Empresaria Group Regulatory News (EMR)

18 Apr 2008 07:00

Empresaria Group PLC18 April 2008 Empresaria Group plc Press Release Full Year Results for the Year Ended 31 December 2007 Adjusted profit before tax up 114% to £6.2m as group reports a transformational year April 18, 2008: The AIM-quoted staffing and recruitment group Empresaria todayannounced a doubling in revenue and pre-tax profits for the year ended 31December 2007, and said it had made further significant strides in diversifyingits operations internationally. The group also announced a strong start to 2008, with revenues and net feeincome on a like-for-like basis ahead of 2007. Adjusted pre-tax profits for the year increased 114% to £6.2 million on revenueup 96% to £147.8 million. The group said the figures reflected the impact of the acquisition of Headway,its German based operation as well as a strong performance from its UKbusinesses. Empresaria's strategy is to achieve balanced growth by developing its existingbusinesses, investing in start-up businesses and making selective acquisitions.To manage its exposure to fluctuations in any one economy the Group hascontinued its strategy of diversifying into international markets offeringopportunities for high growth. In addition, it has focused on increasing thecontribution of its temporary and contract businesses, which offer greatervisibility of revenues and resilience to economic down turns. For the first time, just over 50% of the Group's net fee income was generatedoutside of the UK (2006 -19%) and 72% of its net fee income was generated by itstemporary and contract businesses compared to 56% in 2006. Empresaria has operations in 18 countries across Europe, Asia, Australia and theAmericas trading through 49 companies. Chairman Tony Martin said the investments made in Germany and Chile hadtransformed the Group and commented, "Empresaria can for the first time beaccurately described as a truly international specialist staffing group,becoming increasingly balanced in terms of sector, geography and operationalmix. The fact that it is not weighed down by large clerical and industrialstaffing operations, we believe creates significant potential for futurerelative out-performance. Further, the natural diversification of investmentacross sectors and geographies should provide resilience in times of economicuncertainty." "The group has enjoyed a good start to 2008. Revenues and net fee income on alike-for-like basis are ahead of 2007 and there is no evidence of any materialchange in demand for group services. The heavy investment in start up companiesmade in recent years, particularly in the Asia region, is now starting togenerate financial returns. We continue to see strong revenue growth in ourContinental European operations and, particularly in Germany, see opportunitiesto improve operating margins." A presentation of these results will be made to analysts and investors at 9.00amon 18 April 2008 and an edited copy of this will be made available later thatmorning on the Empresaria Group plc website: www.empresaria.com. For further information contact: Miles Hunt, Chief Executive, Empresaria Group plc: 01293 649 900Stuart Kilpatrick, Group Finance Director, Empresaria Group plc: 01293 649 900Allan Piper, First City Financial Public Relations: 020 7242 2666Nicholas How, Kaupthing Singer & Friedlander: 020 3205 7620 Full results announcement attached Empresaria Group plc Preliminary Announcement for the Year Ended 31 December 2007 Headlines 2007 Financial headlines • Revenues of £147.8m (2006: £75.5m) up 96%. • Gross profit of £42.4m (2006: £21.8m) up 95% • Profit before tax of £6.0m (2006: £2.9m) up 107% • Adjusted profit before tax* of £6.2m (2006: £2.9m) up 114% • Earnings per share of 8.4p (2006: 6.7p) up 25% • Adjusted earnings per share* 9.2p (2006 : 7.2p) up 28% • Group cash at bank at year end £4.1m (2006: £3.3m) • Group net debt at year end £4.2m (2006: £1.4m) • Proposed dividend of 0.55p (2006: 0.50p) Operational headlines • Strong organic growth from UK businesses • Completion of the acquisition of Headway Group (Germany) in May 2007 • Entry into the Dutch staffing market through the investment in EAR in May 2007 • Entry into the South American market with investment in Alternattiva of Chile in November 2007 • Further expansion in Japan by investment in FINES KK in June 2007 • Strong progress in the ASEAN ** market with the establishment of start-up operations in Singapore and the Philippines as well as the acquisition of a training business in Indonesia • Senior management team strengthened • Encouraging start to 2008 Financial highlights£ 000's 2007 2006 2005 2004 2003 Revenue 147,827 75,459 54,060 45,430 29,367Gross Profit 42,351 21,840 15,393 13,141 10,589Total Operating Profit 6,738 3,505 1,914 1,067 817Adjusted Operating Profit * 6,918 3,505 2,532 1,715 1,234Adjusted Profit Before Tax * 6,170 2,894 2,225 1,390 1,113Basic Earnings per share (pence) 8.4 6.7 3.1 1.4 1.9Adjusted Earnings per share (pence) * 9.2 7.2 5.7 4.2 3.9Dividend Proposed per share (pence) 0.55 0.50 0.45 0.40 0.38 * Figures based on underlying profits excluding amortisation of intangibleassets and any exceptional items. See reconciliation on page 24. ** ASEAN stands for Association of Southeast Asian Nations Our businesses Financial summary by region In accordance with our strategy of creating a diversified internationalspecialist staffing business we review the regional performance of ouroperations, a summary of which is provided below. As the Group develops weexpect to provide further analysis in relation to the Rest of the World once thesize of individual regions justifies it. Our businesses in the UK The UK Group provides permanent and temporary staffing solutions across fivemain sectors; Construction and Property Services, Financial Services, SupplyChain, Public Sector and Other Brands. Financial highlights for the UK 2007 2006Revenue (£'000s) 81,168 65,976Net Fee Income (£'000's) 1 20,958 17,689Adjusted Operating Profit (£'000's) 2 4,055 2,732Number of Trading Companies 3 18 20Number of Employees 265 249 Our businesses in Continental Europe Following the acquisition of headwayholdings