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.

22 July 2021

FRANCHISE BRANDS PLC

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

Interim results for the six months ended 30 June 2021

Strong revenue recovery and record profits give confidence in a full year performance ahead of expectations

Franchise Brands plc (AIM: FRAN), a multi-brand franchise business, is pleased to announce its unaudited results for the six months ended 30 June 2021.

Financial highlights

· Revenue increased by 18% to £28.6m (H1 2020: £24.2m).

· Adjusted EBITDA* increased by 50% to £4.2m (H1 2020: £2.8m).

· Statutory profit before tax increased by 200% to £2.6m (H1 2020: £0.9m).

· Strong cash conversion of 84% (H1 2020: 38%).

· Net cash of £5.2m at 30 June 2021 (31 December 2020: £4.9m).

· Adjusted EPS** increased by 46% to 2.70p (H1 2020: 1.84p).

· Basic EPS increased by 143% to 1.63p (H1 2020: 0.67p).

· An interim dividend of 0.60p per share declared (interim 2020: 0.30p per share).

Operational highlights

· A strong recovery across the Group, despite the Q1 lockdown.

· Metro Rod and Metro Plumb system sales increased by 21% to £23.7m, including a record £4.3m in June.

· Metro Rod won significant £1m contract with Peel Ports, being delivered directly.

· Digital transformation continues at pace: launch of new customer portal "Connect".

· Pump sales by Metro Rod franchisees increased 159% to £0.7m, facilitated by Willow Pumps.

· Willow Pumps sales growth of 11% driven by higher gross margin service work and the development of the Metro Rod corporate franchise areas.

· A strong performance by the B2C division.

· Robust return of recruitment with 40 new franchisees (H1 2020: 27).

· Total number of franchisees up to 393 (30 December 2020: 386).

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

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

Stephen Hemsley, Executive Chairman, commented:

"The first half of 2021 has been a period of strong recovery from the COVID-impacted performance in 2020, despite the lockdown in Q1.

"The strength of our brands, our people and our franchisees have allowed us to weather the storm and emerge fitter and stronger as both a team and as a business. We look forward to the second half of the year and beyond with great optimism. We are confident that the full year performance will be ahead of current consensus market expectations."

 Consensus market expectations for the financial year ended 31 December 2021 are currently as follows:

·Revenue £56.7m

·Adjusted EBITDA £7.85m

·Adjusted EPS 5.07p

·Dividend 1.40p

Enquiries:

CHAIRMAN'S STATEMENT

Introduction

The first half of 2021 has been a period of strong recovery from the COVID-impacted performance in 2020, despite the lockdown in Q1. Metro Rod and Willow Pumps provide essential services to a wide range of sectors which have gradually reopened over the period. As consumer confidence has returned, our B2C businesses have seen a recovery in the demand for the services offered by our franchisees and increased interest in buying a franchise. Some key sectors which the B2B division serves have still not fully reopened and the vaccination programme which underpins consumer confidence has not yet been completed, so we look forward to the second half of the year (and beyond) with considerable confidence.

 Metro Rod Division

The Metro Rod Division comprises the franchise activities of Metro Rod and Metro Plumb, and the direct labour ("DLO") London based plumbing business, Kemac, which are all the responsibility of the divisional MD, Peter Molloy.

System sales at Metro Rod and Metro Plumb grew by 21% in the first half of the year, accelerating throughout the period to a record £4.3m in June. This strong overall performance masks a quarterly performance impacted by lockdowns. We had previously announced that Q1 2020 (pre-COVID) was a record for the business with 19% growth in system sales year-on-year, whereas Q1 2021 was substantially impacted by the winter lockdown and, as a result, systems sales grew by only 2% year-on-year. Q2 2021 saw a complete reversal of this position as we experienced the first, and most severe lockdown in Q2 2020, whereas in Q2 2021 the restrictions were more modest and, as a result, system sales grew by 48% year-on-year.

The growth in system sales was spread through almost the entire network, with 44 of the 47 Metro Rod and Metro Plumb franchisees growing their business during the first half of the year (H1 2020: 21). Of the 44 in growth, 70% or 31 franchisees grew by more than 20% year-on-year (H1 2020: 8). We also achieved 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.

Demonstrating Metro Rod's ability to take on large scale projects for customers directly, we were pleased to secure a £1m contract with Peel Ports Group to deliver a comprehensive drainage mapping and maintenance plan for its Liverpool site. We invested in additional equipment and employed 20 new operatives to satisfy the requirements of the project.

