Empresaria Group Regulatory News (EMR)

14 March 2018

Empresaria Group plc

("Empresaria" or the "Group")

Results for the year ended 31 December 2017

Record adjusted profit before tax and adjusted earnings per share

Empresaria, the international specialist staffing group, has continued to deliver on its strategy with record adjusted profit before tax and growth in adjusted diluted earnings per share.

· Eighteen consecutive quarters of net fee income growth

· Six consecutive years of double digit % growth in adjusted earnings per share

· Conversion ratio increased to 16.7% (2016: 16.6%)

· Proposed final dividend increased by 15% to 1.32p (2016: 1.15p)

· Net debt increased to £12.0m (2016: £10.5m) in line with expectations following deferred consideration paid in the period

· Strong profit growth in Japan, Chile and parts of the UK business

· Successful integration of Rishworth Aviation and ConSol Partners

· Strong platform in place for next phase of growth

* adjusted to exclude amortisation of intangible assets, exceptional items, gain or loss on disposal of business and fair value charges on acquisition of non-controlling interests.

Chief Executive Joost Kreulen said:

"We are pleased to be reporting another year of record results, with this period being the sixth year of double digit adjusted diluted earnings per share growth. The strength of the business has again allowed us to increase our annual dividend in line with our progressive dividend policy.

Our diversification by geography and sector places the Group in a strong position to withstand localised market issues. The Group remains focused on delivering our strategy: strengthening a multi-branded group, with a focus on developing leading brands that are diversified and balanced by geography and sector.

The Group has a strong platform in place from which to launch the next phase of its growth and we see good opportunities to support the profitable growth of our brands in the year ahead."

 - Ends -

Enquiries:

Notes for editors:

· Empresaria Group plc is an international specialist staffing group with 18 brands operating in 20 countries across the globe including the UK, Germany, Japan, India, UAE, Indonesia, Chile, Australia, Thailand, Singapore, Finland, USA, New Zealand, China, Malaysia, Vietnam and the Philippines.

· Empresaria offers temporary/contract and permanent staffing solutions as well as offshore recruitment services in seven key sectors: technical & industrial, aviation services, IT & design, professional services, healthcare, executive search and retail.

· Empresaria applies a multi brand, management equity philosophy and business model, with Empresaria group company management teams holding significant equity in their own business.

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

Chairman's statement

The Group has delivered another record year of profit. Our business model and strategy is delivering consistently, with 18 quarters of net fee income growth over the prior year period to the end of 2017. As well as the growth in profit, our diversification across sectors and geographies helps to reduce risk and insulate the Group from difficulties in individual markets.

Empresaria is a global business, operating from locations in 20 countries. Whilst global reach is clearly important, local focus is key with our management teams running their businesses in alignment with local market conditions and opportunities.

As part of our strategy to develop leading brands, we invest to help them develop and take a leading position within their niche sector area of expertise. It is important that each brand has the potential to develop within the Group and where changes are needed, we identify and implement them. In line with this ethos, we ended 2017 with 18 brands, having merged two brands and exited from another. The Board sees good opportunities for growth across the Group and we will continue to invest in our brands to build capacity and coverage.

The market

As we enter 2018 the worldwide economic conditions are largely positive, with synchronised growth forecast for the first time since the global financial crisis. The main markets that we operate in are expected to grow, and this includes the UK where we continue to operate under a cloud of Brexit uncertainty. We are seeing candidate shortages across our markets and regions. We play a vital role in helping client companies find the right resources they need to grow.

The positive economic outlook suggests a good year ahead for the staffing sector, with "Staffing Industry Analysts" forecasting 6% growth in the global staffing sector in 2018. Against this is ongoing geo-political uncertainty, which could derail growth in any territory, as well as the impact of new legislation in our markets, with particular changes in Germany and Japan impacting the temporary staffing markets in 2018. Our diversity puts us in a good position to both manage the impact of localised issues and make the most of positive market conditions.

People, values & culture 

The Board has over 100 years of combined experience in the staffing industry and during the year we took steps to strengthen the board with Spencer Wreford taking on the role of Chief Operating Officer. We look forward to welcoming Tim Anderson to the board as Group Finance Director by the end of March 2018.

As we have continued to invest in our brands, the average number of staff across the Group in the year has increased to 1,367 (2016: 1,282). The success of the Group is down to the hard work of every one of them and the Board would like to thank each individual for their contribution to our success.

A key part of our business model, and one that aligns key operating company management and Empresaria shareholder interests, is subsidiary management equity, where management hold shares in their operating companies. This approach helps Empresaria to attract and retain the best people. At the end of the year we had 51 management shareholders owning shares in the operating companies they are responsible for.

It is important for businesses to have a clear vision to help frame all decision making and identify priorities for investment. We operate in a people business and our purpose is to help people to achieve their potential, whether this is our internal staff who can develop meaningful careers within the Group, our candidates who we help to find work, or our clients who we help to identify the best candidates.

