Staffline Group financial results
The most significant and time consuming area in finalising the financial results has related to the Group's historical compliance with National Minimum Wage Regulations 2015 ("NMW"). Liabilities in relation to this have been booked as exceptional, non-underlying charges on the basis of their nature, magnitude and the fact that they relate to a period of 6 years from 2013 to 2018. On 12 March 2019 the Group announced that the Board had received the key findings of an independent legal investigation and deemed it prudent to increase a provision in respect of additional costs from £4.4m to £7.9m. Since then, and with the benefit of additional independent specialist advice and following discussions with HMRC, the Group has further reviewed its obligations and liabilities in respect of this matter. As a result of completing this further review, the Board has made a final update to the provision for liabilities associated with historical NMW compliance, increasing this from £7.9m to £15.1m, which includes £0.5m of adviser costs, all of which it expects to be a cash cost in 2019. Additional exceptional costs included in the 2018 result relating to extended audit procedures will be £1.8m, taking total non-recurring exceptional charges for 2018 to £32.6m.
In recent years, NMW compliance has emerged as a highly complex area which has affected a significant number of UK businesses across industry and retail, in particular. The Group's non-compliance was initially identified by a self-review process as part of HMRC's compliance review. It relates to a limited number of food production facilities and the payment for preparation time, which is generally the time spent donning workwear. In these cases, the Group was following its end customers' operational procedures for clocking in and out. These procedures have now been rectified so that all work related time is paid in accordance with current legislation. Any additional time paid is charged to the customer in the same way as all other hours supplied. However, the additional costs incurred in relation to historical non-compliance are not recoverable from customers. The nature, complexity and volume of data that has been analysed as part of the additional independent specialist review, and the subsequent audit of this information has been a very significant undertaking which took several months to complete. Furthermore, the calculation of underpayments is a difficult and complex matter requiring judgement and the application of assumptions, all of which have been subject to discussions with HMRC.
On 17 May 2019 the Group issued a trading update referencing headwinds faced in both of its training and recruitment divisions. As a consequence, the Board expects the Group to require a waiver of possible future breaches to the leverage covenant in its lending agreements. The Group continues to operate within its facilities and is expected to do so into the foreseeable future. Constructive discussions with the Group's lenders are ongoing and, in conjunction, the Company has commenced discussions with investors regarding a Placing of ordinary shares to raise approximately £30m for the Company with the target of reducing 2019 year end leverage, being net debt/underlying EBITDA, to below 2x. In the event that the Company does pursue an equity capital raise the Board anticipates also launching an Open Offer for an additional £7m to enable wider shareholder participation. In light of these discussions the Board will not recommend a final dividend for the 2018 financial year. The Board reiterates its guidance that the Group will report an underlying performance for the year ended 31 December 2018 in line with expectations. The Board also continues to expect the Group to report underlying EBIT for the year ending 31 December 2019 in the range of £23-28m and, before proceeds of any equity capital raise, net debt at year end to be in line with current market expectations.
Chris Pullen, Chief Executive of Staffline, commented:
"Whilst the time taken to announce our 2018 financial results is frustrating, we look forward to posting these results at the end of June at which point we expect the business to return to normalised trading. Staffline continues to enjoy a unique position in its markets and once this episode is behind us we are confident of a return to future growth."