GmbH ("Headway") in May 2007, theGroup has a significant foothold in the German recruitment market. In additionthe Group has interests in companies based in Holland, Poland, Slovakia and theCzech Republic. Financial highlights for Continental Europe 2007 2006Revenue (£'000s) 52,444 455Net Fee Income (£'000's) 1 16,826 401Adjusted Operating Profit (£'000's) 2 2,497 45Number of Trading Companies 3 10 4Number of Employees 298 34 Our businesses in the rest of the world The Group has interests in companies based in Japan, South East Asia, Australia,India, China and Chile. Financial highlights for the rest of the world 2007 2006Revenue (£'000s) 14,215 9,028Net Fee Income (£'000's) 1 4,567 3,750Adjusted Operating Profit (£'000's) 2 366 728Number of Trading Companies 3 21 10Number of Employees 197 82 1 Net fee income is equivalent to gross profit.2 Figures based on underlying profits excluding amortisation of intangible assets and any exceptional items. See reconciliation on note 8.3 Reduction due to consolidation within the Public and Logistics Sectors during 2007. Chairman's statement Overview 2007 2007 was a transformational and highly successful year for the group. Revenues,net fee income (gross profit) and pre-tax profits doubled in the year, driven bya combination of strong organic growth from established businesses, increasingcontribution from recent start up investments and strong profits fromacquisitions. Of greater significance, however, was the transformation in theshape and mix of the business. In 2005 the group derived 97% of its net feeincome from the UK. In 2007 the net fee income split was approximately 50:50and in 2008 we expect almost 70% to come from markets outside the UK.It is not just the proportion of income generated outside the UK that is ofimportance but where that income derives from. Group development focus is onemerging economies and developing staffing markets. Following the acquisitionof Headway in May 2007, the group generates approximately the same net feeincome from Germany - one of the fastest growing staffing markets in Europe - asit does the UK. In addition, Empresaria has high growth operations in countriessuch as Japan, India, China and Indonesia, each with high development potential. Empresaria can for the first time be accurately described as a trulyinternational specialist staffing group, becoming increasingly balanced in termsof sector, geography and operational mix. The fact that it is not weighed down,as other staffing groups are, by large clerical and industrial staffingoperations, we believe creates significant potential for future relativeout-performance. Further, the natural diversification of investment acrosssectors and geographies should provide resilience in times of economicuncertainty. Financial performance Revenues for the year ended 31 December 2007 increased by 96% to £147.8m and netfee income increased by 95% to £42.4m, a slightly higher figure than indicatedin the February trading statement following revision of the impact of currencyfluctuations and a review of the fair value of acquisitions. Profit before tax(adjusted for amortisation of intangible assets) increased by 114% to £6.2m.Although these figures include seven months of contribution from our acquisitionof Headway in Germany, they also reflect the strong organic growth contributionfrom our established UK companies and the benefit of improved profitability ascentral costs are absorbed across a broader group network. Group strategy Empresaria's strategy is to develop an international specialist staffing group,balanced in terms of sector, geography and operational mix and driven by acombination of organic and acquisitive growth. Both group strategy and structure follow the underpinning philosophy ofmanagement equity and the importance of aligning the interests of shareholdersand individual group company management teams through sharing risk and reward byway of equity participation. Investments are made where management hold andretain a meaningful stake in the business. The group's decentralised structurealso reflects this philosophy with local management retaining operationalautonomy and central functions focussing on financial planning and control,group development and administration. For individual management teams thisarrangement offers a combination of support, responsibility and independence.As Empresaria grows the group benefits from economies of scale and improvedrates of conversion of net fee income to operating margin as central costs areabsorbed across a wider community. The evolution of Empresaria to date can be categorised broadly in two phases.The first phase was the development from inception to the AiM float in late2004. During this period it established itself as a diversified UK-basedspecialist staffing group, known for its management equity philosophy andrecognised for its consistent strong financial performance. Since 2004, thesecond phase, the group has been re-engineered. The strong philosophicalfoundations and flexible corporate structure remain the same but the developmentfocus has shifted to new geographic markets in order to gain access to highergrowth economies and markets at the same time as reducing dependency on the UKeconomic and regulatory environment. Empresaria is now a different company tothat of 2004 but its process of development is still at an early stage. TheGroup is still unrepresented in the majority of Continental European countriesand also South America where Chile forms the only base of operations at present.As other markets develop, particularly in the fast growing Asian countries,there will be increased segmentation and creation of new vertical staffingniches which in turn will offer new opportunities for investment. The speed offurther expansion will be dictated by market conditions and on identifying theright investment opportunities. Empresaria's people The fantastic performance of the group in 2007 would not have been achievedwithout the dedication, energy and enthusiasm of the more than 1,000 people(including Associates) now working within the Group. We would like to thankthem all for their hard work and for their