2nd Apr 2007 07:02
Evolution Group PLC02 April 2007 Embargoed until 7.00am 2 April 2007 The Evolution Group Plc (the "Evolution Group", the "Group", the "Company") Preliminary results for the year ended 31 December 2006 Evolution Group, the listed investment bank and private client fund managementgroup, today announces its preliminary results for the year ended 31 December2006.Operational highlights • Evolution Securities - business model re-balanced and improving operational performance. • Williams de Broe - strong performance; 175% increase in assets under management to £2.2 billion; and strong organic growth in 2007. • Group restructuring and integration of acquired businesses complete. • Excellent start to 2007. Financial highlights • Total Group income (before fee and commission expenses) increased by 15% to £84.7million (2005: £73.5 million). • Clean profit before tax of £25.1 million (2005: £30.4 million) 1, in line with trading update in October 2006. • Profit before tax of £15.8million (2005: £63.6 million, including £39.4m one-off gain). • Strong balance sheet restored following agreement with ING on 27 March 2007. • Increase in annual dividend of 25% with a final dividend proposed of 1.00p (2005: 0.80p) following the dividend of 0.50p paid in October 2006 (2005: 0.40p). • Purchase of own shares for £17.3 million (2005: £49.6 million). Commenting on the results and the Group's outlook, Martin Gray, Chairman, said: "2006 was a year of significant change for the Evolution Group (the "Group" orthe "Company"). This occurred because of significant acquisitions, whichimpacted all our operating subsidiaries, and the process of integrating thosebusinesses into the Group. I can report that we have made very good progresswith both the integration and in developing each of the businesses in line withthe strategy we have set for them. In financial terms, I am pleased to report continued growth in our total Groupincome (before fee and commission expenses) from £73.5m to £84.7m, an increaseof 15%. We have now achieved significant headline income growth for the past sixyears. 2007 has started well. The integration of the Williams de Broe Plc acquisitionis virtually complete and the resultant merged businesses are materiallydifferent and stronger. The re-development of Evolution Securities is gatheringpace, is on track and in line with objectives. We are continuing to experiencestrong growth in our private client fund management business, which has beenre-branded Williams de Broe, and Evolution Securities China remains well placedto benefit from the substantial opportunities that China offers. With our strongbalance sheet and a talented and committed team of people, we believe we arevery well positioned to benefit from the increased scale of our restructuredbusinesses and ready to move to the next stage of the Group's development." 1 Clean profit before tax clean earnings and adjusted operating profit aredefined in the Financial Review section below. -Ends- For further information, please contact: The Evolution Group Plc 020 7071 4300Alex Snow, Chief Executive OfficerGraeme Dell, Finance DirectorBell Pottinger Corporate and Financial 020 7861 3232Charles CookAngus Prentice Notes to Editors: The Evolution Group Plc The Evolution Group is the holding company of Evolution Securities Limited,Williams de Broe Limited and Evolution Securities China Limited. Founded inApril 2001 and originally listed on the AIM, the Evolution Group joined theOfficial List in 2003 and now has a market capitalisation of over £325 million. Evolution Securities Limited is a leading investment bank focused on mid-cap UKpublic companies. It provides a full range of investment banking servicesincluding equity research, institutional sales and trading, market making andcorporate finance advice. Evolution Securities Limited has approximately 100retained corporate clients. It is authorised and regulated by the FinancialServices Authority. Williams de Broe Limited is a leading private client fund manager, with officesin Bath, Birmingham, Bournemouth, Exeter, Guildford and London. Williams de Broeis authorised and regulated by the Financial Services Authority. Evolution Securities China Limited is a specialist Chinese investment bankingbusiness with offices in London, Hong Kong and Shanghai. It offers UK basedinstitutional clients research and trading in listed Chinese stocks and Chinesecorporates access to the markets in London and Hong Kong. CHAIRMAN'S STATEMENT 2006 was a year of significant change for the Evolution Group (the "Group" orthe "Company"). This occurred because of significant acquisitions, whichimpacted all our operating subsidiaries, and the process of integrating thosebusinesses into the Group. I can report that we have made very good progresswith both the integration and in developing each of the businesses in line withthe strategy we have set for them. In financial terms, I am pleased to report continued growth in our total Groupincome (before fee and commission expenses) from £73.5m to £84.7m, an increaseof 15%. We have now achieved significant headline income growth for the past sixyears. Whilst statutory operating profit last year declined to £11.9m (2005: £58.6m),this is due both to the prior year's figures benefiting from significant profitarising upon disposals of assets totalling £40.0m and the presence ofexceptional costs related to the acquisition and restructuring of Williams deBroe. We are refocusing Evolution Securities Limited to a more stable and, we believe,more sustainable model. As we do that, the business has continued to make asignificant contribution to the Group, achieving total income (before fee andcommission expenses) of £60m (2005: £59.9m). Achieving a better balance betweenprimary and secondary market activities has been a priority for this business.We have made very real progress towards meeting this objective in the secondhalf of 2006. Williams de Broe Limited (formerly Christows Limited), the private client fundmanagement business, completed the year with a record quarter for total incomeand profitability. This was the result of the combined value of funds undermanagement totalling £2.2bn, up 175% from £0.8bn at the end of 2005 followingthe integration of the business onto a common platform. This contributed to theoverall increase in total income (before fee and commission expenses) from£11.5m in 2005 to £20.6m in 2006, a growth of 79%. The re-branding to theWilliams de Broe name was completed smoothly, and has been well received byclients, business partners, commentators and staff. Evolution Securities China Limited completed an excellent year in 2006 withtotal income increasing by 96% to £4.1m compared with £2.1m for 2005. Thebusiness was strengthened both by the acquisition of Watterson Asia, a Hong Kongbased regulated corporate finance and securities dealing business, and by