Empresaria Group Regulatory News (EMR)

18 March 2020

Empresaria Group plc

("Empresaria" or the "Group")

Results for the year ended 31 December 2019

Growth in net fee income in a challenging economic environment. Operational improvements building a strong platform for future growth.

Empresaria, the global specialist staffing group, reports its final results for the year ended 31 December 2019.

· Diversified business delivering growth in net fee income

o +3%, +2% in constant currency

o 37% growth in Offshore Recruitment Services sector

· Decline in profits reflecting a challenging economic environment in certain key markets

o Impact from engineering business and Brexit uncertainty in the UK, alongside the weakening of the German automotive sector

· Strong growth in other markets

o Offshore Recruitment Services adjusted operating profit up 88%

· Stronger Together initiative with a focus on organic growth and operational improvement

o Aligned business around six core sectors to improve collaboration and leverage synergies

o Increased support from central team

o Investment in common technology (e.g. Bullhorn)

o Evolving operating models in certain brands to enable them to scale more effectively

o Creating a performance based culture

· Proposed dividend of 2.2p per share, an increase of 10% in line with progressive dividend policy

· Building a strong foundation that will drive future growth and profits

1 Adjusted to exclude amortisation of intangible assets identified in business combinations, impairment of goodwill, exceptional items, fair value charges on acquisition of non-controlling shares and, in the case of earnings, any related tax.

2 The constant currency movement is calculated by translating the 2018 results at the 2019 exchange rates.

An interview with management covering the results is available here: http://bit.ly/EMR_FY19

Chief Executive Officer, Rhona Driggs, commented:

"We are pleased to be reporting net fee income growth in a challenging economic environment. These challenges have impacted the bottom line, particularly in our UK engineering business where we have taken the decision to close a substantial part of the operation.

Notwithstanding the wider market challenges, we have made great progress in 2019 in implementing operational improvements that will help us build a strong platform for future growth. These are spearheaded by our Stronger Together initiative, which aligns our business around core sectors, enabling us to share common experiences and leverage synergies.

We are focused on driving organic growth and have a series of operational improvements and investments under way to deliver this, some of which are already bearing fruit. Our central team is delivering increased levels of support to ensure our businesses benefit from being part of a global group. Additionally, we are investing in technology, including working with Bullhorn to upgrade our front office system, to ensure that we remain competitive in connecting talent with jobs. Our Offshore Recruitment Services sector, which delivered an 88% increase in adjusted profit, will also be a key driver of growth across the Group as we look to make better use of this internal expertise.

While we are cognisant of the ongoing economic and market headwinds, particularly the outbreak of coronavirus, we are confident that the positive changes we have made in 2019 and the further changes and investments planned in 2020 leave us well positioned for the longer term."

- Ends -

Enquiries:

Notes for editors:

§ Empresaria Group plc is a global specialist staffing group offering temporary and contract recruitment, permanent recruitment and offshore recruitment services across 6 sectors: Professional, IT, Healthcare, Property, Construction and Engineering, Commercial and Offshore Recruitment Services.

§ Empresaria operates in 20 countries across the world including the 4 largest staffing markets of the US, Japan, UK and Germany along with a strong presence elsewhere in Asia Pacific and Latin America.

§ Empresaria is listed on AIM under ticker EMR. For more information: empresaria.com

Chairman's statement

2019 performance

We are pleased to report our full year results which have delivered growth in net fee income despite a challenging economic environment in some of our key markets. As for many in the staffing sector, we have seen adverse impacts from Brexit and the weakening of the German automotive sector which combined with challenges in our UK Engineering business have resulted in a reduction in profits, but our diversification by sector and geography has delivered good growth elsewhere. For example, our Offshore Recruitment Services sector has gone from strength to strength delivering a 37% increase in net fee income and an 88% increase in adjusted operating profit.

Following our decision to align our brands around our core sectors, we have continued to make good progress in addressing operational issues, taking the decision to substantially reduce the UK engineering business and merging brands within our Professional sector. We have identified further key areas for operational improvement and investment in 2020 and we are building a strong foundation for future growth.

People & strategy

In June 2019 we appointed Rhona Driggs as Chief Executive Officer. Rhona has been with the Group since November 2018 when she joined as Chief Operating Officer. She has implemented significant operational change and initiatives, and has put in place a new clear strategy and operational investment plan for 2020 and beyond focused on delivering organic growth.

In May 2019 we launched our Stronger Together initiative which seeks to maximise the benefits to our businesses of being part of a global group and allows them to benefit from the expertise we have across Empresaria.

Our business model is a key differentiator for the Group and in the constantly evolving staffing sector it is important that we are continually evaluating how we operate in order to ensure that our approach remains relevant and competitive.

We are currently looking at alternatives to replace our second generation management equity scheme to achieve a more relevant and more flexible performance based reward for management. Our first generation management equity scheme has been very successful when attracting new businesses into the Group, enabling us to retain key management and giving them the opportunity to continue to grow their business while holding an equity stake and we will continue to apply this principal when looking at future investments.

The average number of staff across the Group increased to 1,955 (2018: 1,625) driven by the growth in our Offshore Recruitment Services sector where average headcount has increased by 299 from last year. The success of the Group is down to the hard work and commitment of all our staff and the Board would like to thank all of them for their contribution to our continued success.

We continue to operate with a decentralised structure but with increased levels of support from the central team. Local management remain responsible for running their businesses within the context of the Group's strategic objectives and with clear governance and control oversight from the centre. We believe in a strong and clear governance approach and expect high standards and compliance across the Group.

Dividend

The Board has reviewed the dividend in line with our progressive dividend policy and for the year ended 31 December 2019 we propose a dividend of 2.2p, up 10% on the prior year, demonstrating the strength of the balance sheet and the Board's confidence in the Group's prospects. Subject to shareholder approval at the Annual General Meeting, the dividend will be paid on 29 May 2020 to shareholders on the register on 15 May 2020.

Outlook

The world of work is continuing to change rapidly as technology evolves. Skilled worker shortages continue to be a key challenge as we seek to create a flexible workforce that can adopt new skills in real time.

The difficult economic environment of 2019 looks set to continue into 2020 and we have new challenges from the implementation of IR35 in the UK and the current global outbreak of coronavirus. However, with the operational changes and investments we have made in 2019 and have planned for 2020, we are building a strong foundation for the future.

Tony Martin

Chairman

17 March 2020

Chief Executive's Review

Having been in the role for nearly nine months now, I see tremendous potential in the Group. We have a great opportunity to drive best practices, leverage synergies and the ability for greater collaboration to gain meaningful market share with existing clients across the globe. There is also a great ability to drive future growth and profits through leveraging the expertise in our Offshore Recruitment Services sector across our businesses. This along with creating size and scale in our sectors and markets will accelerate our growth. I am confident we have the right strategy and I am excited to start delivering on these opportunities.

Performance and operational review

In 2019 Group performance was affected by economic factors such as Brexit uncertainty and the weakening of the German automotive sector which were exacerbated by issues within our UK Engineering business. However, despite these issues we delivered growth in net fee income of 3% to £74.5m with increases across all our sectors with the exception of Property, Construction & Engineering. While adjusted profit before tax was down by 18% to £9.3m we remain a very profitable group.

We made a number of operational changes during the year, including the difficult decision to close a substantial part of our UK engineering business which made a significant loss in 2019. This business had struggled for a number of years and had seen a significant reduction in its net fee income over that time. As a result of the actions we've taken our Property, Construction & Engineering sector is expected to return to profit in 2020.

In addition, we made significant changes in our businesses impacted by Brexit or the downturn in the German automotive sector. This involved right-sizing cost bases or adjusting operating models to create a more efficient operation along with driving a sales strategy to diversify our client base. These changes did not come without cost but the benefits will be seen as we move into 2020.

Our Offshore Recruitment Services sector performed strongly, delivering a 37% increase in net fee income and an 88% increase in adjusted operating profit. This performance demonstrates the value that this sector adds to the Group, something that we believe is unique amongst our peers. This sector will also be a key enabler for growth across other parts of the Group as we look to leverage this internal expertise to drive additional revenue, along with cost and operational efficiencies, in our other sectors.

Strategic update

The Group has historically been run as a series of independent businesses with common majority ownership and key strategic support but limited operational involvement from the central team. The result of this was limited ability of the individual businesses to realise the full benefits of being part of a global group. In May 2019 we launched our Stronger Together initiative which seeks to maximise the benefits to our businesses of being part of a global group and allows them to benefit from the expertise we have across Empresaria.

This has led us to strategically increase investment in key areas of our central team to provide the level of support that is needed to drive growth in our brands. This has also driven the operational changes we have made that are captured in our Stronger Together initiative.

These key changes include:

· Aligning our businesses around core sectors enabling them to share common experiences, leverage synergies and learn from each other.

· Increasing support from the central team, in particular in marketing, training and technology has helped align strategy and evolve best practice.

· Increasing investment in common technology (e.g. Bullhorn, Workplace). Technology is key in the staffing sector to enable us to respond to our client demands quickly and effectively to remain competitive, while a common platform increases the ability to generate cross-selling and to generate meaningful and business intelligence from across the Group.

· Evolving our operating models in certain brands to enable them to scale more effectively in the temporary segment.

· Creating a performance based culture where results are openly shared across the management levels and aligning incentive schemes across the business. This also comes with the understanding that underperformance will be addressed rapidly.

While these are significant changes to how the Group historically operated, the engagement and receptiveness across the Group has exceeded my expectations and as a result we have already started to see meaningful positive outcomes.

We are focused on organic growth as we look to reduce our level of net debt. Any investment in the short term will therefore be focused on our existing businesses and we do not plan on making any substantial external investments. We are also focused on increasing the proportion of net fee income we derive from temporary/contract business so that our "temp to perm ratio" increases from its present level of 60:40 towards our target level of 70:30. This requires the operating model adjustments we have made and are continuing to make to create greater scalability in our temporary/contract business.

Our investment priorities for 2020 include:

· Implementation of Bullhorn across multiple brands to ensure they have the technology to enable them to maximise their value to clients and candidates.

· Investment in our IT sector to develop our temporary and contract revenues in the US and to strengthen our temporary and contract position in the UK.

· Identification of key leadership to drive our growth and provide us with the sector and functional expertise needed to maximise our results.

· Investment in evolving our infrastructure and diversifying our revenue in our Offshore Recruitment Services sector to ensure this continues to be a high performing sector for us. We have seen rapid growth in recent years and need to continue to invest to enable this sector to deliver the next phase of growth. These investments will be key to help us ensure this continues to be a high performing sector for us in the future.

