9 March 2023

FRANCHISE BRANDS PLC

("Franchise Brands", the "Group" or the "Company")

Final results for the year ended 31 December 2022

Another significant and highly successful year for the Group

Record organic growth at Metro Rod and transformational acquisition of Filta which has performed ahead of expectations

Franchise Brands plc (AIM: FRAN), an international multi-brand franchise business, is pleased to announce its audited results for the year ended 31 December 2022.

Financial highlights

·   Revenue increased by 72% to £99.2m (2021: £57.7m) reflecting record organic growth from the B2B Division, complemented by the acquisition of Filta.

·    Adjusted EBITDA* increased by 80% to £15.3m (2021: £8.5m).

·    Adjusted profit** before tax increased by 98% to £12.8m (2021: £6.5m).

·    Statutory profit before tax increased by 78% to £10.3m (2021: £5.8m).

·    Cash conversion (after adding back acquisition and reorganisation costs) of 79% (2021: 97%). The decline was due to additional trade debtors at Metro Rod on increased system sales.

·    Net cash*** of £8.0m at 31 December 2022 (2021: £6.5m).

·    Adjusted EPS** increased by 51% to 8.38p (2021: 5.55p).

·    Basic EPS increased by 54% to 6.81p (2021: 4.42p).

·    Final dividend of 1.1p per share proposed (2021: 0.9p per share), giving a 33% increase in the total dividend for the year to 2.0p per share (2021: 1.5p per share), 4.2 times covered by adjusted profit after tax (2021: 3.7 times).

Operational highlights

·    Completion of the transformational acquisition of Filta in March, establishing an international footprint, a broader range of complementary services and considerably enhanced scale.  

·    Filta International has delivered strong results, ahead of our expectations, driven by the full recovery in its key commercial customer sectors and the elevated price of cooking oil.

·    Excellent performance of the newly-created B2B division with revenue growing by 34%.

·    Metro Rod and Metro Plumb system sales increased by 19% to a record £60m.

·    Willow Pumps sales increased 14% and accelerated its cross-selling strategy.

·      Significant turnaround in productivity at Filta UK which has been integrated at pace.

·    B2C division franchisee recruitment and retention affected by the unusual labour market and post-Covid employment trends, nevertheless, underlying franchisee trading remained robust.

·    Continuing to leverage efficiency-enhancing technology across the Group.

Current trading and outlook

·  Good momentum in the B2B businesses continued into 2023 to date, reflecting defensive growth opportunities for its essential services to resilient and diversified sectors.

·    Filta International maintains excellent progress in North America.

·    Strategic review has concluded there are greater opportunities for the Group for organic, acquisitive and international growth within the B2B franchise sector. The B2C Division is therefore being offered for sale.

*Adjusted EBITDA is earnings before interest, tax, depreciation, amortisation, exchange differences, and share-based payment expense and non-recurring items.

**Adjusted profit before tax and Adjusted EPS are before amortisation of acquired intangibles, share-based payment expense, exchange differences and non-recurring items.

*** Net Cash is cash less hire purchase obligations and obligations under leases.

Stephen Hemsley, Executive Chairman, commented:

"2022 was another significant and highly successful year for the Group, with a strong performance driven by record organic growth in the Group's UK B2B division complemented by the transformational acquisition of Filta, which has performed ahead of our expectations.   

"The excellent momentum in the B2B businesses has continued in 2023 to date, as we capture the defensive growth opportunities afforded by the Group's mostly essential services, strong leadership positions in its chosen markets, and reputation for high quality, reliable services among its diversified client base.

"We look forward with confidence to expanding the business organically and by seeking further earnings-enhancing acquisitions. We have clear opportunities to grow our franchise businesses through further investment in sales and marketing, supporting franchisees to expand their services, and leveraging efficiency-enhancing technology.  In addition, our focus on B2B franchise businesses provides a strong platform from which to seek selective acquisitions of van-based businesses that provide essential services, as we seek to expand our international footprint."

Enquiries:

About Franchise Brands plc

Franchise Brands is an international, multi-brand franchisor focused on building market-leading businesses primarily via a franchise model. The Group currently has a combined network of 586 franchisees across six principal franchise brands in the UK, North America and Europe.

Franchise Brands' focus is on B2B van-based reactive and planned services. The Company owns several market-leading brands with a long trading history which benefit from the Group's central support services, in particular technology, marketing, management experience and other group resources. At the centre of Franchise Brands' business building strategy is helping its franchisees grow their businesses.

