ARE.L Regulatory News (ARE)

11 April 2018

Arena Events Group plc

Annual results for the year ended 31 December 2017

"A year of excellent progress and strong revenue growth"

Arena Events Group plc (AIM: ARE, 'Arena' or 'the Group'), is pleased to announce its Full Year Results for the year ended 31 December 2017. 

Financial Highlights

· Group revenue increased by 18% to £109.6m (2016: £93.2m)

· Adjusted EBITDA(1) grew by 25% to £10.6m (2016: £8.5m)

· Adjusted Earnings(2) increased to £4.0m (2016: £1.2m)

· Basic adjusted EPS (3) 3.5p (2016: 1p)

· Return on Capital Employed (4) increased from 4.2% to 8.3%

· Year end net bank debt £11.5m (2016: £30m)

· Final dividend of 0.9 pence per share proposed, to bring total dividend for the year to 1.35 pence per share

Operational Highlights

· Extended contract with European Golf Tour for 4 years (up to £10m)

· Largest contract win in Arena's history - US PGA 5 year contract secured (up to $40m)

· Acquired Wernick seating and mass participation sports business in April 2017

· Contract with ITV for 'Dancing on Ice' temporary TV studio

· Two year contract for the inaugural CJ golf Trophy in South Korea

· Strong balance sheet gives platform for future acquisitive growth

In February 2018, the Company acquired GLD Productions, the first post-IPO acquisition, and this month the acquisition of Ironmonger Events in Hong Kong has been agreed.

The Group expects to post its Annual Report and Accounts to shareholders in late April and the AGM will be held at 4pm on 24 May 2018, at Pinsent Masons, 30 Crown Place, London.

Greg Lawless, Chief Executive Officer of Arena, commented:

"2017 was a year of excellent progress for the Group with the delivery of a number of key milestones that have laid the foundation for the future development of the business.

We added a number of major new multi-year contracts in each division, including the PGA of Americas and the CJ Trophy in Korea which together with the acquisition of the Wernick seating and mass participation sports business enabled us to deliver a very strong set of results with adjusted EBITDA exceeding £10 million for the first time.

We will continue to build on this strong momentum and I am pleased to report that 2018 has started well which gives us the confidence that we can keep growing the business over the coming years."

Notes

1 Adjusted EBITDA excludes exceptional and non-recurring items, primarily related to the cost of admission to AIM, restructuring and legal costs

2 The reconciliation of Adjusted Earnings to statutory net income is

3 Basic Adjusted Earnings per share is calculated using Adjusted Earnings divided by the number of shares in issue at year end, assuming those shares had been in issue for the full year

4 Return on Capital Employed is calculated as Adjusted EBITDA less depreciation and amortisation; divided by average capital employed being total fixed assets including goodwill plus working capital.

Enquiries:

Notes to Editors:

Arena Events Group plc (www.arenagroup.com) is a provider of temporary physical structures, seating, ice rinks, furniture and interiors. The Group has operations across Europe, the US, the Middle East and Asia, and current clients include Wimbledon Tennis, The Open, PGA European Tour and Ryder Cup.

The Group services major sporting, outdoor and leisure events, providing a managed solution from concept and design through to the construction and integration of the final structure and interior. Contracts range in size and complexity from a simple equipment rental for a local outdoor event, to an integrated solution of multiple structures and interiors for a major international sporting event.

Chairman's Statement

I am pleased to present the Group's first annual results as a publicly quoted company. 

The Arena Group listed on the AIM market on 25 July 2017 and I became Non-Executive Chairman on that date. The Board is currently made up of four directors, myself, Ian Metcalfe, who chairs the Remuneration Committee and two Executive Directors. The Board will keep this composition under review. 

We have taken the decision as a Board, to adopt the highest standards of governance whilst ensuring the executive team continue to have the flexibility to manage the business without distraction or incurring excessive costs. 

There is no doubt that 2017 has been a successful first year as a public company, with the achievement of excellent financial results, successful delivery of several major contracts and the creation of a strong leadership team.

The Board is pleased to recommend payment of a final dividend for the year ending 31 December 2017 of 0.9 pence. This gives a total dividend for 2017 of 1.35 pence per share, subject to approval at the Annual General Meeting, on 24 May 2018. The final dividend will be paid in July 2018 to shareholders of the Company on the Register of Members at the close of business on 7 June 2018.