Market Dynamics

Each Empresaria business is exposed to the local drivers impacting their market and sector and these can vary significantly from business to business. The diverse nature of the Group, both by sector and geography, provides some natural protection against risks arising from these with opportunities in one market offsetting challenges in another. Our management teams are experts in their specific markets allowing them to identify and respond to local trends and drivers.

We do see trends in the wider sector which have the ability to impact the Group as a whole:

· The need for speed - Being the best is no longer good enough if you are not there first. Clients want qualified candidates quickly and will not be willing to wait for the perfect candidate. Our investments in technology and processes are aimed at improving the speed and efficiency of our operations.

· The continuing rise of Managed Services Providers (MSPs) and Recruitment Process Outsourcing (RPO) outside of the US - An ongoing trend that continues to develop throughout global staffing markets. Some staffing firms try to resist these, but both represent excellent opportunities for businesses with the right operating models and we are investing to ensure our brands are well positioned to grow in these areas.

· The power of regional selling - Clients want to minimise the number of staffing companies they engage with and this includes across geographic regions. As a global group Empresaria is well positioned to meet these requirements, however the siloed way in which the business had historically operated did not encourage this to happen. As we bring the Group together in collaboration we will be better positioned to deliver on a regional basis and increase our market share with clients.

Outlook

We remain cognisant of economic and market headwinds particularly with the acceleration of the current coronavirus outbreak. We are unsure of the impact this will have on the staffing sector at this time, however we remain confident on our longer term prospects given the positive changes we made in 2019 and the further areas for operational change and investment planned 2020. Our Stronger Together initiative is gaining momentum and we are starting to see some real benefits from the changes we have made. As with any change, in particular the cultural shift we are driving, it will take time to realise those benefits but I am confident that we are well on our way to building a strong foundation that will enable us to accelerate future profits.

Rhona Driggs

Chief Executive Officer

17 March 2020

Operating Review

Professional

Revenue reduced by 11% (10% in constant currency), net fee income was up 2% (1% in constant currency) with adjusted operating profit decreasing by 22% reflecting a mix of performances across the sector.

The reduction in revenue was largely driven by our aviation business which, as previously communicated, expected more challenging market conditions in 2019. However, a significant part of the reduction in revenue is due to a change in the billing structure for a number of pilots which, following a base transfer, have moved from our payroll onto our client's payroll. This means that while we achieve the same net fee income, we do not gross up the revenue for salary costs. The challenging market conditions are expected to continue into 2020 as we are now seeing an adverse impact from the ongoing grounding of the Boeing 737 Max and an ongoing reduction in demand for new pilots from a large client. The current outbreak of coronavirus is starting to have an impact with airlines delaying recruitment processes while they assess the impact.

Brexit uncertainty had a significant impact in the UK, predominantly on our professional services business which has a high exposure to the financial services sector. Steps have been taken to right size the cost base and we expect to see the benefits of this as we move into 2020.

During the year we merged our marketing/digital business under our professional services business, at the same time closing our loss-making operation in Hong Kong. This business had been struggling to grow and had a high cost base and this move will generate immediate cost savings and provide improved opportunity for long term growth. Our office in Auckland, New Zealand, which opened in early 2019, continues to show good promise, but our office in Brisbane, Australia, which opened around the same time, has proven unsuccessful and was subsequently closed.

Elsewhere in professional we saw strong net fee income growth in our Asia-based executive search business, although in 2019 this was offset by increases in the cost base. Our domestic services business had another good year showing increases in both net fee income and profits.

Overall adjusted operating profit for the sector was down reflecting the significant impact of Brexit on professional services and the reduction in our aviation business.

IT

Revenue increased by 3% (0% in constant currency), with net fee income up 6% (3% in constant currency) and adjusted operating profit unchanged from 2018.

In Japan we saw net fee income growth as increases in permanent fees more than offset the challenges of rebuilding the temp base following the regulatory changes in 2018.

In the UK net fee income grew strongly with growth coming mainly from permanent recruitment. We will be investing in 2020 to strengthen our position in the temp market.

The US saw a fall in net fee income after a very strong 2018 which saw benefit from the growth of the cryptocurrency market. This market declined sharply at the start of 2019 and other sources of revenue have had to be found. The Austin office which opened in April 2019 is progressing well and is already breaking even as we move into 2020. We are investing in growing our presence in the US temp market as we are currently permanent placement focused. There is a tremendous opportunity to grow in this market and this will also build more stability into the financial results.

Total adjusted operating profit for the sector was flat year on year with growth in the UK and Japan offset by the fall in the US.

We invested further in this segment by acquiring additional shares in ConSol Partners taking our ownership to 82.5%. This business has performed well since joining the Group and our investment reflects the Group's commitment to investing in high potential sectors.

Healthcare

Revenue was unchanged (down 1% in constant currency), net fee income grew by 4% (2% in constant currency) and adjusted operating profit was unchanged.

The first half of 2019 saw a slow start to the year for the sector with our businesses in both Finland and the US struggling with operational issues.

In Finland we had a reduction in the number of contractors on assignment due to recruitment challenges. In September we appointed a new managing director to the business and there has been a rejuvenated recruitment effort which is starting to see results. The business is in the early stages of leveraging our offshore recruitment operation in India to improve delivery and reduce cost.

In the US we were struggling to deliver both on volume and speed in a very competitive MSP environment. We restructured the operations in April and aligned our structure to the demands of our clients which included leveraging our internal offshore recruitment services expertise to meet the high volume and speed requirements. As a result, we were able employ a much larger team (note this headcount is shown with the Offshore Recruitment Services sector) for a lower cost and significantly increase fill ratios. Following this we have seen much improved profitability in the second half of the year.

Total adjusted operating profit for the sector is in line with the prior year with the improvements seen in the second half of the year offsetting the slow start.

Property, Construction & Engineering

Revenue fell by 29%, net fee income by 28% and the sector recorded an adjusted operating loss of £1.2m. There is no currency translation impact as all operations are UK based.

The fall in results was driven by our UK engineering business. This business had been struggling with declining net fee income in recent years and in 2019 Brexit and challenging market conditions combined with the insolvency of certain clients and the early closure of major projects resulting in further material decline in revenues. Due to this deterioration in trading, a restructuring of the UK engineering business was undertaken resulting in the closure of a substantial part of the business with selected profitable elements retained.

We were also impacted by Brexit uncertainty as the fall in new house sales in the UK reduced demand for our business supplying sales professionals. This business experienced one of the worst markets in its history but remained profitable due to its efficient operating model.

We are working on ways in which to diversify the revenues in this sector creating a more rounded supplier focused on white collar roles.

Future growth and investment in this sector will be targeted at the skilled, white collar market where we see greater opportunity and less risk. This sector is expected to return to profit in 2020 as a result of the actions taken.

Commercial

Revenue increased by 7% (9% in constant currency), net fee income by 3% (3% in constant currency) while adjusted operating profit fell by 4%.

In Germany the 2018 legislation changes are now business as usual and we are not experiencing any ongoing adverse effects. Our businesses there have successfully integrated these changes into their operations, with our logistics business returning to net fee income growth. However, we have been impacted by the weakening of the German automotive sector in our temp business and this significantly impacted both net fee income and profitability in the period. Action was taken to right size the cost base of the business and we are starting to realise the benefit of these actions.

In Latin America we see great opportunity for our businesses to work together to generate improved results through cross-selling in the region and this is something we will be looking to aggressively drive forward in 2020. In Chile we had another solid year with growth in both net fee income and adjusted operating profit, while our business in Peru, which joined the Group in July 2018, has continued to perform well, growing its customer base in what is a competitive and low margin market. A full year contribution from Peru in 2019 resulted in an increase to sector net fee income of £1.0m.

Sector adjusted operating profit has fallen slightly year on the year with the adverse impact of the German automotive sector outweighing the positive contributions elsewhere.

Offshore Recruitment Services

Revenue increased by 54% (54% in constant currency), net fee income by 37% (37% in constant currency) and adjusted operating profit by 88%.

Our Offshore Recruitment Services sector has continued to see substantial growth, delivering another very strong year with growth across all its target markets with the US leading the way with increased demand and several new client wins.

This success takes us to over 1,100 full time employees at 31 December 2019 and we have identified a need to increase investment in the infrastructure of the business in 2020 in order to support its future growth.

We see this sector as integral to the future success of Empresaria, both through its delivery to external clients, but also through increased internal delivery to operations across the Group.

Our UAE operation sits under the Offshore Recruitment Services structure and we see opportunity to bring these services to the UAE and the surrounding region.

Regional Summary

The UK was our worst performing region, impacted by Brexit and the issues in our UK engineering business, and showing declines in revenue, net fee income and adjusted operating profit. While there were positive performances, most notably in our domestic services operation, these were not enough to offset the declines elsewhere.

In Continental Europe we saw revenue, net fee income and adjusted operating profit reduce. This was a result of the impact of the weakening of the German automotive sector combined with the issues in our Healthcare business in Finland.

Asia Pacific has been our strongest performing region with growth in net fee income and adjusted operating profit. The fall in revenue is primarily driven by a change in income recognition following changes under a key contract which did not impact net fee income (see Professional sector above). The biggest driver of growth has been our Offshore Recruitment Services sector.

In the Americas performance has been in line with the prior year, with the increases in revenue and net fee income being primarily driven by a full year contribution from our investment in Peru which joined the Group in July 2018. The positive results seen in our Commercial operations have been more than offset by the reduction in profits in our US IT business.

Finance Review

Overview

The Group has delivered growth in net fee income of 3% against a challenging economic background. The impact of Brexit, the weakening of the German automotive sector, combined with a deterioration in our UK engineering business have resulted in adjusted profit before tax falling by 18% to £9.3m and reported profit before tax falling to £2.9m (2018: £9.4m).

Despite the reduction in profits pre-tax free cash flow increased to £10.4m (2018: £9.6m) reflecting working capital inflows. But with the impact of higher tax cash flows and investment activity, adjusted net debt has increased to £19.1m (2018: £17.1m). Investment activity has been focused on our existing businesses and included capital expenditure of £1.5m and the July investment in additional shares in our UK and US IT business for consideration of £3.5m.

Income statement

* Adjusted to exclude amortisation of intangible assets identified in business combinations, impairment of goodwill, exceptional items, fair value charges on acquisition of non-controlling shares and, in the case of earnings, any related tax. See note 7 for a reconciliation between profit before tax and adjusted profit before tax.

** The constant currency movement is calculated by translating the 2018 results at the 2019 exchange rates

Net fee income increased by 3%, 2% in constant currency. Adjusted operating profit reduced by 15%, 16% in constant currency, reflecting the growth in our Offshore Recruitment Services sector which was more than offset by the challenges elsewhere. A detailed analysis by sector is provided in the operating review. Central costs have increased to £4.2m (2018: £3.7m) reflecting investments in central staff including marketing, training and technology.

Adjusted profit before tax has reduced by 18%, 19% in constant currency, to £9.3m reflecting the lower operating profit along with the adoption of IFRS 16 Leases which has increased the net interest charge by £0.4m with no restatement of comparatives. Reported profit before tax shows a more significant reduction to £2.9m with goodwill impairment charges of £2.5m and exceptional costs of £2.1m. The goodwill impairment charge arises following the decision to exit a substantial part of the Group's loss making UK engineering business. Exceptional costs include £1.1m related to the UK engineering business, £0.5m of costs associated with merging brands within the Professional sector and £0.5m costs related to the Group's change of Chief Executive Officer in June 2019. Further details on exceptional items are provided in note 3.

The total tax charge for the year is £2.4m (2018: £3.6m), representing an effective tax rate of 83% (2018: 38%) and reflecting the high level of non-deductible goodwill impairment. On an adjusted basis, the effective rate was 37% (2018: 34%). Based on the tax rates in the countries in which we operate a lower tax rate would be expected, the effective rate is higher due to a number of factors, including:

· the level of non-deductible expenses in the year (£0.4m);

· withholding and dividend taxes resulting from overseas operations (£0.1m); and

· deferred tax assets not recognised for certain tax losses around the Group (£0.3m).

Adjusted, diluted earnings per share fell by 30% to 8.5p. This reflects the reduction in adjusted profit before tax, along with an increase in the allocation of profits to non-controlling interests. Those businesses with higher non-controlling ownership have performed more strongly relative to the rest of the Group in 2019 resulting in this increased allocation. Reported diluted loss per share was 1.6p (2018: earnings per share 9.1p).

Balance sheet

Goodwill and intangible assets represent the largest assets on the balance sheet and arise from the investments the Group has made. As at 31 December 2019 the balance was £49.0m (2018: £54.8m). The movements in the year were £1.9m of amortisation of intangible assets (2018: £1.8m), foreign exchange losses of £1.5m (2018: gain of £0.6m), software additions of £0.1m (£2018: £0.2m) and an impairment charge of £2.5m (2018: £0.3m) related to the Group's UK engineering business.

Trade and other receivables includes trade receivables of £45.6m (2018: £48.1m) with the reduction from 2018 reflecting a lower level of activity at the end of 2019 against 2018, including as a result of the restructuring of the UK Engineering business. Average debtor days for the Group in 2019 were 44 (2018: 42), with debtor days at 31 December 2019 of 44 (2018: 44). The bad debt expense during the year was £0.6m (2018: £0.7m).

Cash and borrowings are discussed in the financing section below.

Right-of-use assets and associated lease liabilities have been recognised in accordance with IFRS 16 Leases. Comparative financial information has not been restated. Further information is provided in notes 1 and 15 to the financial statements.

Cash flow

The Group is highly cash generative with a strong correlation between pre-tax profits and cash flows. The Group measures its free cash flow as a key performance indicator and defines this as net cash from operating activities per the cash flow statement excluding cash flows related to pilot bond liabilities (see financing section below) and after deducting payments made under lease agreements.

The reduction in free cash flow in 2019 compared to 2018 reflects higher tax payments in the year. As an international business the Group's tax cash flows can be more volatile but, as can be seen from the table, pre-tax the Group's free cash flows are much more stable. Free cash flow (pre-tax) for 2019 equates to 112% of adjusted profit before tax (2018: 84%) demonstrating the Group's ability to convert profits into cash.

In 2019 the Group utilised its free cash flow as follows:

The purchase of shares in subsidiary undertakings relates to the acquisition of further shares in ConSol Partners in July 2019 (see note 4).

Capital expenditure of £1.5m reflects investments in our offices in India where the operations in Ahmedabad moved into a single purpose-built office in early 2019 having previously been spread across multiple sites. Dividends paid to shareholders were £1.0m reflecting the increased final dividend for 2019 while dividends paid to non-controlling interests were £0.6m.

Financing

The Group's treasury function is managed centrally and the Group's financial risk management policies are set out in note 24 of the annual report.

Adjusted net debt at 31 December 2019 increased to £19.1m (2018: £17.1m). Adjusted net debt excludes cash of £1.5m (2018: £5.3m) held to match pilot bonds within our aviation business. Where required by the client, pilot bonds are taken at the start of the pilot's contract and are repayable to the pilot or the client during the course of the contract or if it ends early. There is no legal restriction over this cash, but given the requirement to repay it over a three year period, and that to hold these is a client requirement, we exclude cash equal to the amount of the bonds when calculating our adjusted net debt measure. At the start of 2019 a major client removed the requirement to hold bonds and as a result the level of bonds held fell significantly. This had no impact on our adjusted net debt measure.

During 2019 the month end average adjusted net debt position was £18.7m (2018: £19.0m) with a high of £23.0m at 30 September (2018: £21.2m at 28 February) and a low of £15.3m at 31 January (2018: £17.1m at 31 December).

Our debt to debtors ratio (adjusted net debt as a percentage of trade receivables) has increased to 42% (2018: 36%) reflecting the increase in adjusted net debt and reduction in trade receivables. We continue to be focused on reducing our debt levels with the aim of reducing the debt to debtor ratio to 25%.

Total borrowings were £35.2m (2018: £37.2m) being bank overdrafts of £17.9m (2018: £22.0m), bank loans of £10.4m (2018: £5.5m) and invoice financing of £6.9m (2018: £9.7m). The Group's borrowings are principally held to fund working capital requirements and are predominantly due within one year. As at 31 December 2019, £10.0m of borrowings are shown as non-current, which is the amount drawn under the Group's revolving credit facility.

The Group maintains a range of facilities to manage its working capital and financing requirements. At 31 December 2019 the Group had facilities totalling £55.1m (2018: £49.4m).

During the year the revolving credit facility was extended to £14.0m from £10.0m by activating £4.0m of the £5.0m accordion arrangement. These funds were drawn in order to purchase the additional shares in ConSol Partners in July. A further £1.0m is available under this accordion arrangement and is agreed in principle with the bank but would need new credit approval for any draw down.

Covenants are tested on a quarterly basis in respect of the revolving credit facility. All tests have been met during the year. The covenants and our performance against them as at 31 December 2019 are as follows:

Management equity

As discussed in the Chairman's statement, the Group was built on a management equity philosophy, with key management holding a meaningful stake in the business they are responsible for. We are looking at alternative incentive schemes to replace the second generation equity but existing shareholdings remain in place and continue to be reflected in these accounts. The model typically operates as follows:

Acquisition of shares

At least 51% of shares are held by Empresaria with the balance being held by management, either having been retained when Empresaria initially invested, or subsequently acquired by them at fair value. Shares retained by management upon initial investment typically have no material changes to their rights and are termed first generation shares. Shares subsequently sold to management, either because first generation shares have been acquired by Empresaria or issued to incentivise the next tier of management, are termed second generation shares. Second generation shares are acquired by management at a fair value which is made more affordable by setting a profit threshold level such that these shares only create value once that threshold is exceeded. Second generation shares typically have restrictions such as limited or no entitlement to dividends.

Holding period

Shares can be offered for sale after a specified holding period, typically four or five years. Shares cannot all be sold in one year requiring a minimum of two or three years for full disposal. While management can choose to offer their shares for sale, the decision to purchase these is solely at the discretion of Empresaria and there are no put or call options in place. Empresaria's decision to buy shares is based on each specific situation, with consideration given to management succession plans, recent trading performance and the potential of the business in the next few years.

Valuation

The valuation basis is agreed up front and documented in the shareholders' agreements. The valuation is typically based on the average profit after tax for the previous three years using Empresaria's trading multiple (share price divided by adjusted EPS) less 0.5 with a cap of 10, to ensure that it is earnings accretive to Empresaria's shareholders.

Based on the Group's results for the year ended 31 December 2019, and using the valuation mechanisms in shareholders' agreement but ignoring holding period requirements, the potential payment to acquire non-controlling interests in full in 2020 would be £10.5m based on Empresaria's share price at close on 13 March 2020, and could be up to a maximum of £14.2m using the maximum multiple that could be applied. Of these amounts approximately 90% relates to first generation shares. There is no legal obligation on the Group to acquire the shares held by management at any time.

In some situations the consideration payable under the shareholders' agreement for second generation equity may be greater than the fair value of the shares under IFRS 13 such as where there are restrictions over the rights of the shares, typically over dividends. The valuation mechanism in the majority of shareholders' agreements uses an earnings multiple, which does not differentiate between shares with restricted rights and those without restrictions. If the price paid for the shares is in excess of this fair value, this additional amount paid is recognised as a charge in the income statement. These charges are treated as adjusting items when presenting our adjusted profit and earnings measures.

During the period the Group acquired additional shares in ConSol Partners for consideration of £3.5m. The two founding management shareholders left their operational roles within this business at the end of 2019 following a successful handover period with incoming management. They continue to work with the Group on a consultancy basis, but we expect that they will offer their remaining shares to Empresaria at the next window in May.

Other shares acquired from or sold to management were for total consideration of less than £0.1m.

Dividend

During the year, the Group paid a dividend of 2.0p per share in respect of the year ended 31 December 2018. For the year ended 31 December 2019, the Board is proposing a dividend of 2.2p per share, an increase of 10% in line with the Group's progressive dividend policy and demonstrating the strength of the Group's balance sheet and the Board's confidence in the Group's prospects. Subject to shareholder approval at the Annual General Meeting, the dividend will be paid on 29 May 2020 to shareholders on the register on 15 May 2020.

Going concern

The Board has undertaken a recent and thorough review of the Group's budget, forecasts and associated risks and sensitivities including the latest available information on the coronavirus outbreak and the potential impact on the Group. Given the business forecasts and early trading performance, the Group is expected to be able to continue in operational existence for the foreseeable future, being a period of at least 12 months from the date of approval of the accounts. As a result, the going concern basis continues to be appropriate in preparing the financial statements.

Tim Anderson

Chief Financial Officer

17 March 2020

Consolidated income statement 

Details of adjusted earnings per share are shown in note 8.

Consolidated statement of comprehensive income

Consolidated balance sheet

Consolidated statement of changes in equity

Consolidated cash flow statement

1 Basis of preparation and general information

The financial information has been abridged from the audited financial information for the year ended 31 December 2019.

The financial information set out above does not constitute the Company's consolidated statutory accounts for the years ended 31 December 2019 or 2018, but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's Annual General Meeting. The Auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their reports and did not contain statements under s498(2) or (3) Companies Act 2006 or equivalent preceding legislation.

Accounting policies have been consistently applied consistently with those set out in the 2018 financial statements, as amended when relevant to reflect the adoption of new standards, amendments and interpretations which became effective in the year. The only new standard which had a significant impact on these financial statements is the adoption of IFRS 16 Leases as set out below.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ('IFRS'), this announcement does not itself contain sufficient financial information to comply with IFRS. The Group will be publishing full financial statements that comply with IFRS in April 2020.

IFRS 16 Leases (effective 1 January 2019)

The Group has adopted IFRS 16 for the first time in these financial statements. The Group has opted to apply the modified retrospective approach which does not require the restatement of comparative information. 2018 figures have therefore not been restated and IFRS 16 has an impact from 1 January 2019.

On 1 January 2019 the Group recognised right-of-use assets and corresponding and equal lease liabilities with no impact on the Group's net assets or equity. From 1 January 2019 the Group no longer records a rental expense within its operating costs but instead records a depreciation charge in respect of the right-of-use assets within operating costs, and an interest charge on the lease liabilities within its finance costs.

In applying IFRS 16 for the first time the Group has used the following practical expedients as permitted by the standard:

· the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease

· not to reassess whether a contract is, or contains a lease at the date of initial application. For contracts entered into before 1 January 2019 the Group has relied on its assessment made in applying IAS 17 and IFRIC 4 Determining whether an arrangement contains a lease.

The weighted average lessee's incremental borrowing rate applied to lease liabilities recognised as at 1 January was 3.1%.

The lease liability recognised on 1 January 2019 differs from the discounted value of operating lease commitments disclosed at 31 December 2018 under IAS 17 Leases. The main cause of this is differences in the assessment of the lease term. Under IAS 17 only contractual commitments were included which reflected the Group's ability to give notice on certain leases, while under IFRS 16 longer lease terms are reflected where this is within the power of the Group and reflects the expected length of those leases.

2 Segment and revenue analysis

During the year the Group has reviewed and revised its segmental reporting. Information reported to the Group's Executive Committee, considered to be the chief operating decision maker of the Group for the purpose of resource allocation and assessment of segment performance, is now based on the Group's six operating sectors and the information for 2018 has been re-presented.

The Group has one principal activity, the provision of staffing and recruitment services delivered across number of service lines being permanent placement, temporary and contract placements and offshore recruitment services.

The analysis of the Group's results by sector is set out below:

3 Exceptional items

Exceptional items are those items that in the Directors' view are required to be separately disclosed by virtue of their size, nature or incidence. Adjusted operating profit, adjusted profit before tax and adjusted earnings are considered to be key measures in understanding the Group's financial performance and exclude exceptional items.

4 Shares acquired in existing subsidiaries

In July 2019, the Group acquired a further 17.5% interest in ConSol Partners (Holdings) Limited ("ConSol"), an exsiting subsidiary, taking its total interest to 82.5%. The shares have been acquired for cash consideration of £3.5m on terms in line with the original acquisition in 2016. ConSol is a specialist recruitment business in the IT sector with a focus on niche sectors across communications, cloud and digital.

This transaction was recorded within equity as a movement in non-controlling interests of £1.4m and the remaining £2.1m was recorded in the equity reserve.

5 Finance income and costs

6 Taxation

The tax expense for the year is as follows:

7 Reconciliation of adjusted profit before tax to Profit before tax

8 Earnings per share

Basic earnings per share is assessed by dividing the earnings attributable to the owners of Empresaria Group plc by the weighted average number of shares in issue during the year. Diluted earnings per share is calculated as for basic earnings per share but adjusting the weighted average number of shares for the diluting impact of shares that could potentially be issued. For 2019 and 2018 these are all related to share. Reconciliations between basic and diluted measures are given below.

The Group also presents adjusted earnings per share which it considers to be a key measure of the Group's performance. A reconciliation of earnings to adjusted earnings is provided below.

The weighted average number of shares (basic) has been calculated as the weighted average number of shares in issue during the year plus the number of share options already vested less the weighted average number of shares held by the Empresaria Employee Benefit Trust. The Trustees have waived their rights to dividends on the shares held by the Empresaria Employee Benefit Trust.

9 Goodwill

Goodwill is reviewed and tested for impairment on an annual basis or more frequently if there is an indication that goodwill might be impaired. Goodwill has been tested for impairment by comparing the carrying amount of the group of cash generating units (CGUs) the goodwill has been allocated to, with the recoverable amount of those CGUs. The recoverable amounts of the CGUs are considered to be their value in use.

The key assumptions in assessing value in use are as follows:

Operating profit and pre-tax cash flows

The operating profit and pre-tax cash flows are based on the 2020 budgets approved by the Group's Board. These budgets are extrapolated using short-term industry growth rate forecasts and long-term growth rates and margins that are consistent with the business plans approved by the Group's Board. These cash flows are discounted to present value to assess the value in use.

Discount rates

The pre-tax, country specific rates used to discount the forecast cash flows range from 9% to 16% (2018: 8% to 16%) reflecting current local market assessments of the time value of money and the risks specific to the relevant business. These discount rates reflect the estimated industry weighted average cost of capital in each market and are based on the Groups weighted average cost of capital adjusted for local factors.

Pre-tax discount rates used by sector are as follows:

Growth rates

The growth rates used to extrapolate beyond the most recent budgets and forecasts and to determine terminal values are based upon long term average GDP growth forecasts for the relevant country. Growth rates are capped at 6% for the purposes of this calculation and range from 0.5% to 6.0%. GDP growth is a key driver of our business, and is therefore an appropriate assumption in developing long-term forecasts.

Growth rates used by sector are as follows:

As a result of the impairment reviews carried out at 31 December 2019, an impairment charge of £2.5m (2018: £0.3m) has been recognised for a business in the Property, Construction, and Engineering sector following the decision to close a substantial part of it, reducing the carrying amount of goodwill in respect of that business to nil.

As part of the impairment review, reasonably possible changes in the growth rate and discount rate assumptions have been considered to assess the impact on the recoverable amount of each business. Were the long-term growth rate to reduce to nil no impairment charge would be recorded (2018: nil), while if the discount rate were to increase by 2% no impairment charge would be recorded (2018: £0.9m).

During 2019 the Group combined two of its businesses within the Professional sector, combining the goodwill associated with these and allocating them to the combined business. No impairment risk was identified as a result of this.

The carrying amount of goodwill by sector is as follows:

10 Borrowings

The following key bank facilities are in place at 31 December 2019:

A revolving credit facility of £14.0m, expiring in June 2021. As at 31 December 2019 the amount outstanding is £10.0m (2018: £5.0m). Interest is payable at 1.5% plus LIBOR or EURIBOR. During the year, £4.0m of a potential £5.0m extension to the revolving credit facility was activated, increasing the revolving facility to £14.0m. The revolving credit facility is subject to financial covenants and these are disclosed in the Finance Review.

Overdraft facilities are in place in the UK with a limit of £7.5m. The balance on this facility as at 31 December 2019 was £5.9m (2018: £3.9m). The interest rate was fixed at 1% above applicable currency base rates. A $2.0m overdraft facility to provide working capital funding to Pharmaceutical Strategies had a balance as at 31 December 2019 of $1.5m (2018: $0.8m). Interest on this USD facility is payable at 2% over LIBOR. A €13m (2018: €13.0m) overdraft facility is also in place in Germany. The balance at 31 December 2019 was €10.9m (2018: €7.8m) Interest is payable at EURIBOR plus 2.3%. A NZ$2.0m overdraft facility has been set up for Rishworth Aviation in New Zealand during 2019. The overdraft has not been utilised and attracts interest at 2% over the base lending rate. Bank overdrafts in the table reflects the requirement under IFRS to gross up certain cash and overdraft balances which are netted for banking facility purposes. This amount is £1.7m in 2019 (2018: £10.4m).

The UK facilities are secured by a first fixed charge over all book and other debts given by the Company and certain of its UK subsidiaries, Headway in Germany and Rishworth Aviation in New Zealand.

There is an invoice financing facility in the UK of £13.0m (2018: £13.0m). As at 31 December 2019 the amount outstanding was £6.0m (2018: £8.4m). Interest is payable at 1.47% over UK base rate. Following the Group's decision to close a substantial part of the UK engineering business, the invoice financing facility was reduced to £10m in March 2020. There are also invoice financing facilities in Chile of £4.0m (2018: £2.5m). As at 31 December 2019 the amount outstanding was £0.8m (2018: £1.3m). Interest is payable at approximately 4.4%.

11 Net debt

a) Net debt

Cash and cash equivalents at 31 December 2019 includes cash of £0.3m (2018: £0.4m) held by a subsidiary in China which is subject to currency exchange restrictions.

b) Adjusted net debt

The Group presents adjusted net debt as its principle debt measure. Adjusted net debt is equal to net debt excluding cash held in respect of pilot bonds within the Rishworth Aviation business. Where required by the client, pilot bonds are taken at the start of the pilot's contract and are repayable to the pilot or the client during the course of the contract or if it ends early. There is no legal restriction over this cash, but given the requirement to repay it over a three year period, and that to hold these is a client requirement, cash equal to the amount of the bonds is excluded in calculating adjusted net debt.

c) Movement in adjusted net debt

12 Trade and other receivables

Trade receivables include £31.8m (2018: £34.8m) on which security has been given as part of bank facilities.

13 Trade and other payables

Pilot bonds represent unrestricted funds held by our aviation business at the request of clients that are repayable to the pilot over the course of a contract, typically between three and five years. If the pilot terminates their contract early, the outstanding bond is payable to the client. For this reason the bonds are shown as a current liability. As at 31 December 2019, if the bonds were to be repaid in line with existing contracts, £1.1m (2018: £2.9m) would be repayable in more than one year.

14 Dividends

The proposed dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

15 Leases

The Group has adopted IFRS 16 Leases for the first time in this condensed set of financial statements. The Group has opted to apply the transition approach which does not require the restatement of comparative information. Further details are provided in note 1.

The Group's leases are predominantly property leases. These include leases for the offices from which the businesses across the Group operate and these have terms of typically 1 to 5 years. Additionally in Germany accommodation is provided to temporary workers with lease lengths typically estimated at between 0 and 2 years.

The movements in the carrying value of right-of-use assets is provided below.