Appreciate Group PLC

Full Year Results

RNS Number : 8918V
Appreciate Group PLC
12 August 2020
 

12 August 2020

Appreciate Group plc

 

 

Preliminary Final Results for the Year Ended 31 March 2020

 

Summary

Appreciate Group (the 'Group'), the UK's leading multi-retailer redemption product provider to corporate and consumer markets, today announces its final results for the financial year ended 31 March 2020, and provides an update on current trading for the new financial year to date.

 

Financial highlights

· Trading for the 11 month period to the end of February 2020 was in line with expectations with final month of the financial year impacted by the COVID-19 lockdown

· Billings* down marginally by 1.6 per cent to £419.9m (2019: £426.9m)

· Revenue up by 2.1 per cent to £112.7m (2019: £110.4m)

· Profit before tax before exceptional items** of £11.4m (2019: £12.5m)

· Total cash balances, including monies held in trust and deposits, of £132.3m (2019: £134.0m)

· Year end free cash of £29.6m (2019: £36.9m) (excluding funds held in trust)

· Exceptional items of £3.7m (2019: £1.2m) following impairments of goodwill and the value of our former main operating site at Valley Road

· The Board has decided not to recommend a final dividend given continued short-term uncertainty from COVID-19. The Board intends to return to its dividend policy as soon as it is prudent to do so.  

 

 

Statutory results  

· Operating profit of £6.4m (2019: £9.7m)

· Profit before tax of £7.7m (2019: £11.3m)

· Earnings per share of 2.96p (2019: 4.78p)

 

 

Operational and strategic highlights  

Divisional performance

 

· Corporate

Growth in billings* of 1.5 per cent to £197.7m (2019: £194.8m)

Corporate revenue decreased 2.4 per cent to £50.3m (2019: £51.5m)

Increased demand seen from existing and new clients recruited prior to lockdown

Segmental profit decreased by £1.2m to £6.6m (2019: £7.8m) due to higher administration costs.

 

· Consumer

Billings* fell by 4.3 per cent to £222.2m (2019: £232.1m)

Revenue up 5.9 per cent to £62.4m (2019: £58.9m)

Increased customers coming to us directly and using digital

Improvements in gross margin due to changing mix  

Segmental profit of £5.3m (2019: £6.8m) primarily due to an increase in administration costs and exceptional redundancy costs.

 

Strategic business plan well advanced

· Strategic business plan now well advanced with logistics and operations already complete; infrastructure investment has significantly enhanced the scalability, resilience and efficiency of the business.

· New digital offerings have improved our appeal to customers - including a contactless-enabled digital gift card. 

· Further progress made in move to more profitable card and digital products - paper share of product mix fell to 41.9 per cent (2019: 48.4 per cent).

· Renamed business to Appreciate Group plc (from Park Group plc) to reflect our product range and position as an innovative payments, savings and rewards provider.

· Relocated our offices to Chapel Street, Liverpool as part of workplace and cultural transformation.

· Attracting new talent into the organisation as a consequence of our relocation, providing the skills needed for our future business.

 


COVID-19 impact and response

· Our investment in technology and work practices meant that over 80 per cent of the Group's employees were able to seamlessly transition to home working immediately after lockdown.

· COVID-19 has led to an acceleration in the appeal of digital products that will support our future plans.  

· Prioritised digital offerings to support customers through the pandemic by adding e-codes and e-cards to our proposition on highstreetvouchers.com.

· Physical dispatch area operational again from May after being closed at lockdown.

· Approximately 80 colleagues furloughed during April before a phased reopening of fulfilment operations from May 2020.

 


Current trading and outlook

· Total billings* have progressively recovered as lockdown eases; 48 per cent down as at the end of Q1 in the new financial year compared to Q1 in the prior year.

· Sale of Budworth Properties Limited, a Group subsidiary which owns the land and buildings located at Valley Road, Birkenhead, completed on 10 August for a transaction value of £3.2m providing operational flexibility.

· Bank financing completed; £15m revolving credit facility provides additional financial flexibility and sufficient cash headroom to enable the business to trade with confidence, as well as drive sales of higher margin products and investment in shift to digital.  

· Proposals made to cease production of hampers.

· New digital products launched and tested.

 


Ian O'Doherty, Chief Executive Officer, commented:

"We've made significant progress in implementing our strategy to adapt our business for the future. Our focus on digital products and delivery has intensified, and we've accelerated our development of smarter, more efficient ways of working. This will position us well for doing business after COVID-19.

 

"Our continued investment in transformation, with changes to logistics and operations completed, is already showing significant benefits. Whilst our performance has been interrupted by the lockdown, we have seen trading start to recover and expect the resumption of growth founded on the more robust and scalable business model.

"We are confident that delivery of the strategic business plan will be the bedrock of strong and sustained future growth."


 

Appreciate Group will host a webcast presentation for analysts at 9.00am this morning.

If you would like to attend, please contact MHP on 020 3128 8193 or [email protected] .


 

Appreciate Group plc

Liberum

(NOMAD and broker)

MHP Communications

Ian O'Doherty, CEO

Tim Clancy, CFO

Richard Crawley

Jamie Richards

Reg Hoare

Katie Hunt

Charles Hirst

Andy Hammerton, Head of Corporate Affairs

 

Tel: 0151 653 1700

 

Tel: 020 3100 2222

 

Tel: 020 3128 8193

Email:  [email protected]

 

The information contained within this announcement is deemed by Appreciate Group to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").

 

Notes to Editors:

Appreciate Group is one of the UK's leading gifting, pre-payment and engagement companies, and experts at creating joyful experiences and connecting people to the things in life they enjoy the most.

 

Everything Appreciate Group does is focused on creating more joy in the world, and it is proud to be trusted to help its customers create moments they can treasure and remember, whether they are giving, celebrating or rewarding.

 

Appreciate Group is a financial services business with a wide portfolio of brands which provide solutions for its consumer and business customers. Its consumer-facing brands meet a range of prepayment and gifting needs, while its business products help corporate customers reward and recognise their employees and clients.

 

Appreciate Group is home to many of the country's most-loved gifting, pre-payment and engagement solutions including Park Christmas Savings, Highstreetvouchers.com and Love2shop, and we are fast-becoming the home of digital innovation in gifting.

 

Whether it's saving towards the perfect family Christmas or celebrating with gift cards and vouchers, we create and supply products that millions of people trust when it comes to giving and receiving with family, friends or colleagues.

 

Park Christmas Savings: As the UK's largest family Christmas savings club, Park Christmas Savings has helped over 2.7 million families budget for Christmas on a short-term or year-round basis.

 

Love2shop: Love2shop offers gift cards and gift vouchers available to spend at stores and attractions across the UK. They are also used through our Love2shop Business Services providing corporate partners with incentives and rewards for their employees and clients.

 

Select Digital Gift Card: The UK's first fully digital multi-retailer gift card, available to spend online or in-store through your mobile wallet.

 

Appreciate Group plc's shares are traded on AIM, a market operated by the London Stock Exchange.

 

The Park Prepayments Protection Trust is designed to increase protection for customers' prepayments. The Trust has three directors, two of whom are independent of Appreciate. Details of the trust are set out here: https://www.getpark.co.uk/CORPORATE/declaration.pdf  

 

 

 

 

Chairman's statement

Introduction  

Our heritage stretches more than five decades, and during that time we've weathered many storms as a business. Consistently, we have emerged ready for growth, and we intend to do so again.

 

The Board, our management teams and all our colleagues have worked with dedication and focus to develop and implement our new strategy over the last two years; and, more recently, to manage and mitigate the unprecedented challenges posed by the consequences of the COVID-19 pandemic.

 

As well as adapting our business for the future during this period, notably by intensifying our focus on digital products and delivery, we have strengthened our focus on developing smarter, more efficient ways of working that will set us up well to capitalise on doing business after COVID-19.


Because of the foundations we have put in place over the last two years - in particular the new office and IT investment - we have been able to transition to home working and maintain continuity for much of what we do. This has ensured we are well placed to deliver on customer demands, maintain satisfaction, and accelerate the development of new products and services, some of which are defining our market.

 

During the past year, we've taken the opportunity to become a better, stronger business, innovating in digital, building resilience, testing new products and reaching new markets, so we are well positioned to continue to increase our market share and fulfil our ambition and those of our stakeholders.

 

Results for the year

Results are broadly in line with expectations, having been impacted by the COVID-19 pandemic and subsequent lockdown in the last weeks of our financial year.

 

Billings* decreased by 1.6 per cent in the year to 31 March 2020 to £419.9m (2019: £426.9m) despite good growth from our Corporate business.  Revenue increased slightly by 2.1 per cent to £112.7m (2019: £110.4m) driven by a rise in Consumer revenue.

 

Operating profit before exceptional items ** for the year was £10.1m (2019: £10.9m).  Interest income was £1.5m (2019: £1.6m) on average cash balances (including cash held in trust) of £177m (2019: £174.0m), after which profit before tax was £8.3m (2019: £11.3m). 

 

Profit before tax and exceptionals was £11.4m (2019: £12.5m) before exceptional charges of £3.7m relating to the impairments of goodwill, impairment of our former main operating site, and restructuring costs (2019: £1.2m of exceptional items).  Total cash balances, including monies held in trust and bank deposits, at 31 March 2020 were £132.3m (2019: £134.0m).

* See accounting policies for a reconciliation of billings to revenue

** see financial review for reconciliation of adjusted to statutory profit measure


COVID-19 update

Whilst the timing of a return to normal market conditions remains unclear, the impact of COVID-19 on the current financial year ending 31 March 2021 will be significant. However, we expect the improvement seen in trading over recent months to continue and for performance to recover thereafter . We also recognise that this could be tempered in the event of a second wave.

 

Demand in our Corporate and Consumer areas has been approximately 48 per cent below last year since lockdown began.  We have previously stated that our Christmas Savings order book business is approximately 10 per cent below the prior year, and cancellation rates remain similar to previous years, and this has remained the case. Our customers continue to benefit from their savings being protected by the Park Prepayment Protection Trust.

