Brady Regulatory News (BRY)

7th September 2017

Brady PLC

("Brady", the "Company" or the "Group")

INTERIM RESULTS

For the six months to 30 June 2017

Brady plc, the leading global provider of trading, risk management and settlement solutions to the energy, commodities and recycling sectors, is pleased to announce its interim results for the six months to 30 June 2017.

Operational Highlights

The business continues its transition from a one-off licence revenue model to a recurring revenue model;

· Four new licence deals signed on a recurring revenue basis in H1;

· Two new energy licence deals signed following strategic decision to build connectivity to the important renewables sector via the Irish Single Integrated Market ("I-SEM");

· Recurring revenue represented 68% of total sales in H1 (H1 2016: 60%).

Outlook

Financial Summary

1 Adjusted earnings per share, as calculated by external analysts, are based on the profit after tax adjusted for acquired intangible assets amortisation, share based compensation, exceptional items and normalised tax.

Ian Jenks, Executive Chairman, commented:

"We have continued to take actions this year to move the business towards a solutions model focussed on growing recurring revenue to improve the quality of our earnings. Brady successfully secured a number of recurring revenue contracts during the period, and I am pleased to report that recurring revenue now represents 68% of total sales.

Whilst our H1 results reflect the natural consequence of our transition process away from the legacy licence model, the actions we have taken in the first half of the year coupled with the actions we will undertake in the second half will allow the business to scale efficiently and deliver significant improvements in profitability in 2018 and beyond. 

With a high visibility of over 93% of our full year revenue and control of our cost base we continue to expect full year results to be in line with market expectations."

For further information please contact:

About Brady

Brady plc (BRY.L) is the largest European-headquartered provider of trading and risk management software to the global commodity and energy markets. Brady combines fully integrated and complete solutions supporting the entire commodity trading operation, from capture of financial and physical trading, through risk management, handling of physical operations, back office financials and treasury settlement, for energy, refined, unrefined and scrap metals, soft commodities and agriculturals.

Brady has 30 years' expertise in the commodity markets with some 400 customers worldwide, who depend on Brady's software solutions to deliver vital business transactions across their global operations. Brady clients include many of the world's largest financial institutions, trading companies, miners, refiners and producers, recycling companies, scrap processors, tier one banks and a large number of London Metal Exchange (LME) Category 1 and 2 clearing members and many leading European energy generators, traders and consumers.

For further information visit: www.bradyplc.com

Brady plc: Twitter/Facebook/LinkedIn 

CHAIRMAN'S STATEMENT

2017 to date has been a year of necessary transition and as expected there are some short term costs associated with this transition.

At last year's Interim Results, Brady announced plans to review its organisational structure in order to:

· Improve earnings visibility by changing its focus from one-off licence deals to a recurring revenue model;

· Focus on expanding Brady's Energy products to the rest of Europe though initiatives such as Irish Single Integrated Market connectivity; and

· Deliver products based on microservices supported by the Brady Framework

During the period, recurring revenue increased to £9.0 million from £8.9 million, and I am pleased to report that recurring revenue now represents 68% of total sales, with high visibility of over 93% of our full year earnings. Reflecting the strategic decision to focus on recurring revenue, one-off licence revenue decreased to £0.9 million from £1.5 million in the prior period, and service fees reduced to £3.2 million from £4.3 million.

The transition from upfront one-off fees to predictable recurring revenue over the life of a contract means that, as we anticipated, our results for the first half are down on the previous period. During this year of transition, we expect that the business's legacy seasonal weighting towards H2 will prevail but that once transitioned the H1 and H2 split will be more evenly weighted.

During the first half of the year market conditions have continued to be challenging in the energy and commodity trading sectors. This combined with our transition process means that our profit before exceptional items and tax decreased by £3.0 million to a loss of £2.9 million (from a profit of £0.1 million) during the first half of the year. Adjusted EBITDA decreased from £2.0 million to a £0.9 million loss, with £1.6 million of the decrease attributable to the reduction in revenue to £13.2 million. A further £1.2 million is due to an increase in the cost base resulting from weakness in Sterling in 2017 compared to the corresponding period in 2016. Our loss before tax increased from £0.1 million in H1 2016 to £3.5 million in H1 2017. Cash at 30 June 2017 was £5.0 million (2016 - £ 6.4 million). 

