Interim Results 2020

RNS Number : 2308Z

Safestyle UK PLC

17 September 2020

 

17 September 2020

Safestyle UK plc

("Safestyle" or the "Group")

Interim Results 2020

Safestyle UK plc (AIM: SFE), the leading UK-focused retailer and manufacturer of PVCu replacement windows and doors for the homeowner market, today announces its interim results for the six months ended 30 June 2020.

Financial and operational highlights

	Unaudited	Unaudited
	6 months ended	6 months ended
	30 Jun 2020	30 Jun 2019
	£m	£m	% change
Revenue	42.1	64.4	(34.7%)
Gross profit	9.7	16.6	(41.5%)
Gross margin %	23.13%	25.84%	(271bps)
Underlying (loss) before taxation1	(5.1)	(0.8)	(513.5%)
Non-underlying items2	(0.5)	(1.6)	68.5%
(Loss) before taxation	(5.6)	(2.5)	(126.4%)
EPS - Basic	(5.0p)	(2.8p)	(78.6%)
Net cash / (debt)3	6.0	(0.6)

¹ Underlying (loss) before taxation is defined as reported (loss) before taxation before non-underlying items and is included as an alternative performance measure in order to aid users in understanding the ongoing performance of the Group. 

² Non-underlying items consist of non-recurring costs, share-based payments and the Commercial Agreement amortisation.

³ Net cash / (debt) is cash and cash equivalents less loan facility.

A reconciliation between the terms used in the above table and those in the financial statements can be found in the Financial Review.

· Prior to lockdown the Group had started the year well with turnover and profitability ahead of 2019

· The business continued to grow market share (as measured by FENSA), reaching 9.2% in Q1 2020 vs 8.5% in 2019

· Operations ceased on 23 March and hence revenue and profitability between March and May were materially lower versus the prior year as a result of the COVID-19 pandemic

· The business undertook a Placing of new shares in April which raised £8.2m to strengthen the Group's balance sheet

· Operations were restarted in a phased way from late May and order intake since then has been strong, achieving year on year growth of 26.4% across the three month period between June to August

· Increased sales have required a step-up in headcount across survey, manufacturing, customer services and installation resource to match demand

· The business has experienced some operational challenges linked to the ramp up in capacity, the service / warranty backlog from lockdown and recent, temporary disruption to the supply chain 

· Despite these challenges, progress has been made with operational capacity increases delivering revenue growth year on year of 13.5% for July and August

· The difference between the operational capacity requirement and order intake growth since the restart has resulted in an order book that was 45% higher than the prior year at the end of June increasing to 82% higher at the end of August

· Good progress has been sustained on operational KPIs, with average price per frame up 3.0% versus H1 2019 to £688 and average order value up by 4.1% versus H1 2019 to £3,440

· The Group's financial position is strong, with net cash of £6.0m at the end of H1 2020 (31 December 2019: £0.4m).  Alongside the Placing of new shares, the deferral of a £2.5m VAT payment until March 2021 has contributed to this favourable net cash position

Outlook

· The Group has seen strong customer demand since the restart of operations in May and we aim to continue to invest behind this growth and maintain a strong order book

· This growth in order intake has recently been matched by delivering a 20% increase in survey, processing, manufacturing and fit capacity which will enable double digit revenue growth in the second half of the year

· The operational challenges linked to recovery and growth have adversely impacted customer service levels post-lockdown and investment is now underway to address this rapidly

· There remains significant uncertainty around the short and medium term and the Board continues to closely monitor the Group's performance to understand the sustainability of recent performance levels with the intention of providing guidance for the full year as soon as it is credible to do so

· The Board believes that as the clear national value brand in our category, with recent strong increases in market share, the business is well positioned to navigate the likely challenges ahead

Commenting on the results, Mike Gallacher, CEO said:

"The first half of 2020 presented some major management and operational challenges which were successfully navigated with strong support from our shareholders, effective Government intervention and the efforts of all of our staff.  Clearly their health and safety, along with that of our customers, was our priority during the lockdown period.

Since we re-emerged from lockdown, our strong order intake performance has been sustained and we have moved to ramp up operational capacity to match this demand.  We have experienced some operational challenges linked to recovering the backlog of warranty work from the lockdown, our growth and recent supplier performance.  We are focused on ensuring that the impact of these issues on our good customer service levels is addressed promptly.

Concurrently, despite the challenges in the first half of 2020 our team have been able to make tangible progress on our longer-term strategic priorities.  This includes modernising our brand, professionalising our sales force and  embedding best practice compliance processes.  

It is not yet clear if the recent strong trading performance is sustainable in light of the current economic environment and any uncertainty is likely to impact consumer confidence.  However our strong order book, our position as a leading national value brand and the progress made on modernising the business leaves us well positioned to sustain our momentum as we move into 2021."

Enquiries:

Safestyle UK plc Mike Gallacher, Chief Executive Officer Rob Neale, Chief Financial Officer via FTI Consulting Zeus Capital (Nominated Adviser & Joint Broker) Dan Bate / Dan Harris / Dominic King Tel: [phone] Liberum Capital Limited (Joint Broker) Neil Patel / Jamie Richards Tel: [phone] FTI Consulting (Financial PR) Alex Beagley / James Styles Tel: [phone]

About Safestyle UK plc

The Group is the leading retailer and manufacturer of PVCu replacement windows and doors to the UK homeowner market.  For more information please visit www.safestyleukplc.co.uk or www.safestyle-windows.co.uk.

CEO's Statement

Summary of Performance

The majority of the Group's financial performance measures and KPIs for H1 2020 were adversely impacted by the cessation of installation activity for nine weeks as a result of the COVID-19 pandemic and lockdown period.

