2 October 2019
Kin and Carta plc
('Kin + Carta', the 'Group', or the 'Company').
Full Year Results
Investing to Capture the High Growth DX Opportunity
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Financial Highlights
● Like-for-like1 net revenue of £148.0 million3, up 2% compared to the prior year
● Adjusted profit before tax of £17.6 million3; down 2.5% compared to the prior year, which includes previously announced £3 million of growth investments
● Adjusted operating margin 13% of net revenue (2018: 14%)3
● Statutory profit before tax of £1.8 million (2018: loss of £31.2 million)
● Net debt £38.4 million (2018: £26.0 million), representing a net debt to Adjusted EBITDA ratio of 1.68x
● Full year dividend maintained at 1.95 pence per share
● A year of continued transformation and investment to capture the DX growth opportunity
● Improved performance in Strategy pillar (16% of net revenue)
● Ongoing double-digit growth in Innovation (56% of net revenue)
● Stabilisation of Communications (28% of net revenue)
● Growth investments gaining traction: 40 Connective deals signed in the period including new clients Barclays, Blue Cross Blue Shield and Shell
● Growth investments included geographic expansion, building central sales, marketing and partnerships functions and implementing global financial and delivery systems
● Leadership team strengthened by the appointment of new Chairman with significant DX experience and CFO together with senior management appointments across the company
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| 362 DAYS | 371 DAYS TO3 AUGUST2018 5 | %CHANGE | LIKE-FOR-LIKE 3WORKING DAYS%CHANGE | LIKE-FOR-LIKE |
Revenue | £172.9m | £178.4m | (3.1)% | (0.4)% | (2.1)% |
Net revenue 2, 4 | £148.0m | £149.7m | (1.1)% | 1.6% | unchanged |
Adjusted profit before tax 4 | £17.6m | £18.5m | (5.0)% | (2.4)% | (7.5)% |
Adjusted basic earnings per share 4 | 9.22p | 10.10p | (8.7)% | (8.1)% | - |
Statutory profit/(loss) before tax | £1.8m | £(31.2)m | | - | - |
Statutory basic earnings/(loss) per share | 0.73p | (22.09)p | | - | - |
Full year dividend | 1.95p | 1.95p | | - | - |
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| Net debt | £38.4m | £26.0m | £12.4m | - | - |
1 Like-for-like net revenue is defined as the revenue from continuing operations using the same number of working days when comparing the current period to the prior period.
2 Net revenue is defined as gross revenue excluding all direct costs and third party expenses passed to clients (note 11)
3 Further details are provided within Alternative Performance Measure section.
4 Adjusted results exclude Adjusting Items to enhance understanding of the ongoing financial performance of the Group. Adjusting Items comprise redundancies, restructuring costs; gain or loss on disposal of properties; impairment or amortisation charges related to goodwill, tangible and intangible assets; contingent consideration required to be treated as remuneration; movements in deferred consideration and costs related to the Company's Defined Benefits Pension Scheme (note 3).
5 Continuing operations excludes the results of the Books and Marketing Activation segments disposed in the prior year (note 12).
J Schwan, CEO, said:
"This year Kin + Carta has made significant headway executing on the strategic plan we outlined at the end of fiscal year 2018. We have reoriented our proposition and brand towards where we see the greatest opportunity, the DX market.
"We provide leading edge work for some of the world's best companies and our three pillars represent the services required to help customers along every step of their DX journey. The strength of our Innovation pillar demonstrates the power of this model. Our Strategy and Communication pillars are highly complementary, but we have had to reposition them to take advantage of higher value DX oriented opportunities. Although this repositioning has taken longer than we expected, due to the sheer scale of change required, I'm pleased to say we are seeing improved performance in Strategy, and a stabilisation of the Communication business.
"Digital transformation is a market which is growing globally at a high teens CAGR and impacting every sector. Kin + Carta is doing all the right things to position itself to take advantage of this market and I believe the benefits of our repositioning and investment will accelerate our growth during 2020.
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For further information, please contact:
| Kin and Carta plc | +44 (0)20 7928 8844 |
| J Schwan, Chief Executive Officer Chris Kutsor, Chief Financial Officer
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| Powerscourt | +44 (0)20 3328 8386 |
| Elly Williamson / Jessica Hodgson
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| Numis Securities Limited | +44 (0)207 260 1345 |
| Nick Westlake / Matt Lewis |
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Kin and Carta plc provides next-generation, digital transformation services that apply technology, data and creativity to help clients invent, market, and operate new digital products and services. Kin + Carta operates across the United Kingdom, Europe, the United States of America, South America, and Asia and fuses three specialisms - strategy, innovation, and communications - under its organisational model called "The Connective".
The pace of change at Kin + Carta has been persistent and invigorating as we focus our business on its areas of highest potential. In the past twelve months Kin + Carta has launched a new brand, refined its business model, overhauled its proposition, launched new financial and collaboration systems, appointed new sales and marketing teams and refreshed its Board and senior leadership team. We also launched four new offices, stretching our suite of capabilities into the US for the first time.
Technology's impact on our lives and the economy is accelerating. The global digital transformation (DX) market is projected to grow at an 18% CAGR from $290bn in 2018 to $665bn in 2023. We have been relentless in our action this year to create a platform for long-term value creation in this growing market. While this has had some impact on our near-term financial results, we believe we have made the right moves to support the long-term growth of the business and build a prosperous future. In parallel, we have honed our acquisition strategy to expand our platform into new regions when the right opportunities present themselves.
Financial Performance
2019 reflects mixed financial results. We invested for growth and are pleased to see early signs of success with significant new client wins across our key sectors such as Barclays, Blue Cross Blue Shield and Shell. We also drove structural changes in our Communication and Strategy pillars to re-focus on more strategic DX opportunities. Our Strategy pillar is already seeing an improved year ahead and our Communications pillar is stabilising. We are now much better positioned heading into FY2020.
Other positive developments during the year include improved geographic diversification and higher growth in DX-focused business, which both help provide a more solid and sustainable foundation for future growth. These changes continue to be driven by a focus on areas of greatest opportunity such as Innovation and the higher growth market in the US. Our Innovation pillar now accounts for 56% of the Group's net revenue compared to 48% a year ago, and our US business is now 46% of net revenue, compared to 40% in the prior year. Our new global sales and marketing function signed over 40 Connective deals, holding our target of a healthy 50% gross margin, and our pipeline and backlog has improved.
As explained in the pre-close Trading Update, these results include £3 million of investment in launching our new strategy which was second half weighted. We continue to invest at a similar level in 2020. This investment encompasses an ongoing realignment of our operations, our sales and marketing function, geographic expansion and launching new capabilities to the market.
Operational Update
Kin + Carta offers our clients three distinct sets of tightly integrated digital transformation capabilities:
● Strategy - Our sector-focused management consultants help our clients better understand the shifts in their market and how their products and services need to evolve.
● Innovation - Our 700+ software engineers and designers utilise emerging technologies to create new products and services for our clients to bring to market.
● Communications - Our digital marketing experts help our clients amplify their digital investments by finding new audiences and converting them into lifelong customers.
These three capabilities combine to form our Connective proposition, a holistic combination offering customers the ability to drive meaningful change in their business. We've made significant progress over the past year evolving the Company around this core proposition.
Strategy
We started the year with a set of disparate businesses in our Strategy pillar, operating somewhat independently from the rest of the Group. After a significant amount of restructuring we now have a powerful go-to-market brand and a clear strategic front-end to our DX proposition.
The newly formed Kin + Carta Advisory ("KCA") is a management consultancy focused on helping our clients navigate the sometimes overwhelming digital opportunity, while enabling a clear bridge to implementation through our Innovation and Communication capabilities. KCA consultants are focused on our key sectors, are located in offices in both London and New York and are already delivering projects leading to meaningful implementation programs for our Innovation and Communication pillars.
KCA is supported by Kin + Carta Incite, our next-generation market research consultancy that provides strategic insights to KCA as well as our other pillars. In addition to our enterprise customers, we are also engaged by some of the largest technology companies in the world; including Amazon, Facebook, Apple and Google. The ability for Kin + Carta consultants to serve both the disruptors and the disrupted provides them with a unique perspective in the market.
We are optimistic around the moves we've made in our Strategy pillar and look forward to unlocking further growth opportunities in the year ahead.
Innovation
Our digital Innovation pillar, comprising Kin + Carta Solstice and Kin + Carta TAB, is delivering double digit revenue growth in both the US and the UK. We continue to build meaningful products and platforms for some of the world's largest companies in the most exciting areas of emerging technology such as Cloud, Machine Visioning, Artificial Intelligence, Natural Language Interfaces, Blockchain and Mobile.
Our fastest growth area is in Cloud Transformation. This involves helping our clients re-engineer legacy software systems to run on top of our partners' (Google, Microsoft, Amazon, Pivotal) cloud platforms. These transformation projects allow us to form deep, long-term relationships with our customers while providing them the agility of a digitally native company.