We operate with a decentralised structure, with local management responsible for running their businesses but 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. Our culture is based on shared ownership and reward. We are a Group of like-minded people with a passion for helping people realise their potential.

We take stakeholder engagement seriously. We have regular communication with Group companies and staff through our newsletters, we present to investors to explain our strategy and results, both to institutional investors and private shareholders and we engage with regulators and Government agencies both directly in response to consultations or proposals and through our membership of worldwide trade associations.

Shareholder returns

The Group has delivered six consecutive years of double-digit growth in adjusted diluted earnings per share as we look to build a sustainable business for the long-term benefit of shareholders and other key stakeholders. The adjusted measures exclude amortisation, exceptional items, profit or loss on business disposals and fair value charges on equity instruments. We use the adjusted measures as we believe they reflect the underlying trading results and are measures typically used by investors and the analyst community.

The Board has reviewed the dividend and in line with our progressive dividend policy, for the year ended 31 December 2017, we propose an increase of 15% to 1.32p per share (2016: 1.15p per share) to be approved by shareholders at the Annual General Meeting. The dividend will be paid on 31 May 2018 to shareholders on the register on 4 May 2018.

At the end of the year we initiated a small share buy-back programme, which concluded in January 2018 with the total purchase of 260,384 shares at a cost of £249,445. These shares are held in an Employee Benefit Trust to cover potential exercises of vested share options thus reducing the dilutive effect of issuing new shares. Based on the number of vested options and the share price at the time, this was a sensible use of capital for the benefit of all shareholders.

Outlook

The Group has a strong platform from which to deliver the next phase of growth. The economic conditions are positive and whilst we maintain a cautious view on political risk, we see good opportunities to develop our Group further during the year ahead. We have a proven strategy and brands that have the potential to grow their profit.

Tony MartinChairman13 March 2018

Chief Executive's Review

Group performance in the year

We are pleased to have delivered another record year of profit, further demonstrating that our strategy of being diversified by sector and geography is working, with adjusted profit before tax growing 20% to £11.0m (2016: £9.2m). The 2017 results include a full year of contribution from the investments made in 2016 in Rishworth Aviation and ConSol Partners.

* Adjusted to exclude amortisation of intangible assets, exceptional items, gain or loss on disposal of business and fair value charges on acquisition of non-controlling interests. See note 6 for a reconciliation between profit before tax and adjusted profit before tax.

** The constant currency movement is calculated by translating the 2016 results at the 2017 exchange rates

Group revenue increased by 32% to £357.1m (2016: £270.4m), with net fee income up 18% to £69.4m (2016: £59.0m). Our strongest results were in Japan (IT & design sector), Chile (retail sector) and in the professional services and other specialist sectors of the UK. Permanent revenue was up 14% and temporary and contract revenue was up 34%.

The two investments made in 2016 have integrated well into the Group. Rishworth Aviation has performed in line with our expectations. The decision was taken to incur professional fees to support the set-up of new bases of operations for key clients, which are already generating profitable returns and further consolidate their position as a key business partner. Our investment in ConSol has also been positive, with the UK office trading well and expanding their operations in Continental Europe. We have invested in the US office, bringing in more experienced staff and increasing their focus on temporary sales. There has been a positive contribution in the second half of the year from these changes and we see a good momentum moving into 2018.

We have continued to invest in our Group, with Monroe Consulting launching in Vietnam, a new country for the Group. This operation has started well and complements their existing footprint across South East Asia. The Group has also seen average staff numbers increase by 7% as we continue to invest in line with our leading brands strategy. In the UK, two brands were merged into FastTrack (technical & industrial) and LMA (professional services), which are expected to provide both operational and cost synergies in the coming years.

With a Group operating in 20 countries and across various sectors, it is unrealistic to expect all brands to be performing at their peak at the same time. Our organic performance in the year has been impacted by weaker performances, primarily within the technical & industrial sector, and actions have been taken to make changes where required. At the net fee income level, the growth was driven by the investments made in 2016, with organic growth of 1%, although once currency benefits are removed, the constant currency organic net fees decreased by 3%. Germany and the Middle East were our weaker markets in the period. We saw a reduction in net fee income in Germany following the introduction of new legislation to limit the amount of time a worker can be treated as a temporary worker at the same client to 18 months as well as new minimum wage rules. We have been proactive in managing this position with worker rotations but this has resulted in lower temporary margins and a subsequent decline in profit. In the Middle East we have incurred restructuring costs in the year, bringing the cost base in line with current trading and whilst loss making, it was an improvement on the prior year and we saw a positive trend across the second half. In the UK a mixture of changes within the sales team and merger costs have put pressure on the results. As part of a mid-term growth plan, we will be investing further. The fact that we were able to deliver a record result in 2017, despite difficulties in certain markets, underlines the benefit of our strategy to be diversified across sectors and geographies and so not being reliant on any single market.

