Grech: turnaround is taking longer than we anticipated
Slater & Gordon (S&G) will not be able to pay off the bank debt that falls due next year and will need the continuing support of its lenders “to continue as a going concern”, it admitted today while unveiling more disastrous financial results that showed a 38% fall in income in the UK.
The second six months of 2016 – the first half results of its 2017 financial year – saw the Australian-listed firm report a net loss of A$425m (£262m), A$350m of which was made up of an “impairment charge against the carrying value of UK intangible assets”.
The only crumb of comfort was that this was less than half of that in the same period the previous year, when it was A$958m, again caused by a write-down of goodwill arising from the purchase of Quindell’s professional services division (now Slater Gordon Solutions, or SGS).
S&G also said that its UK reorganisation was almost complete: staff numbers are down 20% – “without disruption to client service” – and it has closed 18 offices, taking the total to 30.
S&G’s share price crashed 22% to an all-time low of 12.5c – two years ago, it was nearly A$8.
The results showed that S&G’s total liabilities exceeded its total assets by A$126m as of 31 December 2016. Its syndicated facility agreement (SFA) is A$737m, of which A$20m is repayable in August 2017, A$10m in February 2018, A$421m in May 2018 and A$286m in March 2019.
“The group’s current operating environment continues to present challenges and uncertainty,” they said. “On 15 February 2017, the group presented updated trading and cash flow forecasts and a number of recapitalisation options to its lenders.
“Under the SFA, a majority of lenders by value must agree to a satisfactory recapitalisation plan by 26 May 2017. Negotiations between the group and lenders are ongoing and the group has reasonable grounds to believe that these will be satisfactorily concluded. Should this not occur, the borrowings under the SFA may become due and payable within a further 14 days of this date.
“The group will not have sufficient free cash flow to pay interest and repay the facilities in May 2018, or earlier, and there is some risk that it may not meet minimum cash balances specified in the SFA. Accordingly, the group requires the ongoing support of its lenders to continue as a going concern.”
The six months saw revenue across the firm fall by a third to A$322m; in the UK, the main S&G business dropped 35% to A$75.6m (although it said the fall was 18% in “local currency terms”), and SGS 40% to £141m (25% in “local currency terms”). Cash flow is still negative, but in far better shape that it was in the last corresponding period.
The main S&G business has “continued to underperform during this period due to the disruption caused by the performance improvement programme, staff turnover and “the impact of negative sentiment on the business”.
Parts of both the personal injury and general law businesses underperformed, while there was “slower progress than anticipated in the fast-track file transition programme, with new fast-track files now being conducted by SGS”.
More positively, enquiry volumes remained “strong” in the serious and specialised personal injury practice, and were “satisfactory” in general law.
“Brand awareness of the Slater and Gordon Lawyers brand was maintained despite reduced marketing spend,” it added.
SGS’s income fell because it lost two of its key motor services contracts. Further, there were fewer RTA settlements on a reduced case intake, while staff turnover had impacted case handler “effectiveness”. The reduced claims intake has been a deliberate strategy during 2016, however, with the aim of improving case quality while lowering marketing spend.
Noise-induced hearing loss settlements increased “but remain below expectations”; at the same time, “cost containment” in this practice, along with the savings achieved by the performance improvement programme, contributed to much improved earnings.
Group managing director Andrew Grech said: “This half-year result continues to reflect a business that is still very much in the midst of a major transition.
“While we have made progress in the past 12 months, the turnaround is taking longer than we anticipated and billed revenue performance is segments of the business is lower than expected. The full impact of the performance improvement initiatives will take time. SGS delivered positive earnings and operating cash flow.
“I would like to acknowledge the hard work of our UK team for continuing to deliver excellent client results across a wide array of service lines in this period of transition.”
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