Half Yearly Report

30th Sep 2009 07:00



KELLAN GROUP PLC HALF YEAR INTERIM RESULTS

FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2009

Kellan Group PLC (AIM: KLN.L) (the "Company" and together with its subsidiaries the "Group" or "Kellan"), a leading IT, accountancy, hospitality, leisure and professional services recruitment group, announces its half year interim results for the Group for the six month period ended 30 June 2009. 

Financial summary

Operational highlights

John Bowmer and Tony Reeves, Co-Chairmen of Kellan, commenting on these results said,

Enquiries:

Kellan Group PLC

Ross Eades, Chief Executive Officer

Will Coker, Chief Financial Officer

Tel: + 44 (0) 20 7268 6200

Strand Partners Limited 

Simon Raggett / Angela Peace

Tel: +44 (0) 20 7409 3494

Chief Executive Officer's Statement

Introduction

The six months to 30 June 2009 have been a period of considerable change and challenge for the Kellan Group. It is not surprising that a Group like ours, which has historically been heavily dependent on the permanent recruitment market for the bulk of its net fee income, has suffered due to the reduction in demand for these services arising from the economic downturn. This has also been the case with many of our competitors. Following my appointment as CEO in late April it was necessary to both continue and accelerate the existing cost reduction initiatives as well as streamline the management structure in order to stem the tide of NFI decline and further lower the cost base. That said, I have been pleased with the way in which the divisional management have continually reacted to the challenge of cutting their cloth to match current market demands. 

Although our longer term strategic aims remain the same, the focus for the Group in the short-term is clearly returning the business to profitability and it is paramount that we are exerting all our efforts towards weathering the economic storm whilst ensuring we are well positioned for the upturn. I am pleased to be able to report that the management team has continued to develop and implement the corrective actions and our operating cost base (excluding exceptional items, depreciation, amortisation and share based payment charges) which is £8.1 million in the current six month period (June 2008: £10.8 million) is anticipated to be below £6.5 million for the second half of 2009. This back to basics approach, focusing more on our core business using costs-to-income ratios as the key target measurement, has already started to produce better results at the EBITDA level, which we anticipate will move us very close to a monthly breakeven position midway through the latter half of this year.

Whilst we are cutting back to the core within many of our business units we all understand the importance of ensuring that we don't cut too deeply in to the fabric of each business. As a services business the majority of the cost cutting exercises have been focused on reducing headcount and scaling back positions which are no longer required. This has mainly been non-revenue generating positions which don't 'ring the till'. Although it has been far from pleasant to have to disassemble and unpick areas of our Group I have been extremely pleased with the understanding, resilience and positive nature shown by our staff.

Although recently we have experienced a slight rise in job vacancy traffic we remain cautious about the overall economic outlook. We will continue to structure and invest for the future during the second half of this year, as well as continue to look for potential value enhancing acquisitions. We will work hard to ensure that the short term economic environment does not deter our longer term ability to build a successful, durable company that will be a significant force in recruitment in the coming years.

Financial Highlights

The Group's revenue for the six months to 30 June 2009 was £15.2 million (June 2008: £25.4 million) producing NFI of £6.6 million, representing a decrease of 49% on the first six months of 2008. (June 2008: £13.1 million)

We are reporting a loss for the period of £3.2 million (June 2008: Profit £1.3 million) after charging exceptional costs in respect of staff redundancies of £0.6 million (June 2008: £Nil) and onerous leases of £0.7 million (June 2008: £Nil). These non recurring items were necessary to rationalise the cost base following the decline in income resulting from impact of the economic downturn on our business. Staff and property costs represent nearly 90% of the total cost base, and so unfortunately we are left with little option as to where we are able to seek reductions.

Losses for the six months combined with debt servicing and capital expenditure have collectively generated a cash outflow of £0.8 million after utilising £1.1 million of previously undrawn working capital facilities. Our credit collection team was able to return Days Sales Outstanding at 39 (June 2008: 41).

Gearing (face value of loans and borrowings as a percentage of total equity) worsened to 21.4% from a December 2008 year end 13.9% (June 2008: 12.4%)

We have maintained the original planned repayment schedules for loans taken out as part of the Quantica acquisition, serviced all interest on that debt as well as the working capital facility. The projected covenant breaches on our facilities highlighted in the 2008 year end accounts crystallised during the period, however the facilities themselves have not been breached. We have worked very closely and proactively with our bankers and they have maintained their support for the Group whilst we continue to rationalise our cost base and stabilise our income streams to reach a break even trading (EBITDA) position. We are cautiously optimistic of returning to this position on a monthly basis in the back half of 2009, nevertheless it is likely we will seek some form of additional funding to bolster working capital headroom as the economic storm continues to be weathered.