contribution to Empresaria's success. Current trading and outlook As stated in the trading statement in February, the group has enjoyed a goodstart to 2008. Revenues and net fee income on a like-for-like basis are aheadof 2007 and there is no evidence of any material change in demand for groupservices. The heavy investment in start up companies made in recent years,particularly in the Asia region, is now starting to generate financial returns.We continue to see strong revenue growth in our Continental Europe operationsand, particularly in Germany, see opportunities to improve operating margins. The outlook for the year needs to be considered with the economic forecasts inmind. In this context the Board is mindful of the challenges and opportunitiesthat may be faced in the coming months. Empresaria has no meaningful directexposure to the US economy. Although Empresaria does have significantoperations in the UK, these are concentrated in large part on specialist sectorswhere there is still a shortage of skilled staff and, in the case of ourProperty Services operations, where demand is underpinned by long terminfrastructure projects. The diversification into emerging economies and countries where recent labourmarket liberalisation is creating growing demand for staffing solutions isanticipated to offset softening markets elsewhere. In both relative andabsolute terms we believe Empresaria is strongly positioned to take advantage ofincreased opportunities created as a consequence of economic downturn or marketdisruption. With these factors in mind the Board is cautiously optimistic as to the outlookfor the current year. Tony MartinChairman17 April 2008 Chief Executive's review Performance review 2007 The rapid rate of development in 2007 has changed both the scale and scope ofEmpresaria's operations. Reflecting these changes we are breaking down ourreview of the business this year into three regions, UK, Continental Europe andRest of the World. This breakdown allows us to highlight not only relativefinancial performance of each region but, of equal interest, the distinctivegrowth strategies applied in each market. The UK performed strongly in 2007. Development focus in the UK over recentyears has been to expand and strengthen our existing operations. This approachis reflected in healthy organic growth rates at both revenue and net fee incomeline of 20%, an improvement in the proportion of net fee income derived fromtemporary staffing revenue to 58% and increased operational efficiency drivingthe group's bottom line performance. In Continental Europe, where labour markets tend to be more highly regulated andeconomies of scale create greater competitive advantage, our approach has beento build strong bridgeheads in individual country markets through acquisitionand then to use these as cornerstones for growth in each country. The clearestexample of this approach was the investment in Headway in Germany in May 2007.Headway performed in line with expectations in 2007, generating year on yearrevenue and net fee income growth of 25%. Outside of the UK and Continental Europe we have targeted emerging economies andstaffing markets where the primary focus has been on investing in start upoperations with experienced local management teams. This approach has aninitial adverse impact on profits but, as we are already experiencing, createsrapid organic growth in immature but fast developing markets. The year 2007 wassignificant for this region as the large number of recent start up companiesmoved collectively towards profitability. Headway investment On May 3, 2007 Empresaria acquired 60% in the German staffing company Headway, afast growing, partially specialised staffing company, based in Bavaria andexpanding its network rapidly in other parts of Germany. This acquisition was animportant strategic step in the internationalisation programme and givesEmpresaria a much more balanced stream of revenues and profits. In the period from May to the end of the year Headway contributed revenues of£47m, net fee income of £15m and operating profit of £2m, in line withexpectations. The German market has experienced strong growth in 2007. Headway achieved salesgrowth of 25.1%, exceeding the estimated market growth of approximately 20%,running an ambitious expansion programme with a net total of 22 new branchopenings, starting from 47 branches in the beginning of 2006 and ending the yearwith 69 branches. The investment made in new branch offices in 2007 will benefitsales growth and profitability of Headway from 2008 onwards, as the immaturebranch network starts to exploit its potential. Particularly good progress was achieved in the specialised divisions HeadwayLogistics, Headway Engineers and Headway Industry during 2007, increasing theproportion of the company's specialist business to 56.2%, while Headway Austriaachieved profitability in 2007. The priorities for 2008 are to increaseprofitability of the immature branch network, improving efficiencies throughoutthe organisation as well as strengthening the successful existing divisions. Management team and structure The Group is managed by a small, balanced Board of Directors with anon-executive Chairman, two executive directors and two non-executive directors.Below the main board is a Board of Management chaired by the Chief Executive.The executive directors are the Group Chief Executive and Group FinanceDirector. In 2006 we created the role of Head of European Operations withContinental Europe companies reporting to this new position. We have now createda similar role for the UK. As previously announced, Nick Hall-Palmer steps downas Group Finance Director and as a member of the main Board following thereporting of our 2007 results after eight successful years in the role. His newrole is Group Development Director and Head of UK Operations. Nick is replacedas Group Finance Director by Stuart Kilpatrick. We welcome Stuart to the team. Market overview Staffing is a relatively young industry. Growth rates and growth dynamicsdiffer from country to country. As individual staffing markets evolve,generalist clerical and industrial staffing services make way for