Marlowe Regulatory News (MRL)

8 July 2020

Marlowe plc

Audited results for the year ended 31 March 2020

Marlowe plc ("Marlowe", the "Company" or the "Group"), the specialist services group focused on developing companies which assure safety and regulatory compliance, announces its audited results for the year ended 31 March 2020 ("FY 2020").

Financial performance

Financial highlights

· Group revenue up 44% to £185.4 million. Run-rate revenues of approximately £200 million with c.78% recurring in nature

· Adjusted EBITDA*1 up 51% to £16.6 million

· Adjusted profit before tax*1 up 54% to £13.6 million

· Adjusted EPS*1 up 30% to 24.3p

· Adjusted EBITDA*1 for Risk Management & Compliance and Water Treatment & Air Quality up 38% and 61% respectively

· Underlying cash conversion of 83%, maintaining FY19 level

· Net debt* at 31 March 2020 £32.3 million (31 March 2019: £20.1 million), subsequently reduced following oversubscribed placing to raise £40 million announced on 26 June 2020

Operational highlights

· Organic growth accelerated to 7% driven by strong new business sales, improved customer retention and successes with the Group's cross-selling strategy

· Eight acquisitions completed in the period, including Clearwater, transforming the scale and capabilities of the Group's activities in the Water Treatment & Hygiene market. The acquisitions of Quantum Risk Management, Law At Work and Managed Occupational Health strengthened our leading position in Health, Safety & Compliance markets, while four further acquisitions deepened the Group's presence across the compliance & safety sectors

· Acquisition of Elogbooks, a leading provider of contractor management software and services, completed post period end, representing the next step in our strategy to deliver integrated technology and services to enhance the compliance, safety and upkeep of our clients' premises

· All integration programmes on track, with good progress made on operational and technological improvements across the Group, including the development of Meridian, our compliance software platform

· The proportion of customers taking multiple services from the Group increased to approximately 23% of revenue (FY19: c.20%) as a result of our broader compliance capabilities and initiatives focused on cross-selling services. Of our top 100 customers, 56 are now taking multiple services

· Divestment of non-core air quality activities, improving quality of earnings and recurring revenue profile of the Group

· Increased level of attractive M&A opportunities in the current economic environment to add significant further scale to the Group

COVID-19 update

· Resilience during COVID-19 has demonstrated both the defensive nature and agility of our business model and platform for growth

· New service lines such as COVID-19 risk assessments & audits, occupational health services and fever screening technology are generating new revenue streams in our health, safety and compliance division, while presenting a strong pipeline of opportunities

· Post-period end, there has been some disruption to operations resulting from site access issues in Q1 of the new financial year. However, the regulations that govern the requirement for our services and ensure that our clients operate safely and compliantly have minimised this disruption. We expect site access to return to pre-COVID levels over the summer

· Looking ahead, we expect to see favourable structural trends leading to increased focus on health, safety and compliance

*Excluding the effects of the adoption of IFRS 16 - Leases

**Including the effects of the adoption of IFRS 16 - Leases

1Expanation of non-IFRS measures are contained within the Finance Director's review below.

Commenting on the results, Alex Dacre, Chief Executive, said:

"We are pleased to report another strong financial performance and a year of substantial progress in developing the scale and breadth of our Group through accelerating organic growth, significant M&A, further margin enhancement and good underlying cash generation.

"Marlowe has further strengthened its position as the UK leader in specialist services which assure safety and regulatory compliance. Our Group is uniquely positioned in the UK to provide our customers with a comprehensive one-stop approach to their health, safety and regulatory compliance needs; from software, assurance & consultancy, through to the full implementation of their recurring testing, inspection and compliance requirements.

"Marlowe's defensive qualities, strong channel to market, organic growth momentum and track record of accelerating growth through targeted M&A have secured a strong position from which to gain further market share across all our business streams and to create sustainable shareholder value.

"Whilst we have seen some disruption from COVID-19 which affected the early part of our new financial year, the impact has been manageable and, given the regulations that govern the requirement for our essential services, our business model has demonstrated resilience and presented opportunities for new service offerings.

"We believe that the crisis will lead to favourable structural trends resulting in an increased focus on the health, safety, wellbeing & compliance markets that we occupy. We see an increased level of attractive opportunities to consolidate our markets through further acquisitions to accelerate our growth, and we are well-placed to act on these following our recent oversubscribed placing.

"Given the defensive nature of our business model, we expect to see growth in line with our pre COVID-19 expectations as restrictions are lifted. COVID-19 is no longer having a significant impact on our operations and we expect to deliver further good progress in the current year.

"I would like to express my thanks to our team for their exceptional response during the COVID-19 crisis and for their significant contribution in delivering our strategy during the year."

For further information:

Annual Report and Financial Statements and Notice of Annual General Meeting

The Company announces that it has today published its Annual Report & Financial Statements for the year ended 31 March 2020.

The AGM has been convened for 10 am on 30 September 2020 at 20 Grosvenor Place, London, SW1X 7HN. The expectation is that this will be a physical meeting but this will be reviewed nearer the time in light of the prevailing COVID-19 guidance.

The Annual Report & Financial Statements 2020 and the Notice of AGM 2020 will be posted to shareholders and can be viewed at or downloaded from the Company's corporate website at www.marloweplc.com.

CHIEF EXECUTIVE'S REVIEW

Results & Strategy

Since its inception in 2016, Marlowe has grown to become the UK leader in specialist services which assure safety & regulatory compliance. We continued to make strong progress during FY20, with substantial growth in revenues, adjusted profits and adjusted earnings per share. We realised further margin enhancements whilst delivering good underlying cash generation.

