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UK – Empresaria profits down and European confidence fragile

21 March 2012

The international recruitment and management services group, Empresaria Group Plc (EMR:LSE), reported on Wednesday that annual revenue in 2011 went up marginally by +1% from £206.8 million in 2010 to £208.9 million.

“Global economic conditions remain uncertain and while we continue to see generally good candidate and client demand, confidence is fragile and necessitates a cautious approach, especially in the UK and Continental Europe. The Group trades in many emerging markets across the world and we see opportunities for organic growth across these regions and expect to see improved returns for the year ahead,” said Tony Martin, Chairman of Empresaria.

Final results for the year ended 31 December 2011 showed that profit before tax decreased -71% to £1.9 million from £6.5 million a year ago. But the firm recorded a reduced net debt of £5.6 million at year-end from £6.1 million in 2010, after investing £2.1 million in working capital and £1.3 million purchasing minority shares. 

Gross profit (or Net Fee Income) saw a slight increase of +1% from £46.5 million to £46.9 million in 2011, resulting in a flat gross margin of 22.5%.

Operating profit for the year dropped to £2.8 million in 2011 from £7.2 million in the previous year. This was mainly caused by lower profits in Germany, where the adoption of new collective bargaining agreements required the firm to increase pay rates for some temporary workers. When adjusted to exclude amortisation of intangible assets, movements on values of put and call options and exceptional items operating profit declined by -28% to £5.3 million from £7.4 million in the prior year.

Permanents sales grew by +21%, helping to offset flat temporary revenue and a reduced temporary margin of 17.3% (2010: 18.1%). In 2011 permanent sales contributed 29% of net fee income, compared to 26% in 2010.

During the year, the firm also reduced its headcount from 883 in 2010 to 803 in 2011. This was mainly due to the fact that the Group disposed of some of its businesses. Operations in Indonesia where discontinued as the firm ceased operation of its subsidiary ‘Advance Career Indonesia’, resulting in a net loss of £0.4 million. 

In the UK, revenues dropped -8% to £67 million in 2011, down from £72.7 million with a +12% increase in permanent revenue being offset by a -9% reduction in temporary revenue. However, net fee income went up from £15.2 million in 2010 to £16 million in the year, representing 34% of the Group’s net fee income, a slight increase of +1% from a year ago.

The firm said the reduction in revenue was largely a result of infrastructure and construction operations, targeting higher margin and more value added contracts. Overall, the UK gross margin went up +24% (2010: 21%) while temporary staffing accounted for 60% of net fee income (2010: 64%), reflecting an improved permanent market. 

Adjusted operating profit in the UK remained flat at £2.0 million.

Market conditions in the UK were good in the first half of 2011, but growth rates slowed in the second half and in particular in the final quarter. Infrastructure and Construction businesses experienced lower temporary revenue but an increase in permanent revenue. In Financial services, revenues grew but with fierce competition, the outlook for the sector is cautious, exacerbated by the ongoing Euro crisis and potential impact on the banking industry. 

In Continental Europe, revenues increased by +3% to £102.7 million from £99.4 million in 2010, but there was a decline in net fee income of -10% to £19.7 million from £21.9 million in 2010. The region contributed 42% of the Group’s total net fee income. Pressure on margins across the region also resulted in a fall of the gross margin dropping -3% to 19%. Adjusted operating profit declined to £2.2 million to £3.9 million in 2010.

Although in Germany the economy proved resilient, the firm was not able to benefit fully from this during 2011 as revenue in the country was slightly down against 2010. As a result of the legal challenge against certain collective bargaining agreements some of Empresaria’s German operations may be subject to retrospective pay claims and social security contributions. Following audit results from the social security agency which provides a clearer estimate of their maximum claim and the likely timing for making payments to them, the company has reduced the provision made at the half year of £3.0m to £1.7m at the year end, reflecting lower expected exposure.

The firm’s healthcare staffing operations, based in Finland and Estonia, performed well with high revenue and net fee income growth. The shortage of healthcare staff in Finland is expected to contribute to business growth, the firm said today. Also, the Group’s specialist businesses in the Czech Republic and Slovakia also saw good growth in revenue and net fee income.

In the Rest of the World, revenue increased by +13% to £39.2 million from £34.7 million while net fee income also went up +19% to £11.2 million, from £9.4 million a year ago. This region has been Empresaria’s fastest growing in 2011 and now represents 24% of Group net fee income.

Permanent revenue increased by +27% and temporary revenue grew by +10%, with temporary margins also improving. Permanent recruitment contributed 60% of net fee income while temporary recruitment revenue is primarily delivered through businesses in Chile, Japan and Australia. But the investment in new offices in Singapore, China and Australia had a negative impact on profit of approximately £0.6 million – this is the main factor for the decline in adjusted operating profit to £1.1 million (2010: £1.5 million).

In Japan, operations were affected by the earthquake and tsunami in March 2011, which stopped temporary workers from being able to work and slowed down the recruitment process across the country. However, revenue and net fee income grew as profit remained flat.

In South East Asia, the firm reported continued growth in revenue and net fee income, although operating profit was down as a result of the investments in new office openings. In India revenue was flat year-on-year but profitability was down due to the need to restructure the business following the loss of a key client in the RPO operation. There is also an exceptional provision of £0.2 million in relation to a long-running historic contractual dispute. In China there has been a growth in profits due to a higher proportion of permanent recruitment. 

In South America, the firm’s outsourcing business in Chile had good revenue and profit growth, after recovering from the market disruption in 2010 caused by the earthquake. Gross margin has also improved.

In his business review, new Chief Executive Officer, Joost Kreulen, who replaced Miles Hunt at the start of 2012 said “There are some clear immediate priorities; improving the margins in Germany and ensuring that the lower profit businesses and the investments made in 2011 deliver growth and increased profit for 2012 are the key focus areas for the whole management team. While we remain open to external investment opportunities, we do expect to focus on our existing operations over the next year”.

Empresaria Group is UK-based international specialist staffing company. Following today’s announcement, the company’s share price improved +2.23% at £26.58, down -59.11% from a year ago but +56.35% above the 52-week low of £17.00 set on 6 December 2011. This values the firm at £11.59 million. 

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