 

We remain focussed on driving efficiencies where possible and delaying any discretionary spend or capital projects.  We have cancelled annual pay reviews and made no awards for FY2019/20 under the company wide annual bonus plan.

 

Dividend

We reported in March that the Board had decided that it was prudent not to pay the interim dividend of 1.05 pence per ordinary share as previously announced and due to be paid on 6 April 2020. 

 

The Board recognises the importance of dividends to its shareholders and is committed to its progressive dividend policy which seeks to reflect the Group's strong underlying cash flow and profit generation, whilst retaining sufficient capital to fund investment in the business. 

 

The UK trading conditions continue to be uncertain and at this point, despite favourable trends, the outcome of our peak Q3 trading period remains uncertain.  In addition, the ongoing pandemic poses risk to successful operational delivery.  We know from experience that an outage of any kind - people absence, system interruption, etc. - at an inopportune time can have a disproportionate impact.  These factors combined lead the Board to consider it prudent not to recommend a dividend for this financial year.  It has been the Board's policy to distribute just over half of post-tax profit as dividend, with one third of that as an interim dividend and the remaining two thirds as a final dividend. The Board intends to return to that policy as soon as it is appropriate to do so.

 

In considering its recommendation on the dividend this year, the Board has taken into account the fact that Appreciate Group has received £243,000 through the Government's Coronavirus Job Retention Scheme between March and June and has put in place a financing facility of £15 million (a measure planned prior to the COVID-19 crisis) to cover cash flow fluctuations reflecting its evolving business model from the strategic changes implemented last year. 

 

Investing in our people to deliver growth

Board changes

In September, we strengthened the Board with the appointment of Sally Cabrini as a non-executive director and Chair of the Remuneration Committee.  Sally brings with her a record of relevant experience as a board member. She is Chair of the Remuneration Committee at FirstGroup plc and was a member of audit and risk committees and Chair of the remuneration committee of Lookers plc.  Her executive experience includes roles with Interserve Group Limited, and United Utilities plc.

 

We were also pleased to announce the appointment of John Gittins, an existing non-executive director, as Senior Independent Director.

 

Our colleagues

The Board would like to thank all our colleagues for their outstanding hard work, adaptability and resilience.  Through this challenging period, the Board and leadership team have remained focused on doing the very best for our people; by ensuring their safety and well-being and by providing them with the necessary tools, support, training and development to thrive in these times of change.

 

Central to this is a strong culture that supports everyone in working together with clarity and purpose as we deliver our growth plans.  We have significantly improved the working environment and technology used by colleagues and made a commitment to improving employee engagement along with our ability to communicate, driving openness and dialogue, as well as enhancing collaboration.

 

Outlook

The Board remains positive about the prospects of the business and the long-term benefits of the Group's strategic business plan, which is now well advanced with elements such as logistics and operations already complete.

 

The Board has reviewed five financial scenarios of the potential impact of COVID-19 on the business. We remain focused on managing liquidity due to swings in free cash from month to month, driven by the timings of monies being moved in and out of trusts, and the purchasing of third party, single retailer redemption products. To support this, a bank financing exercise has been completed, which will provide the additional financial flexibility to protect against downside risk in the short term; whilst enabling longer term growth, as well as investing in the continued switch to digital products. Further details are contained within our going concern disclosures.


The investment in transformation that we have been undertaking has already shown benefit, although this has inevitably been interrupted by the lockdown.  We continue to expect good future growth prospects founded on the more robust and scalable business model we are creating.


In summary, we are pleased with the considerable progress that we have made and are making, and we are confident that delivery of the strategic business plan will lay the foundations for strong and sustained growth in future years.

 

Laura Carstensen
Chairman
12 August 2020

 

 

 

 

Chief Executive's Review

 

Introduction

This was another year in which Appreciate Group has taken a number of important steps forward, as we continued to build upon our position as one of the UK's leading gifting, pre-payment and engagement companies.

 

Our consumer-facing brands meet a range of prepayment and gifting needs, while business products support engagement by helping corporate customers reward and recognise their employees and clients.    

 

We are pleased to report that we have made tangible progress on the strategic business plan announced in December 2018.  During last year we relocated our offices, implemented new technologies, trialled new digital products and changed the company name and brand.  All of this has contributed to the development of a robust and scalable business model that will enable us to take advantage of the growth opportunities in our markets.

 

We remain confident in our strategy and in the medium to long-term opportunity, particularly as the current pandemic is leading to an acceleration to digital in all areas of consumer and business activity.  We continue to believe that the steps we are taking will strengthen the Group's proposition for consumers, businesses and redemption partners alike.  Our ability to capitalise on opportunities in the fast-evolving markets that we serve has increased, but the timing of this has been set back by the COVID-19 pandemic.

 

Thankfully, work completed and investments made during the recent past, particularly in technology, the ability to work from home and business continuity, have meant that we have been better positioned to cope with the challenges of the pandemic than we would otherwise have been.  We are already seeing improvements in the efficiency of our operations, which will lead to enhanced profitability in future years.  Our continued progress implementing the strategic business plan and pivoting to digital products has positioned the Group well to emerge from the lockdown a stronger business.

 

COVID-19 impact and response

Trading for the 11-month period to the end of February 2020 was in line with our expectations.  The final month of the financial year brought the COVID-19 lockdown; the market challenges of this period are well documented, but the business responded well to the disruption and there are some encouraging signs for the future.

 

The safety of our colleagues, their families, our customers and our communities is our first priority.  In line with Government guidelines at year end, we initially closed all our facilities, including our fulfilment and reconciliation operation.  The investment in technology we have made over the last year meant that over 80 per cent of the Group's employees were able to work from home immediately and effectively.  We have supported those colleagues unable to fulfil their role from home through parental leave or furloughing under the Government's Coronavirus Job Retention Scheme.

 

Group trading websites continued to accept and fulfil orders, but our emphasis shifted to digital delivery only.  Without the ability to dispatch physical product, our products available for sale were initially limited.  We have addressed this by prioritising our digital offerings and adding e-codes and e-cards to our proposition on highstreetvouchers.com (HSV).  However, many corporate clients continue to request physical product and we have been able to accommodate this with a phased easing of restrictions on fulfilment from May 2020 (all the time adhering to Government guidelines and ensuring the safety of colleagues).

 

In our year end trading update, issued on 30 April 2020, we acknowledged the initial impact of lockdown by stating that "demand in our Corporate and Other Consumer areas is approximately 70 per cent below last year." I am pleased to report that we have seen trading gradually improve in the new financial year. Total billings have started to recover; they were down 47 per cent year on year in May, and 35 per cent down in June to give a year to date position of 48 per cent down for the first quarter. We also stated that "current cancellation rates (for our Christmas Savings business) are similar to previous years" and this has remained the case as at the end of July 2020.

 

The redemption rates of our products currently in circulation have also been affected, as the number of outlets open to use our products decreased, although we continue to see customers redeeming products in high street stores that are open and at online retailers. We made the decision to extend the date of products which were due to expire at the end of March 2020 for a period of several months whilst many shops were closed to help mitigate this and support our customers. 

 

Lower redemption rates in March 2020 have had an adverse financial impact on the results for the year ended 31 March 2020.  Conversely, this delay in spending has a positive impact on cash flow.  Overall redemptions in the new financial year starting 1 April 2020 are down year-on-year by approximately 39 per cent as at 31 July 2020.  Within that, not surprisingly, redemptions in physical shops are down and redemptions online are up (approximately -75 per cent and +44 per cent respectively).

 

Part of our overall strategy has been to promote our own products as much as possible, with the result that overall billings of our multi-redemption products are 91 per cent of the total from April 2020 to July 2020, up from 84 per cent at the same point last year.  The same is true within Corporate, where billings of our multi-redeemer products increased to 89 per cent from 83 per cent. 

 

On HSV we have promoted all available digital products, which has included many single-store e-codes.  This has resulted in the percentage of digital products jumping to 45 per cent since their introduction last year.  We have also seen billings of our multi-redemption products increasing from 76 per cent to 79 per cent for the first four months of the new financial year.

 

As well as adding to the range on HSV, we have taken steps to optimise the flow of traffic to our website.  During the month of April there were 279,684 visits to HSV, down 25 per cent on last year.  May was 8 per cent lower; whilst June and July both saw slightly more visits than the previous year following the measures taken and recovery from lockdown.

 

We have also taken steps to improve the conversion of sales opportunities created.  Since the end of March, the conversion rate on HSV has improved.  The average conversion rate over the last five days of March - in the immediate aftermath of lockdown - was 2.78 per cent; while the average over the months from May to July 2020 has been around 5 per cent.

 

These are encouraging signs regarding number of visitors and conversion to sales.  Work to optimise the flow of traffic and conversion rate continues.

 

Divisional review

We continue to operate in dynamic and growing markets, serving customers in both corporate and consumer channels.  There has been an encouraging rate of growth in the UK gift card market during the calendar year 2019, with growth in the second half at 12 per cent and the market now estimated to be worth approximately £7bn annually.#


#Source: UK Gift Card and Voucher Association

 

Corporate (44.6 per cent of Group revenue in the year ended 31 March 2020)

Appreciate Group's Corporate business provides around 42,000 business customers with market-leading incentive, recognition and rewards options for an estimated two million recipients through around 190 redemption partners with almost 24,000 outlets. 

 

Corporate billings of £197.7m were 1.5 per cent ahead of the prior year (2019: £194.8m). Corporate revenue was £50.3m (2019: £51.5m) representing a decrease of 2.4 per cent. Segmental profit decreased by £1.2m to £6.6m (2019: £7.8m) due to higher administration costs.  The pre-exceptionals performance from our Corporate business was driven through a combination of billings growth and a more profitable product mix.

 

In the year we strengthened the businesses we work with by adding organisations such as BP, Britvic and Howdens as prestigious new partners.

