Marlowe Regulatory News (MRL)

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 as amended by regulation 11 of the Market Abuse (Amendment) (EU Exit) Regulations 2019/310. Upon the publication of this announcement via Regulatory Information Service, this inside information is now considered to be in the public domain.

23 November 2022

Marlowe plc

Interim results for the six months to 30 September 2022

Strong first half performance

Marlowe plc ("Marlowe", the "Group" or the "Company"), the UK leader in business-critical services and software which assure safety and regulatory compliance, announces its unaudited results for the six-month period ended 30 September 2022.

Financial performance

Marlowe is holding a half year results presentation for investors and analysts at 09:00 GMT today. A

link to this event is here.  

An on-demand version of the presentation will subsequently be made available on the Marlowe plc website.

1 Earnings before interest, taxes, depreciation and amortisation ("EBITDA")

2 Explanation of non-IFRS measures are contained within the Chief Financial Officer's review

3 Divisional EBITDA margin does not include central costs

Financial highlights

Strong & resilient performance as we continue to execute our compliance strategy

· Group revenue increased 66% to £222.9 million

§ Current annualised run-rate revenue £468 million

· Adjusted EBITDA increased 80% to £39.2 million

§ Current annualised run-rate adjusted EBITDA £83 million

§ Statutory EBITDA increased 93% to £26.3m

· Adjusted profit before tax increased 74% to £26.4 million

· Adjusted basic EPS increased 39% to 22.3p

Strong organic growth

· Underlying organic revenue growth of 8%, with both divisions delivering strong growth in excess of market (GRC growth of 7%; TIC growth of 9%)

· Organic growth driven by good levels of new business and increasing market share, increasing client lifetime value, cross-sell and price increases

· Continued attractive structural growth across our markets

· c.85% of revenue recurring, underpinned by non-discretionary regulatory compliance requirements

Software subscription revenues

· Software Annual Recurring Revenue ("SaaS ARR"): c.£39 million

· Overall software activities generating approximately 25% of Group annualised run-rate adjusted EBITDA

Margin expansion

· Divisional adjusted EBITDA margin increased by 100bps to 18.8% as we continue to deliver integration synergies, benefit from our increased scale and efficiency and generate revenue from higher-margin business streams

· Continuing to effectively manage inflationary environment

Strong balance sheet and operating cash flow: 

· Net debt/EBITDA leverage ratio of 2.1x at 30 September 2022 (1.6x at 31 March 2022), within our target range of 1.5x to 2.5x

· Increase in net debt reflects the cost of acquiring businesses in line with our growth strategy

· Net cash generated from operations of £22.6 million (HY22: £12.4 million) which includes adverse timing related increases in working capital which we largely expect to unwind in the second half of the year

Medium-term growth strategy

· Continue to expect to reach c.£500 million run-rate revenue and c.£100 million run-rate adjusted EBITDA with 90%+ cash conversion materially ahead of original end of FY24 target

Successful execution of M&A programme

· £44 million capital invested this financial year in ten bolt-on acquisitions, for an average multiple of 6.8x adjusted EBITDA

· Pipeline of earnings enhancing acquisitions well developed, and in a strong financial position to capitalise on opportunities

· Integrations on-track and acquisitions performing in-line with pre-acquisition expectations

Current trading and outlook

· We expect to continue delivering strong financial performance with trading for the full year expected to be slightly ahead of expectations incorporating continued high single digit organic growth

· Ten acquisitions completed this financial year, further deepening our presence in compliance software, employment law & HR and occupational health across GRC, as well as in TIC division

· Group successfully managing inflationary environment via customer pricing and both staff retention and recruitment strategies performing strongly

· Finance costs for the full year will reflect the increase in borrowing costs due to the significant increase in base rates and the enlarged debt facilities

· Continued strong levels of demand across Marlowe's client base, supported by the non-discretionary nature of our services & software which are driven by regulatory requirements

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

"We are pleased to report another strong performance that demonstrates the resilience of our business and the attractiveness of the compliance software and service growth markets that we serve.

We have been able to further increase Group margins in the period, reflecting the continued realisation of operational efficiencies and the successful pass-through of increased inflationary costs to our customers. The software and services we provide are predominantly non-discretionary and based on multi-year contracts and SaaS based subscriptions, which provides excellent revenue visibility.

Alongside delivering strong organic growth of 8% in the period, we completed 10 bolt-on acquisitions in line with our strategy to deepen our presence across our compliance markets. We benefit from a well-designed organisational structure which allows for significant acquisition and integration capacity and these programmes are on track.

