REG - Sage Group PLC - Half-year Report <Origin Href="QuoteRef">SGE.L</Origin> - Part 3
05/05/2016 07:06
- Part 3: For the preceding part double click ID:nRSE3000Xb
(9.2)
Recurring items
Acquired intangibles are assets which have previously been recognised as part of business combinations. These assets are
predominantly brands, customer relationships and technology rights.
The adjustment relating to acquisition related items comprises the cost of carrying out business combinations in the
period, partly offset by the net release of earn-out liabilities on previous acquisitions.
Non-recurring items
Charges of £31.2m have been incurred in the current year as a result of the implementation of the business transformation
strategy. This is comprised of people exit charges of £16.3m, net property exit costs of £10.7m and other directly
attributable costs of £4.2m. These charges are one-off in nature and directly linked to the business transformation that is
under way.
In addition, there has been income in the year arising from recovery of costs relating to the Archer Capital litigation
case following its conclusion in 2015.
The fair value adjustment relates to an embedded derivative asset which relates to contractual terms agreed as part of the
US private placement debt. This has been recognised on the face of the balance sheet as a non-current other financial
asset.
4 Income tax expense
The effective tax rate on statutory profit before tax was 25% (six months ended 31 March 2015 (restated): 26%) whilst the
effective tax rate on underlying profit before tax was 27% (six months ended 31 March 2015 (restated): 25%). The effective
income tax rate represents the best estimate of the average annual effective income tax rate expected for the full year,
applied to the profit before income tax for the six months ended 31 March 2016.
5 Dividends
Six months ended Six months ended 31 March 2015 Year ended 30 September
31 March 2016 (Unaudited)£m 2015 (Audited)£m
(Unaudited)£m
Finaldividend paid for the year ended 30 September 2014 of 8.00p per share - 85.7 85.7
Interim dividend paid for the year ended 30 September 2015 of 4.45p per share - - 47.8
Final dividend paid for the year ended 30 September 2015 of 8.65p per share 93.0 - -
93.0 85.7 133.5
The interim dividend of 4.80p per share will be paid on 3 June 2016 to shareholders on the register at the close of
business on 13 May 2016.
6 Earnings per share
Basic earnings per share is calculated by dividing the profit for the period attributable to owners of the parent by the
weighted average number of ordinary shares in issue during the period, excluding those held as treasury shares, which are
treated as cancelled.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of
all dilutive potential ordinary shares. The Group has dilutive potential ordinary shares consisting of share options
granted to employees, where the exercise price is less than the average market price of the Company's ordinary shares
during the period.
UnderlyingSix months ended Underlying as reported Underlying Statutory Statutory
31 March 2016 Six months ended Six months ended Six months ended Six months ended 31 March
(Unaudited) 31 March2015 (Unaudited)(Restated) 31 March2015 (Unaudited)(Restated) 31 March2016(Unaudited) 2015 (Unaudited)(Restated)
Earnings attributable to owners of the parent (£m)
Profit for the period 130.0 133.4 131.6 106.3 124.8
Number of shares (millions)
Weighted average number of shares 1,075.5 1,071.7 1,071.7 1,075.5 1,071.7
Dilutive effects of shares 6.6 2.1 2.1 6.6 2.1
1,082.1 1,073.8 1,073.8 1,082.1 1,073.8
Earnings per share attributable to owners of the parent (pence)
Basic earnings per share 12.09 12.45 12.28 9.88 11.65
Diluted earnings per share 12.01 12.42 12.26 9.82 11.62
The prior period weighted average share base has been restated to include shares held by the Employee Benefit Trust as
treasury shares.
Reconciliation of earnings Six months ended Six months ended
31 March 31 March
2016 2015
(Unaudited) (Unaudited)(Restated)
£m £m
Underlying earnings attributable to owners of the parent 130.0 131.6
Impact of movement in foreign currency exchange rates - 1.8
Underlying earnings attributable to owners of the parent (after exchange movement) 130.0 133.4
Non-recurring items (29.0) -
Amortisation of acquired intangible assets (8.4) (9.5)
Goodwill impairment and fair value adjustments 1.4 1.0
Other acquisition-related items (0.1) (0.7)
Taxation on adjustments 12.4 0.6
Net adjustments (23.7) (8.6)
Earnings statutory profit for period 106.3 124.8
7 Non-current assets
Goodwill Otherintangibleassets Property, plant and equipment Total
(Unaudited)£m (Unaudited)£m (Unaudited) £m (Unaudited)£m
Opening net book amount at 1 October 2015 1,446.0 105.5 122.7 1,674.2
Additions - 2.6 12.9 15.5
Acquisition - 6.5 - 6.5
Disposals - - (1.0) (1.0)
Depreciation, amortisation and other movements - (14.0) (10.3) (24.3)
Impairment - - - -
Exchange movement 74.1 7.5 3.1 84.7
Closing net book amount at 31 March 2016 1,520.1 108.1 127.4 1,755.6
Goodwill Otherintangibleassets Property, plant and equipment Total
(Unaudited)£m (Unaudited)£m (Unaudited) £m (Unaudited)£m
Opening net book amount at 1 October 2014 1,433.0 98.1 126.7 1,657.8
Additions - 3.1 8.9 12.0
Acquisition 77.0 33.5 1.0 111.5
Disposals - (0.1) (0.8) (0.9)
Depreciation, amortisation and other movements - (14.9) (9.0) (23.9)
Impairment - - (0.6) (0.6)
Exchange movement 30.7 0.9 (0.2) 31.4
Closing net book amount at 31 March 2015 1,540.7 120.6 126.0 1,787.3
Goodwill is not subject to amortisation, but is tested for impairment annually at 30 June or whenever there is any
indication of impairment. At 31 March 2016, there were no indicators of impairment to goodwill. Full details of the outcome
of the 2015 goodwill impairment review are provided in the 2015 financial statements.