theCompany being granted separate regulatory status by the FSA for the Londonbusiness. Update on acquisition of Williams de Broe As reported previously, on 3 June 2006 the Group acquired 100% of the equity ofWilliams de Broe Plc and its wholly-owned subsidiaries together with its sistercompany Williams de Broe Administration Limited (together "the AcquiredEntities") from ING Belgium SA and Williams de Broe Holdings Limitedrespectively (collectively "ING") (referred to as "the Acquisition"). Following the legal completion of the Acquisition we have worked to complete themigration of that business into our existing operating businesses. After we haddone that, we have had an intense period of activity centred on finalisingresidual client asset transfers, resolving legacy reconciliation issues,completing clean up and realisation activities and preparing completion accountsin preparation for the ultimate closedown of the resultant shell entities byMembers Voluntary Liquidation ("MVL"). These matters are now very nearly completed, and I believe that central to thisachievement has been the agreement of final transaction terms. When we announcedthe transaction last year, recording that the Acquisition was ultimately to bepriced at net asset value seemed a simple enough objective. However, completinga realisation process, necessary to determine the assets and liabilitiesacquired, and documenting this to allow for two very thorough audits, by our ownand the sellers' independent accountants, has been a huge task. The final transaction terms have now been agreed with ING and the amount of£15.0m which we originally placed into escrow has been returned and payment of£5.4m from ING has been received by the Group in compensation for the netliabilities. Overall, the Acquisition has resulted in negative goodwill arisingof £11.3m which has been taken as a credit to the income statement. In addition,we have received financial contributions toward extinguishing legacy issues andthe clean up process. Over the last ten months we have liaised extensively withING and this co-operation has contributed to the successful completion of thetransaction. We remain confident of resolving all outstanding issues and ultimatelycompleting the final closedown and achieving the MVL of the acquired legalentities in line with our objectives in the very near future. I am very satisfied that the completion of this transaction on the terms agreedcontributes significant value to the Group. Corporate governance and board development These two areas have remained very much in focus through 2006 following theinitiatives I described at this time last year. Against a background ofsignificant change brought about by the acquisitions we have made we haveendeavoured to increase the effectiveness and accountability of our subsidiarycompany boards, control functions and committees, and once again have made verypositive progress. Last May, I announced the retirement of Oliver Vaughan after nine years ofservice with the Group. Since then we have made both executive and non-executiveappointments. In June, Andrew Umbers was appointed to the Board, having joinedthe Group as Chief Executive Officer of Evolution Securities in the previousmonth. Andrew has brought to this role a clear strategic understanding of thebusiness opportunity and adds considerable strength to the executive team andthe Board. In September, Mark Nicholls was appointed as a non-executive director and hasalready made a valuable contribution to the Board bringing, as he does,significant senior corporate finance executive and non-executive directorexperience. These appointments have maintained our strategy of strengthening theBoard. We intend to continue that strategy. Dividend The Board recommends the payment of a final dividend of 1.0p per share (2005:0.8p). This follows the interim dividend payment of 0.5p per share announced inSeptember and paid in October (2005: 0.4p). This increase in the overalldividend is in line with our stated progressive dividend policy and is anacknowledgement of our continued confidence in the Group's operating businesses. Share buyback During 2006 the Company undertook a share buyback programme purchasing 9,912,152shares for cancellation at a total cost of £12.4m. We may continue with thisprogramme during the remainder of 2007 and to facilitate this we will be seekingapproval from shareholders for this at this year's Annual General Meeting. Shares purchased by the Employee Trust The Trust purchased 3,159,465 shares during the year (2005: 5,310,443) for totalconsideration of £4.9 m (2005: £7.1m) through the Group's share incentive trustto meet share incentive awards made to staff. The Company will continue thisprocess in 2007. Balance sheet strength and cash balances At the year-end, the Group had net assets of £153.1m (2005: £156.7m) and, ofthis, the Group's cash balances were £88.6m (2005: £138.0m). Maintaining astrong balance sheet is core Group policy. We pursue that strategy through themanagement of these two values. The final adjusting settlement relating to theacquisition of Williams de Broe, straddling as it does the balance sheet datehas temporarily reduced the Group's cash reserves. Greater levels of workingcapital in trading portfolio assets and net trade receivables have alsoinfluenced the Group's cash position, as has the purchase of the Group's ownshares. The Group Employees The entire Group is underpinned by the continued exceptional performance of ouremployees. In a year of such dramatic change to the Group where, throughacquisitions and growth, we have welcomed 100 new colleagues to the Group, thismore than ever is the case. I have been hugely impressed at the manner, speedand efficiency with which our teams have completed the physical integration ofthe businesses which have been acquired and the way in which the combined unitshave then performed. I am confident that this will develop further in thefuture. I should like to thank each and every one of our colleagues for theircontribution towards the Group's financial performance and other achievementslast year. Outlook 2007 has started well. The integration of the Williams de Broe Plc acquisitionis complete and the resultant merged businesses are materially different andstronger. The re-development of Evolution Securities is gathering pace, is ontrack and in line with objectives. We are continuing to experience strong growthin our private client fund management business, which has been re-brandedWilliams de Broe, and Evolution Securities China remains well placed to benefitfrom the substantial opportunities that China offers. With our strong balancesheet and a talented and committed team of people, we believe we are very wellpositioned to benefit from the increased scale of our restructured businessesand ready to move to the next stage of the Group's development. Martin GrayChairman31 March 2007 Chief Executive's Report The Group has made good progress during 2006 towards its stated goal ofachieving greater balance across its business units and by revenue type. Thissignificant rebalancing was achieved through undertaking strategic change in2006, which has had a negative impact on last year's overall profitability.However, I am confident that this approach was absolutely the right one inrespect of the creation of long-term shareholder value. Income breakdown The detailed income analysis by segment and by operating company is shown below. 