Good performances from UK and Rest of the World regions. Performance in Continental Europe impacted by previously highlighted issues in Germany, but overall business model has shown resilience and there are encouraging opportunities for growth.
|2011||2010||% change||% change (constant currency)|
|Net fee income||£46.9m||£46.5m||+1%||0%|
|Adjusted operating profit *||£5.3m||£7.4m||-28%|
|Profit before tax||£1.9m||£6.5m||-71%|
|Adjusted profit before tax *||£4.5m||£6.6m||-32%|
|(Loss)/earnings per share||(0.4)p||7.0p||n/a|
|Adjusted earnings per share *||4.0p||6.2p||-35%|
* Adjusted results exclude amortisation of intangible assets, movements on values of put and call options and exceptional items.
Tony Martin, Chairman of Empresaria, commented:
"The UK and Rest of the World regions grew net fee income by 5% and 19% respectively. However, the Group as a whole experienced a 1% growth in revenue and net fee income, with adjusted profit before tax down 32% to £4.5m and adjusted EPS down 35% to 4.0p. The major reason for this was lower profits in Germany, where the adoption of new collective bargaining agreements, following court rulings, required us to increase the pay rates for some of our temporary workers and to incur significant legal fees. This has had a negative impact on margins and while we have seen an improvement in gross margin over the second half of the year, it still remains below historic levels. We have obtained greater clarity on the potential exposure against retrospective pay claims from temporary workers and social security contributions in relation to these court rulings. This has lead us to reduce the provision that we made at the half year of £3.0m to £1.7m at the year end, reflecting the lower expected exposure.
Global economic conditions remain uncertain and, while we continue to see generally good candidate and client demand, confidence is fragile and necessitates a cautious approach, especially in the UK and Continental Europe. The Group trades in many emerging markets across the world and we see opportunities for organic growth across these regions and expect to see improved returns for the year ahead."
A presentation of these results will be made to analysts and investors on 21 March 2012 and an edited copy of this will be made available late that morning on the Empresaria Group plc website: www.empresaria.com
Overview of performance in 2011
The UK and Rest of the World regions grew net fee income by 5% and 19% respectively. However, the Group as a whole experienced a 1% growth in revenue and net fee income, with adjusted profit before tax down 32% to £4.5m and adjusted EPS down 35% to 4.0p. The major reason for this was lower profits in Germany, where the adoption of new collective bargaining agreements, following court rulings, required us to increase the pay rates for some of our temporary workers and to incur significant legal fees. This has had a negative impact on margins and while we have seen an improvement in gross margin over the second half of the year, it still remains below historic levels. We have obtained greater clarity on the potential exposure against retrospective pay claims from temporary workers and social security contributions in relation to these court rulings. This has lead us to reduce the provision that we made at the half year of £3.0m to £1.7m at the year end, reflecting the lower expected exposure.
The year also saw the terrible earthquake and tsunami in Japan which resulted in the Japanese economy entering into recession by the end of the year. We are thankful that all of our staff were safe and the strong leadership exhibited by our local management teams helped both our businesses to achieve comparable profits with the prior year.
We have continued to reduce our reported net debt, which was down to £5.6m at year end (2010: £6.1m), despite further investment in working capital to support the revenue growth and set up of new offices in the Rest of the World region. This investment has seen four of our existing brands establish themselves in new markets during the year and demonstrates our continued commitment to generate organic profit growth from our existing Group.
As reported at the half year, Miles Hunt has decided to leave the Group to pursue other opportunities. He ceased to be the Chief Executive Officer as at 31 December 2011, but remains on the Board until 31 March 2012 as a Non-executive Director. He has overseen a smooth transition to Joost Kreulen, who became Chief Executive Officer on 1 January 2012.
Joost has been with the Group since 2009, initially responsible for our Asian operations and more recently also for a number of our UK based businesses. Prior to joining Empresaria Joost was head of specialist staffing operations for Vedior in the Netherlands as well as being responsible for business development within Northern Europe and Germany.
The Board would like to thank Miles for his enormous contribution to the development of Empresaria since formation in 1996, during which time the Group has grown from a start up in one office, armed only with a management philosophy and a vision for growth, into a specialist staffing group stretching across 19 countries.
The number of people working within the Group fell to 803 at the end of 2011, down from 883 the previous year. The average number of staff throughout the year was 848, up from 832 in the previous year. The lower number at the year-end reflects the loss of 85 staff from businesses that were disposed of during the year. Empresaria's success is largely dependent on the efforts and contribution of its people and the Board would like to thank them for all of their hard work in the year.
The priorities for our free cash flow remain to invest in developing our business and to strengthen our balance sheet, while supporting a sustainable dividend policy. For the year ended 31 December 2011, the Board is proposing to maintain a dividend of 0.35p per share (2010: 0.35p per share) which, if approved by shareholders at the Company's Annual General Meeting, will be paid on 16 July 2012 to shareholders on the register on 15 June 2012.