 

Consumer (55.4 per cent of Group revenue in the year ended 31 March 2020)

Consumers can access Appreciate Group's multi-retailer redemption product directly from our website highstreetvouchers.com or via our leading Christmas savings offering, which currently helps approximately 350,000 families budget for Christmas. 

 

Our Consumer business billings were £222.2m compared to £232.1m in the prior year. Consumer revenue was £62.4m (2019: £58.9m) which produced a segmental profit of £5.3m versus £6.8m in the prior year. This fall in profit was primarily due to an increase in administration costs and exceptional redundancy costs of £0.4m.

Appreciate Group has continued to attract increasing numbers of customers directly.  However, the challenges with the legacy agency model in the Christmas savings business persist, and we are taking actions to mitigate this.

 

Significant improvements have been made in the customer offering during the period.  We have taken our core product into the mobile era, creating a contactless-enabled digital gift card, which can be loaded into the wallet app on a smartphone.  This can be delivered by various means - email, SMS or WhatsApp - and is simple, transparent and easy to use.  This development allows instant celebration and reward of moments that matter to customers, with a wide range of redemption partners, both online and contactless in-store using a mobile device.

 

Progress with our strategic business plan

We have made good progress during the year, continuing the implementation of our strategic business plan, as set out in December 2018, in building a robust and scalable platform from which to grow.

 

Productivity

We have taken numerous steps to become more efficient and effective.  During the year, we s uccessfully completed a large-scale office relocation to Liverpool city centre, establishing a modern, collaborative working culture; we migrated to cloud-based computing and digital collaboration and workflow solutions (Office 365); we introduced new technologies to facilitate agile working; and we invested in our team and talent.

 

The project to implement a new Enterprise Resource Planning (ERP) system is progressing well, despite some COVID-19 related delays.  This will provide the scalability, resilience and efficiency required for more seamless and automated back office support functions across the business.

 

In addition to facilitating the move to Liverpool, we streamlined the remaining operations based at Valley Road in Birkenhead to enable the sale of the site, as well as harnessing efficiencies through new channels.  One example of this is a stronger focus on promoting chat for Customer Care, which has led to a 31 per cent increase in chat sessions and 8 per cent fewer voice calls year on year.


On 10 August we announced that we had completed the sale of our land and premises at Valley Road in Birkenhead to HP (Valley Road) Limited for £3.2m. The site had been substantially vacated since the relocation to Liverpool, but continues to house our fulfilment and reconciliation operations.  A limited amount of space for these activities will be leased back as part of the agreement.

 

Appeal

In terms of broadening our customer appeal, we have s uccessfully tested two new products - Select Digital Gift Card and Giftli - as part of work to target currently untapped demand from a broader audience. We are using these learnings to further develop our digital strategy.

 

Leading our industry, we took gifting into the mobile era with the contactless-enabled digital gift card, which can be loaded into the wallet app on mobile devices and allow instant celebration and reward of moments that matter to customers.  Important learnings from these trials are being incorporated into an enhanced proposition for Corporate clients.

 

As well as this innovation in product development, we have enhanced the experience and journey for Park Christmas Savings customers, streamlined our social media and marketing communications and added e-codes and e-cards to highstreetvouchers.com and offered digital gift card to corporate clients.


Clarity

To bring clarity to our offer for all customers, we have r edefined and rationalised our brand architecture, which included renaming Park Group plc to Appreciate Group plc. We believe this more accurately reflects the Group's product range and position as an innovative payments, savings and rewards provider to Corporate and Consumer markets.  This allows the Group to take full advantage of the growth opportunities available in an expanding market.  We also refreshed the Park Christmas Savings brand through all channels including the website and app.

 

Key to supporting this has been the development of clear brand guidelines and a company tone of voice, as well as significantly boosting our Group brand activation and awareness activities, with targeted social media postings and community partnerships.

Our core business functions are now focused around products and market segment, centralising some of the activity previously conducted separately within the business units, and we have a robust and disciplined approach to new product development.

The number of product variants we offer has been consolidated and simplified, in particular reducing the number of single retailer physical products on sale through all channels.

We are now proposing to cease production of hampers and merchandise.  This decision was initially taken for the Christmas 2020 season to protect the health of our workforce and provide our customers with certainty given the potential for disruption in the supply chain during the ongoing lockdown and potential of further restrictions.  This enabled us to carry out a longer term review of the future of the hamper business, and we have commenced consultation with colleagues about proposals to close this part of our business.  Whilst hampers were the roots from which we grew as a business more than 50 years ago, they now only equate for  less than 2 per cent of billings and are no longer considered part of our future strategy.  All hamper customers will be offered the chance to migrate to other Appreciate Group products so that we can help them continue to budget and pay for Christmas.  


Experience

We have taken significant steps to make us easier to work with for all of our customers, particularly in the digital space.

 

During the year we have created an end-to-end, fully digital experience for gift-card purchase, delivery and redemption, with contactless capability in a mobile phone wallet, working with Mastercard and CleverCards. We believe this has been, in many ways, a real game-changer for our industry, as it completely reimagines how gift cards should work in a mobile-enabled world.

We've also improved the digital and physical experience for our customers; enhanced the client on-boarding journey;

worked to optimise the conversion rates on our websites; launched new ERP solutions, developed resilience and security in our networks, standardised our complaints process and established a Customer Committee to help drive improvements in the customer experience.

 

Looking ahead

I am extremely proud to lead a team of colleagues who are dedicated to our purpose of creating joyful experiences and connecting people to the things in life they enjoy. This unwavering commitment has never been more evident than in recent months when they have risen to the challenge to support our customers and partners. Their commitment gives me confidence that, combined with our strategy, we are strongly positioned for the future.

 

Ian O'Doherty
Chief Executive
12 August 2020

 

 

 

 

Financial Review

 

Impact of Covid-19

At the start of lockdown in March 2020, just like many businesses across the UK, the Group followed Government guidance and temporarily closed its distribution and warehouse facilities to help stop the spread of coronavirus. With no means to fulfil physical orders at that time the Group's focus shifted to digital products.

 

In May 2020 the Valley Road facility reopened with social distancing procedures in place. Demand in our Corporate and Other Consumer areas reduced during the lockdown period with April demand 70 per cent lower than prior year. We have seen trading gradually improve in the new financial year; billings were down 47 per cent year on year in May, and 35 per cent down in June to give a year to date position of -48 per cent at the end of Q1.

 

Although the Christmas Savers order book is currently 9 per cent below the prior year, most customer plans are normally in place by March and we have seen normal cancellations trends since then, so this part of the business has to date, been unaffected.

 

Redemptions have also significantly fallen, with an 80 per cent decrease for vouchers and 61 per cent decrease for cards and e-codes compared to quarter one of the prior year. Despite this overall reduction in redemptions, which beneficially reduces cash outflow, we have a seen a significant shift to online redemption partners and grocery retail, reflecting the flexibility of our products.

 

The Group has taken several actions to conserve cash by reducing discretionary expenditure. These actions include the following:  

Furloughing employees -  The Group has utilised the Government's Job Retention Scheme with a number of employees being furloughed, whose pay has been topped up to 100 per cent by the Group. In quarter one of the financial year ending 31 March 2021, there were an average of 65 employees on furlough per month, for a total saving of £243,000.

Dividend cancellation - The Group decided to cancel the dividend payment for 2020, which has conserved £6m of cash.

Deferral of VAT payments - The Group has deferred £936,000 of VAT payments between March and June 2020.  These are now payable by 31 March 2021.

Employee remuneration revisions - The decision was made to cancel all annual pay reviews and bonuses.

 

The Board has reviewed five forecast scenarios, covering a range of likely outcomes: base case plus two downside and two upside scenarios.  The Group is currently trading slightly ahead of the base case and has carefully considered the base case, downside scenarios, current trading and trends since the year end and the assessment of reverse stress tests.  Having secured a £15m revolving credit facility we have adequate flexibility to provide sufficient cash headroom to enable the business to trade with confidence.  Further details are contained within our going concern disclosures.


The Board continues to actively manage the risks of the business which have been updated for the impact of Covid-19. We are planning for a peak season which will be delivered whilst adhering to social distancing guidelines. The decision to close our hamper and third party packing business will give additional operational flexibility to achieve this. Following our technology investments over the last year, which further strengthen our business continuity plan, the majority of employees continue to effectively work from home.

 

Billings and Revenue

The Group's products are split into the following categories:

· Multi-retailer redemption products - Love2shop vouchers, flexecash® cards, Mastercards and  e-codes

· Single retailer redemption products - third party retailer vouchers, cards and e-codes

· Other - hampers, merchandise and consultancy fees

 

Following the adoption of IFRS15 in the prior financial year, multi-retailer redemption product billings are the gross value of goods and services shipped and invoiced to customers during the year.  Revenue for multi-retailer redemption products is the net service fee received on redemption, cardholder fees and breakage which are recognised when multi-retailer redemption products are redeemed.

 

For single retailer redemption products and other, both billings and revenue are the gross value of goods and services shipped and invoiced to customers during the year.

 

Billings*

2020

£m

2019

£m

Change

%

Multi-retailer redemption products

354.3

362.4

-2.2

Single retailer redemption products

52.9

50.8

+4.2

Other

12.7

13.7

-7.3

Total

419.9

426.9

-1.6

 

Multi-retailer redemption product billings includes billings in respect of e-codes which are capable of being converted into either multi-retailer redemption products or single retailer redemption products.  Revenue figures below reflect the product into which the e-code is converted by the cardholder.

 

 

Revenue

2020

£m

2019

£m

Change

%

Multi-retailer redemption products

37.9

41.1

-7.9

Single retailer redemption products

62.1

55.6

+11.7

Other

12.7

13.7

-7.3

Total

112.7

110.4

+2.1

 

The mix of in-house, multi-retailer products remains high, in line with the strategy of promoting our own products. The mix of multi-retailer redemption products was 84.4 per cent of total billings, marginally lower than last year's 84.9 per cent.