For the year ended 31 March 2020, adjusted earnings before interest, tax, depreciation, amortisation and exceptional items*1 were up 51% to £16.6 million (FY19: £11.0 million), adjusted profit before tax*1 was up 54% to £13.6 million (FY19: £8.9 million) and adjusted earnings per share*1 were up 30% to 24.3p (FY19: 18.8p) on revenues up 44% to £185.4 million (FY19: £128.5 million). Adjusting for the dilutive impact of Clearwater, the Group's divisional adjusted EBITDA* margin from continuing operations rose to 11.4% (FY19: 9.8%). Statutory profit before tax for the year was £0.5 million (FY19: £2.0 million) after adjusting for acquisition and restructuring related costs and reflecting a loss on the disposal of non-core businesses of £0.8 million (FY19: profit of £1.9 million). Statutory EPS was (0.8)p (FY19: 3.8p).

Organic growth accelerated to 7% driven by strong new business sales, improved customer retention and successes with the Group's cross-selling strategy. Our Group can deliver an end-to-end approach to our clients' health, safety & regulatory compliance: from risk & compliance software, safety audits & inspections, risk assessments, health assurance, employment law & HR compliance through to recurring compliance programmes across health & safety, fire safety & security, water treatment & hygiene, air quality and occupational health. Approximately 23% of Marlowe's revenues are now multi-service (up from 20% in FY19), where we are leveraging our comprehensive service offering to deliver more than one service to a client. Of our top 100 customers, 56 are now taking multiple services.

Further growth through acquisitions

M&A is a fundamental component of our strategy and we continued to execute at pace throughout the year, completing eight acquisitions which have deepened our presence in existing markets and broadened our compliance capabilities into both HR and employment law compliance and occupational health - both markets with significant synergies with our strategy to deliver an end-to-end approach to our clients' safety and regulatory compliance. The acquisition of Clearwater, in May 2019, transformed the scale and scope of our leading water treatment & hygiene operation. The change that the business has undergone since joining Marlowe is a clear illustration of our model to create significant shareholder value through identifying highly complementary acquisitions and delivering an effective integration programme that results in extensive financial and operational synergies.

The acquisitions of Quantum Risk Management ("Quantum"), Law At Work ("LAW"), Managed Occupational Health ("MOH"), Eurosafe UK Group ("Eurosafe") and Solve HR ("Solve") have transformed the scale and scope of our Health, Safety & Compliance division and the acquisition of FSE Fire Safety Systems ("FSE") has added further scale and regional density to our leading Fire Safety & Security division which continues to build good organic market share.

The acquisition of Elogbooks, announced since the year-end, is the next step in our strategy to deliver integrated technology and services to enhance the compliance, safety and upkeep of our clients' premises. Following the acquisition, more than 5% of Group revenue derives from software subscriptions. Alongside Meridian, our existing software platform, the addition of the Elogbooks software will position us to offer our clients a complete technology-enabled contractor management, compliance and health & safety solution. The acquisition significantly expands the Group's digital capabilities and service offering in providing our clients with visibility and control over their service providers' performance and compliance. Elogbooks is a software tool which allows users to schedule compliance and maintenance activities and monitor them from start to finish, providing a full picture of the state of contractor activity, service delivery and the compliance of facilities. Its 4D monitoring solution connects to physical assets in buildings to feedback real-time compliance and building performance data. We see considerable scope to deploy Elogbooks' system and technology across our existing businesses to further enhance the health, safety and compliance of our customers.

Our business model and COVID-19

Our broad range of compliance service capabilities, superior service levels, the provision of our proprietary software and digital applications, along with our ability to operate efficiently and effectively across the UK, provides us with a durable competitive advantage over both our large multi-national competition in the Testing, Inspection and Certification sector, who lack our agility and UK focus, along with the smaller regional competition who lack our access to capital to invest in growth, scale economies, technology, geographical coverage and additional capabilities.

Alongside the ever-evolving regulations that underpin the requirement for our services, our markets, which are fragmented and offer significant scope for further growth, benefit from other long-term growth drivers: insurance requirements; public expectations around safety, compliance and wellbeing; corporate reputational and brand risk; increased regulatory enforcement; and continued population growth and urbanisation.

Set against the backdrop of a significant public health crisis, Marlowe's role in delivering services which help our clients to remain safe, healthy, efficient and compliant has never been more relevant. Our resilient trading performance throughout the pandemic reflects the defensive strengths of our business model which is focused on B2B sectors in which the services that we provide are essential to our clients' operations and are invariably governed by regulations which dictate that our services are required in order to operate safely and compliantly. This regulation and the essential nature of our services ensure that our business is well-insulated from economic cycles. The services that our Group delivers are mission-critical to over 20,000 organisations across the country who rely on us throughout the year to keep their organisations safe and compliant, to help maintain their employees' health & safety compliance and wellbeing, and to keep their 350,000 premises across the UK safe and operational.

The way that our Group responded to the crisis reinforces the strength of our business model: short lines of communication, agility and the entrepreneurial autonomy necessary to implement plans quickly, meant that each of our divisional management teams were able to rapidly refine their service delivery models such that we have been able to deliver our services safely and effectively. Alongside this, we were able to quickly implement selective precautionary cost reduction measures to minimise the impact on profitability and preserve cash. These precautionary cost reduction measures saw the Marlowe Non-Executive Board and Chief Executive waive their salaries for Q1 of our new financial year. In addition, senior managers across the Group voluntarily agreed to temporary salary reductions of between 15-20%. The Group also selectively used the Government furlough scheme and implemented a pay freeze whilst reducing certain other discretionary costs.

