Franchise Brands plc Annual Report and Accounts 2018 25 Financial Statements Strategic Report Governance Statutory revenue and fee & direct labour income Statutory consolidated revenue has increased 43% from £24.9m to £35.5m with the additional revenue coming from Metro Rod. Statutory revenue is made up of a number of different income streams that have differing accounting policies and is not, therefore, a KPI that management track on a consolidated basis. The Group as a franchisor has three main fee income streams: MSF received from our existing franchisees either based on fixed monthly fees or as a percentage of system sales; fees generated from the sale or resale of franchise territories; and income from the sale of products to franchisees. The Group, through Metro Rod, also has two direct labour divisions, Kemac, a plumbing operation based in London, and our new Metro Rod corporate franchise in Exeter, which comprise a separate category of direct labour income. 2018 2017 Restated Change £'000 % £'000 % £'000 % MSF Income 10,894 61% 8,235 65% 2,659 32% Area Sales 1,513 8% 1,829 14% (316) -17% Product Sales 895 5% 946 7% (51) -5% Direct Labour 4,564 26% 1,690 13% 2,874 170% Fee Income 17,866 12,701 5,165 41% Overall fee and direct labour income has increased 41% from £12.7m to £17.9m. The 32% increase in recurring MSF income reflects our focus on improving the quality of our income stream to one which is more aligned to the growth in franchisees’ sales, rather than recruitment income from the sale and resale of franchise territories. On a pro forma basis, System Sales at Metro Rod grew 10.2% from £33.9m to £37.4m. As part of the Vision 2023 strategy, we have introduced a variety of schemes and incentives to better enable our franchisees to grow their businesses. These include rebates relating to growing their System Sales, and a financing scheme with HSBC to give them access to funds to increase their capacity. As a result of these initiatives we have seen some really outstanding performances: 20 franchisees have seen double-digit like-for-like sales growth, with 7 growing by above 30%. We now have 14 franchisees with sales larger than £1m (2017: 12). Within the overall increase, the local sales made by franchisees in their territories and Metro Plumb sales drove the growth, increasing by 14% and 27% respectively. Income from area sales has fallen in both absolute terms and relative to other income streams. ChipsAway, Ovenclean and Barking Mad have all suffered a slow-down in relation to franchisee recruitment, due to the external environment. Although we have seen a fall in the number of new franchisees entering our networks, we have seen an increase in the level of existing franchisees investing in additional territories or buying extra postcodes to increase the size of their existing territories. We have seen direct labour income increase strongly from £1.7m to £4.6m with the inclusion of Kemac for a full year, and the addition of the Exeter region as a corporately owned and run franchise for 10 months. In particular, Kemac has benefitted during 2018 from several large one-off contracts. Our fee and direct labour income generates a high level of gross margin; in the current period this has reduced marginally to 73% (2017: 76%) due to the change in our income mix, as our direct labour income achieves lower margins at around 25% than our core business as a franchisor at around 90%. Overall, gross profit increased by 35% from £9.7m to £13.1m. Trading results – EBITDA 2018 £'000 2017 Restated £'000 Change £'000 Change % Metro Rod 2,498 1,306 1,192 91% ChipsAway 1,920 1,912 8 0% Ovenclean 304 297 7 2% Barking Mad 160 187 (27) -14% Head Office (1,182) (1,005) (177) 18% Group EBITDA 3,700 2,697 1,003 37% Metro Rod, which includes Metro Plumb, Kemac and Exeter, made an EBITDA contribution of £2.5m in the period, up from £1.3m for the almost nine months of ownership in FY 2017. On a pro forma basis Metro Rod would have contributed around £1.8m in 2017 if it had been owned for the full year, which gives an implied organic EBITDA growth of 38%. This growth has been driven by the increase in our MSF income on system sales from our national network of 40 Metro Rod franchisees, and our one new standalone Metro Plumb franchise. Given the decrease in recruitment, it is encouraging to report that the EBITDA contribution for ChipsAway, Ovenclean and Barking Mad has been flat at £2.4m (2017: £2.4m), as lower recruitment income has been offset by higher levels of MSF income, including a higher proportion of ChipsAway franchisees paying supplemental licence fees based on their sales, rather than flat monthly fees. Group overheads increased from £1.0m to £1.2m, principally as a result of the annualisation of the cost increases which took place following the acquisition of Metro Rod. Adjusted EBITDA for the Group has increased by 37% from £2.7m to £3.7m.