Franchise Brands (LSE:FRAN) — Annual results for the year ended 2025

0:01 Good morning, and welcome to the FRANCHISE BRANDS PLC twenty twenty five Annual Results Investor Presentation. Questions are encouraged and they can be submitted at any time using the Q and A tab situated on the top right corner of your screen. Just simply type in your questions and press send. Before we begin, I would like to submit the following poll, and I would now like to hand you over to executive chairman, Steven Hemsley. Good morning to you, sir. Good morning, everybody. Welcome to the FRANCHISE BRANDS twenty twenty five results. I've got with me today, Peter Malloy, our CEO, and Andrew Mallows, our CFO. So for those of you who don't know the business, I'll I'll just do a brief introduction of who we are and and what we do and how we create value for shareholders. So so we're a leading international multi franchise business with a portfolio of of seven high quality franchise businesses operating through 600 franchisees in 10 countries across UK, North America, and Europe.

1:03 We generate system sales of about 335,000,000 and and generate an adjusted EBITDA around 35,000,000. One of the key aspects of franchise brands is the resilience of the underlying demand for our mostly essential services. We also have a strategy to reduce our sector dependency by targeting growth in in in sectors that are particularly resilient. We have an attractive financial profile in a franchise model because we are focused on helping our franchisees grow. And if they grow, we grow because we generate a royalty on their system sales. We're capital light as our most franchise business and highly cash generative.

1:51 The franchisees make the underlying investment in the in the business, and we just provide the central infrastructure. We have small shares, large fragmented markets, and our maximum potential model indicates that we have the opportunity to grow the business to 2,100,000,000 of system sales. Again, like most franchise businesses, we're operationally geared, which means that our overhead doesn't grow proportionally with the growth in system sales. We create shareholder value in a number of ways, and currently, we're actively reviewing, the strategic fit of certain businesses with a view to, disposal. We have launched share a buyback program. The key objective of that really is to cover the option dilution.

2:44 As we delever and reduce our interest charge, our EPS is currently growing faster than the adjusted EBITDA. We also have a progressive dividend policy, which we've consistently delivered since we IPO ed in 2016. So just a quick summary of 2025. System sales grew to a record level, albeit by only 2% in in the year. Adjusted EBITDA came in at 35,200,000, and pretax profit at 12,700,000 after charging interest and the amortization of the intangibles acquired on the acquisitions. Adjusted EBITDA grew by 5% to nine p, and we are proposing a dividend total dividend for the year of 2.5p per share.

3:38 Adjusted debt came down significantly during the year from a gearing ratio of 1.9 to 1.6, and we ended the year with 55,000,000 of debt. And that represented a cash conversion of 98%. Track record of the business summarized on these slides. As you can see, consistent growth in system sales, 47% over the last five years. Adjusted EBITDA growing at a compound rate of 43%. Adjusted earnings share a little behind that at the moment, and that's mainly due to the interest charge of the 100,000,000 debt we took on to acquire the Pertek business. And as I just mentioned, a progressive dividend policy that has grown in line with earnings per share.

4:32 Group at a glance. Again, I won't go through this in too much detail because Peter's gonna cover it, but but the, system sales split, by geography is is, about 50% in The UK and about a quarter each in North America and Europe. Adjusted EBITDA, slightly over half our EBITDA is generated in The UK, 20% in North America, and just under 30% in Europe. Capital allocation is a key issue this year as we're announcing the review of businesses that are not b to b franchise businesses. And to the extent that they do not fit in with our future growth plans or we think that they're not gonna generate sufficient shareholder return in the short term, we will be looking to dispose of these.

5:31 As I mentioned, we have launched a a share buyback program and also reconfirm that we do not intend to make any further acquisitions until the debt is fully repaid, which depending on when the acquisitions are, you know, could be as early as the end of this year or next year. But, nevertheless, we wouldn't expect to make acquisitions until 2028 for reasons Peter will come on to explain with our One Franchise Brands integration. So now pleased to hand over to Peter, who will go through the maximum potential model and how we grow the business. Thanks, Steven. Just to build on a couple of things that Steven mentioned. I mean, this slide really demonstrates our track record of growing businesses, but it also demonstrates the size of the opportunity using the maximum potential model.

6:29 For those not familiar with it, the maximum potential model is effectively the best performance by a franchisee in any of the brands in terms of penetration of that market in their territory and the average spend per property or postcode in that territory as well. So although it seems a bit theoretical, it's actually based on actual performance, and that's how we get to the 2,100,000 or 2,100,000,000, should I say. So if every franchisee performed to the best of the best in that existing brand, that's the size of the opportunity that we see in the business. The beauty of the maximum potential model is it it allows us to highlight what those franchisees are doing well and take that information to the other franchisees in that business to help them grow as well.