 

Revenue increased by 2.1 per cent to £112.7m due to a greater mix of single retailer redemption products which are reported gross in revenue as opposed to multi-retailer redemption products which are reported net in revenue. The value of multi-retailer revenue has decreased by 7.9 per cent offset by strong demand for single retailer redemption products which were 11.7 per cent higher, due to higher online demand, particularly e-codes which can be converted to single retailer products.

 

Profit from operations

The Group's operations are divided into two principal operating segments:

 

· Consumer - which represents sales to consumers, utilising the Group's Christmas savings offering and our website, highstreetvouchers.com; and

· Corporate - comprising sales to businesses, offering primarily sales of the Love2shop voucher, flexecash® cards, Mastercards and e-codes in addition to other retailer vouchers.

 

All other segments comprise central costs and property costs which are shown separately in order to give a more meaningful view of divisional performance.

 

 

2020

£'000

2019

£'000

Change

£'000

Consumer 

5,327

6,809

(1,482)

Corporate

6,581

7,789

(1,208)

All other segments

(5,512)

(4,866)

(646)

Operating profit

6,396

9,732

(3,336)

 

Consumer

In the Consumer business, customer billings have decreased by 4.3 per cent from £232.1m to £222.2m.  Billings for Christmas savers were down by 4 per cent and there was a similar performance in other Consumer billings, derived through the highstreetvouchers.com website, which were also 4 per cent lower than last year, offset by other products which were 1.5 per cent lower. Revenue has increased by 5.9 per cent to £62.4m (2019: £58.9m), primarily due to a higher mix of single retailer redemption products.

 

Operating profit was £5.3m, a decrease of £1.5m (22.1 per cent) from the £6.8m achieved in the prior year.  This was primarily due to an increase in administration costs, as explained below, and exceptional redundancy costs of £0.4m.

 

Corporate

In the Corporate business customer billings have increased by 1.5 per cent, from £194.8m to £197.7m.  This growth was due to £7.5m of new business, continuing good retention rates of existing clients  (95 per cent) and strong online billings which were 13 per cent higher than prior year.  Corporate revenue fell by 2.4 per cent over the prior year, from £51.5m to £50.3m due to a higher mix of card and digital products (66.6 per cent vs 60.0 per cent last year) which have more deferred revenue.

 

Operating profit decreased by 15.4 per cent to £6.6m (2019: £7.8m) due to higher administration costs, as explained below.

 

All other segments

Central and property costs increased by 12.2 per cent from £4.9m to £5.5m. This increase is due to the higher impairment cost of the Valley Road site at £1.8m (2019: £1.2m).

 

Administration Costs

Administration costs increased from £17.4m to £20.0m due the costs of strategy implementation and additional management and professional fees. Strategy implementation costs of £1.5m relate to the office relocation and rebranding and will be non-recurring.

 

Reconciliation of adjusted to statutory profit

The Board believes that adjusted profit excluding exceptional items such as impairments and redundancy costs is the best measure of the underlying performance of the Group. This gives stakeholders a better understanding of the Group's trading position in the year by adjusting for items which are significant in value, infrequent and in the case of impairments, do not have a cashflow impact in the year.

 

 

2020

Operating profit

Profit before tax

Profit after tax

 

£'000

£'000

£'000

Profit before exceptional items

10,072

11,376

9,187

Impairment of property, plant and equipment and available for sale assets

(1,813)

(1,813)

(1,813)

Impairment of goodwill

(1,316)

(1,316)

(1,316)

Impairment of obsolete stock

(124)

(124)

(124)

Redundancy costs

(423)

(423)

(423)

Statutory profit

6,396

7,700

5,511

 

 

 

 

2019

 

 

 

Profit before exceptional items

10,942

12,514

10,092

Impairment of property, plant and equipment

(1,210)

(1,210)

(1,210)

Statutory profit

9,732

11,304

8,882

 

 

 

 

 

Exceptional Costs

In September 2019, the Group relocated its head office from Birkenhead to Liverpool. Following this move, we have now successfully sold the freehold land and building at Valley Road, Birkenhead whilst securing a lease-back for the space still occupied by a small number of operational staff. Our balance sheet reflects the expected disposal of this asset, which is classified as an 'asset held for sale', following the previously announced impairment charge to the P&L account of £1.8m.

 

We have reviewed our brand engagement agency, FMI, acquired in 2016, which is reliant on one large client and also involved in business relating to event management which is heavily impacted by restrictions following lockdown. We have concluded that the goodwill is impaired relating to this acquisition, totalling £0.9m.

 

Subsequent to our year end, we have taken the decision to cease production of hampers. We have impaired the value of stock for hampers held at 31 March 2020 by £0.1m which reflects the likely re-sale value of these stock items. Additionally, we have impaired the value of Family Hampers customer lists by £0.4m.

 

During the year, we restructured our marketing department with the aim of creating different roles focused on digital marketing. The redundancy costs relating to employees made redundant following this review amounted to £0.4m.

 

Finance income

Finance income decreased by 6.3 per cent to £1.5m from £1.6m. Average total cash held by the Group, including cash held in trust during the year increased by 1.7 per cent to £177m (2019 : £174m), however the yield achieved on this higher cash balance decreased due to the decrease in base rates.

 

Taxation

The effective tax rate for the year was 28.4 per cent (2019: 21.4 per cent) of profit before tax.  The increase compared to the prior year was primarily due to the fact that the increased impairment charge in respect of the Valley Road site and part of the impairment of goodwill did not attract tax relief.  In addition to this, the cancellation of the corporation tax rate reduction to 17 per cent, which was due to be effective from 1 April 2020, has resulted in an increase in deferred tax charges in the current year.

 

Earnings per share

Basic earnings per share (EPS) fell by 38.1 per cent from 4.78p in 2019 to 2.96p. Excluding the exceptional charge basic EPS is 5.04p (2019: 5.43p), down 7.2 per cent.

 

Dividends

The Board has reviewed five forecast scenarios, covering a range of outcomes, and have carefully considered the base case scenario, current trading and trends since the year end and the assessment of reverse stress tests. The UK trading conditions continue to be uncertain and at this point, before the outcome of our peak Q3 trading period, the Board consider it prudent not to recommend a dividend for this financial year (prior year 3.20p per share).

 

It has been the Board's policy to distribute just over half of post-tax profit as dividend, with one third of that as an interim dividend and the remaining two thirds as a final dividend.  The Board intends to return to that policy as soon as it is appropriate to do so. 

 

Cash flows and treasury

Cash flows from operating activities were £5.6m, £1.2m (17.6 per cent) lower than the prior year, due to an increase in monies held in trust and higher tax payments, offset by a working capital cash inflow. Monies in trust grew from £99.3m in 2019 to £102.7m. This growth was primarily in the Park Card Services Limited e-money Trust (PCSET) to support the e-money float in accordance with regulatory requirements. This increased by £7.6m to £44.2m due to higher levels of card and digital business.

 

In addition, £55.1m (2019: £60.9m) was held by the Park Prepayments Trustee Company Limited. The trust holds payments received in respect of orders for delivery the following Christmas. The conditions for the release of this money to the Group are detailed in the trust deed, which is available at www.getpark.co.uk.

 

Also, at 31 March 2020, the Group held £3.4m of other ring fenced funds (2019: £1.8m).

 

At the end of March 2020 £29.6m (2019: £36.9m) of cash was held by the Group. This was £7.2m (19.6 per cent) lower than the prior year due to the switch to a higher mix of regulated products which is cash consumptive in the short term plus higher capital expenditure relating to strategy implementation.

 

The total amount of cash and deposits net of any overdraft position held by the Group, combined with the monies held in trust, has decreased in the year by 1.3 per cent to £132.3m from £134.0m. These total balances peaked at just under £234m in the year, representing a marginal decrease of £1.2m from the prior year.

 

We have completed a bank financing exercise of an unsecured 5 year revolving credit facility (RCF) with Santander UK of £15m plus an additional uncommitted accordion of £10m. This facility will provide the additional financial flexibility to protect against downside risk in the short term; whilst enabling longer term growth, as well as investing in the continued switch to digital products.  The RCF has 3 covenant requirements, as detailed within the going concern disclosures.

 

Intangible Assets

As part of the Board's strategy to develop a scalable and resilient platform to enable future growth, we have continued to invest in our technology platform in the year with £3.1m of additions (prior year £0.8m). This included investment in a new ERP platform, Microsoft Dynamics 365.

 

IFRS16

With effect from 1 April 2019 we adopted IFRS16 relating to leases. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognise most leases on the statement of financial position. Under IFRS16 the Group recognises a right-of-use-asset (ROUA) and a lease liability (LL) at the lease commencement date. At the balance sheet date this balance was £3.8m and further details are available in note 13.

 

Trade and other payables

Included within trade and other payables is deferred income in respect of multi-retailer redemption products (vouchers, cards and e-codes).  Revenue is deferred for service fees and breakage, net of discount.  The amount of revenue deferred at March 2020 has increased to £7.4m from £7.0m in the prior year due to an increase in card mix and slower redemption of paper vouchers.  The increase in card mix, where breakage levels are higher, has resulted in greater deferred revenue. 

 

Provisions

At 31 March 2020, provisions have decreased to £53.8m from £58.3m. This was mainly due to an increase in the amounts provided in respect of flexecash® cards of £1.1m and a decrease in the amounts provided for unspent vouchers of £6.1m. The value of unspent vouchers included in the provision, arises primarily from sales in the Corporate business. 

 

Pensions

The Group continues to operate two defined benefit pension schemes, where pensions at retirement are based on service and final salary. These schemes are now closed to future accrual of benefit arising from service with the Group. These schemes have a combined net pension surplus of £4.2m based on the valuation under IAS19 performed at 31 March 2020 (2019: surplus of £1.9m).