The Group will continue to adopt the highest operational standards and to deliver the "Arena Standard" throughout its operations. We will also continue to explore value accretive acquisition opportunities in line with our stated strategy.

Finally, I would like to take this opportunity to express my sincere thanks to all Arena employees for their hard work and dedication. In a very fragmented and competitive industry, the level of service and commitment demonstrated by our employees differentiates Arena from its competitors. 

Ken Hanna

Chairman

CEO's Report

I am pleased to present the Group's first Strategic Report to shareholders. 2017 was a year of excellent progress for the Group with the delivery of a number of key milestones that have laid the foundations for the future development of the business.

Introduction

The history of the Arena Group is a long one and the Company can trace its origins back over 250 years. There will, no doubt, have been a number of years where significant milestones were achieved during this long history, but I do not believe that any previous year can match the historic milestones that the Group has achieved this year.

As milestones go, the listing of the Group on the AIM market of the London Stock Exchange on 25 July 2017 has to take pride of place. The Initial Public Offering ("IPO") which raised £56m, net of expenses, not only significantly reduced the Group's net debt and strengthened our balance sheet, but has also given us the shareholder base to support the value accretive acquisitions that are an integral part of the Group's ambitious strategic plan.

The listing also helped to raise our profile as a leading provider of event rental solutions delivering what we refer to as the "Arena Standard" wherever we are in the world. This standard is part of the Group's unique value proposition and promises that we will deliver to the highest standards in our industry - from any of our 14 bases spread across three regional divisions in the UK & Europe, Middle East & Asia, and the US.  

Results

The Group delivered adjusted EBITDA of £10.6m (2016: £8.5m) and an adjusted net income of £4.0 m (2016: £1.2m). The statutory operating profit was £0.3m (2016: £1.2m). The statutory loss before tax was £2.9m (2016: £3.6m), which includes £4.9m of costs considered to be exceptional or non-recurring, as well as the finance costs related to the high debt and loan note structure in place prior to the IPO. Given these one-off and exceptional costs, and to give a better understanding of the underlying performance of the business, we present adjusted EBITDA and adjusted net income. On this adjusted basis, 2017 was a record set of results, with the Group's adjusted EBITDA of £10.6m - exceeding £10m for the first time in the Group's history. 

These results are described in more detail in the financial review below including a reconciliation of adjusted numbers to statutory figures. Our results were achieved from our normal contracted and recurring customer revenues coupled with the addition of a number of new multi-year contracts and one-off events.

The most significant new multi-year contract win was in the US with the addition of a five year contract to deliver the three US PGA annual events, including the Men's PGA Championship, which was held in 2017 in Quail Hollow, North Carolina.

Industry Overview

The global event rental sector is a highly fragmented and siloed (single product/service focused) industry. There are very few international organisations and typically businesses in the sector tend to be very single product focused. This landscape has not changed significantly during 2017 - with most industry transactions focused on increasing the size, rather than the product/service offerings, of the relevant company.

A number of significant transactions were, however, completed in 2017.

The main European transaction of note was the acquisition of De Boer Structures by Losberger, which has created the largest structures business in the world. This new group has, for the first time, seen the combination of a major structures manufacturer with a major structures rental business. This is a significant development as, traditionally, manufacture and rental businesses have remained distinctly separate.

In the US, the break-up of the former Classic Party Rentals business, based out of Los Angeles, has changed the landscape of the North American event rental sector. Classic was the largest single, event rental, business in the US with operations spread across more than ten locations from California to Florida. The disposal programme saw a number of different transactions with the largest transaction being the disposal of the Classic West Coast party rental business to Bright Rentals, based out of LA. This break-up has now eliminated the only truly national party and structures rental company in the US. This presents a significant opportunity for the development of the Arena business in the US as we outlined at the time of the listing.

Apart from these two major developments, the industry continues to see a good flow of acquisition activity in the smaller scale business units that operate within the sector. We continue to be active in this space as we look for value-accretive bolt on businesses that have the potential to enhance the performance of our existing business.

Growth Strategies

We outlined four key components of our strategic plan as part of the IPO process in 2017.