2006 2005 £'000 % £'000 % Investment banking and marketsEvolution Securities1 60,049 71 59,888 82Evolution Securities China2 4,077 5 2,082 3 -------- --------Sub-total 64,126 61,970 Investment ManagementWilliams de Broe3 20,621 24 11,502 15 OtherOther income (58) - 3 - -------- ----- -------- ----- 84,689 100 73,475 100Commissions paid away (1,788) (1,500) -------- --------Total income 82,901 71,975 -------- -------- Note 1The results of Evolution Securities are defined as those arising from EvolutionSecurities Limited ("ESL") and its subsidiary Evolution Securities (US) Inc.("ESUS") and the investment banking business of the Acquired Entities sinceacquisition. 2The results of Evolution Securities China are defined as those arising fromEvolution Securites China Limited ("ESCL") and its subsidiary EvolutionWatterson Securities Limited ("EWSL"). 3The results of Williams de Broe are defined as those arising from Williams deBroe Limited (formerly Christows Limited) ("WdB") and the private client fundmanagement business of the Aquired Entities since acquisition. Evolution Securities Within ESL, the core strategic objective is to become a better balanced businessthrough increasing our secondary market focus and penetration while naturallyreducing our reliance on primary market income. In 2006, we started to achieve this by the addition of the Acquired Entities'institutional business, the introduction of new leadership for ESL and thesetting and communication of the strategic vision for the future direction ofthe business to become a leading UK investment bank. Secondary markets ResearchStrength in equity research lies at the heart of any secondary market business.ESL's origins lay in the small and mid-cap sectors, and we recognised thatcoverage and expertise in large cap stocks was a pre-requisite to thedevelopment of a successful secondary market franchise. The Acquired Entities'sresearch team was recognised for the quality of its large cap coverage. Inbringing the two research teams together, establishing sector teams, improvingworking practices and introducing new leadership we have made a step changetowards our strategic goals. At the end of 2006 we had 24 analysts covering over270 small, mid and large cap stocks. Institutional Sales & Sales TradingInstitutional sales remain the focal route for communicating research ideas toour institutional client base. Our enlarged sales presence can support theincreased research capability, and has good coverage of the UK, US andContinental European client base. The sales trading team of six people is aligned with the institutional dealingdesks in the UK, Europe and the US in line with the sales team structure. Thisensures the successful execution of business generated by the sales teamtogether with other orders generated by the increased market share across all UKmarket indices. Equity Market MakingOur market making strength has continued to assist our increased secondarymarket activities. The market place is changing dramatically and ESL hasrecognised this. We have taken a lead in a number of initiatives with the LondonStock Exchange, historically embracing the introduction of the SETSmm order bookand more recently being one of the first designated Large Size Market Makers. In 2006 ESL expanded the number of stocks in which we make markets to includethe entire FTSE250 and FTSE100, which matches the increased research and salescoverage. ESL now makes markets in a total of 1,214 stocks. During the year ESL traded profitability. These revenues came from transactingvia both traditional voice based method and increasingly through furtherpenetration in the Retail Service Provider ("RSP") market providing directaccess to the retail clients of other member firms. In 2006 our total RSP volumewas 217,000 trades (2005: 130,000) representing 18% of the total business (2005:31%). In aggregate in 2006 ESL has experienced significant gains in market shares andpresence in both agency business and total transactional share across all UKindices. This strategy requires a co-ordinated improvement across research,sales and market-making. This strategy will continue in 2007. Primary market activities In 2006 our overall fundraising activities from IPOs and fundraisings fromexisting listed clients raised £659m (2005: £864m). This was achieved through 42transactions (2005: 51 transactions) of which 12 were IPOs (2005: 11). Theprimary activities of the business are principally conducted within thecorporate finance and corporate broking areas. Corporate FinanceThe corporate finance team consists of 24 professionals arranged into teams witha predominantly sectoral focus in line with the research structure. Thisapproach ensures that experienced individuals with relevant specialist knowledgeare in place to advise our corporate clients. Throughout 2006 we continued toimprove our internal controls via committees dealing with new business,commitment, underwriting and pricing. I believe our procedures remain at theleading edge of those within our peer group. This is evidenced by the success ofIPOs transacted by ESL in 2006 which registered a weighted average return of31%. Corporate BrokingIn 2006 we performed a review of the way in which we had traditionally performedfundraising activities and compared this with the results of an extensive surveyof other investment banks operating in the UK markets on all scales. As a resultof the review we implemented a dedicated corporate broking unit which isfocussed entirely on servicing the day to day requirements of our corporateclients. In this capacity, it provides significant services in its own right butalso acts to co-ordinate the interaction of other areas of the firm with thecorporate client at appropriate times. Investment Management Our private client fund management business saw tremendous change during 2006,and I believe, has significantly increased its value to the Evolution Group. Thebrand name under which this business operates changed to Williams de Broe during2006. The total income (before fee and commission expenses) increased by 79% to£20.6m in 2006 (2005: £11.5m). Clearly, the most obvious characteristic of change to the business is the brandunder which it operates. At the time of the Acquisition we reviewed the twobrand names and concluded that operating the private client fund