Interim Results

Hydrogen Group Plc

UNAUDITED RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2020

The Board of Hydrogen Group plc ("Hydrogen Group" or the "Group") (AIM: HYDG) announces its unaudited results for the half year ended 30 June 2020.

Highlights

· Key priority remains the safety of our staff and other stakeholders

· Trading during the period was significantly impacted by the Covid-19 pandemic

· NFI decreased by 24% to £11.7m (H1 2019: £15.3m)

o Contract NFI fell by 20% to £4.9m (H1 2019: £6.1m)

o Permanent NFI fell 26% to £6.8m (H1 2019: £9.2m)

o Group contract margin however continued to increase to 12.6% (H1 2019: 11.2%)

· Underlying* Profit Before Tax ("PBT") decreased by 79% to £0.4m (H1 2019: £1.9m) and profit conversion of Net Fee Income** ("NFI") decreased to 3.3% (H1 2019: 12.1%) reflecting the operational leverage in the Group

· Statutory PBT decreased by 93% to £0.1m (H1 2019: £1.4m)

· Strong net cash of £6.5m at 30 June 2019 (31 December 2019: £4.5m and 30 June 2019: £3.4m)

· Underlying EPS*** in the period decreased by 3.8p, 81%, to 0.9p (H1 2019: 4.7p)

· Reported EPS in the period decreased to 0.0p (H1 2019: 3.6p)

· Cancellation of dividend (2019: 0.6p per share)

Post period end

· The proposed cancellation of Hydrogen Group's listing on AIM and accompanying tender offer for its shares announced today in a circular to shareholders

* Adjusted for foreign exchange (gains)/losses, share based payments, non-controlling loss/(interest), amortisation of acquired intangibles and exceptional items.

** Net Fee Income is the equivalent of gross profit

*** Underlying PBT less tax divided by weighted average number of shares

Commenting, Ian Temple, CEO of Hydrogen Group plc said:

"In common with most companies in our sector the first half of 2020 has been a challenging period for Hydrogen Group. As we have navigated the business through the Covid-19 pandemic our priority has been to do everything we can to ensure that our staff, clients and candidates are as safe as possible, while also focusing on maintaining the strength of our balance sheet by preserving cash.

"I would like to take this opportunity to thank all our staff for their exceptional commitment and hard work over the period."

Enquiries:

Notes to the editor

Hydrogen Group is a group of specialist recruitment and people solutions businesses with a proven global platform with clients' in over 50 countries. We deliver by building market leading niche specialist teams that develop a deep understanding of candidate and clients' needs and developing solutions.

Overview

The first half of 2020 was significantly impacted by the COVID-19 pandemic. Client demand was adversely impacted in the APAC region from January, this spread rapidly to our EMEA and US business during the latter stages of the first quarter.

As stated in our final results for 2019, the Group's primary objectives during the pandemic have been to do everything we can to ensure that our staff and other stakeholders are as safe as possible, and to focus on maintaining the strength of our balance sheet by preserving cash.

We acted quickly to reduce costs. During April, all staff globally accepted a temporary cut in basic pay, with the potential for it to be retrospectively recovered in early 2021 from any profit before tax generated for FY 2020. The pay cut reduced cash spend by £0.5m during Q2 and we have accrued £0.3m of payroll costs at 30 June, being the Board's current estimate of how much of this saving will be recovered by staff. We also utilised the UK Coronavirus Job Retention Scheme, and furthermore, we reduced costs by restructuring parts of our management team and more proactively performance managing several of our weaker performers. These actions, coupled with government support in the form of payment deferral schemes and job protection support programmes across the multiple overseas territories in which the Group operates, have enabled the Group to increase net cash during the period to £6.5m (31 December 2019: £4.5m, and 30 June 2019: £3.4m).

Prior to the pandemic, we had already both invested in technology throughout the Group to support remote working and adopted flexible working practices in many of our offices, which together, enabled our staff to seamlessly transition to home-working as lockdowns were instigated. Consequently, activity levels have been impacted by client demand rather than our capability to transact work.

