Franchise Brands Regulatory News (FRAN)

Prior to publication, the information contained within this announcement was deemed by the Company to constitute inside information as stipulated under the UK Market Abuse Regulation. With the publication of this announcement, this information is now considered to be in the public domain.

26 July 2022

FRANCHISE BRANDS PLC

("Franchise Brands", the "Group" or the "Company")

Interim results for the six months ended 30 June 2022

Trading in the first half of 2022 has been buoyant, at the top end of expectations, supporting a 50% increase in the interim dividend

Transformational acquisition of Filta

Franchise Brands plc (AIM: FRAN), an international multi-brand franchise business, is pleased to announce its unaudited results for the six months ended 30 June 2022.

Financial highlights

· Revenue increased by 60% to £44.5m (H1 2021: £27.8m).

· Adjusted EBITDA* increased by 74% to £7.3m (H1 2021: £4.2m).

· Statutory profit before tax increased by 83% to £4.8m (H1 2021: £2.6m).

· Adjusted EPS** increased by 51% to 4.07p (H1 2021: 2.70p).

· Basic EPS increased by 89% to 3.08p (H1 2021: 1.63p).

· Net cash*** of £4.7m at 30 June 2022 (31 December 2021: £6.5m) after £1.3m of costs associated with the acquisition of Filta, and Willow Pumps contingent consideration payment of £1.7m.

· Strong first half of the year and optimism for the full-year performance has given the Board the confidence to declare a 50% increase in the interim dividend to 0.90p per share (interim 2021: 0.60p per share).

Operational highlights

· Metro Rod and Metro Plumb system sales increased by 20% to £28.5m.

· Metro Plumb system sales increased by 32% and now represent 9% of total system sales.

· Pump sales increased by 78% and now represent almost 5% of system sales.

· Technology-enablement of the business continues to have a positive impact on overhead costs, for example, robots assisted in logging 27% of all jobs in H1 2022.

· Scheduling solution supporting further efficiency and productivity gains currently being trialled.

· Completion of the transformational acquisition of Filta in March, bringing an international footprint, a broader range of complementary services and considerably enhanced scale.

· Filta International has delivered strong results, ahead of our expectations, driven by both the recovering levels of activity in the customer base post-Covid and the elevated price of cooking oil.

· Filta UK integration progressing well as part of the overall B2B integration and harmonisation initiatives.

· B2C recruitment of 29 new B2C franchisees (H1 2021: 40) against a five-year average of 34.

· Andrew Mallows, Group Commercial Director, appointed interim CFO to replace Brian Hogan who has resigned for personal reasons.

*Adjusted EBITDA is earnings before interest, tax, depreciation, amortisation and share-based payment expense and non-recurring items.

** Adjusted EPS is earnings per share before amortisation of acquired intangibles, share-based payment expense and non-recurring items.

*** Net cash is cash less obligations under leases

Stephen Hemsley, Executive Chairman, commented:

"The Group has had a highly productive and successful first half, with record organic growth primarily driven by Metro Rod and the transformational acquisition of Filta bringing highly complementary services, an international footprint and considerably enhanced scale.

"In the near term, we are focussed on integration to capitalise on the opportunities the acquisition presents and we expect continued momentum in the traditionally stronger second half of the year to enable us to deliver a full year performance at the top end of market expectations*.

"Beyond the near term, we are confident our largest businesses, Metro Rod and Filta, are well positioned to capture the clear opportunities to grow from their current small share of large, fragmented markets where scale is becoming still more of a competitive advantage, including through the implementation of efficiency-enhancing technology.

"As a highly profitable and cash generative business, with a strong ungeared balance sheet, we are in a robust financial position to weather uncertain economic conditions, take advantage of future organic growth and acquisition opportunities, and deliver growing returns to shareholders, as we have today through a 50% increase in our interim dividend."

*Consensus market expectations for the financial year ending 31 December 2022 are currently as follows:

· Revenue £91.2m

· Adjusted EBITDA £14.0m

· Adjusted EPS 7.11p

· Dividend 1.90p

Enquiries:

CHAIRMAN'S STATEMENT

Introduction

The first half of 2022 has been a very busy and successful period for the Company, with the transformational acquisition of Filta Group Holdings plc ("Filta") and the organic growth of the existing business to record levels, driven by Metro Rod.

The acquisition of Filta has taken us from a UK-focused company to one with international scale and an expanded management team capable of developing the Group in North America, the UK and Europe. It will allow us to significantly progress our ambition of offering a "Water In. Waste Out" service to the UK commercial sector, where we have a small share of a fragmented market with substantial opportunities to grow all aspects of our business.