The field-based services that we deliver were designated as critical under Government guidance, enabling us to play our part in helping to keep our clients - which include healthcare facilities, food production and care homes - compliant with health & safety laws and regulations, and their premises safe and operational. Many of the risks and compliance issues that we help clients navigate were more pronounced during the lockdown than in normal times and parts our Group, including employment law, HR compliance, occupational health and certain water hygiene activities, experienced an increased demand for services and quickly shaped their service offering to assist clients through this period. The Group now provides COVID-19 health & safety risk assessments, audits and Return to Work safety audits to ensure workplaces and other premises comply with the latest Government guidance. In addition, we are delivering COVID-19 surface swab testing and fever screening technology, people-counting flow control solutions to facilitate social distancing, and various COVID-19 focused occupational health & safety services. These services have generated in the region of £2 million additional revenue during the first quarter of the new financial year with a strong pipeline of further opportunities.

Looking ahead

Looking to the future, with run rate revenues now in the region of £200 million, the critical mass and scale that the Group has achieved across our markets is allowing us to benefit from many economies such as route density, scheduling efficiencies and the ability to deliver faster and better service to our clients. This scale, along with the significant progress that we have made through implementing operational and technological enhancements across the Group and the effective integration programmes we have delivered, has resulted in further sustainable organic growth along with profit margin improvements which we expect to continue to expand.

The Marlowe model of growth through acquisition allows us to significantly accelerate our organic growth through identifying complementary acquisitions in our target sectors, integrating these businesses into our platform, enhancing their operations, realising financial synergies and then accelerating growth through operational improvements and collaboration with other businesses in our Group and effective cross-selling. Our M&A model is well defined and rehearsed - we have completed 37 transactions (35 acquisitions and 2 non-core divestments) since 2016 - and is a core part of our investment proposition to generate material shareholder value. In the context of the UK wide economic shock of COVID-19, we see opportunities to accelerate the consolidation of our markets through further M&A.

The relevance and importance of the markets that we occupy has never been in sharper focus and Marlowe is well positioned to benefit from the ever-increasing needs of organisations for health, safety and compliance assurance services. We are confident there will be significant growth opportunities for the Group in the current year both organically and through accelerating the Marlowe model of growth through fast-paced acquisition.

Risk Management & Compliance

Marlowe's Risk Management & Compliance division delivers services which assure the safety and regulatory compliance of organisations, their premises and their people. The division provides risk & compliance software, health & safety, fire safety & security, HR & employment law compliance and occupational health services to help organisations assure safety & compliance and to mitigate risk. A large portion of the services we deliver recur from month to month or year to year and are essential to our customers' operations and the safety & wellbeing of their staff. Across the division, we employ in the region of 670 consultants, auditors, technicians, risk-assessors, engineers and other experts who provide advice, consultancy, inspections, audits, risk assessments, testing & inspection services, maintenance, installation, commissioning and training with the aim of assuring and certifying our clients' safety & regulatory compliance. The division employs an additional 550 support staff who are strategically located across the country.

Our Risk Management & Compliance division performed strongly during FY20 and recorded adjusted EBITDA*1 growth of 38% to £8.7 million with adjusted operating profit*1 growth of 42% to £8.1 million (2019: £5.8 million) and revenues of £80.2 million (2019: £67.4 million). This growth reflects the contribution from acquisitions made at the end of FY19, during FY20 and strong organic growth. Risk Management & Compliance's divisional adjusted EBITDA* margin rose to 10.8% (FY19: 9.3%).

Following the acquisition of William Martin in FY19, we have further strengthened our leading Health, Safety & Compliance operation through the acquisitions during the year of Quantum, Law At Work, Managed Occupational Health and Solve HR.

Following the Elogbooks acquisition and further good growth in Meridian, Risk & Compliance software has become a key service line for the Group and now accounts for a material and growing segment of our divisional revenues (in excess of 10%), offering attractive subscription qualities. Our ability to deliver technology-enabled services and the implementation of compliance software as a service along with the use of digital applications forms a key part of our growth strategy. Our market leading platforms, Meridian and Elogbooks, are used by some of the UK's largest multi-site organisations to manage their complete contractor management, safety & compliance obligations. The systems improve safety standards, ensure compliance and can provide real-time visibility of compliance data via our proprietary 4D remote monitoring sensor technology.

We have made significant investments in our Meridian platform during the year and our combined software team now consists of 40 development professionals who continue to enhance the systems. We view the use of technology and software across our whole Group as a key differentiator between ourselves and our competition and Meridian and Elogbooks are our key applications in this field. Customers who work across both platforms enjoy a complete software-enabled maintenance, compliance and health & safety solution from the two specialist systems. During the year, we have launched a new version of Meridian: Meridian Compliance, which is a self-administered version of the software, sold at a lower price point and more accessible for smaller organisations than Meridian Enterprise, our account managed and customisable version of the software.

The acquisition of Quantum in August further strengthened Marlowe's leading position in the property-related health, safety and compliance sector and enhances our ability to provide an end-to-end solution for our customers' safety and regulatory compliance needs. Founded in 2003, Quantum is a leading provider of health & safety consultancy services to commercial organisations across the UK. The business conducts audit and consultancy services for approximately 8,000 commercial sites each year, providing specialist advice on managing health & safety risks and ensuring compliance with a wide variety of health & safety regulations. The integration of the business into William Martin has proceeded to plan and the business, which had no proprietary software upon acquisition, is beginning to benefit from the application of our Meridian software and suite of digital applications. William Martin is delivering on its growth plan with acquisition activity supplementing pleasing organic growth. We have increased headcount within our health & safety operation by 19 heads during the year as we continue to invest in our leading service capability in this market.