managementbusiness in the future under the Williams de Broe brand would maximise theopportunity for growth. We believe the values, heritage and background to thebrand underpins a business servicing private individuals founded on security ofassets and a trusted service ethos. The brand change was completed in October2006. We have now largely completed a revision of all client documents, andproduct brochures. We believe the change of brand has been very well receivedinternally by all the stakeholders. Funds under management ("FUM")Growth in funds under management remains a core focus within our private clientfund management business. On this measurement, I believe 2006 can becharacterised as a period where a fundamental change of scale has occurredbecause of a combination of continued strong organic growth of 44% from the 1January 2006 value together with the acquisition of client funds undermanagement. At 31 December 2006 the aggregate FUM were £2.2bn (2005 £0.8bn), anincrease of 175%. There are still considerable opportunities for our FUM tocontinue to grow further in 2007 and we are on target to achieve our aim of £3bnof FUM. Branch networkThe combined Williams de Broe business has an excellent geographic spread withbranches in Bath, Bournemouth, Birmingham, Exeter, Guildford and London. Part ofthe synergy of the merged entity has been combining the mutual offices in bothLondon and Birmingham, apart from the cost synergies, these actions havesignificantly increased our presence in the larger financial centres which webelieve represent real growth opportunities. Intermediary distributionIt was clear, looking at the two businesses before they were combined, that theyshared a common strategy based on building a broad distribution for theirproducts via relationships with various types of professional intermediaryincluding IFAs, lawyers and accountants. Central to this strategy has been theextension of the philosophy of a specialist intermediary sales team focusing bygeographic location, which in 2006 won and introduced new funds under managementtotalling £152m (2005: £75m) an increase of 103%. We have continued to grow ourintermediary sales capability, in scale and in terms of product offering whichhas produced significantly higher FUM sales in 2007. ProductsThe Williams de Broe product range is centred on core values of discretionaryfee paying portfolio management with its discretionary service and privateportfolio account service. Additionally, there are a number of specialist fundsand multi-manager services. The Williams de Broe Assetmaster product which hasbeen successfully performing with top quartile performance in its three yearssince launch in all four of its sub funds. Finally, there has been considerableinterest in the specialist tax efficient portfolio services that were launchedat the end of 2005 providing products which have a national reach. Evolution Securities China The Group's specialist Chinese investment banking business completed its thirdyear of operation during the summer of 2006. The year was marked by thecompletion of a fundraising round bringing in a small number of externalinvestors so broadening the shareholder base from the historic combination of anEvolution Group majority with minority staff shareholders. This marks asignificant stage in the development of the business and comes as the financialresults for the year once again increased significantly. Headline income grew to£4.1m (2005: £2.1m), an increase of 96%. The year was also marked with the acquisition in June of Watterson Asia Ltd, acorporate finance and share distribution business in Hong Kong regulated by theSecurities and Futures Commission, which broadened the reach and capability ofthe business. This process was further enhanced by the achievement of separateregulatory person status for the London business of ESCL, which had previouslyoperated as an appointed representative of its sister company, ESL. Infrastructure, culture and employees During 2006, when all the Group businesses underwent significant change, it wasvital to be able to place confidence in the Group's infrastructure, culture andstaff. Our infrastructure in its broadest terms incorporates the whole physical, peopleand technology based support for the revenue generating activities of theoperating businesses. Under such circumstances a key test is the adaptabilityand responsiveness of our people and systems to accommodate change in thebusiness. Last year, I believe the Group's infrastructure and support teams roseand met every challenge that occurred as we acquired and integrated ouracquisitions. This would be a significant achievement in its own right, but wasmade even more impressive by the pace by which such change was possible, thelimited impact that this had on business carrying on as usual as integration wasundertaken and the fact that the inherited infrastructure within the AcquiredEntities was in considerable disarray before integration. In addition to theseacquisitions we implemented a new trading platform within Evolution Securitiesand undertook further initiatives with compliance, operations, IT and risk tofurther enhance the control environment in operation within the Group. The dynamics of employees and culture are never tested as much as at times ofmajor business integration of predominantly people based businesses. The keylast year in each business was being confident in understanding our culturalobjectives and then ensuring that these remained intact during and afterintegration, reinforcing them through the governance structures in place. This has been the third acquisition and significant restructuring that the Grouphas undertaken in the past six years, and in many ways the most complicated. Ihave been delighted by application and determination of our team in completingthis task. I am confident that the most recent acquisition of Williams de Broewill create significant value for all our shareholders. Outlook 2006 was characterised by a significant acquisition and a rebalancing of theGroup. Early in 2006 we decided that there would be a normalisation of corporaterevenues in UK mid-markets and sought to balance the Group's overall revenuesbetween large transactional driven and more repeatable earnings streams, yetcontinue to demonstrate good growth within the Group. This required some realchange within the organisation, by way of new executive management andemployees, revised financial budgeting, and finally by the acquisition ofWilliams de Broe. I am pleased to report that revenues in the first quarter of 2007 have been verystrong, and there is a real balance in the breakdown of these revenues, whichprovide a more stable platform for further growth in both of our business units.This has been at the core of your Group's strategy. We are however aware of increased volatility levels within the markets in whichwe operate, and there is