The increased scale of the enlarged Group also allows us to leverage further the investment we have made in our shared support services and infrastructure, particularly in the area of technology. The technology-enablement of the business continues to have a positive impact on our overhead costs which is improving our operational gearing as we grow.

The Filta Acquisition

On 16 February 2022, we announced that we had agreed on the terms of a recommended all-share offer to acquire Filta. The offer became wholly unconditional on 10 March and the acquisition was completed on 1 June when the compulsory acquisition of all remaining Filta shares was completed.

FiltaFry, the core and original service of Filta, provides cooking oil filtration and fryer management services to a wide variety of commercial customers, including restaurants, supermarkets, stadiums, healthcare, education, hotels and amusement parks through an exclusively franchised network. Franchisees also supply cooking oil to customers and collect used oil, which is then sold to be recycled into biodiesel.

The North American FiltaFry business has achieved significant scale due to the prevalence of fried food in these markets, with 130 franchise partners, most of which are multi-van operators. FiltaFry in mainland Europe is comprised of 17 franchisees, including 15 in Germany, 1 in France and a Benelux master franchisee based in the Netherlands. The FiltaFry business in North America and mainland Europe forms a new division of the Group under the leadership of Jason Sayers.

Filta's operations in the UK include a FiltaFry network of 27 franchisees, which operates on a similar basis to FiltaFry Europe, and a direct labour organisation ("DLO") which provides a wide range of services to the commercial kitchen sector, as follows:

· The supply, installation and maintenance of GRUs: Filta has a ten-year exclusive agreement with the manufacturer of the newly developed and patented Cyclone GRU which offers industry-leading removal of fat, oils and grease ("FOG") from wastewater at very low energy costs. With escalating regulatory and environmental legislation, we see a significant opportunity to roll-out the Cyclone unit in all our markets once the necessary regulatory approvals have been secured.

· Pump and drainage repair and maintenance: The Filta UK DLO offers pump and drainage maintenance services mainly to the hospitality sector. These services are highly complementary to those offered by Metro Rod and Willow Pumps. We are, therefore, reviewing how to deliver these services more efficiently.

· Fridge and freezer seal replacement: Trading as FiltaSeal, this exciting business offers a one-stop service to any user of commercial fridges or freezers. It employs a patented system to make replacement fridge and freezer seals on-site from the back of a specially equipped van. This highly cost-effective and convenient service is provided on both a planned and reactive basis to commercial kitchens, retailers, and food manufacturers. We see a significant opportunity to expand this business as a DLO.

· Commercial kitchen extraction vent cleaning and servicing: Trading as FiltaVent, this is another exciting growth opportunity. This innovative solution helps commercial kitchen owners comply with their insurance policies by having their kitchen vents cleaned and maintained to TR 19 regulatory standards. Although FiltaVent is an embryonic service stream we believe there are significant opportunities to expand this area of the business.

B2B Division

The B2B Division now includes Metro Rod, Willow Pumps, the newly acquired Filta UK DLO, and the UK FiltaFry franchise network. In order to maximise the opportunity to grow these complementary businesses by selling a broader range of services to the combined customer base, we have started to integrate and harmonise them under the leadership of Peter Molloy, formerly Managing Director of Metro Rod and Metro Plumb. By streamlining how they operate and collaborate, we expect to unlock further market opportunities, reduce costs and provide our customers with a better service.

To further accelerate this process, we have also agreed the early settlement of the contingent consideration due in respect of the Willow Pumps acquisition. Under the terms of the October 2019 acquisition agreement a further consideration of up to £7.5m was payable in respect of the five years to 31 December 2024 linked to sales and profits growth over the period. A total of £0.7m was paid in respect of the first two years ended 31 December 2021, and a further £1.3m was paid at the end of May to settle this liability.

Metro Rod, Metro Plumb and Kemac

Metro Rod and Metro Plumb experienced continued strong momentum, with system sales growing by 20% in the period to £28.5m. This growth was spread through almost the entire network, with 46 of the 53 Metro Rod and Metro Plumb franchisees growing their businesses (H1 2021: 44), and 61% or 28 franchisees growing by more than 20% year-on-year (H1 2021: 31).

We also achieved further good progress on existing initiatives to widen and deepen the services offered by the franchise network, particularly in the area of pump service and maintenance. Pump sales grew by 78% and now represent almost 5% of system sales, with an average order value nearly five times that of drainage.

