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Empresaria Group Confident of Sustainable Growth

Empresaria Group Confident of Sustainable Growth

Empresaria Group plc  has delivered an improved profit over the prior year with particularly strong growth from the Rest of the World region.

Financial Highlights

2012

2011

% change

% change (constant currency)

Revenue

&pound194.3m

&pound208.9m

-7%

-4%

Net fee income

&pound43.9m

&pound46.9m

-6%

-3.5%

Operating profit

&pound4.4m

&pound2.8m

57%

Adjusted operating profit*

&pound5.4m

&pound5.3m

2%

Profit before tax

&pound3.6m

&pound1.9m

89%

Adjusted profit before tax*

&pound4.6m

&pound4.5m

2%

Earnings/(loss) per share

3.0p

(0.4)p

n/a

Adjusted earnings per share*

5.0p

4.0p

25%

Chief Executive Joost Kreulen said:  "In 2012 we delivered an improved profit performance over the prior year against the backdrop of challenging worldwide staffing markets and ongoing economic uncertainties. During the year we had to resolve some specific operational issues, in particular in Chile and Germany, but strong foundations now exist across the Group which can provide the basis for sustainable growth despite continued volatility in some of our markets.

Group revenue and net fee income were marginally lower than in 2011, but a tight control of costs offset this and allowed us to deliver an increased operating profit of &pound4.4m (2011: &pound2.8m) and profit before tax of &pound3.6m (2011: &pound1.9m). On an adjusted basis, profit before tax was &pound4.6m (2011: &pound4.5m).

We remain focused on delivering profitable growth, optimising our delivery models and tightly managing costs to improve conversion ratios. We closely monitor the productivity and efficiency of the whole organisation and this will continue to be a key area of focus in 2013, as the global economic conditions remain difficult and changeable. We are also looking at where we can make further investments in our brands to help them expand internationally and whilst we remain focused on bringing down our overall debt we will have a selective approach to external investments if the right opportunity comes up."

Chairman's statement

Overview of performance in 2012

Overall Group revenue was &pound194.3m (2011: &pound208.9m), a reduction of 7%, with Group net fee income reducing 6% to &pound43.9m (2011: &pound46.9m). However, good control over costs meant that both adjusted operating profit of &pound5.4m and adjusted profit before tax of &pound4.6m were up 2% on 2011. Adjusted earnings per share increased 25% to 5.0p (2011: 4.0p), benefitting from the purchases of minority shares made in the year.

At the regional level, the Rest of the World continued to grow strongly with net fee income increasing by 9% on the prior year. There was another particularly strong performance from the Asian region which grew by 15% year on year. Our recent investments in Singapore and Hong Kong are developing well and we expect them to deliver positive contributions in 2013.

Our UK business has solid foundations and maintained net fee income in 2012 at prior year levels, despite the double-dip recession. Tight cost control helped in delivering an increase in adjusted operating profit.

In Continental Europe, net fee income declined 20% over the year, predominantly as a result of the required realignment of our business in Germany. This restructuring exercise has removed a significant level of costs and right-sized the business for the current market conditions, but resulted in lower profits in 2012. We have recognised &pound1.1m of exceptional restructuring costs for Germany in these accounts. This has been partially offset by a reduction in the provision against claims for retrospective pay and social security in Germany. We have settled a large proportion of the historic claims and only had a small number of additional claims arise in the year.

Our reported net debt has increased to &pound8.1m (2011: &pound5.6m) due to our investment in working capital, a reduction in credit insured invoice financing and the purchase of minority shares, in particular the acquisition of the remaining minority shares in Headway for a total cash outlay in the year of Euro 2.95m (approximately &pound2.4m). By accelerating this purchase fully into 2012, the Company benefitted from a saving of approximately &pound0.6m in total consideration.

Board

Joost Kreulen took over as Chief Executive Officer on 1 January 2012, having been responsible for the Group's Asian operations since 2009 and, more recently, also for a number of the Group's UK based businesses. Joost has extensive experience of operational and business development roles within specialist staffing operations, having worked for over 25 years in the staffing industry.

Miles Hunt resigned from the Board, ceasing to be a Non-executive Director on 31 March 2012.

People

In absolute terms, staff numbers increased from 803 at the end of 2011 to 834 at the end of 2012, although the average number of staff fell from 848 last year to 834 this year, with the movements across the regions mirroring their financial performance.

The success of the Group is dependent on having the right people in the right place and the Board would like to thank all of the Group's staff for their hard work, commitment and contribution over the last year, in what have been challenging conditions for a number of our brands.

The Group strategy and success is underpinned by a philosophy of management equity. Operating company management teams invest directly in their own businesses, thereby aligning management and shareholder interests. Where we have acquired first generation management equity we are actively pursuing a strategy of second generation equity, to incentivise senior managers to drive the next stage of development of their companies. This will typically involve setting a threshold profit limit and allowing minority shareholders to benefit from increases in profit over this limit.

Dividend

We continue to adopt a sustainable dividend policy, whilst prioritising free cash flow for developing the Group and strengthening the balance sheet. For the year ended 31 December 2012, the Board is proposing to maintain the final dividend at 0.35p per share (2011: 0.35p per share) which, if approved by Shareholders at the Annual General Meeting, will be paid on 24 June 2013 to shareholders on the register at 24 May 2013.

Governance

The principle of sound corporate governance practices is core to our success as a Group. The diversified nature of the Group, operating through 20 brands across 18 countries, means it is vital that a strong control culture and clear policies on corporate conduct and governance exist and are communicated and monitored effectively. The Board develop the Group's corporate governance arrangements in line with the UK Corporate Governance Code, making sure that the entrepreneurial freedom enjoyed by the operating companies is within a framework of clearly understood principles and controls.

Current trading and outlook

We are cautiously optimistic about the current year. Global economic conditions remain uncertain and there are many risks to the fragile recovery seen in some of our key markets. However, due to the actions taken during 2012, we expect a better Group performance in 2013. In particular, the operational improvements made in Germany and Chile mean both are better placed for the current year and the investments made in Singapore should contribute more positively from the solid platform now in place.

We continue to see opportunities for growth within our existing Group and will take a selective approach to external investments.

Chief Executive Officer's business review

Overview

In 2012 we delivered an improved profit performance over the prior year against the backdrop of challenging worldwide staffing markets and ongoing economic uncertainties. During the year we had to resolve some specific operational issues, in particular in Chile and Germany, but strong foundations now exist across the Group which can provide the basis for sustainable growth despite continued volatility in some of our markets.

Group revenue and net fee income were marginally lower than in 2011, but a tight control of costs offset this and allowed us to deliver an increased operating profit of &pound4.4m (2011: &pound2.8m) and profit before tax of &pound3.6m (2011: &pound1.9m). On an adjusted basis, profit before tax was &pound4.6m (2011: &pound4.5m).

Performance across the regions was mixed. Adjusted operating profit grew 33% in the Rest of the World and 12% in the UK, but it declined 23% in Continental Europe. The growth in the Rest of the World was driven by Asia-Pacific, with adjusted operating profit up more than 50%. The region was the fastest growing in the Group again this year. In Chile the exit costs of an onerous loss-making contract resulted in a loss for the year. However there was a much better performance in the second half of the year and we are confident that the business is much stronger and has a better mix of clients going into 2013. The UK has performed consistently, despite the double-dip recession and particularly weak market conditions across the financial services sector. In Continental Europe we have seen improvements in the Czech Republic and Slovakia, but these have been overshadowed by the reduced profit from Germany. Profit in Finland and Estonia was lower in the year as the business transitioned to a new management team.

Claims for retrospective pay and social security in Germany have been lower than originally anticipated, allowing a write back of the provision of &pound0.4m in the year. As at the end of 2012 we hold a provision of &pound1.0m which we believe is sufficient to cover all current and potential liabilities for these claims. During the year, in light of the impacts of changing pay rate tariffs and a declining German economy, we have taken action to reduce costs and right-size our German temporary recruitment business, closing or merging 13 branch offices across Germany and Austria and reducing staff numbers by 13% on average. Whilst we anticipate another challenging year in Germany, principally due to the introduction of equal pay legislation across many industries from November 2012, we believe the action taken during 2012 has helped put our business back on a profitable growth trend and are confident of increased demand over the medium-term.

We remain focused on delivering profitable growth, optimising our delivery models and tightly managing costs to improve conversion ratios. We closely monitor the productivity and efficiency of the whole organisation and this will continue to be a key area of focus in 2013, as the global economic conditions remain difficult and changeable. We are also looking at where we can make further investments in our brands to help them expand internationally and, whilst we remain focused on bringing down our overall debt, we will have a selective approach to external investments if the right opportunity comes up.

Regional Performance

UK

&poundm

2012

2011

Revenue

66.5

67.0

Net fee income

16.0

16.0

Adjusted operating profit

2.2

2.0

% of Group net fee income

36%

34%

Average number of employees

201

201

Revenue decreased by 1% to &pound66.5m (2011: &pound67.0m) with an increase in permanent fees of 3%, offset by a decline in temporary fees of 1%. The temporary margin was also slightly down by 0.4% on 2011 but overall net fee income was level at &pound16.0m. The higher level of permanent fees helped the gross margin improve marginally to 24.0%. The biggest challenge in the year was in the banking and finance sector, where lower global demand hit confidence in the London market and impacted both clients and candidates.

The proportion of net fee income from temporary sales was 59% (2011: 60%), reflecting the stronger permanent sales performance. Adjusted operating profit was up 12% to &pound2.2m (2011: &pound2.0m) as a result of tight cost control. This increase helped the UK region increase its share of the Group's net fee income by 2% to 36%. Employee numbers remained the same, averaging 201 in the year.

Market conditions during the year in the UK were poor, with uncertainty and poor visibility due to the double-dip recession. In addition, whilst we had anticipated a slowdown in demand across the London region during the Olympic Games, the expectation had been for a catch up in the second half of the year to make up for lost productivity. This did not materialise and second half revenue was down on the first half, although net fee income and adjusted operating profit were just ahead.

Within the Infrastructure and Construction sector business, there was a small decline in permanent sales, but an increase in temporary sales as our Building services brand, Reflex HR, opened a new office in London to target this market in more depth. However, profits were lower as costs were increased due to this new office investment. FastTrack's Heathrow Airport office, opened in 2011, continued to perform well and generated a significantly better return in its second year of operation. The outlook for new infrastructure projects appears more positive at the beginning of 2013 than it did a year ago and we hope this will feed into higher demand for our services during the course of the year.

Our two Financial Services brands had a mixed year. There was a 33% increase in insurance staffing revenue along with a five-fold increase in adjusted operating profit. However, market conditions within the core banking and finance sector were very difficult and we saw a reduction in both permanent and temporary sales. Costs were managed down and whilst the business reported a trading profit it was significantly down on the prior year. The business has diversified its sector coverage and now offers a wider range of staffing services for back-office and compliance functions.

Results within our Other brands group have been largely positive, especially from the Creative and Retail (real estate) brands, which generated increased profits over 2011. The Recruitment-to-Recruitment brand had another challenged year, with only technical, oil & gas and IT sectors consistently increasing staff this year. Further investments in the Domestic Services brand to enhance their web presence and marketing effectiveness meant profit was slightly down on prior year.

Continental Europe

&poundm

2012

2011

Revenue

83.2

102.7

Net fee income

15.7

19.7

Adjusted operating profit

1.7

2.2

% of Group net fee income

36%

42%

Average number of employees

198

221

Revenue decreased by 19% to &pound83.2m (2011: &pound102.7m) and this fed through to a 20% decline in net fee income to &pound15.7m (2011: &pound19.7m). There was an increase in permanent sales of 92%, albeit from a low base, but this was offset by a reduced temporary margin of 0.7%. The proportion of net fee income from temporary sales remained high at 96% (2011: 98%). There were significant cost savings made during the year, with average staff numbers falling 10%, but this was not enough to offset the lower net fee income, resulting in adjusted operating profit of &pound1.7m, down &pound0.5m on 2011.

The market conditions across Europe have been challenging. Even Germany has not been immune, with a negative GDP in the last quarter of 2012, preceded by worsening economic conditions. Germany also introduced equal pay directives for temporary workers in the last quarter of 2012, which is currently being adopted by the majority of industries. This leads to pay rate surcharges over current pay levels of up to 50%, phased in over a nine month period. Whilst this is not expected to have a long-term negative impact on the temporary recruitment industry, we anticipate a fall in demand of up to 20% in the short-term and a reduced gross margin as clients react to the increased costs by reducing the levels of temporary labour.

These issues in Germany have necessitated a reduction of the cost base across the branch network and at head office. A restructuring programme was implemented in the second quarter and is now largely completed. This has resulted in 13 branch offices being closed down or merged and a material reduction in staff. Average staff numbers in Germany over 2012 were 13% lower than 2011 and were 16% down at the year end. The cost base going into 2013 is 15% lower than at the beginning of 2012 and, whilst we expect a further fall in revenue, this should ensure that the profits improve in 2013.

Profits continued to improve within the outsourced business which is looking at ways of broadening its client base. The cost base was restructured in 2011, in reaction to the increased pay rates after changing tariffs, as a result of which the business was better placed for 2012.

There has also been a release of &pound0.4m of the provision held against claims for retrospective pay and social security contributions in Germany and the provision stood at &pound1.0m at year end. Only a small number of new claims were submitted in the year and the social security audit was successfully finalised for all years to 2009. Nearly half of all claims submitted to date have been settled for an average of 15% of the original claim value. We are confident that the current provision level is sufficient to cover all known and potential claims in this matter.

In March 2012, we reached agreement with the former minority shareholder in Headway to purchase 6.7% of his minority holding for &euro1.3m and to restructure the timings of the put and call options over the remaining 13.33%. During the summer of 2012, following an approach by the vendor, we agreed an early settlement for the remaining shares. Whilst this resulted in a further cash outflow in the year, increasing the Group's net debt, we negotiated a reduced price for the purchase, saving in the region of &pound0.6m in total consideration. Of the &euro2.2m consideration, &euro1.1m was payable on completion with two tranches of &euro550,000 payable before the end of December 2012 and March 2013. This purchase was funded by a new &euro2.2m revolving credit facility, repayable in full by the end of December 2013.

The results at our Healthcare business in the Baltic region were down on the prior year. Overall, demand for its services is stable, but it has become more competitive to attract qualified staff. The business has invested further in its recruitment team and is looking to broaden its candidate base within the Baltic region.

Our specialist businesses in the Czech Republic and Slovakia performed much stronger than in the prior year, with both businesses delivering a small profit, against losses in 2011.

Rest of the World

&poundm

2012

2011

Revenue

44.6

39.2

Net fee income

12.2

11.2

Adjusted operating profit

1.5

1.1

% of Group net fee income

28%

24%

Average number of employees

435

426

Revenue grew by 14% to &pound44.6m (2011: &pound39.2m) and net fee income grew by 9% to &pound12.2m (2011: &pound11.2m). This remains the Group's fastest growing region and now represents 28% of Group net fee income. The temporary margin declined by nearly 2%, mainly due to a specific operational issue in Chile arising in the first half and which has now been addressed. Permanent revenue (including revenue from the training and Recruitment Process Outsourcing businesses) grew by 16% and now accounts for 64% of regional net fee income. Overall temporary revenue (from Japan, Australia and the outsourcing business in Chile) grew 13% but a lower overall gross margin restricted net fee income growth. Costs increased with the greater activity, and average staff numbers increased by 2%, driven by the training business in Indonesia. Adjusted operating profit was &pound1.5m (2011: &pound1.1m) up 33%.

In Japan, profits from both Group brands grew by over 40% as trading conditions in Tokyo returned to normal following the earthquake and tsunami in early 2011. The Japanese economy remains constrained and is not forecasting high growth, but we expect to see a continued strong performance for our businesses in 2013.

The South East Asia region saw strong growth in revenue, although profit growth was held back by the costs of investments in Singapore and Hong Kong. Our executive search brand, Monroe Consulting, grew revenues by just under 40% across its established offices in Indonesia, Thailand and Philippines, although losses in Singapore held back overall growth. The Group's investments in Singapore delivered a second year of losses, but we are confident that they have reached sufficient scale to make a positive contribution in 2013. There was a small loss in Hong Kong in line with expectations for a first year launch. Our training business in Indonesia achieved higher sales in 2012 but, as a result of investments in staff, the profit remained on the same level as prior year.

Revenue in India was flat year-on-year but, following the restructuring in 2011, improved efficiency and cost control resulted in better net fee income and a strong improvement in profit for the year, against a loss in 2011. Demand for Recruitment Process Outsourcing services is strongest from the US market and we expect this to be a positive trend into 2013.

In China, we saw steady revenue and profit growth, despite a slowdown in the local economy in the second half of the year. The forecast is for China to return to sustainable levels of economic growth and this should help our business to deliver steady growth. The two businesses in Shanghai were merged during the year.

Revenue from Australia grew by 20% and this fed through to a strong improvement in profit. The Melbourne office, opened in 2011, has contributed profitably this year. The Australian market weakened in the last quarter of 2012 but the early signs for 2013 are more promising.

Our Chilean business was loss making in the year, despite a significantly improved second half performance. The business took the decision to exit from an unprofitable major contract, accounting for approximately 30% of sales, which resulted in transitional losses. New clients have already been found to help the sales volume recover. Some transitional costs will continue into 2013 but, due to the actions taken during 2012, the business is able to deliver more reliable and less risky income streams and we are confident of returning it to profitability in 2013.

Finance review

Revenue and net fee income

Revenue for the year was &pound194.3m (2011: &pound208.9m), a 7% decrease with net fee income decreasing by 6% to &pound43.9m (2011: &pound46.9m). Gross margin was 22.6% (2011: 22.5%) with an increase in permanent revenue offset by a lower temporary margin. Permanent sales (including training and RPO services) grew by 12% and accounted for 35% of net fee income (2011: 29%). Temporary revenue (including outsourced services) was down 8% on 2011, with the margin also reducing to 16.2% (2011: 17.3%).

The proportion of net fee income from non-UK operations reduced slightly to 64% (2011: 66%). On a constant currency basis, net fee income would have been 3.5% below 2011.

Trading summary

From continuing operations

2012

2011

% change

&poundm

&poundm

Revenue

194.3

208.9

(7%)

Net fee income

43.9

46.9

(6%)

Administrative costs

(38.5)

(41.6)

(7%)

Operating profit

4.4

2.8

57%

Adjusted operating profit*

5.4

5.3

2%

Net finance income and costs

(0.8)

(0.9)

(11%)

Profit before tax

3.6

1.9

89%

Adjusted profit before tax*

4.6

4.5

2%

* The adjusted operating profit and adjusted profit before tax figures exclude exceptional items, intangible amortisation and movements in the values of put and call options (see note 6 for details).

Operating profit

Operating profit was &pound4.4m, up 57% on 2011. On an adjusted basis, it was up 2% at &pound5.4m. The conversion ratio of 12.0% was an improvement on 11.3% in 2011.

This was due to a reduction in administrative costs, which at &pound38.5m were down 7% on 2011, with about two thirds of the saving coming from staff salaries and commissions. The Group reacted quickly to changes in market conditions to manage costs down during the year. In the UK, costs were slightly down on the prior year, in Continental Europe were 20% down year-on-year, but were 6% higher in the Rest of the World. About one third of this increase in the Rest of the World related to the new investment in Hong Kong.

Finance income and costs

Finance income was &pound0.1m (2011: &pound0.6m), all being bank interest income (2011: &pound0.1m). Finance costs were &pound0.9m (2011: &pound1.5m), which all related to interest payable on invoice discounting, bank loans and overdrafts (2011: &pound0.9m).

An agreement was reached to purchase the minority shares of Headway during the year, so there are no longer any put or call options. In 2011, there was a net loss of &pound0.1m from the movement in the fair value of these options.

Exceptional charges

International Financial Reporting Standards (IFRS) require that items of income and expenditure that are material in terms of their nature or amount should be disclosed separately. Such items have been disclosed as exceptional charges in these accounts. The total net charge is &pound0.7m (2011: &pound2.2m) and is made up of two items in Germany: the charge of &pound1.1m for restructuring costs which relate to the closure or merger of branch offices and divisions and the termination of staff, reduced by the release of &pound0.4m of the provision for potential claims for retrospective pay and social security.

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