individualmarket specialists as the drivers of growth. Liberalisation of previouslyrestricted labour markets acts as a catalyst for super-normal growth rates,specific recent examples being Japan and Germany. The penetration rate - thepercentage of the working population of a country in temporary work - variesfrom country to country depending on the regulatory and cultural environment.The UK has the highest penetration rate of all international staffing markets.Temporary staffing tends to follow permanent staffing in each new market asemployers and workers acclimatise to the benefits of flexible staffing. Aboveall, the industry as a whole is growing on the back of the rapid global andregional demographic changes, the increasing shortages of skilled staff and theincreasing demand for flexible workforce solutions and flexible workingarrangements. The short-term fortunes of generalist clerical and industrial staffing companiesare connected to the broad economic environment in which they operate. Forspecialist staffing companies such as Empresaria, our short-term fortunes arelargely dictated by the performance of the specialist markets we serve. In the case of the UK market, the most developed of all international markets,we have deliberately invested in a portfolio of sectors with different economicand market dynamics. This diversification strategy has worked well over timeand enabled us to grow consistently through previous difficult marketconditions. At the moment we are seeing no material change in our markets.Investment banking (approximately 8% of UK net fee income) has seen a decline inpermanent revenues but, by way of compensation, has seen a significant increasein temporary staffing revenues. With the exception of our Public Sectordivision (4% of 2007 UK net fee income), which continues to encounterchallenging market conditions, all sectors are performing strongly and are aheadof 2007 at both revenue and net fee income levels for the first two months oftrading in 2008. Our Property Services and Construction sector, in particular,is experiencing strong demand for its services, particularly from infrastructureand transportation clients associated with upcoming projects such as the 2012Olympics and the new London Cross-Rail initiative. In Continental Europe, Empresaria's principal exposure is to the German market,one of the stronger economies and without doubt one of the fastest growingstaffing markets as a consequence of recent labour market liberalisation.Although industry growth rates appear to have declined over the course of 2007,they are still expected to remain at double digit levels for a number of yearsto come. Outside of Germany we are experiencing growth in our Eastern Europeanoperations and enjoying contribution from our new Dutch company, EAR, whose rateof expansion is being restricted by the shortage of available skilled workers. The developing markets of Asia and Latin America offer substantial long termgrowth opportunities. In Asia in particular, we are well placed to takeadvantage of developing economies and nascent staffing industries. Empresarianow operates in China (and is looking to increase its investment there in 2008),India, Thailand, Malaysia, Singapore, Indonesia and the Philippines. We areexperiencing rapid growth in each of these countries and foresee a continuationof this trend in 2008. Across all regions, Empresaria has a broad mix of temporary and permanentstaffing operations with a group wide split of net fee income in 2007 of 72%:28%temporary to permanent. Miles HuntChief Executive17 April 2008 Operational review UK Revenues from UK operations increased 23% to £81.2m and net fee income grew 18%to £21.0m. The differing growth rates reflected a change in the mix of our UKbusiness with significant growth coming from our, primarily temporary staffing,Property Services and Construction division. As a consequence, the mix oftemporary staffing net fee income to permanent recruitment net fee incomecontinued to improve to a 58%:42% (2006: 56%:44%) split, therefore resulting ina drop in the UK gross margin percentage from 28.9% to 28.6%. Within our Property Services and Construction sector our FastTrack brand inparticular performed well in the year, buoyed by contract wins at Heathrow andLondon Underground. With construction work now commencing for the 2012 Olympicswe anticipate the number of upcoming business development opportunities toincrease significantly this year. Our Other Brands sector also generated significant growth in the year withGreycoat Placements (domestic staff), McCall (recruitment to recruitment), TheRecruitment Business (creative design) and Bar 2 (payroll services) alldelivering good results. The performance of the sector as a whole would havebeen stronger but for poor performance from EUResource, an on-site recruitmentoperation, that suffered from a number of bad debt issues (resolved by the endof 2007) and poor commercial management leading to the replacement of themanaging director and corporate restructuring at the end of 2007. The changesat EUResource are expected to result in a drop in revenues in this sector in2008. We do, however, expect continued overall growth in net fee incomegenerated by this sector in 2008.Within the Financial Services sector LMa, our banking operations brand, saw a56% growth in revenues as it concentrated on expanding its temporary staffingoperations. It started 2008 with approximately twice the number of temporarystaff deployed as at the same time in 2007. Insurance operations also grew withLime Street launching a new Bristol office in the second half of the year. The Supply Chain businesses benefited from the structural changes made at thebeginning of the year and the integration of the MVP and DriveLink operations.Since then, we have invested in a new managed service business offering a broadrange of staffing solutions to the logistics and supply chain industry and,since the year end, we have acquired Forward Prospects, a small freightforwarding recruitment business.The only sector in the UK to experience a decline in either revenues or net feeincome was the Public Sector. The market is undergoing