We are growing existing relationships and winning new exciting Fortune 1000 clients in our strategic sectors. Our UK team leveraged the Connective's financial services sector expertise to win three of the largest banks in Europe as new customers. Our US team leveraged the healthcare strength in our UK Strategy pillar to win several significant multi-year projects with healthcare insurers.
Our 700+ strong global engineering team is collaborating across regions more closely than ever, developing new tools and skills and accelerating their distribution across our global client base. The future for our Innovation pillar is truly exciting.
Communications
Our communications pillar, comprising Kin + Carta AmazeRealise and Kin + Carta Edit, had a challenging year as it shifted its focus away from low value projects to higher value DX work and larger projects. This involved focusing on clients who are looking to implement new marketing technology (MarTech) platforms as opposed to focusing on clients commissioning one-off campaign work. Where we define and implement a MarTech platform in addition to the content that goes on the platform, the relationship with the client becomes deeper, the tenure longer and our ability to impact change more meaningful.
Changes we have implemented in this pillar include some significant new hires and appointments, including a new Managing Director, new Chief Growth Officer, new Director of Employee Experience, and new Financial Director. We also appointed our Chief Connective Officer, Charlie Wrench, as the interim Head of Communications as we work further through its evolution.
Historically, our digital marketing capabilities were solely focused in the UK which experienced delays to some client investment decisions due to Brexit uncertainty. Our focus this year was to diversify our geographic presence and bring our capabilities to the US market. We opened our first office in Chicago and began offering our communications service offerings into our existing innovation-focused Fortune 1000 client base. This involved making more strategic hires, as well as laying the groundwork for a joint business development effort between our Innovation and Communications sales teams which is building a base for growth in FY2020.
We have also won some significant new clients in the UK within the pillar, while also winning 11 different marketing technology-related awards during the year. Our Communication pillar also referred over £5 million in revenue around the Group, a sign of the Connective strategy beginning to pay dividends.
While we still have more work to do to shape our Communications pillar for our DX-focused future, we are optimistic that the moves we have made will set us up for long term success starting in the second half FY2020.
Strategic Priorities
At the time that we unveiled our new transformation strategy and identity, we pinpointed six strategic priorities. A year into this journey, we have made significant progress against all of these, which we outline below. We have also simplified this list into the following five ongoing priorities, which we believe will underpin the next stage of our growth.
1) GROWTH - We will accelerate organic growth through the continuous optimisation of a highly measurable, integrated and scalable demand generation machine: in FY19 we built new central sales, marketing, partnerships and lead generation teams and signed over 40 cross-specialisms deals valued at over £11 million in new net revenue through these channels. Our goal in the next financial year is to optimise these teams around our key sectors and scale our new partnership function in the US and the UK.
2) PROPOSITION - We will build a market defining set of sector-focused technology-led business transformation offerings: in FY19 we hired our first Chief Connective Officer, Charlie Wrench, launched our new brand, defined our first go-to-market DX proposition and created Kin + Carta Advisory as the strategic "front-end" to our DX proposition. We evolved our capabilities in Cloud Modernisation, Artificial Intelligence, MarTech Modernisation and in Digital Advisory. Our sector focused approach allowed for our Innovation pillar to meaningfully break into the Healthcare sector for the first time with two seven-figure multi-year wins whilst also expanding our Financial Services expertise in the UK winning three of Europe's largest banks as new clients. In the next financial year we will continue to invest in the evolution of our Connective proposition and begin a process of further rationalising our brands to make it easier for our clients to engage multiple parts of our proposition.
3) PEOPLE - We will create an industry leading employee experience with a focus on the growth potential of our talent and a shared commitment to a triple bottom-line (profits, people and planet): in FY19, through a number of new employee experience initiatives we won seven Best Place To Work awards and raised our global employee NPS (eNPS) score by more than 50%. We also launched our first coordinated Corporate Social Responsibility (CSR) plan, which pledges to certify all of our specialisms as B Corps (www.bcorporation.net) by 2022, with a plan to certify our first four specialisms in the next financial year. To learn more about B Corp you can read about our plans in the CSR section of our forthcoming Annual Report and Accounts.
4) PLATFORM - We will build an operational platform made up of best-in-class operational systems and seamless shared services: In FY19 we rolled out new collaboration, financial and project delivery systems. In the next financial year we will roll out standard CRM and HR systems and begin expanding our shared services platform. This will ensure we are taking advantage of operational gearing as we scale, while allowing for our specialisms to focus on what makes them unique.
5) EXPANSION - We will execute a purposeful and intelligent geographic expansion into new regions domestically and internationally: In FY19 we launched a new Innovation office in Edinburgh, a new Communications office in Chicago and new Kin + Carta Advisory offices in New York and London. We now have all three of our core capabilities in the US. In the next financial year we will turn our attention to acquisition opportunities, with a focus on unlocking growth in the western and southern regions of the US.
By continuing to focus on these five key areas we believe we will be poised to accelerate growth within the exciting DX market.
Outlook
Trading at the start of the new financial year has been in line with expectations. Our Strategy pillar is seeing improved performance, our Innovation pillar continues to power ahead and our Communications pillar is stabilising.
For FY2020 we expect double-digit net revenue growth of 10-12%, accelerating primarily in the second half, with double-digit Adjusted operating margins of 12-13% for the year. Whilst investment will have some impact on H1 2020 profitability, it will deliver higher growth and improved profitability in H2 2020. The investments we are making in realigning our business and the functions and systems that power its growth have positioned us well for the long-term.
Over the medium term we expect both net revenue growth and operating margins to improve into the low teens, whilst we manage operating margin to fund continuing investment in the growth of the business. We will look to manage Adjusted net debt to EBITDA between one and two times depending on the opportunities available to us.
The realignment of our operations combined with ongoing investment in them positions us at the heart of the DX market opportunity. Core to our growth is our Connective collaborative model, harnessing the best combination of our skills for each of our clients. The power of the Connective is gaining traction evidenced by significant referrals and revenue growth across the business. I am excited about the potential for Kin + Carta as our growth accelerates into 2020 and beyond.
J Schwan
Chief Executive Officer
1 October 2019
I am pleased to serve as the new Kin + Carta CFO and excited about the opportunity in front of us. We have the people, the client base and the appropriate strategy to capture significantly more growth from the DX market in the near term and coming years. We continue to make the necessary changes to position the Company for more reliable, and profitable future growth.
The results that follow are discussed in terms of continuing operations. The results are for 362 days compared to the prior period of 371 days.
The Group's statutory results for continuing operations are set out in the table below:
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| 362 DAYS TO 31 JULY2019 | 371 DAYS TO 3 AUGUST2018 |
Revenue | £172.9m | £178.4m |
Net revenue | £148.3m | £149.7m |
Statutory profit/(loss) before interest and tax | £4.3m | £(28.2)m |
Statutory profit/(loss) before tax | £1.8m | £(31.2)m |
Basic profit/(loss) per share | 0.73p | (22.09)p |
The Group's statutory profit before tax of £1.8 million (2018: loss of £31.2 million) includes Adjusting Items of £15.8 million (2018: £49.6 million), of which £13.2 million relates to non-cash items in the current period. Adjusting non-cash items include past service costs of £4.1 million related to the St Ives Defined Benefits Scheme (the "Scheme"), contingent consideration treated as remuneration of £2.4 million, and the amortisation of acquired intangibles of £6.7 million.
The Group prepares Adjusted results which, in management's view, reflect how the business is managed and show the performance in a manner consistent with the previous year. Adjusted results exclude items such as costs related to restructuring activities, acquisitions made in current and prior periods, disposal of sites, impairment charges and the Scheme charges. Further details are provided in the Alternative Performance Measures section below.
Net revenue growth on a like for like basis of working days was 2% (£2.7 million), including a favourable currency impact of approximately 2%. Net revenue from clients outside of the UK increased from £72.6 million to £78.5 million, and now represents 54% of Group net revenues compared to 48% in the prior year.
Adjusted operating profit was £19.9 million, or 13% of net revenue compared to £21.2 million and 14% in the prior year, reflecting higher investments in growth, restructuring in the Communication and Strategy businesses, as well as macro economic weakness in the UK market.
Central costs were £5.8 million (2018: £5.3 million). The Group has separately identified these central costs that cannot be directly attributed to the individual trading entities of the Group. Central administration costs represent 3.9% of Group net revenue, and comprise the costs of running a plc and certain functions retained in the centre.
Acquisitions
No acquisitions were made in the current period. However, the total current year cash outflow for businesses acquired in prior periods was £19.9 million. This includes a final payment of £3.4 million related to Solstice, and £16.5 million to settle the third deferred consideration payment for the TAB business. There remains at 31 July 2019 a liability of £2.0 million in relation to the final tranche of TAB's deferred consideration. Subsequent to the period end in August 2019, the Group settled the remaining liability of £1.2 million in cash and issued a loan note for £0.8 million.
Balance Sheet
The net assets of the Group have increased from £81.4 million to £88.0 million primarily due to net profit after tax of £1.1 million and a net actuarial gain of £5.2 million related to the Scheme. Total assets have increased from £191.7 million to £194.5 million and total liabilities have decreased from £110.3 million to £106.9 million. Non-current assets consist largely of goodwill and intangible assets of £111.2 million (2018: £116.2 million).
