Franchise Brands plc Annual Report and Accounts 2018 07 Financial Statements Strategic Report Governance Development of these new business systems is progressing well and several have been rolled out to the franchisees. Others such as the works management system (“WMS”) and linked CRM are still under development. The existing WMS originated from a legacy system developed by a previous corporate owner. It is over-complicated and too slow for our current business volumes. In addition, it neither links with other systems nor allows us to adequately update our customers on the status of their jobs. The new WMS, which is being developed in close co-operation with our franchisees, is on trial in our directly-owned operation in Exeter and we expect to start rolling it out to a wider group of franchisees in the second half of 2019. Whilst most of the technology development activity is currently focused on Metro Rod, these systems will also have direct applications in other Group businesses and future acquisitions. The other key element of Vision 2023 is to grow sales, which had increased relatively slowly in previous years. One of the contributing factors was the very low level of awareness of the Metro Rod brand and the focus on a limited number of national accounts which were won by a central sales team. We launched the National Advertising Fund (“NAF”) in January 2018 with the objective of growing brand awareness and promoting local sales and marketing activity. This has allowed the creation of a dedicated marketing team. We have also put in place an initiative to encourage franchisees to employ their own direct sales force and are now supporting this with dedicated central resource. The transfer of increased responsibility from the Support Centre to the franchisees, together with the local sales and marketing initiatives, will increase the franchisees’ cost base whilst allowing the Support Centre to reduce its headcount and become more efficient. This transfer of responsibility and cost can only be equitably achieved if we progressively reduce the Management Service Fee (“MSF”) charged to franchisees. Therefore, a sales-based incentive scheme was launched which, together with allowable expenses, has resulted in the average MSF reducing to 18.6% in 2018, compared with the contracted rate of 22.5%. It is our ultimate aim to gradually reduce the MSF to 15%. As well as being a fair level in a rebalanced business, a 15% MSF will have the additional advantage of significantly improving our competitiveness. Whilst this MSF reduction will erode our percentage margin, our overall cash profitability will increase as sales increase and our cost percentage declines and eventually becomes semi-fixed in cash terms. The drainage market, which we estimate to be approximately £1bn in size, is extremely fragmented with 1,500-1,800 providers, most of which are local firms. This presents a clear consolidation opportunity for Metro Rod, with a strong brand and best-in-class IT systems. Strategic acquisitions that can assist in expanding the scope of services that we can offer will also assist us in growing market share from our current modest level of 4%. OUR GUIDING PRINCIPLES At Franchise Brands we have five guiding principles that inform the way we work with each other, support our franchisees and serve our customers and the communities in which we operate: We demand integrity: We are professional in everything we do and treat people with respect. Nothing is more important to us than acting with integrity at all times. We empower our people: We empower our people and expect them to take ownership of a situation and to be accountable for their actions and the results they generate. We are challenging of ourselves: We set high standards, are demanding of ourselves, are prepared to challenge the norm and have a relentless focus on continual improvement. We are fair: We consider that fairness and transparency are essential to creating high-trust working relationships with each other, and with our franchisees, partners and suppliers. We work as a team: We place a huge amount of importance on teamwork between our colleagues and our franchisees in creating a dynamic business which delivers impressive results. We are inclusive, encourage ideas and innovation and welcome diversity.