 

The Group has recognised net interest income of £44,000 (2019: £73,000) in the statement of profit or loss in respect of the pension schemes. In addition, the Group has recognised a re-measurement gain in the statement of comprehensive income (SOCI) of £1.9m (2019: loss of £0.8m) net of tax.

 

In the year ended 31 March 2020, there were no contributions by the Group to the schemes (2019:  £0.5m). The latest triannual scheme funding reports, performed as at 31 March 2019, indicated that one scheme had a technical provisions deficit (reflecting the liabilities to pay pension benefits in relation to past service as they fall due) of £0.1m and one had a surplus on the same basis of £1.6m. No further contributions to either scheme are currently required.  The next triannual valuation will be undertaken as at 31 March 2022 when the positions will be reassessed.

 

Tim Clancy

Chief Financial Officer

12 August 2020

 

* See accounting policies for a reconciliation of billings to revenue

 

 

 

 

Going Concern

 

The financial statements are prepared on a going concern basis.

 

At the start of lockdown in March 2020, just like many businesses across the UK, the Group followed Government guidance and temporarily closed its distribution and warehouse facilities to help stop the spread of coronavirus. With no means to fulfil physical orders at that time the Group's focus shifted to digital products. In May 2020 the Valley Road facility reopened with social distancing procedures in place.

 

There has been a negative impact on trading for quarter one of the financial year ending 31 March 2021, with reductions in billings compared to the same period in the prior year of 45 per cent for corporate and 65 per cent for HSV, our website where we service both consumer and corporate customers. Redemptions have also significantly fallen, with an 80 per cent decrease for vouchers and 61 per cent decrease for cards and e-codes compared to quarter one of the prior year.

 

Despite this, as the year has progressed the month-on-month trend in billings has been encouraging, with significant improvement being shown in each successive month's results. Corporate and HSV billings for April 2020 were 35 per cent and 19 per cent respectively of April 2019 billings, whereas for June 2020 were 68 per cent and 54 per cent of the levels seen in June 2019.

 

The Group has taken action to conserve cash during this uncertain time and support its position as a going concern. These actions include the following:

Furloughing employees - The Group has utilised the Government's Job Retention Scheme with a number of employees being furloughed, whose pay has been topped up to 100 per cent by the Group. In quarter one of the financial year ending 31 March 2021, there were an average of 65 employees on furlough per month, for a total saving of £243,000 in the quarter.

Dividend cancellation - The Group decided to cancel the dividend payment for 2020, which has conserved £6m of cash.

Deferral of VAT payments - The Group has deferred £936,000 of VAT payments between March and June 2020.  These are now payable by 31 March 2021.

Employee remuneration revisions - The decision was made to cancel all annual pay reviews, make no awards for FY2019/20 under the company wide annual bonus plan, and to postpone the leadership team's share incentive awards for the year ended 31 March 2020.

In addition to the above actions that have already been taken, management have reviewed the cost base of the business in order to identify any further potential savings.

 

Forecasting

Five scenarios have been modelled in order to assess the potential impact of the Covid-19 pandemic on the results of the Group going forward. The key variables that are altered between scenarios are: corporate and HSV demand, Christmas Savers order book cancellations and reductions, and paper and card redemptions. The scenarios model the upcoming two year period, with specific focus on the twelve months from the signing of the annual report and accounts. The base case was approved by the Board.  Management concluded that this base case reflected their best estimate of the likely impact of Covid-19, with initial trading slightly ahead, and this base case has also been used in the financing discussions with the banks.

 

Base case scenario

The base case scenario, assumes decreases in corporate and HSV billings against the initial forecast of 60 per cent in quarter one of the year ending 31 March 2021, with a gradual recovery through the financial year to 25 per cent down in quarter four. In quarter one and two of the year ending 31 March 2022 (which goes just beyond the twelve month going concern window from signing of the accounts), growth of 40 per cent against the 2021 forecast is assumed. The reduction in Christmas Savers in year one is 11 per cent.

 

The actual results for quarter one are slightly ahead of the base case, with overall corporate and HSV billings decreasing by 48 per cent compared to the 60 per cent assumed. In addition, July trading is ahead of forecast. This gives the Group confidence that the base case scenario is currently the best estimate and minimises the likelihood of any downside risks modelled within the other scenarios.

From a going concern perspective, the monthly forecasting of the Group's free cash balance in this scenario is the key area for consideration, as liquidity is the principal going concern risk.  The base case, before usage of the RCF, shows a negative free cash balance in July 2021, recovering by September 2021.

 

Downside scenario

In addition to the base case, management also considered the downside scenario that assumed decreases in corporate and HSV billings against the initial forecast of 75 per cent in quarter one of the year ending 31 March 2021, with a gradual recovery through the financial year to 25 per cent down in quarter four. In quarter one and two of the year ending 31 March 2022, growth of 40 per cent against the 2021 forecast is assumed. The reduction in Christmas Savers in year one is 14 per cent. This forecast a negative free cash balance, before usage of the RCF, in June 2021.

 

Further actions possible

Management has identified further actions which could be freely implemented in order to conserve cash.  These actions do not include any staff redundancies other those being consulted on in respect of the closure of the fulfilment business.

 

These savings include:

· reduction in discretionary consultancy and IT costs;

· delaying the implementation of the new ERP system; and

· cancelling the bonus for the year ending 31 March 2021.

 

These were overlaid net of additional costs, including those associated with the closure of the fulfilment business.

 

The overall impact of these actions is to bolster the cash position of the Group, with the base case, before usage of the RCF, showing a small shortfall in August 2021.

 

New financing

The Group has access to a recently agreed committed RCF of £15m, with an additional uncommitted accordion of £10m.

 

With the RCF in place, and having cancelled the final dividend payment, the directors consider that sufficient headroom exists to cover any negative sensitivities of COVID-19 in both the base case and downside scenario.

The following covenants are in place with regards to the RCF:

· Leverage/net debt cover - debt must not be greater than three times the last twelve months (LTM) rolling earnings before interest, taxation, depreciation and amortisation (EBITDA);

· Interest cover - LTM rolling EBITDA must not be less than four times the LTM rolling interest charge. This is expected to be approximately £50,000 per month, resulting in a LTM rolling interest charge of £0.6m, meaning LTM rolling EBITDA must not fall below £2.4m; and

· Christmas Savers cash - requires that Christmas Savers cash cannot be lower than monies in advance.

A LTM basis is used due to the seasonality of the Group's business. The leverage/net debt cover and interest cover covenants are assessed on a biannual basis starting in March 2021. The Christmas savers cash covenant is measured quarterly starting March 2021.

 

With the RCF in place, in line with the base case forecast, it is not envisaged that the Group will draw down on the facility until July 2021. The Group is forecast to be in full compliance with the three covenants throughout the twelve month period from the signing of the annual report and accounts, with sufficient headroom in place in both the base case and downside scenarios.

 

Reverse Stress Tests

Several reverse stress tests have been completed. These allow management to assess their current financial resources and the likelihood that such a 'business-breaking' scenario would occur.

 

Reverse stress tests were run in respect of accelerated voucher redemption, reduced voucher billings and reduced Corporate and HSV billings (across vouchers, cards and codes).  Each stress test brought forward the timing at which the RCF was required within the business. In each test, with the RCF in place and in some cases with further mitigating actions, each position could be managed, albeit the covenants currently agreed would be breached. However, management were satisfied that each reverse stress test was highly unlikely due to the extreme nature of the sensitivity required. 

 

Conclusion

The directors have carefully considered the base case, downside scenario, current trading and trends since the year end and the assessment of the reverse stress tests. In light of the newly agreed £15m RCF, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Therefore, the Directors continue to adopt the going concern basis of accounting in preparing the consolidated financial statements.

 

 

 

Risk Factors

Financial risks

Risk area

 

Potential impact

 

Mitigation

Group funding

 

The Group, like many other companies, depends on its ability to continue to service its debts as they fall due and to have access to finance where this is necessary.

 

The Group manages its capital to safeguard its ability to operate as a going concern. The Group has access to funds for working capital from the PPPT for a defined period in the year, although the Group has not used this facility in either of the last two years.

 

The Group have secured a 5 year RCF which will provide additional financial flexibility.  In addition the Group has a high level of visibility of future revenue streams from some of its Consumer business. The funding requirements of the business are continually reforecast to ensure that sufficient liquidity exists to support its operations and future plans.

Treasury risks

 

The Group has significant funds on deposit and as such is exposed to interest rate risk, counterparty risk and exchange rate movements.

 

The Group treasury policy ensures that funds are only placed with and spread between high quality counterparties and where appropriate any exchange rate exposure is managed, utilising forward contracts, to minimise any potential impact. Some funds are placed on fixed term deposits to mitigate interest rate fluctuations.

Banking system

 

Disruption to the banking system would adversely impact on the Group's ability to collect payments from customers and could adversely affect the Group's cash position.

 

The Group seeks wherever possible to offer the widest possible range of payment options to customers to reduce the potential impact of failure of a single payment route.

Pension funding

 

The Group may be required to increase its contributions to cover any funding shortfalls.

 

The Group's pension schemes are closed to future benefit accrual related to service. Funding rates are in accordance with the agreements reached with the trustees after consultation with the scheme actuary.

Financial services and other market regulation

 

The business model may be compromised by changes in existing regulation or by the introduction of new regulation. Possible new regulation could include a requirement to ring fence funds for vouchers sold to consumers. This would adversely affect the Group's cash position.

 

The Group has a regulatory team that monitors and enforces compliance with existing regulations and keeps the Group up to date with impending regulation. The Group shares the objectives of Government in treating customers fairly and in the protection of customer prepayments. The Group operates a number of trusts to safeguard funds held on behalf of customers.

Credit risks

 

Failure of one or more customers and the risk of default by credit customers due to reduced economic activity.

 

Customers are given an appropriate level of credit based on their trading history and financial status, and a prudent approach is adopted towards credit control.

Credit insurance is used in the majority of cases where customers do not pay in advance.