The Group's run-rate revenues and adjusted EBITDA have grown to £468 million and £83 million respectively, and we remain confident of achieving our run-rate targets of £500 million of revenues and £100 million of adjusted EBITDA materially ahead of the end of FY24. We have made a strong start to the second half, with good levels of organic growth, and we remain well positioned to benefit from the opportunities within our pipeline of earnings-enhancing acquisitions."

CHIEF EXECUTIVE'S REVIEW

Group Results

The Group delivered another strong financial performance in the half-year. Revenue grew 66% to £222.9 million, driven by organic growth of 8% and the contribution from acquisitions.

The Group benefits from attractive pricing power because of the value customers place on the high standards of compliance we deliver, and we are driving Group efficiencies due to the operational improvements we have implemented, our increased scale and our success with delivering integration programmes. These factors have contributed to an adjusted EBITDA increase of 80% to £39.2 million with adjusted divisional EBITDA margins increasing by a further 100bps to 18.8%.

Operating in highly cash generative sectors, a key management focus is free cash flow. We can redeploy these cash flows into bolt-on M&A activity which, alongside the organic growth that we deliver, creates highly attractive returns for our shareholders. Cash generation is a key performance indicator on which we focus closely and which we want our stakeholders to follow easily, as cash-flow can become opaque in a dynamic high-growth business undertaking many acquisitions. The Group generated £27.8 million (HY22: £14.9 million) of underlying free cash flow before interest and tax in the period. The table on page 14 provides more detail.

Statutory EBITDA increased to £26.3m (HY22: £13.6m). Statutory operating profit increased to £5.7 million (HY22: £2.8 million). Profit before tax was £1.7 million (HY22: £1.6 million). Basic earnings per share was 1.1p (HY22: 1.7p). This reflects the major investment in restructuring and integrating acquired businesses, and also the higher levels of non-cash amortisation of acquired intangibles.

At 30 September 2022 adjusted net debt was £156.2 million (HY22: £41.2 million), excluding lease liabilities of £28.0 million (HY22: £20.5 million), with a proforma net debt/adjusted EBITDA gearing ratio of 2.1x, within the target range of 1.5x-2.5x. The increase in net debt is directly attributable to the level of M&A activity undertaken over the 12-month period.

Strong organic growth

The need for Marlowe's compliance solutions is underpinned by strong structural growth drivers. Regulations continually evolve, become more complex and exist amidst an expanding associated enforcement burden. As a result, businesses have an increasing need for external expertise, consultancy and assurance services to ensure that they remain compliant.

Strict insurance requirements and regulatory fines associated with non-compliance are increasing. The average health & safety fine in the UK increased 381% from 2018 to 2022. Our proposition keeps our customers compliant in this stringent regulatory environment and ensures their workforces and organisations are healthy, safe and efficient.

In addition to benefiting from these tailwinds, we accelerate organic growth by cross-selling and up-selling our services and software across our business lines. The same individual in our clients' organisations is often responsible for several compliance areas, whether Head of Risk, a Health & Safety Director, an HR Director, or an SME business operator. For example, the person responsible for procuring fire and security services is often also responsible for procuring water & air hygiene services and health and safety software. Similarly, if an individual is responsible for procuring HR and employment law services, they are also likely be responsible for procuring occupational health, compliance eLearning or HR software. This same channel to market allows us to successfully cross-sell services and software to existing customers, which each year contributes around c.2% to our organic growth.

Currently over 40% of our customers take at least two of our service or software offerings, a proportion that we expect to continue increasing as we promote our proposition as a one-stop-shop for our customers' compliance and regulatory needs. Notable examples in the period include:

· A 5-year EHS intelligence subscription to an existing eLearning customer (a big four accountancy firm)

· A c.£1 million cross-sell between our fire safety division (TIC) and our health & safety division (GRC) to a property management customer

· An eLearning solution to an existing hospitality chain client (40,000 employees) in safety & compliance standards. This particular client started as an employment law advisory client before then quickly developing into a retained Health & Safety services client. Subsequently, it then awarded Marlowe a national fire risk assessment contract and has recently taken on our eLearning software solution.

Software is a core part of the service that we deliver, a key competitive differentiator and a central part of our future growth strategy. Our SaaS revenues are generated through recurring monthly subscriptions, typically as part of 3+ year contracts and we achieve customer net retention rates which are consistently over 100%. This is the result of their undesirable switching costs, the high compliance standards they result in and the customer success and account management that we deliver which results in strong upsell metrics. Our Compliance Software business now generates over £39 million of ARR which we expect to continue to grow at a fast pace as we continue to deliver strong organic growth and deliver selective acquisitions which will broaden our SaaS capabilities and deepen our scale. 