Metro Plumb continued to expand with the recruitment of four new stand-alone franchisees bringing the total to 11. We have also sold additional territories to 3 existing franchisees to enable them to expand their businesses. We continue to prioritise the recruitment of stand-alone Metro Plumb franchisees in both new territories and through resales from Metro Rod franchisees. The benefit to Metro Rod franchisees of selling their plumbing business is that it gives them both the resources and focus to grow their drainage businesses. Metro Plumb system sales grew by 32% and now represent 9% of total system sales. We continue to focus on broadening the customer base in both the commercial and domestic plumbing sectors.

Kemac, the London-based DLO plumbing business, which operates five Metro Plumb territories, also provides specialist services to several water utilities. It traded satisfactorily in the period and continues to broaden its customer base and the range of services offered.

Willow Pumps

Willow Pumps has been slower in recovering from the impact of the Covid restrictions owing to its greater focus on the construction and hospitality sectors. Core sales grew by 12%, driven by a 14% increase in service and emergency work and by a 12% increase in supply and installation work ("S&I"). Service work now represents 78% of total sales (H1 2021: 77%).

The early settlement of the Willow earn-out will help build on recent initiatives between Willow Pumps and Metro Rod to deliver pump services in an optimum way by utilising the Metro Rod depot network, although this does result in an element of the margin on such work moving between the two businesses.

The Metro Rod corporate franchises in Kent & Sussex and Exeter, which are managed by Willow Pumps, grew sales by 6% and continued to operate profitably. They have also played a key role in trialling our new labour scheduling IT solution.

Filta UK

Since the acquisition, we have reorganised the management of the Filta UK business to reduce overheads in some areas by eliminating duplication and focusing the business on sales and operational delivery. To facilitate this, we have begun recruiting additional technicians in areas of the business where we see the greatest opportunities, such as FiltaSeal.

The pump and drainage maintenance activities are highly complementary to the mainly reactive services offered by the regional depots of Metro Rod, Metro Plumb and Willow Pumps. Elements of this work, particularly tankering, have also historically been sub-contracted. We are therefore reviewing all these activities to establish how the enlarged Group can best deliver them for the mutual benefit of the customer, the franchisees and the DLOs.

An area of focus for the growth within the Filta UK DLO has been the roll-out of the Cyclone GRU, but this has been held up by supply constraints and delays in securing regulatory approval in target markets. Several potentially large customers have also postponed the deployment of GRUs due to internal business reviews. However, we are confident the unit is an efficient and innovative solution to helping customers with the increased regulations governing the disposal of FOG in an environmentally-friendly manner.

Filta North America & Europe

Since the acquisition, Filta North America, led by Tom Dunn, has performed strongly, driven by both the recovering levels of activity in the customer base post-Covid and the elevated price of cooking oil. The small and currently sub-scale operations in Europe have recovered more slowly due to the slower reopening of the hospitality sector.

The bounce-back in activity in Filta's key customer sectors of hospitality, education and sporting venues post-Covid has been rapid and broad. The elevated price of cooking oil has also had a number of cumulative positive benefits to the business. As the FiltaFry technology can double the life of cooking oil, customer demand for the core filtration service has risen. This has driven demand from our franchisees for additional mobile filtration units ("MFU's"), the main driver of our product and Management Service Fee ("MSF") income.

The elevated price of used cooking oil over the period is due to a number of factors including the higher price of virgin cooking oil due to supply issues; higher fuel oil prices; and Federal and State sustainability incentives to increase the proportion of biodiesel in vehicle fuel. The FiltaFry filtration process and careful storage of the used cooking oil by the franchisees also produces a better quality used cooking oil for recycling which needs less subsequent processing. This has recently been reflected in premium pricing, which accounts for about a quarter of the price improvement that Filta is currently benefitting from. A virtuous circle has therefore been created, with higher cooking oil prices driving demand for the underlying FiltaFry filtration service from customers, which drives demand for additional MFUs from franchisees, which is in turn funded by the enhanced cashflow generated by higher waste oil prices.

Due to the structural differences in the market, with a much lower density of fryers per location in Europe, the economics of the European business are on a reduced scale to that of North America. Most franchisees in Europe are single van operators offering only the core oil filtration service to smaller customer premises. Generally, they do not collect and recycle cooking oil, although some are engaged in the servicing of grease recovery units ("GRUs") in commercial kitchens, which we see as an area for future development.

In summary, Filta International has delivered strong results ahead of our expectations. The North America business has benefitted from the strong bounce-back in the US economy together with a number of cumulative, positive benefits resulting from the elevated price of cooking oil. The movement in exchange rates over the period has also enhanced the sterling value of the dollar earnings of Filta North America to the Group. This performance also reflects the operational gearing benefits of a franchise model when revenue accelerates, and we anticipate that Filta International will continue to build on this momentum.