Tax
The total tax charge for continuing operations was £0.7 million (2018: £1.2 million). A number of Adjusting Items are not deductible for taxation purposes. Further details are provided in the Alternative Performance Measures section below.
The Group's effective tax rate on the Adjusted profit before tax was 19.5% (2018: 19.8%) compared to the standard rate of corporation tax of 19% (2018: 19%) and federal US tax of 21% (2018: 21%) for the Group. The Adjusted tax charge was £3.4 million (2018: £3.7 million). The Group's effective tax rate on Adjusted profit is lower than the prior period due to a decrease in UK and US statutory corporate income tax rates.
Net income tax of £0.3 million (2018: £5.4 million) was paid in the period.
The Board is recommending a final dividend of 1.30 pence per ordinary share (2018: 1.30 pence) giving a total dividend of 1.95 pence (2018: 1.95 pence) in respect of the 2019 financial period. The dividend is covered 4.7 times by 2019 Adjusted earnings. Subject to shareholder approval at the Annual General Meeting, the final dividend will be paid on 17 December 2019 to shareholders on the register at 22 November 2019, with an ex-dividend date of 21 November 2019.
The Group closed the Scheme to new members in 2002 and ceased future accruals within the Scheme in 2008. The Group accounts for post-retirement benefits in accordance with IAS 19 Employee Benefits. The Consolidated Balance Sheet reflects the net surplus on the Scheme at 31 July 2019 based on the market value of the assets at that date and the valuation of liabilities using a discount rate based on AA non-gilt bond yields.
On an IAS 19 basis, the net surplus on the Scheme was £6.7 million (2018: surplus of £1.9 million) before the related deferred tax liability. The value of the plan assets increased to £385.9 million (2018: £353.5 million) due to the strength of investment returns. Approximately 65% of the plan assets are invested in return seeking assets providing a higher level of return over the longer period. Plan liabilities increased to £379.2 million (2018: £351.6 million) due primarily to the decrease in the discount rate used, partially offset by the impact of a reduction in assumed rates of future improvement in life expectancy. The increase in the accounting surplus is primarily attributable to the reduction in the assumed rate of future improvement in life expectancy of scheme members.
The Scheme's actuarial valuations determine the cash deficit recovery payments by the Group and the Scheme's triennial valuation as of April 2019 is currently in progress. The Group currently makes deficit funding contributions of £2.6 million per annum and a contribution of £0.4 million per annum towards the costs of administration of the Scheme. On the disposal of the Books segment in April 2018, the Group made an additional contribution of £2.5 million to the Scheme.
The charge for the Group's defined contribution schemes was £2.3 million (2018: £2.1 million) in the period.
Cash generated from operations was £9.0 million (2018: £25.8 million). The decline was due to the disposal of the Books and Marketing Activation segments in the prior period and an increase in working capital investment in the current period. Total dividends paid were £3.0 million (2018: £2.8 million). This consisted of a final dividend for 2018 financial period of 1.30 pence per share and an interim dividend of 0.65 pence per share.
The capital expenditure incurred within the continuing business primarily related to the fit out of new office space and the refurbishment of offices.
During the period, the Group sold a property in Redditch for a consideration of £7.2 million. This property was previously occupied by SP Group Limited, which was disposed in the prior period.
During the period, the Group successfully negotiated a new revolving credit facility of £85.0 million, expiring on 30 November 2022, on terms broadly in line with the previous agreement. The banking group consists of HSBC Bank plc, Bank of Ireland and Fifth Third Bank.
Net debt increased during the year from £26.0 million to £38.4 million primarily due to payments of earnout-related consideration of £19.9 million for the Solstice and TAB acquisitions, partially offset by the sale proceeds from the Redditch property. At 31 July 2019, Kin + Carta had drawn £60.4 million on its revolving credit facility, leaving an unutilised commitment of £24.6 million. The Group had cash and cash equivalents of £22.0 million.
At 31 July 2019, the ratio of net debt to EBITDA before Adjusting Items was 1.7 times (2018: 1.1 times) as shown in the Alternative Performance Measures section below.
The Annual report includes both statutory and Adjusted Results. In the management's view, the Adjusted results reflect the on-going performance of the business, how the business is managed on a day to day basis and allows for a consistent and meaningful comparison.
The APMs and KPIs are aligned to our strategy and are used to measure the performance of our business and are the basis for remuneration.
The Adjusted results exclude the items listed below as their inclusion could distort the understanding of the performance for the year and the comparison with prior years.
Adjusted operating profit is calculated by adding back costs relating to restructuring activities, acquisitions made in prior periods, the disposal of surplus property, impairment charges, movements in deferred consideration and St Ives Defined Benefits Pension Scheme. The tax effects of these adjustments are reflected in the Adjusted tax charge. The adjustments are detailed below:
1. Profit on the disposal of property plant and equipment and restructuring costs - these items are excluded in order to reflect the performance of the business in a consistent manner and how the performance of the business is managed on a day to day basis. They are not considered to be part of the core activities of the business.
They have arisen as a result of initiatives to reduce the cost base and improve the efficiency and collaboration across the Group. The initiatives reflect a significant change in the organisational structure of a business area and are assessed on an individual basis and excluded from the Adjusted results.
2. Amortisation of acquired intangibles and impairments - the amortisation and impairments of assets acquired through business combinations are excluded from Adjusted results. These costs are acquisition related and are not part of the on-going trading performance of the business. The amortisation of computer software is included within the Adjusted results as it is part of the on-going trading performance.
3. Contingent consideration required to be treated as remuneration, and increase in deferred consideration - our acquisitions, where deferred consideration arises, are structured such that the consideration is contingent on continued employment within the Group. Under IFRS3 this is treated as an expense and therefore part of the statutory result. Where the purchase price has been determined and there is a subsequent increase or decrease arising from the payment of deferred consideration under IFRS3 this is required to be expensed. We do not consider this to be part of the underlying trading performance.
4. Administrative expenses related to St Ives Defined Benefits Pension Scheme - the Scheme was closed to new members in 2002 and ceased future accrual in 2008. There are now less than 5 employees who are members of the Scheme and still employed by the Group. On the disposal of the Books segment Kin and Carta plc is the last remaining employer. The costs of the Scheme including administration costs, past service costs related to Guaranteed Minimum pension 'GMP' and pension finance charge/(credit) are not considered to be part of the on-going performance of the Group and they are excluded from the performance measures. As such they are treated as Adjusting items. The analysis of Adjusting Items from continuing operations is set out below:
ADJUSTING ITEMS DESCRIPTION | 362 DAYS TO 31 JULY2019 £'000 | 371 DAYS TO 3 AUGUST |
Profit on disposal of property, plant and equipment | (1,771) | (1,542) |
Amortisation of acquired intangibles | 6,674 | 8,659 |
Expenses related to restructuring items | 2,635 | 3,062 |
Impairment of goodwill and other assets | - | 12,082 |
Contingent consideration required to be treated as remuneration | 2,375 | 23,994 |
Increase in deferred consideration | - | 3,094 |
Administrative expenses/(income) related to St Ives Defined Benefits Pension Scheme | 5,707 | (31) |
| Total Adjusting Items added back to the statutory operating profit | 15,620 | 49,318 |
| Bank amortisation fees | 189 | - |
| Pension finance charge | (30) | 324 |
| Total Adjusting Items added back to the statutory profit before tax | 15,779 | 49,642 |
| Tax related to Adjusting Items | (2,772) | (2,436) |
| Total Adjusting Items added back to the statutory profit after tax | 13,007 | 47,206 |
The key APMs frequently used by the Group for continuing operations are:
Like-for-like revenue: The measure is defined as the revenue from continuing operations using the same number of working days when comparing the current period to the prior period. The Company moved to calendar billable month reporting from August 2018; the previous reporting cycle comprised of 52/53 week years. The number of working days in the current period was 258 against a comparator of 265 days. The comparator revenue has been adjusted to reflect an equal number of working days.
| | 362 DAYS TO 31 JULY 2019£'000 | 371 DAYS TO 3 AUGUST 2018 £,000 |
| Statutory revenue | 172,874 | 178,355 |
| Number of working days in the period | 258 | 265 |
| Number of working days in the current period | 258 | 258 |
| Like-for-like revenue | 172,874 | 173,643 |
| Like-for-like revenue % | (0.4)% |
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| 362 DAYS TO 31 JULY 2019£'000 | 371 DAYS TO 3 AUGUST 2018 |
| Statutory revenue | 172,874 | 178,355 |
| Less Adjusting revenue | (763) | (63) |
| Adjusted revenue | 172,111 | 178,292 |
Adjusting revenue includes revenue recorded after the decision to cease the operations of a subsidiary.
Adjusted net revenue: The measure is defined as revenue less project-related costs as shown on the consolidated income statement. Project-related costs comprise primarily of third party pass-through expenses and direct costs attributable to a project.