We are now a business with run-rate revenues of £464 million and with this scale comes a number of competitive advantages. Firstly, we have a broad scope of capabilities and geographic coverage to service customers nationally across their compliance requirements. Alongside this, we have a strong and increasing inhouse capability and specialist knowledge with over 130 software developers and some 3,500 fee-earning specialists with extensive compliance expertise. We leverage this knowledge to enhance and develop our software and service offerings and bring software products and services to market organically, allowing us to deepen our customer relationships and cross-sell even more effectively.

Resilient business model

Marlowe's services and software are underpinned by regulations and are therefore predominantly non-discretionary and essential throughout the economic cycle. For example, all businesses and public sector organisations need to comply with the Health & Safety at Work Act. This law has several requirements including the need for a Health & Safety Risk Assessment to be completed and recorded by a competent person if a business has five or more employees. Additionally, employees must be provided with adequate health & safety training which can be conducted via eLearning software. These are both services that Marlowe provides on a recurring basis. The cost of non-compliance is significant including large fines, increased insurance premiums and, for the most serious offences, prosecution or even imprisonment. In addition, the brand and reputational risk for organisations presented by non-compliance is significant. The non-discretionary nature of services and software we provide, often over multi-year contracts, underpins the high visibility of our revenues with approximately 85% recurring.

The majority of Marlowe's direct and indirect costs are our people and we have seen some wage inflation during the period. This inflation has been successfully mitigated through inflation-linked contractual arrangements with our clients or via increased contract pricing and we have not seen an adverse margin impact as a result. The Group is not exposed to other material inflationary cost pressures, and we do not expect inflation to adversely impact the Group's operating margins going forward.

Marlowe has over 50,000 customers spanning more than 50 different sectors, ranging from large multinational companies to SMEs, as well as government and public sector organisations. Within this, no single customer contributes more than two percent of Marlowe's total revenue. The typical SME we work with has around 70 employees. Within GRC, customers pay for our services and software in advance as a monthly subscription and are usually committed to 3 or 5 year contracts. In TIC, we are paid monthly in arrears as part of similarly long-term contracts and we protect our cash flows by using credit insurance.

Our software and service offerings are a relatively small cost for our customers. This, coupled with our high levels of service and technology benefits, as well as the increasing cost of non-compliance, means we successfully maintain long-term customer relationships, with an average duration of over 12 years. There also exist significant implementation costs and risks for customers changing compliance service provider and long-term customer loyalty is created in part due to our software-related offerings, which are typically provided in conjunction with our services. We do not expect the potential macro-economic downturn to have any significant impact on levels of client demand for our services

Strengthening and integrating

We have a well-designed organisational structure which is focused on divisional entrepreneurial autonomy and agility. This structure gives our operational managers the clear responsibility and necessary resources to deliver profitable organic revenue growth, whilst also driving integration programmes at pace. Each of our six business lines has an entrepreneurial management team supported by dedicated integration resources and a well-developed integration methodology. This siloed approach to integration means we can undertake multiple integrations simultaneously and that we benefit from significant bandwidth to continue successfully accelerating our growth via bolt-on acquisitions whilst allowing our management teams to focus mainly on organic growth, whilst still actively overseeing and directing their integration strategies.

Restructuring acquired businesses is an essential part of our integration programmes and ensures that our operating models, efficiencies and customer service standards are optimised. Restructuring costs as a percentage of capital deployed continue to reduce over time, and we are achieving attractive returns from this effort and investment. The integration of acquired businesses is typically completed within a year of acquisition, though is often in a significantly shorter timeframe for smaller acquisitions.

Integrating businesses is essential for driving cost and revenue efficiencies. For example, prior to its acquisition by the Group, 20% of the profits of Ellis Whittam (now rebranded to WorkNest within the Employment Law, HR and Health & Safety space) were consumed by third party software licensing costs. As a result of Marlowe's software capability, these costs have now been insourced with Group software displacing the third-party software, improving the client experience and significantly enhancing our margin.

Disciplined approach to M&A

We have so far completed 10 bolt-on acquisitions in FY23 for a consideration of £44 million. These acquisitions deepen our presence across GRC in compliance software, employment law & HR, occupational health and in our TIC compliance services. Our continued ability to source and complete bolt-on deals off-market allows us to achieve attractive valuations, with an average of 6.8x adjusted EBITDA multiple (before synergies) paid in the year-to-date.

The markets we occupy are highly fragmented. Our current run rate revenues indicate we serve on average c.5% of our estimated total addressable UK markets of £8.6 billion, yet we are a top three player in each of the compliance segments we service and market leader in three sectors. We use acquisition as a tool to deepen our presence in our current compliance verticals and broaden into new ones. Marlowe is set up favourably to source deals, complete in-house due-diligence and execute on attractive multiples with large dedicated corporate development, strategy and integration planning teams. 