7:22 We still have multiple levers to grow, and I'll talk about some of those as we go through the presentation. But one other thing just to highlight is the we mentioned last year cross selling, and I would love it to have been better than it's it's been in 2025. However, we've made some significant progress in both water and waste and in Pertek with some blue chip companies, Green King, Dalkea, SeaWorld Shipping, Bowles Rental, for example, who were now all spending money across the group, whereas previously, it was in a single entity. One of the things that can seem complex from the outside looking in is actually how we make our money.

8:13 And this is a useful slide to really explain how we do that. What you can see is that the the bulk of the sales of the 435,000,000 system sales come through franchise channels with 47,000,000 coming out of the DLO businesses. And then if you look to the right hand side of the slide, you can see where actually we what percentage of profit we make from each of those channels. And when Steven talked earlier about disposal of noncore businesses, I think what this demonstrates is that if we put our energy and our efforts into our franchise models, I think we we get a better return, and that's really feeding some of the strategy going forward. So in terms of making money to simplify it, we have a royalty which is blended across the group at about 15%, and we take that from a lot of men in a lot of vans doing a lot of jobs across each of the brands.

9:12 So from a simplistic point of view, that's how we generate our money. Just wanna talk a little bit about performance in in 2025. Overall system sales increased by 2%. And in depressed markets, think some of the work we did in terms of sector diversification, targeting better quality work, increasing the number of services that we deliver, allowed us to continue to grow the business, albeit modestly. The standout performance for the year was clearly Filter International, who who took advantage of a strong economy. But it's okay having a strong economy. You've got to have a business that's prepared and ready to take advantage of that. And some of the strategy that they deployed over the last two to three years enabled them to grow significantly in 2025.

10:06 So, I mean, it's also worth touching on the the sales excluding the used cooking oil, 7% up in in U in sterling and 11% up in local currency. And I'll touch on it a little bit more in a in a moment about the used cooking oil and the situation regarding that. Water and waste was essentially flat, but the actions we took to mitigate some of the market pressures allowed us to have a year on year flat performance. Just moving to adjusted EBITDA. Overall, flat in the year, but good cost control and some of the actions that we took allowed us to absorb some of the inflationary pressures that we faced.

10:57 There were two standout performances, and one I've touched on in terms of filter where filter US were 21% up in in local currency and 18% in sterling, but also Willow Pumps. Willow Pumps grew by 15%, and that's really as a result of the maturing of our special projects division, which we introduced in 2024. That was to expand our range of services, particularly into infrastructure projects, which weren't core to the existing Metro or the Willow business. Per Tech worked in a difficult environment in The UK and Benelux, particularly with the slowdown in construction and plant, and it was also adversely affected in a profit perspective from our DLO businesses in both France and in Sweden.

11:52 But pleasingly, we had a strong performance in Germany where, again, we saw some of the divert the sector diversification coming through and improving our profitability in Germany. Water and waste grew by 7%. And although the sales were modest in the year in terms of growth, the work that we've done on integration and driving efficiencies allowed us to produce a a reasonable result in the water and waste division. So just a little bit more in terms of Pertech. I I touched on some of the challenges, but just to remind you really, and this sales strategy goes across all of the brands and not just in in per tech. There are three elements to it, which is expanding to underrepresented sectors, expand our range of services, and then critically retain our customers in the depressed markets.

12:49 Because the retention of those customers will be critical as those markets recover. Inevitably, they will recover, and we need to be the supplier of choice. But despite some of those challenges in the in the core business, what you can see is that some of that sector diversification is now starting to pay dividends, particularly in The UK in mining, quarrying, and rail, Germany in industrial, and particularly there where we're improving and increasing our total hose management service. Benelux waste and agriculture and marine are all growing against the backdrop of depressed construction of plant hire. And I guess the the the exciting thing for me is that you look at all of our franchisees across all of the brands and not just Infertech, not all of them deliver all of the services that we sell.

13:42 So one of the elements that we're going to be focusing on in 2026 is getting the franchisees to take up the services that are the most attractive to our customers. In terms of water and waste, Metro Rod are attracting better quality work. Although the job numbers are down, the average order value has increased by 9%. And and that's for two primary reasons. We continue to pull away from low value, low quality work. But equally, what we do there is introduce or we've introduced over a number of years additional services at better value, which means that we get a better bang for our book from our labor that's out there, our franchisees labor that's out there executing the works.