Operational risks

Risk area

 

Potential impact

 

Mitigation

Business continuity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cyber security

 

 

 

 

 

 

 

 

 

 

Data management

 

 

 

 

 

 

 

 

 

Technology risk

 

 

 

 

 

 

 

 

 

Failure to provide adequate service levels to customers, retail partners or other suppliers, resulting in a failure to maintain services that generate revenue.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There is a risk that an attack on our infrastructure by an individual or Group could be successful and impact the availability of critical systems.

 

 

 

 

 

Incorrect data retention, data management or data loss with customer, financial, regulatory, reputational impact

 

 

 

 

 

 

Hardware and software obsolescence causing system failure with customer, financial, regulatory, reputational impact

 

 

 

 

Implementation of new hardware, software, managed services causing system failure with customer, financial, regulatory, reputational impact

 

 

 

The Group has a hybrid technology resiliency strategy incorporating on premise and Cloud high availability services. We have three separate data/comms centres and a remote recovery site for core data and infrastructure to ensure that service is maintained in the event of a site loss event. We have implemented Microsoft Office 365 which supports full remote working capability for all office based staff.

Our focus is on the elimination of any single point of failure in our IT systems.

 The Group has decided to upgrade its IT Systems by implementing a new ERP system, Microsoft Dynamics, which will provide scalability, resilience and efficiency.

 

The Group plans and tests its business continuity procedures in preparation for catastrophic events and also to deal with the existence of counterfeit vouchers or cards.

 

Our infrastructure has a layered approach to cybersecurity with proactive external and internal monitoring and alerting designed to prevent unauthorised access and active defence to reduce the likelihood and impact of a successful attack. We are ISO 27001 certified.

 

 

 

We have implemented a new Data Warehouse with automated data cleansing and active data management per GDPR rules; we have Active Data loss prevention protocols in messaging platforms and have deployed Microsoft Office 365 with higher encryption standards; we are PCI and ISO 27001 certified

 

 

 

The Group is actively addressing hardware and software obsolescence and is implementing a new ERP system, Microsoft Dynamics as well as hybrid Cloud solutions which will improve scalability, resilience and efficiency

 

Developed and purchased software and services are extensively tested prior to implementation. There is a robust vendor management process for critical service suppliers.

Loss of key management

 

The Group depends on its directors and key personnel. The loss of the services of any directors or other key employees could damage the Group's business, financial condition and results.

 

Existing key appointments are rewarded with competitive remuneration packages including long term incentives linked to the Group's performance and shareholder return.

Relationships with high street and online retailers

 

The Group is dependent upon the success of its Love2shop voucher and flexecash® card. These products only operate provided the participating retailers continue to accept them as payment for goods or services provided. The failure of one or more participating retailers could make these products less attractive to customers.

 

The Group has a dedicated team of managers whose role it is to ensure that the Group's products have a full range of retailers. They also work closely with all retailers to promote their businesses to our customers who utilise our vouchers and cards to drive forward incremental sales to their retail outlets. Contracts which provide minimum notice periods for withdrawal are in place with all retailers and are designed to mitigate any potential impact on our business.

We are a Mastercard issuer and use the services of a transaction processor for some of our products to be accepted at retailers.

Failure of the distribution network

 

The failure of the distribution network during the Christmas period, for example a Post Office strike, road network disruption or fuel shortages could adversely impact the results and reputation of Appreciate's brands.

 

Wherever possible the Group seeks to utilise a wide range of geographically spread carriers to mitigate the failure of a single operator.

 

The strategy towards digital will also help mitigate this risk.

Brand perception and reputation

 

Adverse market perception in relation to the Group's products or services, for example, following the collapse of a competitor. This could result in a downturn in demand for its products and services.

 

Operation of a process of continual review of all marketing media, material and websites to promote transparency to customers.

Extensive testing and rigorous internal controls exist for all Group systems to maintain continuity of online customer service.

Our brand strategy has been thoroughly reviewed.

Promotional activity

 

The success of the Group's annual promotional campaign is essential to ensure the continued recruitment of customers. Failure to recruit would result in loss of revenue to the Group. Promotional activity must also be cost effective.

 

Detailed management processes that are designed to optimise the cost of recruiting customers are in place.

Competition

 

 

 

 

 

 

 

 

 

 

Loss of margins or market share arising from increased activity from competitors.

 

The Group has a broad base of customers and no single customer represents more than 4 per cent of total customer billings.

Significant resources are dedicated to developing and maintaining strong relationships with customers and to developing new and innovative products which meet their precise needs.

Coronavirus (COVID-19)

 

Coronavirus poses a threat to both the health 

of employees and the businesses of Appreciate Group.

 

 

Plans for business continuity, working practices, staff deployment and welfare across sites, working from home and hygiene precautions have been implemented.  They are reviewed on an ongoing basis.

 

The financial impact upon the business is monitored closely. We have modelled various financial scenarios to cover, for example, liquidity risk. They contain mitigating actions such as obtaining bank finance or altering the mix of products sold. We have added to our range of digital products as part of our strategy. For further details on how we model the businesses cash requirements, please see the Financial Review.

 

The closure during lockdown of high street stores may prevent the receipt and redemption of our paper vouchers. We continued to receive and redeem vouchers for essential stores on a limited service basis during lockdown, with the safety of our staff of paramount concern, and our operations will return to normal, again with the safety of our staff of paramount concern, as high street shops re-open. 

 

The potential impact of coronavirus on our production, warehousing and distribution facilities has been assessed.

 

We are reviewing our "Working from Home" policy and procedures and will only require all staff to return to work when it is safe to do so.

 

If there is a "second wave" of the virus we believe all relevant staff can work from home. If the high street is closed with only essential shops opening then we can offer a limited service in order for customers to use our products to purchase essential items. We will also continue to enhance our digital product offering accordingly.

 

 

 

 

Appreciate Group plc

 

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

FOR THE YEAR TO 31 MARCH 2019

 

 

 

2020 

 

2019 

 

Notes

£'000 

 

£'000 

 

 

 

 

 

Billings

6

419,857 

 

426,901 

 

 

 

 

 

Revenue

6

 

 

 

Goods - Single retailer redemption products

 

62,142 

 

55,624 

Other goods

 

6,240 

 

7,511 

Services - Multi-retailer redemption products

 

37,870 

 

41,111 

Other services

 

6,371 

 

6,119 

Other

 

101 

 

29 

 

 

112,724 

 

110,394 

 

 

 

 

 

Cost of sales excluding exceptional items

 

(79,778)

 

(79,117)

Impairment of obsolete stock

11

(124)

 

-

Gross profit

 

32,822 

 

31,277 

Distribution costs

 

(2,838)

 

(2,934)

Administrative expenses

 

(20,036)

 

(17,401)

 

 

 

 

 

Impairment of property, plant and equipment

10

(163)

 

(1,210)

Impairment of assets held for sale

12

(1,650)

 

-

Impairment of goodwill

9

(1,316)

 

-

Redundancy costs

14

(423)

 

-

Operating profit

 

6,396 

 

9,732 

 

 

 

 

 

Finance income

 

1,481 

 

1,572 

Finance costs

 

(177) 

 

Profit before taxation

 

7,700 

 

11,304 

Taxation

 

(2,189)

 

(2,422)

Profit for the year attributable to equity holders of the parent

 

5,511 

 

8,882 

 

 

Earnings per share

8

 

 

:  basic

 

2.96p

4.78p

:  diluted

 

2.96p

4.77p

 

 

 

 

 

 

Appreciate Group plc

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR TO 31 MARCH 2020

 

 

2020 

 

2019 

 

£'000 

 

£'000 

 

 

 

5,511 

 

8,882 

Other comprehensive income/(expense)

 

 

 

Items that will not be reclassified to profit or loss:

Remeasurement of defined benefit pension schemes

2,235 

 

(1,009)

Deferred tax on defined benefit pension schemes

(383)

 

172 

 

1,852 

 

(837)

Items that may be reclassified subsequently to profit or loss:

 

 

 

Foreign exchange translation differences

18 

 

(3)

 

 

 

 

1,870 

 

(840)

 

 

 

7,381 

 

8,042 

 

 

 

Appreciate Group plc

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2020

 

 

 

As at 

 

As at 

 

 

31.03.20 

 

31.03.19 

 

Notes

£'000 

 

£'000 

Assets

 

 

 

 

Non-current assets

 

 

 

 

Goodwill

9

800 

 

2,168 

Other intangible assets

 

4,757 

 

2,295 

Property, plant and equipment

10

2,662 

 

6,216 

Right of use assets

13

3,799 

 

Retirement benefit asset

 

4,206 

 

1,927 

 

 

16,224 

 

12,606 

Current assets

 

 

 

 

Inventories

11

2,840 

 

4,574 

Trade and other receivables

 

9,457 

 

12,582 

Tax receivable

 

266 

 

Other financial assets

 

 

200 

Monies held in trust

 

102,693 

 

99,251 

Cash

 

29,632 

 

36,868 

 

 

144,888 

 

153,475 

Assets held for sale

12

3,153 

 

 

 

148,041 

 

153,475 

 

 

 

 

 

Total assets

 

164,265 

 

166,081 

 

Liabilities

 

 

 

 

Current liabilities

 

 

 

 

Bank overdraft

 

-

 

(2,305)

Trade payables

 

(57,150)

 

(61,191)

Payables in respect of cards and vouchers

 

(17,060)

 

(14,193)

Deferred income

 

(7,359)

 

(6,983)

Other payables

 

(5,294)

 

(5,280)

Tax payable

 

-

 

(580)

Provisions

 

(53,802)

 

(58,286)

 

 

(140,665)

 

(148,818)

Non-current liabilities

 

 

 

 

Deferred tax liability

 

(1,121)

 

(553)

Lease liabilities

13

(4,132)

 

-

 

 

(5,253)

 

(553)

 

 

 

 

 

Total liabilities

 