Prior to the lockdown, the Group had started the year well, with the performance in the eight week period to  February 2020 representing revenue growth of £0.6m (3.4%), gross profit growth of £0.6m (11.4%) and an underlying profit before taxation of £0.9m, an improvement of £1.4m ( 273%) versus the same period for the prior year.

The improvement in these metrics demonstrated the continued upward trend in the Group's financial performance and the positive impact of the measures taken as part of phase two of the Turnaround Plan.  These actions increased revenues, improved the gross margin and drove an increase in underlying profit before taxation.

The impact on the financial performance of the business as a result of COVID-19 from late March to the end of May resulted in the Group incurring losses in those three months totalling in excess of £6m.  Encouragingly, following the restart of installation activity at the end of May, the Group returned to a modest profit in June on activity levels that were, for most of that month, lower than pre-COVID-19 levels as a result of the Group's phased return to work.

Impact of and response to COVID-19

Following the 'Stay at Home' measures guidance published by the Government on 23 March in relation to the COVID-19 outbreak, the Group took prompt and decisive action with the aims of:

· protecting its people, business and customers,

· providing the best service possible through the crisis, and

· ensuring it had both the capability and plans in place to accelerate rapidly out of the crisis.

As a result, the Group announced that it was temporarily closing all of its locations across the country and also temporarily ceasing all installation activities for a nine week period. 

The Group had prepared for this event well ahead of time and measures were swiftly put in place to garner all available Government support to protect cash.  95% of the Group's staff were formally furloughed at 80% pay at the end of March and the CEO, Chairman and each of the Non-Executive Directors took a 50% reduction in salary / fees for the duration of the crisis.

Having put in place these immediate measures and with the safety of the Group's staff and customers secured, the key objective for the Board was to ensure the business was well capitalised, using all possible options available to the Group, including the Government's Job Retention Scheme.  The Group obtained furlough support totalling £1.8m in H1 2020, almost entirely in relation to furloughed staff during the April and May period.

To further underpin the balance sheet and to build a strong cash buffer in order to support the Group through and out of the crisis, the Group performed an equity Placing and raised £8.2m in net proceeds from existing and new shareholders.  This Placing was achieved in conjunction with appropriate reductions in covenant targets for both the duration of the lockdown and our restart alongside an extension of the borrowing facility to October 2023.  The strong and rapid support from our shareholders and banking partners was a critical enabler for managing the business smoothly through this challenging time.

The Group restarted its operations in late May, following the creation of a comprehensive restart plan which was based on a phased and measured return to work.  Detailed policies were put in place to ensure staff and customer safety in line with the COVID-19 Secure guidelines.

With the necessary health and safety measures in place, manufacturing restarted on 18 May, followed swiftly by installations, survey and in-home selling by the end of May.  Colleagues working in our various support functions also returned to work in line with this phased restart, the pace of which was linked to activity levels.  Many of our returning colleagues continued to work from home in the initial phase.  However our offices have been altered to be COVID-safe and we now have the vast majority of staff working normally.

Trading and Operational Update

Since the business restarted operations at the end of May and despite the impact of local lockdowns we have been able to return to largely normal operations.  The COVID-safe policies and practices developed during the shutdown are now well embedded and continue to be welcomed by consumers.

Demand has continued to be strong since our restart with order intake performance between June to August showing growth of 26.4% versus 2019.  This has been driven by three factors:

Market Demand: While there is limited real time market data available we can be clear that the RMI (repair, maintenance and improvement) category has benefited from a shift in consumer spending from leisure, travel and entertainment into home improvement.  Our continued, albeit reduced, commercial operations (via remote selling) during lockdown gave us early visibility of this demand and informed our decision to recommence sales operations promptly and earlier than previously planned.

Sales and Marketing Improvements: Significant progress has been made in recovering from the Group's challenges in 2018 and then modernising our sales and marketing functions.  This has included embedding and leveraging our digital transformation project, rebuilding a modern and compliant door canvass force and making improvements in our digital marketing capabilities.

Competitive Set: While the majority of our competition comes from local businesses, our national competitors impact us most in digital lead acquisition.  Our national competitors restarted operations later than our business and one performed a major restructuring coming out of the lockdown.

The latter two factors have driven an improved market share (as measured by FENSA) from 8.5% in 2019 to 11.1% in Q2 2020 although the Q2 share figures are likely to be skewed by the speed of our restart versus our competitors.

Operationally the business has continued to ramp up its capacity in order processing, survey, manufacturing and installation.  Our target has been to increase capacity by over 20% as rapidly as possible in the face of strong trading.  Delivering this ramp up in capacity has required investment in recruitment and staffing levels and as a result installation revenue has lagged sales performance.  The capacity increase is now in place and offers the opportunity to better manage recent growth in our order book. 

The business has also had to navigate some limited supply disruption caused by the effect of industry-wide supply constraints.  In general, the impact of this has been mitigated by our close relationship with our major suppliers and proactive building of buffer stocks through the summer.

Strategic Priorities

2020 has provided an unprecedented series of challenges and these, combined with the impact of the lockdown, have impacted the pace of delivery of phase three of our Turnaround Plan.  However, I am pleased that progress has still been made in critical improvement projects:

Modernising our Brand: Our intent has been to apply best in class marketing to our value brand, developing new communications that take us beyond the iconic "Buy One, Get One Free" advertising that consumers know.  In addition, we have aimed to modernise our digital marketing, leveraging our scale by working with new, best in class partners.  In both areas we have made good progress and the benefits from the appointment of Journey Further as our new digital marketing agency are already mitigating growth in digital lead acquisition costs.

As a result of this work, we will be ready to recommence investment in sustained brand communication when the market context is judged appropriate.

Sustaining Momentum in Compliance and Customer Service:  While impacted by the lockdown and the disruption caused by COVID-19, progress has again been made in relation to compliance and customer service.  Compliance processes are now embedded and audited and we continue to focus on Health and Safety, Data Protection and ensuring we sell fairly.

