (before fee and commission expenses) 4,077 2,082
Fee and commission expenses (82) (89)
---------- ----------
Total income 3,995 1,993
Operating expenses (3,259) (1,889)
---------- ----------
Operating profit 736 104
Cost of options 49 6
---------- ----------
Adjusted operating profit 785 110
========== ==========
Evolution Securities China income analysis
ESCL's total income (before fee and commission expenses) has grown in all areas.
It can clearly be seen that the driver of growth is corporate finance income
which results from the interest from Chinese corporates for London listings and
of strong fees earned in Hong Kong in the second half from its newly acquired
subsidiary. This business is still at an early stage of development but we
believe the income opportunities with a more broadly spread footprint are good.
2006 2005
--------- ----------
Corporate finance 83% 66%
Sales commissions 10% 19%
Trading 7% 13%
Other income - 2%
Evolution Securities China cost analysis
ESCL's total cost1 base increased by over 70% as the scale of the business
changed during the year. This cost increase occurred mainly as a result of the
hiring of staff in London and Shanghai coupled with the acquisition of Watterson
Asia in Hong Kong. The level of performance related staff costs increased in
line with the operating profits since within this business bonus is calculated
based on percentage of profits.
2006 2005
--------- ----------
Staff costs - Non performance related 47% 53%
Staff costs - Performance related 21% 6%
Other costs 31% 41%
Cost of options 1% -%
1 Excludes the impact of the cost of options.
Private client fund management
Looking next at Williams de Broe (formerly Christows Limited), the Group's
private fund management business, 2006 has seen a continuation of the progress
of the last three years with an increase of 70% (2005: 24%) in adjusted
operating profit from £1.1m in 2005 to £1.9m in 2006. Its overall costs have
increased in part due to the increase in the scale of the business but given the
significant period that it took to integrate the businesses there are
significant duplicated costs arising from the dual platforms in operation before
full integration took place.
2006 2005
£'000 £'000
---------- ----------
Income (before fee and commission expenses) 20,621 11,503
Fee and commission expenses (529) (374)
---------- ----------
Total income 20,092 11,129
Operating expenses (19,568) (10,194)
---------- ----------
Operating profit 524 935
Exceptional operating expenses 910 -
Cost of options 453 146
---------- ----------
Adjusted operating profit 1,887 1,081
---------- ----------
Private client fund management income analysis
Williams de Broe's (formerly Christows Limited) mix of income has remained
relatively constant across the two periods demonstrating the consistency of the
business model and the similarity of this model with the Acquired Entities'
private client business. As the overall level of funds under management
increases, recurring management fees is becoming a significant source of stable
income for the Group. Sales commissions also have a good degree of dependability
as a result of the vast majority of funds being managed on a discretionary
basis.
2006 2005
--------- ---------
Sales commissions 54% 60%
Management fees 40% 34%
Other income 6% 6%
Private client fund management cost analysis
The overall cost/income1 ratio for Williams de Broe Limited has remained stable
at 93% (2005: 90%) but this has been significantly impacted by the duplicated
costs highlighted above. The cost structure within Williams de Broe Limited is
highly predictable and well managed. The process of absorbing the Acquired
Entities into Williams de Broe Limited, whilst still maintaining forward
momentum shows the strength of our business. The new scale of the business is
expected to result in significantly enhanced levels of profitability in the
future.
2006 2005
--------- ---------
Staff costs - Non performance related 31% 31%
Staff costs - Performance related 20% 27%
Other costs 42% 41%
Cost of options and exceptional staff costs 7% 1%
1 Excludes the impact of the cost of options and exceptional items.
Other activities
The Group's other activities consist of the central support costs not recovered
from the operating businesses, the profits on and provisions against available
for sale investments, the partial disposal of IP2IPO in the prior year and the
other legacy fixed asset investments. In 2006 this principally consists of the
post acquisition results of the Acquired Entities that have not been able to be
allocated to the institutional investment banking or private client businesses
but are not by their nature or size exceptional.
2006 2005
£'000 £'000
---------- ----------
Total income (58) 3
Operating expenses (1,054) (1,800)
(Loss) / profit on available for sale investments (437) 39,931
Profit on part sale of subsidiary 1,087
Share of associated undertaking operating profit 1 -
---------- ----------
Operating profit (461) 38,134
Loss / (profit) on available for sale investments 437 (39,931)
Profit on part sale of subsidiary (1,087)
Share of post tax results of associated undertaking (1) -
Impairment of intangibles 778 -
Amortisation 213 128
Goodwill arising on acquisition (11,347)
Exceptional operating expenses 9,136
Cost of options 930 1,891
---------- ----------
Adjusted operating (loss) / (profit) (1,402) 222
========== ==========
Investment portfolio
As previously reported, the Group has continued to exit from its legacy
investment portfolio. The Group seeks to extract value from this portfolio with
profit on sale of other available-for-sale investments totalling £0.1m in 2006
(2005: £4.3m). Set against this the Group has a negative fair value reserve of
£1.4m against the remaining portfolio of available-for-sale investments (2005:
1.7m).
Balance sheet strength and cashflow
The Group remains focused on maintaining a strong balance sheet. At the year-end
the Group had net assets of £153.1m (2005: £156.7m) including cash of £88.6m
(2005: £138.0m). At 31 December 2006 there were increased working capital
requirements compared with the previous year end as overall net trade
receivables and net trading portfolio assets in Evolution Securities Limited
were greater. This increase occurred as a result of greater daily transaction
volumes outstanding at the year end and the greater number of market making
stocks in which positions were held. In addition at the year end there were a
number of balances outstanding that were related to the close down of the
Acquired Entities which have been resolved as the entities assets and
liabilities have been realised prior to placing it into MVL.
Largely as a result of the increased working capital requirements outlined above
there is an overall net outflow of cash from operating activities of £4.4m. In
addition there is a £26.4m outflow from investing activities principally arising
from the two acquisitions and other fixed asset purchases. When taken together
with the £20.2m outflow from own and treasury share purchases and dividends
paid, there is a resultant overall decrease in cash for 2006 of £49.3m.
Dividend
The Board is proposing a final dividend per share for 2006 of 1.0p per share
(2005: 0.80p). This dividend is payable on 8 June 2007 to shareholders on the
register on 11 May 2007. This follows the dividend paid in October 2006 of 0.50p
per share (2005: 0.40p).
Graeme Dell
Finance Director
31 March 2007
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December
2006 2005
£'000 £'000
Fee and commission income 70,295 63,205
Fee and commission expenses (1,788) (1,500)
-------- ---------
Net fee and commission income 68,507 61,705
Trading income 13,042 9,206
Other income 1,352 1,064
-------- --------
Total income 82,901 71,975
Profit on disposal of available-for-sale investments (432) 40,048
Profit on part sale of subsidiary 1,087 -
Share of post tax results of associate 1 -
Goodwill arising on acquisition 11,347 -
--------------------------------------------------------------------------------
Operating expenses (70,502) (53,440)
Exceptional operating expenses (12,488) -
--------------------------------------------------------------------------------
Total operating expenses (82,990) (53,440)
--------- ---------
Operating profit 11,914 58,583
Interest receivable and similar income 4,097 5,044
Interest payable and similar charges (174) (37)
--------- ---------
Profit before tax 15,837 63,590
--------- ---------
Tax expense (7,218) (4,524)
Exceptional tax expense (4,785) -
----------------------------------- --------- ---------
Total tax expense (12,003) (4,524)
-------- ---------
Profit for the year 3,834 59,066
-------- ---------
-------- ---------
Profit attributable to minority interest 111 25
Profit attributable to equity holders of The Evolution
Group Plc 3,723 59,041
-------- ----------
3,834 59,066
-------- ----------
-------- ----------
(Restated)
Basic earnings per ordinary share 1.74p 26.18p
Diluted earnings per share 1.61p 24.36p