(145,918)

 

(149,371)

 

 

 

 

 

 

 

 

 

 

Net assets

 

18,347 

 

16,710 

 

Equity attributable to equity holders of the parent

 

 

 

 

 

 

 

 

 

 

Share capital

 

  3,727 

 

  3,727 

Share premium

 

6,470 

 

6,470 

Retained earnings

 

8,461 

 

6,824 

Other reserves

 

(311)

 

(311)

 

 

 

 

 

Total equity

 

18,347 

 

16,710 

 

 

 

Appreciate Group plc

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 

 

Share

capital

Share

Premium

Other 

reserves 

Retained 

earnings 

Total 

equity 

 

£'000

£'000

£'000 

£'000 

£'000 

 

 

 

 

 

 

Balance at 1 April 2019

3,727

6,470

(311)

6,824 

16,710 

 

 

 

 

 

 

Total comprehensive income for the year

 

 

 

 

 

Profit

-

-

5,511 

5,511 

 

 

 

 

 

 

Other comprehensive expense

 

 

 

 

 

Remeasurement of defined benefit pension schemes

-

-

2,235 

2,235 

Tax on defined benefit pension schemes

-

-

(383)

(383)

Foreign exchange translation adjustments

-

-

18 

18 

Total other comprehensive expense

-

-

1,870 

1,870 

Total comprehensive income for the year

-

-

7,381 

7,381 

 

 

 

 

 

 

 

 

 

 

 

Equity settled share-based payment transactions

-

-

233 

233 

Tax on equity settled share-based payment transactions

-

-

(14)

(14)

Dividends

-

-

(5,963)

(5,963)

-

-

(5,744)

(5,744)

 

 

 

 

 

 

3,727

6,470

(311)

8,461 

18,347 

 

 

 

 

 

 

Balance at 1 April 2018

3,711

6,137

(311)

4,488 

14,025 

 

 

 

 

 

 

Total comprehensive income for the year

 

 

 

 

 

Profit as restated

-

-

8,882 

8,882 

 

 

 

 

 

 

Other comprehensive expense

 

 

 

 

 

Remeasurement of defined benefit pension schemes

-

-

(1,009)

(1,009)

Tax on defined benefit pension schemes

-

-

172 

172 

Foreign exchange translation adjustments

-

-

(3)

(3)

Total other comprehensive income

-

-

(840)

(840)

Total comprehensive income for the year

-

-

8,042 

8,042 

 

 

 

 

 

 

 

 

 

 

 

Equity settled share-based payment transactions

-

-

11 

11 

Tax on equity settled share-based payment transactions

-

-

(45)

(45)

Exercise of share options

12

333

345 

LTIP shares awarded

4

-

(4)

Dividends

-

-

(5,668)

(5,668)

16

333

(5,706)

(5,357)

 

 

 

 

 

 

Balance at 31 March 2019

3,727

6,470

(311)

6,824 

16,710 

Other reserves relate to the acquisition of a minority interest in a subsidiary.

 

 

Appreciate Group plc

 

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR TO 31 MARCH 2020

 

 

2020 

 

2019 

 

Notes

£'000 

 

£'000 

Cash flows from operating activities

 

 

 

 

Cash generated from operations

16

6,866 

 

6,874 

Interest received

 

1,648 

 

1,497 

Interest paid

 

(8)

 

Tax paid

 

(2,864)

 

(1,576)

Net cash generated from operating activities

 

5,642 

 

6,795 

 

 

 

Proceeds from sale of property, plant and equipment

 

 

Purchase of intangible assets

 

(3,103)

 

(781)

Purchase of property, plant and equipment

 

(1,927)

 

(371)

 

 

 

 

 

Net cash used in investing activities

 

(5,029)

 

(1,152)

 

 

 

Cash flows from financing activities

 

 

 

 

Lease incentive payment

 

500 

 

Payment of lease liabilities

 

(81)

 

Proceeds from exercise of share options

 

 

345 

Dividends paid to shareholders

 

(5,963)

 

(5,668)

Net cash used in financing activities

 

(5,544)

 

(5,323)

Net (decrease)/increase in cash and cash equivalents

 

(4,931)

 

320 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

34,563 

 

34,243 

 

 

 

 

 

Cash and cash equivalents at end of period

 

29,632 

 

34,563 

 

 

 

 

 

Cash and cash equivalents comprise:

 

 

 

 

Cash

 

29,632 

 

36,868 

Bank overdrafts

 

 

(2,305)

 

 

29,632 

 

34,563 

 

 

(1)  Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS's) as adopted by the European Union (EU) including International Financial Reporting Interpretations Committee (IFRIC) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

 

Appreciate Group plc is incorporated and domiciled in the United Kingdom. The financial statements have been prepared under the historical cost convention, as modified by the accounting for financial instruments at fair value where required by IAS 39 Financial Instruments: Recognition and Measurement. The Group financial statements are presented in sterling and all values are rounded to the nearest thousand (£'000) except where otherwise stated.

 

The accounting policies have been applied consistently to all periods presented in these financial statements and by all Group entities.

 

(2)  Going concern

The financial statements are prepared on a going concern basis.

 

At the start of lockdown in March 2020, just like many businesses across the UK, the Group followed Government guidance and temporarily closed its distribution and warehouse facilities to help stop the spread of coronavirus. With no means to fulfil physical orders at that time the Group's focus shifted to digital products. In May 2020 the Valley Road facility reopened with social distancing procedures in place.

 

There has been a negative impact on trading for quarter one of the financial year ending 31 March 2021, with reductions in billings compared to the same period in the prior year of 45 per cent for corporate and 65 per cent for HSV, our website where we service both consumer and corporate customers. Redemptions have also significantly fallen, with an 80 per cent decrease for vouchers and 61 per cent decrease for cards and e-codes compared to quarter one of the prior year.

 

Despite this, as the year has progressed the month-on-month trend in billings has been encouraging, with significant improvement being shown in each successive month's results. Corporate and HSV billings for April 2020 were 35 per cent and 19 per cent respectively of April 2019 billings, whereas for June 2020 were 68 per cent and 54 per cent of the levels seen in June 2019.

 

The Group has taken action to conserve cash during this uncertain time and support its position as a going concern. These actions include the following:

Furloughing employees - The Group has utilised the Government's Job Retention Scheme with a number of employees being furloughed, whose pay has been topped up to 100 per cent by the Group. In quarter one of the financial year ending 31 March 2021, there were an average of 65 employees on furlough per month, for a total saving of £243,000 in the quarter.

Dividend cancellation - The Group decided to cancel the dividend payment for 2020, which has conserved £6m of cash.

Deferral of VAT payments - The Group has deferred £936,000 of VAT payments between March and June 2020.  These are now payable by 31 March 2021.

Employee remuneration revisions - The decision was made to cancel all annual pay reviews, make no awards for FY2019/20 under the company wide annual bonus plan, and to postpone the leadership team's share incentive awards for the year ended 31 March 2020.

In addition to the above actions that have already been taken, management have reviewed the cost base of the business in order to identify any further potential savings.

 

Forecasting

Five scenarios have been modelled in order to assess the potential impact of the Covid-19 pandemic on the results of the Group going forward. The key variables that are altered between scenarios are: corporate and HSV demand, Christmas Savers order book cancellations and reductions, and paper and card redemptions. The scenarios model the upcoming two year period, with specific focus on the twelve months from the signing of the annual report and accounts. The base case was approved by the Board.  Management concluded that this base case reflected their best estimate of the likely impact of Covid-19, with initial trading slightly ahead, and this base case has also been used in the financing discussions with the banks.

 

Base case scenario

The base case scenario, assumes decreases in corporate and HSV billings against the initial forecast of 60 per cent in quarter one of the year ending 31 March 2021, with a gradual recovery through the financial year to 25 per cent down in quarter four. In quarter one and two of the year ending 31 March 2022 (which goes just beyond the twelve month going concern window from signing of the accounts), growth of 40 per cent against the 2021 forecast is assumed. The reduction in Christmas Savers in year one is 11 per cent.

 

The actual results for quarter one are slightly ahead of the base case, with overall corporate and HSV billings decreasing by 48 per cent compared to the 60 per cent assumed. In addition, July trading is ahead of forecast. This gives the Group confidence that the base case scenario is currently the best estimate and minimises the likelihood of any downside risks modelled within the other scenarios.

 

From a going concern perspective, the monthly forecasting of the Group's free cash balance in this scenario is the key area for consideration, as liquidity is the principal going concern risk.  The base case, before usage of the RCF, shows a negative free cash balance in July 2021, recovering by September 2021.

 

Downside scenario

In addition to the base case, management also considered the downside scenario that assumed decreases in corporate and HSV billings against the initial forecast of 75 per cent in quarter one of the year ending 31 March 2021, with a gradual recovery through the financial year to 25 per cent down in quarter four. In quarter one and two of the year ending 31 March 2022, growth of 40 per cent against the 2021 forecast is assumed. The reduction in Christmas Savers in year one is 14 per cent. This forecast a negative free cash balance, before usage of the RCF, in June 2021.

 

Further actions possible

Management has identified further actions which could be freely implemented in order to conserve cash.  These actions do not include any staff redundancies other those being consulted on in respect of the closure of the fulfilment business.

 

These savings include:

· reduction in discretionary consultancy and IT costs;

· delaying the implementation of the new ERP system; and

· cancelling the bonus for the year ending 31 March 2021.

These were overlaid net of additional costs, including those associated with the closure of the fulfilment business.

 

The overall impact of these actions is to bolster the cash position of the Group, with the base case, before usage of the RCF, showing a small shortfall in August 2021.

 

New financing

The Group has access to a recently agreed committed RCF of £15m, with an additional uncommitted accordion of £10m.

With the RCF in place, and having cancelled the final dividend payment, the directors consider that sufficient headroom exists to cover any negative sensitivities of COVID-19 in both the base case and downside scenario.