The business has dedicated resources for warranty and service work and the lockdown has generated a significant backlog of work which we are now resourcing to recover.  This has reduced our normal levels of customer service and we are actively communicating with impacted customers while prioritising emergency cases.  We expect to have largely addressed this backlog by the end of the year.

Improving the National Sales and Depot Network:  Despite the huge operational challenges, progress has been made and during the fourth quarter of 2020, a limited number of 'role model' depots and branches will be in place.  Within our Sales organisation, we have now completed the recruitment of a new regional management structure that will support our sustained focus on levelling up branch performance using the new sales management information systems. 

Inevitably, the pace of delivering our strategic agenda has been slowed in 2020 but we will exit the year having made tangible progress in modernising the business and enabling our future growth.

Outlook

Operationally, the business has invested during Q3 in building the capacity to install at a significantly higher level than originally planned for 2020.  This will result in improved financial delivery in October and November, albeit risks remain around continued supply chain disruption.

It is recognised that the market outlook remains uncertain and it is not yet clear if the recent strong trading performance is sustainable.  Any negative economic and employment news is likely to impact consumer confidence in the months ahead.  As a result, the business is prepared for what may well be a challenging trading context as we move into 2021, though it remains well positioned to navigate these challenges.

Mike Gallacher

Chief Executive Officer

17 September 2020

Financial Review

	6 months ended June 2020			6 months ended June 2019
	Underlying	Non-underlying items1	Total	Underlying	Non-underlying items1	Total	Change in underlying %
Financials	£000	£000	£000	£000	£000	£000
Revenue	42,082		42,082	64,413		64,413	(34.7%)
Cost of sales	(32,349)		(32,349)	(47,771)		(47,771)	32.3%
Gross Profit	9,733		9,733	16,642		16,642	(41.5%)
Other Operating Expenses	(14,207)	(520)	(14,727)	(16,745)	(1,649)	(18,394)	15.2%
Operating (Loss)	(4,474)	(520)	(4,994)	(103)	(1,649)	(1,752)	(4233.3%)
Finance Income	-		-	1		1	(100.0%)
Finance Costs	(619)		(619)	(728)		(728)	14.9%
(Loss) Before Taxation	(5,093)	(520)	(5,613)	(830)	(1,649)	(2,479)	(513.5%)
Taxation			622			170
(Loss) for the Year			(4,991)			(2,309)
Basic EPS (pence per share)			(5.0p)			(2.8p)
Diluted EPS (pence per share)			(5.0p)			(2.8p)
Cash and Cash equivalents			10,120			5,374
Loan facility			(4,095)			(6,016)
Net cash / (debt)2			6,025			(642)

KPIs	H1 2020	H1 2019	Change %
Average Order Value (£ inc VAT)	3,440	3,304	4.1%
Average Frame Price (£ inc VAT)	688	669	3.0%
Frames installed - units	62,697	98,966	(36.6%)
Orders installed	15,054	24,029	(37.4%)
Frames per order	4.16	4.12	1.1%

Financial and KPI headlines

· Frames and orders installed of 62,697 and 15,054 respectively represent a 36.6% and 37.4% reduction versus H1 2019 due to the lower installations activity as a result of the lockdown as described above.

· Average frame price improved by 3.0% to £688 as a result of the annualisation of small price increases in H1 2019 and, moreover, as a result of an increased focus on discount levels.  This average price improvement was achieved despite a reduced mix of higher average-priced composite guard doors which was 7.7% in H1 2020 compared to 10.0% in H1 2019.

· Revenue decreased by 34.7% to £42.1m which is again due to the cessation of installation activity for part of the period. 

· Gross profit decreased by £6.9m (41.5%) while the gross margin percentage reduced by 271bps to 23.1%.  A year on year improvement in gross margin percentage was being delivered prior to the lockdown, however, when activities paused, the business continued to incur a level of fixed costs alongside a continuation of investment in the order book during the lockdown and into June which culminated in an order book that was 45% ahead of the prior year at the end of June.

· Underlying other operating expenses³ reduced by £2.5m (15.2%) to £14.2m.  Reduced investment in TV advertising versus the prior year, a £1.1m reclaim under the Government's Coronavirus Job Retention Scheme ('CJRS') claim and annualisation of cost reduction activities in the prior year all contributed to the year on year reduction. 

· Reported other operating expenses reduced by £3.7m (20.1%) to £14.7m as a result of the items described above along with a reduction in non-recurring costs which have reduced following completion of the actions taken as part of the cost reduction initiatives under phase two of the Group's Turnaround Plan.

· Finance costs have decreased year on year as a result of reduced borrowing facility costs due to lower utilisation (and thus lower fees) in relation to the £3m revolving credit facility.

· Underlying (loss) before taxation⁴ was a loss of £(5.1)m (H1 2019: loss of £(0.8)m) with the increased loss attributable to the impact of COVID-19 and the subsequent lockdown period on the trading performance of the business.

· Non-underlying items were £0.5m for the period (H1 2019: £1.6m), full details of which are provided on the following pages of this Financial Review.

· Reported (loss) before taxation was a loss of £(5.6)m (H1 2019: loss of £(2.5)m).

· Net cash / (debt)² was £6.0m versus net (debt) of £(0.6)m at the end of H1 2019 and net cash of £0.4m at 31 December 2019.  The improved cash position is despite the losses incurred in the first half of the year and is a result of a successful Placing of new shares in April which raised net proceeds of £8.2m and the agreed deferral of tax payments originally payable during the lockdown period.