B2C Division

The B2C division comprises the ChipsAway, Ovenclean and Barking Mad franchise businesses, which continue to be the responsibility of Tim Harris, the divisional Managing Director. The B2C franchise market is going through one of the most unusual periods I can recall. Following the pandemic there are two competing forces at work. On the one hand, we are seeing acceptable levels of interest from new franchisee candidates who want a better work/life balance and see starting their own business as a way of achieving this. Conversely, we are seeing some long-term franchisees opt for early retirement or a return to employment at the currently inflated salary levels on offer in specific sectors.

Underlying trading in the franchise communities of all three brands remains robust, as our generally older and more financially secure customer base is reasonably resilient to cost-of-living pressures. Franchisees continue to benefit from a substantial number of customer leads that are generated by our national marketing activity. For example, less than 25% of leads generated for ChipsAway franchisees are converted into jobs due to a number of factors, including capacity constraints. We therefore have a significant degree of resilience before our franchisees' income would be impacted by any downturn in the economy.

ChipsAway continues to be our strongest B2C brand with 16 recruits in the period (H1 2021: 27). It also had the greatest attrition, with 25 leavers, resulting in a decline in the system to 204 franchisees, slightly below the five-year average. Ovenclean recruitment maintained last year's strong progress with eight recruits (H1 2021: 9) and seven leavers, resulting in an unchanged system of 106 franchisees, in line with the five-year average. Barking Mad, which was severely impacted by the Covid restrictions on foreign travel, recruited five new franchisees and had eight leavers, resulting in a further decline in this system to 60 franchisees. The unprecedented number of leavers at Barking Mad since the start of the pandemic is stabilising, and franchisee trading is rapidly improving as the foreign holiday market recovers.

Overall, B2C franchise recruitment in the period was satisfactory, albeit below the exceptional levels achieved in the immediate post-lockdown period, with 29 recruits (H1 2021: 40) against a five-year average of 34. The total number of leavers, at 40, was slightly higher than the five-year average of 35. As a result, the total number of franchisees in the B2C division at the period end was 370 (30 June 2021: 394) and compares to a five-year average at the half-year of 387 franchisees.

Azura

We acquired Azura, a leading franchise management software system developer, in November 2021 to secure our software development capability and full ownership of the intellectual property in Vision, our proprietary works management system. We also foresaw an opportunity to use our in-house expertise to help Azura further develop and market its franchise management software as a service ("SaaS") solution to other franchise brands. Since the acquisition, the planned management succession has also been completed, with Simon Pullum becoming Non-Executive Chairman of Azura and Mark Scott, previously Operations Director, being promoted to Managing Director.

Azura operates on an arms-length basis within the Franchise Brands Group to ensure that other competing franchise businesses have the confidence to continue using the Azura platform. Whilst Franchise Brands continues to be Azura's largest customer, third-party trading in the period has been encouraging and we have added new franchise businesses as customers and experienced minimal attrition.

Digital transformation

The digital transformation of the business is progressing well with continuing upgrades to the Vision works management system to improve functionality. These have been focused on improving engineer productivity and efficiency. The technology-enablement of the business continues to have a positive impact on our overhead costs as manual, repetitive tasks are automated. This is improving our operational gearing and hence the profitability of both ours and our franchisees' businesses, as we grow. Robots assisted in logging 27% of all jobs in the period. 

We have also been developing technology-enabled solutions which can help us address business-critical issues in the current environment. A key focus has been the development of a scheduling tool to improve engineer utilisation and efficiency. This is a vital requirement in the current tight labour market where inflationary wage pressures might otherwise erode margins or limit our ability to grow. An initial scheduling solution has been trialled at our corporate operations and this has now been expanded to include a franchise business. The early results have been encouraging, with a reduction in unproductive, and therefore unbillable, time of 23 minutes per engineer per day. Whilst this may be viewed as modest progress, it represents a significant amount of additional potential capacity across the resource base of over 500 engineers, with any incremental sales achieved using this time being at a very high margin.

Our technology team has also been reviewing Filta's IT platforms, particularly in the UK DLO, to identify opportunities to automate operational processes. We are also looking at areas where Filta's IT platforms might further improve our existing systems.

People

Following the acquisition of Filta, I would like to welcome Jason Sayers to the Franchise Brands plc Board. Jason will be responsible for developing the Filta business in North America and Europe, including identifying acquisition opportunities.