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| 362 DAYS TO 31 JULY 2019£'000 | 371 DAYS TO AUGUST 2018£,000 |
| Adjusted revenue | 172,111 | 178,355 |
| Project-related costs | (24,090) | (28,614) |
| Adjusted net revenue | 148,021 | 149,678 |
Like-for-like Adjusted net revenue: The measure is defined as the Adjusted net revenue from continuing operations using the same number of working days when comparing the current period to the prior period. The Company moved to calendar month reporting from August 2018; the previous reporting cycle comprised of 52/53 week years. The number of working days in the current period was 258 against a comparator of 265 days. The comparator revenue has been adjusted to reflect an equal number of working days.
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| 362 DAYS TO 31 JULY 2019£'000 | 371 DAYS TO 3 AUGUST 2018£,000 |
| Adjusted net revenue | 148,021 | 149,678 |
| Number of working days in the period | 258 | 265 |
| Number of working days in the current period | 258 | 258 |
| Like-for-like working days Adjusted net revenue | 148,021 | 145,724 |
| Like-for-like working days Adjusted net revenue growth % | 1.6% |
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Like-for-like Adjusted net revenue at constant currency: The measure is defined as the Adjusted net revenue from continuing operations using the same number of working days when comparing the current period to the prior period at constant currency. The Company moved to calendar month reporting from August 2018; the previous reporting cycle comprised of 52/53 week years. The number of working days in the current period was 258 against a comparator of 265 days. The comparator revenue has been adjusted to reflect an equal number of working days.
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| 362 DAYS TO 31 JULY 2019 | 371 DAYS TO 3 AUGUST 2018£,000 |
| Like-for-like working days Adjusted net revenue | 148,021 | 145,724 |
| Effect of constant currency | - | 2,711 |
| Like-for-like working days Adjusted net revenue at constant currency | 148,021 | 148,435 |
| Like-for-like working days Adjusted net revenue decline % at constant currency | (0.3)% |
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Adjusted operating profit: This measure is defined as the operating profit or loss less Adjusting Items.
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| 362 DAYS TO 31 JULY 2019 | 371 DAYS TO 3 AUGUST 2018 |
| Statutory operating profit/(loss) | 4,265 | (28,153) |
| Add back total Adjusting Items excluding pension finance charge and tax | 15,620 | 49,318 |
| Adjusted operating profit | 19,885 | 21,165 |
Adjusted profit before tax: This measure is defined as the Group net profit or loss before tax less Adjusting Items.
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| 362 DAYS TO 31 JULY 2019£'000 | 371 DAYS TO 3 AUGUST 2018£,000 |
| Statutory profit/(loss) before tax | 1,777 | (31,171) |
| Add back total Adjusting Items excluding tax | 15,779 | 49,642 |
| Adjusted profit before tax | 17,556 | 18,471 |
Like-for-like Adjusted profit before tax: The measure is defined as the adjusted profit before tax from continuing operations using the same number of working days when comparing the current period to the prior period. The Company moved to calendar month reporting from August 2018; the previous reporting cycle comprised of 52/53 week years. The number of working days in the current period was 258 against a comparator of 265 days. The comparator revenue has been adjusted to reflect an equal number of working days.
|
| 362 DAYS TO 31 JULY 2019£'000 | 371 DAYS TO 3 AUGUST 2018 |
| Adjusted profit before tax | 17,556 | 18,471 |
| Number of working days in the period | 258 | 265 |
| Number of working days in the current period | 258 | 258 |
| Like-for-like Adjusted profit before tax | 17,556 | 17,983 |
| Like-for-like Adjusted profit before tax % | (2.4)% |
|
Adjusted profit after tax: This measure is defined as the Group profit or loss after tax before Adjusting Items:
|
| 362 DAYS TO 31 JULY 2019£'000 | 371 DAYS TO 3 AUGUST 2018£,000 |
| Statutory profit/(loss) after tax | 1,121 | (32,394) |
| Add back total Adjusting Items | 13,007 | 47,206 |
| Adjusted profit after tax | 14,128 | 14,812 |
Adjusted basic earnings per share: This measure is defined as basic earnings per share after Adjusting Items.
|
| 362 DAYS TO 31 JULY2019£'000 | 371 DAYS TO 3 AUGUST 2018£,000 |
| Adjusted profit after tax | 14,128 | 14,812 |
| Weighted number of shares ('000) | 153,307 | 146,654 |
| Adjusted basic earnings per share (pence) | 9.22 | 10.10 |
Adjusted operating margin: This measure is defined as the percentage of Adjusted operating profit over net revenue.
|
| 362 DAYS TO 31 JULY 2019£'000 | 371 DAYS TO 3 AUGUST 2018£,000 |
| Adjusted net revenue | 148,021 | 149,678 |
| Adjusted operating profit | 19,885 | 21,165 |
| Adjusted operating margin | 13.4% | 14.1% |
Adjusted EBITDA: This measure is defined as the Adjusted operating profit or loss before depreciation, amortisation, finance expense and taxation. The amortisation charge is adjusted to remove the effect of the amortisation of acquired intangibles, which is included as an Adjusting Item.
The Adjusted EBITDA for 2018 has been determined on the basis of the continuing operations only for the purpose of calculating the ratio of net: EBITDA.
|
| 362 DAYS TO 31 JULY 2019£'000 | 371 DAYS TO 3 AUGUST 2018£,000 |
| Adjusted operating profit | 19,885 | 21,165 |
| Add: Depreciation and amortisation - continuing operations for the current year | 9,471 | 11,025 |
| Less: Amortisation of intangibles classified as Adjusting Items | (6,674) | (8,659) |
| Adjusted EBITDA | 22,682 | 23,531 |
Net debt: This measure is calculated as the total of loans and other borrowings (both current and non-current), less cash and cash equivalents.
|
| 2019£'000 | 2018£'000 |
| Loans - current liabilities | - | 40,363 |
| Loans - non-current liabilities | 60,416 | - |
| Cash and cash equivalents | (22,017) | (14,398) |
| Net Debt | 38,399 | 25,965 |
For the measurement of the bank covenants, cash and cash equivalents denominated in currencies other than GBP Sterling are translated at an average rate rather than at the period end spot rate used in the Consolidated Balance Sheet. The reconciliation is as follows:
|
| 2019 | 2018£'000 |
| Net Debt | 38,399 | 25,965 |
| Foreign exchange difference between spot rate and average rate | (272) | - |
| Net Debt for covenant purposes | 38,127 | 25,965 |
Net debt to Adjusted EBITDA: This measure is calculated by dividing Net Debt by Adjusted EBITDA. The Adjusted EBITDA for the prior year is based on continuing and discontinued operations.
|
| 362 DAYS TO 31 JULY 2019£'000 | 371 DAYS TO 3 AUGUST 2018£,000 |
| Adjusted EBITDA | 22,682 | 23,531 |
| Net Debt for covenant purposes | 38,127 | 25,965 |
| Net debt to Adjusted EBITDA | 1.68 | 1.10 |
Consolidated Income Statement
|
|
| 362 DAYS TO 31 JULY 2019 | 371 DAYS TO 3 AUGUST 2018 | ||||
|
| Note | Adjusted Results
£'000 | Adjusting Items (note 3) £'000 | Statutory Results
£'000 | Adjusted Results
£'000 | Adjusting Items
£'000 | Statutory Results
£'000 |
|
|
|
|
|
|
|
|
|
| Continuing operations: |
|
|
|
|
|
|
|
| Revenue | 2 | 172,111 | 763 | 172,874 | 178,292 | 63 | 178,355 |
| Project-related costs |
| (24,090) | (525) | (24,615) | (28,614) | - | (28,614) |
| Net revenue |
| 148,021 | 238 | 148,259 | 149,678 | 63 | 149,741 |
| Cost of service |
| (74,805) | (303) | (75,108) | (74,075) | (247) | (74,322) |
| Gross profit |
| 73,216 | (65) | 73,151 | 75,603 | (184) | 75,419 |
| Selling costs |
| (14,732) | (34) | (14,766) | (13,170) | - | (13,170) |
| Administrative expenses |
| (38,763) | (17,292) | (56,055) | (41,817) | (50,676) | (92,493) |
| Share of results of joint arrangement |
| 169 | - | 169 | 569 | - | 569 |
| Other operating (expense)/income |
| (5) | 1,771 | 1,766 | (20) | 1,542 | 1,522 |
| Operating profit/(loss) |
| 19,885 | (15,620) | 4,265 | 21,165 | (49,318) | (28,153) |
| Net pension finance income/(expense) |
| - | 30 | 30 | - | (324) | (324) |
| Other finance expense |
| (2,329) | (189) | (2,518) | (2,694) | - | (2,694) |
| Profit/(loss) before tax | 2 | 17,556 | (15,779) | 1,777 | 18,471 | (49,642) | (31,171) |
| Income tax (charge)/credit |
| (3,428) | 2,772 | (656) | (3,659) | 2,436 | (1,223) |
| Net profit/(loss) for the period from continuing operations |
| 14,128 | (13,007) | 1,121 | 14,812 | (47,206) | (32,394) |
| Net profit from discontinued operations |
| - | - | - | 3,511 | (326) | 3,185 |
| Net profit/(loss) for the period |
| 14,128 | (13,007) | 1,121 | 18,323 | (47,532) | (29,209) |
|
|
|
|
|
|
|
|
|
| Shareholders of the parent company |
| 14,128 | (13,007) | 1,121 | 18,323 | (47,532) | (29,209) |
|
|
|
|
|
|
|
|
|
| From continuing operations |
| 9.22 | (8.49) | 0.73 | 10.10 | (32.19) | (22.09) |
| From continuing and discontinued operations | 7 | 9.22 | (8.49) | 0.73 | 12.49 | (32.41) | (19.92) |
| Diluted earnings/(loss) per share (p) |
|
|
|
|
|
|
|
| From continuing operations |
| 9.17 | (8.44) | 0.73 | 10.10 | (32.19) | (22.09) |
| From continuing and discontinued operations | 7 | 9.17 | (8.44) | 0.73 | 12.49 | (32.41) | (19.92) |
* The results for the 371 days to 3 August 2018 have been restated for certain types of cost reclassifications (note 10) and to present net revenue (note 11).
Consolidated Other Comprehensive Income
|
| 362 DAYS TO31 JULY 2019£'000 | 371 DAYS TO3 AUGUST 2018£'000 |
| Profit/(loss) for the period | 1,121 | (29,209) |
| Items that will not be reclassified subsequently to profit or loss: |
|
|
| Actuarial profit on defined benefits pension scheme | 6,206 | 10,958 |
| Tax charge on items taken through other comprehensive income | (991) | (1,731) |
|
| 5,215 | 9,227 |
| Items that may be reclassified subsequently to profit or loss: |
|
|
| Transfers of (losses)/gains on cash flow hedges | (265) | 76 |
| (Losses)/gains on cash flow hedges | (201) | 265 |
| Foreign exchange gains/(losses) | 2,068 | (852) |
|
| 1,602 | (511) |
| Other comprehensive income for the period | 6,817 | 8,716 |
| Total comprehensive income/(expense) for the period attributable to shareholders of the parent company | 7,938 | (20,493) |
Consolidated Statement of Changes in Equity
|
| SHARE CAPITAL£'000 | ADDITIONAL | ESOPRESERVE£'000 | TREASURYSHARES£'000 | SHARE OPTION | HEDGING AND TRANSLATION RESERVE£'000 | OTHERRESERVES£'000 | RETAINED EARNINGS/ | TOTAL£'000 |
| Balance at 29 July 2017 | 14,284 | 70,418 | - | (163) | 7,900 | 1,194 | 79,349 | 3,572 | 97,205 |
| Loss for the period | - | - | - | - | - | - | - | (29,209) | (29,209) |
| Other comprehensive (expense)/income | - | - | - | - | - | (511) | (511) | 9,227 | 8,716 |
| Total comprehensive expense | - | - | - | - | - | (511) | (511) | (19,982) | (20,493) |
| Dividends | - | - | - | - | - | - | - | (2,784) | (2,784) |
| Recognition of share-based contingent consideration deemed as remuneration | - | - | - | - | 6,016 | - | 6,016 | - | 6,016 |
| Transfer of share-based contingent consideration deemed as remuneration | - | 119 | - | - | (6,865) | - | (6,746) | 6,965 | 219 |
| Recognition of share-based payments | - | - | - | - | 1,274 | - | 1,274 | - | 1,274 |
| Settlement of share-based contingent consideration deemed as remuneration | 1,059 | - | - | - | (1,101) | - | (1,101) | 42 | - |
| Tax on share-based payments | - | - | - | - | (74) | - | (74) | - | (74) |
|
3 August 2018 | 15,343 | 70,537 | - | (163) | 7,150 | 683 | 78,207 | (12,187) | 81,363 |
| Profit for the period | - | - | - | - | - | - | - | 1,121 | 1,121 |
| Other comprehensive income | - | - | - | - | - | 1,602 | 1,602 | 5,215 | 6,817 |
| Total comprehensive income | - | - | - | - | - | 1,602 | 1,602 | 6,336 | 7,938 |
| Dividends | - | - | - | - | - | - | - | (2,990) | (2,990) |
| Recognition of share-based contingent consideration deemed as remuneration | - | - | - | - | 1,669 | - | 1,669 | - | 1,669 |
| Transfer of share-based contingent consideration deemed as remuneration | - | 128 | - | - | (7,440) | - | (7,312) | 7,909 | 597 |
| Purchase of own shares | - | - | (185) | - | - | - | (185) | - | (185) |
| Recognition of share-based payments | - | - | - | - | (650) | - | (650) | - | (650) |
| Settlement of share-based payment | - | - | 164 | - | - | - | 164 | 8 | 172 |
| Tax on share-based payments | - | - | - | - | 75 | - | 75 | - | 75 |
| Balance at 31 July 2019 | 15,343 | 70,665 | (21) | (163) | 804 | 2,285 | 73,570 | (924) | 87,989 |
** Additional paid-in capital includes share premium, merger reserve and capital redemption reserve.
Consolidated Balance Sheet
|
| NOTE | 31 JULY 2019£'000 | 3 AUGUST 2018£'000 |
| Assets |
|
|
|
| Non-current assets |
|
|
|
| Property, plant and equipment |
| 5,499 | 6,301 |
| Investment property |
| 4,957 | 4,470 |
| Goodwill |
| 85,662 | 84,742 |
| Other intangible assets |
| 25,573 | 31,493 |
| Other long-term financial asset |
| - | 3 |
| Investment in joint arrangement |
| 547 | 223 |
| Deferred tax assets |
| 2,528 | 1,264 |
| Retirement benefits surplus | 8 | 6,665 | 1,858 |
| Other non-current assets |
| 18 | 13 |
|
|
| 131,449 | 130,367 |
| Current assets |
|
|
|
| Trade and other receivables |
| 40,911 | 40,451 |
| Derivative financial instruments |
| - | 291 |
| Income tax receivable |
| 136 | 904 |
| Assets held for sale |
| - | 5,282 |
| Cash and cash equivalents |
| 22,017 | 14,398 |
|
|
| 63,064 | 61,326 |
| Total assets |
| 194,513 | 191,693 |
| Liabilities |
|
|
|
| Current liabilities |
|
|
|
| Loans |
| - | 40,363 |
| Trade and other payables |
| 27,479 | 35,851 |
| Derivative financial instruments |
| 158 | 62 |
| Income tax payable |
| 1,946 | 61 |
| Deferred consideration payable |
| 2,000 | 21,170 |
| Deferred income |
| 5,195 | 4,915 |
| Provisions |
| 1,383 | 919 |
|
|
| 38,161 | 103,341 |
| Non-current liabilities |
|
|
|
| Loans |
| 60,416 | - |
| Other non-current liabilities |
| 2,228 | 822 |
| Provisions |
| 1,874 | 1,849 |
| Deferred tax liabilities |
| 3,845 | 4,318 |
|
|
| 68,363 | 6,989 |
| Total liabilities |
| 106,524 | 110,330 |
| Net assets |
| 87,989 | 81,363 |
|
|
|
|
|
| Capital and reserves |
|
|
|
| Share capital |
| 15,343 | 15,343 |
| Other reserves |
| 73,570 | 78,207 |
| Accumulated deficit |
| (924) | (12,187) |
| Total equity |
| 87,989 | 81,363 |
These financial statements were approved by the Board of Directors on 1 October 2019.
Consolidated Cashflow Statement
|
| NOTE | 362 DAYS TO31 JULY 2019£000 | 371 DAYS TO3 AUGUST 2018£000 |
| Operating activities |
|
|
|
| Cash generated from operations |
| 8,989 | 25,848 |
| Interest paid |
| (2,329) | (2,694) |
| Income taxes paid |
| (306) | (5,430) |
| Net cash generated from operating activities |
| 6,354 | 17,724 |
|
|
|
|
|
| Investing activities |
|
|
|
| Purchase of property, plant and equipment |
| (2,756) | (4,425) |
| Purchase of other intangibles |
| (279) | (149) |
| Proceeds on disposal of property, plant and equipment |
| 7,230 | 3,166 |
| Proceeds on disposal of subsidiaries |
| - | 32,442 |
| Deferred consideration paid for acquisitions made in prior periods |
| (19,875) | (16,518) |
| Net cash (used)/generated from investing activities |
| (15,680) | 14,516 |
|
|
|
|
|
| Financing activities |
|
|
|
| Purchase of own shares |
| (185) | - |
| Dividends paid | 6 | (2,990) | (2,784) |
| Additional investment in joint venture |
| (118) | - |
| Increase/(decrease) in bank loans |
| 19,083 | (40,000) |
| Net cash generated/(used) in financing activities |
| 15,790 | (42,784) |
| Net increase/(decrease) in cash and cash equivalents |
| 6,464 | (10,544) |
| Cash and cash equivalents at beginning of the period |
| 14,398 | 25,651 |
| Effect of foreign exchange rate changes |
| 1,155 | (709) |
| Cash and cash equivalents at end of the period | 9 | 22,017 | 14,398 |
The preliminary results have been prepared on the basis of the accounting policies as set out in the Group's Annual Report and Accounts 2019 and 2018. The financial information set out in the preliminary results does not comprise statutory accounts for the purpose of section 434 of the Companies Act 2006 in respect of the periods ended 31 July 2019 and 3 August 2018.