Operating Review

 

Berkeley Scott

Berkeley Scott, our hospitality and leisure recruitment brand has experienced the largest drop in net fee income across the Group when compared to H1 last year. This has resulted in the need to reduce the headcount from 79 heads in Q1 to 46 heads at the start of H2. We also took decisions to remove the branch presence in Leeds and cover it from the office in Manchester as well as close Southampton but continue to service clients from Guildford. NFI has been relatively flat during H1 but the reduced cost base has produced an improvement in the contribution line and we are well positioned for the turn in this sector. We have a market leading brand in Berkeley Scott with a good experienced management team and lately it has been encouraging to see an increase in job vacancy traffic. A good indicator for this has been the return of vacancies coming specifically from the Hotels business.

RK Accountancy

 

This company has experienced a steady but continual decline in NFI throughout the period, which we believe has mainly been a reflection of the markets on which we focus and is inline with our competitors in this space. In June, we completed the brand refresh which allowed us to maintain the heritage of the brand whilst at the same time repositioning it to reflect both the current visions and values, and act as the bedrock for future growth. Estimates for H2 will see this business return to a more reasonable level of NFI generation. We currently have 9 branches and, once the market turns, we still believe that the strategy of geographical expansion of RK Accountancy, especially in the South-East, is the correct one.

RK Supply Chain

The heavy investment made in RK Supply Chain during the latter months of 2008 has not produced the predicted returns. After failing to produce sufficient NFI to cover staff costs by the end of May, it became clear that if this business was to meet this target in H2 then changes would have to take place. The leadership for this division has changed and the strategy, for the time being, is focussed on its core service offering. The Manchester operation has been closed after a very disappointing performance in the year to date and the teams in Canada and London have been reduced down to the key revenue generating staff. That said, since these changes have been implemented, the initial signs are good, with the staff responding positively to the changes made, with an increase in work ethics which have started to filter through in the recent numbers. The Canadian office is now beginning to generate sufficient revenue/NFI in order to cover its costs and more. The change in focus away from planning jobs in to the procurement space and government related business has started to deliver more opportunities across the team in Canada. Earlier this year we completed the brand refresh and the result is a clean, precise projection of the services RK Supply Chain offer and a reflection on the work we conduct. 

RK Search/Robinson Keane

 

Our niche search businesses had a tough first half and saw an NFI drop which meant the need to cut costs accordingly. Moving in to H2 we have experienced an increase in NFI which is encouraging for the future as most of the assignments worked on are for senior appointments. We continue to drive the strategy within niche, focussed areas of the search market and fully expect growth going forward with a number of new opportunities coming from some of the 64 NHS Trusts within the North-West.

Quantica Search & Selection

Overall Quantica Search and Selection experienced a good first half with healthy results being produced from both the manufacturing and retail business units. The business has also successfully managed to consistently reduce its cost base to match the current demand for services. 

Quantica Technology

The contract numbers in Quantica Technology appear now to be relatively flat after a decline in the early months of 2009, nevertheless we have not been able to win enough new client opportunities and have relied too heavily on existing clients. The risk here is that higher than usual permanent fees will have to be achieved during H2 if we are to achieve the desired results. We have a number of potential opportunities with a number of health sector clients which, if successful will make sure that we have a significantly better H2. We are fully committed to the Technology sector and envisage modest growth in the short-term with the need to acquire complementary businesses in this space in the future in order to create a division with real critical mass.

Integration of Quantica and further development of Kellan head office functions

With the move to a single Head Office in London, we were able to consolidate our finance and IT departments into one location and realise the previously identified staff synergies from the acquisition of Quantica in September 2007. The final piece of our jigsaw will be to consider merging IT networks when the respective contracts expire at the end of 2010.

Aside from the synergies referred to above that had always been planned, the corporate cost base; staff, property, IT, marketing and general costs were also rationalised in line with the rest of the business. Overall "corporate" headcount ended the period on 28, a reduction of 30 from June 2008. 

We have, where possible and appropriate, consolidated brands into single geographical premises and taken onerous lease charges (the residual rent, rates, service charge and dilapidation costs) on vacant buildings to cover the cost through to the end of lease terms. Naturally we try to sublet or assign all of our unwanted properties but the market and general surplus of such premises makes this a slow process to execute.

Although the processes above have been painful, and were not in line with our plans prior to the downturn, we believe the rationalisation will position us more strongly for when the market returns.

