Ignite/Clarius auditors activate Code Red on the back of horrific 2019 results

The collapse of Rubicor four months ago means that the gong for the worst run publicly-listed recruitment company now passes to the directors of Ignite/Clarius. The Chairman of the Board is Garry Sladden. Twelve months ago I dissected the depressing and relentless decline of the company under Mr Sladden’s stewardship however I concluded my blog by identifying some glimpses of green shoots in the 2018 results.

I apologise to Ignite/Clarius shareholder and employees for raising their hopes. My slightly optimistic tone proved to be unfounded now that the 2019 full year results have been released.

How bad is it?

The following three indicators are sufficient to answer that question.

1) CEO role vacant for ten months: CEO, Julian Sallabank, after two years of declining results, resigned in January and left the company three months later. Mr Sladden assured us in the 2019 Annual report (published on 30 August) that “We have been actively engaged in the search for a new Chief Executive Officer and currently have several strong candidates in the final stages of negotiations.”

Fourteen weeks later no appointment has been made and the role remains vacant.

This absence of a CEO, ten months after previous CEO’s resignation was publicly announced, is a debacle that the Chairman is 100 per cent responsible for.

2) Much-heralded new (2018) GMs all departed: The three new state GMs, whose appointments, credentials and potential merited a total of 485 words in 2018 Annual Report have all departed during 2019.  The Victorian GM’s (Jayson Eichstadt) tenure was just under two years, the NSW GM (Stephen Hockey) lasted 18 months and the Queensland GM (Bruce Moss) didn’t reach a year. It’s unlikely to be a coincidence that none of the three have prospered.

Either, each of these leaders was an unsuitable match for their respective roles or the leadership they each experienced from the Chairman was ineffective in helping them identify and solve the long-standing performance issues in their respective regions.

These three significant departures were not directly acknowledged or explained in the 2019 Annual Report

3) Catastrophic decline in key financial metrics: The financial performance of the company continues to head south at a rapid rate of knots.

	2014	2019	Five year change	12 month change*
Revenue	$179.4	$152.9	-15%	-16.1%
Gross profit	$37.1	$25.8	-30.4%	-18.5%
Net Assets	$35.4	$8.87	-74.9%	-37%
November share price (peak)	25 cents	5 cents	-80%	No change

All figures in AUD millions unless otherwise indicated.  *there was a restatement of the 2018 financial results meaning that these figures do not align with the results I reported in my November 2018 blog on the company’s results.

The 2019 after-tax loss of $5.8 million was a 126% worse result than 2018’s loss of $2.6 million.

Although revenue from the On Demand IT Services division grew 15.9% to $10.8 million (2018: $9.4 m) the comparative FY2014 sales figure was $15.2 million, representing a 28 per cent decline across five years.

The accumulated losses across the past five years (2014 – 2019) now total $28.6 million.

In my blog dissecting Ignite/Clarius’s 2018 performance I highlighted some (relative) good news in the financial results. Below are my 2018 comments (in italics) followed by the result in each area, as reported in the 2019 Annual Report:

Gross profit margin has shown small but steady growth (2016; 21%, 2017; 21.3% and 2018; 22.6%). Gross profit margin 2019 was 16.9%

Better cash flow management has reduced debtor financing costs from $3.25 million in 2017 to $628k in 2018. The 2019 debtor financing costs ballooned to $5.8 million, a more than eight-fold increase in 12 months.

A nearly $1 million improvement in the cash position ($1.79 m in 2017 to $2.78 m in 2018). The 2019 cash position was $1.287, a decline of 54% in 12 months.

What’s happening now?

The Chairman’s 2019 AGM slide pack contained all the bad news and no reason to be optimistic that anything was going to change.

The 2017 Annual Report articulated the company’s mission statement, 2020 vision and the “2020 Back in Black” strategy. The mission statement and vision were both so laughably clichéd and meaningless they were never mentioned again in subsequent annual reports.

The progress with respect to the 2020 Back in Black strategy merited 291 words in the 2018 Annual Report but failed to gain any mention whatsoever in the 2019 Annual report.  We can draw the obvious conclusion about how effective this project has been.

As I have said before in my analysis of publicly-listed recruitment companies – when the CEO doesn’t understand how to improve sales they focus on marginally-relevant busy-work like cost-cutting and rebranding as well as navel-gazing exercises such as new (and almost always, turgid) mission and vision statements. These are the lowest priority things when sales are declining. The single focus should be on improving sales and gross profit, especially in a bull market.

The only sensible thing the Chairman has done is divest the company of their China division, via a management buyout. China has been a massive distraction for the board and the various CEOs for many years. As I implored in my September 2017 review of Ignite/Clarius’s results:

Stop friggin’ around with your non-core businesses – sell them or close them! The evidence is staring you in the face: On Demand, People Services and China (recruitment) are each, and all, a massive distraction. The underwhelming results in each of those divisions, in the face of booming recruitment-focused competitors, makes the action required obvious.

Clarius Board: You run an Australian recruitment business. Get back to core business.

It’s seems extraordinary that it took the Ignite/Clarius board years to make the decision to exit China.

Where to from here?

Unfortunately it’s now far too late to save Ignite/Clarius as the worst news for Ignite/Clarius shareholder, employees and creditors was all the way back in the sixth-last page of the Annual Report: Deloitte’s Independent Auditor’s Report to the Directors of Ignite Limited (Ignite Annual Report 2019, page 63)

We draw attention to Note 2 in the financial report which indicates that the Group incurred a net loss after tax of $5,812,000 and had net cash outflows from operating activities of $1,287,000, for the year ended 30 June 2019. As stated in Note 2, these conditions, along with the matters set forth in Note 2, indicate the existence of a Material Uncertainty that may cast significant doubt about the Group’s ability to continue as a going concern (my bold). Our opinion is not modified in respect of this matter.

See if you can spot any similarities between this statement and what the auditors of Rubicor; Pitcher Partners, said in the Rubicor 2018 Annual Report:

At 30 June 2018 the Group had an accumulated deficit balance of $4.7 million and its current liabilities exceed its current assets by $8.0 million. The Group made an EBITDA loss before non-recurring adjustments of $2.1 million. These conditions give rise to a material uncertainty which cast doubt about the Group’s ability to continue as a going concern. (Rubicor Annual Report 2018, page 16)

This is the language conservative auditors use when they are saying to anybody listening; “Code Red warning – get out while you can” 

The primary issue of concern to Deloitte is Ignite/Clarius’s debtor financing:

“… the Group is reliant upon an Australian debtor finance facility of up to an amount of 75% of eligible trade receivables or $15,000,000 to meet its liabilities and obligations at certain points within its cash flow cycle. There is a significant degree of management judgement relating to the future performance of the Group and the continuing availability of the debtor finance facility.” (Ignite Annual Report 2019, page 64)

The reality is that when your reliance on debtor finance has reached such a level and your costs relating to such finance have increased eight-fold (ie $5.2 million) in just twelve months, you are trapped in a death spiral with only one likely outcome.

No wonder Garry Sladden has been unable to hire a CEO – any candidate who was truly of the calibre required to turn the company around would have completed their due diligence knowing that the good ship Ignite/Clarius was almost certainly heading for the rocks at a rapid rate of knots and nothing could prevent the shipwreck.

 

Related blogs

Ignite/Clarius board put on notice by shareholders at AGM

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Clarius Results: Sales slump in booming market and another full year loss