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The Rethink Group plc Interim Results Show Positive Performance

The Rethink Group plc Interim Results Show Positive Performance

The Rethink Group is pleased to announce its interim results for the six months ended 30 June 2012.

Financial Highlights

&sect Revenue increased 28.2% to &pound44.1m (H1 2011: &pound34.4m)

&sect Gross Profit increased 33.3% to &pound10.4m (H1 2011: &pound7.8m)

&sect PBT of &pound0.3m (H1 2011: &pound0.4m)

&sect EBITDA of &pound0.59m (H1 2011: &pound0.64m)

&sect Net debt of &pound8.3m (FY 2011: &pound7.1m, H1 2011: &pound8.3m)

&sect Basic earnings per share 2.407 pence (H1 2011: 3.250 pence)

Operational Highlights

&sect Major Investment in Recruitment initiatives, including:

- the establishment of a Retail Division to support large retail customers

- the expansion of the Berkley Pharmaceutical brand into the UK

- further investment in key personnel in Ireland, Houston, Singapore & Dubai

- launch of Otravida, our Search & Selection brand

&sect Technology Services signed a partnership with SAP

&sect Group staff numbers increased to 260 (H1 2011: 213)

Jon Butterfield, Chief Executive Officer of Rethink, commented: "I am pleased to report we have increased revenues and gross profits for the six months to June 2012.

"There have been some opportunistic strategic investments made in key areas, which in the short term have increased costs. In addition post period end, in July and August, we experienced an unexpected decline in permanent revenues within the Recruitment Division. Despite activity having since returned to expected levels, our results for 2012 will be impacted, and we therefore expect full year results to be substantially below current market forecasts.

"Despite these challenges, we believe Rethink is well positioned to continue its track record of growth in 2013 and beyond, in addition, the Group is approaching a scale where our investment in resources will translate into greater profits."

Chairman and CEO's Statement

Despite the challenging economic climate both in the UK and globally, we were pleased to have increased revenues in the six month period to 30 June 2012 by 28.2% to &pound44.1m (H1 2011: &pound34.4m). At the same time, gross profits (net fee income) increased by 33.3% to &pound10.4m (H1 2011: &pound7.8m).

As Rethink entered 2012, it was decided by the Board to invest significantly in new fee earners in order to continue to build the service delivery capability of the Group, and to create scale to best position Rethink for future organic growth. As a result, at today's date, the Group has 185 fee earners, compared with 144 as at 31 December 2011. This, alongside other additional headcount, equates to an annualised increase in the cost base of approximately &pound2m.

The results for the first six months of 2012 reflect this substantial investment in the cost base and operating profit margins declined to 4.4% (H1 2011: 6.9%). We expect the positive impact of this investment to be seen in 2013 and beyond as the new fee earners build up productivity, which will in turn translate into increased operating profits.

Post period end, in July and August, the Recruitment Division experienced an unexpected decline in activity which impacted revenues and profits as a number of permanent placements failed to complete. Although activity levels have since returned to expected levels in September, and pipeline business is robust, the weak performance in the two months will not be recouped. As a consequence, results for the full year to 31 December 2012 will be substantially below market expectations and in addition, the Board, with prudence in mind, will not be declaring an interim dividend.

The Board believes that Rethink is well positioned for future growth as the returns from its investments flow through into the core Recruitment Division.

Operational Review

Rethink's structure is aligned to its customer needs be that the implementation of a new system, the hiring of an expert team or the acquisition of first class talent. The Group is divided into three distinct divisions: Recruitment, Talent Management and Technology Services.

Recruitment Division - ReThink, Berkley and Otravida

Rethink has implemented leading edge tools and methodologies to identify the best talent in the shortest possible time we ensure effective delivery for our clients.

With organic growth rates of our largest Recruitment subdivision, ReThink Recruitment, up 35.6% in the period, it continues to outperform the majority of its listed competitors in the UK. Despite the shortfall in July and August, the underlying business is performing well. The investment in the Recruitment Division during the first half of the year in both fee earners and our Academy trainees has bolstered the Group's leading position providing a robust and scalable platform for future growth. In the period, Rethink also established a Retail Division to support large retail customers. The return on these investments is expected to be seen in 2013. The Board anticipates that, Rethink will not make to same level of investment next year, therefore the Group intends to leverage its larger team to maximise return.

The integration of Berkley Recruitment Group ("Berkley") into Rethink during the second half of 2011 and early 2012 following its acquisition last year is complete. A front office operating system has been put in place across the enlarged Group and the back office functions are now all housed in Manchester. We invested in the two Berkley offices in Ireland during the first half and the outcome has been pleasing, in particular the growth in contract business has been a highlight. During the half, we also expanded the Berkley brand to develop its pharmaceutical and life sciences offering into the UK. This was a strategic decision given that the pharmaceutical market is a key area for Berkley in both Ireland and Asia. We are pleased to report that the expansion into this market in the UK is progressing well and that this new division is expected to be breakeven in the second half of the year.

The development of the Berkley operations in Singapore has taken longer than initially expected and we have relocated further resource from the UK to assist with this. In addition we have made a further investment in Dubai and Houston to support the broader Group's Middle East and US expansion plans.