Metro Plumb has continued to trade well throughout the period due to the resilient nature of its principal activity of emergency plumbing services. We now have five independent Metro Plumb franchisees compared with two in the first half of 2020. Plumbing remains a clear growth opportunity for the Group and we continue to focus on recruiting more independent franchisees and broadening the customer base.

Kemac, which operates 6 Metro Plumb territories in the London area, and provides specialist services to several water utilities, traded well in the period following the management changes made in 2020. It is currently working on broadening its customer base to improve resilience and increase the range of services offered.

The digital transformation taking place within Metro Rod continues at pace. The completion of the roll-out of the new works management system "Vision" at the end of 2020 and the subsequent introduction of the customer portal "Connect" are contributing to improved customer service and efficiency savings. Following customer and franchisee feedback, these platforms are now being optimised, with a series of upgrades that will further enhance functionality. This integrated platform now allows us to progress with further automation of the job acquisition, deployment, reporting and invoicing process using robotics and AI technologies. The digitisation of the business is having a positive impact on our overhead costs as manual, repetitive, tasks are automated which will improve our operational gearing, and hence profitability, as we grow.

Willow Pumps Division

This division comprises the core Willow Pumps DLO pump business acquired in 2019 and the Metro Rod corporate franchises in Kent & Sussex and Exeter which are all the responsibility of the divisional MD, Ian Lawrence.

The core Willow Pumps business was significantly impacted by the winter lockdown with Q1 sales down 31% year-on-year. However, these recovered strongly in Q2 as the restrictions lifted, with sales growth of 43% year-on-year in the quarter, resulting in overall sales growth of 9% in the first half of the year. As we saw in the first half of 2020, the main driver of growth in the period was the higher gross margin service and emergency work rather than the lower gross margin supply and installation work ("S&I"). Service work now represents 77% of total sales (H1 2020: 64%).

Following the successful transfer of two Metro Rod corporate franchise areas to Willow Pumps in the first half of 2020, their sales have grown by 19% year-on-year and this previously loss-making activity has been returned to profitability.

Overall, the division saw an 11% increase in revenue. Although the core business continues to be more impacted by the partial closure of the hospitality sector, and particularly hotel and holiday venues, we are confident that sales growth will accelerate in the second half of the year as these venues fully reopen.

In addition, Willow Pumps continues to facilitate the growth of pump-related work within Metro Rod, where system sales by our franchisees have increased 159% to £0.7m (H1 2020: £0.3m), more than that achieved in the whole of 2019 and 2020 combined. 

B2C Division

The B2C division comprises the ChipsAway, Ovenclean and Barking Mad franchise businesses, which are the responsibility of the divisional MD, Tim Harris.

The division recovered strongly in the first half of 2021, despite the Q1 lockdown, as most of the franchisees continued to trade and, therefore, paid full Management Service Fees ("MSF"). By comparison, in Q2 2020 all these businesses were shut down and fees were reduced to nominal levels.

Franchise recruitment was also strong with 40 new franchisees in the period (H1 2020: 27). ChipsAway continues to be the strongest brand with 27 new recruits in the period (H1 2020: 23), however, Ovenclean recruitment accelerated strongly with 9 new recruits (H1 2020: 2). Barking Mad also contributed with 4 new recruits (H1 2020: 2). The total number of franchisees in the B2C division grew to 393 (30 June 2020: 389).

Despite the strong overall performance during the period, the B2C brands continue to recover at different speeds. ChipsAway continues to be our largest network, generating 86% of divisional EBITDA, a year-on-year increase of 51%. The improved franchise recruitment income at Ovenclean allowed it to contribute 13% of divisional EBITDA and more than double its contribution in the period. Barking Mad, our smallest network, returned to profitability as a result of franchise recruitment and significant cost-savings as a result of the integration of its activities into the main Kidderminster facility. Barking Mad's MSF income will not recover until the foreign holiday market returns, which we anticipate will occur in the second half of the year.

Outlook

As we emerge from COVID-related disruption, the Group is very well placed to continue investing in organic growth and earnings-enhancing acquisitions. In March, we set out for the first time new strategic financial targets for the Group of run-rate revenues of £100m and adjusted EBITDA of £15m by the end of 2023. With all our main businesses growing again and with a positive outlook, we are confident that the Group's organic growth priorities are well supported and on track to deliver. We are, therefore, increasing our focus on growth by acquisition and are actively reviewing acquisition opportunities that would be significantly earnings-enhancing.