doubt over the extended credit cycle continuing in bothcapital markets and financial products. This may create a more uncertain equityenvironment. However these are challenges the Group is well equipped to face. Webelieve that we can grow strongly both organically and, as we have recentlyproven, through successful further acquisition. Alex SnowChief Executive Officer31 March 2007 FINANCIAL REVIEW Adjusted operating profit The statutory operating profit for the Group is shown below. The Board continuesto believe a truer reflection of the performance of the Group's on-goingoperating businesses is afforded by the measure of 'Adjusted operating profit'that excludes items that are one-off or non-recurring (including items that fallto be treated as exceptional), are not part of the on-going businessprofitability or, in the case of the cost of options and amortisation ofintangible assets which we view in the same manner as goodwill, representnon-cash items. This measure is therefore used as the principal performancecriteria against which the vesting of stock awards is determined. In addition, the Board reviews performance against the measure 'Clean profitbefore tax', which represents adjusted operating profit plus net interest; andalso the measure 'Clean earnings', which represents clean profit before tax lesstax expense (excluding exceptional tax expense). The analyst community alsofollows these measures as benchmarks for the Group's on-going performance. The following table reconciles these measures and demonstrates a reduction inadjusted operating profit by 17% to £21.2 in 2006 (2005: £25.4m) which isprincipally due to duplicated operating costs following the acquisition ofWilliams de Broe and the reduction of corporate finance fee income, particularlywithin the fourth quarter when market conditions deteriorated. The Clean profitbefore tax for 2006 is £25.1m (2005: £30.4m) and Clean earnings are £17.9m(2005: £25.9m) 2006 2005 £'000 £'000 £'000 £'000 Operating profit 11,914 58,583 Items not included within adjustedoperating profit: Profit on disposal ofavailable-for-sale investments (5) (117)Profit on part sale of subsidiary (1,087) - -------- ------- -------- --------Adjustment for provisions andprofits on investments (1,092) (117) Amortisation of intangibles 213 128Share of results of associatedundertakings (1) -Cost of share options granted to employees 7,823 6,744 -------- ------- -------- --------Non-cash items 8,035 6,872 Exceptional items--------------------------------------------------------------------------------Exceptional loss/ (gain) arising ondisposal of available-for-sale investments 437 (39,931)Goodwill arising on acquisition (11,347) -Operating expenses 12,488 ---------------------------------------------------------------------------------Total exceptional items 1,578 (39,931) Impairment of intangibles 778 - -------- ------- -------- --------Adjustment for items that are oneoff or non-recurring 2,356 (39,931) Adjusted Group operating profit 21,213 25,407Net interest receivable 3,923 5,007 ------- -------- Clean profit before tax 25,136 30,414Tax expense1 (7,218) (4,524) ------- --------Clean earnings 17,918 25,890 ------- -------- (Restated) Clean earnings per share 8.14p 11.48pClean diluted earnings per share 7.52p 10.68p 1 Excludes the exceptional tax expense of £4,785,000. Acquisition of Williams de Broe In line with the structure of the Acquisition as outlined in the Chairman'sStatement the Directors have undertaken a detailed review of the financialinformation of the Acquired Entities, including the legacy reconciliation andaccounting issues. The statutory accounts for the years 2004 and 2005 have nowbeen completed and filed. Finally, the Group has converted the financialinformation of the Acquired Entities to the accounting policies adopted by theGroup. These amounts have now been included in the financial statements for theGroup and the fair value of net assets has been recorded in accordance with IFRS3, 'Business Combinations'. Following formal agreement between the Company and ING over the finalconsideration to be paid for the business we are able to confirm that a receiptfrom ING for the net liabilities existing at 3 June 2006 of £5.4m has beenreceived. Additionally, cash totalling £15.0m, which was placed in escrow on 3June 2006, was returned in full on 27 March 2007 and has been included in thebalance sheet as cash and the interest receivable accrued since that date hasbeen taken to the Income Statement. In addition, the provision of workingcapital to the Acquired Entities totalling £26m, which was paid to ING on 3 June2006, in the form of a £5.0m subordinated loan and a £21.0m cash facility hasbeen included in cost of investment in accordance with IFRS 3. Further details of the acquisition can be found below. The negative goodwillarising on acquisition is £11.3m has been taken to the income statement inaccordance with IFRS 3, 'Business Combinations'. Exceptional items During 2006 the Group has incurred significant costs and income arising from thepurchase of the Acquired Entities and from its legacy available for saleinvestment portfolio, which it considers to be exceptional. A summary of all exceptional items for 2006, together with management's bestestimate of 2007 exceptional costs is provided below: Estimated to be expensed in 2006 2007 Total 2005Exceptional items £'000 £'000 £'000 £'000 Goodwill arising on acquisitionNegative goodwill 11,347 - 11,347 - Available for sale investmentsExceptional (loss)/gain arising ondisposal of availablefor sale investments (437) - (437) 39,931 Operating expenses Retention and loyalty bonuses (6,179) (1,319) (7,498) -Costs to close down business (3,449) (1,000) (4,449) - Other operating expenses (2,860) (500) (3,360) - ------- --------- ------- ------- (12,488) (2,819) (15,307) - ------- --------- ------- -------Total Exceptional items (1,578) (2,819) (4,397) 39,931 ------- --------- ------- ------- The Group will necessarily incur approximately £2.8m during 2007 in furthercosts in closing down the Acquired Entities and in retaining key staff out toJuly 2007. The Group considers these to be exceptional. Segmental reporting In accordance with IAS 14, 'Segment Reporting', the primary business segmentsare, Investment banking and markets, Private Client fund management, and Other. Investment banking and markets 2006 2005 £'000 £'000 ---------- -------- Income (before fee and commission expenses) 64,126 61,969Fee and commission expenses (1,259) (1,126) ---------- --------Total income 62,867 60,843Operating expenses (51,022) (41,446)Profit on disposal of available-for-sale investments 5 117 ---------- --------Operating profit 11,850 19,514 Profit on disposal of available-for-sale investments (5) (117)Exceptional operating expenses 2,443 -Cost of options 6,440 4,701 ---------- --------Adjusted operating profit 20,728 24,098 ========== ======== In line with the analysis presented in the Chief Executive Officer's Reportabove, the Investment banking and markets segment is further divided intoEvolution Securities (consisting of ESL, ESUS) and ESCL (consisting of ESCL andEWSL) together with the institutional investment banking business of theAcquired Entities. The breakout of revenues and costs for these categories isdetailed below. Evolution Securities Within the investment banking business of Evolution Securities the overall levelof income has remained constant from 2005 to 2006. Costs have increased dueprincipally to the increased scale of the operation following the integration ofthe institutional team from the Acquired Entities. Part of this cost increaseoccurred when we operated two separate platforms immediately following theAcquisition and was therefore duplicated. As a result, and as disclosed below adjusted operating profit has fallen from£24.0m in 2005 to £19.9m in 2006. 2006 2005 £'000 £'000 --------- ---------- Income (before fee and commission expenses) 60,049 59,887Fee and commission expenses (1,177) (1,037) --------- ----------Total income 58,872 58,850Operating expenses (47,763) (39,557)Profit on disposal of available-for-sale investments 5 117 --------- ----------Operating profit 11,114 19,410 Profit on disposal of available-for-sale investments (5) (117)Exceptional operating expenses 2,443 -Cost of options 6,391 4,701 --------- ----------Adjusted operating profit 19,943 23,994 ========= ========== Evolution Securities' income analysis Evolution Securities' total income (before fee and commission expenses) hasclearly benefited in 2006 from a stronger secondary income contribution withreduced levels of primary revenue in line with our stated goals. Salescommissions have grown in total following the increased market shares andvolumes in larger capitalisation stocks. Equity trading income was up byapproximately 42% in absolute terms, which has therefore had a greater impact onthe balance between primary and secondary income. 2006 2005 --------- ---------Corporate finance 55% 68%Sales commissions 21% 16%Trading 21% 15%Other 3% 1% Evolution Securities' cost analysis With the total income remaining stable in 2006 the cost/income1 ratio for theEvolution Securities business has increased to 66% (2005: 59%). Non-performancestaff costs this year continue to make up the same proportion of the total costbase as in 2005. The performance related staff costs have reduced in line withthe reduction in the overall profitability in the Evolution Securities businessas they are directly formulated based upon the profits achieved. The other costshave increased principally because of the increases in premises, directtransactions, systems and market data. 2006 2005 --------- ---------Staff costs - Non performance related 24% 19%Staff costs - Performance related 17% 35%Other costs 40% 34%Cost of options and exceptional staff costs 19% 12% 1 Excludes the impact of the cost of options and exceptional items. Evolution Securities China There has been further significant growth in the scale and profitability of thisbusiness resulting in an adjusted operating profit of £0.8m in 2006 from £0.1min 2005. 2006 2005 £'000 £'000 ---------- ---------- Income (before fee and commission expenses) 4,077 2,082Fee and commission expenses (82) (89) ---------- ----------Total income 3,995 1,993Operating expenses (3,259) (1,889) ---------- ----------Operating profit 736 104 Cost of options 49 6 ---------- ----------Adjusted operating profit 785 110 ========== ========== Evolution Securities China income analysis ESCL's total income (before fee and commission expenses) has grown in all areas.It can clearly be seen that the driver of growth is corporate finance incomewhich results from the interest from Chinese corporates for London listings andof strong fees earned in Hong Kong in the second half from its newly acquiredsubsidiary. This business is still at an early stage of development but webelieve the income opportunities with a more broadly spread footprint are good. 2006 2005 --------- ----------Corporate finance 83% 66%Sales commissions 10% 19%Trading 7% 13%Other income - 2% Evolution Securities China cost analysis ESCL's total cost1 base increased by over 70% as the scale of the businesschanged during the year. This cost increase occurred mainly as a result of thehiring of staff in London and Shanghai coupled with the acquisition of WattersonAsia in Hong Kong. The level of performance related staff costs increased inline with the operating profits since within this business bonus is calculatedbased on percentage of profits. 2006 2005 --------- ----------Staff costs - Non performance related 47% 53%Staff costs - Performance related 21% 6%Other costs 31% 41%Cost of options 1% -% 1 Excludes the impact of the cost of options. Private client fund management Looking next at Williams de Broe (formerly Christows Limited), the Group'sprivate fund management business, 2006 has seen a continuation of the progressof the last three years with an increase of 70% (2005: 24%) in adjustedoperating profit from £1.1m in 2005 to £1.9m in 2006. Its overall costs haveincreased in part due to the increase in the scale of the business but given thesignificant period that it took to integrate the businesses there aresignificant duplicated costs arising from the dual platforms in operation beforefull integration took place. 2006 2005 £'000 £'000 ---------- ---------- Income (before fee and commission expenses) 20,621 11,503Fee and commission expenses (529) (374) ---------- ----------Total income 20,092 11,129Operating expenses (19,568) (10,194) ---------- ----------Operating profit 524 935 Exceptional operating expenses 910 -Cost of options 453 146 ---------- ----------Adjusted operating profit 1,887 1,081 ---------- ---------- Private client fund management income analysis Williams de Broe's (formerly Christows Limited) mix of income has remainedrelatively constant across the two periods demonstrating the consistency of thebusiness model and the similarity of this model with the Acquired Entities'private client business. As the overall level of funds under managementincreases, recurring management fees is becoming a significant source of stableincome for the Group. Sales commissions also have a good degree of dependabilityas a result of the vast majority of funds being managed on a discretionarybasis. 2006 2005 --------- ---------Sales commissions 54% 60%Management fees 40% 34%Other income 6% 6% Private client fund management cost analysis The overall cost/income1 ratio for Williams de Broe Limited has remained stableat 93% (2005: 90%) but this has been significantly impacted by the duplicatedcosts highlighted above. The cost structure within Williams de Broe Limited ishighly predictable and well managed. The process of absorbing the AcquiredEntities into Williams de Broe Limited, whilst still maintaining forwardmomentum shows the strength of our business. The new scale of the business isexpected to result in significantly enhanced levels of profitability in thefuture. 