In early 2012 we launched Otravida, our executive Search and Selection division. This division is growing steadily and has made a positive contribution to the Group at the half year. Importantly, pass-through business opportunities are emerging within the Recruitment Division across other brand and service operations - this is a good endorsement of the seniority of the candidates, and confidence of our clients that trust us with their search business.

Revenues have increased to &pound27.4m (H1 2011: &pound14.2m) which includes a full six month contribution from Berkley, acquired in June 2011.

Gross profit from the Recruitment Division has increased by 62.2% to &pound7.3m (H1 2011 restated: &pound4.5m), which includes a full six month contribution from Berkley of &pound1.2m. The underlying organic growth rate excluding the Berkley contribution is 35.6%

Contribution in the period is &pound0.7m, up from the corresponding six month period in 2011 (H1 2011: &pound0.5m).

Talent Management

Rethink does not approach Talent Management in a one-size fits all manner every project demands innovation to ensure the best possible solution, and where appropriate, Rethink provides access to a recruitment process management tool that maximises efficiencies and control. The offering continues to develop and evolve as existing and prospective clients seek to secure our broader expertise to help them plan and apply their technology talent resource in a more effective way to meet their strategic goals.

Revenues in the first six months were &pound14.4m (H1 2011 restated: &pound18.4m). However, gross profit (net fee income) from the Talent Management Division increased to &pound2.02m (H1 2011 restated: &pound1.86m), an increase of 8.6%. The increase in net fee income was due to the change in business mix from contract to permanent recruitment.

The investment in experienced senior management to support the development of this division has led to a short term decline in Contribution to &pound1.3m (H1 2011 restated: &pound1.4m). However we have increased the client base in this area by 40% during H1 2012 and we expect a number of significant opportunities to arise as a result in the second half of the year.

Technology Services

In the Technology Services Division, Aiimi, we are harnessing the possibilities of emerging technologies, working closely with OpenText and Microstrategy. Aiimi has more certified consultants in these areas than any other partner in the UK marketplace, providing a strong position which to leverage across the Group. The need for better business information and management tools provides our Technology Division with a real opportunity to grow the BI (Business Intelligence) and ECM (Enterprise Content Management) practices in particular.

In the period, Aiimi entered into a strategic partnership with SAP which significantly increased the addressable market. This partnership is progressing well and we expect revenues to flow into the second half of 2012.

Our Technology Services offerings across consulting, software distribution and support have all grown over the period. Particular success was seen in the first half in developing annuity revenues through the provision of IT service management and solutions delivered on our SaaS (Software-as-a-Service) platform.

We were pleased with the performance of the Technology Services Division over the half, which continued to deliver strong growth, with revenue up 27.8% to &pound2.3m (H1 2011: &pound1.8m).

Contribution from ongoing operations was &pound0.2m (H1 2011 &pound0.2m).

Financial Review

Gross profits (net fee income) increased 33.3% to &pound10.4m (H1 2011: &pound7.8m), which reflects a full six month's performance from Berkley, completed on 20 June 2011. Administrative expenses (excluding depreciation and interest) across the Group have increased to &pound9.8m (H1 2011: &pound7.2m), which includes six months of costs of the Berkley acquisition.

Consequently, EBITDA has shown a small decline to &pound0.59m (H1 2011: &pound0.64m).

The Group reported basic earnings per share for the period of 2.407p (H1 2011: 3.250p).

Working Capital and Net Debt

Trade and Other Receivables grew to &pound22.8m at 30 June 2012 (at 31 December 2011: &pound20.2m). The increase in working capital has been funded by increased invoice discounting of &pound9.1m (FY 2011: &pound8.0m). Net debt was &pound8.3m (FY 2011: &pound7.1m, H1 2011: &pound8.3m).

Banking Facilities

The Board is confident that the Group's current banking facilities are adequate to support the working capital demands of the Group as it continues to experience growth in its revenues. As a result of the unexpected shortfall in revenues for July and August 2012 (described above) the Group entered into discussions with its principal bank Lloyds TSB Commercial Finance Limited ("Lloyds") regarding the terms of its existing invoice discounting facility. The Group has agreed a revised facility with Lloyds which includes certain new conditions, a resetting of the existing covenants (including the profit before tax hurdle rate which has been significantly reduced from the previous level) and an increase in aggregate facility limit to &pound16.75m from &pound14.75m.


Although the general economic backdrop in the UK continues to be fragile, our Group-wide underlying growth in gross profits in the first six months has been robust. There have been indications since the beginning of September that the Recruitment Division has returned to expected activity levels this is reflected in placements made and also Rethink's strong pipeline of opportunities. We therefore expect improvements in operating profit margin as new sales staff become productive and key initiatives invested in during the first half deliver in the months ahead.

At today's date, we have 875 contractors on billing across the Group (FY 2011: 837), and we believe, based on previous trends and current demand, that our contractor volumes will continue to rise over the remainder of the year.

Although we remain cautious about future prospects in the current economic climate and will be set back by two months in our expectations for 2012, Rethink has a track record of growth and we believe that the business is strategically well placed.


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