Brian Hogan, who joined the Board as CFO following the Filta acquisition is leaving the business for personal reasons and will be returning to the US. He has resigned from the Board with immediate effect. Andrew Mallows, our Group Commercial Director, will be appointed interim CFO (non Board). Andrew was our original Finance Director at the time of our IPO in 2016 and previously was Finance Director of Domino's Pizza from 2001 to 2004.

Following the settlement of the Willow Pumps earn-out, Ian Lawrence, formerly Managing Director of the business has been appointed Non-Executive Chairman and Kevin Perry, previously Head of Sales and Marketing, has been promoted to Managing Director reporting to Peter Molloy. Kevin will be supported by Joe Lawrence who has been promoted to Operations Director.

Acquisitions

The short-term focus of the Group will be organic growth and the integration of Filta into the enlarged Group. We remain interested in acquiring B2C franchise businesses but continue to be cautious given the current economic environment for consumers.

The merger with Filta has established a franchise business with a robust international footprint that will, in due course, allow overseas development of the Group's existing brands and facilitate the acquisition of new brands in North America, the UK and Europe. When the right market conditions prevail and we identify an attractive opportunity, we will be very well placed to make earnings-enhancing acquisitions given we are profitable, highly cash generative and have an ungeared £100 million balance sheet.

Outlook

Since our IPO in 2016, we have successfully built the business both organically and by acquisition and our highly experienced management team has a strong track record in delivering profitable growth. The investment we have made in Metro Rod since acquiring the business in April 2017 has resulted in system sales increasing from £33.5m in the whole of 2017 to £28.5m in the first half of 2022. Given our small share of a highly fragmented market where scale is becoming still more of a competitive advantage, we see significant potential to grow this business over the long term. Filta also has considerable growth potential given its very low share of the commercial kitchen services market. We also see significant potential to grow Metro Plumb into a truly national plumbing business. 

Trading in the first half of 2022 has been buoyant for our two largest businesses, Metro Rod and Filta North America, which together contributed 72% of adjusted EBITDA. We expect this pattern to be repeated in the traditionally stronger second half of the year. The availability of engineer resources in a tight labour market remains a critical factor as we grow, but we are confident that our new scheduling tool will play an important role in improving labour efficiency and contribute to providing the additional capacity we need to grow.

The outlook for our B2C business, which accounts for 19% of EBITDA, is more uncertain for the reasons set out above. The team is, however, working hard on a series of initiatives which will mitigate the effects of any shortfall in new franchise recruitment and network attrition. Further leveraging the use of our central resources and the excellent management team we have in the B2C division by complementary acquisitions remains our ambition. However, in the current environment we are cautious about acquiring consumer-facing franchise businesses.

In the DLO businesses that form part of the B2B Division, good progress is being made in integrating operational delivery and developing sales across the enlarged customer base. We are also focused on ensuring that our franchise communities fully participate in providing the expanding range of services on offer.

Overall, we remain confident that the enlarged Group will maintain the momentum established since the end of the Covid lockdowns into the second half of the year and beyond, and we anticipate a full-year performance at the top end of market expectations.

Conclusion

The last couple of years have been very challenging for everyone in the business, but the teamwork of my colleagues, our franchisees and particularly our engineers has resulted in us collectively building an even stronger, more robust business which has thrived in the current environment.

Our technology-enabled business is highly profitable, enjoys a robust cash flow, and has a strong ungeared £100 million balance sheet, which positions us very well to weather any short-term challenges the current economic conditions may present and to take advantage of future organic growth and acquisition opportunities that will further drive shareholder value.

Stephen Hemsley

Executive Chairman

25 July 2022

FINANCIAL REVIEW

Summary statement of income (unaudited)

The Group's results for the six months ended 30 June 2022 include a contribution from Filta for the four-month period since acquisition and a full six-month contribution from Azura (acquired in November 2021).

Overall, consolidated Group revenue has increased by 60% to £44.5m in the period (H1 2021: £27.8m). Gross profit has also increased 60% to £16.3m (H1 2021: £10.2m). Statutory revenue and gross margins have a different mix following the acquisitions, and as a result of the varying mix of the underlying businesses as they grow and is not a KPI we use at Group level.

Initial cost savings made in the integration of Filta and the continued efficiency gains arising from the digital enablement of the business resulted in overheads increasing by only 50%. This has driven a 74% increase in adjusted EBITDA, which is a key KPI, to a record £7.3m (H1 2021: £4.2m). 