14:39 Willow pumps improved, as I said, because of the special project maturity and really a small change of direction in our supply and install division, which was focusing on pump stations that had a much shorter gestation period to realize profit much earlier in the cycle. Filter UK is now a 100% franchised in terms of FOG services. I think two years ago, that was sub 35%, and that's enabled us there to control the overhead in that business and, again, produce profitability. So just moving to filter international, which again was the standout performance.

15:25 And I touched earlier on the evolution of the strategy. The strategy was deployed in Filter International when we bought the business in, I think, was 2022. An excellent performance. 45% of the franchisees are now on a royalty, representing 68% of the sales. FilterMax is starting to pay dividends, which is where the best franchisees are operating in the franchise territories with the biggest opportunity. And probably the most exciting thing about the filter business looking forward is the introduction of FilterClean Pro. Only 6% of the system sales come from FilterClean, And Steven and I were out in America at the start of the the month to see the launch of the new FILTER CLEAN business.

16:19 This enables us to approach new markets, untapped markets. In for example, in The US, we don't do any of the quick service restaurants with filtration. What filter clean pro allows us to do is to approach those customers, and we're starting to see some real traction there. From the launch of the program in on the March 4, 24 franchisees have now signed up to the filter clean program, and we've got a huge amount of interest from national customers. Just to touch on used cooking oil for a moment. I mean, clearly, the the war in The Middle East, it could have a potential impact on it. Our view is that used cooking oil prices will probably firm up due as a result of the conflict due to the crude oil volatility, the continuing restriction on Chinese imports, and the soybean price of soybean oil price increasing in the short term. So we don't see any negative connotations in the short to medium term.

17:31 Just touching on the one f b initiatives. This is what I described as a so what slide. We've introduced all of these systems, but but so what? What is the result going to be? And and just as a note of caution, when I say we've introduced all of these systems, they've been introduced in January and February of this year. So we're still in the rollout and education phase, but the next phase we go into is the learning and enhancing. And that will allow us then to understand where we can drive efficiencies and integrate the business still further by the introduction of these systems and platforms. What the architecture allows us to do is to overlay AI to, again, produce the most efficient performance for our business.

18:25 And that benefit realization, we believe, will start to come through at the back end of 2026 and into 2027. Part of that will be from efficiencies, and part of that will come through the the launch of the CRM, which we accelerated to develop our sales and particularly from a cross sell perspective where we get greater visibility of our customers across the group. So handing over to Andrew who will give us a summary of the group results. Thank you, Peter. As both Steven and Peter have said, adjusted EBITDA grew very modestly to 35,200,000. Now there are a couple of standout things on on this slide I'd like to go through. Our finance expense decreased by 25%.

19:16 A number of factors influenced that. Base rate fell by 1% over the year. Our leverage contributed another 25 basis points to the reduction. And we moved from a syndicate of four banks when we acquired Pertech to a single bank, and that renegotiation gave us another 55 basis point reduction in interest rate. And as we continue to pay down our debt, interest will fall further. The average interest rate for '24 was 7.6%. For '25, 6.4, and we ended the year at 5.4%. The other interesting thing to note is, unfortunately, our tax rate rose to 27 and a half percent. Now that's pretty much on the money given our international business, given the higher tax rates in both Germany and The US.

20:15 I think this is very interesting slide of of where we started with our cash and and effectively what we did with it. There are some some standouts on this slide as well. 15,800,000 reduction in in debt, £1,000,000 in purchases of PPE demonstrating the capital light franchising model. And we continue with our share buy ins, as Steven said earlier, to cover option dilution with a net spend of of 1,500,000. Again, the summary here is the the net debt leverage rate of 1.6 reduced to 55,000,000, showing that as we as we continue and and are a strong cash generative business, we will reduce our our debt, which will accelerate earnings per share.

21:08 And now I'll hand back to Peter. Thank you, Andrew. Just a final bit from me is just really to to give you an update in terms of some of the strategic priorities that we've been working on. I'm not gonna go through the entire slide, but just to draw your attention to a couple of things that I think will help us going forward. We've introduced in Pertek in The UK a new van based franchise model. What this enables us to do is where we've got territories that are underutilized, but the opportunity in that territory doesn't support a bricks and mortar location. We can put a van based franchisee in there, different level of cost of entry, slightly different operating model, but ensuring that we're covering that territory.