Detail of the current period acquisition has been provided in note 11.
8 Financial instruments
For financial assets and liabilities, the carrying amount approximates the fair value of the instruments, with the
exception of US senior loan notes due to these bearing interest at fixed rates which are currently higher than floating
rates. The fair value of borrowings is determined by reference to interest rate movements on the US $ private placement
market and therefore can be considered as a level 2 fair value as defined within IFRS 13 with the respective book and fair
values included in the table below.
At 31 March 2016 At 31 March 2015
Book Value£m Fair Value£m Book Value£m Fair Value£m
Long term-borrowing 484.0 494.5 499.3 509.0
Short term-borrowing 34.7 35.8 33.7 34.8
9 Ordinary shares and share premium
Number of shares (Unaudited) Ordinary Shares Share premium Total(Unaudited)£m
(Unaudited) £m (Unaudited) £m
At 1 October 2015 1,118,298,748 11.8 541.2 553.0
Shares issued/proceeds 551,880 - 1.4 1.4
At 31 March 2016 1,118,850,628 11.8 542.6 554.4
Ordinaryshares£m Sharepremium£m Total£m
Number ofshares
At 1 October 2014 1,115,892,047 11.7 535.9 547.6
Shares issued/proceeds 962,612 - 2.1 2.1
At 31 March 2015 1,116,854,659 11.7 538.0 549.7
In the current period, the group purchased 385,000 shares at a cost of £2.4m through the Employee Benefit Trust.
During the prior period, the Group purchased 3,457,020 shares at a cost of £12.4m and a cash outflow of £15.5m. Shares
purchased under the Group's buyback programme are initially retained in issue as treasury shares and represent a deduction
from equity. Treasury shares are subsequently cancelled on a periodic basis.
10 Cash flow and net debt
Six months ended Six months ended
31 March 31 March
2016 2015(Unaudited)
(Unaudited) (Restated)
£m £m
Statutory operating profit 151.8 178.7
Depreciation/amortisation/impairment/profit on disposal of non-current assets 24.3 24.2
Share-based payments 6.0 4.8
Changes in working capital (30.1) (42.9)
Increase in deferred income 60.9 61.4
Exchange movement 0.9 20.1
Cash generated from continuing operations 213.8 246.3
Net interest paid (9.2) (10.2)
Income tax paid (48.5) (60.1)
Net capital expenditure (14.5) (11.2)
Free cash flow 141.6 164.8
Net debt at 1 October (425.4) (437.2)
Acquisitions and disposals of subsidiaries, net of cash (6.3) (97.5)
Dividends paid to owners of the parent (93.0) (85.7)
Purchase of treasury shares (2.4) (15.5)
Exchange movement (18.9) (38.9)
Other 0.9 0.1
Net debt at 31 March (403.5) (509.9)
Analysis of change in net debt (inclusive of finance leases) At Cash flow Acquisitions Non-cash movements Exchange movement At 31 March 2016
1 October 2015 £m £m £m £m (Unaudited)
(Audited) £m
£m
Cash and cash equivalents 263.4 83.1 (6.3) - 16.0 356.2
Bank overdrafts - - - - - -
Cash, cash equivalents and bank overdrafts 263.4 83.1 (6.3) - 16.0 356.2
Finance leases due within one year (0.6) 0.6 - (0.4) - (0.4)
Loans due within one year (33.0) 34.7 - (34.7) (1.7) (34.7)
Loans due after more than one year (571.0) (26.6) - 34.2 (28.3) (591.7)
Finance leases due after more than one year (0.4) (0.3) - 0.4 - (0.3)
Cash held on behalf of customers (83.8) (43.9) - - (4.9) (132.6)
Total (425.4) 47.6 (6.3) (0.5) (18.9) (403.5)
Included in cash above is £132.6m (31 March 2015: £91.5m, 30 September 2015: £83.8m) relating to cash held on behalf of
customers. This arises as a consequence of providing payment transaction processing and electronic fund transfer services.