The financial information for the period ended 31 July 2019 has been extracted from the Group's 2019 statutory accounts for that period which have been prepared on a going concern basis and in accordance with the recognition and measurement principles of International Financial Reporting Standards as adopted by the European Union ('IFRS') and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The preliminary results have been prepared under the historical cost convention, except for the recognition of derivative financial instruments, and using the accounting policies set out in the Group's 2018 statutory accounts. The accounting policies adopted are consistent with those of the previous financial year, and there have been no changes in accounting standards during the year that have had a material effect on the Group, apart from the restatement explained in note 10 and the presentation of net revenue in note 11.
The 2019 statutory accounts will be delivered to the Registrar of Companies following the Company's 2019 Annual General Meeting. The financial information for the period ended 3 August 2018 has been extracted from the Group's statutory accounts for that period, which have been delivered to the Registrar of Companies. The Auditor's reports on both the Group's 2019 and 2018 statutory accounts were unqualified and did not contain statements under sections 498(2) or 498(3) of the Companies Act 2006 in respect of the 2019 and 2018 statutory accounts.
The Directors, having made appropriate enquiries, consider that adequate resources exist for the Group to continue in operational existence for a period of at least twelve months from the date of approval of the consolidated financial statements and that, therefore, it is appropriate to adopt the going concern basis in preparing the combined financial information for the period ended 31 July 2019.
New accounting standards, amendments to standards, and IFRIC interpretations which became applicable during the period were either not relevant or had no impact on the Group's net results or net assets except as described below.
IFRS 9 Financial Instruments.
The Group adopted IFRS 9 Financial Instruments ('IFRS 9') for the financial period beginning on 4 August 2018.
Under the standard, trade receivables and cash will continue to be accounted for at amortised cost. IFRS 9 introduces an expected credit losses model, rather than the current incurred loss model, when assessing the impairment of financial assets. Given the historic rate of revenue loss and aging of the trade receivables, the expected loss model does not have a material impact on Group's opening retained earnings on application as at 4 August 2018 and the current period. Therefore in line with the transition guidelines in IFRS 9, the Group has not restated its financial statements for the current and prior period.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 Revenue from Contracts with Customers ('IFRS 15') was adopted by the Group for the financial period beginning on 4 August 2018. In accordance with the transition provisions, the new rules have been adopted using the simplified retrospective transition method. The transition to IFRS 15 did not have a material impact on the Group's opening retained earnings. As a result a reconciliation of retained earnings is not required. Following the adoption of IFRS 15, certain liabilities which were previously presented as deferred income are now presented as contract liabilities.
IFRS 16 Leases
The Group delivers transformative growth for the world's largest companies and fuses three specialisms - Strategy, Innovation, and Communications under its organisational model - The Connective. It is a network which spans all of the Group's digital transformation businesses.
The Group reports its results through one segment - The Connective - and with corporate costs shown as a separate segment based on the Group's internal reporting to the Chief Operating Decision Maker ("CODM"). The CODM has been determined to be the Chief Executive Officer and Chief Financial Officer who are primarily responsible for the assessment of the performance of the businesses/brands which currently operate under The Connective.
The corporate costs are reported separately to the single operating segment as this presentation better reflects the segment's underlying profitability.
Results from continuing operations for the current period:
|
| 362 DAYS TO 31 JULY 2019 |
|
| The Connective | Corporate costs | Total |
| £'000 | £'000 | £'000 | |
| Revenue | 172,874 | - | 172,874 |
|
|
|
|
|
| Net revenue | 148,259 | - | 148,259 |
| Adjusting items | (238) | - | (238) |
| Adjusted net revenue | 148,021 | - | 148,021 |
|
|
|
|
|
| Operating profit/(loss) before Adjusting Items | 25,631 | (5,746) | 19,885 |
| Adjusting Items | (9,913) | (5,707) | (15,620) |
| Statutory profit/(loss) from operations | 15,718 | (11,453) | 4,265 |
| Net pension finance income |
|
| 30 |
| Other finance expense |
|
| (2,518) |
| Statutory profit before tax |
|
| 1,777 |
| Income tax charge |
|
| (656) |
| Statutory net profit for the period from continuing operations |
|
| 1,121 |
Results from continuing operations for the prior period:
|
| 371 DAYS TO 3 AUGUST 2018 (RESTATED NOTE 11) |
|
| The Connective | Corporate costs | Total |
| £'000 | £'000 | £'000 | |
| Revenue | 178,355 | - | 178,355 |
|
|
|
|
|
| Net revenue | 149,741 | - | 149,741 |
| Adjusting items | (63) | - | (63) |
| Adjusted net revenue | 149,678 | - | 149,678 |
|
|
|
|
|
| Operating profit/(loss) before Adjusting Items | 26,483 | (5,318) | 21,165 |
| Adjusting Items | (49,287) | (31) | (49,318) |
| Statutory loss from operations | (22,804) | (5,349) | (28,153) |
| Net pension finance expense |
|
| (324) |
| Other finance expense |
|
| (2,694) |
| Statutory loss before tax |
|
| (31,171) |
| Income tax charge |
|
| (1,223) |
| Statutory net loss for the period from continuing operations |
|
| (32,394) |
Operations
Revenue by geographical area is based on the location where the provision of goods and services have been provided.
|
| 362 DAYS TO 31 JULY 2019£'000 | 371 DAYS TO3 AUGUST 2018£'000 |
| United Kingdom | 105,738 | 119,753 |
| United States of America | 65,166 | 57,066 |
| Rest of the world | 1,970 | 1,536 |
| Total | 172,874 | 178,355 |
Customer location
The Group derives 51% (2018: 55%) of the total revenue from customers located in the UK, 41% (2018: 36%) of the total revenue from customers located in the US and 8% (2018: 9%) from customers located in the rest of the world.
Adjusting items disclosed on the face of the Consolidated Income Statement are as follows:
| Expense/(income) | 2019£000 | 2019£000 | 2018£'000 | 2018£'000 |
| Restructuring items |
|
|
|
|
| Redundancies and other charges | 1,946 |
| 2,737 |
|
| Losses related to closure of subsidiary | 251 |
| - |
|
| Costs associated with empty properties | 279 |
| 325 |
|
| Impairment of tangible assets | 159 |
| - |
|
|
|
| 2,635 |
| 3,062 |
| St Ives Defined Benefits Pension Scheme costs |
|
|
|
|
| Scheme administrative costs | 502 |
| 617 |
|
| Curtailment credit | - |
| (1,261) |
|
| Past service cost (GMP equalisation uplift) | 4,126 |
| - |
|
| Other related costs | 1,079 |
| 613 |
|
|
|
| 5,707 |
| (31) |
| Costs related to acquisitions made in prior periods |
|
|
|
|
| Amortisation of acquired intangibles | 6,674 |
| 8,659 |
|
| Impairment of goodwill and intangible assets | - |
| 12,082 |
|
| Contingent consideration required to be treated as remuneration | 2,375 |
| 23,994 |
|
| Increase in deferred consideration | - |
| 3,094 |
|
|
|
| 9,049 |
| 47,829 |
| Adjusting Items |
| 17,391 |
| 50,860 |
| Profit on disposal of property, plant and equipment |
| (1,771) |
| (1,542) |
| Adjusting Items before interest and tax |
| 15,620 |
| 49,318 |
| Bank arrangement fees |
| 189 |
| - |
| Net pension finance (credit)/charge in respect of defined benefits pension scheme |
| (30) |
| 324 |
| Adjusting Items before tax |
| 15,779 |
| 49,642 |
| Income tax credit |
| (2,772) |
| (2,436) |
| Adjusting Items after tax |
| 13,007 |
| 47,206 |
During the period, a decision was made to cease the operations of My Bench Limited, a 100% subsidiary of the Kin and Carta plc, and therefore a charge of £0.3 million was recorded as an Adjusting Item.
Empty property costs of £0.3 million and impairment of £0.2 million are recorded in the Consolidated Income Statement, following the restructuring activities in Pragma. These items are shown as Adjusting Items.
Disposal of properties
The profit on disposal of property, plant and equipment is comprised of £1.9 million relating to the sale of property in Redditch offset by a loss of £0.1 million relating to obsolete software.
St Ives Defined Benefits Pension Scheme costs
The Scheme charges include service costs of £0.5 million, costs related to Guaranteed Minimum Pension (GMP) equalisation uplift of £4.1 million and costs in relation to running the scheme of £1.0 million, offset by a Pension finance credit of £30,000. These items are recorded in corporate costs.
Costs related to acquisitions made in prior periods
Charges relating to the amortisation of acquired customer relationships, proprietary techniques and software amounted to £6.7 million in the current period.