Our pipeline of earnings enhancing acquisitions is well developed, and we are in a strong financial position to capitalise on these opportunities. We expect to report further progress both deepening and broadening our scale and capabilities in the second half of the financial year.

Outlook

We have traded in-line with expectations in first six months of the year. The second half has started strongly and we expect to continue delivering strong financial performance with trading for the full year expected to be slightly ahead of expectations incorporating continued high single digit organic growth.

We are a highly cash generative business which allows us to successfully execute our bolt-on acquisition strategy while operating within our preferred leverage range without the requirement to access the equity markets. We remain confident of achieving our run-rate targets of £500 million of revenues and £100 million of adjusted EBITDA materially ahead of the end of FY24 as originally targeted. We remain well positioned to benefit from the opportunities within our pipeline of earnings-enhancing acquisitions.

Governance, Risk & Compliance

GRC encompasses our consulting and software solutions across Compliance Software & eLearning, Health & Safety, Employment Law & HR and Occupational Health. Our software compliance platforms are used to implement governance frameworks and manage and monitor audit and control risk. The majority of the compliance services we deliver revolve around employees and organisational risks.

1  Earnings before interest, taxes, depreciation and amortisation ("EBITDA")

2 Explanation of non-IFRS measures are contained within the Chief Financial Officer's review

Financial Review

Our GRC division performed well during HY23, with revenue increasing 168% to £92.3million (HY22: £34.4 million). This reflected organic growth along with growth from acquisitions. Organic revenue growth was 7%, and was driven by new business, increased customer retention rates, cross-selling and price increases across our business lines. The vast majority of our GRC revenue is recurring and is delivered as multi-year contracted consultancy or SaaS-based subscriptions.

Adjusted EBITDA increased by 125% to £23.9 million (HY22: £10.6 million), reflecting good organic growth, operational improvements, and the synergy benefit from integrating acquisitions. The adjusted EBITDA margin was 25.9% (HY22: 30.8%). This reflects the mix of business within the division following the significant acquisition activity in occupational health primarily during the fourth quarter of the prior year. Occupational Health now contributes over £110 million of run-rate revenue. Whilst our Occupational Health business is performing well and delivers some of the best margins in its sector, this business line operates at a lower EBITDA margin than some of our other consultancy and software business lines. Excluding Occupational Health, GRC margins have increased by c.300bps, reflecting the ongoing work undertaken to generate operational efficiencies. We expect to increase the divisional margin back to 30% over time, including from integration synergies and operational improvements, additional scale, operational gearing and an increasing proportion of revenue from higher-margin software subscriptions.

Operational review

Compliance Software

Our Compliance Software business line encompasses compliance eLearning and compliance SaaS-based products. Our platforms enable customers to comply with a wide variety of regulations while improving governance and control. One of our key differentiators is that our software is built by developers who are able to collaborate closely with colleagues who are industry practitioners with deep end-market expertise.

Our SaaS activities have delivered continued and buoyant organic revenue growth. We expect this to continue to accelerate in the second half and beyond as we leverage our integrated sales and marketing teams and add additional users at a low incremental cost, which will continue to benefit our margins. Software is usually paid for in advance and is delivered through multi-year subscriptions, with net customer revenue retention rates remaining over 100% as we benefit from low attrition rates and continue to successfully upsell across our customer subscriptions.

We service clients across a wide range of industries over an increasing number of geographies. Our risk management and contractor compliance software is typically focused on enterprise-level clients, while our eLearning and regulatory information offerings are focused on a mix of enterprise and SME customers. We continue to benefit from good customer wins in this space and our organic growth is being accelerated by the major cross-sales opportunity across our service clients.

We now have over 130 software developers within the Group and we benefit from having three key software development hubs in the UK, Ireland and Israel. This allows us to access a larger pool of IT talent, as we continue to enhance and grow our software offerings.

Employment Law, HR and Health & Safety

Our Employment Law, HR and Health & Safety businesses delivers a range of subscription-based consultancy services. These ensure regulatory compliance and safety, and support clients' commercial objectives via the delivery of responsive, support and innovative digital solutions. Our Health & Safety consultants provide advice, conduct audits and risk assessments, and through our software platform customers are able to track safety and compliance. We extend this health & safety proposition into HR and Employment Law compliance, which we cross-sell alongside a range of digital products such as HR, safety and case management software as well as eLearning.