Development and delivery of Group strategy must be supported by sound corporate governance practices that are appropriate to the size and philosophy of the Group. Since the Group moved to AIM in late 2004, strategic development has lead to an increase in the size and spread of the Group, in terms of both sector and geography, with a focus on developing staffing markets and emerging economies. Underpinning Group strategy we continue with the philosophy of management equity, with operating company management teams investing directly in their own businesses thereby aligning management and shareholder interests. The increased size and spread of the Group, together with the philosophy of management equity, has required the development and provision of a sound corporate governance framework. The Board continue to develop and enhance the Group's corporate governance arrangements in line with the principles of the UK Corporate Governance Code, balancing the need to operate the Group in an efficient, effective and ethical manner whilst allowing entrepreneurial management teams to operate to deliver the strategic goals of the Group.
We were delighted to receive external recognition for the communication of our corporate governance reporting, winning the 2011 ICSA Hermes Transparency in Governance award for best annual report in the AIM/small cap companies category.
Current trading and outlook
Global economic conditions remain uncertain and while we continue to see generally good candidate and client demand, confidence is fragile and necessitates a cautious approach, especially in the UK and Continental Europe. The Group trades in many emerging markets across the world and we see opportunities for organic growth across these regions and expect to see improved returns for the year ahead.
Chief Executive Officer's business review
This is my first set of results as Chief Executive Officer, which I became with effect from 1 January 2012. I initially joined Empresaria at the beginning of 2009 with a focus on the Asia region only. Since assuming the role of CEO I have had the opportunity to extend my knowledge of the Group across all of its regions and to work closely with all of our businesses. I am encouraged by the management strength throughout our regions and I believe this will help us deliver good organic growth.
Group results overview
The Group generated revenue of £208.9m, an increase of 1% over the prior year and net fee income (gross profit) of £46.9m, also up 1% on 2010. Within this, performance across our operating regions was variable, reflecting their different market conditions during the year. In the Rest of the World region revenue grew by 13% to £39.2m (2010: £34.7m) and net fee income grew by 19% to £11.2m (2010: £9.4m). Our Asian and South American businesses continued to improve their gross profit contribution to the Group with good performances from Indonesia, Thailand and Chile in particular. This region was the main focus for expansion in the year, with new offices and branches opened in Singapore, Australia and China across six of our brands. The economic conditions in this region are generally more positive than in Europe and we see further opportunities for growth. In March 2011 Japan suffered from a natural disaster with an earthquake and resulting tsunami having a devastating effect on the country. Despite this, our two businesses performed very well with revenue and net fee income growth year on year and adjusted operating profit level with 2010. In total the adjusted operating profit for the region was down on the prior year at £1.1m, mainly due to the significant investment in setting up the new offices.
In the UK revenue was down 8% to £67.0m (2010: £72.7m) but net fee income was up 5% at £16.0m (2010: £15.2m). As highlighted last year, our infrastructure and construction operations are moving away from lower margin contracts to focus on more value added and higher margin business. Adjusted operating profit was £2.0m, level with 2010, following increases in staff costs and bad debts.
In Continental Europe, revenue increased by 3% to £102.7m (2010: £99.4m), but net fee income declined by 10% to £19.7m (2010: £21.9m). The operations in Continental Europe are primarily temporary staffing and heavily weighted to Germany and Austria, which together represent 86% of the regional net fee income. The reduction in profit is mainly due to the lower margins in Germany resulting from the change in pay tariffs for temporary workers following the legal ruling at the end of 2010 relating to certain collective bargaining agreements. These costs were not able to be fully passed on to clients or offset through cost savings elsewhere and, while margins improved in the second half of the year, they are still below historic levels. We saw improved results in our healthcare business in Finland, however, overall adjusted operating profit for Continental Europe declined to £2.2m (2010: £3.9m).
Overall Group gross margin was 22.5%, the same as last year, with a 21% increase in permanent revenue helping to offset flat temporary revenue and a reduced temporary margin of 17.3% (2010: 18.1%). Permanent sales contributed 29% of the Group net fee income (2010: 26%).
Cash generated from operations in the year was £3.9m (2010: £8.3m). After accounting for tax and interest, the Group generated free cash flow (being net cash from operating activities) of £1.2m (2010: £5.1m), with £2.0m used to acquire equity held by management in subsidiary companies and fixed assets and £0.3m to pay dividends to shareholders and to holders of minority shares in subsidiaries. There was a cash inflow of £1.0m from disposal proceeds. Group net debt at the year-end was £5.6m (2010: £6.1m).
There are some clear immediate priorities; improving the margins in Germany and ensuring that the lower profit businesses and the investments made in 2011 deliver growth and increased profit for 2012 are the key focus areas for the whole management team. While we remain open to external investment opportunities, we do expect to focus on our existing operations over the next year.
The Group has continued to invest in new geographic markets as part of its diversification strategy. With the help of the hub concept in Singapore, four brands are now established in this market and are expected to make a positive contribution to profits in 2012. We have also invested in new branches in China and Australia. In January 2012 we opened our first office in Hong Kong, focussing on the financial services sector.
We continue to position the Group to increase our exposure to white collar and professional recruitment and to improve conversion ratios and working capital efficiency. In the first half of the year we disposed of our interest in a primarily blue collar UK logistics operation to its management team and in the second half of the year we sold our Indonesian payroll outsourcing business to an Australian trade buyer. These transactions have removed low margin, low profit businesses from the Group, generated cash proceeds of £1.0m and reduced our exposure to overseas debt finance.