significantconsolidation and margin erosion and, as a result, we are currently reviewingour options for this sector. Continental Europe Revenues grew from £0.5m in 2006 to £52.4m in 2007. Net fee income grew from£0.4m in 2006 to £16.8m in 2007. Outside of the Headway contribution (with operations in Germany and Austria) theprincipal contributors in the year were EAR in Holland and ITC in Poland whichcollectively contributed revenues of £5.4m and net fee income of £1.4m. Inaddition the group operates in the Czech Republic and Slovakia through the GiTbrand. ITC was acquired in late 2006 and is currently expanding from its corebase of "work abroad" services to offer temporary staffing solutions to thedomestic Polish market. EAR was acquired in May 2007 and focuses mainly onsupplying technical trades from a network of four offices in central andsouthern Holland. Rest of the World Revenues grew 57% to £14.2m and net fee income grew 22% to £4.6m. Headlinenumbers do not provide a true reflection of the underlying development activityof this broad region. Recent start ups in India, China and in countriesthroughout South East Asia have now either reached profitability or are close todoing so. The Monroe Consulting operation (executive recruitment) has expandedto new offices in Manila, Bangkok and Singapore to add to existing offices inJakarta and Kuala Lumpur. The Advanced Career operation in Indonesia (temporarystaffing and outsourcing) now has seven branches in the country as well as newoperations in Singapore. Following the acquisition of Learning Resources(corporate training solutions) in Indonesia in March 2007, we have establishednew offices in Bangkok, Singapore and Manila. Our operations in India and Chinacontinue to expand in terms of revenues, people and infrastructure. Revenues from Japan were flat year on year as a result of a change in mix of ourSkillhouse IT staffing business with more clients converting temporary staff topermanent positions and our Australian operations have seen a significant dropin revenues following the re-structuring of the business reported this time lastyear. In the case of Japan we are seeing a resumption in growth and a renewedemphasis on temporary over permanent staffing revenue, assisted by the rapidgrowth of our new fashion industry staffing company, FINES, established in July2007. In Australia, the organisational changes made over the course of the yearhave now created a more stable platform on which to grow. The acquisition of shares in Alternattiva in Chile late in the year representsthe first investment by Empresaria in Latin America. Alternattiva providestemporary and outsourced staffing solutions to the retail and telecommunicationsindustries in Chile. It is a long-standing family company with a strong marketpresence. Financial review Financial performance Revenue Group revenue rose by £72.3m (96%) in the year. Like for like sales increased by20%. Gross margin The Group's net fee income percentage remained steady at 29%.The Group's gross margin generated from the contract and temporary businessesgrew to 72% of total gross margin (2006: 56%). This increase is in accordancewith the Group's strategy of developing its temporary staffing business andreflects both strong temporary revenue growth in our UK construction businessesand the acquisition of the Headway Group, which is a purely temporary staffingbusiness. Profitability The Group uses adjusted profit before taxation (PBT) (as defined and calculatedon page 24) as its principal measure of operating performance. Profits beforetax are adjusted to remove the effects of amortisation of intangible assets andany exceptional items incurred during the year. Adjusted PBT for the year - for existing and continuing operations - rose by114% (2006: 30%) to £6.2.m (2006: £2.9m) for the Group. Adjusted operating margin on revenues increased slightly to 4.7% (2006: 4.6%),despite continued investment in organic growth, particularly in the rest of theworld. Taxation The effective rate of corporation tax to headline profit before tax was 31% in2007 compared to 29% in 2006. The difference between the effective rate and the standard UK rate ofcorporation tax principally reflects the Group's exposure to higher taxenvironments outside of the UK. For example Japan where rates are in excess of40%. Earnings per share Earnings per share, (EPS), adjusted for the effects of amortisation ofintangible assets and exceptional items, was 9.2 pence, an increase of 28% over2006 (7.2 pence).In 2007, the Group's weighted average issued share capital, as used to calculateEPS, increased by 31% principally as a result of shares issued to acquire theHeadway Group as well as to increase the Group's share in existing operations. Dividend The Directors have recommended the payment of a dividend of 0.55 pence per share(2006: 0.50 pence), representing an increase of 10%. If approved, the dividendwill be paid on 18 August 2008 to members registered on 18 July 2007. Net assets As at 31 December 2007 the net assets of the Group were £29.1m (2006:£11.6m). Executive Equity Purchase Plan The Group operates an equity participation programme to incentivise its seniormanagement. An award under the scheme was made in 2007 and a charge of £102,500is reflected in the income statement. Acquisitions Goodwill and other intangible assets increased by £14.3m in the year, to £24.7m(2006: £10.3m) at 31 December 2007. The details of the main transactions behindthis increase are explained below: Purchase of Headway Group In May 2007, the Group acquired 60% of the Headway Group for a cashconsideration of £9.9m. The balance of 40% of Headway remains with keymanagement shareholders and an option exists for them to sell a further onethird of their remaining holding to Empresaria after 2009 for a maximumaggregate consideration of Euros 10m (approximately £7.5m). Headway provides temporary and contract staff to a number of specialistindustries through over 60 branches throughout Germany and Austria, includingthe Logistics, Engineering, Automotive, Retail and Biotechnology Sectors. Purchase of EAR Group In May 2007, the Group acquired 60% of the share capital