The Group temporary margin was 12.7% (2016: 14.5%) with the reduction mainly due to the full year impact of Rishworth Aviation, which has a high revenue and relatively low gross margin percentage, and the lower margins in Germany. The mix of net fee income was consistent with the prior year, with 60% from temporary and contract sales and 40% from permanent sales. The share of net fees from professional and specialist levels increased to 87% (2016: 86%). The Group generated 66% of net fee income from outside the UK (2016: 68%).

We have seen another improvement in our conversion ratio, albeit a small increase to 16.7% (2016: 16.6%). This represents six years of consecutive improvement, although the rate of growth was held back by costs incurred on exiting property leases in the UK, non-exceptional restructuring costs and investing in new staff. We have a clear focus to manage our costs, allowing investment in building the teams, but always looking for ways to operate more efficiently, with a particular focus on staff productivity.

Within our English speaking brands we have started to use our offshore recruitment outsourcing business in India to take over certain internal accounting processes, to deliver consistency, build scale and manage costs. Operating profit grew by 2% to £8.9m (2016: £8.7m), with higher amortisation costs of £1.7m (2016: £1.1m) reflecting the recent investments made by the Group, as well as a £0.9m loss on disposal for exiting the training business in Indonesia. The adjusted operating profit, stated before amortisation, exceptional items, profit or loss on business disposals and fair value charges on equity instruments grew by 18% to £11.6m (2016: £9.8m). The disposal was of a non-core business, which joined the Group in 2007. There was a need for a significant cash investment to restructure it for growth and we did not believe it was an ongoing fit with the Group. This was an accounting loss only and meant we did not need to make any further cash injections.

Profit before tax was up 3% to £8.1m (2016: £7.9m), with the underlying adjusted profit before tax up 20% to £11.0m (2016: £9.2m). Interest costs were level year on year, despite the increase in net debt. We also had a benefit from the weakness in Sterling on the translation of our overseas results. On a constant currency basis adjusted profit before tax was up 14% but reported profit before tax was down 2%. Currency has been beneficial for the last two years, following the Brexit vote, but based on the exchange rates at year end we would not expect to see the same benefit during 2018.

Diluted earnings per share was down 15% to 7.9p (2016: 9.3p), also impacted by the higher amortisation charges and loss on disposal. On an adjusted basis there was an 11% growth to 12.5p (2016: 11.3p), representing the sixth year of double digit percentage growth.

Five year plan 2014-2018

As we enter 2018 we start the last year of our most recent five year growth plan. We are pleased with the progress we have made in all three key measures. We will continue to work on improving the conversion ratio and all three targets remain ongoing areas of focus for the Group.

Over the first four years of our plan we have delivered a 63% growth in net fee income, with 26% from organic growth (for businesses in the Group in 2013), 43% from new investments and 6% lost through divestments. The Board's decision to operate above the long-term debt to debtors target is explained in the Finance review below.

Focus into 2018

Organic growth has always been a core part of our business model and despite the low overall organic growth in the year, this remains a key focus of management. We agree specific plans with each brand to help them develop into leading brands in their sectors and we will continue to invest in new staff, locations and markets where we see opportunities to grow. We are confident that the plans we are following will help the Group deliver profitable organic growth in 2018.

We have not made any external investments during 2017, concentrating on integrating the three investments we made over a 12 month period from October 2015 to October 2016. It was important to settle them into the Group before looking for new investment opportunities. With the main focus on organic growth in 2018, we do not currently expect to make any significant external investments, but we will continue to work on identifying suitable opportunities to further develop the Group in line with our strategy. As part of balancing our sector and geographic coverage, we have a particular interest in increasing our presence in the Latin American region and the healthcare and professional services sectors. We also work with our brands to identify and execute sector specific bolt-on acquisition opportunities, to help accelerate their growth plans.

Regional performance

United Kingdom

Revenue increased by 24% and net fee income was up 23%, helped by having a full year of contribution from ConSol Partners. However, excluding this the underlying movement in net fee income was a reduction of 2%, due to lower sales within our insurance and technical & industrial brands. Our UK based brands in technical & industrial merged at the beginning of 2017 and overall the integration has run smoothly. The sector has been challenging, with candidate shortages and delays to key projects and at the same time the credit community has also been very cautious in this sector and this is unlikely to improve following recent well publicised company collapses. We are working closely with the business to help them make improvements in structure and process to recover their profit levels including the introduction of an improved training programme during the year. We plan to invest in adding more staff in 2018.

In professional services we have seen positive conditions, with activity levels high throughout the year. We have merged the insurance brand into LMA, our leading professional services brand, with effect from January 2018, with resulting cost and operational synergies. We have not seen any impact on client demand due to Brexit and staff numbers have increased 10% year on year. The LMA business has a good track record of adding new service lines and we are confident they will be able to maximise the opportunities with a dedicated insurance division.

We were also pleased with the contributions in domestic services and retail (new house sales), with both growing year on year and looking to strengthen their regional presence in 2018.