The second half of the year has started encouragingly with continuing growth in both Metro Rod and Willow Pumps as a result of the opening up of the hospitality and leisure sectors. In the B2C division, franchise recruitment remains buoyant as people continue to reassess their work/life balance following the impact of the COVID crisis. If they decide that self-employment is the right course for them, there is no safer way to achieve this than through franchising. We are therefore confident that the full year performance will be ahead of current consensus market expectations.

Conclusion

As ever, I would like to thank my colleagues, our franchisees and particularly our engineers, for their continued hard work and commitment in what continues to be a challenging and disrupted working environment. The adaptability and resilience everyone has shown in dealing with this disruption, whilst continuing to grow the business, has been remarkable and I am very grateful to them all.

In conclusion, we have weathered the storm and emerged fitter and stronger as a team and as a business, and have heightened ambitions. We therefore look forward to the second half of the year and beyond with great optimism.

Stephen Hemsley

Executive Chairman

FINANCIAL REVIEW

Summary statement of income (unaudited)

Overall, consolidated Group revenue has increased by 18% to £28.6m in the period (H1 2020: £24.2m). This has been driven by the increase in demand for the Group's services following the continued lifting of COVID-19 lockdown restrictions. Gross profit has increased 22% to £11.7m (H1 2020: £9.6m), reflecting a slight increase in the gross margin from 40% to 41% as revenues have returned more strongly in the higher-margin franchise operations of the Group. Overheads increased by only 11%, resulting in a 50% increase in Group EBITDA to a record £4.2m (H1 2020: £2.8m).

Divisional trading results

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

Metro Rod

Metro Rod comprises the franchise and direct labour activities of Metro Rod and Metro Plumb, and the direct labour DLO London based plumbing business, Kemac. The results of the division 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 21% to a record £23.7m in the period (H1 2020: £19.6m). Our net MSF income at Metro Rod increased by 17% to £4.4m (H1 2020: £3.7m), which represented an effective MSF of 18.6% (H1 2020: 19.1%). We continue to incentivise Metro Rod's franchisees to grow their businesses through a series of MSF discount schemes designed to encourage sales growth and investment in a broader range of equipment and people. In line with this strategy, as system sales have grown, especially in tanker and pump work, the effective MSF percentage rate has fallen.

Other gross profit represents the gross profit from Metro Rod's DLOs. This profit increased 69% to £0.7m (H1 2020: £0.4m) due to a good performance by Kemac and the contribution from Metro Rod's new, centrally managed, contract with Peel Ports.

The 54% increase in the adjusted EBITDA to £2.3m (H1 2020: £1.5m; H1 2019: £1.4m) has been driven by the increase in system sales and the strong performance by direct labour operations. In addition, the division continues to benefit from some permanent cost savings through the efficiencies developed during lockdowns and the continuing benefits resulting from the investment in IT systems.

Willow Pumps

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

The Willow Pumps core business has two distinct types of revenue: Service revenue and Supply and 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 core revenue increased by only 9%, overall divisional revenue increased by 11% as a result of the 19% growth in sales at the Metro Rod DLOs. This increase in volume and more effective management of overhead costs resulted in these activities generating a positive return.

Core sales growth has been weighted towards higher gross margin service revenue, rather than lower gross margin S&I revenue and therefore, gross margin increased from 52% to 54%, leading to an increase in core gross profit of 22% to £3.7m (H1 2020: £3.3m).

By their nature direct labour operations have less operational gearing than franchise businesses, as the increase in income needs to be matched by increased labour costs, all of which are included in administration expenses. As a result, there was an 18% increase in administrative expenses when compared with the prior period.

Overall, the 11% increase in revenue has resulted in a 13% increase in adjusted EBITDA to £0.9m (H1 2020: £0.8m).

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 mostly 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. Area Sales are the fees generated from the sale (or resale) of franchise territories.

Our B2C division, was the most impacted by the 2020 Spring lockdown as the franchisees where unable to trade. To help ensure their survival the majority of fees charged to the networks were suspended or greatly reduced during this period. During the current period almost all franchisees were back to paying full monthly fees and as a result revenue increased by 32%. Franchise recruitment also recovered strongly during the period with 40 new franchisees joining the three brands (H1 2020: 27).

The cost base of this business was very strictly controlled particularly when compared with a significant reduction in salary costs in H1 2020 resulting from the furlough scheme. In the current period we have seen the benefit of our decision to close the Barking Mad head office and consolidate all B2C operations in Kidderminster.

Overall, the 31% increase in gross profit, tied to a stable cost base, resulted in an impressive 63% increase in adjusted EBITDA to £1.5m (H1 2020: £0.9m; H1 2019: £1.2m).

Adjusted & statutory profit

Depreciation and amortisation of software increased 23% to £0.8m (H1 2020: £0.7m) as a result of the increase in the amortisation charge in respect of software development, and the purchase of £0.8m of tangible assets to support the Peel Ports contract at Metro Rod.

The finance charge has reduced by 40% due to the lower net debt position following the April 2020 Placing which raised £13.6m (net of expenses) and was partially used to pay down bank facilities. The finance charge does not solely reflect bank interest, but also includes interest on capitalised leases.

During H1 2020 we took a £0.6m charge in respect of events related to the COVID-19 crisis. We believed it was prudent to anticipate that a number of customers would fail as the various Government support schemes begin to unwind, and as a result we increased our bad debt provision by £0.5m. During the period the level of actual credit losses were £0.1m which were expensed, resulting in us continuing to hold a total bad debt provision of £0.8m provision (31 December 2020: £0.8m).

The other loss of £0.2m (H1 2020: £0.1m) represents the movement in the fair value of the deferred consideration in relation to the acquisition of Willow Pumps which is provided in accordance with IFRS 9.

The tax charge for the period at 40% (H1 2020: 35%) was higher than the statutory rate of 19% due to the revaluation of the deferred tax liability on acquired intangibles resulting from the increase in the future corporation tax rate to 25%. This added £0.6m to the H1 tax charge. Excluding this one-off charge (which will not recur at the year-end), the underlying tax rate would have been 19%.

As a result, the statutory profit after tax increased by 174% to £1.6m (H1 2020: £0.6m).

Earnings per share

No new shares have been issued during the period, meaning that the total number of Ordinary Shares in issue throughout the period was 95,758,470 (31 December 2020: 95,758,470). On 30 April 2020 the Group completed a Placing of 15,555,556 new Ordinary Shares. Although this represented a 20% dilution, the basic weighted average number of Ordinary Shares in issue and not in Treasury in H1 2020 was 85,067,691 (H1 2021: 95,758,470) resulting in 12.5% dilution in the current period. As a result, whilst adjusted profit after tax grew by 65% to £2.6m (H1 2020: £1.6m), adjusted earnings per share increased by only 46% to 2.7p (H1 2020: 1.84p).

Basic earnings per share increased by 143% to 1.63p (H1 2020: 0.67p).

Financing and cash flow

At 30 June 2021, the Group had cash of £12.2m, and undrawn bank facilities of £7.0m (comprised of the £5m Revolving Credit Facility ("RCF") and £2m overdraft), giving the Group £19.2m of cash and available facilities.

Overall, the Group continue to be substantially ungeared, being in a net cash position of £5.2m (31 December 2020: £4.9m). The Group continues to hold cash on its balance sheet to allow flexibility in terms of corporate activity.

The Group generated cash from operating activities of £3.5m (H1 2020: £1.1m) resulting in a cash conversion rate from adjusted EBITDA of 84% (H1 2020: 38%). During H1 2020 the Group continued to make payments to all suppliers, providers of finance and HMRC, however, we took a pragmatic stance with some of our commercial customers who were unable to trade during lockdowns. As our trading partners have been able to re-establish more normal trading terms in H1 2021, our cash conversion has improved significantly.

The cash generated in the period has been partially absorbed in additional working capital as turnover has grown and by the investment required in plant and machinery needed for the Peel Ports contract. We have also continued to invest in our IT infrastructure.

Dividend

Given the strong balance sheet position, the significant increase in profits and the optimism the Board has for the full year, the Board has declared an interim dividend of 0.60p per share (H1 2020: 0.30p). This also reflects a reweighting between the interim and final dividend and the unwinding of the cautious approach we took in 2020. The interim dividend will be paid on 17 September 2021 to shareholders on the register on 3 September 2021.

Chris Dent

Chief Financial Officer

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the six months ended 30 June 2021

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 June 2021

CONSOLIDATED STATEMENT OF CASH FLOWS

For the six months ended 30 June 2021

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2021

1. Accounting policies

Basis of preparation

The consolidated financial statements for the six months ended 30 June 2021 and 2020 are unaudited and were approved by the Directors on 21 July 2021. 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 2020 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 2020.

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.

2. 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.

During the current and comparative periods, the Group has not incurred any exceptional costs which the Directors believe should be separately identified.

Earnings per share

3. 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/.