References

¹ See later section in this Financial Review

² Net cash / (debt) is cash and cash equivalents less loan facility

³ Underlying other operating expenses are defined in the 'Underlying performance measures' section below and the reconciliation between this measure and the GAAP measure is shown in the 'Financials' table at the front of this Financial Review

⁴ Underlying (loss) before taxation is defined in the 'Underlying performance measures' section below and the reconciliation between this measure and the GAAP measure is shown in the 'Financials' table at the front of this Financial Review

Underlying performance measures

In the course of the last two years, the Group encountered a series of unprecedented and unusual challenges.  These gave rise to a number of significant non-underlying items in 2018 and consequential items continued into 2019 as the Group addressed the impact of these challenges, predominantly as part of the Turnaround Plan.

Consequently, adjusted measures of underlying gross profit, underlying other operating expenses and underlying (loss) before taxation have been presented as the primary measures of financial performance.  Adoption of these measures results in non-underlying items being excluded to enable a meaningful evaluation of the performance of the Group compared to prior periods. 

These alternative measures are entirely consistent with how the Board monitors the financial performance of the Group and the underlying profit / (loss) before taxation is the basis of performance targets for incentive plans for the Executive Directors and senior management team.

Non-underlying items consist of non-recurring costs, share-based payments and Commercial Agreement amortisation.  A full breakdown of these items is shown below.  Non-recurring costs are excluded because they are not expected to repeat in future years.  These costs are therefore not included in the Group's primary performance measures as they would distort how the performance and progress of the Group is assessed and evaluated. 

Share-based payments are subject to volatility and fluctuation and are excluded from the primary performance measures as such changes year to year would again potentially distort the evaluation of the Group's performance year to year.

Finally, Commercial Agreement amortisation is also excluded from the primary performance measures because the Board believes that exclusion of this enables a better evaluation of the Group's underlying performance year to year.

Revenue

Revenue for the period was £42.1m compared to £64.4m last year, representing a decrease of 34.7% as a result of no installation activity taking place across late March, April and May.  The year on year revenue performance up to the end of Feb represented year on year growth of 3.4%. 

The impact on volumes was a similar decline of 36.6% to 62,697 frames installed compared to 98,966 in the equivalent period last year.  The revenue decline was less than this volume decline as a result of improvements in the non-volume performance measures as follows:

· The average frame price increased by 3.0% to £688 (H1 2019: £669).  The annualisation benefit of list price increases alongside a larger beneficial component coming from reduced discount levels were the major drivers of the improvement. 

· The improvement in the average frame price was also despite a reduced mix of higher average-priced composite guard doors which reduced to 7.7% of installed volumes (H1 2019: 10.0%).

· The above favourable average price gains were offset by a marginal increase in uptake of our consumer finance offers and a higher proportion of our industry-leading 0% finance option, the cost of which is deducted from revenue.  The Group has seen continued growth in the uptake of consumer finance products in the last five years, but the rate of uptake increase has begun to slow. 

· The other reported operational KPIs also improved versus H1 2019 with the metric of frames per order increasing by 1.1% to 4.16 which is a reversal of a declining trend seen in the last 18 months and follows the rebalancing of mix out of higher-value composite doors.

· Finally, the average order value also improved by 4.1% to £3,440.  Progress in these operational KPIs remains a critical area of ongoing focus for the Group as it looks to drive improving quality of revenue alongside volume recovery out of lockdown and as part of phase three of the Turnaround Plan.

Gross profit

Gross profit decreased by £6.9m (41.5%) in the period to £9.7m (H1 2019: £16.6m) while the gross margin percentage reduced by 271bps to 23.1% (H1 2019: 25.8%).  The reduction in installation volumes described above was the main contributor to the year on year reduction in gross margin.  The factors behind the dilution in gross margin percentage were as follows:

· Prior to the lockdown, the Group was continuing to experience increased costs per leads generated as a result of continued competition driving up 'Pay Per Click' and other digital marketing channel costs.  Moving into the middle of the first half, despite the cessation of installation activities, the Group continued, albeit on a much-reduced scale, to respond via remote-selling methods to customer enquiries during the lockdown period.  These enquiries were generated with minimal levels of investment as compared to spend prior to the lockdown. 

Following the restart of operations, the Group experienced a strong consumer response as it stepped up its lead generation activities across all lead sources and although the costs per lead increased as volumes grew when compared to the very low levels during lockdown, these were still markedly lower than the first two months of the year with costs per lead in June over 10% favourable compared to June 2019. 

The cumulative impact of the above is that order intake has significantly exceeded the level of installation activity which has generated an order book that is 45% ahead of the prior year position at the end of June.  This investment has diluted gross margin % in the first half.

· Aside from the volume and order intake investment, gross margin was impacted favourably by a £0.7m reclaim under the CJRS scheme from the UK Government to contribute to the costs of the Group's furloughed factory employees. 

This CJRS reclaim was largely offset as a result of the following :

· The Group continued to incur some fixed costs that could not be fully removed during lockdown such as leased equipment costs;

· Finally, as the business restarted its factory in late May, the initial few weeks of operation were part of a staged return to work plan which inevitably resulted in a lower level of productivity than normal whilst COVID-secure ways of working were fully embedded.

Underlying other operating expenses

Underlying other operating expenses reduced by £2.5m (15.2%) to £14.2m versus H1 2019 .  There were reductions in the amount invested in TV advertising versus H1 2019 of £0.4m which partially offset the increased investment in digital media lead generation channels referred to above.  Excluding this reduced TV advertising spend, all other operating expenses were, in total, £2.1m lower than the first half of last year with variances versus the prior period in specific areas as follows:

· In addition to the amount received and included within gross margin as described above, the Group also received £1.1m for its CJRS reclaim for furloughed staff costs that are expensed within underlying other operating expenses.  Half of the amount reclaimed was for staff furloughed in April with the remaining half spread across May and June.  This reducing reclaim profile after April reflects the gradual return to work of furloughed staff through the second half of May with 60% of staff returned to work by the end of May and 93% by the end of June.