Franchise Brands employs 415 people from 5 principal offices in the UK, Orlando, Florida and the Netherlands.

For further information, visit www.franchisebrands.co.uk

CHAIRMAN'S STATEMENT

Introduction

I am pleased to report another significant and highly successful year for the Group. The Group's strong performance was driven by record organic growth at Metro Rod and the newly formed UK B2B division, complemented by the transformational acquisition of Filta Group Holdings plc ("Filta") which has performed ahead of our expectations. This strong performance has been delivered in challenging macro-economic conditions, highlighting the strength, resilience and growing diversification of the business model.

These B2B businesses offer substantial potential for future organic growth, supported by the relatively essential nature of the services they provide and the strength and quality of our franchise networks. Our businesses have small shares of their large, yet relatively fragmented markets, where our scale and ability to serve customers through a one-stop range of services is becoming more of a competitive advantage. We have identified multiple levers to help to maximise business potential, underpinned by efficiency-enhancing technology, which will drive sustainable organic growth and operational leverage.

The acquisition of Filta has taken us from a UK-focused company to one with an international footprint. Our ambition is to continue to expand internationally, both organically and by acquisition, with the objective of generating our income equally from the UK, North America and continental Europe. Since the IPO of Franchise Brands in 2016, approximately 50% of our EBITDA growth has been organic and we continue to see this as a key driver for the business.

Corporate Activity and Strategic Review

On 16 February 2022, we announced the agreed terms of a recommended all-share offer to acquire Filta. The offer became wholly unconditional on 10 March 2022 and the acquisition was completed on 1 June 2022.

On 25 May 2022, we announced the early settlement of the earn-out consideration for the 2019 acquisition of Willow Pumps. This has enabled an accelerated programme of integration and harmonisation across the Group's B2B division following the acquisition of the Filta business in the UK, and is facilitating the accelerated expansion of pump services within Metro Rod.  

In our year-end trading update on 12 January 2023, we announced a strategic review of the B2C division. While we consider the factors that depressed franchise recruitment and retention in 2022 were transitory, there are greater opportunities for the Group for organic, acquisitive and international growth within the B2B franchise segment.

Our B2B organic and acquisitive growth focus will be on van-based delivery of reactive and planned essential services. The attractions of the B2B sector are that commercial customers typically have a regular recurring need for our services, coupled with a greater average spend and, therefore, higher lifetime value. Franchise Brands has a strong competitive advantage in these sectors given the ability to cross-sell an increasing range of complementary services and develop marketing synergies.

The Group's operational structure is also best suited to developing B2B businesses, in particular where we can leverage our scaleable technology to drive efficiency and operational gearing. Finally, B2B franchise businesses are more attractive acquisition targets for us as they tend to be larger, royalty-based, international businesses with greater potential for growth.

In December the Board appointed finnCap Cavendish to seek a buyer for the B2C division, and as a result, we are required to disclose this division as a discontinuing activity within these accounts. However, we continue to operate this division as normal, pending a sale, and indeed expect to see a significant recovery in franchise recruitment in the current year following the slowdown in the second half of 2022. As noted below, this division was 16.7% of Group EBITDA in 2022.

B2B Division

The B2B Division, which includes Metro Rod, Willow Pumps, and the UK business of the newly-acquired Filta group, had an excellent year growing system sales by 29% to £90.2m. Statutory revenue grew by 34% to £71.4m and Adjusted EBITDA by 30% to £9.2m.  

Metro Rod and Metro Plumb

Metro Rod and Metro Plumb experienced continued strong momentum in 2022, with system sales growing by 19% to reach £60m in the year. This growth was underpinned by continued progress on initiatives to widen and deepen the services offered by franchisees. Pump sales, which have an average order value nearly five times that of drainage, grew by 80%. This, together with the continued investment by franchisees in tankers, helped drive tanker and pump sales to a record 22% of system sales.

Franchisees experienced strong growth in their businesses, with one of the 42 Metro Rod franchisees exceeding £3m in sales for the first time, another five exceeding £2m in sales (2021: 1), and 27 exceeding £1m in sales (2021: 24). This growth was spread through almost the entire network, with 48 of the 55 Metro Rod and Metro Plumb franchisees growing their businesses (2021: 47 out of 49) and 27 franchisees growing by more than 20% year-on-year (2021: 32).