Dividend per share - Interim (paid) 0.5p 0.40p
- Final (proposed) 1.0p 0.80p
Dividend (£'000) - Interim (paid) 1,109 859
- Final (proposed) 2,888 1,781
CONSOLIDATED BALANCE SHEET
As at 31 December
2006 2005
£'000 £'000
ASSETS
Non-current assets
Goodwill 9,956 9,085
Other intangible assets 2,745 232
Property, plant and equipment 4,337 3,695
Deferred tax assets 10,973 7,693
Investment in associate 109 -
Trade and other receivables 35 -
----------- -----------
Total non-current assets 28,155 20,705
----------- -----------
Current assets
Trade and other receivables 133,298 42,069
Available-for-sale investments 1,926 2,027
Trading portfolio assets 26,243 13,446
Cash and cash equivalents 88,565 137,973
----------- -----------
Total current assets 250,032 195,515
----------- -----------
Total assets 278,187 216,220
----------- -----------
LIABILITIES
Current liabilities
Trade and other payables 106,952 51,196
Trading portfolio liabilities 14,728 6,200
Current tax liabilities 2,579 1,947
----------- -----------
Total current liabilities 124,259 59,343
----------- -----------
Non-current liabilities
Deferred tax liabilities 459 -
Provisions for liabilities 333 184
----------- -----------
Total non-current liabilities 792 184
----------- -----------
----------- -----------
Total liabilities 125,051 59,527
----------- -----------
EQUITY
Capital and reserves attributable to equity
shareholders
Share capital 2,214 2,255
Share premium 28,445 27,942
Capital redemption reserve 373 274
Merger reserve 51,230 51,230
Fair value and other reserves (1,491) (1,652)
Retained earnings 71,211 76,592
----------- -----------
Shareholders' equity excluding minority interest 151,982 156,641
Minority interest in equity 1,154 52
----------- -----------
Total equity 153,136 156,693
----------- -----------
----------- -----------
Total equity and liabilities 278,187 216,220
----------- -----------
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December
£'000 2006 £'000 2005
£'000 £'000
Cash flow from operating activities
Cash generated from operations (3,783) 25,749
Interest received 3,695 5,044
Interest paid (174) (37)
Tax paid (4,241) (5,824)
--------- --------
Net cash inflow from operating
activities (4,503) 24,932
Cash flows from investing activities
Purchase of subsidiary shares - (2)
Acquisition of subsidiary, net of cash (21,676) -
acquired
Fees in relation to acquisition of (1,733) -
subsidiaries
Purchase of property, plant and (2,188) (3,368)
equipment
Purchase of intangible assets (733) (106)
Purchase of available-for-sale assets (539) (1,074)
Net proceeds from sale of
available-for-sale 525 52,525
investments
Investment in associates (45) -
Dividends received 17 15
-------- --------
Net cash generated from investing
activities (26,372) 47,990
Cash flows from financing activities
Issues of ordinary share capital 436 1,614
Issue of ordinary share capital to 1,318 1
minorities
Dividends paid to the company's (2,888) (2,166)
shareholders
Purchase of shares held by the Trust (4,893) (7,111)
Purchase of treasury shares (12,384) (42,513)
-------- --------
Net cash used in financing activities (18,411) (50,175)
-------- --------
Net increase in cash and bank overdrafts (49,286) 22,747
Cash and bank overdrafts at beginning of 137,973 115,170
period
Exchange gains/(losses) and bank (122) 56
overdrafts --------- ---------
Cash and bank overdrafts at end of 8,565 137,973
period --------- ---------
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
For the year ended 31 December
2006 2005
£'000 £'000
(Restated)
Profit for the financial year 3,834 59,066
Available-for-sale investments:
Fair value changes taken to equity during the year (254) (2,059)
Fair value changes transferred to income statement on
disposal 536 (37,222)
Deferred tax on share options taken to equity (1,188) 133
---------- ----------
Net losses not recognised in income statement (906) (39,148)
---------- ----------
Total recognised income and expense for the year 2,928 19,918
---------- ----------
Attributable to:
Minority interest 111 25
Equity shareholders of the Parent 2,817 19,893
---------- ----------
2,928 19,918
---------- ----------
Other information
A summary of the accounting policies adopted by the Group is set out in the
half-year results announcement on 12 September 2006 with the exception of our
policy on 'Exceptional tems' noted below.