These four components are designed to help us deliver not only top line revenue growth, but more importantly improvement in EBITDA margins that we believe will continue to create demonstrable shareholder value over the coming years.

Geographic expansion

• Future geographic expansion will be initially focused on the US where the Group currently has approximately a one per cent. market share, and a predominantly Upper Midwest and East Coast presence. An improved presence on the West Coast would bolster the business's national tenting reach and allow the servicing of national customers across the entire North American continent on a more economic basis.

Product Extension

• We intend to replicate our UK multi-product offering in other parts of the Group.

• We will continue to review and expand our product range and service capabilities in all regions to ensure we are providing as broad a product offering as possible to our customers in each region.

• The April 2017 acquisition of Wernick Events, a seating and mass participation business based in Coventry is a good example of this. This acquisition added some 24,000 tiered seats to our existing stock of 76,000, but also allowed us to enter the fast-growing mass participation sports market in the UK where we now deliver over 300 events each year for Cancer Research UK and other event organisers.

Reduction of seasonality

• Our business by its nature is seasonal in each region. This means that typically each region suffers losses in the low season.

• We plan to continue to expand into complementary markets to extend the season in each region, thus improving asset and labour utilisation.

• The expansion of our temporary ice rink business in the UK is a good example of this, where we now deliver 30 temporary ice rinks over the winter season including venues such as the Tower of London, Hampton Court, Canary Wharf and Liverpool. The Group is now EBITDA profitable nine months out of twelve and our objective is to ultimately have positive EBITDA every month of the year as a consequence of this strategic component.

Vertical Integration / manufacturing of temporary structures 

• The Group already has two small manufacturing facilities, one in Malaysia and the other in the US.

• These units manufacture certain parts and bespoke products for a number of unique client requirements.

• Given the importance of being able to offer bespoke, innovative and cost effective product solutions to our customers we will look to add to these existing manufacturing facilities in order to continue providing our customers with state-of-the-art solutions across our regional divisions.

Acquisitions

I am pleased to report that we have, since the year end, made progress in a number of these areas with two acquisitions, each of which will contribute to the future growth of the Group.

Our first acquisition since the IPO was GLD Productions, a specialist provider of furniture into the music and event sectors, based in the UK. The deal was announced on 2 February 2018. This business has now been successfully integrated into our Spaceworks Furniture Hire unit in Membury and we believe will be a valuable addition to our UK & Europe Division.

We have also agreed the acquisition of Ironmonger Events in Hong Kong, a business operated and partly owned by the vendor of the structures business we acquired in Hong Kong two years ago. This transaction will allow us to offer a complete end-to-end event solutions business in this dynamic part of the world.

We continue to evaluate a number of other acquisitions and we are confident that we will have a number of additional acquisitions to announce before the end of 2018.

United States Attorney's Office investigation of Arena Americas

On 29 March 2018 we notified the market that our US subsidiary, Arena Event Services Inc ("Arena Americas"), had been informed by the US Attorney's Office ("USAO") that it had formally charged one of Arena Americas previous customers for a violation related to the Small Business set-aside program for business conducted between 2007 and 2017.

As a result of this, Arena Americas was notified by the USAO that it has launched an investigation into Arena America's relationship with this customer. Since 2013, when Arena acquired the Americas business, total revenue generated from contracts with this customer has been $4m with EBITDA of approximately $0.5m. Based on other similar cases, fines of up to two times revenues or profits have been imposed, implying a possible range of fines between $1m and $8m. Due to the level of uncertainty over the outcome, the Group has not made any provision for future costs in the annual financial statements related to this investigation.

We continue to proactively engage with the USAO in order to draw this matter to a conclusion as soon as possible. However, at this date, we are not in a position to finalise this matter with the USAO. We hope to have further news within the next few months and will update the market accordingly.

Looking Ahead

We are pleased to have delivered a strong set of inaugural results, post IPO, in 2017. These results, on an adjusted basis, represent a significant increase over our adjusted 2016 numbers and were, in the main, delivered by strong organic growth.

We have started 2018 with the delivery of two value accretive acquisitions, a strong pipeline of future acquisitions, combined with a healthy first quarters trading. We remain confident that we can continue to grow the business organically and by way of acquisition over the next few years as we continue to leverage our new-found plc status.