· Alongside the impact of the CJRS reclaim, salary costs were £1.0m lower than the prior period as a result of the annualisation benefit of the restructuring activities taken during 2019 as part of the Turnaround Plan.

· IT licensing and infrastructure costs increased by £0.2m versus the prior year as the rollout of technology across the Group continues, most notably the implementation of Office 365 and Microsoft Teams which proved crucial to underpin remote working during the lockdown and to enable a phased return to office working after restrictions were lifted.

· Finally, costs associated with the Group's response to implementing COVID-19 safeguards including enhanced cleaning routines for offices, the provision of Personal Protective Equipment to the workforce and providing safety screens around workstations totalled £0.2m in the first half of the year.  The annualised equivalent of these costs is forecast to be approximately £0.5m.

Underlying (loss) before taxation

Underlying (loss) before taxation was a loss of £(5.1)m in the period (H1 2019: a loss of £(0.8)m).  This is before the non-underlying items described below.

Non-underlying items

A total of £0.5m has been separately treated as non-underlying items for the year (H1 2019: £1.6m).  The prior period included £1.1m of costs related to restructuring activities as part of phase two of the Turnaround Plan. 

The current period's costs consist of £0.1m of non-recurring costs (H1 2019: £1.1m), a £0.2m shared based payment charge (H1 2019: £0.3m) and £0.2m (H1 2019: £0.2m) of Commercial Agreement (Intangible Asset) amortisation.  The table below shows the full breakdown of these items:

	H1 2020	H1 2019
	£000	£000
Restructuring and operational costs	100	571
Impairment of right-of-use assets	36	524
Total non-recurring costs (note 5)	136	1,095
Commercial Agreement amortisation	226	226
Equity-settled share based payment charges	158	328
Total non-underlying items	520	1,649

The Commercial Agreement amortisation is a result of an agreement entered into in 2018 with Mr M. Misra which encompassed a five year non-compete agreement and the provision of services by Mr Misra in support of the continued recovery of Safestyle.  The Group agreed consideration with Mr Misra subject to the satisfaction of both clear performance conditions by him over five years and Safestyle's trading performance in 2019.

Subject to satisfying the strict terms of the agreement, the consideration takes the form of an allotment by Safestyle to Mr Misra of four million ordinary shares of 1 pence each in the capital of the Group and a payment of cash consideration that, following conclusion of the 2019 year, has been confirmed at £1.0m.  Both the share issue and the cash consideration payment are due to take place in October 2020.

The items classified as non-recurring costs on the Consolidated Income Statement, the share based payment charge and the amortisation of the intangible asset created as a result of the Commercial Agreement reached in 2018 have all been excluded from the underlying (loss) before taxation performance measure to enable a meaningful evaluation of the performance of the Group from year to year.

Earnings per share

Basic earnings per share for the period were a loss of (5.0)p compared to a loss of (2.8)p in H1 2019.  The basis for these calculations is detailed in note 6.

Net cash / (debt) and cashflow

As reported in the CEO's statement, a key aspect of the Group's response to the COVID-19 pandemic to mitigate the impact on the Group's liquidity as a result of the cessation of revenue-driving activity was to raise funds via a share Placing.

The Placing was completed at the end of April with net proceeds of £8.2m raised.  Alongside this injection of additional liquidity, the Group also secured a two year extension to its existing borrowing facilities until October 2023.  Covenant waivers for the lockdown period and reductions in covenant targets for the remainder of the facility were also secured.

At the end of the first half, net cash was £6.0m (H1 2019: net (debt) of £(0.6)m).  £4.5m of the Group's £7.5m facility, being that of the term loan, was fully drawn with the remaining £3m revolving credit facility undrawn. 

The deferral of payments to HRMC that have been agreed represent a year on year working capital benefit of £3.0m and contribute to the above net cash position increase.  The majority of this deferral, being that of a £2.5m VAT liability originally payable during the lockdown period, will be paid in March 2021.  Since the restart of operations, the Group has not continued to defer additional tax payments owed to HMRC and, with the exception of the deferred amount, is paying all its liabilities normally.

Net cash (outflow) / inflow from operating activities, including the cashflow impact of non-underlying items, was an outflow of £(0.1)m (H1 2019: inflow of £1.6m).  This net outflow was a result of the losses in the first half which were largely offset by working capital benefits as a result of the deferred HMRC payments and an increase in payments on account for customer deposits received in line with the growth in the order book described above. 

Capital expenditure in the first half of £0.3m was the same as that in H1 2020.  Whilst some capex expenditure was deferred as part of the Group's response to the pandemic, critical investment in replacing and upgrading IT hardware continued. 

After the £8.2m proceeds in relation to the share Placing and the lease payments of £2.1m on leased assets (H1 2019: £2.2m), net cash inflow in the period was £5.7m (H1 2019: £1.2m).

Dividends

In order to protect the Group's strengthened liquidity position in an environment where confidence and consumer demand remain uncertain, the Board is not declaring an interim dividend for this year (2019: £nil per share).

Going Concern

Following the lockdown, the Group is meeting its day-to-day working capital requirements with liquidity levels built as a result of the share Placing in April 2020 and through the utilisation of part of its borrowing facility.  The Group is also generating positive operating cashflows following the restart of operations.  The Group's borrowing facility consists of a £4.5m Term Loan which was drawn on inception of the facility and a revolving credit facility of £3.0m that is currently undrawn.  Cash and cash equivalents are £10.1m at the end of June. 

The Directors have prepared a number of forecasts covering the period to December 2021 which include a number of assumptions in relation to sales volume, pricing growth and margin improvements, with various levels of written sales reductions applied to sensitise the forecasts.

A level of uncertainty as to the future impact of the COVID-19 pandemic remains and has been separately considered as part of the directors' consideration of the going concern basis of preparation.  It remains difficult to predict the overall outcome and future impact of COVID-19 at this stage.  However, in some of the scenarios modelled, specifically those which include a second national lockdown, there is a risk of breaching the Group's financial covenants despite the EBITDA covenant headroom increasing during the first half of the year.