By acquiring Law at Work in December, a business which helps clients to mitigate their employee-related risks and assure their health & safety performance, we both strengthened Marlowe's health & safety operation and significantly advanced our capabilities to work with clients across the full spectrum of their compliance needs. The business, which delivers subscription-based consultancy services, operates nationally in an attractive and underserved market in which we see significant growth opportunities. The acquisition was a major step in strengthening our position as the UK leader in regulated compliance services to organisations of all sizes. LAW employs approximately 70 staff, more than half of whom are employment lawyers, HR compliance professionals and health & safety consultants, whose advice and consultancy ensure that commercial organisations remain compliant with employment law and health & safety legislation. The acquisition was a further step in Marlowe's strategy of building an end-to-end provider of regulated compliance services and offers synergies with the Group's existing health, safety and compliance businesses, in particular William Martin. Since the LAW acquisition we have gone on to add further scale in this field through the acquisitions of Solve HR in March and Deminos Consulting in May, after the end of the financial year - two business providing subscription-based HR & employment law compliance services to a range of SMEs across the UK. Both acquisitions are being integrated into Law At Work. In line with our strategy to deliver technology-enabled services, we have recently rolled out an SME-focused version of our Meridian software, designed for the Law At Work client base.

In March we acquired Managed Occupational Health. MOH is a leading national provider of occupational health services employing approximately 70 staff, including 40 technicians, nurses and doctors who provide recurring occupational health advice, assessments and monitoring to help employers comply with health & safety legislation and assure the physical and mental health and wellbeing of their employees. The business works across a broad range of sectors including education, financial services and food processing. In acquiring MOH, we have added further scale to Marlowe's health & safety operation and extended our capabilities to work with clients across the full spectrum of their occupational health needs. The business operates nationally in an attractive and underserved market in which we see significant growth opportunities.

Our Fire Safety & Security business is now one of the UK leaders in delivering recurring compliance programmes across our clients' entire fire safety and security requirements: from consultancy and risk assessment through to the testing, inspection, remediation and upgrade of a broad range of fire and security systems and applications. We now benefit from attractive scale and route density across the UK which continues to result in improved productivity and enhanced service levels. Average revenue per fee earner increased by 6% during the year. These service levels lead in turn to reduced attrition and enhanced organic growth which has been strong during the year at 7%. The 13 acquisitions that have built this business to date, including the recent acquisition of FSE Fire Systems, have been integrated into our operating platform. Headquartered in Nottingham, FSE provides a range of fire safety and security services with a large base of customers in the East Midlands area adding attractive regional density. During July, we will be moving into a new state of the art head office facility for our Fire & Security operation in Manchester. The facility will house our 24/7 Connected Services monitoring centre along with client demonstration facilities for various fire safety & security applications and underlines our ambition to become the UK market leader in fire safety & security. The UK market is around £2 billion in size and remains very fragmented. There is considerable further scope for growth through M&A which we are well placed to take advantage of.

Water Treatment & Air Quality

Our Water Treatment & Air Quality division delivers regulatory-driven compliance services mainly focused on water hygiene, water treatment, air testing & quality and environmental services. A large portion of the services we deliver recur from month-to-month or year-to-year and are essential to our customers' operations and stipulated by regulation. Across the division, we employ in the region of 700 consultants, risk assessors, technicians, engineers and other experts who provide audits, consultancy, inspections, tests, samples, and water treatment services which certify the regulatory compliance of a wide range of commercial premises and ensure that our clients' operations are efficient and sustainable. We employ an additional 450 office and remote support staff who are strategically located across the county.

Our Water Treatment & Air Quality division had another strong year, reporting adjusted EBITDA*1 growth of 61% to £10.1 million (2019: £6.3 million) with adjusted operating profits*1 of £8.8 million (2019: £5.3 million) on revenues of £105.2 million (2019: £61.1 million). This growth reflects the benefit of the Clearwater acquisition in the year and the full year contribution from acquisitions made in FY19 together with good organic growth and revenue generated per salesperson increasing significantly during the year. Additionally, we have seen further improvements in the underlying profit margins of the division as a result of initiatives focused on enhancing productivity and utilisation, supplementing the synergies realised as a result of our increased scale and the effective integration of acquired businesses, particularly Clearwater. Adjusting for the dilutive impact of Clearwater which was acquired during the year and loss-making upon acquisition, adjusted EBITDA* margin from continuing Water Treatment & Air Quality activities was 12.1% (FY19: 10.3%).

This acquisition of Clearwater was a transformational step in our strategy to consolidate the water treatment and hygiene market. The acquisition strengthened our national capabilities whilst contributing in the region of £25 million of largely recurring revenues to the Group. Founded in 1990 and employing approximately 375 staff across 11 locations, Clearwater, which was previously owned by Baird Capital Partners Europe, provides a range of services mainly related to water treatment, hygiene and compliance across the UK and Ireland. The business has approximately 2,400 customers across a broad range of end markets including healthcare, education, food processing, leisure and public services. The majority of Clearwater's revenues are recurring and derived from long-term contracted customer relationships.