Metro Plumb continued to expand with the recruitment of 6 new stand-alone franchisees bringing the total to 13 at the year-end. System sales (including Kemac which operates 5 Metro Plumb territories) grew by 23% in the year. We continue to focus on the recruitment of more independent Metro Plumb franchisees and broadening the customer base in both the commercial and domestic plumbing sectors.

Willow Pumps

Willow Pumps made an increased contribution in 2022, with total sales growing by 14% to reach £18.2m in the year. This was driven by a strong recovery in supply and installation work which increased by 43% and an 8% increase in service work.

The early settlement of the Willow earn-out consideration enabled greater progress with initiatives between Willow Pumps and Metro Rod to deliver pump services in an optimum way by utilising the Metro Rod depot network. Of Willow Pumps' total revenue, 18.4% (2021: 11.5%) was delivered by the Metro Rod network, demonstrating the acceleration of our cross-selling strategy. It is our objective to further increase the proportion of pump work undertaken by Metro Rod franchisees. As this will move margin between the two businesses, we expect Willow Pumps' profitability to grow more slowly in future years.  

Filta UK

The UK business of the Filta group was acquired in March 2022. It delivers a wide range of complementary services, primarily to commercial kitchens, via a combination of a direct labour organisation ("DLO") and franchisees. These services include: fats, oil and grease (FOG) solutions; cooking oil filtration; fryer management services; extraction vent cleaning and servicing; pump and drainage servicing; and on-site fridge and freezer seal replacement. The services can help commercial kitchen owners to address environmental impact and enforcement; assure health and safety compliance; reduce energy and other operating costs; and improve food quality.

Filta UK has undergone a period of rapid change as part of the creation of the B2B division, with the streamlining of the management structure, the sharing of central services such as health & safety and HR and a refocusing of the business on improving customer service and optimising service delivery.

This has resulted in a significant turnaround in productivity and profitability. We see significant potential to grow these franchise and DLO businesses by expanding their capacity and coverage and enhancing service delivery through our B2B franchise networks. The quality of Filta UK's blue-chip customer base also provides an opportunity to cross-sell many of the other services offered by the B2B division.

Filta International

The North American division of the Filta group, which was acquired in March 2022, has performed strongly and ahead of expectations. This has been driven by the full recovery of its key hospitality customers and the heightened demand for the FiltaFry oil filtration service due to the elevated price of virgin cooking oil, as the FiltaFry technology can double the usable life of the oil.  This has also driven the value of used cooking oil, which is collected from customers and sold by Filta North America for reprocessing into biofuel.

As a result, Filta North America system sales increased 51% for the twelve months of 2022 to reach $92m and exited the year with a record sales run-rate of $100m per annum (Franchise Brands only owned the business for approximately ten months in 2022). The additional income generated has been used by many franchisees to expand their businesses by investing in new mobile filtration units ("MFU"), which will further drive both sales and used oil collections in the coming years. Customers are also increasingly valuing the monthly Environmental Impact Reports we provide. These quantify the farming, processing and packaging environmental benefits of extending the life of the oil and detail the additional savings of recycling the oil into biodiesel.

Filta's market penetration is very low and our "maximum potential model" indicates a potential market size of approaching $1bn based on feasible levels of market penetration and average customer spend. We have developed an accelerated expansion plan called "Filta Max" to seek to capture more of this available market. The key drivers are increased investment in sales and marketing and the accelerated development of un-franchised areas (one-third of the US) or under-serviced areas of existing franchised areas. We expect to start seeing the benefits of this investment in 2023.

The small and currently sub-scale Filta operations in Europe have recovered more slowly as a result of the slower reopening of the hospitality sector. Due to the structural differences in the market, with a much lower density of fryers per location, the economics of the European business are on a reduced scale to that of North America. Most franchisees offer the core oil filtration service and limited collection and recycling of used cooking oil, although some are engaged in the servicing of grease recovery units ("GRUs") in commercial kitchens, which we see as an area for future development.

B2C Division

The B2C division, which comprises ChipsAway, Ovenclean and Barking Mad, had a satisfactory level of franchisee recruitment in the first six months of the year. However, as anticipated in my half-year report, recruitment in the second half of the year was weak with only 10 new recruits (H2 2021: 28), bringing the year-end total to 39 recruits (2021: 57), markedly lower than the 5-year average of 55. We attribute this to the high levels of employment and wages which have made self-employment a less attractive option, combined with a low level of redundancies during 2022. Since the year-end, there has been a recovery in enquiry levels which is feeding through in improved recruitment in Q1 2023.