The Directors note that the financial position of the Group is stronger than prior to the lockdown in March and is confident that liquidity could be managed should the lockdown period be of comparable length to that of the previous one.

Based on the above, having made these enquiries, the Directors believe that it remains appropriate to prepare the financial statements on a going concern basis.  However, the specific second lockdown scenario would indicate the existence of a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern and that the Group may, as a consequence, be unable to realise its assets and discharge its liabilities in the normal course of business.  The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate.

Rob Neale

Chief Financial Officer

17 September 2020

Consolidated Income Statement

				Unaudited		Unaudited		Audited
			Note	6 months ended		6 months ended		12 months ended
				30 June 2020		30 June 2019		31 December 2019
				£000		£000		£000
	Revenue			42,082		64,413		126,237
	Cost of sales			(32,349)		(47,771)		(94,337)
	Gross profit			9,733		16,642		31,900
	Other operating expenses			(14,727)		(18,394)		(34,332)
	Operating (loss)			(4,994)		(1,752)		(2,432)
	Finance income			-		1		2
	Finance costs			(619)		(728)		(1,402)
	Net Finance Costs			(619)		(727)		(1,400)
	(Loss) before taxation			(5,613)		(2,479)		(3,832)
	Underlying (loss) before taxation before non-recurring costs, Commercial Agreement amortisation and share based payments			(5,093)		(830)		(1,518)
	Non-recurring costs		5	(136)		(1,095)		(1,850)
	Commercial Agreement amortisation			(226)		(226)		(452)
	Share based payments			(158)		(328)		(12)
	(Loss) before taxation			(5,613)		(2,479)		(3,832)
	Taxation			622		170		526
	(Loss) for the period			(4,991)		(2,309)		(3,306)
	(Loss) earnings per share
	Basic (pence per share)		6	(5.0p)		(2.8p)		(4.0p)
	Diluted (pence per share)		6	(5.0p)		(2.8p)		(4.0p)

There is no other comprehensive income for the period.

All operations were continuing throughout all periods.

Consolidated Statement of Financial Position

			Unaudited		Unaudited		Audited
		Note	6 months ended		6 months ended		12 months ended
			30 June 2020		30 June 2019		31 December 2019
			£000		£000		£000
Assets
Intangible assets - Trademarks			504		504		504
Intangible assets - Goodwill			20,758		20,758		20,758
Intangible assets - Software			824		1,783		1,122
Intangible assets - Other			1,510		1,962		1,736
Property, plant and equipment			12,213		12,980		12,633
Right-of-use assets			6,318		7,488		6,012
Deferred taxation asset			1,508		693		886
Non-current assets			43,635		46,168		43,651
Inventories			3,346		2,727		2,725
Trade and other receivables			6,184		6,880		3,999
Cash and cash equivalents			10,120		5,374		4,435
Current assets			19,650		14,981		11,159
Total assets			63,285		61,149		54,810
Equity
Called up share capital		8	1,328		828		828
Share premium account		8	89,495		81,845		81,845
Profit and loss account			5,176		11,366		10,009
Common control transaction reserve			(66,527)		(66,527)		(66,527)
			29,472		27,512		26,155
Liabilities
Trade and other payables		7	19,990		15,564		15,384
Lease liabilities			4,291		3,432		2,482
Deferred taxation liability			17		53		17
Provision for liabilities and charges			1,089		857		990
Current liabilities			25,387		19,906		18,873
Provision for liabilities and charges			1,888		3,468		1,891
Lease liabilities			2,443		4,247		3,900
Borrowing facility			4,095		6,016		3,991
Non-current liabilities			8,426		13,731		9,782
Total liabilities			33,813		33,637		28,655
Total equity and liabilities			63,285		61,149		54,810

Consolidated Statement of Changes in Equity

	Share capital	Share premium	Profit and loss account	Common control transaction reserve	Total equity
	£000	£000	£000	£000	£000
Balance at 30 June 2019	828	81,845	11,366	(66,527)	27,512
Total comprehensive (loss) for the period	-	-	(997)	-	(997)
Transactions with owners recorded directly in equity:
Equity settled share based payment transactions	-	-	(316)	-	(316)
Deferred taxation asset taken to reserves	-	-	(44)	-	(44)
Balance at 31 December 2019	828	81,845	10,009	(66,527)	26,155
Total comprehensive (loss) for the period	-	-	(4,991)	-	(4,991)
Issue of new shares	500	7,650	-	-	8,150
Transactions with owners recorded directly in equity:
Equity settled share based payment transactions	-	-	158	-	158
Balance at 30 June 2020	1,328	89,495	5,176	(66,527)	29,472