Alongside this, we have remained focussed on the longer-term development of the business through the continued advancement of our operating model centred on its four core strategic pillars: Proposition, Platform, People and Performance. To that end, during the period we have:

· implemented an enhanced staff appraisal and performance management programme;

· restructured contractor payment terms to improve the Group's cash flow; and

· contracted with an Indian BPO partner to outsource our global compliance and pay & bill functions.

The Board of Hydrogen Group has today also announced the proposed cancellation of its listing on AIM and an accompanying tender offer for its shares as set out in the Circular to shareholders dated 8 September 2020.

Financial Highlights

Primarily driven by the impact of Covid-19, but also in the UK in Q1 by the impact of the then proposed changes to the IR35 legislation on clients' contract hiring plans, turnover fell by 29% in both actual and common currency terms to £45.4m (2019: £64.1m) and Group NFI fell by 24% in both actual and constant currency terms to £11.7m (H1 2019: £15.3m).

The improved geographic diversification of revenues experienced in recent periods, achieved through a reduced reliance on the UK market in relative terms, has been maintained as the percentage of NFI denominated in currencies other than Sterling remained broadly flat at 56% (H1 2019: 57%). Foreign currency income, in general, is naturally hedged against foreign currency expenditure.

EMEA NFI fell 24% to £6.5m (H1 2019: £8.6m) on both a reported and constant currency basis. The impact of IR35 continued to depress demand for contract recruitment during the first quarter in the UK, which was severely exacerbated by the impact of Covid-19 from March. Demand was impacted in all geographies and sectors although the London based Legal practice and the Edinburgh office both performed creditably.

In APAC, NFI fell by 29% to £3.5m (H1 2019: £4.9m) on both a reported and constant currency basis. Activity levels in the region were impacted by Covid-19 from late January, some two months ahead of the US or EMEA, as a result NFI fell during the half year in all our offices. Activity levels were most significantly impacted in Hong Kong. Conversely, our Thai business performed robustly under the circumstances.

USA NFI fell by 16% (17% in constant currency terms) to £1.6m (H1 2019: £1.9m). Encouragingly contract NFI grew by 53% (54% in constant currency terms), despite the pandemic, as a result of the investment we made in our US contract capability during the second half of 2019.

Group contract NFI fell by 20% and permanent NFI by 26% during the half year, driving a small change in mix to 42% contract (H1 2019: 40%); 58% permanent (H1 2019: 60%). While in absolute terms contract NFI has reduced due to both the pandemic and IR35, in relative terms contract recruitment has been less impacted than permanent by Covid-19 primarily because of its longer revenue recognition profile, coupled with both the growth in our US contract business and the impact, globally, of contractors on average working longer hours during lockdown.

The trend of improving contract margins experienced in recent periods has continued, with the Group achieving a contract margin of 12.6% in H1 2019 (H1 2019: 11.2%) primarily as a result of a reduction in volume at low margin major accounts in the UK.

Operating profit for the period decreased to £0.2m (H1 2019: £1.4m), while profit before tax was £0.1m (H1 2019: £1.4m).

Underlying PBT remains the Board's preferred measure of trading performance of the business, as it excludes non-trading items and non-repeatable gains and losses. This fell to £0.4m (H1 2019: £1.9m).

Underlying EPS is calculated as follows:

Cash flow and cash position

At 30 June 2020, the Group had net cash of £6.5m (31 December 2019: £4.5m and 30 June 2019: £3.4m). The increase in net cash was primarily driven by an increase in net cash from operating activities of £2.7m, which in turn predominantly resulted from a decrease in working capital balances of £2.1m. The fall in working capital was principally caused by both the utilisation of Government, COVID-19 related, payment deferral schemes of £0.8m and the impact of reduced contractor numbers.

Bank facilities

Hydrogen has an existing invoice discounting facility of £18.0m, with a commitment to January 2022. This facility shall continue until ended by either party giving to the other not less than three months' written notice. 

During the period, the Group has further extended its facilities by entering into new working capital agreements with HSBC in the USA for USD1.5m, Australia for AUD2.0m and Singapore for SGD1.7m.

Dividend

Due to the uncertainty created by the Covid-19 pandemic, in common with many businesses, the Board announced the suspension of the Group's final dividend in its 2019 annual report. In light of this and given the proposed cancellation of Hydrogen's listing on AIM and accompanying tender offer for its shares also announced today, the Board does not believe it is appropriate to announce an interim dividend (H1 2019: 0.6p).