Summary and Outlook

After my initial 'baptism of fire' on joining the Kellan Group, earlier this year, I'm pleased to say that I can now see a clear route to returning the Group back to a profitable trading position.

Companies are still trying to benefit from the poor market conditions by requesting reductions in fees to agencies. The reduction in fees, the dismissal of contractors/temps and the seizure of permanent recruitment has left companies on core teams of staff and with minimal flexibility. In H2 I envisage that we will be fighting to grow our temp numbers and permanent revenue will start to edge up with a more correctly aligned Group cost base to support this.

The immediate plan is to focus on organic growth; especially the execution of the H2 business plans and the good news is that the outlook for every business in the Group is positive against a back drop of slightly negative sentiment within the recruitment market place. The market is still considerable and some shrinkage does not inevitably mean our share cannot grow. The key is aligning with active clients with real needs and ensuring that we outperform the competition. We will still keep a keen eye on potential acquisitions/mergers which are cash generative and can be creatively funded. 

I would like to thank our management and staff as well as business associates and investors for their continued confidence in our Group. I genuinely appreciate the efforts being made by everyone right across our business and am delighted by the high level of professionalism and commitment shown in each of our offices to grow the business and achieve new successes.

Ross Eades 

Chief Executive Officer

			Unaudited	Unaudited	Audited
			6 months	6 months	12 months
			ended	ended	ended
			30 June	30 June	31 December
			2009	2008	2008
		Note	£000	£000	£000
Revenue			15,226	25,352	46,720
Cost of sales			(8,579)	(12,277)	(23,908)
Gross profit			6,647	13,075	22,812
Administrative expenses			(9,744)	(11,346)	(26,817)
Operating (loss) / profit before impairment charge		3	(3,097)	1,729	1,044
Impairment of goodwill		7	-	-	(5,049)
Operating (loss) / profit		3	(3,097)	1,729	(4,005)
Financial income			10	45	77
Financial expenses			(159)	(182)	(510)
(Loss) / profit before tax			(3,246)	1,592	(4,438)
Tax credit / (charge)		2	62	(311)	(18)
(Loss) / profit for the period			(3,184)	1,281	(4,456)
Attributable to:
Equity holders of the parent			(3,184)	1,281	(4,456)
Basic profit/(loss) per share in pence		4	(3.7)	1.5	(5.1)
Diluted profit/(loss) per share in pence		4	(3.7)	1.3	(5.1)

The above results relate to continuing operations.

There are no adjustments between the (loss)/profit for the period and the total comprehensive (expense)/income for the period or the comparative periods.

										Unaudited		Unaudited		Audited
										30 June		30 June		31 December
										2009		2008		2008
								Note		£000		£000		£000
Non-current assets
	Property, plant and equipment									1,057		872		970
	Intangible assets							7		23,423		29,180		23,644
										24,480		30,052		24,614
Current assets
	Trade and other receivables							5		5,024		9,432		7,096
	Other financial assets									-		2		-
	Cash and cash equivalents									570		1,803		1,379
										5,594		11,237		8,475
Total assets										30,074		41,289		33,089
Current liabilities
	Other loans and borrowings									3,820		840		767
	Trade and other payables							6		2,997		5,823		3,986
	Corporation tax payable									207		753		207
	Other financial liabilities									124		-		135
	Provisions									511		22		326
										7,659		7,438		5,421
Non-current liabilities
	Other loans and borrowings									-		2,630		2,320
	Provisions									462		178		59
	Deferred tax liabilities									1,048		1,174		1,110
										1,510		3,982		3,489
Total liabilities										9,169		11,420		8,910
Net assets										20,905		29,869		24,179
Equity attributable to equity holders of the parent
	Share capital									1,742		1,742		1,742
	Share premium									13,728		13,728		13,728
	Merger reserve									16,081		16,081		16,081
	Capital redemption reserve									2		2		2
	Retained earnings									(10,648)		(1,684)		(7,374)
Total equity										20,905		29,869		24,179
				Share			Share		Merger		Redemption		Retained		Total
				capital			premium		reserve		reserve		earnings		equity
				£000			£000		£000		£000		£000		£000
Balance at 1 January 2008				1,742			13,740		16,081		2		(3,050)		28,515
(Loss)/profit for the period				-			-		-		-		1,281		1,281
Total comprehensive income for the 6 month period ended 30 June 2008				-			-		-		-		1,281		1,281
Share issue costs				-			(12)		-		-		-		(12)
Share-based payment charge				-			-		-		-		85		85
Balance at 30 June 2008				1,742			13,728		16,081		2		(1,684)		29,869
(Loss)/profit for the period				-			-		-		-		(5,737)		(5,737)
Total comprehensive income for the 6 month period ended 31 December 2008				-			-		-		-		(5,737)		(5,737)
Share-based payment charge				-			-		-		-		47		47
Balance at 31 December 2008				1,742			13,728		16,081		2		(7,374)		24,179
(Loss)/profit for the period				-			-		-		-		(3,184)		(3,184)
Total comprehensive income for the 6 month period ended 30 June 2009				-			-		-		-		(3,184)		(3,184)
Share-based payment release				-			-		-		-		(90)		(90)
Balance at 30 June 2009				1,742			13,728		16,081		2		(10,648)		20,905