In IT & digital we have strengthened our presence with ConSol Partners. From their office in London they cover the UK and Continental Europe markets and they have seen the mix shift more towards Europe over the course of the year. In the digital & design sector our two brands have invested in staff and systems, such that their net contribution has been steady with the prior year, but we have seen an improving trend over the second half of the year, in particular with stronger temporary sales, and see good opportunities to grow into 2018.

Continental Europe

Revenue grew by 7% but net fee income was down by 2%, with the temporary margin down 2% in Germany. The adjusted operating profit of £5.1m was up £0.2m on 2016, helped by a lower allocation of central charges due to the lower share of Group net fee income.

The Headway business in Germany and Austria continues to dominate the region. The Austrian business was positive, with investments made in staff. The German temporary staffing division has integrated new sales staff and invested in training and marketing and is well positioned to benefit from these investments in 2018. The Logistics division in Germany delivered strong profits but was negatively impacted by new legislation that was implemented in April 2017 and the set up costs related to taking on new clients. The new regulations limit the time a worker can be on a temporary contract with a client to 18 months, with new equal pay regulations also introduced. With this division operating at lower pay brackets, these changes have increased pressure on margins and projects are being managed to meet client service period restrictions. We expect there will be a continuing impact into 2018 as clients get used to the new rules. We are confident that the high quality service we provide in the market will see us well placed to respond to ongoing client needs into the long-term.

Our Finnish healthcare business has had a solid year. We oversaw a change in the senior management team during the year and are investing in marketing initiatives in 2018 to improve candidate attraction.

Asia Pacific

Revenue grew by 72% and net fee income grew 19%. This was largely due to the full year contribution from Rishworth Aviation, which has a low temporary margin of 6%, so there is a larger impact on revenue. Excluding this, net fee income was up 3%.

The Rishworth business has performed in line with expectations and has settled well into the Group, providing a new sector specialism. A key focus in the year has been on setting up new pilot bases for their largest client. Whilst this required them to incur additional professional fees, we expect the costs to reduce for 2018 and the new bases are already making profitable contributions.

There were particularly strong performances from Skillhouse in Japan (IT, digital & design sector) where the positive economic conditions, combined with an ageing population, has created strong client demand. Candidates are in short supply and new legislation takes effect in 2018 which limits the time workers can be on temporary or outsourced contracts with clients. We have yet to see how clients will react to these changes.

In South East Asia our executive search brand, Monroe Consulting, launched in Vietnam and now operate in six countries across the region. There were good results in Thailand, Malaysia and Indonesia and investments in staff across all offices. In India there was good growth in the outsourcing services to the UK, in particular in the healthcare sector, although their profit growth was dampened by currency impacts. They invested in additional sales resources for the key UK and US markets and we see good opportunities for 2018. We exited our non-core training business in Indonesia, with a sale to the management team as it would have required significant cash and time investments to turn it around and we felt it would be more successful as an independent company.

In professional services the LMA business in Singapore grew net fee income and profit. They continue to invest in new staff to capitalise on their market position.

Following a difficult period, our business in the technical & industrial sector in the Middle East has been fully restructured, with a new manager in place, and a cost base in line with current trading levels. There were additional bad debt write offs for historic issues and the UK base has been closed down. There has been an increase in oil price in the second half of the year, which should help local economic confidence and we expect a positive contribution in 2018.

Americas

Revenue grew by 25% with net fee income up 59%, helped by the first full year contribution from ConSol Partners. Excluding this, the net fee income was up 17%.

In Chile, we were pleased with another year of growth, with record profits. There was growth in all key divisions, with the strongest growth in the newer permanent and temporary staffing areas but also 12% growth in net fees from the outsourcing business.

In the IT, digital & design sector, we had the first full year of ConSol Partners. We invested in staff to build the temporary sales service, increased the management resource and changed the mix in favour of more experienced consultants. The growth in temporary sales is slow and we expect this will take time to see any meaningful change in the sales mix. However, the other staff changes have had a more immediate impact, with a much improved second half result to offset the first half year and this positive momentum gives us confidence moving into 2018.

In healthcare, we have seen an improving performance from Pharmaceutical Strategies in the second half of the year. Following a change in client mix during 2016 they have made progress in broadening their client base and penetration in key clients with a wider service offering. There have been positive changes in the sales and recruitment teams and we are confident that this will deliver improved returns.

Joost Kreulen

Chief Executive Officer

13 March 2018

Finance review

Performance overview

Tax

The total tax charge in the year is £3.6m (2016: £3.5m), representing an effective tax rate of 44% (2016: 44%). The effective rate based on the adjusted profit before tax, so excluding the effect of amortisation, exceptional items, profit or loss on business disposals and fair value charges on equity instruments is 37% (2016: 40%). This rate is higher than the UK rate due to a number of factors:

· The mix of profits is weighted towards higher tax jurisdictions, including Germany, Japan, India, Australia and New Zealand (£1.1m).

· The level of non-deductible expenses in the year (£0.5m)

· A deferred tax asset has not been recognised for certain of the tax losses around the Group (£0.4m).