Current Trading

Activity levels stabilised during the final weeks of the second quarter having fallen significantly through April and May. Since the period end client demand and, consequently, lead indicators have begun to improve in most of the Group's markets. However, the shape of this recovery is currently shallow, and it has yet to translate to a meaningful improvement in reported monthly revenue levels.

Forward visibility continues to be very poor, and the Board remains mindful of the impact that a second wave of the pandemic may have on demand levels. Indeed, a number of our markets, including Los Angeles and Hong Kong, have returned to lockdown to varying degrees in recent weeks. As a result, we will continue to focus on cost control while ensuring that the Group maintains the critical mass in all our key markets that is required to benefit from a meaningful recovery in client demand levels when it arises.

Hydrogen Group Plc

Unaudited Condensed Consolidated Interim Statement of Comprehensive Income

For the six months ended 30 June 2019

The notes to the accounts set out below form an integral part of this unaudited condensed consolidated interim report

Hydrogen Group Plc

Unaudited Condensed Consolidated Interim Statement of Changes in Equity

For the six months ended 30 June 2020

The notes to the accounts set out below form an integral part of this unaudited condensed consolidated interim report.

Hydrogen Group Plc

Unaudited Condensed Consolidated Interim Statement of Cash Flows

For the six months ended 30 June 2020

The notes to the accounts set out below form an integral part of this unaudited condensed consolidated interim report.

Hydrogen Group Plc

Notes to the Unaudited Condensed Consolidated Interim Report

For the six months ended 30 June 2020

1 General information

The principal activity of Hydrogen Group plc ("the Company") and its subsidiaries' (together known as "the Group") is the provision of services for mid to senior level professional staff. The Group consists of three operating segments, EMEA, USA and APAC, offering both permanent and contract services for large and medium sized organisations. The Group offers services in Professional Support Services (including legal, finance, technology and business transformation) and in Technical and Scientific market sectors (Energy and Life Sciences). The Group operates across the world from a network of offices in Australia, Dubai, Hong Kong, Malaysia, Singapore, Thailand, UK and the USA, plus a number of internationally focused teams based in the UK.

Hydrogen Group plc is the Group's ultimate parent company. The Company is a limited liability company incorporated and domiciled in the United Kingdom. The registered office address and principal place of business is 30 Eastcheap, London, EC3M 1HD, England. Hydrogen Group plc's shares are listed on AIM. Registered company number is 05563206.

The unaudited condensed consolidated interim report for the six months ended 30 June 2020 (including comparatives) is presented in GBP '000, and were approved and authorised for issue by the Board of directors on 8 September 2020.

Copies of these interim results are available at the Company's registered office and on the Company's website - www.hydrogengroup.com.

This unaudited condensed consolidated interim report does not constitute statutory accounts of the Group within the meaning of section 434 of the Companies Act 2006. The financial information for the year ended 31 December 2019 has been extracted from the statutory accounts for that year, which have been filed with the Registrar of Companies. The auditor's report on those accounts was unqualified, however includes a material uncertainty paragraph relating to Going Concern.

2 Basis of preparation

The unaudited condensed consolidated interim report for the six months ended 30 June 2020 has been prepared using accounting policies consistent with International Financial Reporting Standards ("IFRSs") as adopted by the European Union. The unaudited condensed consolidated interim report should be read in conjunction with the annual financial statements for the year ended 31 December 2019, which were prepared in accordance with IFRSs as adopted by the European Union.

These financial statements have been prepared under the historical cost convention. This unaudited condensed consolidated interim report has been prepared in accordance with the accounting policies adopted in the last annual financial statements for the year ended 31 December 2019 other than in respect of changes in policy to new standards as set out in note 3 below.

Hydrogen has an existing invoice discounting facility of £18.0m, with a commitment to January 2022. This facility shall continue until ended by either party giving to the other not less than three months' written notice. During the year, the Group has further extended its facilities by entering into new working capital agreements with HSBC in the USA for USD1.5m, Australia for AUD2.0m and Singapore for SGD1.7m.