						Unaudited			Unaudited	Audited
						6 months			6 months	12 months
						ended			ended	ended
						30 June			30 June	31 December
						2009			2008	2008
						£000			£000	£000
Cash flows from operating activities
(Loss)/profit for the period								(3,184)	1,281	(4,456)
	Adjustments for:
	Depreciation, amortisation and impairment						455		437		867
	Financial income						(10)		(45)		(77)
	Financial expense						134		186		339
	Amortisation of loan cost						36		36		73
	Net (profit)/loss on measurement of interest rate swap to fair value						(11)		(40)		98
	Loss on sale of property, plant and equipment						18		9		37
	Impairment of goodwill						—		—		5,049
	Equity settled share-based payment (release)/charge						(90)		85		132
	Taxation						(62)		311		18
							(2,714)		2,260		2,080
	Decrease in trade and other receivables						2,072		1,140		3,349
	Decrease in trade and other payables						(989)		(363)		(2,200)
	Adjustment to goodwill for pre-acquisition accruals not required						—		—		272
	(Decrease)/increase in provisions						588		(45)		140
							(1,043)		2,992		3,641
	Tax (paid)/receivable						—		1		(189)
Net cash (outflow)/inflow from operating activities							(1,043)		2,993		3,452
Cash flows from investing activities
	Interest received						10		45		77
	Acquisition of property, plant and equipment						(339)		(258)		(599)
Net cash outflow from investing activities							(329)		(213)		(522)
Cash flows from financing activities
		Proceeds from the issue of share capital, net of issue costs					—		(12)		(12)
		Drawdown/(repayment) of invoice discounting balances					1,117		(978)		(979)
		Interest paid and loan costs					(134)		(182)		(339)
		Repayment of borrowings					(420)		(423)		(840)
		Payment of the capital element of finance lease liabilities					—		(1)		—
Net cash inflow/(outflow) from financing activities							563		(1,596)		(2,170)
		Net (decrease)/increase in cash and cash equivalents					(809)		1,184		760
		Cash and cash equivalents at the beginning of the period					1,379		619		619
Cash and cash equivalents at the end of the period							570		1,803		1,379

1 Accounting policies

Accounting periods

The accounting reference date of the Group is 31 December. The current half year interim results are for the six months ended 30 June 2009. The comparative half year interim results are for the six months ended 30 June 2008. The comparative period end's results are for the twelve months ended 31 December 2008.

Financial information

The financial information for the six months ended 30 June 2009 and the six months ended 30 June 2008 are unaudited and unreviewed and do not constitute the Group's statutory financial statements for those periods. The comparative financial information for the full year ended 31 December 2008 has, however, been derived from the audited statutory financial statements for that period. A copy of those statutory accounts for that period has been delivered to the Registrar of Companies. The auditors report on those accounts was not qualified and did not contain statements under s237(2) or (3) of the Companies Act 1985 but did include an emphasis of matter paragraph as a result of the Group's likely breaches of debt covenants in the forthcoming year and the agreement of amended terms with the respective lender, and the consequent existence of a material uncertainty which may have cast doubt about the Group's ability to continue as a going concern. 

Basis of preparation

The half year interim financial statements have been prepared on a going concern basis using the recognition and measurement principles of IFRS as endorsed for use in the European Union.

The accounting policies used in the preparation of these condensed financial statements are set out in the statutory financial statements for the period ended 31 December 2008 which are also the policies that are expected to be applicable at 31 December 2009.

The accounts for the 12 month period ended 31 December 2008 highlighted that due to the recent decline in the UK recruitment market, the Group expected to breach some of the financial covenants contained in its borrowing agreement with its lender during the first half of 2009. Covenants on these borrowings, which comprise a term loan taken out to acquire Quantica Plc in September 2007 and an invoice discounting facility used for working capital, are tested quarterly using the 12 month period to the date of the respective test. As predicted, some of the covenants have been breached during the current period. The facilities themselves have not been breached. 