of the EAR Group, foran initial consideration of £289,000, paid in cash/shares. Based in the Netherlands, the business specialises in the provision of temporaryand permanent staff, principally in the field of construction and propertyservices. Purchase of Alternattiva Group In November 2007, the Group acquired 56% of the Alternattiva Group, a leadingChilean staffing business providing temporary and outsourced staff principallyin the sales, marketing and promotional staffing solutions. The initial consideration amounted to £690,000 with a maximum furtherconsideration of approximately £1.1m payable depending on the financialperformance of the business in 2008. Purchase of minority share holdings During 2007, Empresaria increased it shareholdings in Lime Street RecruitmentLimited and The Recruitment Business Limited for an aggregate consideration of£495,000, of which £45,000 was payable by the issue of 24,789 shares inEmpresaria Group, with the balance paid in cash. Post year end purchases Since the year end Empresaria acquired a controlling interest in ForwardProspects Limited, Spa Elite Limited and Travel World Selection Limited for atotal maximum consideration of £100,000. All businesses are based in the UK. Principal risks and uncertainties The principal risks and uncertainties that the Group face are: Growth management The Group's growth strategy includes the investment in and management of startup businesses and acquisitions. This strategy has certain risks and failure toimprove operating performance of start-up businesses and acquired businesses mayadversely impact results, including the Group's cash flow. Failure to ensure the Group has sufficient senior management resources to manageand control its growth could adversely impact its profitability. The Boardregularly assesses the number and suitability of its senior management resourcesand adapts this resource to the needs of the Group. Dependence on key executives and personnel The Group's future success is substantially dependent on retaining andincentivising its senior management and certain key employees. The loss of theservice of key personnel may have an adverse impact on the Group's business andrelationships. However, the Group's philosophy of management equity ensures that key managementare appropriately incentivised through equity ownership. In addition, as theGroup grows and diversifies geographically, its reliance on any one company andthe individuals associated with that company reduces. Market risks Political environment A change in government policy may impact on the level of public spending in thekey sectors in which the Group operates. Changes of this nature in themacro-economic environment could adversely affect the financial performance ofthe Company. Economic environment The performance of staffing businesses has historically shown a strongcorrelation with performance of the economies in which they operate.Empresaria's strategy of diversification within individual geographic marketsand its expansion internationally is designed to mitigate the effect of adownturn in any one economy. Nevertheless, significant economic downturn ineither the UK or Germany could result in reduced revenues and profits for theGroup. Legislative change The Company's business is subject to European, UK and overseas employmentlegislation. Any changes to this may impact on the manner in which Empresariaconducts its business and could therefore affect the financial performance ofthe Group. Financial risks and treasury management The Group expanded significantly overseas by both acquisition and organicgrowth. This expansion has been partly funded by parent company loansprincipally denominated in local currency of the recipient company. Thereforethe parent company is exposed to exchange rate fluctuations between the grant ofthe loan and its settlement. Where these loans are material, the Group has takenout forward exchange contracts to manage these risks. With regard to credit risk the company has implemented policies that requireappropriate credit checks on potential customers before contracts are commenced. In respect of interest rate risk the Group has interest bearing assets andliabilities. Interest bearing assets and liabilities include cash balances andoverdrafts, all of which have interest rates applied which are commensurate withthe scale of the Group's operations. Cash flow For the first time in a number of years operating cash flow was lower thanoperating profit. Net cash of £2.4m (2006: £5.4m) was generated from operationsduring the year. The relative cash generation is affected by two principalfactors. As stated in last year's Annual Report, the 2006 cash flow was improvedby a significant one-time increase in the amount of invoice discountingliability subject to non-recourse arrangements. In 2007 cash flow was depressedby the mid-year acquisition of Headway, where a number of pre-acquisitionliabilities, were settled post acquisition. The main elements of these wereemployer's liability insurance in respect of 2006, as well as accrued payrollcosts. The total one-time effect amounted to approximately £1.7m. The Group debtors grew by £5m in the year due principally to growth in revenuesat our temporary operations, especially Headway in Germany and Fast Track in theUK. In the 2006 Annual Report we also commented on the UK government's abolition ofmanaged service companies and identified a negative cash flow impact on theGroup over 2007 and 2008. In practice the closure process of the Group's managedservice operations has taken longer than anticipated and the impact will be feltin 2008 and 2009. The Group spent £12.8m of cash on acquisitions (including cash acquired),investment in associates and capital expenditure and raised £12.7m fromfinancing activities, of which £11.5m was from the issue of shares to fund theacquisition of the Headway Group. Net debt increased by £2.8m to £4.2m during the year, mainly reflecting debttaken out to fund acquisitions of new companies and the purchase of minorityinterests (£1.4m) and non-current liabilities assumed with new acquisitions(£0.7m). Management of liquidity risk The Group maintains