2006 2005 --------- ---------Staff costs - Non performance related 31% 31%Staff costs - Performance related 20% 27%Other costs 42% 41%Cost of options and exceptional staff costs 7% 1% 1 Excludes the impact of the cost of options and exceptional items. Other activities The Group's other activities consist of the central support costs not recoveredfrom the operating businesses, the profits on and provisions against availablefor sale investments, the partial disposal of IP2IPO in the prior year and theother legacy fixed asset investments. In 2006 this principally consists of thepost acquisition results of the Acquired Entities that have not been able to beallocated to the institutional investment banking or private client businessesbut are not by their nature or size exceptional. 2006 2005 £'000 £'000 ---------- ----------Total income (58) 3Operating expenses (1,054) (1,800)(Loss) / profit on available for sale investments (437) 39,931Profit on part sale of subsidiary 1,087Share of associated undertaking operating profit 1 - ---------- ----------Operating profit (461) 38,134 Loss / (profit) on available for sale investments 437 (39,931)Profit on part sale of subsidiary (1,087)Share of post tax results of associated undertaking (1) -Impairment of intangibles 778 -Amortisation 213 128Goodwill arising on acquisition (11,347)Exceptional operating expenses 9,136Cost of options 930 1,891 ---------- ----------Adjusted operating (loss) / (profit) (1,402) 222 ========== ========== Investment portfolio As previously reported, the Group has continued to exit from its legacyinvestment portfolio. The Group seeks to extract value from this portfolio withprofit on sale of other available-for-sale investments totalling £0.1m in 2006(2005: £4.3m). Set against this the Group has a negative fair value reserve of£1.4m against the remaining portfolio of available-for-sale investments (2005:1.7m). Balance sheet strength and cashflow The Group remains focused on maintaining a strong balance sheet. At the year-endthe Group had net assets of £153.1m (2005: £156.7m) including cash of £88.6m(2005: £138.0m). At 31 December 2006 there were increased working capitalrequirements compared with the previous year end as overall net tradereceivables and net trading portfolio assets in Evolution Securities Limitedwere greater. This increase occurred as a result of greater daily transactionvolumes outstanding at the year end and the greater number of market makingstocks in which positions were held. In addition at the year end there were anumber of balances outstanding that were related to the close down of theAcquired Entities which have been resolved as the entities assets andliabilities have been realised prior to placing it into MVL. Largely as a result of the increased working capital requirements outlined abovethere is an overall net outflow of cash from operating activities of £4.4m. Inaddition there is a £26.4m outflow from investing activities principally arisingfrom the two acquisitions and other fixed asset purchases. When taken togetherwith the £20.2m outflow from own and treasury share purchases and dividendspaid, there is a resultant overall decrease in cash for 2006 of £49.3m. Dividend The Board is proposing a final dividend per share for 2006 of 1.0p per share(2005: 0.80p). This dividend is payable on 8 June 2007 to shareholders on theregister on 11 May 2007. This follows the dividend paid in October 2006 of 0.50pper share (2005: 0.40p). Graeme DellFinance Director31 March 2007 CONSOLIDATED INCOME STATEMENTFor the year ended 31 December 2006 2005 £'000 £'000 Fee and commission income 70,295 63,205 Fee and commission expenses (1,788) (1,500) -------- ---------Net fee and commission income 68,507 61,705Trading income 13,042 9,206Other income 1,352 1,064 -------- --------Total income 82,901 71,975 Profit on disposal of available-for-sale investments (432) 40,048Profit on part sale of subsidiary 1,087 -Share of post tax results of associate 1 -Goodwill arising on acquisition 11,347 ---------------------------------------------------------------------------------Operating expenses (70,502) (53,440)Exceptional operating expenses (12,488) ---------------------------------------------------------------------------------Total operating expenses (82,990) (53,440) --------- ---------Operating profit 11,914 58,583 Interest receivable and similar income 4,097 5,044Interest payable and similar charges (174) (37) --------- ---------Profit before tax 15,837 63,590 --------- --------- Tax expense (7,218) (4,524)Exceptional tax expense (4,785) ------------------------------------ --------- --------- Total tax expense (12,003) (4,524) -------- ---------Profit for the year 3,834 59,066 -------- --------- -------- ---------Profit attributable to minority interest 111 25Profit attributable to equity holders of The EvolutionGroup Plc 3,723 59,041 -------- ---------- 3,834 59,066 -------- ---------- -------- ---------- (Restated)Basic earnings per ordinary share 1.74p 26.18pDiluted earnings per share 1.61p 24.36p Dividend per share - Interim (paid) 0.5p 0.40p - Final (proposed) 1.0p 0.80p Dividend (£'000) - Interim (paid) 1,109 859 - Final (proposed) 2,888 1,781 CONSOLIDATED BALANCE SHEETAs at 31 December 2006 2005 £'000 £'000ASSETS Non-current assets Goodwill 9,956 9,085Other intangible assets 2,745 232Property, plant and equipment 4,337 3,695Deferred tax assets 10,973 7,693Investment in associate 109 - Trade and other receivables 35 - ----------- -----------Total non-current assets 28,155 20,705 ----------- ----------- Current assets Trade and other receivables 133,298 42,069Available-for-sale investments 1,926 2,027Trading portfolio assets 26,243 13,446Cash and cash equivalents 88,565 137,973 ----------- -----------Total current assets 250,032 195,515 ----------- -----------Total assets 278,187 216,220 ----------- -----------LIABILITIESCurrent liabilities Trade and other payables 106,952 51,196Trading portfolio liabilities 14,728 6,200Current tax liabilities 2,579 1,947 ----------- -----------Total current liabilities 124,259 59,343 ----------- -----------Non-current liabilities Deferred tax liabilities 459 -Provisions for liabilities 333 184 ----------- -----------Total non-current liabilities 792 184 ----------- ----------- ----------- -----------Total liabilities 125,051 59,527 ----------- ----------- EQUITY Capital and reserves attributable to equityshareholders Share capital 2,214 2,255Share premium 28,445 27,942Capital redemption reserve 373 274Merger reserve 51,230 51,230Fair value and other reserves (1,491) (1,652)Retained earnings 71,211 76,592 ----------- -----------Shareholders' equity excluding minority interest 151,982 156,641 Minority interest in equity 1,154 52 ----------- -----------Total equity 153,136 156,693 ----------- ----------- ----------- -----------Total equity and liabilities 278,187 216,220 ----------- ----------- CONSOLIDATED CASH FLOW STATEMENTFor the year ended 31 December £'000 2006 £'000 2005 £'000 £'000 Cash flow from operating activitiesCash generated from operations (3,783) 25,749Interest received 3,695 5,044Interest paid (174) (37)Tax paid (4,241) (5,824) --------- --------Net cash inflow from operating activities (4,503) 24,932 Cash flows from investing activitiesPurchase of subsidiary shares - (2)Acquisition of subsidiary, net of cash (21,676) -acquiredFees in relation to acquisition of (1,733) -subsidiariesPurchase of property, plant and (2,188) (3,368)equipmentPurchase of intangible assets (733) (106)Purchase of available-for-sale assets (539) (1,074)Net proceeds from sale ofavailable-for-sale 525 52,525investmentsInvestment in associates (45) -Dividends received 17 15 -------- --------Net cash generated from investing activities (26,372) 47,990 Cash flows from financing activitiesIssues of ordinary share capital 436 1,614Issue of ordinary share capital to 1,318 1minoritiesDividends paid to the company's (2,888) (2,166)shareholdersPurchase of shares held by the Trust (4,893) (7,111)Purchase of treasury shares (12,384) (42,513) -------- -------- Net cash used in financing activities (18,411) (50,175) -------- --------Net increase in cash and bank overdrafts (49,286) 22,747Cash and bank overdrafts at beginning of 137,973 115,170periodExchange gains/(losses) and bank (122) 56overdrafts --------- --------- Cash and bank overdrafts at end of 8,565 137,973period --------- --------- CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEFor the year ended 31 December 2006 2005 £'000 £'000 (Restated) Profit for the financial year 3,834 59,066 Available-for-sale investments:Fair value changes taken to equity during the year (254) (2,059)Fair value changes transferred to income statement ondisposal 536 (37,222) Deferred tax on share options taken to equity (1,188) 133 ---------- ----------Net losses not recognised in income statement (906) (39,148) ---------- ----------Total recognised income and expense for the year 2,928 19,918 ---------- ---------- Attributable to:Minority interest 111 25Equity shareholders of the Parent 2,817 19,893 ---------- ---------- 2,928 19,918 ---------- ---------- Other information A summary of the accounting policies adopted by the Group is set out in thehalf-year results announcement on 12 September 2006 with the exception of ourpolicy on 'Exceptional tems' noted below. The financial information in this statement does not constitute the Group'sstatutory accounts for the year ended 31 December 2006 within the meaning ofSection 240 of the Companies Act 1985. The statutory accounts for 2006 will befinalised on the basis of the financial information presented by the Directorsin this preliminary announcement and will be delivered to the Registrar ofCompanies following the Company's Annual General Meeting. The Group will be circulating the full annual report and accounts toshareholders and copies will be available from the Registered Office of theCompany, 9th Floor, 100 Wood Street, London EC2V 7AN from the date of despatchto shareholders for one month. The prior year diluted earnings per share ("EPS") figures have been amended toreflect the adjustment to diluted shares for option costs not yet charged to theincome statement in line with IAS 33, 'Earnings per share'. This adjustment hasresulted in the prior year diluted EPS increasing by 1.01p from 23.35p to24.36p. The Consolidated Statement of Recognised Income and Expense now includes withinthe prior year comparative deferred tax on share options which had been taken toequity but excluded in error from this statement. This adjustment has resultedin an increase in total recognised income of £133,000. Exceptional items Exceptional items are shown on the face of the consolidated income statement forthe Group. The Group presents them separately, in order to simplifycomparability between different financial periods. An exceptional item isdefined in terms of its size and/or nature. These do not arise from normaltrading operations and may not be individually significant in size but inaggregate are worthy of separate disclosures. BUSINESS COMBINATIONS W deb MVL Limited (formerly Williams de Broe Plc) and Williams de BroeAdministrations Ltd ( 'Williams de Broe') On 3 June 2006, the company acquired 100% of the share capital of the AcquiredEntities for a consideration of £16.3m. The acquired business contributed revenues of £7.4m and £1.4m profit after taxto the Group for the period from acquisition to 31 December 2006. We are unableto provide the impact on consolidated revenue and consolidated profit for theyear ended 31 December 2006 had the Acquisition occurred on 1 January 2006. On 2 October 2006, Williams de Broe Plc changed its name to, W deb MVL Limited. Details of net assets acquired and goodwill are as follows: £'000Purchase considerationInter-company debts assumed by the Company 26,029Acquisition expenses 1,609 Amount recoverable for negative net assets (5,413)Amount recoverable from indemnities received (5,927) -----------Total purchase consideration 16,298fair value of net identifiable assets acquired 27,645 -----------Negative goodwill arising (11,348) ----------- The assets and liabilities arising from the acquisition are as follows: W deb MVL'S Acquisition Fair value Fair value carrying amount adjustment adjustments £'000 £'000 £'000 £'000 Cash and cashequivalents 5,654 - - 5,654Investments 70 - - 70Customerrelationships - - 1,125 1,125Brand - - 1,066 1,066Distributionchannels - - 351 351Receivables 263,250 - - 263,250Payables (250,752) - - (250,752)Workingcapital fromGroup (26,029) 26,029 - -Net deferredtax assets 7,468 - (587) 6,881 ------------ --------- --------- ---------Netidentifiable(liabilities)/ assetsacquired (339) 26,029 1,955 27,645 ------------ --------- --------- --------- Outflow of cash to acquire business, net of cash acquired: £'000 Provision of working capital 26,029Cash and cash equivalents in subsidiary acquired (4,623) ----------Cash outflow on acquisition 21,406 ---------- The provisional allocation of the purchase consideration to the assets acquiredwill be reviewed based on additional information up to 3 June 2007. Based oncurrent available information management do not expect that any net adjustmentsresulting from such reviews will have a material effect on the financialposition or results of the Group. Annual General Meeting The arrangements for, and notification of business to be transacted at, theCompany's Annual General Meeting will be provided with the annual report andaccounts to be circulated to shareholders in due course. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
EVG.L