Contingent consideration required to be treated as remuneration charge of £2.4 million relates to a prior period acquisition of The App Business Limited ('TAB').
Tax
In the current period, the tax credit of £2.8 million (2018: £2.4 million) relates to the items discussed above.
Discontinued Operations
In the prior period, £0.3 million was recorded as Adjusting Items in respect of the disposal of the Books and Marketing Activation segments.
| Continuing Operations: | 2019£000 | 2018£000 |
| Total current tax charge: |
|
|
| Current period | (2,970) | (3,588) |
| Adjustments in respect of prior periods | (575) | 58 |
| Total current tax charge | (3,545) | (3,530) |
| Deferred tax on origination and reversal of temporary differences: |
|
|
| Deferred tax credit | 2,641 | 2,249 |
| Adjustments in respect of prior periods | 248 | 58 |
| Total deferred tax credit | 2,889 | 2,307 |
| Total income tax charge | (656) | (1,223) |
|
|
|
|
| Discontinued Operations: | 2019£000 | 2018£000 |
| Total current tax charge: |
|
|
| Current period | - | (894) |
| Adjustments in respect of prior periods | - | 35 |
| Total current tax charge | - | (859) |
| Deferred tax on origination and reversal of temporary differences: |
|
|
| Deferred tax credit | - | 175 |
| Adjustments in respect of prior periods | - | 19 |
| Total deferred tax credit | - | 194 |
| Total income tax charge | - | (665) |
|
|
|
|
| Continuing and Discontinued Operations: | 2019£000 | 2018£000 |
| Total current tax charge: |
|
|
| Current period | (2,970) | (4,482) |
| Adjustments in respect of prior periods | (575) | 93 |
| Total current tax charge | (3,545) | (4,389) |
| Deferred tax on origination and reversal of temporary differences: |
|
|
| Deferred tax credit | 2,641 | 2,424 |
| Adjustments in respect of prior periods | 248 | 77 |
| Total deferred tax credit | 2,889 | 2,501 |
| Total income tax charge | (656) | (1,888) |
Income tax on the profit/(loss) from continuing operations before and after Adjusting Items is as follows:
| | 2019£000 | 2018£000 |
| Tax charge on Adjusted profit before tax | (3,428) | (3,659) |
| Tax credit on Adjusting items | 2,772 | 2,436 |
| Total income tax charge | (656) | (1,223) |
The tax charge for continuing operations can be reconciled to the profit/(loss) before tax shown in the Consolidated Income Statement as follows:
| | 2019£000 | 2018£000 |
| Profit/(loss) before tax from continuing operations | 1,777 | (31,171) |
| Tax calculated at a rate of 46.9% (2018: 19.04%) | (835) | 5,935 |
| Non-deductible charges on impairment of tangible and intangible assets | - | (1,817) |
| Expenses not deductible for tax purposes | (789) | (6,546) |
| Effect of tax deductible goodwill | 588 | 626 |
| Effect of change in United Kingdom corporate tax rate | 66 | (46) |
| Credit on research and development activities | 255 | 244 |
| Movement in deferred tax on industrial buildings | 368 | 290 |
| Re-assessment of tax losses | 18 | (25) |
| Adjustments in respect of prior periods | (327) | 116 |
| Total income tax charge | (656) | (1,223) |
Income tax as shown in the Consolidated Statement of Comprehensive Income is as follows:
| | 2019£000 | 2018£000 |
| United Kingdom corporation tax credit | 608 | 1,258 |
| Deferred tax on origination and reversal of temporary differences | (1,599) | (2,989) |
| Total income tax charge | (991) | (1,731) |
Income tax as shown in the Consolidated Statement of Changes in Equity is as follows:
| | 2019£000 | 2018£000 |
| Deferred tax on origination and reversal of temporary differences | 75 | (74) |
|
|
£'000 |
| TAB - deferred consideration | 16,523 |
| Solstice - deferred consideration | 3,352 |
| Net cash outflow | 19,875 |
|
| per share | 2019£'000 | 2018£'000 |
| Final dividend paid for the period ended 28 July 2017 | 1.30p | − | 1,857 |
| Interim dividend paid for the period ended 2 February 2018 | 0.65p | − | 927 |
| Final dividend paid for the period ended 3 August 2018 | 1.30p | 1,993 | − |
| Interim dividend paid for the period ended 31 January 2019 | 0.65p | 997 | − |
| Dividends paid during the period |
| 2,990 | 2,784 |
| Proposed final dividend at the period end of 1.30p per share | 1.30p | 1,993 | 1,993 |
The calculation of the basic and diluted earnings/(loss) per share are based on the following:
|
| 2019£000 | 2018£000 |
| Weighted average number of ordinary shares for the purposes of basic earnings/(loss) per share | 153,307 | 146,654 |
| Effect of dilutive potential ordinary shares: |
|
|
| Share options | 842 | − |
| Weighted average number of ordinary shares for the purposes of diluted earnings/(loss) per share | 154,149 | 146,654 |
|
| 2019 | 2018 | ||
| Continuing Operations | Earnings /(loss) £'000 | Earnings /(loss) per share pence | Earnings /(loss) £'000 | Earnings /(loss) per share pence |
|
|
|
|
|
|
| Earnings/(loss) and basic earnings/(loss) per share |
|
|
|
|
| Adjusted earnings and Adjusted basic earnings per share | 14,128 | 9.22 | 14,812 | 10.10 |
| Adjusting items | (13,007) | (8.49) | (47,206) | (32.19) |
| Earnings/(loss) and basic earnings/(loss) per share | 1,121 | 0.73 | (32,394) | (22.09) |
|
|
|
|
|
|
| Earnings/(loss) and diluted earnings/(loss) per share |
|
|
|
|
| Adjusted earnings and Adjusted diluted earnings per share | 14,128 | 9.17 | 14,812 | 10.10 |
| Adjusting items | (13,007) | (8.44) | (47,206) | (32.19) |
| Earnings/(loss) and diluted earnings/(loss) per share | 1,121 | 0.73 | (32,394) | (22.09) |
|
|
|
|
|
|
| Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
| Earnings and basic earnings per share |
|
|
|
|
| Adjusted earnings and Adjusted basic earnings per share | - | - | 3,511 | 2.39 |
| Adjusting items | - | - | (326) | (0.22) |
| Earnings and basic earnings per share | - | - | 3,185 | 2.17 |
|
|
|
|
|
|
| Earnings and diluted earnings per share |
|
|
|
|
| Adjusted earnings and Adjusted diluted earnings per share | - | - | 3,511 | 2.39 |
| Adjusting Items | - | - | (326) | (0.22) |
| Earnings and diluted earnings per share | - | - | 3,185 | 2.17 |
|
|
|
|
|
|
| Continuing and Discontinued Operations |
|
|
|
|
|
|
|
|
|
|
| Earnings/(loss) and basic earnings/(loss) per share |
|
|
|
|
| Adjusted earnings and Adjusted basic earnings per share | 14,128 | 9.22 | 18,323 | 12.49 |
| Adjusting items | (13,007) | (8.49) | (47,532) | (32.41) |
| Earnings/(loss) and basic earnings/(loss) per share | 1,121 | 0.73 | (29,209) | (19.92) |
|
|
|
|
|
|
| Earnings/(loss) and diluted earnings/(loss) per share |
|
|
|
|
| Adjusted earnings and Adjusted diluted earnings per share | 14,128 | 9.17 | 18,323 | 12.49 |
| Adjusting Items | (13,007) | (8.44) | (47,532) | (32.41) |
| Earnings/(loss) and diluted earnings/(loss) per share | 1,121 | 0.73 | (29,209) | (19.92) |
Adjusted earnings/(loss) is calculated by adding back Adjusting Items, as adjusted for tax, to the profit/(loss) for the period.
9. Notes to the consolidated cash flow statement
Reconciliation of cash generated from operations
|
| 2019£'000 | 2018£'000 |
| Profit/(loss) from continuing operations | 4,265 | (28,153) |
| Profit from discontinued operations | - | 3,850 |
|
|
|
|
| Adjustments for: |
|
|
| Depreciation of property, plant and equipment | 2,648 | 3,905 |
| Share of profit from joint arrangement | (169) | (569) |
| Disbursement from joint arrangement | - | 876 |
| Impairment losses related to continuing operations | 159 | 12,082 |
| Impairment losses related to discontinued operations | - | 18,833 |
| Amortisation of intangible assets | 6,823 | 8,683 |
| Profit on disposal of subsidiaries | - | (18,334) |
| Profit on disposal of property, plant and equipment | (1,766) | (1,501) |
| Share-based payment (credit)/charge | (650) | 1,274 |
| Settlement of share-based payment | 172 | - |
| Increase/(decrease) in defined benefits pension scheme obligations | 1,429 | (7,882) |
| Re-measurement of deferred consideration | - | 3,094 |
| Charge for contingent consideration required to be treated as remuneration | 2,375 | 23,994 |
| Increase in provisions | 491 | 1,402 |
| Operating cash inflows before movements in working capital | 15,777 | 21,554 |
| (Increase)/decrease in receivables | (181) | 9,620 |
| Decrease in inventory | - | 662 |
| Decrease in payables | (6,856) | (4,587) |
| Increase in contract liabilities | 5,164 | - |
| Decrease in deferred income | (4,915) | (1,401) |
| Cash generated from operations | 8,989 | 25,848 |
ºAnalysis of' financing liabilities | | | Non-cash changes |
| |
|
| 4 August 2018 £000 | Financing Cash flow £'000 | Repayment £'000 | Foreign exchange gains £'000 | 31 July 2019 £'000 |
| Bank loans - current | 40,363 | - | (40,363) | - | - |
| Bank loans - non-current | - | 59,446 | - | 970 | 60,416 |
|
| 40,363 | 59,446 | (40,363) | 970 | 60,416 |
The effective interest rates on cash and cash equivalents are based on current market rates.