a range of facilities appropriate to fund its workingcapital requirements as well as its strategy of organic and acquisitiveexpansion.At the year end, the Group's financing arrangements comprised: • cash at bank of £4.1m;• overdraft facilities of £5.8m, of which £2.5m was utilised at the year end;• a revolving credit loan facility of £2.5m, of which £1.2m has been utilised. This facility is shown under current liabilities reflecting its flexibility. In practice the facility is available until the end of 2009;• outstanding term loans of £2.1m repayable over the next four years; and• amounts owed in respect of invoice discounting and factoring agreements of £1.9m. Nick Hall-PalmerGroup Finance Director17 April 2008 Consolidated income statement 2007 2006 Note £'000 £'000 Continuing operationsRevenue 147,827 75,459Cost of sales (105,476) (53,619) ---------- ----------Gross profit 42,351 21,840Administrative costs (35,613) (18,335) ---------- ----------Operating profit 6,738 3,505Finance income 240 6Finance costs (870) (414) ---------- ----------Net finance cost (630) (408)Share of operating loss from associates (118) (203) ---------- ----------Profit before tax 5,990 2,894Income tax expense (1,881) (828) ---------- ----------Profit for the year 4,109 2,066 ========== ========== Attributable to:Equity holders of the parent 2,549 1,558Minority interest 1,560 508 ---------- ---------- 4,109 2,066 ========== ========== Earnings per share from continuing operations:Basic and diluted earnings per share 2 8.4 6.7 ========== ========== Consolidated balance sheet 2007 2006 £'000 £'000ASSETSNon-current assetsProperty, plant and equipment 1,887 790Goodwill 21,973 10,346Other intangible assets 2,710 -Interests in associates 981 582Deferred tax assets 940 334 ---------- ---------- 28,491 12,052 ---------- ---------- Current assetsTrade and other receivables 32,494 11,229Cash and cash equivalents 4,110 3,342 ---------- ---------- 36,604 14,571 ---------- ----------Total assets 65,095 26,623 ========== ========== LIABILITIES Current liabilitiesTrade and other payables 24,773 9,388Corporation tax payable 2,086 798Short-term borrowings 6,227 3,558 ---------- ---------- 33,086 13,744 ---------- ---------- Non-current liabilitiesLong-term borrowings 2,050 1,201Deferred tax liabilities 909 125 ---------- ----------Total non-current liabilities 2,959 1,326 ---------- ----------Total liabilities 36,045 15,070 ---------- ----------Net assets 29,050 11,553 ========== ========== Consolidated balance sheet (continued) 2007 2006 £'000 £'000EQUITYShare capital 1,668 1,193Share premium account 16,623 5,185Merger reserve 1,539 1,539Translation reserve 962 (28)Fair value reserve (52) (78)Retained earnings 5,302 2,922 ---------- ----------Equity attributable to equity holders of the parent 26,042 10,733Minority interest 3,008 820 ---------- ----------Total equity 29,050 11,553 ========== ========== Consolidated statement of recognised income and expense 2007 2006 £'000 £'000 Available-for-sale investments: Valuation gains/(losses) taken to equity 25 (78)Exchange difference on net assets of overseas subsidiaries 853 (28)Tax on items taken directly to or transferred from equity (7) 23 ---------- ----------Net income / (loss) recognised directly in equity 871 (83)Profit for the period 4,109 2,066 ---------- ----------Total recognised income and expense for the period 4,980 1,983 ========== ========== Attributable to:Equity holders of the parent 3,557 1,475Minority interest 1,423 508 ---------- ---------- 4,980 1,983 ========== ========== Consolidated cash flow statement Consolidated 2007 2006 Note £'000 £'000 Net cash from operating activities 3 1,009 4,630 Cash flows from investing activitiesAcquisition of new subsidiaries (11,874) (1,652)Further shares acquired in existing subsidiaries (1,396) (417)Cash acquired with subsidiary acquired 2,158 9Acquisition of investment in associates (447) (694)Loans given to associates (393) (214)Purchase of property, plant and equipment (1,093) (528)Finance income 142 6 ---------- ----------Net cash used in investing activities (12,903) (3,490) ---------- ---------- Cash flows from financing activitiesProceeds from issue of share capital 11,501 905Proceeds from bank loan / borrowings 3,943 725Payment of loan (282) (247)(Decrease) in factoring borrowings (1,090) (733)Finance cost (772) (414)Dividends paid (166) (106)Dividends paid to minority shareholders in subsidiary undertakings (472) (333) ---------- ----------Net cash from / (used in ) financing activities 12,662 (203) ---------- ---------- Net increase in cash and cash equivalents 768 937Cash and cash equivalents at beginning of period 3,342 2,405 ---------- ----------Cash and cash equivalents at end of period 4,110 3,342 ========== ========== Notes to the consolidated financial statements 1 Basis of preparation and general information The financial information set out above does not constitute the Company'sstatutory accounts for the years ended 31 December 2007 and 2006, but is derivedfrom those accounts. Statutory accounts for 2006 have been delivered to theRegistrar of Companies and those for 2007 will be delivered following theCompany's Annual General Meeting. The Auditors have reported on those accounts;their reports were unqualified, did not draw attention to any matters by way ofemphasis without qualifying their reports and did not contain statements underthe Companies Act 1985, sections 237(2) or (3). Accounting policies have been consistently applied throughout 2006 and 2007. The consolidated financial statements are for the twelve months ended 31December 2007. They have been based on the company's financial statements whichare prepared in accordance with International financial reporting standards asadopted for use in the EU. 2 Earnings per share Basic and diluted earnings per share The calculation of the basic earnings per share is based on the earningsattributable to ordinary shareholders divided by the weighted average number ofshares in issue during the year. Based on current trading conditions, the Directors are of the opinion that therewould be no dilution to the earnings per share figure resulting from subsidiaryminority shareholders trading up. Reconciliations of the earnings and weighted average number of shares used inthe calculations are set out below. 