Treasury

The Group's treasury function is managed centrally. Under the Group's treasury policy speculative transactions are not permitted and where possible liabilities, typically debt, match the location and currency of the related assets. The following matters are reserved for Board approval: 

- Changes to the Group's capital structure.

- Approval of Group financing arrangements or significant changes to existing arrangements.

- Approval of treasury policies and any activity involving forward contracts, derivatives, hedging activity and significant foreign currency exposures.

- Approving the appointment of any of the Group's principal bankers.

Capital management and allocation

The Board monitors the overall level of debt across the Group, to ensure we operate in line with our facilities and investment plans. There is a constant need to balance the conflicting priorities of reducing the debt level, investing in the business and returning funds to shareholders through dividend payments. Any increase in bank facilities needs Board approval and treasury management is part of the monthly Board reporting. The Board has set a target debt to debtors ratio of 25% and we also monitor other key debt ratios as follows:

The principle followed by the Board is that debt should be available to fund working capital and that equity should be used for significant external investments. During 2016, the decision was taken to use debt to fund the external investments, taking into account shareholder dilution, the available funding options and the relative costs of raising new funds at the time. This was believed to be the best overall result for shareholders, based on our expectations of the business after making the investments. The Group reported net debt increased to £12.0m at 31 December 2017 (2016: £10.5m), as expected with the £5.6m deferred consideration payable on ConSol Partners in 2017. We expect to see a reduction in debt by the end of 2018 as we do not currently plan to make any significant external investments in the year.

The cash held by Rishworth Aviation at 31 December 2017 includes £7.5m for pilot bonds (2016: £5.2m), amounts which are repayable to pilots or the client throughout 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, when calculating our 'debt to debtors' ratio we exclude the cash held as pilot bonds, giving an adjusted net debt of £19.5m (2016: £15.7m) at year end. The 'debt to debtors' ratio has increased to 45%, from 38% last year, impacted by the deferred consideration spend in the year.

The Group generates positive cash each year, with a strong correlation between operating cash flow and adjusted profit before tax.

The cash generated from operations has been utilised in 2017 as follows:

The deferred consideration includes £5.6m paid in relation to the investment in ConSol Partners. There are no further payments remaining on any existing investments. The taxation payment of £5.5m includes £0.8m of advance withholding tax on dividends, which is expected to be recovered in 2018.

Dividend

During the year, the Group paid a dividend of £0.6m in respect of the year ended 31 December 2016, amounting to 1.15p per share. For the year ended 31 December 2017, the Board is proposing a dividend of 1.32p per share, which if approved by shareholders at the Annual General Meeting, will be paid on 31 May 2018 to shareholders on the register on 4 May 2018.

Liquidity and funding risk

The Group maintains a range of appropriate facilities to manage its working capital and medium-term financing requirements. At the year end, the Group had banking facilities totalling £50.5m (2016: £52.0m). This included a reduction in the UK invoice financing facility as ConSol Partners joined the Group arrangement and so closed their previous facility. We also increased the overall level of overdrafts across the Group, with the UK term loan reducing in line with the agreed repayment terms. The amount of facility undrawn of £19.3m (2016: £15.4m) excludes the headroom on the invoice financing facility, which is available to the UK companies only. The £10.0m revolving credit facility is with HSBC Bank plc, entered into for investment funding in 2016. Connected to this facility is a £5.0m accordion arrangement which has been agreed in principle by the bank, but would need new credit approval for any draw down from this amount. As part of the bank facilities with HSBC Bank plc, security is provided by companies in the UK, Germany and New Zealand. 

As part of the revolving credit facility we need to meet bank covenant tests on a quarterly basis. All tests have been met during the year. The covenants and our performance against them at year end are as follows:

Interest rate risk

The Group's bank facilities are subject to floating interest rates. This is expected to match the interest costs with the economic cycle (eg when interest rates are higher there is typically better economic growth and so for a cyclical industry such as recruitment, profits should be greater when the economy is performing positively). The overdraft and invoice financing facilities are used to fund working capital requirements for temporary and contract recruitment businesses. During a downturn there is typically an unwinding of working capital as trade receivables are collected, so reducing the financing requirement and subsequent interest cost.

The majority of UK bank accounts are included in a cash pooling arrangement. An interest optimisation model allows currency balances (including overdrafts) to be included within the cash pooling arrangement. With interest income not generally paid on current accounts, the Group aims to minimise the external interest cost by pooling surplus funds from around the Group to minimise the use of the overdraft facilities.

Finance income was £0.1m (2016: £0.1m), all being bank interest income. Finance costs were £0.7m (2016: £0.7m), which related to interest payable on invoice discounting, bank loans and overdrafts. The effective interest rate for bank facilities for the year was 2.6% (2016: 2.6%).

Foreign exchange risk

There was no foreign exchange from trading in the year (2016: nil).