22:00 And what that does with their existing franchisees, it puts a little bit of pressure on them to ensure that they are utilizing that territory to its fullest potential. We're also looking at in water and waste and Metro in particular is creating new territories. Those of you who are familiar with the business know that Metro is fully covered. We'd like to introduce some new franchisees by carving up some of the existing territories, and we successfully did that in the first couple of months of twenty twenty twenty six. I touched earlier about all of our franchisees not delivering all of the services we sell, and that's gonna be a key priority for us going through this year.

22:46 We're supporting that by introducing additional levels of training, particularly in Germany where we have enhanced the training facility to support our franchisees. And then really the use of AI. We've been using AI in one form or another for a number of years. What we're now doing is looking at a complete holistic approach to the use of artificial intelligence, both from an agent perspective, but also from a new generic deployment of AI as well. And what we anticipate being able to do, as I touched on earlier, by creating the integrated platforms is to overlay artificial intelligence to enable us to take a job from cradle to grave with the minimum human intervention and therefore, accuracy accuracy and speed.

23:37 The last one to draw your attention to is procurement. We're starting to leverage the group's buying power, and I think we'll start to see that coming through particularly in Pertech mid twenty twenty twin sorry, 2026. What you won't see as a direct result of that is that flowing through to franchise brands directly. What you should be able to see is that flowing through indirectly as we get better buying prices for our franchisees to enable them to be more competitive, particularly in project type work. So that's just a brief update on the strategic priorities. Steven, do you wanna take us through a trading update and outlook? Yeah. Sure. First first there we go. Thank you very much, Fina.

24:34 The the current trading really demonstrates the continuing resilience of the business. The reactive service work is still strong and consistent. The project work in UK and Germany hasn't really picked up yet, although there are signs of recovery. And filter in North America continues to trade very strongly, and with the additional tailwind in the the last month or so of a very strong, used oil price, which is a component of our income in in North America. The ONE FRANCHISE BRANDS initiative continue to position the group well and integrate our businesses, which is, as as I mentioned before, fundamental to the next acquisition because we want to create a platform onto which the next acquisition will bolt fairly seamlessly and and integrate that with the enlarged group.

25:44 The current city forecast we consider to be realistic, and and we've confirmed that we're currently thinking we'll be in line with the range there. The integration of the group gives us some confidence that our our cost control is is is good at present, and and and we can come in on budget there. And we continue to have confidence in the the future. So I think that probably actually, I will do I will briefly go through the investment case. So why should you invest in franchise brands? Well, we have a portfolio of market leading brands in resilient sectors. We have significant growth opportunities as demonstrated by the maximum potential model.

26:34 We're significantly cash generating capital light business, which allows us to degear very quickly. We have operational, gearing, as I mentioned before, which allows us to keep our overheads fairly fixed as the franchisees, increase their system sales. Obviously, that works in the opposite direction. Were we not to increase system sales, there's not a lot we can do to to to trim our overheads. But, unfortunately, we're looking now for a period of recovery in some of the sectors in which we operate, particularly in Germany and and The UK with with The US still trading strongly. And you have a highly experienced management team of franchise brands, a lot of whom were with me at at Domino's and and and subsequently, we've recruited a strong team around the world, particularly US, Germany, and UK.

27:35 So I commend the investment opportunity to you. That's great. Thank you very much indeed for your presentation this morning. Ladies and gentlemen, please do continue to submit your questions using the q and a tab situated on the top right corner of your screen. While the company take a few moments to view those questions submitted today, I would like to remind you the recording of this presentation along with a copy of the slides and the published Q and A can be accessed via investor dashboard. Stephen, at this point, if I may hand back to you to chair the Q and A session, and I'll pick up from you at the end. Okay. Thanks very much. We have one pre submitted question, which is that you mentioned again that the Board are actively considering the disposal of noncore businesses. Given given the current global macro conditions, do you continue to receive interest in these businesses?

28:25 Although not ideal, would you consider breaking up the b to c division and disposing of the franchise businesses separately? Have you received any firm offers or any part of the business or for the group as a whole? Right. Some of that, I can answer. Some of it, obviously, I can't. The answer is that, yes, we do. And notwithstanding what's happening in the world at the moment, there is a lot of interest in our businesses. And some of that is materializing into probably a little short of offers, but but but of serious interest. So I I don't think the the current situation is is gonna affect that. As far as breaking up b to c, that will be difficult.