The acquisition has strengthened Marlowe's position as a major player in the water treatment and hygiene market, with the Group's enlarged business benefiting from run-rate revenues in the water services market of c.£75 million. The acquisition also broadened Marlowe's technical capabilities and enhanced its route density nationally. Clearwater has been integrated into WCS Group, Marlowe's Water operation, broadening the capabilities of the combined business to enhance the range of services it provides to customers.

Upon acquisition, the Clearwater business was lossmaking. As a result of the integration of Clearwater into WCS Group, attractive synergies are being realised such that towards the end of the financial year, the business's operating margin was improving to be more in line with the Group's wider Water activities. The integration programme has delivered an overhaul of the operating model of the business which has seen: improvement of service and compliance levels (from 85% to 98%) and the resultant increase in new business levels; the integration of the service delivery team, leading to attractive route density synergies; the exit of the previous senior management team; the removal of a large number of duplicated roles across various back office functions; closure of properties; the implementation of new systems and processes; a reduction in the use of sub-contract labour; the insourcing of water treatment chemical spend to our in-house blending facility; and a transformation of the culture of the business into a growth-focused, leading compliance service provider. Costs incurred in the restructuring and integration of Clearwater into WCS Group were £4.2 million in the period.

During the year, we integrated our Air Testing & Quality operation, which trades as Tersus Consultancy and DCUK, more closely with our Water Treatment & Hygiene operation, to ensure that the significant synergies between these parts of our Group could be fully advanced. At the same time, we divested certain non-core Air Quality activities for a consideration of up to £7.0 million. The non-core activities, primarily non-recurring asbestos remediation project work which generated revenues of approximately £18 million, were acquired in July 2017 as a part of the acquisition of DCUK, which carried out one-off projects alongside its core ventilation hygiene and air quality business. The Group retained all ventilation hygiene and air quality activities and continues to provide recurring asbestos consultancy services. The divestiture of the non-recurring elements of DCUK is in line with the Group's focus on businesses with recurring, contracted revenues. Divesting of this non-core part of DCUK enhances our quality of earnings by reducing our exposure to non-recurring project related revenues in line with our strategy which is focused on recurring, non-discretionary services in regulated safety & compliance sectors.

Outlook

Marlowe's defensive qualities, strong channel to market, organic growth momentum and track record of accelerating growth through targeted M&A strongly position us to continue to gain further market share across all our business streams and to create sustainable shareholder value.

Whilst we have seen some disruption from COVID-19 which affected the early part of our new financial year, the impact has been manageable and, given the regulations that govern the requirement for our essential services, our business model has demonstrated resilience and presented opportunities for new service offerings.

We believe that the crisis will lead to favourable structural trends resulting in an increased focus on the health, safety, wellbeing & compliance markets that we occupy. We see an increased level of attractive opportunities to consolidate our markets through further acquisitions to accelerate our growth, and we are well-placed to act on these following our recent oversubscribed placing.

Given the defensive nature of our business model, we expect to see growth in line with our pre COVID-19 expectations as restrictions are lifted. COVID-19 is no longer having a significant impact on our operations and we expect to deliver further good progress in the current year.

Alex Dacre

Chief Executive

FINANCE DIRECTOR'S REVIEW

Introduction

The financial results reflect a year of transition in accounting policies with the adoption of IFRS 16 'Leases', having a material effect on the consolidated income statement and balance sheet. As such, the results are shown under IFRS 16 and additionally on a consistent basis without IFRS 16, to enable like for like comparison with FY19 and to prepare for FY21 reporting.

Revenue

Revenue for the year ended 31 March 2020 increased by 44% to £185.4 million (2019: £128.5 million) reflecting improved organic growth and the contribution from acquisitions completed in the year, together with the full year benefit of those completed in FY19.

Profitability

On a statutory basis, profit before tax from continuing operations for the year ended 31 March 2020 was £0.5 million (2019: £2.0 million) and is stated after the adoption of IFRS 16 Leases which had the effect of increasing charges to the Income Statement by £0.4 million. In addition, statutory profit was impacted by the disposal of non-core businesses in FY20 and FY19. These activities reduced profit before tax by £0.8 million in FY20 and increased profit before tax by £1.9 million in FY19. Adjusted profit before tax, on a consistent accounting policy basis, for the year was £13.6 million (2019: £8.9 million). Our key measures of profitability for the Group are, on a consistent accounting policy basis, adjusted operating profit and adjusted EBITDA. In the year ended 31 March 2020, adjusted operating profit increased by 55% to £14.7 million (2019: £9.5 million) and adjusted EBITDA increased by 51% to £16.6 million (2019: £11.0 million). Adjusted EBITDA means operating profit before interest, tax, depreciation and amortisation and excludes separately disclosed acquisition and other costs.

Non-IFRS measures

The financial statements contain all the information and disclosures required by the relevant accounting standards and regulatory obligations that apply to the Group. The Annual Report and financial statements also include measures which are not defined by generally accepted accounting principles such as IFRS. We believe this information, along with comparable IFRS measures, is useful as it provides investors with a basis for measuring the performance of the Group on a comparable basis. The Board and our managers use these financial measures to evaluate our operating performance. Non-IFRS financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with IFRS. Similarly, non-IFRS measures as reported by us may not be comparable with similar measures reported by other companies.

Due to the nature of acquisition and other costs in relation to each acquisition and the non-cash element of certain charges, the Directors believe that adjusted EBITDA and adjusted measures of operating profit, profit before tax and earnings per share provide shareholders with a useful representation of the underlying earnings derived from the Group's business and a more comparable view of the year-on-year underlying financial performance of the Group.