The Group remains open to translation risk from reporting overseas results in Sterling. We do not actively hedge this exposure, with the diversity of operations across different countries providing an element of natural hedge. During the year we were positively impacted overall by movements in exchange rates on the translation of Group results, the largest are detailed below:

There are a small number of forward currency contracts in place at IMS (to sell US dollars and Pounds sterling) and ConSol Partners (to sell Euros). The amount covered by these at year end was £0.8m (2016: £0.6m).

Credit risk

The main credit risks arise through the use of different banks across the Group and on the Group's trade receivables. The credit ratings of the banks used within the Group are monitored with a target that no more than 10% of Group cash is held in banks with a rating below BBB (Fitch rating) or equivalent. This target was fully met throughout the year.

Debtor days are reviewed monthly with high balances followed up with local management. Average debtor days for the Group in 2017 were 41 (2016: 47), with a year-end balance of 40 (2016: 41 days). This has reduced with Rishworth Aviation joining the Group as they have low debtor days, with airlines typically paying either in advance or within a short period of pilots being paid.

The debtor days in UAE remain higher than the Group average, although good progress has been made in managing this position. The outstanding debtor balance has reduced at the end of December 2017, although there have been further bad debt write downs on historic debts during the year. The Group's bad debt expense was £0.8m in the year (2016: £0.6m).

Investments and non-controlling interests

Goodwill and intangibles

Goodwill and intangibles represent the largest assets on the balance sheet and arise due to the acquisitive strategy followed by the Group. As at 31 December 2017 the balance was £54.1m (2016: £56.8m). The movements in the year were £1.7m of amortisation (2016: £1.1m) and foreign exchange loss of £1.0m (2016: gain of £4.7m). There was no impairment in the year (2016: £0.6m).

Investments and disposals

A deferred consideration payment of £5.6m was paid in cash in relation to the investment in ConSol Partners in October 2016, being the final payment due for the purchase of the 65% interest.

The Group received £0.1m in deferred consideration from disposals made in 2013 of the Bar 2 payroll business and in March 2015 of the GiT business.

In September 2017 the Group disposed of its 51% investment in PT Learning Resources, a non-core training business in Indonesia. This resulted in a loss on disposal of £0.9m, after consideration received of £0.1m. The loss represents the write off of historic funding balances with no cash paid to the purchaser. Further cash consideration of £0.2m could be receivable, but is contingent on the outcome of a local tax investigation. No asset has been recognised at this stage.

Management equity philosophy and non-controlling interests

A key component of our business model is management equity, where senior management own shares directly in the operating companies they are responsible for.

When we acquire a majority stake in a business, the shares remaining with the founder are called 'first generation shares'. There are no material changes to the rights belonging to these first generation shares retained by founder management. We also enable senior management to acquire 'second generation shares'. This will often be when the first generation shares have been acquired by Empresaria and we want to incentivise the next tier of management in the operating company to grow the business to the next level. Management need to buy the second generation shares at market value, investing their own cash, which is at risk if the business does not perform. To help lower the market value of the second generation shares (to make it affordable for management to acquire a meaningful stake in the business they are responsible for) and to protect the profit that we have already acquired, we set a 'threshold profit' level. These second generation shares only start creating value for management if the profit grows above the 'threshold profit' level. The second generation shares typically have restrictions, such as limited or no entitlement to dividends and the price paid by the management shareholder reflects these restricted rights.

Based on the results for the year ended 31 December 2017, the total value of all non-controlling interests (shares held by management in the operating companies they are responsible for), if purchased in full in 2018 using the valuation mechanisms in existing shareholders agreements, would total £9.4m (2016: £9.0m), ignoring any potential discounts under the shareholders agreements for shares being acquired before the end of the holding period. 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, 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 the adjusted operating profit, adjusted profit before tax and adjusted earnings per share.

In April 2017, we increased our interest in Monroe Consulting (executive search in the Philippines) from 70% to 90%. The consideration was £0.1m, all paid in cash. This purchase is treated as a fair value charge in the income statement.

In May 2017, we increased our shareholding in Monroe Consulting (executive search in Thailand) by 10%, taking our interest up to 80%. The consideration of £0.2m was paid in cash. This purchase is treated as a fair value charge in the income statement. At the same time we have sold 10% second generation equity (taking our interest back to 70%) to local managers who became first time shareholders in the company. In line with our equity model, the second generation shares only create value if the profits exceed historic levels.

Post balance sheet events

There were no post balance sheet events.

Going concern

The Board has undertaken a recent and thorough review of the Group's budget, forecasts and associated risks and sensitivities. The Group's UK and German overdraft facilities were renewed in March 2018 for a further 12 months. 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.

Spencer WrefordGroup Finance Director & Chief Operating Officer

13 March 2018

Consolidated income statement 

Consolidated statement of comprehensive income

Consolidated balance sheet

Consolidated statement of changes in equity

Equity comprises the following:

· "Share capital" represents the nominal value of equity shares.

· "Share premium account" represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue.

· "Merger reserve" relates to premiums arising on shares issued subject to the provisions of section 612 "Merger relief" of the Companies Act 2006.