The financial information in this statement does not constitute the Group's
statutory accounts for the year ended 31 December 2006 within the meaning of
Section 240 of the Companies Act 1985. The statutory accounts for 2006 will be
finalised on the basis of the financial information presented by the Directors
in this preliminary announcement and will be delivered to the Registrar of
Companies following the Company's Annual General Meeting.
The Group will be circulating the full annual report and accounts to
shareholders and copies will be available from the Registered Office of the
Company, 9th Floor, 100 Wood Street, London EC2V 7AN from the date of despatch
to shareholders for one month.
The prior year diluted earnings per share ("EPS") figures have been amended to
reflect the adjustment to diluted shares for option costs not yet charged to the
income statement in line with IAS 33, 'Earnings per share'. This adjustment has
resulted in the prior year diluted EPS increasing by 1.01p from 23.35p to
24.36p.
The Consolidated Statement of Recognised Income and Expense now includes within
the prior year comparative deferred tax on share options which had been taken to
equity but excluded in error from this statement. This adjustment has resulted
in an increase in total recognised income of £133,000.
Exceptional items
Exceptional items are shown on the face of the consolidated income statement for
the Group. The Group presents them separately, in order to simplify
comparability between different financial periods. An exceptional item is
defined in terms of its size and/or nature. These do not arise from normal
trading operations and may not be individually significant in size but in
aggregate are worthy of separate disclosures.
BUSINESS COMBINATIONS
W deb MVL Limited (formerly Williams de Broe Plc) and Williams de Broe
Administrations Ltd ( 'Williams de Broe')
On 3 June 2006, the company acquired 100% of the share capital of the Acquired
Entities for a consideration of £16.3m.
The acquired business contributed revenues of £7.4m and £1.4m profit after tax
to the Group for the period from acquisition to 31 December 2006. We are unable
to provide the impact on consolidated revenue and consolidated profit for the
year ended 31 December 2006 had the Acquisition occurred on 1 January 2006.
On 2 October 2006, Williams de Broe Plc changed its name to, W deb MVL Limited.
Details of net assets acquired and goodwill are as follows:
£'000
Purchase consideration
Inter-company debts assumed by the Company 26,029
Acquisition expenses 1,609
Amount recoverable for negative net assets (5,413)
Amount recoverable from indemnities received (5,927)
-----------
Total purchase consideration 16,298
fair value of net identifiable assets acquired 27,645
-----------
Negative goodwill arising (11,348)
-----------
The assets and liabilities arising from the acquisition are as follows:
W deb MVL'S Acquisition Fair value Fair value
carrying amount adjustment adjustments
£'000 £'000 £'000 £'000
Cash and cash
equivalents 5,654 - - 5,654
Investments 70 - - 70
Customer
relationships - - 1,125 1,125
Brand - - 1,066 1,066
Distribution
channels - - 351 351
Receivables 263,250 - - 263,250
Payables (250,752) - - (250,752)
Working
capital from
Group (26,029) 26,029 - -
Net deferred
tax assets 7,468 - (587) 6,881
------------ --------- --------- ---------
Net
identifiable
(liabilities)
/ assets
acquired (339) 26,029 1,955 27,645
------------ --------- --------- ---------
Outflow of cash to acquire business, net of cash acquired:
£'000
Provision of working capital 26,029
Cash and cash equivalents in subsidiary acquired (4,623)
----------
Cash outflow on acquisition 21,406
----------
The provisional allocation of the purchase consideration to the assets acquired
will be reviewed based on additional information up to 3 June 2007. Based on
current available information management do not expect that any net adjustments
resulting from such reviews will have a material effect on the financial
position or results of the Group.
Annual General Meeting
The arrangements for, and notification of business to be transacted at, the
Company's Annual General Meeting will be provided with the annual report and
accounts to be circulated to shareholders in due course.
This information is provided by RNS
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