The balance represents cash in transit from third parties to Sage customers. Accordingly, a liability for the same amount
is included in trade and other payables on the balance sheet and is classified within net debt.
The Group continues to be able to borrow at competitive rates and currently deems this to be the most effective means of
raising finance. The Group's current syndicated bank multi-currency revolving credit facility expires in June 2019 with
facility levels of £555m (US$551m and E218m tranches). At 31 March 2016, £110m (H1 2015: £156m) of the multi-currency
revolving debt facility was drawn, with the decrease due to ongoing repayments funded from free cash flows.
Total US private placement ("USPP") loan notes at 31 March 2016 were £519m (US$650m and EURE85m) (H1 2015: £533m, US$700m
and EURE85m). Approximately £35m (US$50m) of USPP borrowings were repaid in March 2016.
11 Acquisitions and disposals
Acquisitions made during the period
On 2 November 2015 the Group acquired trade and business from People's United Bank, a provider of payroll services for
small and medium sized business in North America, for a total consideration of £6.5m. The transaction price included
deferred consideration of £2.0m. As at March 2016, deferred consideration payable amounted to £0.2m. The acquisition
strengthens Sage's position in the large and growing US payroll market.
The acquisition resulted in the recognition of intangible assets of £6.5m, consisting of customer lists. No goodwill was
recognised.
Disposals made during the period
There were no disposals made in the period.
12 Related party transactions
The Group's related parties are its subsidiary undertakings and Executive Committee members. The Group has taken advantage
of the exemption available under IAS 24, "Related Party Disclosures", not to disclose details of transactions with its
subsidiary undertakings.
Key management compensation Six months ended Six months ended
31 March 31 March
2016 2015
(Unaudited)£m (Unaudited)£m
Salaries and short-term employee benefits 3.6 3.4
Post-employment benefits 0.3 0.3
Share-based payments 2.4 1.8
6.3 5.5
The key management figures given above include directors. Key management personnel are deemed to be members of the
Executive Committee and are defined in the Group's Annual Report & Accounts 2015.
Supplier transactions occurred during the period between Sage South Africa (Pty) Ltd, one of the Group's subsidiary
companies and Ivan Epstein, Chief Executive Officer, International. These transactions relate to the lease of four
properties in which Ivan Epstein has a minority and indirect shareholding. During the period £1.9m (2015: £2.2m) relating
to these transactions was charged through selling and administrative expenses. There were no outstanding amounts payable
for the period ended 31 March 2016 (31 March 2015: £nil).
Supplier transactions occurred during the period between Sage SP, S.L., one of the Group's subsidiary companies and Álvaro
Ramírez, former Chief Executive Officer, Europe, who is still a Director in some of the Group's subsidiaries. These
transactions relate to the lease of a property in which Álvaro Ramírez has a minority shareholding. During the period £0.5m
(31 March 2015: £0.5m) relating to these transactions was charged through selling and administrative expenses. There were
no outstanding amounts payable for the period ended 31 March 2016 (31 March 2015: £nil). These arrangements are subject to
independent review using external advisers to ensure all transactions are at arm's length.
Balancing risks and rewards
Risk is inherent within our business activities, and we continue to prioritise and develop our risk management strategy and
capability in recognition of this. Timely identification of risks, combined with their appropriate management and
escalation, enables us to successfully run our business and deliver strategic change, while ensuring that the likelihood
and / or impact associated with such risks is understood and managed within our defined risk appetite.
We have continued to review our Principal Risks, and in line with our multi-year strategy, these remain broadly consistent
with those identified during FY15, and are detailed below. In the course of this review, we have enhanced the measure of
capability within each Principal Risk, reflecting the importance of Sage colleagues in delivering our objectives. All
revisions have been approved through the Audit and Risk Committee.
Other risks are analysed and mitigated via the normal embedded risk management process.