We saw good organic revenue growth in our Employment Law and HR businesses, reflecting new customer growth and the successful implementation of price increases with existing customers. Health & Safety client attrition was slightly higher than target towards the end of FY22 but has now trended back to normal levels and we have experienced good levels of new business in H1 as sales and marketing investments deliver. We expect organic growth for the full year across the business lines to be in the high single digits. Our continued growth is supported by favourable market conditions, notably a greater regulatory burden, increased regulatory interventions and rising insurance premiums. These drive the need for advisory and digital support for employers. There have been 30 major regulatory changes since 2010 relevant to this market, including the 2017 abolition of employment tribunal fees which has resulted in tribunal claims growing 26% year-on-year, a key driver of growth in our services and software.

We completed a number of bolt-on acquisitions in the first half of FY23, as we continued to build scale and deepen our presence in this market. Scale allows us to benefit from operational efficiencies with continued margin enhancement. Our CaseNest IT management system allows us to allocate workload more effectively, by assigning the right case to the right specialist has resulted in a c.20% decrease in the number of specialists required to service the same volume of case work. This platform has been rolled out over the last 18 months as we successfully integrated acquired businesses into the Worknest platform, which benefits from a unified operating structure, a centralised back office, and consistent levels of expert client service, nationally.

Occupational Health

Our Occupational Health business assures regulatory compliance for our clients by improving the physical and mental health of employees, minimising workplace risk and maximising corporate productivity. In many cases occupational health services are regulated by legislation including The Health & Safety at Work Act. The work undertaken is not sector specific and can range from pre-employment health assessments for prison guards or rail workers to, employee assistance programmes and mental health support through to recurring health surveillance programmes for food processing workers to ensure they are not suffering from flour-induced asthma. Such services are often contracted through 3-to-5-year agreements.

Marlowe's Occupational Health business had a transformative year in FY22, including the acquisition in January 2022 of Optima Health to become the leading provider of technology-enabled occupational health services in the UK. Integration plans are on track, we have moved to a single integrated management team and have made strong progress in combining central and support functions where we expect to benefit from over £2 million of integration-related efficiencies during our first year of ownership. Service delivery is in the process of being integrated and we expect significant further operational efficiencies to result from this process. The entire business is moving to the Optima brand and will be operating from unified IT platforms. working across both SME and enterprise clients.

We have seen good organic growth in the first half of the year, and we are benefiting from the breadth of capabilities we can now offer customers. Through our scale we can more efficiently manage clients and also reduce the cost to acquire new clients.

Testing, Inspection & Certification

The majority of our services in TIC revolve around our clients' business premises and include services such as the testing and inspection of water and air systems, hygiene compliance and testing, and the inspection and certification of fire safety and security systems. A large portion of the services we deliver are recurring and are essential to our clients' operations. These are also stipulated by regulatory obligations.

1 Earnings before interest, taxes, depreciation and amortisation ("EBITDA")

2 Explanation of non-IFRS measures are contained within the Chief Financial Officer's review

Financial Review

Our TIC division performed strongly with revenue increasing 30% to £130.6 million (HY22: £100.1 million), reflecting strong organic growth and the benefit from acquisitions. Organic revenue growth was 9% reflecting above-market growth within Water & Air Hygiene and particularly strong growth within Fire Safety & Security. We have benefited from new customer wins, upselling additional capabilities to existing customers and a focus on customer retention leading to reduced attrition. 

Adjusted EBITDA was up 35% to £18.1 million (HY21: £13.4 million) as a result of organic revenue growth, efficiency improvements and the benefit from integration synergies. The adjusted EBITDA margin also increased to 13.9% (HY21: 13.4%), benefiting from scale efficiencies such as improved route density as we add more customers, resulting in increased revenue per day, per fee earner. We are confident that we can increase EBITDA margins further by continuing to drive integration synergies alongside increasing our scale and efficiency. We have made significant investments in recent months in upgrading and improving our operational platforms and we expect these improvements to lead to significantly enhanced productivity and efficiency.

Operational Review

Fire Safety & Security

The services we deliver across Fire Safety & Security are underpinned by increasing and ever-evolving regulations which apply to commercial premises in the UK, such as the Fire Safety Act 2021. Typically, the burden and legal obligation is put on the occupier or landlord to ensure premises are compliant with these complex regulations, with non-compliance leading to fines, difficulties with obtaining insurance cover and, in the worst-case, injury or loss of life.

Acquisitions have been an extremely effective tool in this business and have enabled us to not only broaden our geographic scope but also our capabilities. We completed three bolt-on acquisitions in the year-to-date, investing £6 million at attractive multiples. Integration of these acquisitions, alongside those made in the latter half of last year, is on track and the businesses are trading in-line with pre-acquisition expectations. 

Our Fire Safety & Security division has continued to deliver particularly strong organic growth, significantly above the market rate. The division now generates run-rate revenue of over £115 million. Through our large geographic reach, ever broadening capabilities and bespoke offerings we can offer customers a one-stop-solution for their fire safety and security needs nationally. We have increased individual customer spend in this space by upselling additional services and deepening our client relationships with improving client retention levels. Our recent sales & marketing success has seen strong levels of new business with clients across a broad range of sectors including petrol forecourts, food, distribution and logistics. By providing both market-leading levels of compliance, and broad capabilities, we can effectively displace competitors who struggle to achieve our compliance service levels and lack our breadth of offering. An example of our additional capabilities is our expansion into the highly attractive passive-fire services1 segment of the market where we have delivered very strong growth in the period.

Margins have continued to increase as we build route density, centralise support roles and have an increasing capability to deliver services remotely. Additionally, we can now more successfully triage work through our operational IT systems, to ensure we deploy a fee earner with the correct expertise which leads to greater revenue per day, per fee earner and improves service levels for clients.

We have made a positive start to the second half of FY23, and we expect to see continued strong organic growth as we continue to execute our strategy in this fragmented market.

1A group of systems that compartmentalise a building through the use of fire-resistance-rated walls/floors, doors and gap-filling measures

Water & Air Hygiene

Our market-leading Water & Air Hygiene business generates run-rate revenues of over £150 million and has the broadest service capabilities and coverage in its markets. The services we provide benefit from strong structural tailwinds, in particular from stringent regulations that continue to evolve and increase.

We have seen good organic above-market growth, driven by upselling our capabilities to existing customers and from particularly strong growth within our air & environmental services. We serve 14,000 customers across numerous industries and are the market leader in this space in terms of scale and capability. As we build this scale, we build route density and therefore benefit from increasing revenue per day per fee earner. We have seen good levels of new customers, and no change to typical customer attrition levels with an average customer longevity of around 11 years.

The integrations of the FY22 acquisitions are ahead of schedule and are outperforming our initial expectations as we leverage our well-invested and well-rehearsed integration teams to drive synergies and implement operational improvements. We have continued to invest significantly in operational technology, and we expect to see further margin improvements come through within the next 12 months as we build efficiency, control, and productivity levels. We have also completed the implementation of a new proprietary operating system, Wave, which is beginning to contribute to enhanced scheduling, service and back-office efficiency. This is a system that we have developed in-house over the past two years to support the delivery of our services and improve the client experience and our profit margins. 

Within Water, we have seen slightly higher cost inflation in comparison to the rest of the Group due to the use of raw materials, such as water treatment chemicals, in the delivery of our services. However, we are successfully maintaining margins as we pass these costs onto our customers through both inflationary-linked contracts and annual or biannual reviews.

We have seen a good start to the second half of FY23 and we expect to continue to outperform the market as we benefit from strong customer goodwill and our ability to service nation-wide companies with our scale and very broad capabilities.

CHIEF FINANCIAL OFFICER'S REVIEW

Revenue in the half grew to £222.9 million (HY22: £134.5 million). The increase reflects continued strong organic growth of 8%, combined with contribution from acquisitions completed in the year and the full year benefit of those completed in HY22. Organic growth is measured by comparing current year revenues to prior year revenues. These are adjusted to include the pre-acquisition performance of acquired business as if they had been part of the Group for the same part of the prior year, so that a complete like-for-like comparison can be made. The benefit of this approach is that it provides insight as to how recently acquired businesses, along with our existing business, are performing organically.

Adjusted operating profit increased by 85% to £30.4 million (HY22: £16.4 million) and adjusted EBITDA increased by 80% to £39.2 million (HY22: £21.8 million). Adjusted EBITDA means operating profit before interest, tax, depreciation and amortisation and excludes separately disclosed acquisition and other costs. Group divisional adjusted EBITDA margin increased to 18.8% from 17.8% in HY22. The increase in margin demonstrates the successful execution of our Deepen, Broaden, Strengthen and Digitalise strategy which has seen organic margin improvement in our existing businesses, complemented by the increase in size of the higher margin GRC division. On a statutory basis, operating profit increased by 104% to £5.7 million (HY22: £2.8 million).

Adjusted profit before tax was £26.4 million (HY22: £15.2 million). On a statutory basis, profit before tax for the half year was £1.7 million (HY22: £1.6 million).

Non-IFRS measures

The interim financial results contain all the information and disclosures required by all accounting standards and regulatory obligations that apply to the Group. The results 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 an underlying 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 acquisitions, costs associated with those acquisitions, subsequent integration costs 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.

A reconciliation between statutory operating profit and EBITDA is shown below:

A reconciliation between statutory profit and the adjusted performance measures noted above is shown below:

Acquisition and other costs

Acquisition and other costs totalled £1.5 million in the half year (HY22: £2.0 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 a key component of delivering shareholder value by increasing returns made on acquired businesses. Restructuring costs for the first half of the year were £10.0 million (HY22: £3.4 million). The increase reflects the significant step up in both the scale and pace of acquisitions during the latter half of last year including the acquisition of Optima Health for £135 million and £70 million capital deployed on compliance software acquisitions. Restructuring costs as a percentage of the capital we deployed during the last 12 months reduced, and we expect this trend to continue as integration programmes are on-track and typically restructuring costs primarily consist of:

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

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

· IT costs associated with the integration and transfer to Group IT systems, including costs of third party software used in the delivery of customer contracts where there is a programme to transition such software to one of the Group's existing platforms The majority of these costs are incurred in the 12 months following the completion of an acquisition.

Amortisation of intangible assets for the half year was £11.8 million (HY22: £5.4 million). This increase is attributable to the higher carrying value of intangible assets resulting from the continued execution of the Group's M&A strategy.

Certain legacy and share-based long term incentive schemes have been established to incentivise 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 the charge associated with these schemes to be similar to "Acquisition and other costs" as we continue to execute our stated strategy. Share-based long term incentive costs increased to £1.4 million (HY22: £ 1.2 million) during the half.

Further details behind our approach to the treatment of acquisition and other costs can be found in note 3.

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.

*Refer to note 5

Interest

Finance costs, excluding exceptional finance costs, amounted to £4.0 million in the first six months (HY22: £1.2 million). This movement reflects the increased costs of borrowing driven by SONIA and higher levels of utilisation of the Group's enlarged debt facilities following a refinancing in February.

Taxation

UK Corporation Tax is calculated at 19% (FY22: 19%) of the estimated assessable profit for the year. In addition, deferred taxes at the statement of financial position date have been remeasured to reflect the 25% tax rate from 1 April 2023.

Statement of financial position

The Group looks to maintain a strong balance sheet that is commensurate with the high levels of recurring revenues associated with the business model. Net assets as at 30 September 2022 were £448.1 million (30 September 2021: £266.3 million). This increase is primarily driven from the completion of acquisitions in the 12-month period and the two associated equity placings, the largest of which occurred on completion of the acquisition of Optima Health in January 2022. Property, plant and equipment totalled £13.6 million (30 September 2021: £10.2 million), comprising freehold and long leasehold property, leasehold improvements, operational equipment, vehicles and computer systems.

Cash flow

The Group benefits from revenues which have beneficial underlying working capital characteristics. As a result, working capital as a % of revenue at the half year was 4%. During the first half the Group experienced an increase in working capital requirements, driven by strong organic growth, acquisitions and the effects of timing. The majority of these factors are temporary with £6.0 million relating to billing cycles which include the implementation of a new operating and billing system in our Water & Air Hygiene business and short-term delays to billing on project work in our Fire and Security business. These have led to a temporary increase in accrued income which we expect to unwind in the second half. The change in system reflects our continued commitment to the integration of acquisitions and has been completed successfully.

In addition, we have seen £3.8 million of non-billing timing differences which largely relate to insurance prepayments made in the first half which cover the entire year. The £4.9 million of non-billing timing differences in the prior year relates to the unwind of COVID related VAT and payroll tax benefits in HY21 alongside insurance prepayments.

In total we expect c£10 million of the increase in working capital to unwind in the second half. We have also seen post acquisition working capital movements of £3.0 million which will not unwind but are not part of underlying cash conversion. These include aligning VAT quarters in acquired businesses with the remainder of the Group. Once these factors have been taken into consideration, underlying operating cash flow conversion in the first half was 91%, slightly above our medium-term target. A reconciliation of our underlying free cash flow and cash conversion is below. We expect full year cash conversion of approximately 90%.

Net cash from operations was £22.6 million, an increase of 82% on the prior year (HY22: £12.4 million).

Capital expenditure totalled £7.6 million (HY22: £3.3 million) reflecting the increased scale of the Group and further investment in our software systems and ongoing investment in our businesses.

Net debt and financing

Net debt as at 30 September 2022, including inter alia £28.0 million of lease liabilities, was £184.2 million (FY22: £133.3 million). Net debt (excluding lease liabilities) at the half was £156.2 million (FY22: £108.8 million). The increase in net debt reflects the successful execution of the M&A strategy with over £250 million deployed in the last 12 months. 

In February 2022 the Group announced a new £180 million, 3-year, RCF facility which extended the lending syndicate to a total of six lenders and included a £60 million optional accordion facility. In October the Group exercised £53.3 million of the accordion facility through the support of the existing syndicate.

As a result, the Group remains well funded and continues to have sufficient resources, including headroom on its financing facility, to meet the needs of the Group and to fund acquisitions as part of its 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, adjusted EBITDA, adjusted profit before tax, adjusted operating profit and cash-flow, including debtor analysis.

Unaudited Consolidated Statement of Comprehensive Income

For the six months ended 30 September 2022

Unaudited Consolidated Statement of Changes in Equity

For the six months ended 30 September 2022

Unaudited Consolidated Statement of Financial Position

As at 30 September 2022

Unaudited Consolidated Statement of Cash Flows

For the year ended 31 March 2022

Notes to the consolidated Interim Report

For the six months ended 30 September 2022

1. Basis of Preparation

Basis of preparation

The consolidated interim financial information of the Group for the six months ended 30 September 2022 was approved by the Board of Directors and authorised for issue on 23 November 2022. The disclosed figures are not statutory accounts in terms of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 March 2022, on which the auditors gave an audit report which was unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006, have been filed with the Registrar of Companies. The annual financial statements of the Group are prepared in accordance with applicable law and UK-adopted International Accounting Standards (UK-IAS).

The comparative figures for the financial year ended 31 March 2022 and the six months ended 30 September 2021 are consistent with the Group's annual financial statements and interim financial statements respectively.

Going concern

Based on the Group's cash flow forecasts and projections, the Directors are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future. Whilst the Group saw some disruption from COVID-19 during the previous financial year, the impact was manageable and, given the regulations that govern the requirement for its essential services, the business model has demonstrated resilience. In the event of further disruption to the business in the future as a result of COVID-19 or an escalation of the crisis in Ukraine 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. They continue to adopt the going concern basis of accounting in preparing these interim financial statements.

Accounting policies

This interim report has been prepared in accordance with the recognition and measurement requirements of UK adopted International Accounting Standards (IAS) but does not include all the disclosures that would be required under IAS. The accounting policies adopted in the interim financial statements are consistent with those adopted in the last annual report for financial year ended 31 March 2022 and those applicable for the year ending 31 March 2023.

There were no new relevant Standards or Interpretations to be adopted for the six months ended 30 September 2022.

Critical accounting estimates and judgements continue to be applied to the identification of separable intangibles on acquisition and rate of customer attrition, acquisition and other costs, valuation of separable intangibles on acquisition, impairment of non-financial assets, impairment of trade receivables and recoverability of amounts due from contract assets.

2. Segmental analysis

The Group is organised into two main reporting segments, Governance, Risk & Compliance ("GRC") and Testing, Inspection & Certification ("TIC"). The key profit measures are adjusted operating profit, adjusted EBITDA and adjusted profit before tax and are shown before acquisition and restructuring costs, amortisation of acquisition intangibles, fair value gains/losses in contingent consideration, and share based payments and legacy long term incentives. 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 cash. Central assets include acquisition intangibles, deferred tax and head office assets. Segment liabilities comprise operating liabilities. Central liabilities include deferred tax, corporate borrowings and head office liabilities. Capital expenditure comprises additions to application software and property, plant and equipment. Segment assets and liabilities are allocated between segments on an actual basis.

Six months ended 30 September 2022 - Unaudited

Six months ended 30 September 2021 - Unaudited

Audited year ended 31 March 2022

Six months ended 30 September 2022 - Unaudited

Six months ended 30 September 2021 - Unaudited

Audited year ended 31 March 2022

The above tables reconcile segment adjusted operating profit/(loss) to adjusted EBITDA, which excludes separately disclosed acquisition and other costs, to the standard profit measure under IFRS (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 directly comparable with other companies' adjusted profit measures. It is not intended to be a substitute, or superior to, IFRS measurements of profit.

Major customers

For the six-month period ended 30 September 2022, no customers (30 September 2021: nil) individually accounted for more than 10% of the Group's total revenue.

3. Adjusting items

Due to the nature of acquisitions and other costs in relation to each acquisition and the non-cash element of certain charges, the Directors believe that adjusted operating profit, adjusted EBITDA and adjusted measures of profit before tax and earnings per share provide shareholders with a more appropriate 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. The adjusting items shown on the consolidated statement of comprehensive income and the rationale behind the Directors' view that these should be included as adjusting items are detailed below:

4. Taxation

The underlying tax charge is based on the expected tax rate (19%) for the year ending 31 March 2023 applied to taxable trading profits for the period.

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. Intangible assets

8. Business Combinations

During the period ending 30 September 2022 the Group made 10 acquisitions. The provisional fair values are as follows:

9. Trade and other receivables