· "Retranslation reserve" represents the exchange differences arising from the translation of the financial statements of foreign subsidiaries.

· "Equity reserve" represents movement in equity due to acquisition of non-controlling interests under IFRS 3 Business combinations.

· "Other reserves" represents the share based payment reserve of £0.6m (2016: £0.8m) and exchange differences on intercompany long-term receivables amounting to (£1.3m) (2016: (£1.2m)) which are treated as a net investment in foreign operations.

· "Retained earnings" represents accumulated profits less distributions and income/expense recognised in equity from incorporation.

· "Non-controlling interest" represents equity in a subsidiary not attributable, directly or indirectly, to the group.

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 2017.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2017 or 2016, but is derived from those accounts. Statutory accounts for 2016 have been delivered to the Registrar of Companies and those for 2017 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 throughout 2016 and 2017, except as noted below.

Revised presentation of cash pooling arrangements

Following an agenda decision by the IFRS Interpretation Committee regarding offsetting and cash pooling arrangements, the Group has revised its disclosure of its cash pooling arrangement. This requires grossing up of cash and overdraft balances associated with cash pooling arrangements. As a result we revised the comparative balance sheet and cash flow presentation at 31 December 2016. The impact is to increase cash and cash equivalents and short-term borrowings by £2.3m at 31 December 2016 (2015: £nil). There was no impact on net debt. The impact of this change as at 31 December 2015 was £nil and therefore a 'Consolidated balance sheet' for 2015 has not been presented.

Whilst 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 2018.

2 Segment analysis

Information reported to the Group's Chief Executive who is considered to be chief operating decision maker of the Group for the purpose of resource allocation and assessment of segment performance is based on geographic region. The Group's business is segmented into four regions, UK, Continental Europe, Asia Pacific and the Americas.

The Group has one principal activity, the provision of staffing and recruitment services. Each unit is managed separately with local management responsible for implementing local strategy.

The analysis of the Group's business by geographical origin is set out below:

* Adjusted operating profit is stated before exceptional items, gain or loss on business disposal, intangible amortisation and fair value on acquisition of non-controlling shares.

Revenue of Continental Europe includes £83.9 million (2016: £78.2 million) from Germany and revenue of Asia Pacific includes £97.5 million (2016: £43.3 million) from New Zealand.

The analysis of the Group's revenue and gross profit by client destination is set out below:

The analysis of the Group's business by geographic origin is set out below:

3 Exceptional items and fair value on acquisition of non-controlling shares

Exceptional items are those which, in management's judgement, need to be disclosed separately by virtue of their size or incidence in order for the reader to obtain a proper understanding of the financial information.

Fair value on acquisition of non-controlling shares

The following purchases of non-controlling shares are treated as a fair value charge in the income statement.

In April 2017, the Group increased its interest in Monroe Consulting (executive search in the Philippines) from 70% to 90%. The consideration was £0.1m, all paid in cash.

In May 2017, the Group increased its shareholding in Monroe Consulting (executive search in Thailand) by 10%, taking our interest up to 80%. The consideration of £0.2m was paid in cash.

4 Finance income and cost

5 Taxation

6 Reconciliation of Adjusted profit before tax to Profit before tax

7 Earnings per share

The calculation of the basic earnings per share is based on the earnings attributable to ordinary shareholders divided by the average number of shares in issue during the year. A reconciliation of the earnings and weighted average number of shares used in the calculations are set out below.

The calculation of the basic and diluted earnings per share is based on the following data:

Basic earnings per share has been calculated by dividing the profit attributable to shareholders by the weighted average number of shares in issue during the period after deducting shares held by the Employee Benefit Trust, although the impact of this in 2017 was minimal since the shares were purchased in December 2017. The trustees have waived their rights to dividends on the shares held by the Employee Benefit Trust.

The dilution on the number of shares is from share options granted to the senior management.

8 Goodwill

Goodwill arising on business combinations is reviewed and tested for impairment on an annual basis or more frequently if there is indication that goodwill might be impaired. Goodwill has been tested for impairment by comparing the carrying amount of each cash-generating unit (CGU) at lowest level of cash flow, including goodwill, with the recoverable amount of that income-generating unit. The recoverable amounts of the CGUs are determined from value-in-use calculations.

The key assumptions for the value-in-use calculations are as follows:

Operating profit & pre-tax cash flows

The operating profit & pre-tax cash flow is based on the approved annual budgets for the CGUs approved by the Group's Management Board which are compiled using expectations of fee growth, consultant productivity and operating costs. The Group prepares cash flow forecasts derived from the most recent financial forecasts approved by management and extrapolates cash flows in perpetuity based on the long-term growth rates using margins that are consistent with the business plan approved by the Group's Management Board.

Discount rates

The pre-tax, country specific rate used to discount the forecast cash flows ranges from 8% to 15% (2016: 10% to 20%) reflecting current local market assessments of the time value of money and the risks specific to the relevant CGUs. These discount rates reflect estimated industry weighted average cost of capital in each market.

