14 October 2008

Matchtech Group plc

Preliminary Results for the year ended 31 July 2008

Matchtech Group plc ("Matchtech" or the "Group"), one of the UK's leading specialist technical recruitment companies, is pleased to announce its Preliminary Results for the year ended 31 July 2008.

Financial Highlights

*2007 results exclude sales and profits from the US business sold on 31 August 2006 as well as the non-recurring costs of the IPO.

The financial statements have been prepared under International Financial Reporting standards; see IFRs below.

Operating Highlights

• Substantial organic growth across every sector

• Strong growth throughout the year - Net fee income growth H1 up 22%, H2 up 24%

• Healthy balance of Contingency, Preferred and Master Vendor business

• Maintained good net fee income mix - contract 67%, permanent 33%

• Permanent fees up 28%, permanent placements up 31%

• Contract net fee income up 21% and number of contractors working at the year end up 11%

• Sales force headcount increased by 26%

Current Trading and Proposed Share Buybacks

• Net fee income in the first two months of the current financial year up 13%. Contractors working at the end of September were 4,595, up 5% since end July.

• Seeking shareholder approval at the forthcoming AGM for buybacks of up to 10% of share capital 

Commenting on the results, George Materna, Chairman of Matchtech said:

"Our strong second half performance maintained our momentum and ensured that we built on our track record of sustained organic growth. We have delivered record turnover in the year converting into record profits across every sector of the business.  

"This excellent performance has strengthened our position as the UK's biggest single-site recruitment agency and we have continued to build on our already strong presence in our core industry sectors. 

"The clients and sectors that we serve continue to exhibit strong structural growth characteristics. We are involved in the recruitment process throughout a project's life-cycle from the initial design and conception phase, through the construction and implementation stages and finally to the delivery and maintenance of the asset or infrastructure. Many of these projects, such as the construction of the two new Aircraft Carriers for the Royal Navy which are due in service in 2014 and 2015, and the construction of the Olympic site, due in 2012, operate on long life cycles and are not materially impacted by the current financial turmoil. Moreover we have a highly diversified and expanding customer base, which provides further opportunities for growth and adds an additional element of protection to our business. 

"The technical markets continue to suffer from skills shortages, which, in turn, create demand for qualified candidates despite the macro economic turbulence. By providing high levels of service across the entire UK from our single site location, we are gaining new clients and winning business from our competitors.

"Our clear defensive strategy of pursuing organic growth in our well established areas through working with our highly diversified client base is working and offers scope for further growth.  Whilst there will be competitive and market challenges ahead, we are well positioned, with the flexibility offered by our single site, to respond quickly and effectively to any deterioration in market conditions. 

"Overall trading in the first two months of the current year has been good, with net fee income up 13% on the same period last year and contractor numbers up 5% since the end of July. We are determined and consistent at what we do and believe we can deliver another successful year." 

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IFRS

The financial statements have been prepared in accordance with applicable International Financial Reporting Standards ('IFRS') as adopted by the European Union (EU) and which are effective at 31 July 2008, our first annual reporting date at which we are required to use IFRS accounting standards as adopted by the EU.

Matchtech Group plc's consolidated and company financial statements were prepared in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) until 31 July 2007. The date of transition to IFRS was 1 August 2006. The comparative figures in respect of 2007 have been restated to reflect changes in accounting policies as a result of adoption of IFRS. The disclosures required by IFRS 1 concerning the transition from UK GAAP to IFRS are given in the reconciliation schedules, presented and explained in note 2 to the financial statements. 

Background on Matchtech 

Matchtech specialises in the provision of contract and permanent staff in the Engineering, Built Environment and Support Services sectors across the UK. 

It was established in 1984 and has grown organically to become the UK's 2nd largest technical recruitment specialist and the UK's 17th largest recruitment company (Source: Recruitment International Top 100 Report - 2008). 

Operating from a single site near Southampton, Matchtech provides predominantly professionally-qualified candidates to clients in a broad range of industries including oil and petrochemicals, pharmaceutical, marine, aerospace, automotive, water, electronics, civil engineering, building structures and transport infrastructure. 

Group Chairman's Statement

This has been another excellent year for Matchtech. Our strong second half performance maintained our momentum and ensured that we built on our track record of sustained organic growth. We have delivered record turnover in the year converting into record profits across every sector of the business.

For comparison purposes 2007 results exclude the sales and profits from the US business sold on 31 August 2006 as well as the non-recurring costs of admission to AIM. 

Turnover was £258.8 million, up 28% on 2007, with net fee income (gross profit) of £33.2 million up 23%. 

Operating profit and profit before tax were both up 22% to £13.8 million and £12.8 million respectively, with the First Half profit before tax up 21% and the Second Half up 22%. Adjusted basic earnings per share increased to 39.3 pence, up 21%. 

This excellent performance has strengthened our position as the UK's biggest single-site recruitment agency and we have continued to build on our strong presence in our core industry sectors.

The Board has a progressive dividend policy and I am pleased to confirm a proposed final dividend for the year of 10.6 pence per share, which when added to the interim dividend of 5.0 pence per share, makes a total dividend for the year of 15.6 pence per share, a 14% increase on last year. The final dividend, if approved by shareholders at the Annual General Meeting to be held on 21 November 2008 will be payable on 5 December 2008 to shareholders on the register on 7 November 2008. 

Cash generation has again been strong and our net debt has fallen to £3.1m on 31 July 2008 from £9.8m at the 31 July 2007.

The recruitment and retention of our high quality staff, at all levels and in all areas, along with the ability to align their interests with shareholders and to provide the best service and results possible is essential for sustained organic growth. There is a high performance culture across the group created by the enthusiasm, the dedication, the professionalism and the desire to succeed of all our staff. 

This is a people business and our people have shown a commitment to clients, candidates and contractors that gives a significant competitive advantage. On behalf of the Board, I would like to thank the whole of the Matchtech team for their continued commitment and hard work. 

The clients and sectors that we serve continue to exhibit strong structural growth characteristics. We are involved in the recruitment process throughout a project's life-cycle from the initial design and conception phase, through the construction and implementation stages and finally to the delivery and maintenance of the asset or infrastructure. Many of these projects, such as the construction of the two new Aircraft Carriers for the Royal Navy which are due in service in 2014 and 2015, and the construction of the Olympic site, due in 2012, operate on long life cycles and are not materially impacted by the current financial turmoil. Moreover we have a highly diversified and expanding customer base, which provides further opportunities for growth and adds an additional element of protection to our business.

The technical markets continue to suffer from skills shortages, which, in turn, create demand for qualified candidates despite the macro-economic turbulence. By providing high levels of service across the entire UK from our single site location, we are gaining new clients and winning business from our competitors.

Our clear defensive strategy of pursuing organic growth in our well established areas through working with our highly diversified client base is working and offers scope for further growth. Whilst there will be competitive and market challenges ahead, we are well positioned, with the flexibility offered by our single site, to respond quickly and effectively to deterioration in market conditions.

Overall trading in the first two months of the current year has been good, with net fee income up 13% on the same period last year and contractor numbers up 5% since the end of July. We are determined and consistent at what we do and believe we can deliver another successful year.

George Materna FREC FCIPD

Group Managing Director's Report

Matchtech has continued to deliver consistent growth in both the First and Second Half of the year despite a slowing UK economy. This is testament to the structure and strength of the business, the markets in which we operate and the high quality of our staff and management. 

In a period when the growth of the UK economy has slowed, Matchtech has continued to grow in excess of 20%. We are pleased to report that our results have produced pre-tax profits of £12.8m compared to £10.5m (excluding non-recurring items) in 2007, up 22%.

Our business mix was essentially unchanged. We remain a contract led organisation; contract recruitment accounts for 67% of the Company's net fee income and permanent recruitment 33%. Both areas continue to show good growth, with contract recruitment up 22% and permanent up 28%. Most pleasingly, this growth has been consistent in both H1 and H2.

We have again demonstrated our ability to grow organically across all three of our sectors. Long term publicly funded projects, continuing skills shortages of highly technical candidates and a strategy of expanding our geographical reach within the UK aided growth within our Engineering and the Built Environment sectors.

In our Support Service Sector our strategy of expanding the range of skill types placed has taken us into new markets and diversified our client base.

We continued to deliver a healthy mix of contract and permanent business supplying our clients on a Contingency, Preferred  Supplier and Managed Agency basis. 

Our top 50 clients generated 54% (2007: 50%) of our net fee income. Babcock International, VT Group and Mouchel Group are our largest three clients, each generating around 4% of our net fee income. The highlight of the year was the re-signing of a 5 year contract with Babcock International and extending the VT Group Managed Service Provider contract for a further three years. The largest new contract win in the period was the contract with Ricardo, which is our first Master Vendor win in the Automotive sector.

We have delivered net fee income growth from our strategy of up-selling services with existing clients. This, along with a competitive marketplace, has put a slight downward pressure on our percentage margins which reduced to 12.8% from 13.3% in 2007.

Quality candidates remain in short supply but we have demonstrated our ability to source and place the best. This year we have placed 2,868 candidates into permanent positions, 31% up on 2007's 2,192 and we have filled over 6,800 contract/temporary assignments, up 8% on 2007's 6,300. Contractor care continues to be high on our agenda. This is demonstrated by our stance of continuing to pay our contractors and consultancies weekly. Internal service levels agreements are in place to ensure the contractor receives a high level of service from our consultants and our support staff.

I would like to thank all contractors and consultancies that have worked with Matchtech this year. With the quality service they deliver we are able to foster and maintain strong relationships with our clients.

We increased headcount in all three sectors to keep up with growth, especially within Support Services. Total numbers have risen from 245 to 296 staff, up 21% and sales force from 166 to 209 staff, up 26%.

This strong investment in increased headcount and slight change in business mix between contract and permanent recruitment has reduced our NFI conversion marginally to 41.6% (2007:42.0%). However, we aim to see the benefits from our staff investment next year together with increased staff productivity through training and development geared around service delivery.

The Group's remuneration strategy for sales consultants remains strongly biased towards variable over fixed remuneration,  encouraging staff to over perform.

Our leading edge IT technology continued to deliver operational efficiency and our proven single site strategy ensured our cost base remained under control.

We have further strengthened our business continuity strategy by achieving the new BS25999 Business Continuity standard and as such became the first UK recruitment company to obtain this certification.

Once again our experienced management team and high quality staff have produced another set of excellent results demonstrating their ability to perform in a less buoyant environment. I would like to thank all our staff for their hard work.

Their industry knowledge has ensured we are involved at the early stages of new business development opportunities and their ability to coach and mentor new staff is driving each sector's future growth plans.

We have demonstrated our ability to grow in demanding economic times. Our responsive service delivery model has won contingency business from our competitors and our Managed Service offering has developed an enviable reputation within the industry.

Our growth strategy remains unchanged along with our ability to maintain a low flexible cost base.

Our business development pipeline remains healthy and the management team will be working hard to increase the number of Managed Agency accounts as well as increasing the revenue generated by our existing accounts.

Finally we believe there has been little change in the long term growth drivers in the Engineering and Built Environment sectors and are committed to our strategy to diversify our Support Services sector.

We have a seasoned management team and our single site strategy means we are well positioned to respond quickly and effectively in the event of a weakening in market demand. This gives us confidence in uncertain economic times that Matchtech is well placed to continue to deliver solid performance in the future.

Adrian Gunn FREC

Group Finance Director's Review

This year Matchtech has again delivered consistent growth across all our sectors and the conversion to International Financial Reporting Standard's ("IFRS") has had minimal impact on our reported results.

International Reporting Standards ("IFRS") 

The Financial Statements for year ending 31 July 2008 are the first set of annual results prepared under IFRS. The transitional arrangements are detailed in Note 2 to the accounts on page 28.

The principle impact of the conversion relates to IAS12 Income Taxes, where the provision for the full potential future tax deduction in respect of share options resulted in an increase in the deferred tax asset recognised by £0.4m and the requirement to take to equity the excess tax effect of gains and losses on the exercise of share options in the period over and above the previously expensed share options cost under IFRS 2. The impact is a £0.8m increase in 2007 income tax expense and a resultant £0.8m decrease in profits after tax for that period. Consequently the comparative fully diluted EPS of continuing operations is 29.43p which was previously reported as 32.66p under UK GAAP. The two other areas affected are IAS 17 Leases and IAS 19 Employee Benefits; neither materially affects the results.

Group non-recurring items

For comparison purposes we have excluded from the 2007 results the non-recurring items of the sales and profits of the US business sold on 31st August 2006 of £0.07m as well as the nonrecurring costs of the admission to AIM of £0.6m.

Group Income Statement

Matchtech has continued to build on its resilient business model, once again posting record results.

With all sectors showing growth on last year turnover increased 28% to £258.8m (2007: £202.8m).

Net fee income increased 23% to £33.2m (2007:£26.9m) reflecting a slight fall in our gross profit margin to 12.8% (2007: 13.3%).

A strong permanent marketplace in the sectors in which we operate has resulted in faster growth in permanent fees than contract net fee income and a slight shift in mix, with 67% (2007: 69%) of net fee income derived from recurring contract income and 33% (2007: 31%) from permanent placements. We continue, however, to be a contract led business, maintaining a healthy balance between contract and permanent business.

Investment in new staff slightly impacted the net fee income conversion to operating profit which was 41.6% (2007: 42.0%).

Operating profit rose by 22% to £13.8m (2007: £11.3m). Profit before tax also rose by 22% to £12.8m (2007: £10.5m).

Profit after tax of £9.1m was up 25% (2007: £7.3m).

Group Earnings Per Share

Basic Earnings Per Share were up 30.4% to 39.34p (2007: 30.16p) and Diluted Earnings Per Share up by 30.0% to 38.25p (2007: 29.43p).

Excluding the non-recurring items in 2007, underlying Basic and Diluted Earnings Per Share were up 21.3% and 20.9% respectively.

Group Dividends

The Board has proposed a final dividend for the year of 10.6 pence per share, payable on 5 December 2008 to those shareholders registered on 7 November 2008. This makes a total dividend for the year of 15.6 pence per share (2007: 13.7 pence per share), up 14%.

Group Balance Sheet

Group net assets stood at £17.1m (2007: £10.8m). Net debt fell by £6.7m to £3.1m (2007: £9.8m) and debtor days fell by 3.3 days to 40.1 days (2007: 43.4 days). At 31 July 2008 £0.3m (2007: £0.3m) of the debtor book of £38.3m was greater than 90 days overdue, less than 0.8%.

Group Financing and Cashflow

The Group operates a Confidential Invoice Discounting facility with Barclays Bank plc. The facility ceiling currently stands at the lower of £20m or 90 per cent. of qualifying invoiced debtors.

On 27 May 2008, the Group entered into a £7.5m Revolver Credit facility with Barclays Bank plc. The Revolver Credit facility replaced the previously held £5m three year loan with Barclays Bank and on 31 July 2008 Matchtech repaid the entire balance on the £5m loan.

At 31 July 2008 the balance on the Confidential Invoice Discounting Facility was £3.3million and the borrowings from the Revolver Credit facility were zero.

The utilisation of all borrowing facilities as at 31July 2008 was 12%.

The Group continues to be cash generative at an operating level. Operating cash conversion in 2008, as defined by cash generated from operations as a percentage of operating profit, was 108% (2007: 76%).

Group Financial Risk Management 

The Board reviews and agrees policies for managing financial risks. The Group's finance function is responsible for managing investment and funding requirements including banking and cash flow monitoring. It seeks to ensure that adequate liquidity exists at all times in order to meet its cash requirements

The Group's strategy is to finance its operations through a mixture of cash generated from operations and, where necessary, equity finance and borrowings by way of bank loan and confidential sales ledger financing.

The Group's financial instruments comprise borrowings, cash and various items, such as trade receivable and trade payables, that arise from its operations. The main purpose of these financial instruments is to finance the Group's operations. The Group does not trade in financial instruments. The main risks arising from the Group's financial instruments are described below.

• Liquidity and Interest rate risk

The Group had net debt of £3.1m at the year end, comprising £3.4m (debt) less £0.3m (cash).

The Group's exposure to market risk for changes in interest rates related primarily to the Group's bank loan and sales financing facility debt obligations. Bank interest is charged on a floating rate basis.

As a guide, a 1% increase in interest rates, will cost an approximate £0.1m in additional interest.

The interest rate on the current Confidential Invoice Discounting Facility is linked to Barclays Bank base rate and the Revolver Credit Facility is linked to LIBOR. 

Barclays Bank has the right, at any time, to set-off the amount of any liability owed to the bank against any amounts owed by the bank.

• Credit risk

The Group seeks to trade only with recognised, creditworthy third parties. Receivable balances are monitored on an ongoing basis with the result that the Group's exposure to bad debts has not been significant. There are no significant concentrations of credit risk within the Group, with no debtor as at 31 July 2008 accounting for more than 5% (2007: 7%) of total receivable balances..

• Foreign currency risk

The Board considers that the Group does not have any material risks arising from the effects of exchange rate fluctuations.

Tony Dyer FMCA

CONSOLIDATED INCOME STATEMENT

for the year ended 31st July 2008