The Group's lender continues to be supportive. Positive discussions around future banking terms and the Group's existing and projected working capital requirements are ongoing. However, if the Group is unable to agree amended terms the lender could request early repayment of all outstanding borrowing.

It is also likely that the existing facilities alone will be insufficient to meet the Group's working capital requirements and further funding will be required. The Directors are confident that alternative sources of funding could be obtained although this can not be guaranteed.

Having assessed the position of the bank and the possible options for additional funding, the Directors have a reasonable expectation that the Group will be able to meet its liabilities as they fall due for the foreseeable future. It is on this basis that the Directors consider it appropriate to prepare the Group's interim financial statements on a going concern basis. 

However for the reasons described above, the Directors recognise that there are material uncertainties that may cast significant doubt on the Group's ability to continue as a going concern, and therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business. These material uncertainties comprise the ongoing availability of the existing facilities given the covenant breaches and the ability to obtain additional funding from alternative sources should it be required.

2 Taxation

Recognised in the income statement

	6 month	6 month	12 month
	period ended	period ended	period ended
	30 June	30 June	31 December
	2009	2008	2008
	£000	£000	£000
Current tax expense
Current period	-	374	145
Deferred tax expense
Origination and reversal of temporary differences	(62)	(63)	(127)
Tax charge/(credit)	(62)	311	18

The current period tax charge has been based on the estimated tax rate for the full year to 31 December 2009.

3 Reconciliation of operating (loss)/profit to adjusted EBITA and adjusted EBITDA

	6 month	6 month	12 month
	period ended	period ended	period ended
	30 June	30 June	31 December
	2009	2008	2008
	£000	£000	£000
Operating (loss)/profit as per accounts	(3,097)	1,729	(4,005)
Add back
Impairment of goodwill	-	-	5,049
Amortisation of intangible assets	221	227	442
Share-based payments (release)/charge	(90)	85	132
Onerous leases	726	-	185
Restructuring costs	594	-	415
Adjusted EBITA	(1,646)	2,041	2,218
Depreciation of assets	234	210	425
Adjusted EBITDA	(1,412)	2,251	2,643

4 Earnings per share

Basic earnings per share

The calculation of basic earnings per share is as follows:

	June	June	December
Weighted average number of shares	2009	2008	2008
Issued ordinary shares brought forward	87,086,336	87,086,336	87,086,336
Weighted average number of shares at end of period	87,086,336	87,086,336	87,086,336
Dilutive effect of potential shares	-	7,980,916	-
Diluted weighted average number of shares at end of period	-	95,067,252	-
(Loss)/profit for the period	(3,184,000)	1,281,000	(4,456,000)
Basic (loss)/earnings per share in pence	(3.7)	1.5	(5.1)
Diluted (loss)/earnings per share in pence	(3.7)	1.3	(5.1)
Adjusted basic (loss)/earnings per share in pence (i)	(3.7)	1.5	0.7
Adjusted diluted (loss)/earnings per share in pence (i)	(3.7)	1.3	0.7

There was no dilution in the current period or the comparative period ended December 2008 due to the losses in these periods.

(i) Adjusted (loss)/earnings per share is after eliminating the impairment of goodwill of Nil during the period (Nil period ended June 2008; £5,049,000 year ended Dec 2008).

5 Trade and other receivables

	30 June	30 June	31 December
	2009	2008	2008
	£000	£000	£000
Trade receivables	3,635	7,150	5,532
Other receivables	168	77	96
Prepayments and accrued income	1,221	2,205	1,468
	5,024	9,432	7,096

6 Trade and other payables

	30 June	30 June	31 December
	2009	2008	2008
	£000	£000	£000
Trade payables	410	737	446
Social security and other taxes	673	2,082	1,364
Other creditors	435	346	627
Accruals and deferred income	1,479	2,658	1,549
	2,997	5,823	3,986

7 Intangible Assets

The intangible assets balance at the period ended 30 June 2009 of £23,423,000 includes an amount of £19,668,000 relating to goodwill acquired through business combinations. Further impairment of this balance has been considered in the current period but none has been booked (£5,049,000 impaired at year ended 31 December 2008). The Directors believe the assumptions used in testing impairment at 31 December 2008; projected contribution, rates of growth and discount rates, are still valid and have not materially changed. These assumptions will continue to be reassessed on a six monthly basis.

ENDIR DXGDCGGDGGCC

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Kellan Group