2007 2006-----------------------------------------------------------------------------------------------------------------Profit after tax attributable to Equity shareholders of the parent (£000s) 2,549 1,558Weighted average number of shares 30,192,276 23,102,238Basic and diluted earnings per share (pence) 8.4 6.7----------------------------------------------------------------------------------------------------------------- Adjusted earnings per share 2007 2006 £000 £000-----------------------------------------------------------------------------------------------------------------Profit before tax 5,991 2,894Income tax expense (1,881) (828)Add back: Intangible amortisation 107 - Recognition of pre-acquisition deferred tax asset against goodwill under IFRS - 100 Impairment (net of negative goodwill) 37 - Recognition of deferred tax liability on amortisation on purchased goodwill under IFRS 60 65 IFRS Transition cost 36 -Minority interests (1,575) (562)----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Adjusted profit after tax and minority interests 2,775 1,669----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------Adjusted earnings per share (pence) 9.2 7.2----------------------------------------------------------------------------------------------------------------- 3 Notes to cash flow Net cash from operating activities 2007 2006 £'000 £'000----------------------------------------------------------------------------------------------------------------- Profit for the year 4,109 2,066 Adjustments for: Depreciation 685 337 Negative goodwill (712) - Goodwill impairment 679 - Intangible amortisation 107 - Taxation expense recognised in income statement 1,881 828 Share of losses in associates 118 203 Net finance cost 630 408 (Increase) in trade receivables (5,101) (726) (Decrease) / increase in trade payables (4) 2,253 ---------- ----------Cash generated from operations 2,392 5,369 Income taxes paid (1,383) (739)-----------------------------------------------------------------------------------------------------------------Net cash from operating activities 1,009 4,630----------------------------------------------------------------------------------------------------------------- 4 Financial liabilities - borrowings 2007 2006 £'000 £'000-----------------------------------------------------------------------------------------------------------------CurrentBank overdrafts 2,516 -Amounts relate to invoice financing 1,954 2,568Current portion of bank loans 1,757 990----------------------------------------------------------------------------------------------------------------- 6,227 3,558----------------------------------------------------------------------------------------------------------------- Non-currentBank loans 1,594 1,038Other creditors 456 163----------------------------------------------------------------------------------------------------------------- 2,050 1,201-----------------------------------------------------------------------------------------------------------------Gross Debts 8,277 4,759----------------------------------------------------------------------------------------------------------------- 2007 2006 £'000 £'000-----------------------------------------------------------------------------------------------------------------Gross Debts 8,277 4,759Less : Cash and cash equivalents 4,110 3,342 ------------------------------------------- Net Debts 4,167 1,417----------------------------------------------------------------------------------------------------------------- 5 Business combinations The Group made four acquisitions during the year (2006 - four acquisitions weremade). Newly acquired companies Learning Resources, Headway, EAR, and Alternattiva havecontributed £61,000, £1,028,000, £14,000 and £29,000 to the group profitattributed to equity holders of the parent to 31 December 2007. 6 Annual report and accounts The annual report and accounts for the year ended 31 December 2007 will beposted to shareholders shortly. Additional copies will be available from theCompany Secretary at the Company's registered office Empresaria Group Plc,Peveril Court, 6-8 London Road, Crawley, West Sussex, RH10 8JE. 7 Explanation of transition to IFRS Empresaria Group plc's consolidated financial statements were prepared inaccordance with United Kingdom Accounting Standards (United Kingdom GenerallyAccepted Accounting Practice) until 31 December 2006. The date of transition toIFRS was 1 January 2006. The comparative figures in respect of 2006 have beenrestated to reflect changes in accounting policies as a result of adoption ofIFRS. The disclosures required by IFRS 1 concerning the transition from UK GAAPto IFRS are presented and explained in the group's interim financial statementfor half year ending 30th June 2006. 8 Reconciliation of statutory financial information to adjusted information included within the financial highlights 2007 2006 £'000 £'000 Operating profit 6,738 3,505 Add back: Goodwill / Intangible amortisation 107 - Impairment (Net of negative goodwill) 37 - IFRS Transition cost 36 - ============ ============ ------------Adjusted operating profit 6,918 3,505 Share of loss in associated company (118) (203)Interest payable and similar charges (Net) (630) (408) ============ ============ ------------Adjusted profit before tax 6,170 2,894 Taxation (1,881) (828)Recognition of pre-acquisition deferred tax asset against goodwill under IFRS - 100 Recognition of deferred tax on amortisation on purchased goodwill under IFRS 60 65Minority interests (*) (1,574) (562) ============ ============ ------------Adjusted profit after tax and minority interests 2,775 1,669 ____________ ____________ ============ ============ ============ Adjusted earnings per share (pence) 9.2 7.2 ____________ ____________ ============ ============ ============ (*) - adjusted as necessary for minority interest impact from goodwillamortisation and exceptional item adjustments. 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