Recurring revenue contracts

Brady will receive £3.2 million over the life of four new licence contracts thanks to the recurring revenue model now implemented. Under the former one-off licence model, the revenue recognised in H1 would have been approximately £1 million more than reported. However, under the recurring revenue model Brady will now benefit from a series of contracted payments over a number of years from these deals. Brady recognised £0.1 million in (mainly service) revenue in H1 and will recognise a further £0.6 million from these licence deals in H2 and £0.5 million annually thereafter.

Energy products

Two of these four recurring revenue contracts were signed as a result of our strategic decision to invest in our Energy products and to increase our exposure to the renewables sector, and in particular, building connectivity to the Irish Single Integrated Market ("I-SEM"). One of these contracts was with a new customer, and one is an existing customer. Brady expects to receive £1.4 million over the life of these contracts and will receive annual recurring revenues of £0.23 million. Brady also secured recurring revenue contracts for Commodity and Recycling products.

Microservices

During H1 we have discussed our new "microservices" strategy with both clients and potential clients, and across both groups there has been an overwhelming endorsement of the change. As a result, we are holding three proof of concept trials in H2 using microservices to optimise customer value utilising their data.

Organisational restructuring

We continued to strengthen the management team during H1 and invested in our teams, in the optimal locations, to deliver on our strategy and to allow the business to scale efficiently. During the first half of the year, we were delighted to welcome Sara Mottus, Head of Human Resources and Mark Gilliland, Head of Customer Success to the Operating Board.

As a result of this organisational restructuring, Brady has expensed £0.6 million of redundancy costs, legal costs and consultant costs as an exceptional item.

Looking forward

As of today, 93% of the full year revenue target is either contracted or is a renewal of an existing contract, leaving 7% to be closed out by the year end. Our cost base is in line with management's expectations to the half year and is expected to be in line with market expectations for the full year.

FINANCIAL RESULTS

Group Revenues

Revenues by type

Software licence sales at £0.9m were £0.6m less than the same period last year. In H1 17, Brady signed four new licence deals compared to ten deals in H1 16. This reflects timings of renewals and the focus on recurring revenue as the business strategy moves towards a Software as a Service model.

Recurring revenue for the period was £9.0m compared to £8.9m in the prior period. Recurring revenue represents 68% of total sales in H1 2017 (H1 2016: 60%).

Service and development fees were £3.2m compared to £4.3m in the same period last year reflecting the lower level and timing of new deals in 2017.

The impact of the strengthening of the Swiss Franc, US Dollar and Norwegian NOK against Sterling on revenue was a positive £1.2m.

Operating costs

Operating costs increased by £1.8m to £16.7m from £14.9m in the same period last year. £1.2m of the increase is due to strengthening of Swiss Franc, US Dollar and Norwegian NOK against Sterling. The remaining increase is due to an increase in exceptional items of £0.4m, an increase in amortisation of £0.1m, an increase of £0.4m for other staff costs - mainly contractors less an increase in capitalised development of £0.4m.

Research and development expenditure represented 24 per cent (£3.1m) of the Group's revenues in the first half of 2017 compared to 23 per cent (£3.4m) in the first half of 2016. This is in line with the Group's commitment to ensuring that its product offering is maintained and up-to-date. Of the above research and development cost, £1.2m was capitalised (H1 16: £0.8m) and the increase is due to focus on strategic developments with key partners.

Profitability

Loss before taxation for the first half of 2017 was £3.5m compared to £0.1m for the first half of 2016.

EBITDA for the first half of 2016 was a £0.9m loss compared to £2.0m profit for the first half of 2016. The EBITDA margin for the first half of 2017 was 7 per cent loss compared to 14 per cent profit for the first half of 2016.

Basic earnings per share for the first half of 2017 was (3.97) pence per share compared to an EPS of (0.32) pence per share for the first half of 2016. Adjusted EPS was (2.49) pence per share, down from 1.05 pence in H1 2016.

Balance Sheet

The balance sheet continues to be dominated by goodwill and other intangible assets, largely as a natural consequence of the completion of acquisitions in previous years. As the majority of acquisitions were denominated in foreign currency, there is a movement in carrying value of £1.1m between balance sheet dates due to foreign exchange movements.

The Group continues to enjoy a strong balance sheet with net cash balances at 30 June 2017 of £5.0m (H1 2016: £6.4m).

Cash Flow

Cash outflow from operations in H1 2017 was £0.9m compared to a cash inflow of £1.0m for the same period in 2016.

Investing activities this year consisted of capitalised development £1.2m (H1 2016: £0.8m) and fixed asset purchases of £0.2m (H1 2016: £0.3m).

Selected explanatory notes 

1. Nature of operations and general information

Brady plc and its subsidiaries' principal activity is the provision of trading, risk management and settlement solutions to the energy, metals, recycling and soft commodities industries, through the delivery of client focused software and services.

The Group provides the leading trading and risk management software for global commodity markets. The Group provides a complete integrated solution supporting entire commodities trading operations.

Brady plc, a public limited liability company, is the Group's ultimate parent company. It is registered in England and Wales. The address of Brady plc's registered office is Riverside House, 7th Floor, 2A Southwark Bridge Road, London, SE1 9HA.

These condensed consolidated interim financial statements have been prepared using the recognition and measurement principles of International Financial Reporting Standards ("IFRS") as adopted by the European Union and as issued by the International Accounting Standards Board. They do not include all of the information required for full annual financial statements as defined in Section 434 of the Companies Act 2006 and should be read in conjunction with the Consolidated Financial Statements of the Group as at and for the year ended 31 December 2016. The auditor's report on those financial statements was unqualified and did not contain a statement under Section 498(2) or Section 498(3) of the Companies Act 2006. The consolidated financial statements have been filed with the Registrar of Companies and are available on the Group's website, www.bradyplc.com.

Brady plc's shares are listed on the London Stock Exchange's AIM. Brady plc's consolidated interim financial statements are presented in British pounds (£), which is also the functional currency of the ultimate parent company.

2. Accounting policies

The accounting policies applied by the Group are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 December 2016.

The accounting policies have been applied consistently throughout the Group for the purposes of preparation of these condensed consolidated interim financial statements.

3. Critical accounting judgements and key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimating uncertainty at the reporting date, that have a risk of causing a material adjustment to the carrying values of assets and liabilities within the next financial period are the same as those applied by the Group in its consolidated financial statements as at and for the year ended 31 December 2016.

4. Segment analysis reporting

Operating Segments

In accordance with IFRS 8, "Operating Segments", information for the Group's business units has been derived using the information used by the chief operating decision maker. The Executive Directors have been identified as the chief operating decision makers and the Board is responsible for the allocation of resources to business units and assessing their performance.

In 2016, the Group was organised into 3 business units. However, following the functional transformation of the business, the Group has been organised into one business unit throughout H1 17 and decisions by the chief operating decision maker have been made on this basis.

Revenue by Geography

The Group generates revenue from software licence sales, recurring support and maintenance and rental fees and the provision of associated consulting and development services. Revenues can be analysed as below:

5. Operating costs

Operating costs can be analysed as follows:

6. Share issues

The Company made various allotments of ordinary 1 pence shares during the period on the exercise of various share options. This increased the Company's ordinary shares issued and fully paid at the end of the period by 285,000 (year ended 31 December 2016: 100,000).

7. Share buyback

During the period under review, the number of ordinary shares held in treasury has remained at 4,306.

8. Earnings per share

The calculation of the basic earnings per share is based on the profits attributable to the shareholders of Brady plc divided by the weighted average number of shares in issue during the period. All earnings per share calculations relate to continuing operations of the Group. Separate calculations have been prepared related to the profit before and after exceptional items.

As there was a loss after tax for the six months ended June 2017, the six months ended June 2016 and the year ended December 2016, there was no dilutive effect.

The calculation of the adjusted earnings per share, as calculated by external analysts, is based on the profit after tax adjusted for acquired intangible assets amortisation, share based compensation, exceptional items and normalised tax and is calculated as follows:

 8. Earnings per share (continued)

9. Dividends

During the period Brady plc paid dividends of £nil to its equity shareholders (period ended 30 June 2016: £nil).

10. Exceptional items

The table below shows the exceptional costs incurred during the period.

11. Goodwill

The net carrying amount of Group goodwill can be analysed as follows:

There were no changes in the net carrying amount of purchased goodwill. Changes in the net carrying amount of goodwill on consolidation can be summarised as follows:

 12. Other intangible assets

Intangible assets comprise the following:

Changes in the net carrying amount of Group intangible assets can be summarised as follows:

13. Cash and cash equivalents

Cash and cash equivalents comprise the following:

14. Financial statements

The financial information for the year ended 31 December 2016 included in this interim report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The Group's statutory accounts for the year ended 31 December 2016 have been filed with the Registrar of Companies. This statement can be obtained from the Company's registered office at Riverside House, 7th Floor, 2A Southwark Bridge Road, London, SE1 9HA and are available on the Company's website www.bradyplc.com.