Greg Lawless

Group CEO

Finance Review

Our financial results are summarised below

(1) EBITDA before exceptional costs and share option expense

Revenue

Revenue in the year to 31 December 2017 grew by 18% from £93.2m to £109.6m. Revenue grew in all regions, with particularly strong organic revenue growth in the US, with the winning and delivery of three events for the US PGA adding some £5m of incremental revenue in 2017. The main PGA championship delivered higher than typical revenue in 2017 due to the location of the event and the type of product supplied, which will not be repeated in 2018. 

In the Middle East & Asia region revenue grew by £4m, with the project for the Dubai World Trade Centre generating significant, but one off, sales revenue in the year. Finally, in the UK there was revenue growth of some £6m, the major factors being a full year of scaffolding revenue from the RIM acquisition in late 2016 and revenue from the Wernick Events seating and mass participation sports business acquired on 1 April 2017.

Gross Margin and Operating expenses

Gross profit margin improved by 1.1% to 32.5% due to a focus on operational efficiencies and targeted capital expenditure to reduce the need to hire in equipment for certain projects. 

Operating expenses, excluding exceptional costs, depreciation, amortisation and share option charge, grew by £4.2m with additional overheads of the acquired Wernick business, the RIM scaffolding business (acquired in late 2016) and investment in permanent staff in all regions to manage the higher level of revenue and gross margin. In addition, from July 2017, additional costs were incurred post IPO for items such as Non-executive director fees, Nomad, registrar and Financial PR costs.

Exceptional Costs

The exceptional costs of £4.9m are set out in more detail in note 3 below, and primarily comprise costs incurred related to the IPO in July 2017; the finalisation of the restructuring programmes that started in 2016 in both the UK and the North East region of the US; and legal costs and a doubtful debt provision made in the US in relation to the legal matter described in the CEO report.

Finance Expenses

Finance costs comprise three main components; interest incurred on bank borrowings and finance leases of £1.4m; interest accrued on loan notes in place prior to the IPO of £1.1m (these costs ceased from 30 June 2017); and thirdly, the amortisation of bank loan and loan note arrangement costs incurred both in the year and in previous years of £0.7m, which are being amortised over the expected period of the facilities. To calculate an adjusted net income figure the non-recurring loan note costs and the amortisation of arrangement costs have been added back as well as an adjustment for the level of pre IPO bank interest, so that only normalised bank and finance lease interest is included in the adjusted net income figure.

Tax

The tax charge is low both in relative and absolute terms in 2016 and 2017 due to a combination of factors, including tax free operations in Dubai; no corporation tax charge in the US due to tax deductions for fixed asset purchases; and high bank interest charges prior to the IPO.

Going forward we expect the tax charge to increase modestly but remain lower than the standard UK tax rate due a number of factors including the portion of profits generated in Dubai, carried forward net operating losses in the US and the continued availability of significant US tax allowances for capital expenditure.

Earnings per share and Dividend

The actual earnings per share in 2017 was negative due to exceptional and IPO related costs as well as the high level of pre IPO finance costs described above. Using an adjusted earnings figure, shown in the table below, and the year end number of shares for the full year period, the adjusted basic earnings per share figure was 3.5 pence. 

As stated at the time of the IPO we intend to adopt a balanced approach to retaining capital for future growth opportunities and a progressive, but measured, dividend payment. An interim dividend of 0.45 pence per share was declared in September 2017; and the recommended final dividend is 0.9 pence per share. This will bring the total dividend to 1.35 pence per share for the 2017 year.

Acquisition

On 1 April 2017 the Group acquired certain business and assets from Wernick Events Ltd, comprising the temporary seating business and the mass participation sports division, both based near Coventry. Total cash consideration for the acquisition was £2.1m.

Debt and Cash Position

At the year end the Group had total bank debt between the UK and US of £15.8m and total cash balances of £4.3m, to give a year end net bank debt figure of £11.5m. The Group has committed bank facilities in the US and UK, described in more detail in note 5 below. Subsequent to the year end, the Group secured an additional £5m committed facility from HSBC to fund small acquisitions.

Working Capital

The Group had total working capital at 31 December 2017 of £(0.1)m, compared to £(0.5)m at the previous year end. The Group typically operates with a negative or close to nil working capital position as a significant proportion of customer receipts are invoiced and collected ahead of the event date.

Capital Expenditure

Total capital expenditure in 2017 was £6.7m, of which £4m was maintenance capital expenditure to keep our existing level of rental and other inventory up to the standard required to service our existing customer and contract base. The balance of £2.7m was growth capital expenditure required to support additional revenue and margin from new contracts and opportunities identified during the year. The largest portion of this growth capital expenditure in 2017 was in the US and incurred in relation to the new five year US PGA contract that generated incremental revenue of over £5m in 2017; and in the UK for the purchase of a new style of structure (the I-novation) which was used at a number of events in the year and reduced our requirement to hire structures from other companies, thereby also increasing our gross margin.

Alternative Performance Measures

The Group uses alternative performance measures such as adjusted EBITDA, adjusted earnings per share and adjusted ROCE (as defined below), to allow the users of the financial statements to gain a clearer understanding of the underlying performance of the business. By presenting these measures in addition to the statutory figures, the impact of items such as restructuring and reorganisation costs, acquisition costs and the costs related to the IPO and the pre-IPO debt structure of the Group, can be identified separately.

Performance Indictors 

The Group monitors a number of key performance indicators ("KPIs") which are reviewed at divisional and Board level.

The main KPIs reviewed are summarised in the table and described in more detail below.

Adjusted EBITDA as a percentage of revenue is calculated as adjusted EBITDA (excluding exceptional costs and share option expense) as a percentage of total gross revenue.

Adjusted Earnings per share is the adjusted group net income figure, divided by the average total number of shares in issue for the year. In the table above and due to the IPO in July 2017, the 31 December 2017 number of shares in issue has been used for both periods.

ROCE is calculated as the ratio of adjusted operating profit (being adjusted EBITDA less depreciation and amortisation) divided by average capital employed for the year. Capital employed is defined as the net book value of fixed assets, plus goodwill, plus working capital.

Net bank debt to adjusted EBITDA is the ratio of gross bank debt less cash at year end to the adjusted EBITDA figure for the year.

The Directors are satisfied with each of these measures in 2017.

Piers Wilson

Finance Director

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

The financial statements of Arena Events Group Plc, (company registration number 10799086), were approved by the Board of Directors and authorised for issue on 10 April 2018.

P WilsonDirector

Signed on behalf of the Board of Director

Consolidated statement of changes in equity

Notes to the consolidated financial statements

1 Basis of preparation

The consolidated financial information for the year to 31 December 2017 was approved by the Directors on 10 April 2018. The consolidated financial information has been prepared in accordance with the principles of International Financial Reporting Standards ('IFRS') and has been prepared on a going concern basis. The preliminary consolidated financial information does not constitute statutory consolidated financial statements for the year to 31 December 2017as defined in section 434 of the Companies Act 2006. The report of the auditor on those Group Financial Statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

The Annual Report and Group Financial Statements for the year to 31 December 2017 will be posted to all shareholders by the end of April 2018, submitted for approval at the AGM on 24 May 2018 and filed with the Registrar in due course.

Going concern

The Directors have prepared detailed forecasts with a supporting business plan for the foreseeable future. The forecast indicates that the Group will remain in compliance with covenants throughout the forecast period. As such, the Directors have a reasonable expectation the Company and Group will have adequate resources to continue in operational existence for the foreseeable future. As such, they continue to prepare the financial statements on the basis of going concern.

2 Segmental Reporting

The Group has three reportable segments; UK and Europe (UKE), Middle East and Asia (MEA) and America (US). For each of the three segments, the Group's chief operating decision maker (the "Board") reviews internal management reports on a monthly basis.

The accounting policies of the reportable segments are the same as described in note 1. Information regarding the results of each reportable segment is included below. Segment results before exceptional items are used to measure performance as management believes that such information is the most relevant in evaluating the performance of certain segments relative to other entities that operate within these industries.

3 Profit for the year

Group operating profit is stated after charging/(crediting):

Business development costs relate to one-off costs incurred in relation to new markets. Restructuring costs relate to the restructuring that took place in the US in 2016 and the UK in 2017. All costs shown as exceptional are considered to be one-off and are presented as exceptional items so as to provide an indication of the Group's underlying business.

4 Interest and Finance Charges

5 Bank and other borrowings

All banking covenants were complied with during the year.

As at 31 December 2017, the Group had banking facilities with HSBC and PNC.

The HSBC facility included senior term debt of £5.0m and a revolving credit facility of £3.0m. At 31 December 2017 £nil of the revolving credit facility had been drawn down (2016 £0.6m). The HSBC debt was secured by fixed and floating charges over the assets of each of the UK, Middle East and Asia entities within Group. The facility is available until December 2019.

The PNC facility provides a $20.0m revolving credit facility subject to limitations based on asset valuation, eligible accounts receivable and inventory balances at each month end and bears interest at between 2.25% and 3.75% plus Libor. The facility is available until December 2019.

Total bank facility arrangement fees of £0.4m (2016: £0.4m) were amortised in the year. There were loan note issue costs of £nil in 2017 (2016: £0.3) amortised in the year.

Borrowings interest rates

The analysis of the borrowings is as follows:

6 Net cash flow from operating activities

7 Loss per share

The acquisition of AES Arena Event Services Group Holdings Ltd by Arena Events Group Plc on 07 July 2017 has been accounted for using reverse acquisition accounting principles. The effect of using reverse accounting principles on share capital is that the capital that existed at the point Arena Events Group Plc legally acquired AES Arena Event Services Group Holdings Ltd is accounted for as if it had been in existence as at the comparative period (31 December 2016) and as at the opening balance sheet date (1 January 2017).

The weighted average number of shares in issue for the current and prior year has therefore been stated to reflect the post IPO share capital structure, this adjustment assumes the total shares issued during the IPO were in issue throughout the whole of the current and previous period presented.

The calculations of basic and diluted loss per share are:

8 Dividends

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The proposed dividend is payable to all shareholders on the Register of Members on 07 June 2018. The total estimated dividend to be paid is 0.9 pence per share. The payment for this dividend will not have any tax consequences for the Group.

9 Post balance sheet events

Purchase of loan notes and interest

On 5 January 2018 the Company exercised its call option to acquire all the remaining loan notes issued by the Group, held by Greg Lawless, CEO, and Gaitsford Investments Limited (a company owned and controlled by Greg Lawless) ("Gaitsford"). Greg Lawless and Gaitsford each used the proceeds of such sale to subscribe for an aggregate of 2,513,541 new ordinary shares of 1p each issued by the Company.

The new shares commenced trading on 11 January 2018 and from that date the total number of shares in issue and total voting rights was 117,153,481. As a result of these transactions, Greg Lawless has a total beneficial holding of 6,640,755 ordinary shares in the Company, representing 5.7% of the Company's issued share capital.

Amendment of HSBC Banking Facilities

On 12 January 2018 the Group agreed an amendment to the groups non-US banking facilities with HSBC Bank to reduce the interest margin on its main facilities to between 1.5% and 2.5% depending on the level of leverage. An additional acquisition facility of £5m was secured, available to be drawn down until January 2019 on the same terms as the existing facilities.

Acquisition of the GLD Productions Ltd business

On 1 February 2018 the Group acquired the business and assets of GLD Productions Ltd for total expected consideration of £0.9m. GLD supplies furniture to concerts, music festivals, fashion shows, sporting occasions and corporate hospitality events across the UK. GLD's stock and staff have been incorporated into Arena's Spaceworks Furniture Hire division at its Membury facility. This acquisition is expected to add approximately £1.5m in annual revenue in 2018.

Investigation into Arena America's relationship with a previous customer

Arena Event Services Inc ("Arena Americas") was notified by the US Attorney's Office ("USAO") in March 2018, that it has launched an investigation into Arena America's relationship with a previous customer. This customer, we were informed by the USAO, has formally been charged for a violation related to the Small Business set-aside program for business conducted between 2007 and 2017. 

Since 2013, when Arena acquired the Americas business, total revenue generated from contracts with this customer has been $4m, with EBITDA of approximately $0.5m. Based on other similar cases, fines of up to 2 times revenues or profits have been imposed, implying a possible range of fines between $1m and $8m. We continue to pro-actively engage with the USAO in order to draw this matter to a conclusion as soon as possible. However, as this date, we are not in a position to finalise this matter with the USAO.