To arrive at adjusted profit before tax the following adjustments have been made:

Continuing operations

Reconciliation of adjusted operating profit and adjusted EBITDA

Acquisition and other costs

Acquisition and other costs totalled £12.7 million in the year (2019: £6.9 million).

Acquisition costs include legal fees, professional fees and staff costs incurred as part of the acquisitions.

Restructuring costs, being the costs associated with the integration of acquisitions, remain the key component of acquisition and other costs and increased to £6.7 million in the year (2019: £5.2 million). The increase reflects both the number of transactions completed in the year and the scale of restructuring required at certain acquired businesses, in particular, the acquisition of Clearwater Group Limited ("Clearwater"), completed in May 2019. This business was loss making at the time of the acquisition but significant synergies were identified following its integration into WCS Group, Marlowe's Water operation. Restructuring costs of £4.2 million were incurred in the year relating to the acquisition of Clearwater.

Restructuring costs primarily consisted of:

· The cost of duplicated staff roles during the integration and restructuring period;

· The redundancy cost of implementing the post completion staff structures;

· IT costs associated with the integration and transfer to Group IT systems.

The majority of these costs are incurred in the 12 months following an acquisition.

Amortisation of intangible assets for the year was £3.4 million (2019: £1.8 million) with the increase attributable to the higher carrying value of intangible assets.

Long term incentive schemes have been established to incentivise certain key members of the Group's senior management to create shareholder value through the successful acquisition, restructuring and integration of businesses in their chosen service sectors. As such, we consider share based payments to be part of "Acquisition and other costs" as we continue to execute our stated strategy. Share-based payments decreased to £0.7 million (2019: £0.8 million) during the year.

On 30 March 2020 the Group sold certain non-core assets for a loss of £0.8 million. These assets comprised of primarily non-recurring asbestos remediation project work, acquired in July 2017 as part of the acquisition of DCUK which carried out one-off projects alongside its core ventilation hygiene and air quality business.

Earnings per share

Basic adjusted earnings per share are calculated as adjusted profit for the year less a standard tax charge divided by the weighted average number of shares in issue in the year.

Basic earnings per share reflect the actual tax charge.

Earnings per share* (EPS)

* Refer to note 5

Interest

Net finance costs amounted to £1.6 million in the year (2019: £0.6 million) of which £0.5m is associated with the adoption of IFRS 16.

Taxation

UK Corporation Tax is calculated at 19% (2019: 19%) of the estimated assessable profit for the year.

Statement of financial position

The adoption of IFRS 16 has a material impact on the shape of the Group's balance sheet with an increase in right of use assets and equivalent increase in lease liabilities.

On a consistent accounting basis, excluding IFRS 16, net assets increased by £19.5 million to £97.0 million. As a result of the adoption of IFRS 16, net assets increased to £96.7 million (2019: £77.5 million) primarily due to the placing of shares in May and June 2019. Goodwill and intangibles at 31 March 2020 were £123.2 million (2019: £89.6 million).

Property, plant and equipment totalled £5.9 million (2019: £6.3 million), comprising freehold and long leasehold property, leasehold improvements, operational equipment, vehicles and computer systems.

Cash flow

The net cash inflow from operating activities before restructuring costs, using consistent accounting policies, was £5.7 million (2019: £3.2 million) in the year. Cash conversion (being the ratio of cash generated from operations, excluding any acquisition related flows, to adjusted operating profit) was 83% (2019: 83%).

There was a net working capital outflow in the year, on a consistent accounting policy basis, of £7.9 million (2019: £5.8 million). The movement reflects the continuing increased scale of the Group but also includes additional working capital investment at certain businesses acquired in the year. In particular, the acquisition of Clearwater where a significant investment in working capital was identified during the acquisition process, contributing £2.6 million to the outflow in the year. Management of working capital remains a key focus across the Group with a strong emphasis on cash collection and overdue debt reduction. Net working capital as a percentage of revenue, the key metric used to manage working capital, improving by 2 percentage points in the year to 8% (2019: 10%).

Capital expenditure totalled £2.9 million (2019: £1.8 million) following investment in our IT systems and motor fleet across the business.

Net debt and financing

Net debt, using consistent accounting policies, at the end of the year was £32.3 million (2019: £20.1 million). Following the adoption of IFRS 16 net debt has increased to £46.6 million reflecting the inclusion of the valuation of future lease payments.

Whilst the Group has seen some disruption from COVID-19 which affected the early part of its new financial year, the impact has been manageable and, given the regulations that govern the requirement for its essential services, the business model has demonstrated resilience. As set out in the Chief Executive's review, certain measures have been implemented to mitigate against the additional risks and uncertainties that have arisen as a result of COVID-19. In the event of further disruption to the business in the future as a result of COVID-19, additional cost reduction and cash preservation measures could be utilised in conjunction with the Group's existing debt facility to reduce costs and preserve cash.

The Group continues to have sufficient headroom on its financing facility to meet the needs of the business and to continue to fund acquisitions as part of its strategy should it choose to do so with debt. In addition, the placing to raise £40 million announced on 26 June 2020, provides additional funding for further acquisitions as part of the Group's ongoing targeted acquisition strategy.

Key Performance Indicators ('KPIs')

The Group uses many different KPI's at an operational level which are specific to the business and provide information to management. The Board uses KPIs that focus on the financial performance of the Group such as revenue, gross profit, adjusted EBITDA and adjusted operating profit.

IFRS 16

IFRS 16 'Leases' was issued in January 2016. The Group has applied the standard from 1 April 2019 and use the modified retrospective approach.

The adoption of the standard has a material impact on the Group's Financial Statements. The changes at 31 March 2020 can be summarised as follows:

· Right of use assets increased by £14.3 million primarily reflecting the sizeable leasehold property and vehicle portfolio of the Group.

· Liabilities increased by £14.3 million reflecting the valuation of future lease payments.

· Profit Before Tax decreased by £0.4m reflecting the following adjustments:

o Credit to the P&L in relation to operating lease payments, primarily motor vehicles, of £5.5 million.

o Increase in depreciation charge relating to capitalisation of leases of £5.4 million.

o Increase in non-cash interest charges relating to the notional finance costs of the assets in use of £0.5 million.

The debt covenants on the Group's borrowing facility are unaffected by the application of IFRS 16 as the covenant calculation are based on the accounting principles in place at the date the agreement was entered into and exclude IFRS16. The cash-flows of the Group remain unaltered as a result of adoption of this new standard.

Mark Adams

Group Finance Director

Notes to the audited preliminary financial information for the year ended 31 March 2020

1. Basis of Preparation

The figures for the year ended 31 March 2020 have been extracted from the audited statutory financial statements for the year on which the auditors have issued an unqualified opinion. The financial information attached has been prepared in accordance with the recognition and measurement requirements of international financial reporting standards (IFRS) as adopted by the EU and international financial reporting interpretations committee (IFRIC) interpretations issued and effective at the time of preparing those financial statements.

The financial information for the year ended 31 March 2020 and 31 March 2019 does not constitute statutory financial information as defined in Section 434 of the Companies Act 2006 and does not contain all of the information required to be disclosed in a full set of IFRS financial statements. This announcement was approved by the Board of Directors and authorised for issue on 8 July 2020. The auditor's report on the financial statements for 31 March 2020 was unqualified, and did not include reference to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and did not contain a statement under either Section 498 (2) or 498 (3) of the Companies Act 2006.

The Group meets its day to day working capital requirements through its financing facility which is due to expire in November 2021. The Directors have considered the Group's forecast cash flows and net debt, as well as the Group's liquidity requirements and borrowing facilities, including downside scenarios reflecting the full financial impact of a more severe COVID-19 scenario. Whilst the Group has seen some disruption from COVID-19 which affected the early part of its new financial year, the impact has been manageable and, given the regulations that govern the requirement for its essential services, the business model has demonstrated resilience. To mitigate against the additional risks and uncertainties that have arisen, the Group has selectively used the government furlough scheme, implemented a pay increase freeze while reducing certain other discretionary costs. In the event of further disruption to the business in the future as a result of COVID-19 the Directors are confident that additional cost reduction and cash preservation measures could be utilised in conjunction with the Group's existing debt facility to reduce costs and preserve cash. In addition, a successful placing of 4,410,430 shares on 26 June 2020 raised additional gross proceeds of £21.1 million. While it is management's intention for the proceeds to be used to fund further acquisitions, if a further significant event was to impact the business, the funds could be redeployed thus providing further support to the ongoing operations of the business. A further placing of 3,957,770 shares, subject to approval by the Company's shareholders at a General Meeting to be held on 15 July, will raise additional gross proceeds of £18.9 million, thus further enhancing the Group's cash position. Following this review and a discussion of the sensitivities the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

The accounting policies applied in the year ended 31 March 2020 are consistent with those applied in the financial statements for the year ended 31 March 2019 with the exception of the following new standards which applied for the first time in the financial year:

IFRS 16 Leases

The Group has adopted IFRS 16 (Leases) since 1 April 2019. The standard's core principle is for entities to recognise a leased asset and a lease liability for almost all leases and requires them to be accounted for in a consistent manner. This introduces a single lessee accounting model and eliminates the previous distinction between an operating lease and a finance lease. Refer to note 11 for further information on the impact of the standard on the Group's accounts.

2. Segmental information

The Group is organised into two main operating segments, Risk Management & Compliance ("Risk & Compliance") and Water Treatment & Air Quality ("Water & Air"). Services per segment operate as described in the Chief Executive's Review. The key profit measures are adjusted operating profit and adjusted EBITDA and are shown before acquisition and restructuring costs, exceptional loss on customer liquidation, share-based payments charge, amortisation of intangible assets and profit on disposal of non-core business. The vast majority of trading of the Group is undertaken within the United Kingdom. Segment assets include intangibles, property, plant and equipment, inventories, receivables and operating cash. Central assets include deferred tax and head office assets. Segment liabilities comprise operating liabilities. Central liabilities include income tax and deferred tax, corporate borrowings and head office liabilities. Capital expenditure comprises additions to property, plant and equipment and includes additions resulting from acquisitions through business combinations. Segment assets and liabilities are allocated between segments on an actual basis.

REVENUE

The revenue from external customers was derived from the Group's principal activities primarily in the UK (where the Company is domiciled):

Reconciliation of segment adjusted operating profit to adjusted EBITDA

The above tables reconcile segment adjusted operating profit/(loss), which excludes separately disclosed acquisition and other costs, to the standard profit measure under International Financial Reporting Standards (Operating Profit). This is the Group's Alternative Profit Measure used when discussing the performance of the Group. The Directors believe that adjusted EBITDA and operating profit is the most appropriate approach for ascertaining the underlying trading performance and trends as it reflects the measures used internally by senior management for all discussions of performance and also reflects the starting profit measure when calculating the Group's banking covenants.

Adjusted EBITDA is not defined by IFRS and therefore may not be comparable with other companies' adjusted operating profit measures. It is not intended to be a substitute, or superior to, IFRS measurements of profit.

Major Customers

For the year ended 31 March 2020 no customers (2019: nil) individually accounted for more than 10% of the Group's total revenue.

3. Restructuring Costs

Restructuring costs, being the costs associated with the integration of acquisitions, remain the key component of acquisition and other costs and increased to £6.7 million (2019: £5.2 million). The increase reflects both the number of transactions completed in the year and the scale of restructuring required at certain acquired businesses, in particular, the acquisition of Clearwater Group Limited ("Clearwater"), completed in May 2019. This business was loss making at the time of the acquisition but significant synergies were identified following its integration into WCS Group, Marlowe's Water operation. Restructuring costs of £4.2 million were incurred in the year relating to the acquisition of Clearwater.

These costs arise due to the following:

· The cost of duplicated staff roles during the integration and restructuring period

· The redundancy costs of implementing the post completion staff structures

· IT costs associated with the integration and transfer to Group IT systems

The majority of these costs are incurred in the 12 months following an acquisition.

4. Taxation

The charge for the year can be reconciled to the profit in the Consolidated Statement of Comprehensive income as follows:

5. Earnings Per Ordinary Share

Basic earnings per share have been calculated on the profit after tax for the period and the weighted average number of ordinary shares in issue during the period.

Adjusted earnings per share

The Directors believe that the adjusted earnings per share provide a more appropriate representation of the underlying earnings derived from the Group's business. The adjusting items are shown in the table below:

The adjusted earnings per share, based on weighted average number of shares in issue during the period, is calculated below:

6. Dividends

The Company has not declared any dividends in respect of the current year or prior year.

7. Business Combinations

If the acquisitions had been completed on the first day of the financial year, Group revenue would have been £208m and Group profit before tax would have been £3.2m. As explained in Note 3, following acquisitions a number of restructuring costs are incurred, and after this post acquisition restructuring the acquisitions have a positive impact on Group profit before tax.

Finalisation of fair values for acquisitions acquired in the current year 

Acquisition of Clearwater Group Limited

On 21 May 2019, the Group acquired Clearwater Group Limited ("Clearwater"), a provider of water treatment & hygiene services, for a total consideration of £3.3m, satisfied by the payment of £3.3m in cash on completion.

The final fair values are as follows:

One hundred percent of the equity of Clearwater was acquired in this transaction. Deferred tax has been provided on the value of the intangible assets at the tax rate applicable at the time the asset is expected to be realised. Acquisition costs of £463k have been charged to profit or loss.

If the acquisition had been completed on the first day of the financial year Clearwater would have generated £22.6m revenue and £1.5m loss before tax.

Provisional fair values for acquisitions acquired in the current year 

Acquisition of Aquatreat Group Limited

On 26 July 2019, the Group acquired Aquatreat Group Limited ("Aquatreat"), a provider of water treatment services, for a total consideration of £0.5m, satisfied by the payment of £0.4m in cash on completion and £0.1m in cash payable subject to the achievement of certain performance targets by the acquired business 12 months post acquisition. Since the acquisition date is less than 12 months prior to the Group's accounts being signed off, the acquisition balance sheet is still subject to finalisation.

The provisional fair values are as follows: 

One hundred percent of the equity of Aquatreat was acquired in this transaction. Acquisition costs of £25k have been charged to profit or loss.

If the acquisition had been completed on the first day of the financial year Aquatreat would have generated £1.4m revenue and £0.2m loss before tax. 

Acquisition of Quantum Risk Management Ltd

On 9 August 2019, the Group acquired Quantum Risk Management Ltd ("Quantum"), a provider of risk compliance and consultancy services, for a total consideration of £7.8m, satisfied by the payment of £4.6m in cash on completion and £3.2m in cash payable subject to the achievement of certain performance targets by the acquired business 12 months post acquisition. Since the acquisition date is less than 12 months prior to the Group's accounts being signed off, the acquisition balance sheet is still subject to finalisation.

The provisional fair values are as follows:

One hundred percent of the equity of Quantum was acquired in this transaction. Deferred tax has been provided on the value of the intangible assets at the tax rate applicable at the time the asset is expected to be realised. Acquisition costs of £141k have been charged to profit or loss.

If the acquisition had been completed on the first day of the financial year Quantum would have generated £5.8m revenue and £0.3m profit before tax.

Acquisition of FSE Fire Safety Systems Limited

On 29 November 2019 the Group acquired FSE Fire Safety Systems Limited ("FSE"), a provider of fire and security services, for a total consideration of £3.0m, satisfied by the payment of £2.8m in cash on completion and £0.2m in cash payable subject to the achievement of certain performance targets by the acquired business in the periods ending 31 August 2020 and 2021. Since the acquisition date is less than 12 months prior to the Group's accounts being signed off, the acquisition balance sheet is still subject to finalisation.

The provisional fair values are as follows:

One hundred percent of the equity of FSE was acquired in this transaction. Deferred tax has been provided on the value of the intangible assets at the tax rate applicable at the time the asset is expected to be realised. Acquisition costs of £66k have been charged to profit or loss.

If the acquisition had been completed on the first day of the financial year FSE would have generated £4.0m revenue and £0.4m profit before tax.

Acquisition of Law At Work (Holdings) Limited

On 2 December 2019 the Group acquired Law At Work (Holdings) Limited ("LAW"), a leading national provider of subscription-based employment law compliance and health and safety services, for a total consideration of £9.7m, satisfied by the payment of £5.7m in cash on completion and £4.0m in cash payable subject to the achievement of certain performance targets by the acquired business in the periods ending 31 May 2020, 2021 and 2022.

The provisional fair values are as follows: