Kellan Group Results and Restructure
Kellan Group Results and Restructure
Kellan Group PLC has announced its preliminary results for the group for the 12 month period ended 31 December 2011.
· 54.5% increase in adjusted EBITDA profit to £0.17 million (2010: £0.11 million) (note 2).
· Continued streamline improvements with administrative expenses (excluding impairment, amortisation, depreciation, shared based payments and restructuring costs) reducing by 13% year on year from £12.2 million in 2010 to £11 million in 2011.
· Improved operating loss (before impairment charge) position of £0.44 million for the year (2010: £0.85 million).
· Non-cash goodwill & Intangiblesimpairment charge of £5 million (2010: £9.5 million).
· (5.72) p per basic and diluted share, compared with (11.1) p per basic and diluted share for 2010.
· £1.40 million raised subsequent to the year end through share subscription and £1.26 million facility in place to draw down against repayment of bank senior debt (at favourable interest rates), conditions only on the final issuance and admission of subscription shares to AIM. Conclusive financing package to fund the growth in fee earners with the aim to execute management's growth strategy.
· £0.65 million of loan notes converted to equity to reduce financing costs and improve leverage ratio for the Group.
The market upturn of late 2010 proved short-lived and as a consequence 2011 was another challenging year for Kellan Group, but one in which adjusted EBITDA profit for the year of £0.17 million showed a 54.5% increase against 2010 and costs were reduced by a further 13% through tight control.
In February 2011 the Group secured an additional £1.35 million of funding. At that time the markets still looked promising and we were able to move our growth strategy forwards, bringing on board a number of industry-leading recruitment professionals who share our vision for the Group. They set about the task of restructuring parts of the Group and improving each brand's position in our key markets. These new fee earners were in place just at the time the recruitment market dipped again and the expected Net Fee Income growth was therefore not realised. Aligning our overall business with the market, we reduced our workforce to 162 (2010:185).
We also continued the ongoing restructuring of our property portfolio, exiting a further two properties and sub-letting one property in 2011.
We initially approached 2012 with a high degree of caution due to the volatile nature of the economic environment, with the management team maintaining its focus on Net Fee Income growth, cost control and working capital management. Our outlook has changed for the better, however, with the announcement today of a placing to raise £1.40 million from existing investors, which will be available for investment in fee earners and projects to stimulate growth and £1.26 million as a drawdown facility that can be drawn down in line with the scheduled repayments of the existing bank term loan. Also £0.65 million loan notes converted to equity to reduce financing costs and to improve the leverage ratio of the group.
We welcome Rakesh Kirpalani to the Board following 18 months as the Finance Director. Guiding the Group through the past year has taken considerable skill, patience and diplomacy and we are delighted to have him with us.
John Bowmer's California base has dictated that he steps down as co-Chairman. I am extremely grateful for his expertise and support as my Co-Chair and I am sure that his vast experience and insight will continue to be readily available to us in his role as non executive director.
Our people have demonstrated consummate professionalism, resilience and good humour during the past year supported by a creative and dedicated team of managers - we would like to thank them all for their dedication and sterling efforts on behalf of our customers.
We would also like to thank the unwavering support of the Group's shareholders whom we join in looking forward to improved market conditions and the realisation of the tremendous potential in the Group.
20 September 2012
Chief Executive Officer's Report
After a slow start to 2011 there were short lived signs of an upturn before renewed concerns around the Euro zone and sovereign debt hit business confidence and forced a further retraction of the recruitment market. The Group has used this time to reshape a number of its key brands in readiness for the delayed but inevitable upturn as well as successfully controlling and further reducing costs. With additional funding now secured, the Group is out of survival mode and can now look forward with real purpose, determination and optimism.
Although the revenue of £26.9 million (2010: £29.8 million) represents a year on year reduction of 9.8%, the benefits of our 2010 cost reduction strategy combined with further efficiency savings during 2011 led to a significant reduction in operating losses for the year before non-cash goodwill & intangibles impairment charge to £0.44 million. (2010: £0.85 million operating loss). Sequentially, the Group made a H2 2011 profit of £0.26 million at adjusted EBITDA level (2010: £0.17 million adjusted EBITDA profit) compared with a H1 2011 loss of £0.09 million (2010: £0.24 million adjusted EBITDA loss)
Phase 2 of our growth strategy was implemented following the securing of £1.35 million additional funding in February 2011 to support the organic growth of the Group's established brands. We maintained our plan to grow our temporary and contract business at a quicker rate than permanent business to ensure the Group is more resilient to adverse changes in the macro economic climate. During the year it became apparent that further changes were necessary within some of the brands and our strategy was revised accordingly to accommodate this.
Phase 3, the strengthening of the Group's brands through tuck-in acquisitions, is planned to commence once sustained profitability is achieved.
Berkeley Scottmaintained its position as market leader in the hospitality and leisure markets. In a very difficult climate the company showed creditable flexibility in being able to adapt its business to deliver a performance very similar to that of 2010. The senior appointment and general management businesses remain consistent and our chef specialism continues to be a real focus in the corporate client and independent hotel and leisure markets. We are also seeing increased competition from in-house recruitment teams and smaller niche businesses. Overall 2012 remains difficult to predict with significant opportunities presented by the Olympics tempered by continued pressure on temporary margin and permanent fees.
Quantica Technology, the Group's IT specialist, continued to build its London and regional UK operations and has now established robust trading links across mainland Europe. The company defended its position in a very challenging environment to deliver a performance largely in line with 2010. Most encouraging was the growth of the contract business in line with our Group strategy. 2012 has started well for Quantica Technology and we believe that they will benefit from the predicted leadership of IT in any recovery.
Following a leadership change for our RK and search brands at the beginning of H2, we confirmed our focus on developing the qualified end of the market through the launch of Robinson Keane Finance Professionals. This frees RK Accountancy to concentrate on the non-qualified and clerical side of the market where its strength has traditionally resided. Both businesses are in an excellent position to make the most of any market improvements.
The Group has been considerably strengthened by the launch in January 2012 of Robinson Keane HR Professionals by two of the HR industry's top recruiters. This is a resilient part of the professional recruitment market and naturally has tangential benefits to all the other brands in the Group.
I would also like to thank our increasingly loyal customer base and our shareholders for their invaluable support throughout 2011. 2012 started in the same vein as the end of 2011 - fleeting signs of improvement in a nervous and volatile trading environment. We have been carefully managing costs and cash whilst maximising opportunities to take market share in a taciturn economic climate. During this challenging time, the Group's staff has worked with tireless enthusiasm, flexibility and spirit to protect, develop and enhance our service offerings and I would like to thank them for their patience, commitment and loyalty.
I would particularly like to thank our Finance Director, Rakesh Kirpalani, for his invaluable, unwavering and expert support. He has played a significant role in rationalising the Group's cost base by driving efficiencies where possible and I welcome him warmly to the Board.
The newly secured funds will allow us to robustly support these excellent people who have helped us through this difficult period. We will invest in making sure they are fully equipped to exploit our growth opportunities and to place the Group at the forefront of our specialist markets. There are very exciting and positive times ahead for everyone associated with Kellan Group.
Continued cost control translated to a significantly reduced operating loss before impairment to £0.44 million (2010: £0.85 million) with the group reaching a break even position at an Adjusted EBITDA level in the second half of the year.
Administrative expenses have decreased to £16.3 million in the year to 31 December 2011, from £22.71 million in 2010. Adjusting the cost base for the impairment, amortisation, depreciation, share based payments and restructuring, like for like costs have reduced from £12.2 million for the year to 31 December 2010 to £11 million for the year to 31 December 2011 which represents a reduction of 13% year on year.
The Group's revenue for the year ended 31 December 2011 was £26.9 million representing a decrease of 9.8% (2010: £29.83 million). This produced Net Fee Income ("NFI") of £10.85 million for the year ended 31 December 2011, a decline of 12.4% (2010: £12.39 million).
Impairment of Intangibles
The impairment review undertaken in 2011 resulted in a non-cash goodwill & intangiblesimpairment charge of £5 million (2010: £9.48 million).
The non-cash impairment of goodwill and intangibles reflects a conservative view to the future growth prospects based on the macro-economic conditions currently in place. Whilst the business aspires to grow at a much faster rate, management deemed it appropriate to impair the intangibles to ensure a fair valuation based on current market conditions.
Monitoring, risk and KPIs
Risk management is an important part of the management process throughout the Group. The composition of the Board is structured to give balance and expertise when considering governance, financial and operational recruitment issues. Meetings incorporate, amongst other agenda items, a review of monthly management accounts, operational and financial KPIs and major issues and risks facing the business.
The most important KPIs used in monitoring the business are as follows:
31 December 2011
31 December 2010
Net Fee Income
Adjusted EBITA as a % of Net Fee Income
Days sales outstanding (DSO)
Headroom on working capital facilities
The principal risks faced by the Group in the current economic climate are considered to be financial, market and people related:
• Financial- The main financial risks arising from the Group's activities are liquidity risk and credit risk. These are monitored by the Board and are disclosed further in notes 1 and 16 of the financial statements.
The Group reset the financial covenants contained in its borrowing agreement with its lender during 2011 and remain within agreed levels at 31 December 2011.
In February 2011 the Group raised £1.35 million of funding through a combination of new equity and convertible loan notes. The Group also entered into an amendment letter to restructure its debt with respect to its existing facilities agreement with its lender. Under the amendment letter, the Group's lender had agreed to a repayment holiday to be applied to all principal amounts outstanding under the facility during 2011. The Group had previously been repaying £210,000 of capital per quarter and as at 31 December 2011 an aggregate principal amount of £1.68 million (2010: £1.68 million) remained outstanding under the facility. These quarterly payments were subject to a one year repayment holiday and repayments of the principal amount outstanding under the facility recommenced on 31 March 2012, with repayments remaining at £210,000 of capital per quarter.
In September 2012 the Group raised £2.66 million of funding through a combination of new equity of £1.40 million and a drawdown facility of £1.26 million that can be drawn down in line with the scheduled repayments of the existing bank term loan. The Group also entered into an amendment letter to restructure its debt with respect to its existing facilities agreement with its lender with repayments of the principal amount outstanding under the facility to continue as planned, with repayments remaining at £210,000 of capital per quarter. Also, £0.65 million loan notes converted to equity to reduce financing costs and improve leverage ratio for the group.
Based on the Group's latest cash flow forecasts and current trading performance it is not expected that any further funding will be required for the foreseeable future. The directors' consideration of the appropriateness of the going concern basis in preparing the financial statements is set out in note 1 to the financial statements.
• Market- the Group operates in a dynamic market place and constantly seeks to ensure the solutions it offers to customers are completive. By operating in various diverse sectors, the Group is, to some degree, protected from a deteriorating market. Nevertheless, throughout most of 2011 the economic downturn significantly affected the recruitment sector. The depth and length of the downturn, combined with the Group's predominance of permanent recruitment fees, generated mostly in the UK, represent a risk.
• People- In a people intensive business, the resignation of key individuals (both billing consultants and influential management) and the potential for them to exit the business taking clients, candidates and other employees to their new employers is a risk. Kellan mitigates this risk through a number of methods including the application of competitive pay structures and share plans to incentivise retention. In addition the Group's employment contracts contain restrictive covenants that reduce a leaver's ability to approach Kellan clients, candidates and employees for certain periods following the end of their employment with the Group.
Net cash outflow at operating level was £0.64 million for the year ended 31 December 2011 (2010: £0.23 million inflow). Investing activities comprised of capital expenditure of £270,000 (2010: £111,000). Net cash inflow from financing activities amounted to £964,000 (2010: £411,000 outflow) comprising the net proceeds of convertible loan notes and the repayment of invoice discounting facility balances as well as the servicing of loan interest. The net increase in cash and cash equivalents in the period was £60, 000 (2010: £291,000 decrease).
Chief Executive Officer
20 September 2012