Pre-tax discount rates used for various cash generating units in operating segments are as follows:

Growth rates

Growth rates used to extrapolate beyond the most recent forecasts and to determine terminal values are based upon the long term average GDP growth forecast, which are consistent with external sources, for the relevant country. Growth rates range from 1.8% to 7.9%. Any growth rate in excess of 6.0% was capped for the purpose of this calculation. GDP growth is a key driver of our business, and is therefore a key consideration in developing long-term forecasts.

Growth rates used for various cash generating units in operating segments are as follows:

Impairment reviews were performed at the year-end by comparing the carrying value of goodwill with the recoverable amount of the CGUs to which goodwill has been allocated.

As part of the impairment review, management has considered the sensitivity of the recoverable amount for each unit to changes in the growth rates and discount rate. This sensitivity analysis showed that the long-term growth rate could reduce to nil without giving rise to any additional impairment of goodwill. The discount rates were also increased by adding an additional 3% to the in country specific pre-tax discount rates. None of these changes in the key assumptions are expected to reasonably occur.

As at 31 December 2017 the Group holds goodwill of £2.5m and intangible assets of £4.8m related to Pharmaceutical Strategies. This has been tested for impairment and there is no indication that there has been any impairment. Given the reduction in profit contribution since the business was acquired, the assumptions in the value in use calculation are based on a return to the pre-acquisition profit level within 3 years, following an improving trading performance through 2017 and management projections of growth, with industry growth rates thereafter. The market remains positive and the business is geared to deliver an increased trading level, in line with the pre-acquisition performance. We have set our targets and growth model to get back to this position. As part of the impairment review we have calculated separate sensitivity analysis based on a 5 year period to get back to pre-acquisition profit levels, an increase of 2% in the weighted average cost of capital and a lower long-term growth rate. In all cases no impairment is indicated. However, a change in these assumptions increases the risk of an impairment in future periods. As an indication of the possible range of outcomes, if the growth rate is reduced after 2018 to industry rates, there is an impairment risk of £1.3m, whilst an additional 1% increase in the weighted average cost of capital (on top of the 2% increase in the sensitivity) would lead to an impairment risk of £0.6m.

Goodwill acquired in a business combination is allocated, at acquisition, to the groups of CGUs that are expected to benefit from that business combination. The carrying amount of goodwill has been allocated as follows:

9 Borrowings

At 31 December 2017 the multi-currency revolving credit facility of £10.0 million, expiring in 2021, had a balance of £1.0 million (2016: £8.5 million). The facility was entered into in the year ended 31 December 2016 to part-fund the investments in Rishworth Aviation and ConSol Partners. Interest is payable at 1.5% plus LIBOR or EURIBOR.

At 31 December 2017 the UK term loan, expiring in 2018, had a balance of £2.0 million (2016: £3.5 million). No drawdowns were made during the year (2016: drawdown of £2.9 million to part fund the investment in Rishworth Aviation and also fund the contingent consideration payment due for Pharmaceutical Strategies). £1.5 million of this loan was repaid during the year and £2.0 million is due to be repaid during the year ended 31 December 2018. Interest is payable at 1.5% above UK base rate. A German bank loan of €5.0 million (2016: €5.0 million) remains outstanding with an expiry in 2018. Interest is payable at EURIBOR plus 3%.

Overdraft facilities are in place in the UK with a limit of £7.5 million (2016: £5.0 million). The balance on this multi-currency facility as at 31 December 2017 was £4.1 million (2016: £0.9 million). The interest rate was fixed during the year at 1.0% above applicable currency base rates. A UK based $1.5 million overdraft facility to provide working capital funding to Pharmaceutical Strategies had a balance of $nil (2016: $0.7 million) as at 31 December 2017. Interest on this USD facility is payable at 2% over currency base rates. During the year a $2.0 million overdraft facility was set up in the United States directly with Pharmaceutical Strategies to replace this facility, which will not be renewed in 2018. An €8.0 million overdraft facility is also in place in Germany. The balance at 31 December 2017 was €4.8 million (2016: €1.2 million). Interest is payable at EURIBOR plus 2.3%.

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.

Other overseas overdrafts and loans had interest rates of between 1.6% and 7.4%.

Cash and cash equivalents at 31 December 2017 include cash with banks of £253,000 (2016: £329,000) held by a subsidiary in China which is subject to currency exchange restrictions.

The cash and cash equivalents above include £7.5 million (2016: £5.2 million) of pilot bonds held by Rishworth Aviation. See note 11 for more details.

The pilot bonds represent unrestricted funds held by Rishworth Aviation that are typically repayable to the pilot over the course of a contract, which typically last between three and five years. If the pilot terminates their contract early, the outstanding bond is payable to the client. For this reason, the full bond value is shown as a current liability. If the bonds are repaid in line with existing contracts, £4.5 million (2016: £3.3 million) would be repayable in more than one year.

12 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.