Divisional trading results

The adjusted EBITDA of the operational business divisions of the Group may be analysed as follows:

B2B Division

The B2B division comprises the franchise activities of Metro Rod, Metro Plumb and Filta UK together with the DLO operations of Willow Pumps, Filta UK and Kemac. The organisation of these activities within this division reflects both management responsibilities and our internal KPIs. The results of the B2B division may be summarised as follows:

Metro Rod

Metro Rod comprises the franchise and direct labour activities of Metro Rod and Metro Plumb, Kemac and the direct labour contract at Peel Ports which came to a conclusion during the period. The results may be summarised as follows:

The statutory revenue of Metro Rod does not reflect the underlying system sales generated by the franchisees as national sales are accounted for on a gross basis, as are the sales of Kemac and the direct labour activities, whereas in respect of the local sales generated by franchisees, only the MSF revenue is reflected. Therefore, it is re-analysed below to reconcile system sales to gross profit.

Overall, system sales at Metro Rod and Metro Plumb increased by 20% to a record £28.5m in the period (H1 2021: £23.7m). The net MSF income at Metro Rod increased by 19% to £5.2m (H1 2021: £4.4m), which represented an effective MSF of 18.4% (H1 2021: 18.6%). We continue to support Metro Rod's franchisees in growing their businesses through a series of MSF incentives designed to encourage sales growth and investment in a broader range of equipment, services and people. In line with this strategy, as system sales have grown, especially in tanker and pump work, the effective MSF percentage rate has continued to fall. Other gross profit increased 33% to £0.9m (H1 2021: £0.7m) due primarily to an increase in franchise sales and resales.

Administration expenses have grown at less than half the rate of system sales as a result of the efficiency gains the digital enablement of the business has allowed and some permanent cost savings resulting from new ways of working developed during lockdowns. As a result, adjusted EBITDA grew by 35% to £3.2m (H1 2021: £2.3m).

Willow Pumps

Willow Pumps comprises the core DLO pump business and the Metro Rod corporate franchises in Kent & Sussex and Exeter. The results may be summarised as follows:

 The Willow Pumps core business has two distinct types of revenue: Service revenue and Supply & Install revenue ("S&I"). Service revenue is generated from the routine service and maintenance of pumps and drains. S&I revenue is generated from the design, supply, and installation of pump stations, which are typically projects that are performed in discrete phases over a number of accounting periods, with revenue recognised over time based on the proportion of the contract which has been completed. The gross profit generated on S&I projects is lower than service work due to the significant proportion of the total cost being the supply of the pumps.

Whilst revenue increased by 12% during the period, the gross margin percentage declined from 33% to 30%, resulting in only a modest 3% increase in gross profit. The principal cause of this decline was the increased cost of materials which could not be passed on to customers. Revised contract terms have been introduced to avoid this in future. Another factor which has contributed to the decline in gross margin was the planned subcontracting of service work to the Metro Rod franchise network. However, the loss of margin in Willow Pumps was compensated for by the additional franchisee margin and MSF income in Metro Rod.

Effective overhead control resulted in administrative expenses growing at a slower rate than revenue. However, this was not sufficient to fully compensate for the shortfall in gross margin and adjusted EBITDA declined marginally.

Filta UK

Filta UK comprises the core DLO services which includes pump and drainage repair and maintenance, fridge and freezer seal replacement, vent cleaning and the supply, installation and maintenance of GRUs. The FiltaFry network of franchisees is also included in this business.

The results for the period are in respect of the four months since acquisition, and may be summarised as follows:

Filta UK has experienced improved revenue and EBITDA growth post-Covid, but this has been lower than expected due to a shortfall in sales. The principal reason for this has been a hold-up in the roll-out of the Cyclone GRU and the associated installation and service work. We remain confident that this activity will make a meaningful contribution to the division once the start-up challenges have been overcome.

Pump service, which accounted for 21% of total revenue in the period, continues to experience a strong pipeline of new business quotes, although operational delivery has been a challenge owing to delays in sourcing materials and labour constraints. As this business is highly complementary to the services offered by Metro Rod, Metro Plumb and Willow Pumps we are reviewing how the service can best be delivered by the broader group.

FiltaSeal, which provided 17% of total revenue, has traded well in the period. Whilst sales volume has been slightly lower than expected due to capacity constraints, this has been more than compensated for by considerably higher margins. Additional technicians are being recruited to significantly expand this activity.

Finally, administrative expenses are lower than expected due to the elimination of duplicated overhead following the acquisition, and other savings made to better align costs with the current sales volume. Overall, Filta UK has made a modest contribution to Group profits, with adjusted EBITDA at £0.3m. However, the actions being taken and the development of group synergies are expected to lead to an improvement in trading in the second half of the year and beyond.

Filta International

Filta International operates a franchise network that comprises the franchise activities of Filta in North America and mainland Europe. Filta International's results for the period represent the four months of contribution since acquisition and may be summarised as follows:

The table below provides a breakdown of the key revenue streams and gross profit contributions for the North American operation.

MSF and Equipment & Supply revenue consists of the monthly charge paid by the franchisees for each MFU in operation; the additional fee for generating and administrating the national accounts; and the revenue from the sale of new MFUs, replacement parts and supplies sold to franchisees. This revenue stream has bounced-back strongly in the period as key customer sectors have recovered from the Covid shutdowns and demand for FiltaFry's services has increased.

Waste oil revenues are derived from the sale of used cooking oil for biodiesel production. Through national agreements with biodiesel companies, Filta administers the programme which involves the franchisees collecting and storing the oil prior to local pick-up via tankers organised by Filta. Filta retains an average 18% margin on waste oil sales. Waste oil revenue has more than doubled from the comparable prior year period with approximately one-third of the increase being volume-related and two-thirds price-related.

Area Sales revenues are derived from the sale and resale of franchise territories. Of the income derived from the sale of a new franchise, 60% is recognised as revenue once training is completed, with the balance spread equally over the 10-year life of the agreement. The revenue from franchise resales, on which a 5-10% commission is earned, is recognised when the transaction completes. During the period, three new franchises and five resales were completed which, in total, was twice as many as in the comparable prior period.

Whilst Europe has experienced improved revenue and gross profit growth post-Covid, the recovery has been slower and has been compounded by hold-ups in rolling out the GRU. We remain confident that this activity will make a strong contribution to the division once the business achieves scale.

B2C Division

The B2C division comprises the ChipsAway, Ovenclean and Barking Mad franchise businesses. The results of the division may be summarised as follows:

The key revenue streams are MSF and Area Sales income. MSF income is primarily made up of fixed monthly fees as this remains the most effective method of generating income given the large number of franchisees and the lower level of individual sales. MSF Income was flat in the period due to the reduced recruitment and higher network churn. Area Sales income represents the fees generated from the sale (or resale) of franchise territories and were lower in the period due to lower recruitment, particularly at ChipsAway. Revenue in the period benefited from the one-off sale of the MyHome domain name for £0.1m.

Cost of sales declined in the period due to a change in the recruitment mix towards Ovenclean and Barking Mad and away from the higher-cost ChipsAway franchise. Overheads increased by 11% as a result of the re-introduction of costs that were suspended during the Covid period, in particular, the annual franchise conference for ChipsAway. Overall, adjusted EBITDA in the B2C division increased by 3% when compared to the buoyant post-recovery trading in the first half of 2021.

Azura

Azura was acquired on 29 November 2021 and therefore this period represents its first H1 trading period as part of the Group.

Since the acquisition, Azura has focused on improving efficiency in delivering its software solutions to franchise businesses and building sales. It has also been building its internal resources to support the further digital enhancement of the Group's businesses. Third-party revenue and adjusted EBITDA for the period have exceeded management expectations.

Adjusted & statutory profit

Depreciation and amortisation of software increased 34% to £1.1m (H1 2021: £0.8m), primarily as a result of the impact of the acquisitions of Filta and Azura and the subsequent additions to both tangible assets and software.

The finance charge has increased by 61% reflecting the interest cost of Filta's debt which included a term debt facility and a Coronavirus Business Interruption Loan. Both of these loans were repaid in full in June 2022. The finance charge also includes interest on hire purchase debt.

The tax charge for the period at 25% (H1 2021: 40%) was higher than the statutory rate of 19% in the UK, reflecting the additional pre-tax profit contribution from the Filta North America operations where the corporate tax rate is 26%.

The increase in the amortisation of acquired intangibles reflect the additional intangible assets acquired as a result of the Filta acquisition. The increase in the share-based payment expense principally reflects the grant of 3 million replacement share options and stock appreciation rights primarily to Filta employees. The non-recurring costs reflect the Filta acquisition costs and the subsequent one-off reorganisation costs. Other gains and losses reflect the write-back of the IFRS13 contingent consideration provision made in respect of the Willow Pumps earn-out following the early settlement of this potential liability.

After a provision in respect of tax on adjusting items, statutory profit after tax increased by 129% to £3.6m (H1 2021: £1.6m).

Earnings per share

During the period the Group issued 33,788,008 new Ordinary Shares in consideration for the acquisition of Filta. In addition, the Group issued 354,465 new Ordinary Shares to satisfy the exercise of share options. This resulted in the total number of Ordinary Shares in issue increasing to 130,008,082 at 30 June 2022 (31 December 2021: 95,865,609) and a basic weighted average number of Ordinary Shares in issue of 116,061,969 (H1 2021: 95,758,470).

Adjusted earnings per share increased by 51% to 4.07p (H1 2021: 2.70p), and basic earnings per share increased by 89% to 3.08p (H1 2021: 1.63p), as set out in the table below.

Financing and cash flow

A summary of the Group cash flow for the period is set out in the table below.

The cash flow from operations includes the working capital movements resulting from the Filta acquisition. The principal uses of cash during the period were the early repayment of Filta's outstanding loans of £3m; the acquisition and subsequent reorganisation costs of Filta of £1.3m; the settlement of the contingent consideration in respect of Willow Pumps which totalled £1.7m; and the £1.2m cost of the 2021 final dividend. After these outflows, the Group finished the period with net cash of £4.7m (31 December 2021: £6.5m) as set out below.

After these outflows, the Group finished the period with net cash of £4.7m (31 December 2021: £6.5m) as set out below.

The Group continues to be ungeared, with a £100m balance sheet, gross cash of £7.5m, and a £5.0m unutilised Revolving Credit Facility giving the Group £12.5m of cash and available facilities.

Dividend

The strong first half of the year and the optimism we have for the full-year performance has given the Board the confidence to declare a 50% increase in the interim dividend to 0.90p per share (H1 2021: 0.60p). The interim dividend will be paid on 23 September 2022 to shareholders on the register on 9 September 2022.

Andrew Mallows

Interim Chief Financial Officer

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 30 June 2022

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 June 2022

CONSOLIDATED STATEMENT OF CASH FLOWS

For the six months ended 30 June 2022

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2022

Accounting policies

Basis of preparation

The consolidated financial statements for the six months ended 30 June 2022 and 2021 are unaudited and were approved by the Directors on 25 July 2022. They do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The financial statements for the year ended 31 December 2021 were prepared in accordance with IFRS and have been delivered to the Registrar of Companies. The report of the auditor on those financial statements was unqualified and did not draw attention to any matters by way of emphasis of matter. The Group's financial statements consolidate the financial statements of Franchise Brands plc and its subsidiaries.

Applicable standards

These unaudited consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, under the historical cost convention. They have not been prepared in accordance with IAS 34, the application of which is not required to the interim financial statements of AIM companies. The interim financial statements have been prepared in accordance with the accounting policies set out in the Group's Annual Report and Accounts for the year ended 31 December 2021.

Going concern

The condensed financial statements have been prepared on a going concern basis. The Group has generated profits both during the period covered by these financial statements and in previous years. These profits have resulted in operating cash inflows into the Group, and the Group has sufficient current financial assets to meet its current liabilities as they fall due.

Notes to the unaudited results for the six months ended 30 June 2022

1. Earnings per share

Basic earnings per share amounts are calculated by dividing profit for the period attributable to equity holders of the Parent by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is calculated by dividing the profit attributable to ordinary equity holders of the Parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of Ordinary Shares that would have been issued on the conversion of all dilutive potential ordinary shares into ordinary shares at the start of the period or, if later, the date of issue.

Earnings per share

2. Non-recurring items

The Company incurred costs associated with the acquisition of Filta. An amount of £1.3 million has been charged in arriving at statutory profit. Following the acquisition, the Group has incurred reorganisation costs principally in the form of redundancy payments.

3. Other gains and losses

During the year, the Group made a gain as a result of the early settlement of the contingent consideration in respect of the Willow Pumps acquisition. At 31 December 2021, the Group recorded a liability of £2.9m in respect of the estimated future payments. During the period, the Group negotiated an early settlement of this contingent consideration for £1.3m, which together with the amount owed for 2021 made a total payment of £1.7m in the period, resulting in a gain of £1.2m being recorded within other gains and losses.

4. Business Combination

On 10 March, the Company announced that its all share offer for Filta became unconditional. On 1 June the Company announced that the compulsory acquisition of the remaining Filta shares was completed. Accordingly, the Company owns 100 per cent. of the entire issued share capital of Filta.

Details of the fair value of the identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows:

The deferred tax liability has been calculated on the value of the intangible assets acquired at a blended corporation tax rate of 24.5% per cent and a corresponding amount has been recognised as goodwill. The amount recognised as goodwill will not be deductible for tax purposes.

The values of the intangibles acquired are currently provisional and will be finalised at the year-end. All of the intangible assets have a useful economic life of 10 years, with the exception of the Brand and Goodwill which both have indefinite lives.

5. Availability of this report

This half-year results report will not be sent to shareholders but is available on the Company's website at https://www.franchisebrands.co.uk/key-documents/.