10. Restatement
Previously the Group reported certain employee costs of the various businesses under cost of sales. The Group's accounting policy is to include these types of costs within selling costs and, accordingly, the comparatives have been restated to ensure consistency. Additionally the Group are reporting net revenue and therefore cost of sales are split between Project related costs and Cost of service. This is detailed within note 11.
|
| 371 DAYS TO 3 AUGUST 2018 | ||
|
| Before restatement | Adjustments | Restated |
|
| £'000 | £'000 | £'000 |
| Adjusted results: |
|
|
|
| Cost of sales | (105,110) | 105,110 | - |
| Project related costs | - | (28,614) | (28,614) |
| Cost of service | - | (74,075) | (74,075) |
| Selling costs | (10,749) | (2,421) | (13,170) |
| Statutory results: |
|
|
|
| Cost of sales | (105,357) | 105,357 | - |
| Project related costs | - | (28,614) | (28,614) |
| Cost of service | - | (74,322) | (74,322) |
| Selling costs | (10,749) | (2,421) | (13,170) |
11. Net revenue
The Group reports net revenue as the Board believes it to be a more relevant growth metric for the business and more closely aligns with technology consulting peers. It is more relevant because the Group is moving away from project related media buying and other pass-through costs which skews gross revenue metrics, and is focusing on more DX related business opportunities that are more indicative of its core business and underlying margin generation.
Net revenue is calculated as revenue less project-related costs as shown on the Consolidated Income Statement.
11. Net revenue (continued)
Project-related costs are comprised primarily of third party pass-through expenses as well as direct third party services attributable to a project. These costs typically include amounts payable to external suppliers where they are engaged, at the Group's discretion, to perform a specific part of the performance obligation under a contract with the client, other than the costs of certain freelance contractors and agency staff.
Cost of service includes the costs of direct employed staff, freelance contractors and agency staff who are engaged in the delivery of performance obligations under client contracts.
The results for the 371 days ended 3 August 2018 have been restated as follows:
|
| 371 DAYS TO 3 AUGUST 2018 | ||
|
| Before restatement | Adjustments | Restated |
|
| £'000 | £'000 | £'000 |
| Adjusted results: |
|
|
|
| Revenue | 178,292 | - | 178,292 |
| Project related costs | N/A | (28,614) | (28,614) |
| Cost of sales | (105,110) | 105,110 | - |
| Net Revenue | N/A | 76,496 | 149,678 |
| Cost of services | N/A | (74,075) | (74,075) |
| Gross profit | 73,182 | 2,421 | 75,603 |
| Selling costs | (10,749) | (2,421) | (13,170) |
| Administrative expenses | (41,817) | - | (41,817) |
| Share of results of joint arrangements | 569 | - | 569 |
| Other operating expense | (20) | - | (20) |
| Operating profit | 21,165 | - | 21,165 |
The above adjustments are also reflected in the Statutory Results for 371 days ended 3 August 2018.
The Group disposed of its Books and Marketing Activation segments in the prior period. As a result, these segments have been classified as discontinued operations for the prior period.
The results of the discontinued operations are summarised as follows;
|
|
| 371 DAYS TO 3 AUGUST 2018£'000 |
| Revenue |
| 140,738 |
| Operating costs |
| (136,562) |
| Profit before tax before Adjusting Items |
| 4,176 |
| Income tax charge |
| (665) |
| Profit after tax before Adjusting Items |
| 3,511 |
Adjusting Items from discontinued operations are analysed below:
|
|
| 371 DAYS TO 3 AUGUST 2018£'000 |
| Impairment of goodwill |
| (14,482) |
| Impairment of non-current and current assets |
| (4,351) |
| Amortisation of acquired intangibles and other Adjusting Items |
| 173 |
| Total Adjusting Items before tax |
| (18,660) |
| Gain on sale of discontinued operations |
| 18,334 |
| Total Adjusting Items after tax |
| (326) |
|
|
| 371 DAYS TO3 AUGUST 2018£'000 |
| Profit after tax before Adjusting Items |
| 3,511 |
| Total Adjusting Items after tax |
| (326) |
| Statutory profit after tax |
| 3,185 |
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. No material related party transactions have been entered into during the period, which might reasonably affect the decisions made by the users of these financial statements.
No executive officers of the Company or their associates had transactions with the Group during the period.
The Group earned revenue of £0.5 million (2018: £0.2 million) from Loop Integration LLC and the Group incurred £6,000 charges (2018: £19,000) for services received. The Group also received a dividend of £nil (2018: £0.4 million). At the reporting date, Loop Integration LLC owed the Group £93,000 (2018: £8,000) for services rendered and £123,000 (2018: £nil) for a loan balance outstanding.
The Group's principal risks and key mitigating activities in place to address them, as at 3 August 2018, are set out in pages 38 to 41 of the Group's Annual Report and Accounts 2018, a copy of which is available on the Group's website: www.kinandcarta.com.
The principal risks have been considered by the Board. While no new key risks have been added to the register during the period, the following changes to the risk ratings have been made, since the period ended 3 August 2018.
(i) Economy and volatility
This risk relates to changing economic conditions that may inhibit growth and create uncertainty. This could lead to volatility in earnings.
Uncertainty in the economy largely associated with Brexit, could result in marketing campaigns or projects being cancelled or deferred at short notice. Whilst the Connective does have long term contracts with clients, the level of spend is predominantly at the client's discretion rather than being derived from guaranteed sales volumes. The board considers this risk to have increased due to the global economic environment.
Mitigations in place include: diversification into markets that are capable of delivering profit growth with an increasing range of marketing companies; diversification through growth in the US and other overseas locations, where client demand warrants it; investment in a wider range of services offered to clients; a continual review of the Connective's cost base; secure more long-term client relationships and contracts with a greater emphasis on recurring revenue; seek to increase market share by investing in sophisticated and targeted sales lead generation; a regular review of performance of all businesses against their budgets, monthly forecasting and implementing remedial action, where needed.
(ii) Data security and GDPR
Failure to adequately protect, prevent or respond to a data breach or cyber-attack would expose the Connective to non-compliance with the General Data Protection Regulation ("GDPR"), reputational damage, fines, disruption to the business and / or the loss of information for our clients, employees or business. It is vital that we continue to educate our people, maintain vigilance across the Connective and scrutinise our existing capabilities. The board considers this risk to have increased due to a fast-changing environment with evolving external threats.
Mitigations in place include: IT functions in place around the Connective with responsibility to protect data (e.g. encryption, firewalls, restricted access); employee awareness drives and training regarding data protection and education on external threats; periodic reviews by Internal Audit, utilising in-house IT as well as specialist external consultants; cyber security and IT questionnaire completed periodically by subsidiaries to highlight areas of potential risk, together with any mitigating actions performed in order to address this risk; A Data Protection Officer in place for the Connective to assist with its GDPR compliance and to provide a report to the Board prior to each Board meeting; GDPR audits and the rolling out of new policies, processes and procedures.
15. Responsibilities
The 2019 Annual Report and Accounts which will be issued in November 2019 contains a responsibility statement in compliance with DTR 4.1.12 of the Listing Rules which sets out that as at the date of approval of the Annual Report and Accounts on 1 October 2019, the directors confirm to the best of their knowledge:
● the Group and Company financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Group and Company, respectively; and
● the performance review contained in the Annual Report and Accounts includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that they face.
At the date of this statement, the directors are those listed in the Group's 2018 Annual Report and Accounts with the exception of the following appointments and resignations:
Appointments: J Schwan - Chief Executive Officer - 4 August 2018
David Bell - Non Executive Director - 4 August 2018
Michele Maher - Non Executive Director - 15 May 2019
Chris Kutsor - Chief Financial Officer - 17 June 2019
John Kerr - Non Executive Chairman Designate - 22 July 2019
Resignations: Matt Armitage - Chief Executive Officer - 4 August 2018
Brad Gray - Chief Financial Officer - 17 June 2019
Mike Butterworth - Non Executive Director - 1 October 2019
The foregoing contains forward looking statements made by the directors in good faith based on information available to them up to 1 October 2019. Such statements need to be read with caution due to inherent uncertainties, including economic and business risk factors underlying such statement.