#1 Business Model TransitionSage does not successfully manage its transition to a global operating model against defined timeframes. Strategic Alignment: Capacity for Growth Sage has operated as a federated set of Operating Companies. The move to a global model provides enhanced governance, process harmonisation, efficiencies and scalability. · Functional reporting established to a global level to allow consistency of direction, and removal of any global / local conflicts· An approved global Business
Model Transition Strategy in place, supported by an overarching plan which details the goal, overall time plan, and scheduled adoption by countries· Clear governance
around strategy and overarching plan through Executive Committee and programme steering committee· Programme lead with delegated authority managing the transition In
progress:· Country / function transitions are in progress in line with overarching plan· On-going monitoring of implementation through the programme management
office, and application of lessons learnt in each successive transition
#2 Licensing Model TransitionSage does not successfully manage its transition to subscription licencing against defined timelines and targets or appropriately adapt its customer approach. Strategic Alignment: Customers for Life Sage is moving from a perpetual to a subscription based licencing model. This transition assists with cash flow; offers a platform for cross selling; and lowers attrition rates, which in turn aids revenue forecasting. It also provides regular customer engagement and enhanced opportunities to develop these relationships. The speed of transition needs to be balanced against any reduction in short term revenues. · An approved licensing model transition strategy is in place, with defined targets and timescales· New products are being offered on a subscription only basis·
A series of approved targets are defined, which span multiple years and support successful delivery of our strategy· Ongoing monitoring and review of the
approved targets is taking place at country, regional and global levels in order to proactively manage the licence transition, and revenue figures· Customer Business
Centres (CBCs) established in North America and Europe to integrate digital marketing, sales and service operations forcustomers using global products
In progress:· Creation of additional CBCs, with staged adoption of global products, to better manage ongoing customer relationships and the sales cycle
#3 Market IntelligenceSage fails to understand and anticipate changes in the external environment, including customer needs, emerging market trends, competitor strategies and regulatory / legal requirements. Strategic Alignment: Customers for LifeWinning in the Market Sage has operated as a federated set of Operating Companies, each using local definitions and methodologies to capture market data.The alignment of federated activities allows consolidation of data across geographies and product to provide a single Sage wide view, and enable trends and white space opportunities to be identified. · A Market and Competitive Intelligence team established, which has overall responsibility for Market Intelligence· Global market intelligence surveys, to
identify market opportunities· Brand health surveys to understand customer perception of the Sage brand and its products· Maintenance of a Market Data portal
through which global market data is provided
In progress:· Definition and delivery of an approved internal communications plan, to share Market Intelligence· Alignment of win / loss data with Market
Intelligence collected and shared
#4 Competitive Positioning and Product DevelopmentSage is unable to clearly identify the approach to market, or deploy competitive advantage, including product development Strategic Alignment:Winning in the MarketCapacity for Growth The competitive environment in which Sage operates has seen significant developments. New players include venture capital funded organisations whose primary goal is to attain market share irrespective of profit, while cloud products and digital sales and marketing strategies are reducing barriers to entry. Sage must translate market intelligence into effective strategies targeting attractive market segments with appropriate products and continually work to reinforce competitive superiority.During the transition to global Sage products, we continue to manage the local product base and plan and evolve these in line with longer-term aspirations. · A global Product Marketing team established to oversee competitive positioning and product development· A global Product Delivery team established to develop
and deliver products· Governance is established around the creation of global products, to ensure effective prioritisation of resources· Accountability for the
maintenance of documented strengths and weaknesses is defined, and for global products this resides with global Product Marketing
In progress:· Assessment of all competitors and documentation of their strengths and weaknesses· Defined 'Customer for Life' roadmaps to detail how all
products fit together· Prioritised development based on 'Customer for Life' roadmaps
#5 Sage BrandSage does not deliver clear and consistent branding to the market Strategic Alignment: One Sage Following several years of acquisitions, work continues to develop the Sage brand. Whilst it is well recognised and trusted by customers in many core markets, at global level brand awareness remains inconsistent.A clear and consistent brand enables customers to understand Sage values. · A global Brand team is in place which has overall responsibility for developing the global Brand · All countries must comply with Sage's Brand Governance and
Brand Guidelines, which is designed to execute the Sage Masterbrand Strategy. Timeframes for compliance of all products are defined, and any exceptions must be approved
through global Brand· Ongoing review of customer experience is performed (Net Promoter Scores), and output reviewed across countries and products to identify
variance, and develop improvement plans· Where no specific brand guidance is provided by global Brand, a defined approval route is in place through the team, and
approval must be obtained in advance of publication
In progress:· All branded assets must be uploaded to the Brand Library, and any exceptions from brand guidelines reported to the Chief Marketing Officer·
Implementation of a Digital Asset Management (DAM) tool to workflow requests, and act as a single information repository· Creation of the Sage Foundation, with
launches by country across FY16, demonstrating our commitment to philanthropic leadership
#6 Strategic PartnershipsSage fails to identify, build and maintain strategic partnerships Strategic Alignment: Revolutionise Business There are increasing instances where developing strategic partnerships will benefit Sage. The governance and control around engagement and use must be defined, as well as management of the eco-system. · A Partner Management team is established to oversee the selection and management of Strategic Partners, including individual accountability for active management
of each relationship· Definitions are in place to ensure clarity over what constitutes a Strategic Partner· All contracts must comply with the Material
Contracts policy, and be approved through legal · Inclusion of defined legal provisions is required. Any variance from such provisions must be recorded as part of
the formal contract approval process
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