The uncertainty as to the future impact of the COVID-19 pandemic has been considered as part of the Group's adoption of the going concern basis. Forecast stress testing scenarios, in light of COVID-19, has demonstrated that the Group could withstand both a material and prolonged decrease in revenue without breaching its banking facilities. On this basis, the Directors have a reasonable expectation that the Group will have sufficient cash flow and available resources to continue operating for at least 12 months from the approval date of these unaudited interim results.

3 Significant accounting policies

New and amended standards and interpretations issued by the IASB that will apply for the first time in the next annual financial statements are not expected to impact the Group as they are either not relevant to the Group's activities or require accounting which is consistent with the Group's current accounting policies.

The accounting policies have been applied consistently throughout the Group for the purposes of preparation of the condensed consolidated interim report. New items impacting the Group where existing IAS20 requirements will be applied in the annual financial statements for the year ended 31 December 2020 are:

Government grants

Government grants are transfers of resources to an entity by Government in return for past or future compliance with certain conditions relating to the operating activities of the entity. Government assistance is action by Government designed to provide an economic benefit that is specific to an entity or range of entities qualifying under certain criteria. The Group recognises Government grants only when there is reasonable assurance that the entity will comply with the conditions attached to them and the grants will be received. Government grants are recognised in profit or loss over the periods in which the grants are intended to compensate. Any grants received in advance will be recognised as an asset on the Company Statement of Financial position.

4 Segment reporting

(a) Revenue, gross profit and operating profit/(loss) by discipline

For management purposes, the Group is organised into the following three operating segments based on the geography of the business unit: EMEA (covering Europe, Middle East and Africa); USA; and APAC (covering Asia and Australia). The operating segments noted reflect the information that is regularly reviewed by the Group's Chief Operating Decision Maker which is the Board of Hydrogen Group plc. All operating segments have similar economic characteristics and share a majority of the aggregation criteria set out in IFRS 8:12.

Revenue reported above represents revenue generated from external customers. There were no sales between segments in the six months to 30 June 2020 (30 June 2019: Nil, 31 December 2019: Nil).

The accounting policies of the reportable segments are the same as the Group's accounting policies described above. Segment profit represents the profit earned by each segment without allocation of central administration costs, finance costs and finance income.

The information reviewed by the chief operating decision maker, or otherwise regularly provided to the chief operating decision maker, does not include information on net assets. The cost to develop this information would be excessive in comparison to the value that would be derived.

There is one external customer that represented more than 11% of the entity's revenues with revenue of £5.4m, and approximately 2% of the Group's NFI, included in the EMEA segment (30 June 2019: one customer, revenue £10.2m, EMEA segment; 31 December 2019: one customer, revenue £17.3m, EMEA segment).

(b) Revenue and gross profit by geography 

(c) Revenue and gross profit by recruitment classification

* includes Fixed Term Contracts (FTC's)

5 Exceptional items

Exceptional items are costs that are separately disclosed due to their material and non-recurring nature.

Restructuring costs relate primarily to the cost of restructuring parts of our senior management team in the UK. In line with prevailing practices, COVID-19 related Government Job Retention scheme grants are not treated as exceptional items and have been netted off the relevant employment costs. Impairment reversal relates to change in value in use of previously impaired lease. Professional fees relate to non-trading advisory costs. All exceptional items are included within administrative expenses in the Consolidated Statement of Comprehensive Income.

6 Taxation

The charge for taxation on profits for the six months amounted to £0.10m (30 June 2019: £0.32m, 31 December 2019: £0.39m).

7 Earnings per share

Earnings per share is calculated by dividing the profit or loss attributable to equity holders of the Group by the weighted average number of ordinary shares in issue.

Fully diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares by existing share options and share incentive plans, assuming dilution through conversion of all existing options and shares held in share plans.

8 Cash flow from operating activities

9 Trade and other receivables

10 Trade and other payables

11 Provisions

12 Investment in associate

The following table provides summarised information of the Group's investment in the associated undertaking:

13 Dividends

Final dividend for 2018 of 1.0p per share recognised within the year ended 2019 as this was declared post year end. No dividend has currently been proposed for the year ended 31 December 2020.

14 Redemption Liability

A financial liability is recognised in respect of the forward purchase at fair value. Movements in the year are as follows: