Final Results

20 June 2024

FRANCHISE BRANDS PLC

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

Final results for the year ended 31 December 2023

Acquisition of Pirtek doubled the size of the Group and integration progressing well

Franchise Brands plc (AIM: FRAN), an international multi-brand franchise business, is pleased to announce its audited results for the year ended 31 December 2023.

Financial highlights

·    System sales increased by 88% to £350.1m (2022: £186.4m).

·    Statutory revenue increased by 74% to £121.3m (2022: £69.8m*).

·    Adjusted EBITDA** increased by 97% to £30.1m (2022: £15.3m*).

·    Adjusted profit before tax increased 55% to £19.7m (2022: £12.7m*).

·    Adjusted EPS*** increased by 1% to 8.42p (2022: 8.34p*).

·    Adjusted net debt**** of £74.7m at 31 December 2023 (31 December 2022: net cash of £9.8m), 2.48x Adjusted EBITDA.

·    Cash conversion rate increased to 100% (2022: 90%) demonstrating the strong cashflow performance of the Group's franchise businesses.

·    Final dividend for FY23 of 1.2p per share proposed (2022: 1.1p), giving a 10% increase in the total dividend for the year of 10% to 2.2p per share (2022: 2.0p), 3.9 times covered by Adjusted profits after tax (2022: 4.2 times).

*The results include a number of prior year adjustments which are set out in Note 1 to the Accounts in the Annual Report & Accounts. The overall impact of the adjustments in 2022 is a reduction in statutory revenue of £29.3m and no change in Adjusted EBITDA as explained further below.

Operational highlights

Another year of momentous change for the business with the acquisition of Pirtek Europe Ltd for £210.8m*****, funded by £100m of bank debt and £114.3m of equity, which has again doubled the size of the Group.

·    The enlarged Group performed strongly in the period generating both the profitability and the cashflow required to service and reduce the debt taken on to fund the Pirtek acquisition.

·    During just over eight months of ownership in 2023, Pirtek traded at record levels, contributing as expected to the Group's results.

·    The integration of Pirtek is progressing well, with an immediate focus on optimising the effectiveness of the business through utilising shared resources, in particular technology.

·    In the newly named Water & Waste Services division, system sales grew by 18.2% to £106.7m, with Metro Rod and Metro Plumb being the main drivers of this increase.

·    Creation of new centralised international IT function that will manage every aspect of the digital landscape for the whole business.

Outlook

·    The resilient underlying demand for the Group's essential reactive services means that the business continues to perform well and grow. The Group's key divisions all achieved record results in 2023, despite some softening in demand in the second half of the year in the construction and hire-fleet customer sectors which has continued into the current year.

·    The fall in the price for used oil in the US also impacted profits in 2023, and whilst volumes continue to grow, the price continues to soften which will impact our income in 2024.

·    The change in the accounting treatment of sale of franchise territories income from taking revenue upfront to spreading it over the life of the franchise agreement may also impact profit in 2024.

·    The short-term operational focus is continuing the integration of all the Group's businesses and repaying the Pirtek acquisition debt, which is progressing well.

·    The centralised international IT function will accelerate growth and new developments that can positively impact the Group although it will increase our IT expenditure in the short term.

·    Capital allocation decisions will balance debt reduction, a progressive dividend policy and organic investment in the Group. The Board does not expect to make any further acquisitions of scale until the acquisition debt is substantially repaid.

Stephen Hemsley, Executive Chairman, commented:

"The Group has delivered Adjusted EBITDA at the top end of the range of market expectations in a year when we once again doubled the size of the Group with the acquisition of Pirtek, having doubled in size in 2022 as a result of the acquisition of Filta. The Group now operates seven brands in ten countries in the UK, Continental Europe and North America, giving it a more diversified international footprint and range of resilient business services.

"The resilient underlying demand for the Group's essential reactive services enabled all of its key divisions to achieve record results in 2023, despite some softening in demand in the construction and hire-fleet customer sectors and in used oil prices which has continued into the current year.  We see significant growth potential for our principal franchise brands of Pirtek, Metro Rod and Filta, which have small shares of large markets, as we extend their range of services, geographical penetration and cross-selling to our larger customer base. This growth potential is supported by our Maximum Potential Model which we use to estimate the potential size of our markets.

 "We are progressing well with integrating the Group's businesses and beginning to share resources internationally, enabled by technology, which will accelerate operational gearing for both us and our franchisees in the coming years. This progress will support our medium-term ambitions of growing system sales to c.£600m and Adjusted EBITDA of c.£60m in 2027, and given the Group is highly cash-generative, we will continue to de-gear as previously guided, giving me great confidence in the tremendous opportunity ahead."

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

*** Adjusted EPS is earnings per share before amortisation of acquired intangibles, share-based payment expense, exchange differences and non-recurring items.

****Adjusted net debt is the key debt measure used for testing bank covenants and excludes debt of £7.6m on right-of-use assets.

*****Less the cash acquired, net of share issue costs

Enquiries:

 About Franchise Brands plc

Franchise Brands is an international, multi-brand franchisor focused on B2B van-based service with 7 franchise brands and a presence in 10 countries across the UK, North America and Europe. The Group is focused on building market-leading businesses primarily via a franchise model and has a combined network of over 625 franchisees.

The Company owns several market-leading brands with long trading histories, including Pirtek in Europe, Filta, Metro Rod and Metro Plumb, all of which benefit from the Group's central support services, particularly technology, marketing, and finance. At the heart of Franchise Brands' business-building strategy is helping its franchisees grow their businesses: "if they grow, we grow".

Franchise Brands employs c700 people across the Group.

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

CHAIRMAN'S STATEMENT

Introduction

2023 has been another year of momentous change for the business with the acquisition of Pirtek, which has again doubled the size of the Group, following the doubling in size in 2022 as a result of the acquisition of Filta Group Holdings plc. The expanded Group now operates seven brands in ten countries in the UK, Continental Europe and North America, giving it a more diversified international footprint and a broader range of resilient business services. The Group generated System sales of £350m in 2023 (statutory revenue: £121.3m).

The enlarged Group performed strongly in the period, generating both the anticipated profitability and the cashflow required to service and reduce the debt taken on to fund the Pirtek acquisition. The Group will use the cash flow from its highly cash-generative, mainly franchised businesses to de-gear and anticipates being in a net cash position in 2027, with this enhanced value accruing to shareholders.

Pirtek Europe

On 20 April 2023, we acquired the entire share capital of Hydraulic Authority I Limited and its subsidiaries, (together "Pirtek"). Pirtek is an established provider of on-site hydraulic hose replacement and associated services. The service is provided via 73 franchises that operate through 217 service centres with over 850 mobile service units ("MSUs"). Its revenues are primarily derived from franchising.

Pirtek operates in eight European countries: the UK, Germany, the Netherlands, Belgium, France, Sweden, Austria and the Republic of Ireland. In the UK, Germany, the Netherlands, Belgium and the Republic of Ireland, the business is mostly franchised, whereas the operations in the start-up markets of France and Sweden are corporately operated. Pirtek has a significant opportunity to expand into eight additional European countries under the terms of its master licence agreement, which gives it perpetual, royalty-free use of the brand in 16 European countries. However, our priority is to achieve profitability in all existing countries before venturing into new markets.

The Pirtek division generated total System sales of £126.0m (statutory revenue: £42.0m). The more developed franchise markets have national coverage and are highly profitable, whereas the start-up corporate markets in France and Sweden and the small Austrian operation have yet to reach scale and only make a small profit.

The resilient underlying demand for Pirtek's essential reactive services resulted in the division trading at record levels during our eight months of ownership in 2023, despite some softening in demand in the second half of the year in the construction and hire-fleet customer sectors that particularly impacted Pirtek in the UK and Germany. These sectors have remained subdued in the year to date, but other Pirtek customer sectors are growing strongly, including waste management, logistics and rail.

Following the completion of the acquisition, we reviewed Pirtek's management structure and concluded that the previous holding company management structure, which was needed as an independent private equity-owned business, was unnecessary as part of a larger group. The objective was to integrate the Pirtek business into Franchise Brands and share as many resources as possible. This integration is being led by Chris Stuckey, previously Managing Director of Pirtek UK, who was promoted to CEO of Pirtek Europe.

An area of particular focus is IT, where Pirtek has a variety of both works management and financial systems, and we have the objective of unifying these, and other systems around the Group, onto common platforms.

With only a modest amount of adaptation, our in-house works management system, Vision, will be an ideal replacement for the Pirtek works management system, and thereby save third party licensing costs. This will result in improved functionality, cost savings and sharing of information for both the franchisees and at corporate level.

We are also working on the closer integration of the Pirtek businesses in the various countries, which, under previous private equity ownership, have historically operated on a more stand-alone basis. We also see a significant opportunity for co-operation with the Metro Rod and Filta businesses at both the franchisee and corporate levels. By sharing resources, knowledge and particularly customers, we believe that growth in System sales for the whole group will be accelerated and overhead costs reduced.

The Pirtek business has a significant opportunity to continue growing in its existing more developed markets through the expansion of its reactive business and by extending the range of services offered. The earlier-stage markets of France, Sweden, and Austria also have huge potential to reach scale and national coverage, particularly where the competition is fragmented. In addition, Pirtek has the opportunity to expand into eight more European markets, which will be developed when the existing early-stage markets become more mature and profitable.

Water & Waste Services division

As most of the group's businesses now operate in the B2B environment, we have renamed the B2B division the Water & Waste Services division, which more accurately describes its activities.

This division includes the UK-based businesses Metro Rod, Metro Plumb, Kemac, Willow Pumps, the Filta UK direct labour operations ("DLO") and the Filta Environmental franchise network. The Filta businesses are included for the full 12 months in this period compared with ten months in 2022 following the acquisition in March 2022. Overall, System sales grew by 18.2% to £106.7m (statutory revenue: £48.9m), with Metro Rod and Metro Plumb being the main drivers of this increase.

Metro Rod, Metro Plumb and Kemac

Metro Rod and Metro Plumb delivered continued strong momentum, with System sales growing by 19.7% in the period to £71.6m (statutory revenue: £15.2m). The rate of growth, however, slowed in H2 to 16% compared with 24% in H1. This resulted from a planned reduction in our dependency on fixed price, high volume, emergency work that provides no potential upside for further work. The valuable labour resources that have been freed up are driving our average order value, which increased by 12% during the year on a 7% increase in jobs completed.

This growth was spread throughout almost the entire network, with 86% of our 42 Metro Rod franchisees growing their businesses in the period (2022: 91%) and 48% growing by more than 20% year-on-year (2022: 61%).

Metro Plumb continued to expand with 18 stand-alone and 19 combined Metro Plumb/Metro Rod franchisees, and six territories operated by Kemac. This results from seven new stand-alone franchisees and two leavers over the previous 12 months. Metro Plumb System sales grew by 22% and now represent 9.6% of total Metro Rod and Metro Plumb System sales in 2023. We continue to focus on increasing the number of stand-alone franchisees and broadening the customer base in both the commercial and domestic plumbing sectors.

Kemac, the London-based DLO plumbing business that operates Metro Plumb corporate franchises and provides specialist services to several water utilities increased its revenues by 10.5% in 2023.

Willow Pumps

Willow Pumps revenue grew by 2.7% to £18.7m (2022: £18.2m), following a significant slowdown in H2. However, this can be attributed to the new management team, which assumed control of the business towards the end of H1, and shifted it away from activities that produced significant sales but little profit, such as above-ground installations and adoptable pump stations. A "special projects" division was also launched during the year focused on work that would be beyond the scope of the Metro Rod franchise network. We expect this new activity to make a significant contribution in future years.

The Metro Rod corporate franchises in Kent & Sussex operated by Willow Pumps were successfully split up and sold to two neighbouring Metro Rod franchisees in H2.

Filta UK

Filta UK has undergone a period of considerable change since being acquired in March 2022. Following the initial management reorganisation, which returned the business to profitability, we have continued to review how best to deliver the wide range of services offered by this business, which was made up of the original and much-neglected Filta Environmental franchise network and two acquisitions that had not been effectively integrated. Some of these services duplicated Metro Rod and Willow Pumps services or could be more efficiently serviced by a re-invigorated Filta Environmental franchise network.

As a result of our review, the following further actions have been taken:

·    The servicing of Grease Recovery Units ("GRUs") previously undertaken by direct labour has been largely transferred to the Filta Environmental franchise network. This has significantly improved the economics of these franchisees' businesses and has allowed us to begin expanding this network. This transfer has reduced our corporate sales and profits but will allow us to build a more robust and sustainable long-term business model, which can be expanded nationally on a franchise basis.

·    The previous distribution arrangement for the supply of the Cyclone GRU has been terminated, and we have acquired the intellectual property rights associated with this unit. We have sub-contracted manufacturing, and now have a reliable supply chain of one of the best-performing GRUs on the market. This will help ensure a consistent supply to our existing customers. It also provides us with the ability to push ahead with marketing to new customers in this rapidly growing market where the treatment of waste water to reduce fats, oil and grease being discharged into the public sewerage system has become a legal requirement.

·    The FiltaSeal business, which provides a cost-effective service replacing fridge and freezer seals on-site for a wide range of customers, is being expanded as a DLO by recruiting more technicians and by additional marketing to the Group's expanded customer base.

·    Overall, Filta UK System sales increased by 35.0% to £12.3m (2022 ten months: £9.1m) and on a like-for-like basis by 13% despite the transfer of servicing business to the franchisees. Now that most of the necessary structural changes have been implemented, we expect further significant progress in 2024.

Filta International

Filta North America System sales increased 34% to $108.2m (statutory revenue: $33.0m) and by 12% on a like-for-like basis. In sterling, System sales increased by 30% to £87.0m (2022 ten months: £66.7m) and by 8% on a like-for-like basis. The management team in North America continued to develop the FiltaMax strategic growth initiatives based on the Maximum Potential Model and experienced robust activity across all key customer sectors. Our focus is now on over 50 metro areas where franchisees can build businesses of scale.

Used oil volumes, sold for recycling into biodiesel, increased by 25% to 6.2m gallons, and to accommodate this, more franchisees have been installing 6,000 gallon tanks. However, in local currency, this was more than offset by a fall in the average weighted selling price of 21% compared with 2022, resulting in a 1% year-on-year reduction in revenue. In sterling term, a decline in the average weighted price of 22% resulted in a decline in revenue of 3%. At the start of 2024, the price of used oil continued to decline but has now stabilised at a lower level, impacting revenue and margin in the current year for both us and our franchisees.

Excluding the revenue from used oil sales and on a like-for-like basis, System sales in North America increased by 19% in local currency and 12% in sterling. To reduce our reliance on used oil sales and to better align us with our franchisees we are transitioning towards an income model based on management service fee ("MSF"). This will be introduced as fast as possible but in some cases may have to wait until the renewal of the franchise agreement, which could be as long as nine years.

The range of services offered to our commercial kitchen customer base is also being expanded with the addition of new bulk virgin oil sales and a kitchen cleaning service, on which MSF will be immediately payable. The delivery of virgin oil (FiltaGold) has been developed with the roll-out of bulk oil handling equipment to franchisees. This will enable them to buy virgin oil in bulk, dispense it into reusable 17-litre "jugs", and profitably supply it to customers at a competitive price. An additional attraction to our customers is the ESG benefits arising from the reduction in the waste they generate from the use of reusable jugs, which will be reported to them in the monthly Environmental Statement that Filta provides.

We have also strengthened the management team of the North American business by recruiting John Michals as Chief Operating Officer. John joined Filta as the franchisee for New Jersey just before the COVID lockdowns but has subsequently led one of the fastest-growing franchises in the network. He is well respected by his fellow franchisees, having previously been President of the Filta Franchise Association. We look forward to working with John and using his valuable experience to accelerate the growth of the Filta system in North America.

Filta's European markets are at an earlier stage and require more work to develop a compelling corporate and franchise model. A number of different strategies are being considered at present to grow this business and eliminate its small losses, including merging the overhead with the established Pirtek business in Europe.

Filta is an almost unique business, with virtually no direct competition and a huge potential market in the US, where customers can benefit from both the cost savings resulting from oil filtration and the environmental benefits arising from the responsible recycling of used oil and fats, oils and grease ("FOG") management. This business has real traction in the US and is poised for significantly accelerated expansion with the strengthening of the management team.

B2C division

The B2C division comprises the ChipsAway, Ovenclean and Barking Mad franchise businesses. The franchise recruitment and retention environment in the UK continues to be challenging. Record employment levels, high wages, high interest rates, and elevated inflation have made people more risk-averse and less attracted to self-employment, even in the relative safety of a franchise model.

Notwithstanding this backdrop, franchise recruitment in 2023 matched that for 2022, with 39 new franchisees joining our B2C brands, and the number of leavers declined from 69 to 59. Overall, we closed the year with 327 franchisees compared to 347 at the end of 2022. In a difficult market, we consider this to be a creditable performance.

In early 2023, we announced that we intended to seek a buyer for the B2C division. While offers were received, these did not meet our expectations, so we decided to suspend marketing activity until further notice. This remains the current position.

Digital transformation

In my 2020 statement, I announced a three-year journey to further develop our IT systems so that jobs could eventually be booked online, deployed to an engineer, reported to our customer, and billed with minimum human intervention. I anticipated that efficiency gains and enhanced sales opportunities would cover the additional cost of the more extensive digitisation of the business and thereby have very little effect on short-term profitability.

Most of the 2020 technical objectives have been met and are being rolled out across the business. The recent acquisitions of Filta and Pirtek have given us the opportunity to implement these developments on an international basis and further enhance them with the new tools available through AI. As an international group that is now more visible, we also need to be ever-more vigilant in cyber security.

We are now taking a further strategic step by creating a centralised international IT function. This function will manage every aspect of the digital landscape for the whole business, ensuring efficient day-to-day IT operations and accelerating new developments that can positively impact the group. This move builds on the expertise we acquired with Azura, enhancing our systems and platforms. Our aim is to migrate most of our UK and European businesses onto a uniform platform based on our "Vision" works management system and a new accounting system, further streamlining our operations.

This will once again increase our IT expenditure in the short term, but as we replace third-party systems, on which we pay licence fees, with our own internally developed systems, the additional costs of the roll-out will decline.

Azura, already a SaaS supplier to around 30 non-group franchise businesses, is also growing as its work for the group enhances its software platforms, making them more attractive to larger third-party users. I anticipate this business becoming a more significant contributor to group profits over the coming years.

Corporate governance

In line with the expansion of the Group and our ambitions for the future, we have developed our corporate governance by introducing a two-tier Board structure. The plc Board now comprises two Executive Directors and three Non-executive Directors, two of whom are independent. I am pleased to welcome to the plc Board Mark Fryer, who joined us as Chief Financial Officer in August, and Peter Kear, who joined us as our Senior Independent Non-executive Director in October. I am also pleased to welcome Rob Bellhouse, previously an independent Non-executive Director, as Company Secretary.

The Management Board is made up of the Chairman, the Chief Financial Officer, the divisional CEOs, the Directors of the central support functions, and the Company Secretary. It is responsible for the day-to-day operational and financial management of the business and the delivery of the Group's strategic plan.

Corporate development and capital allocation

Following the acquisition of Filta and, more recently, Pirtek, our strategic focus is on integrating these businesses into the Group and repaying the acquisition debt facilities.

We will also seek to organically grow System sales by cross-selling all group services into our enlarged customer base, and expanding the range of services offered to deepen and widen this customer base. We will also seek to use our shared central services of finance, IT, and marketing to enhance the effectiveness of all our businesses while looking to reduce costs by sharing resources.

Capital allocation decisions will balance debt reduction, a progressive dividend policy and organic investment in the Group. The Board does not expect to make any further acquisitions of scale until the Pirtek acquisition debt is substantially repaid.

Outlook

The acquisitions of Filta and Pirtek have significantly advanced our ambition of building a market-leading international B2B multi-brand franchisor that generates its income equally from the UK, North America and Continental Europe. The resilient underlying demand for the Group's essential reactive services means that the business continues to perform well and grow. Its key divisions all achieved record results in 2023, despite some softening in demand in the second half of the year in the construction and hire-fleet customer sectors which has continued into the current year.

The reduced pricing being received for used oil in the US also impacted profits in 2023, and whilst volumes continue to grow, the price continues to soften which will impact our income in 2024. The change in the accounting treatment of franchise recruitment income from taking revenue upfront to spreading it over the life of the franchise agreement may also impact profit in 2024.

Our short-term operational focus is integrating all the Group's businesses and repaying the Pirtek acquisition debt, which is progressing well. We are beginning to share resources internationally, particularly in IT, which will accelerate our operational gearing for both us and our franchisees in the coming years.

The Maximum Potential Model, which we use to estimate the size of the markets in which we operate, demonstrates the significant opportunity we have for all our B2B businesses. The Group's System sales in 2023 were £350m, but we estimate the maximum market potential for Metro Rod, Filta International, and Pirtek, based on just the existing range of services we offer, to be £1.8bn.

We have incorporated this methodology into a medium-term strategic model that we set out at our Capital Markets Day on 20 February 2024. The strategic model underscores the Group's medium-term ambitions of growing System sales at a compound rate of 11-12% to achieve c.£600m in 2027. Operational gearing, enabled by technology, will also be a significant driver of Adjusted EBITDA growth. Our operational gearing KPI is the ratio of Adjusted EBITDA to System sales which in 2023 was 8.6%. We aim to improve this by 30 basis points per annum, which, if achieved, would result in an Adjusted EBITDA of c.£60m in 2027.

As a franchised business, the Group is highly cash-generative, and we will use this cash flow to de-gear, with the modelling indicating that we will be in a net cash position by the end of 2027. Whilst this is not a forecast, it demonstrates the tremendous opportunity we have and gives me great confidence in our future prospects.

Conclusion

2023 has been another busy year as we build a Group with a truly international reach.

I would like to welcome our new colleagues at Pirtek and look forward to working with them for many years to come. 2024 is bringing a changed focus as we work on integrating the recent acquisition and repaying our debt, but I am not expecting this to be any less exciting for the excellent corporate team we are building.

Of course, none of this would have been possible without our dedicated franchisees, so I would also like to thank them for their continued hard work and commitment to building our great business. We truly believe that if our franchisees grow, we grow.

Stephen Hemsley

Executive Chairman

19 June 2024

FINANCIAL REVIEW

At close of business on 20 April 2023, we acquired the entire share capital of Hydraulic Authority 1 Limited and its subsidiaries (together "Pirtek" or "Pirtek Europe"). The acquisition was announced to the Stock Exchange on 21 April 2023. The Group's results for the year ended 31 December 2023 therefore include a maiden contribution, for just over eight months, from Pirtek; the first full-year contribution from Filta, which was acquired in March 2022, and the B2C division, which is included as a continuing operation as it is no longer being actively marketed for sale.

Systems sales, which comprise the underlying sales of our franchisees and the statutory revenue of our Direct Labour Operations ("DLO"), increased by 88% to £350.1m in the period (2022: £186.4m). System sales are a KPI of the Group and are considered a good indicator of Group performance as it allows total sales to end customers to be visible on a comparable basis across all businesses within the Group. Statutory revenue comprises many different types of revenue, including the MSF, which is now recorded on a net basis, as well as the statutory revenue of our DLOs. Statutory revenue increased by 74% to £121.3m (2022: £69.8m) after the prior year adjustments referred to below.

A strong trading performance and continued efficiency gains combined with cost savings from integrating Filta and Pirtek have enabled the Group to increase Adjusted EBITDA by 97% to a record £30.1m (2022: £15.3m). Adjusted EBITDA, although an alternate performance measure, is the most important KPI used in managing the business. Overall Adjusted EBITDA / System sales for 2023 has grown to 8.6% (2022: 8.2%), demonstrating the operational gearing arising from the integration of the acquisitions and the continuing digitisation of the business.

Another important KPI of the business, which drives organic investment, debt repayment and dividends, is cash conversion (cash from operations / Adjusted EBITDA). Excluding the acquisition and re-organisation costs for Pirtek in 2023 and Filta in 2022, the cash conversion rate increased to 100% (2022: 90%) demonstrating the strong cashflow performance of the Group's franchise businesses.

Prior Year Adjustments

Following the Group's recent material acquisition and subsequent increase in market capitalisation, the Group has become an Other Entity of Public Interest ("OPIE") and as such the audit of its accounts is now in scope for the purposes of the Financial Reporting Council's audit quality review processes. Following challenges from our auditors, BDO LLP as part of the audit process on the application of accounting standards, we have extensively reviewed our existing accounting policies to ensure they comply with the latest accounting standards and are consistent across the enlarged Group. This has caused a significant delay in publishing this year's results. We are confident this will not re-occur in future years.

As a result of this extensive review, several prior year adjustments are incorporated into the 2023 statements to reflect corrections needed in the 2022 Annual Report. The adjustments are laid out in greater detail in Note 1 on pages 127 to 128 of the Annual Report. The overall impact of the adjustments in 2022 is a reduction in statutory revenue of £29.3m and a reduction in adjusted EBITDA of £0.0m. The principal adjustments are:

·    We have identified that certain transactions in the Group's Metro Rod Limited, The Filta Group Limited, Filta Deutschland GmbH and ChipsAway International subsidiaries had been incorrectly treated in respect of IFRS 15. National account revenue has historically been treated gross, with these subsidiaries being the principal. We are now treating this revenue net, as following consideration of the underlying contracts, facts and circumstances, we consider these subsidiaries to be acting as a commission agent for their franchisees.

·    The businesses only have momentary control of the incoming order following acceptance of the job ahead of passing it to the incumbent franchise in a back-to-back arrangement where local Franchisees have a right of first refusal on the order received. Operational fulfilment also rests with the franchisee. The impact of this is to reduce revenue in the year ended 31 December 2022 by £29.3m, with an equivalent reduction in cost of sales; there is no profit impact of this change.

·    We have identified further transactions in the Metro Rod Limited subsidiary that have been treated incorrectly in respect of IFRS 15. National account revenue has historically been recognised at the point of invoice, as we considered this to be our performance obligation. We now consider our performance obligation to be the passing of the work order to the franchisee, having considered the underlying contracts, facts and circumstances. Therefore, revenue is now recognised at this point. The impact of this is to increase revenue and profit before tax in the year ended 31 December 2022 by £0.2m. In the Consolidated Statement of Financial Position this adjustment increases Trade and Other Receivables for Accrued Income by £3.5m (2021: £2.6m), increases Trade and Other Payables for Accruals by £2.7m (2021: £2.1m) and increases Retained Earnings by £0.7m (2021: £0.6m). In the Consolidated Statement of Cashflows the impact is an increase in profit of £0.2m, a £0.8m reduction in cash flows from trade and other receivables and a £0.7m reduction in cash flows to trade and other payables.

·    We have identified that certain transactions in the Group had been incorrectly treated in respect of IFRS 15 in regard to the timing of recognising franchise sales and related training fees. Within Metro Rod Limited, ChipsAway International Limited, Ovenclean Limited and Barking Mad Limited in the past we have recognised the initial franchise fee when we have delivered the training for the new franchises to operate in line with the necessary standards on completion of the franchise sale (at a point in time). This is however considered a pre-opening activity necessary for the franchisee to operate and not a distinct performance obligation in the franchisee contracts of these subsidiaries. We are now recognising this revenue over the life of the franchise agreement on a straight line basis, as our obligation is to provide a license for the franchise to operate, which extends over the life of the agreement. The impact of this is to reduce revenue and profit before tax in the year ended 31 December 2022 by £0.2m. At 31 December 2022 this also created current deferred income of £0.1m (2021: £0.3m) and non-current deferred income of £0.1m (2021: £0.5m), increased liabilities held for sale by £0.8m (2021: nil), decreased assets held for sale by £0.1m (2021: nil), reversed previously held other debtors of nil (2021: £0.1m) and decreased Retained Earnings by £1.1m (2021: £0.9m) in the Consolidated Statement of Financial Position. In the Consolidated statement of Cashflows this decreased profit by £0.2m, increased cashflows from receivables £0.0m and decreased cashflows to payables £0.2m.

·    Franchise Brands plc acquired Filta Group Holdings plc in March 2022. A valuation exercise was completed in the prior year as part of the purchase price allocation exercise as required by IFRS 3. Corrections required were identified, including incorrect rates and unsuitable valuation models for certain intangibles. Another valuation was completed to correct these points subsequent to the 12-month measurement period.

·    The review occurred outside the permitted time period, and as such requires correction as a prior year adjustment, not as a fair value adjustment. The revaluation decreased the fair value of intangibles acquired by £1.0m (reduced software acquired by £2.7m, reduced indefinite life brands by £0.1m, patent technology by £0.4m and customer relations by £0.6m; however, increased franchise agreements by £2.8m) and reduced the deferred tax liability by £0.3m at recognition with the corresponding impact being a £0.7m increase in goodwill. The impact on the Consolidated Statement of Income is a £0.2m increase in amortisation of acquired intangibles and a £0.0m increase in relation to the deferred tax credit. The impact on the Consolidated Statement of Financial Position is a £0.4m reduction in intangible assets and a £0.3m decrease in deferred tax liability. The impact on the Consolidated Statement of Cash Flows is a £0.1m reduction in profit, a £0.2m increase in the adjustment for amortisation of acquired intangibles and a £0.0m decrease in the adjustment for income tax with nil impact to operating cash flows.

·    In previous periods cash transferred to the Employee Benefit Trust (EBT) was included as part of the EBT reserve. As this cash is held on our behalf, it is now accounted for in cash and cash equivalents. This has increased cash at 31 December 2022 by £0.1m and increased cash at 31 December 2021 by £0.0m in the Consolidated and Company Statement of Financial Position with the corresponding decrease in the EBT reserve. In both the Consolidated and Company Statement of Cashflows this has decreased the purchase of shares by the EBT £0.1m, increased cash at the beginning of the period by £0.0m and increased cash at the end of the period by £0.1m.

·    Cash outflows of £1.7m for the year ended 31 December 2022 with regards to deferred consideration were incorrectly presented as operating cash outflows. As the deferred consideration was related to the purchase of Willow Pumps Limited, these should be recorded as investing activities. As a result, these have been reclassified in the Consolidated and Company Statement of Cash Flows for the year ended 31 December 2022, increasing cash flows from operations by £1.7m and increasing cash outflows from investing activities by £1.7m, with no overall impact on cash flows.

·    The company incurred costs of £1.0m in the acquisition of Filta Group Holdings, expensed as non-recurring costs. Of this, £0.9m were directly attributable costs therefore the treatment of this was incorrect, in accordance with IAS 27 that requires measurement of investment in subsidiaries at cost for the Company. The correction removes these non-recurring costs and increases the investment in group companies. This change is reversed on consolidation in line with IFRS 3 and so has no impact on the Consolidated Statement of Comprehensive Income. In the Company Statement of Comprehensive Income it decreases non-recurring costs by £0.9m and increases profit £0.9m. In the Company Statement of Financial Position, it increases investment in subsidiaries by £0.9m; and in the Company Statement of Cash Flows there is a £0.9m increase in cash flows used in the acquisition of subsidiaries.

·    We have identified that corrections were required in recording intercompany debtors in the company, as they had been incorrectly netted off against creditors in the prior periods. These were originally shown within Trade and Other Payables, so adjustments to the Company Statement of Financial Position were required to increase both Trade and Other Receivables and Trade and Other Payables by £0.6m (2021: £0.3m). There is no change to profit or reserves. The adjustments had no overall impact on cashflows. In the Company Statement of Cashflows it decreased cash flows from trade and other receivables by £0.3m, with an equivalent decrease in cash flows to trade and other payables.

·    We have identified that corrections were required in relation to the treatment of trade debtors recognised in Metro Rod Limited for Local Account sales. In such transactions, the work is sourced by the Franchisee but billed by Metro Rod Limited. The Group is obtaining MSF Royalty income only on the transaction and does not have the credit risk for the full amount. Trade debtors should, therefore, reflect only the amounts due to the Group being the MSF Royalty income. If advanced payments are made to the franchisee before receipt of the full payment from the customer, this should be recorded as a franchisee loan debtor. Given that this is a contractual obligation to the franchisee, the Group has recorded the open commitments at year-end in Note 22. When payment is collected from the customer the assets recorded are de-recognised and a trade payable recorded for the amounts due to the Franchisee. The impact to the Consolidated Statement of Financial Position is a £0.1m (2021: £0.4m) reduction in trade and other receivables and a reduction of £0.1m (2021: £0.4m) in trade and other payables. There is no impact on the Consolidated Statement of Cash Flows. The impact on the Consolidated Statement of Cash Flows is a £0.2m reduction in cash flows from trade and other receivables and a £0.2m reduction in cash flows to trade and other payables.

The following restatements have been made to improve disclosures:

·    Within Note 7 of the financial statements, prior year revenue has been disaggregated further to better understand the Group's revenue streams to ensure compliance with the requirements of IFRS 15.

·    Within Note 14 of the financial statements prior year, intangible assets with indefinite useful lives have been disaggregated further to show Filta International and Filta UK as separate CGUs in line with the conclusions reached by Group management in the prior year. There is no impact on intangibles. The note now also includes the recoverable amount for all CGUs as required by IFRS.

·    In Note 5 of the financial statements, the segment reporting note has been restated to show the assets arising from the consolidation as unallocated assets rather than assets from another segment.

·    Within Note 6 of the financial statements additional disclosures have been made within the Filta Group Holdings section regarding the primary reasons for the business combination, and the amounts of revenue and profit or loss of the acquiree since the acquisition date included in the consolidated statement of comprehensive income for 2022 as required by IFRS 3.

·    Within Note 4 of the financial statements we have restated trade and other payables within the categories of financial instruments table, as it previously included deferred income, which is not defined as a financial instrument.

Summary statement of income

Divisional trading results

Following the acquisition of Pirtek, the decision was taken to rename the B2B Division as Water & Waste Services division to better distinguish the Group trading activities. The divisional trading results may be analysed as follows:

On consolidation, certain inter-company revenues and costs are eliminated to reconcile the Group's statutory revenues, gross profit, and administrative expenses to the underlying entities. These include the work undertaken by Metro Rod on behalf of Willow Pumps and the IT development work undertaken by Azura on behalf of various Group subsidiaries. The net effect on Adjusted EBITDA is zero.

Pirtek Europe

Pirtek Europe operates through a network of depots providing on-site hydraulic hose replacement in eight European countries. It was acquired in April 2023, and therefore, the trading results summarised below comprise just over eight months of

post-acquisition contribution.

Like other businesses in the Group, System sales comprise the sales made to third parties by franchisees; franchise territories operated corporately in each country; and by the DLO operations in the corporate markets of France and Sweden. 94% of System sales were generated by franchisees and 6% by DLOs.

Statutory revenue is made up of MSF and other fee income generated from franchisees (46%), the sale of materials used in the core hose replacement business (25%), and the sales revenue generated by the corporate operations (28%). The business also generates some revenue from the sale and resale of franchise territories, but as the business has national coverage in its largest markets of the UK, Germany and the Netherlands, this is less than 1% of revenue.

When the Pirtek business in Europe was first established in 1998, the franchise model was set up as it had been in other countries, with franchisees paying a low percentage MSF but being tied in under the franchise agreement to purchase all their materials from the franchisor at a mark-up. This structure required constant policing to ensure compliance. In 2017, the company began transitioning to the current model whereby materials are supplied at cost, and a higher MSF Royalty income is received in exchange. This better aligns the interests of the franchisee and franchisor in growing the business, particularly where the service has a high labour, as opposed to material element in the sale, such as with total hose management. The transition was completed in the UK, the Republic of Ireland ("RoI"), Germany, and Austria before the acquisition. It was finally completed in the Netherlands and Belgium by the end of 2023.

The UK and the RoI are the most developed markets, generating £55.8m or 44% of Pirtek Europe's System sales and £6.8m or 51% of its Adjusted EBITDA. RoI, which is operated from the UK facility, was started in 1994 and generates 8% of territory System sales. Both the UK and ROI are almost entirely franchised, with only two corporate franchises in York and Aberdeen. Materials supplied to franchisees make up 27% of the division's Statutory revenue, but these are sold at a small margin, with almost all gross profit arising from the MSF on System sales and other small fees that franchisees pay for training and other add-on services.

Germany & Austria are the next most developed markets, with Germany having been established in 1996. Austria, which was started in 2014 and is operated from the German facility, generates 4% of territory System sales. The combined business generated £46.5m or 37% of Pirtek Europe's System sales and £4.2m or 32% of its Adjusted EBITDA. Like the UK, materials are supplied to the franchisees at cost, and it only has one corporate franchise in Graz, Austria, so once again, the vast majority of income is generated from MSF and other fee income from franchisees.

Benelux, which comprises the operations in the Netherlands and Belgium, were started in 1997 and 1998, respectively. Belgium, which operates from the Netherlands facility, generates 19% of territory System sales. The combined business generated £16.4m or 13% of Pirtek Europe's System sales and £2.6m or 19% of its Adjusted EBITDA. Benelux operates six of the 24 depots as corporate franchises, contributing 24% of System sales in these territories. As mentioned above, Benelux only completed the MSF transition at the end of 2023, so gross profit was generated from both the margin on materials supplied to franchisees and MSF on System sales.

The DLO operations in France and Sweden contributed £7.3m or 6% of the division's System sales and £0.4m or 3% of its Adjusted EBITDA. These early-stage operations do not have national coverage, making the acquisition of national customers more challenging. Whilst they are currently sub-scale, we intend to continue to invest in growing the footprint of depots and service vans and expect them to make a more meaningful contribution over the coming years. Like most franchise businesses, it is necessary to establish the business model's viability in new territories before promoting the opportunity to franchisees, which we may do in the future.

The central costs mostly represent the cost of the Pirtek Europe senior management team based in Acton, London.

Water & Waste Services division

The Water & Waste Services division comprises Metro Rod, Metro Plumb, Filta UK's franchise activities and the DLO operations of Willow Pumps, Filta UK and Kemac. The organisation of these activities within this division reflects both management responsibilities and our internal KPIs. The results of the Water & Waste Services division may be summarised as follows:

Metro Rod

Metro Rod comprises the franchise and direct labour activities of Metro Rod and Metro Plumb and Kemac. The results may be summarised as follows:

Overall, System sales at Metro Rod and Metro Plumb increased by 20% to a record £71.6m (2022: £59.8m), compared to a 21% increase in MSF. We continue to support Metro Rod's franchisees with initiatives to widen and deepen the range of services offered, particularly those with a high average order value, such as pump service, which increased by 21%, and tankering, which increased by 23% during the year. These activities have an average order value of over three times that of drainage.

Statutory revenue of £19m includes MSF; other fee income from franchise sales & resale and training; DLO customers' revenue from corporate franchises and Kemac; and the revenue generated from the National Advertising Fund ("NAF"). As MSF is the key driver of Adjusted EBITDA, it is re-analysed and compared to System sales as follows:

MSF represented 69% (2022: 71%) of Statutory revenue and increased marginally to 18.7% from 18.5% of System sales in 2023. We continue to use MSF incentives to encourage franchisees to grow System sales, offering a lower rate in activities where we are targeting growth. Therefore, the overall rate for the year depends on the mix of sales and the level of allowable costs that may be deducted from sales when calculating the MSF payable, which in turn depends on the type of work undertaken. We anticipate the MSF percentage will decline over time as System sales increase, driven partly by these incentives.

Other gross profit includes the gross profit generated by Kemac and the corporate franchise in North Scotland and the gross profit on franchise sales and resales. It also includes the costs incurred by the national advertising fund, which is a non-profit generating and is run on behalf of the franchisees.

Administration expenses grew by 16%, less than the 20% growth in System sales, due to the operational gearing inherent in a franchise business, accelerated by the continuing investment in the Group's digital transformation. As a result of this operational gearing, Adjusted EBITDA grew by 20% to £7.6m (2022: £6.3m).

Willow Pumps

Willow Pumps comprises the core DLO pump & business and the Metro Rod corporate franchises in Exeter and Kent & Sussex (which was sold in the second half of 2023).

The results for the division may be summarised as follows:

Willow Pumps' core business has historically had two distinct revenue streams: Service revenue and Supply and install revenue ("S&I"). A third revenue stream was launched in Q2 2023 with the establishment of a Special Project Division.

S&I revenue is generated from the design, supply, and installation of pump stations, which historically have been large projects performed in discrete phases over several accounting periods. Service revenue is generated from the routine service and maintenance of above and below-ground pumps and drains. The new management team at Willow is migrating the business away from high-revenue, low gross margin business in pump station design & installation and above-ground pump work to higher margin work that can be completed in shorter time frames. This is now being complimented by a newly recruited team that runs the Special Projects Division. This work will include more significant, longer-term work, but much of the risk and cash-flow challenges will be mitigated by the use of subcontractors. We expect this new activity to start contributing H2 2024.

Off-setting, to some extent, the move to higher-margin work is the increasing amount of work that is being subcontracted to Metro Rod, which, whilst still reflected in Willow Pumps revenue (before consolidation eliminations), is at a far lower margin than would have been the case had it undertaken the work itself. This is more efficient for the Group as it leverages Metro Rod's national coverage in drainage and gives the Metro Rod engineers practical experience in pump work following their training.

As a result of this business's changing focus, revenue has only increased by 3% during the period, but the gross margin contribution has increased by 5% as the gross margin percentage increased to 34% from 33% in 2022. Overheads increased by 7% as a result of the recruitment of the new team for the Special Project Division. Overall, Adjusted EBITDA grew very marginally.

Filta UK

Filta UK comprises the DLO services of fridge & freezer seal replacement; the supply, installation and maintenance of Grease Recovery Units ("GRUs"); extraction vent cleaning & servicing; pump & drainage repair and maintenance; and the Filta Environmental network of 25 franchisees.

The results for 2023 and the comparative ten months from the acquisition in March 2022 may be summarised as follows:

System sales increased by 35% to £12.3m from £9.1m and on a like-for-like basis by 13%. FiltaSeal grew strongly during this period as more technicians were recruited, allowing us to service a larger range of national accounts more efficiently on an increasingly country-wide basis. The revenue generated from the installation of GRUs was impacted by a dispute with our supplier that held up the delivery of these units. This has now been resolved through the acquisition of intellectual property, and we expect strong growth in this area in 2024 and beyond. The cost of resolving this matter was £0.8m, which has been considered exceptional.

Statutory Revenue increased by 27% to £11.0m from £8.7m and has increased by 6% on a like-for-like basis. Administrative expenses were well controlled and declined by 7% on a like-for-like basis, resulting from the annualisation of overhead savings made following the acquisition in 2022 and further savings made possible by subcontracting the GRU servicing work to franchisees.

Adjusted EBITDA increased by 37% to £1.5m from £1.1m and by 14% on a like-for-like basis on System sales, up by 13% on a similar basis. This is considered a creditable result as a significant margin is being transferred to franchisees to improve their viability so that we can grow this franchise system robustly and sustainably in the future.

Filta International

Filta International operates a franchise network that comprises Filta's franchise activities in North America and mainland Continental Europe. The results for 2023 and the comparative ten months from acquisition in March 2022 may be summarised as follows:

System sales increased 30% to £90.5m (2022 ten months: £69.6m), a like-for-like increase of 8%. The like-for-like increase in North America was 9% and 1% in Europe. System sales in North America comprise MSF income; used oil sales; equipment and supplies sales; the fees generated from the sale and resale of franchise territories; and national corporate accounts ("NCA"), marketing and IT revenues.

MSF revenue in North America currently mainly consists of the fixed monthly fee paid by the franchisees for each mobile filtration unit ("MFU") in operation. The high price of used oil in 2022 and the early months of 2023 encouraged the franchises to expand their capacity by purchasing additional MFUs. This drove MSF in 2023, which increased by 38% to £3.1m (2022: £2.3m) and, on a like-for-like basis, by 13%. Our strategy is changing to one where MSF will be based on System sales so that our interests are aligned with franchisees and not focused principally on selling more MFUs. We hope to negotiate this transition with each franchise as soon as possible.

Used oil revenues, all of which is generated in in North America, are derived from the sale of used cooking oil for biodiesel production. Filta administers the programme through national agreements with biodiesel companies, which involves the franchisees collecting and storing the oil before local pick-up via tankers organised centrally. On a like-for-like basis, volumes in 2023 increased by 25% over 2022 to 6.2m gallons, however, this was offset by a 21% decline in the average dollar price. Used oil sales are accounted for on a gross basis, with the margin reflected as gross profit. Filta's margin in 2023 averaged 17% (2022: 18%). Whilst reported revenue from used oil sales increased by 8% to £17.6m from £16.3m and gross profit by 3% to £3.0 from £2.9m, on a like-for-like basis, revenue and gross margin (in sterling) declined by 10% and 14% respectively.

Equipment & Supply revenue in North America consists of revenue from selling new and replacement MFUs, spare parts, and supplies to franchisees. In 2023, revenue increased by 14%, but on a like-for-like basis, it fell by 4%, reflecting the franchisees' reduction in cashflow from the sale of used oil.

Area Sales revenue in North America is derived from the sale and resale of franchise territories. Many new franchisees are introduced by external brokers who are paid a 5-10% commission. The commission payable is recognised when the transaction is completed. Six new franchises and seven resales were completed during the period.

The NCA, marketing, and IT revenues in North America are the additional fees charged to franchisees for generating and administering the national accounts and providing marketing and IT systems. Revenue from these high-margin activities increased by 49% in 2023 or 24% on a like-for-like basis, reflecting the strong growth in the core franchise business. The NCA revenues will eventually be absorbed in the percentage MSF as this is rolled out.

Overall, Adjusted EBITDA in North America, including oil sales, increased by 18% to £6.3m (2022: £5.4m). If the gross margin on oil sales is excluded and without any reapportionment of central overheads, Adjusted EBITDA from the core franchise business grew by 37% to £3.3m (2022: £2.4m) or 14% on a like-for-like basis.

System sales in Europe are generated from fryer management, seal replacement and GRU installations. Overall, System sales grew by 22% and on a like-for-like basis by only 1%, although gross profit grew on a like-for-like basis by 5%, reflecting the sales mix. The slow recovery of this sub-scale business from the effects of the COVID-19 shutdowns continues. This has been compounded by hold-ups in rolling out the GRU due to the supply problems that also impacted Filta in the UK, referred to above. In 2022, additional sales people were recruited in an attempt to accelerate growth, but this has not been successful, and the additional costs have resulted in an increased, albeit relatively small, loss of £0.2m in the period.

B2C Division

The B2C division comprises the ChipsAway, Ovenclean and Barking Mad franchise businesses. The results of the division may be summarised as follows:

Overall, System sales of the B2C division grew by 2% in 2023. This was driven by a 10% increase in the average order values at ChipsAway which represents 72% of divisional System sales. The key Statutory revenue streams are MSF and Area Sales income. MSF income is primarily made up of fixed monthly fees, as this remains the most effective method of generating income given the large number of franchisees with a lower level of individual sales. MSF income overall was flat as whilst the fixed monthly fee was increased, the number of franchisees over the period reduced to 327 at 31 December 2023 (31 December 2022: 349). Notwithstanding the challenging franchise recruitment and retention environment, ChipsAway performed robustly, recruiting 25 new franchisees (2022: 20) with 30 leavers (2022: 40). Overall, 39 new franchisees were recruited (2022: 39) and 59 (2022: 69) left the system.

Prudent cost control resulted in administrative expenses declining slightly during the period. Adjusted EBITDA declined by 6% to £2.3m (2022: £2.5m), but if the one-off £0.1m income from the sale of the MyHome domain name were excluded from 2022, profits were flat year-on-year.

Azura

Azura is a SaaS supplier of franchise management software to the Group and 30 other franchise businesses. The 2023 results may be summarised as follows:

Statutory revenue is comprised of third-party income of £0.4m (2022: £0.4m) and charges to Group companies of £0.3m (2022: £0.4m), which are eliminated on consolidation. Azura continues to develop its software solution with £0.2m capitalised in 2023, which will be amortised over a 5-year period. The enhanced platform is now being targeted at larger international multi-site franchisors rather than its traditional market of smaller domestic franchise businesses. It has also been building its internal resources to support the further digital enablement of the Group's businesses by improving the functionality of the Vision works-management platform and developing this for a roll-out to the Pirtek businesses in the UK and continental Europe.

Adjusted & statutory profit

Software depreciation and amortisation increased 94% to £4.4m (2022: £2.1m), primarily due to the acquisitions of Pirtek and the full twelve-month impact of the Filta acquisition. The finance expense reflects the additional interest cost of the debt taken to acquire Pirtek combined with the increasing base rate over the year.

The overall effective tax rate of the Group has increased from 20% to 26% as a result of the increase in the UK tax rate to 25%, a full-year charge in respect of Filta North America, where the combined state and federal corporate tax rate is 27%, and the acquisition of Pirtek, where tax rates can be higher than in the UK. For example, the combined state, local, and trade taxes are 30% in Germany.

The non-recurring costs of £6.2m (2022: £1.7m) reflect the Pirtek acquisition costs of £3.6m and the subsequent one-off re-organisation costs of £1.5m, the one-off costs of the Filta Cyclone GRU dispute of £0.5m, software written off as a result of the adjustments referred to above of £0.3m, and other costs of £0.3m. The tax on adjusting items reflects the tax relief available on some of these exceptional costs. The exceptional item in 2022 is mainly related to the acquisition and subsequent reorganisation costs of the Filta acquisition.

The increase in the amortisation of acquired intangibles reflects the additional intangible assets acquired with the Pirtek acquisition and the full twelve-month impact of the Filta acquisition. See Note 6.

The increase in the share-based payment expense principally reflects additional grants made to the Pirtek team and other new employees who joined the group during the year.

As a result of the costs incurred in acquiring Pirtek, statutory profit after tax reduced by 63% to £3.0m (2022: £8.1m).

Earnings per share

The adjusted and basic EPS is shown in table:

During the year, the Group issued 63,472,968 new ordinary shares of 0.5p each ("ordinary shares") in consideration for the acquisition of Pirtek. This increased the total number of ordinary shares in issue to 193,784,080 at the year-end (31 December 2022: 130,311,112).

The Employee Benefit Trust ("EBT") started the year holding 1,770,683 ordinary shares, purchased 18,420 ordinary shares during the year at an average price of £2.00, disposed of 226,418 ordinary shares in respect of the exercise of employee shares options, and therefore ended the year holding 1,562,685 ordinary shares. On 31 December 2023, there were 10,347,231 shares under option, of which 2,480,394 were vested and capable of exercise.

The total number of ordinary shares in issue on 31 December 2023, net of the EBT holding, was 192,221,395 (31 December 2022: 128,540,429), and a basic weighted average number of ordinary shares in issue of 173,090,691 (2022: 122,126,350).

Adjusted basic EPS increased by 1% to 8.42p (2022: 8.34p as restated), and basic earnings per share decreased by 74% to 1.75p (2022: 6.65p as restated).

Financing and cash flow

A summary of the Group cash flow for the period is set out in the table below.

The Group generated cash from operating activities of £23.9m (2021: £12.0m), resulting in a cash conversion rate of 79% (2022: 79%). However, if the cost of the Pirtek and Filta acquisitions and reorganisation is added back, the rate of cash conversion in 2023 was 100% (2022: 90%).

Taxes paid increased as profits increased, and the Group moved to quarterly advance payments. Purchases of property, plant, and equipment increased due to the addition of the Pirtek DLO operation. The purchase of IP relates to the purchase of the Cyclone GRU IP.

The acquisition of subsidiaries represents the acquisition of Pirtek for £210.8m, which was financed with bank debt of £100m, £93.5m from the issue of new shares (after costs), and £17.6m new shares given as consideration shares.  Immediately after the acquisition Franchise Brands settled Pirtek's preference shares and loans and borrowings in order to consolidate Group borrowings.  The total value of this post-acquisition settlement was £137.3m, comprising £78.2m loans and borrowings, £0.6m acquisition costs, £21.7m interest on preference shares and £36.8m in relation to the nominal value of the preference shares.  Cash acquired of £7.0m is deducted to result in an acquisition of subsidiaries in the Consolidated Statement of Cash Flows of £48.9m.  In 2022, Filta was acquired in an all-shares transaction, so it did not involve cash movement.

Bank loans repaid represent the repayment of the loans taken out in April 2023 to finance the acquisition of Pirtek. Dividends paid in 2023 represent the combined cash cost of the 2022 final and the 2023 interim dividends.

After these outflows, the Group finished the period with cash of £12.3m (31 December 2022: £10.9m) and gross debt, including hire purchase debt of £87.0m. Lease debt of £7.6m (2022: £1.6m) increased considerably due to the acquisition of Pirtek, which funds the vans used in its DLO operation using lease finance.

The Group had headroom of £23.0m on its bank facilities (total facility including accordion option of £110.0m less £87.0m in use) at 31 December 2023.

The Group's adjusted net debt, as used to test the bank covenants, was £74.7m at 31 December 2023, which represents 2.48x Adjusted 2023 EBITDA. Thus, the Group has comfortable headroom on all its bank covenants.

Dividend

The Board is pleased to propose a final dividend of 1.2 pence per share (2022: 1.1 pence per share). This takes the total dividend for the year to 2.2 pence per share (2022: 2.0 pence per share), an increase of 10%. The dividend is 3.9 times covered by Adjusted profits after tax (2022: 4.2 times).

Subject to shareholder approval at the AGM, the final dividend will be paid to those shareholders on the register on 28 June 2024, at the close of business on 25 July 2024.

Mark Fryer

Chief Financial Officer

19 June 2024

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2023

Consolidated Statement of Financial Position

For the year ended 31 December 2023

*     See Note 1 for details.

Company Statement of Financial Position

At 31 December 2023

*     See Note 1 for details.

Consolidated Statement of Cash Flows

For the year ended 31 December 2023

*       See Note 1 for details.

Reconciliation of cash flow to the Group net debt position

*     See Note 1 for details.

Company Statement of Cash Flows

For the year ended 31 December 2023