Consolidated Statement of Cash Flows

		Unaudited			Unaudited		Audited
		6 months ended			6 months ended		12 months ended
	Note	30 June 2020			30 June 2019		31 December 2019
		£000			£000		£000
Cash flows from operating activities
(Loss) for the period		(4,991)			(2,309)		(3,306)
Adjustments for:
Depreciation of plant, property and equipment		771			850		1,666
Depreciation and impairment of right-of-use assets		1,939			2,490		4,322
Amortisation of intangible fixed assets		441			433		904
Finance income		(0)			(1)		(2)
Finance expense		619			727		1,402
IT project impairment		-			-		113
Equity settled share based payments charge		158			328		12
Taxation (credit)		(622)			(170)		(526)
		(1,685)			2,348		4,585
(Increase) in inventories		(621)			(311)		(309)
(Increase) / decrease in trade and other receivables		(2,185)			(2,402)		479
Increase in trade and other payables	7	4,606			278		98
Increase / (decrease) in provisions		96			14		(1,430)
IFRS 16 prepaid lease costs		-			(428)		(413)
IFRS 16 onerous lease costs		-			-		67
		1,896			(2,849)		(1,508)
Other interest (paid)		(280)			(327)		(1,079)
Taxation received		-			2,457		2,540
Net cash (outflow) / inflow from operating activities		(69)			1,629		4,538
Cash flows from investing activities
Acquisition of property, plant and equipment		(254)			(28)		(86)
Interest received		0			1		2
Acquisition of intangible fixed assets		(15)			(231)		(341)
Net cash (outflow) from investing activities		(269)			(258)		(425)
Cash flows from financing activities
Proceeds from loans and borrowings		-			2,000		-
Proceeds from issue of share capital	8	8,150			-		-
Transaction costs relating to loans and borrowings		(9)			-		(235)
Payment of right-of-use leases		(2,118)			(2,160)		(3,606)
Net cash inflow / (outflow) from financing activities		6,023			(160)		(3,841)
Net inflow in cash and cash equivalents		5,685			1,211		272
Cash and cash equivalents at start of period		4,435			4,163		4,163
Cash and cash equivalents at end of period		10,120			5,374		4,435

Notes to the interim financial information

1  General information

The interim financial information for the six months ended 30 June 2020 and for the six months ended 30 June 2019 does not constitute statutory financial statements as defined in Section 434 of the Companies Act 2006 and is neither reviewed nor audited.  The comparative figures for the year ended 31 December 2019 are not the Group's consolidated statutory accounts for that financial year but are extracted from those accounts which have been reported on by the Group's auditor and delivered to the Registrar of Companies.  The report of the auditor was (i) unqualified and (ii) did not contain a statement under Sections 498(2) or 498(3) of the Companies Act 2006.  The report of the auditor did however draw attention by way of emphasis, without qualifying the report, to the material uncertainty due to COVID-19 identified by the Directors in relation to the going concern basis of preparation.  Further reference to the going concern basis of preparation for these interim financial statements can be found in note 3.

2  Basis of preparation

The condensed consolidated interim financial information for the period ended 30 June 2020 has been prepared in accordance with IAS 34, 'Interim financial reporting' as adopted by the European Union.

Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the last annual consolidated financial statements as at and for the year ended 31 December 2019.

The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the period ended 31 December 2019 which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union.

The accounting policies adopted in the condensed interim financial information are consistent with those set out in the financial statements for the period ended 31 December 2019.

3  Going concern

The financial statements are prepared on a going concern basis which the Directors believe to be appropriate for the following reasons.

The Group made a statutory loss of £(5.0)m in the 6 months to 30 June 2020 (June 19: £(2.3)m loss) and had net current liabilities of £5.7m (June 2019: £4.9m).  As described in the financial review, a key aspect of the Group's response to the COVID-19 pandemic was to raise funds via a share Placing in April with net proceeds of £8.2m raised.  In addition to this injection of additional liquidity, the Group also secured an extension to its existing borrowing facilities until October 2023.  The facility agreement contains certain covenants, including a minimum EBITDA to be tested on a rolling 12 month basis, which was revised in conjunction with the extension such that the minimum EBITDA for covenant compliance has been reduced for 2020 and 2021.  In addition, the 2022 and 2023 covenants are lower than the 2020/21 covenants previously in place.  Covenant waivers for the lockdown period were also secured.  As at 30 June 2020, the £4.5m term loan was fully drawn with the remaining £3.0m revolving credit facility undrawn.  The Group had net cash of £6.0m as at 30 June 2020 (June 2019 net (debt): £(0.6)m). 

The Directors have prepared forecasts covering the period to December 2021, built from the detailed Board approved forecast for 2020.  The forecast includes a number of assumptions in relation to sales volume and pricing growth, and margin improvements, with various levels of written sales reduction applied to sensitise the forecasts.

Whilst the Group's trading and cash flow forecasts have been prepared using current trading assumptions, the operating environment presents a number of challenges which could negatively impact the actual performance achieved.  Excluding the potential impact of COVID-19 which is considered below, these risks include, but are not limited to, achieving forecast levels of order intake, the impact on customer confidence as a result of general economic conditions, Brexit and achieving forecast margin improvements.  If future trading performance significantly underperforms the Group's forecasts, this could impact the ability of the Group to comply with its covenant tests over the period of the forecasts.

A level of uncertainty as to the future impact of the COVID-19 pandemic remains and has been separately considered as part of the Directors' consideration of the going concern basis of preparation.  In modelling the impact on the Group's trading and cashflow projections, the downside scenario considered the possibility of a second national lockdown in November and December 2020, resulting in the full cessation of all order intake and installation activities.  The assumption of reduced Government support for a second lockdown was incorporated into the modelling resulting in a larger loss across November and December than for the previous lockdown period between March and May.  Order intake was subsequently modelled to reduce to 70% of the 2020 budget for the first 3 months of 2021 and to increase slightly to 80% of the 2020 budget for the remainder of 2021.  The Group notes the higher level of consumer demand post lockdown which has led to a significant year on year increase in the order book.  Due to the strong order book at the time of reporting, the assumption is that as happened during the first lockdown period, this will be maintained throughout the second lockdown period, enabling installations to recommence in January 2021 following lifting of the lockdown period. 

It remains difficult to predict the overall outcome and future impact of COVID-19 at this stage and the duration of disruption to written and fitted sales activity could be longer than modelled if the pandemic worsens.  However, in some of the scenarios modelled, there is a risk of breaching the Group's financial covenants despite the covenant headroom now standing at £1.7m.

The Directors note that the financial position of the Group is stronger than prior to the lockdown in March and is confident that liquidity could be managed should the lockdown period be of comparable length to that of the previous one. 

Based on the above, the Directors believe that it remains appropriate to prepare the financial statements on a going concern basis.  However, the specific downside scenario detailed above would indicate the existence of a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern and that the Group may, as a consequence, be unable to realise its assets and discharge its liabilities in the normal course of business.  The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate.

4  Significant accounting policies

Revenue recognition

The Group earns revenues from the sale, design, manufacture and installation of domestic double-glazed replacement windows and doors.  There is no significant judgement involved in the estimation of revenues and no material contract assets or liabilities are recognised.  IFRS 15 requires revenue earned from contracts to be recognised in line with performance obligations based on a five-step model.

Safestyle recognises revenue based on the stand-alone selling price of each performance obligation. The selling price is determined based on the contract agreed with the customer.  Subsidies payable by Safestyle to third party finance providers where the customer takes out a finance product are recognised as a reduction to revenue.  On inception of the contract the performance obligation is identified for each of the distinct goods or services to be provided to the customer.  The following summarises the performance obligations identified and provides information on the time of when they are satisfied and the related revenue recognition policy.

Revenue on sale of windows and doors

The performance obligation in this case is the final installation of products and the performance obligation is satisfied at the point in time that installation is complete and control has therefore passed to the customer.  Revenue is recognised at this point and payment is due on installation.

Survey fees

The performance obligation in this case is the completion of a technical survey assessing the feasibility of the proposed contract.  The revenue is recognised at the point at which the survey fee becomes non-refundable, which is after a period of time defined in the contract.  The survey fee is payable in advance of the survey being carried out.

Non-recurring items

Items that are either material because of their nature, non-recurring or whose significance is sufficient to warrant separate disclosure and identification within the consolidated financial statements are referred to as non-recurring items.  The separate reporting of non-recurring items is important to provide an understanding of the Group's underlying performance.

5  Non-recurring costs

			Unaudited		Unaudited		Audited
			6 months ended		6 months ended		12 months ended
			30 June 2020		30 June 2019		31 December 2019
Non-recurring costs consist of the following:			£'000		£'000		£'000
Restructuring and operational costs			100		571		1,058
Impairment of right-of-use assets			36		524		692
IT Project impairment			-		-		113
Commercial Agreement service fee			-		-		(13)
			136		1,095		1,850

Restructuring costs are expenses incurred, including redundancy payments, as a result of changes being made to reduce the cost structure of the business.

Impairment of right-of-use assets relates to the closure of properties identified as right-of-use assets during the period.

For further detail on the 2019 non-recurring charges, please refer to the 2019 Annual Report.

6  Earnings per share

			Unaudited		Unaudited		Audited
			6 months ended		6 months ended		12 months ended
			30 June 2020		30 June 2019		31 December 2019
(Loss) per share (pence)			(5.0)		(2.8)		(4.0)
Diluted (loss) per share (pence)			(5.0)		(2.8)		(4.0)

a) Basic earnings per share

The calculation of basic earnings per share has been based on the following profit attributable to ordinary shareholders and weighted-average number of shares outstanding.
			Unaudited		Unaudited		Audited
			6 months ended		6 months ended		12 months ended
			30 June 2020		30 June 2019		31 December 2019
			£'000		£'000		£'000
(Loss) attributable to ordinary shareholders			(4,991)		(2,309)		(3,306)
Weighted-average number of ordinary shares (basic)
			No of shares '000		No of shares '000		No of shares '000
In issue during the period			99,753		82,809		82,809

b) Diluted earnings per share

Due to the net loss for the period, diluted loss per share is the same as basic. The calculation of diluted earnings per share has been based on the following profit attributable to ordinary shareholders and weighted-average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares.
			Unaudited		Unaudited		Audited
			6 months ended		6 months ended		12 months ended
			30 June 2020		30 June 2019		31 December 2019
			£'000		£'000		£'000
(Loss) attributable to ordinary shareholders			(4,991)		(2,309)		(3,306)
			No of shares '000		No of shares '000		No of shares '000
Weighted-average number of ordinary shares (basic)			99,753		82,809		82,809
Effect of conversion of share options and share consideration			7,383		7,155		7,166
Weighted-average number of ordinary shares (basic) at period end			107,136		89,964		89,975
The average market value of the Group's shares for the purpose of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding.

7  Trade Payables

			Unaudited		Unaudited		Audited
			6 months ended		6 months ended		12 months ended
			30 June 2020		30 June 2019		31 December 2019
			£'000		£'000		£'000
Trade payables			6,018		6,659		6,675
Other taxation and social security costs			5,856		2,981		2,167
Other payables			2,451		1,754		3,197
Accruals and deferred income			5,665		4,170		3,345
			19,990		15,564		15,384

Trade payables represents the total amounts payable by Safestyle as part of normal business operations. 

Other taxation and social security costs are amounts owed to HMRC for VAT and PAYE / NIC.  The balance has increased at the end of June as a result of the deferral of VAT payments due during the lockdown period in accordance with HMRC's COVID-19 payment deferral scheme.

Other payables have increased versus June 2019 as a result of a higher number of customer deposits and survey fees received in the first half of the year that are deferred until the revenue can be recognised.  This growth is consistent with the year on year increase in the order book as described in the CEO's statement.

8  Share Capital and Share Premium

	Share capital	Share premium	Total equity
	£000	£000	£000
Balance at 30 June 2019	828	81,845	82,673
Balance at 31 December 2019	828	81,845	82,673
Issue of new shares	500	7,650	8,150
Balance at 30 June 2020	1,328	89,495	90,823

Issue of ordinary shares

On 28 April 2020, the general meeting of shareholders approved the issue of 50,000,000 ordinary shares. Following Admission, the total number of ordinary shares and voting rights in the Group was increased to 132,808,896 (2019: 80,808,896).  The net proceeds of £8.2m comprise £8.5m cash proceeds net of £0.3m of expenses incurred in issuing new shares.

 

END

 

 

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