The reduced level of recruitment has been compounded by slightly higher rates of attrition, but this abated in the second half of the year. The total number of leavers in 2022 was 69 (2021: 64), slightly higher than the five-year average of 65. As a result, the total number of B2C franchisees at the year-end was 349 (2021: 379). The reasons for the attrition are a combination of a return to employment by some franchisees, given the high salary levels on offer in specific sectors, compounded by the post-Covid trends of work-life balance and the so-called "great resignation" that have seen some opt for early retirement.

Underlying trading in the franchise communities of all three brands remains robust, as our generally older and more financially secure customer base is reasonably resilient to the current cost-of-living pressures. Therefore, we believe we have a significant degree of resilience before our franchisees' income would be impacted by any economic downturn.

Azura

In 2021 we acquired Azura, a leading franchise management software system developer, to secure full ownership of the IP in our Vision works management software. We also saw an opportunity to help Azura further develop and market its franchise management software as a service ("SaaS") solution to other franchise businesses. Whilst Franchise Brands continues to be Azura's largest customer, we have added a number of new customers during the year and have refocused the sales effort onto larger brands. We have also been developing a new flagship franchisee recruitment product and have focused on ensuring that we deliver the highest levels of customer service.

Digital Transformation

We continued to accelerate our digital transformation of the business. The acquisition of Azura and its team of embedded developers has helped increase the pace at which new features can be added to our Vision platform. Additional functionality in 2022 included a new customer quotations system, additional self-service features for our "Connect" customer portal, and several invoicing features. This has allowed us to continue to automate an increasing number of processes, reduce costs for both us and our franchisees, improve efficiency and enhance customer service and engineer job satisfaction. Our robotics automation journey has also progressed as we launched our own platform during the year which allows us to increase the levels of automation of job logging, invoicing and email handling. Over the past five years, system sales per Support Centre employee have more than doubled demonstrating how technology is driving operational gearing. 

We have also made progress in developing technology-enabled solutions which can help us address business-critical issues.  A key focus has been the development of an advanced scheduling tool to improve engineer utilisation and efficiency, a vital requirement in the current tight labour market. Trials have been ongoing during the year and indicate an initial reduction of unproductive, and therefore unbillable, time of 23 minutes per engineer per day, improved working conditions/hours for engineers and improved customer service. This represents a significant amount of additional potential capacity across the Metro Rod and Metro Plumb resource base of over 550 engineers with any incremental sales achieved using this time being at a very high margin, with minimal incremental cost, which will significantly enhance franchisee profitability.

Our technology team has also been reviewing Filta's IT platforms, particularly in the UK DLO, to identify opportunities to automate operational processes and we are looking at areas where Filta's IT platforms might further improve our existing systems.

Outlook

The excellent momentum created in the B2B businesses in 2022 has continued in 2023 to date without any noticeable impact from slowing economic growth or the rising cost of living. We provide mostly essential services, have strong leadership positions in our chosen markets and enduring goodwill from customers as a result of the continuing high quality, reliable service we have delivered over recent years. We have multiple levers to grow market share and maximise growth across our franchise businesses through further investment in sales and marketing, particularly where we have a unique service with relatively little competition, as in the case of Filta in North America, underpinned by efficiency-enhancing technology.

In addition to our organic growth strategy, we are determined to seek to expand the Group through selective acquisitions of van-based B2B franchise businesses that provide essential services. We also wish to expand our international footprint, with the longer-term objective of having a group of franchise businesses that generate their income equally from the UK, North America and continental Europe.

Conclusion

We have had another busy year and have been very pleased to welcome our new Filta colleagues to the Group. There is always something new to learn from the way another business model is executed, and we are certainly exchanging many great new ideas with the Filta team that will benefit the enlarged Group.

I would also like to thank both the franchisees and corporate teams for their hard work and dedication in a year that has seen its challenges, particularly with a difficult franchise recruitment environment in the B2C division and a certain amount of change with the creation of the B2B division.

We look forward to the rest of 2023 with great enthusiasm and confidence and are determined to capitalise on the excellent momentum we have created in 2022 to both continue expanding the business organically and seek further earnings-enhancing acquisitions.

Stephen Hemsley

Executive Chairman

9 March 2023