29:18 It it is a very integrated business. It runs three brands with a team of twenty, twenty five people, and and to separate out any of those would be difficult. Next question was, could you elaborate on the potential you see for the new FilterClean Pro? I think Peter's probably done that, but, you know, the exciting thing for me is is that it gets us into new markets. That ceiling cleaning product will get us into the QSRs in North America, which we previously haven't serviced because they don't filter their cooking oil. They just change it every day. So I I I huge additional potential there for filtering North America.

30:06 Next question. Good. Good. Could you expand on the businesses currently under strategic review, including the rationale and potential impact on group earnings and margin profile? Well, I mean, I think any business that's not a b to c franchise business is under review. So that would include b to c, would include Willow Pumps, would include Pertek in France and Sweden. It there are some smaller DLOs around the group. So all of those are are subject to review. Now that's not saying that we are intending to dispose of those, but we are looking very closely to align the group more as a b to c b to b, sorry, franchise business, which we think will simplify the group and make it easier more easily understood by investors.

31:15 And as Peter demonstrated with the how we make our money slide, focuses on where we can get the best return, particularly on management time. You know, our key strength is the management of of of franchise businesses, and that will allow us to put more focus into that. How are the royalties gathered for Veracity? I don't understand that question. That's Mark A. Mark, if you'd like to explain to me a little further what that means, I'll come back to you. How do you look to prioritize reducing debt versus buybacks, dividends, and where is the optimal gearing level? Our absolute priority is degearing.

32:03 We want to repay all the debt before we consider a new acquisition. I don't want any hangover of the protect debt when we go again. So that's what we're working towards. However, we will balance that with dividend and share buybacks. So I I think the you know, I went through the the the the capital priorities earlier, so I think we've probably done that one. Are you considering expanding into new geographical territory in our organic rather than looking for an acquisition? Yes. We are. For those of you know franchise businesses, it is a very long and loss making process to expand a franchise business into new territories.

32:58 Normally, what you have to do is to buy a direct labor operation, prove the concept works in a new market before you can then start selling that opportunity to franchisees. I think our core skill of franchise brands is taking existing franchise businesses from good to great. And and whilst, you know, you avoid the the capital outlay of by organic growth, I think I still see better development opportunities for franchise brands in acquiring a business that we can we can improve in its existing geographies. Next one, Damien c. There are further are there further due to costs remaining to be removed from the group, or is it the case that simply controlling ongoing costs?

33:54 Do you wanna have a crack at that one, Peter? I I think the the short answer is there are still duplicate costs in the business. We've done a lot of work in terms of reducing that duplication. As I touched on earlier with the rollout of the systems, we're in the phase now of identifying what enhancements we need to put in place to reduce that duplication of effort. My ideal scenario is to, you know, keep our overhead in and around where they are today, but grow the sales significantly to take advantage of the operational gearing. But, yeah, we're still looking at some areas of duplication of costs. And I think, you know, the one franchise brands initiatives were integrating Yep. IT systems and and other areas of the business will show additional savings coming through.

34:48 Or if not additional savings, fixing our costs at current level as system sales grow. So as a percentage of system sales, they will decline. Absolutely. What proportion of the 2025 revenue and EBITDA were in essential work as opposed to project discretionary work? So for that, exclude filter, which is somewhere between. But of the European businesses, about 80% is reactive work and 20% is the the project work. Marquet, do our franchisees provide an open book so that we know the royalties due are true? Oh, yes. They most certainly do.

35:39 Everything is done through the works management system to control the work that is passed to them, the information on those jobs passed back. And in the case of Metro Rod and Metro Plum, we actually invoice the work. So so we have a high degree of visibility of that. Now can I say that, you know, they never do a job for cash on the side? No. I can't. But is it significant? Most certainly not. That's great. If I may just jump back in there, and thank you for addressing those questions for investors today. But, Stephen, before I redirect investors to provide you with their feedback, which I know is particularly important to yourself and the company, could I just please ask you for a few closing comments? Well, thank you very much for joining us.

36:25 2025 was another tough year for us, but I think the resilience of the business sort of shone through with still managing just about to grow system sales and maintaining profitability. And we're optimistic that with some recovery in The UK and German construction plant high markets that 2026 will be a a a better year for us. So thank you very much for listening to us, and hope to see you this time next year. Fantastic. Thank you once again for updating investors today. Could I please ask investors not to close this session as you will now be automatically redirected to provide your feedback, which will help the company better understand your views and expectations.

37:10 On behalf of the management team, we would like to thank you for attending today's presentation, and good morning to you all. Goodbye. Thank you.