 

The following covenants are in place with regards to the RCF:

· Leverage/net debt cover - debt must not be greater than three times the last twelve months (LTM) rolling earnings before interest, taxation, depreciation and amortisation (EBITDA);

· Interest cover - LTM rolling EBITDA must not be less than four times the LTM rolling interest charge. This is expected to be approximately £50,000 per month, resulting in a LTM rolling interest charge of £0.6m, meaning LTM rolling EBITDA must not fall below £2.4m; and

· Christmas Savers cash - requires that Christmas Savers cash cannot be lower than monies in advance.

A LTM basis is used due to the seasonality of the Group's business. The leverage/net debt cover and interest cover covenants are assessed on a biannual basis starting in March 2021. The Christmas savers cash covenant is measured quarterly starting March 2021.

 

With the RCF in place, in line with the base case forecast, it is not envisaged that the Group will draw down on the facility until July 2021. The Group is forecast to be in full compliance with the three covenants throughout the twelve month period from the signing of the annual report and accounts, with sufficient headroom in place in both the base case and downside scenarios.

 

Reverse Stress Tests

Several reverse stress tests have been completed. These allow management to assess their current financial resources and the likelihood that such a 'business-breaking' scenario would occur.

 

Reverse stress tests were run in respect of accelerated voucher redemption, reduced voucher billings and reduced Corporate and HSV billings (across vouchers, cards and codes).  Each stress test brought forward the timing at which the RCF was required within the business. In each test, with the RCF in place and in some cases with further mitigating actions, each position could be managed, albeit the covenants currently agreed would be breached. However, management were satisfied that each reverse stress test was highly unlikely due to the extreme nature of the sensitivity required. 

 

Conclusion

The directors have carefully considered the base case, downside scenario, current trading and trends since the year end and the assessment of the reverse stress tests. In light of the newly agreed £15m RCF, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Therefore, the Directors continue to adopt the going concern basis of accounting in preparing the consolidated financial statements.

 

(3)  Changes to International Financial Reporting Standards

Interpretations and standards which became effective during the year

The following accounting standards and interpretations, that are relevant to the Group, became effective during the year:

 

 

 

 

 

Effective from accounting period  beginning on or after:

IFRIC 23

Uncertainty over Income Tax Treatment

1 Jan 2019

IFRS 16

Leases

1 Jan 2019

 

The impact of IFRS 16 on the financial statements is shown in the leases accounting policy below.

 

IFRIC 23 has not had a material impact upon the Group's financial performance or position.

 

Interpretations and standards which have been issued and are not yet effective

Amendments to IAS 1 and IAS 8: Definition of Material

 

In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of 'material' across the standards and to clarify certain aspects of the definition. The new definition states that, 'Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.'.

 

The amendments to the definition of material are not expected to have a significant impact on the Group's consolidated financial statements.

 

(4)  Accounting policies

The financial information in this preliminary announcement has been prepared in accordance with the accounting policies described in the annual report and accounts for the year ended 31 March 2019, except for those policies described below. The annual report and accounts for the year ended 31 March 2019 can be found on our website at www.appreciategroup.co.uk.

 

Assets held for sale

On initial classification as held for sale, assets are measured at the lower of their present carrying amount and the fair value less costs to sell, with any adjustments taken to the statement of profit or loss. These assets are not depreciated.

 

Assets are classified as held for sale when they satisfy the following criteria:

· management is committed to a plan to sell

· the asset is available for immediate sale

· an active programme to locate a buyer is initiated

· the sale is highly probable, within 12 months of classification as held for sale (subject to limited exceptions)

· the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value

· actions required to complete the plan indicate that it is unlikely that plan will be significantly changed or withdrawn

Provisions - Dilapidations

An amount is provided to cover the future cost of removing leasehold improvements and restoring the Group's leased offices to their previous condition. Per IAS16.16, if an entity installs leasehold improvements that it is later obligated to remove, the obligating event is the installation of the leasehold improvements, and therefore the debit side of this provision is recorded as part of the leasehold improvements in the property, plant and equipment note.

 

Leases

With effect from 1 April 2019 the Group has adopted IFRS 16, Leases which supersedes IAS 17:  Leases, IFRIC 4: Determining Whether an Arrangement Contains a Lease, SIC 15: Operating Leases - Incentives and SIC 27: Evaluating the Substance of Transactions in the Legal Form of a Lease.  The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to recognise most leases on the statement of financial position.

 

The Group has applied a modified retrospective approach when transitioning to the new standard.  Under this approach, the standard is applied retrospectively and the cumulative effect of initial application of the standard is recognised at the date of adoption, and no restatements have been made in respect of prior periods, as the modified retrospective method eliminates the need to restate comparative information on transition.

 

Policy applicable before 1 April 2019

 

Operating lease rentals are charged to the statement of profit or loss on a straight-line basis over the period of the lease.

 

Policy applicable from 1 April 2019

 

At inception of a contract the Group assesses whether a contract is, or contains, a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. This policy is applied to contracts entered into, or modified on or after 1 April 2019.

 

At inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the contact to each lease component on the basis of their relative standalone price. However, for leases of land and buildings in which it is a lessee, the Group has elected not to segregate non-lease components and account for the lease and non-lease components as a single lease component.

 

Definition of a lease

Previously the Group determined at inception whether an arrangement is, or contains a lease under IFRIC 4. Under IFRS16, the Group assesses whether a contract is or contains a lease based on the definition of a lease.

 

On transition, the Group performed a review of all major contracts to determine whether any contracts not defined as a lease under IAS17 and IFRIC 4, should be reassessed as a lease under IFRS16. After a comprehensive contract review the Group determined that there were no contracts not defined as a lease under IAS17 and IFRIC 4 that should be redefined as a lease under IFRS16.

 

As a lessee

As a lessee, the Group previously classified leases as operating or finance leases based on its assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the underlying asset to the Group.

Under IFRS 16 the Group recognises a right-of-use-asset (ROUA) and a lease liability (LL) at the lease commencement date. The right-of-use-asset is initially measured at cost, which comprises:

· The amount of the initial measurement of the LL;

· Any lease payments made at or before the commencement date, less any lease incentives;

· Any initial direct cost incurred by the lessee;

· An estimate of costs to be incurred by the lessee in restoring the site on which the assets are located.

 

The right-of-use-asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term. In addition, the right-of-use-asset is periodically tested for impairment (see 'Impairment of property, plant and equipment and intangibles' accounting policy), and adjusted for certain remeasurements of the lease liability.

 

At transition, right-of-use-assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.

 

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate.

 

Lease payments included in the measurement of the lease liability comprise the following:

· fixed payments including in substance fixed payments, less any lease incentives receivable;

· variable lease payments that depend on an index or rate, initially measured using the index or rate as at the commencement date;

· amounts expected to be payable under a residual value guarantee; and

· the exercise price under a purchase option that the Group is reasonably certain to exercise an option, and penalties for early termination unless the Group is reasonably certain not to terminate early.

The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change of index or rate, if there is a change in future lease payments arising from a change in the Group's estimate of the amount payable under a residual value guarantee, if there is a change in lease term, or if the Group changes its assessment of whether it will exercise a purchase extension or termination option.

 

At transition, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 April 2019.

 

Practical expedients taken

The Group used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17.

· Applied a single discount rate for a portfolio of leases with reasonably similar characteristics.

· Relied on its assessment of whether leases are onerous immediately before the date of initial application

· Applied the short-term leases exemptions to leases with a lease term that ends within 12 months of the date of initial application.

· Excluded initial direct costs from measuring the right-of-use-assets and liabilities at the date of initial application.

· Used hindsight in determining the lease term where the contract contained options to extend or terminate the lease.

 

Short term leases and leases of low value assets

The Group has elected not to recognise right-of-use-assets and lease liabilities for short term leases of plant & machinery that have a lease term of 12 months or less and leases of low value assets of less than £5,000 (being mainly storage space). The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

 

Under IAS 17

In the comparative period, as a lessee the leases were operating leases and were not recognised in the Group's statement of financial position. Payments made under operating leases were recognised on a straight-line basis over the term of the lease. Lease incentives received were recognised as an integral part of the lease expense, over the term of the lease. 

 

As a lessor

 

When the Group acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease.

 

To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a finance lease; if not then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset.

 

When the Group is an intermediate lessor, it accounts for its interest in the head lease and sub-lease separately. It assesses the lease classification of the sub-lease with reference to the right-of-use-asset arising from the head lease, not with reference to the underlying asset. If a head lease is a short-term lease to which the Group applies the exemption described above, then it classifies the sub-lease as an operating lease.

 

If an arrangement contains a lease and a non-lease component, the Group applies IFRS 15 to allocate the consideration in the contract.

 

As at the transition date the Group did not act as a lessor. In November 2019 the Group sub-let a portion of an office building that it occupied under a lease commenced in February 2018. Under IFRS 16, the Group is required to assess the classification of the sub-lease with reference to the right-of-use-asset and not the underlying asset.

 

The Group applied IFRS 15 Revenue from Contracts with Customers to allocate consideration in the contract to each lease and non-lease component.

 

Impact on Financial Statements

On transition to IFRS 16, the Group recognised and presented separately on the balance sheet £125k of right-of-use-assets and £125k lease liabilities. The modified retrospective method applied by the Group eliminated the need to restate this comparative information upon transition.

 

When measuring lease liabilities, the Group discounted lease payments using its incremental borrowing rate at 1 April 2019. The weighted average applied rate is 5.25 per cent. The Incremental Borrowing Rate was calculated based upon an indicative borrowing rate from our bankers. In arriving at the rate charged due account was taken of the Group's current lack of borrowing, and the fact that the vast majority of the assets under lease were property.

 

Reconciliation of Prior Year Operating Lease Commitments to Lease Liabilities

Description

Land and Buildings

Plant & Equipment

Total

 

£'000

 

£'000

£'000

Operating Lease commitments at 31 March 2019 as disclosed in the Group's Consolidated financial statements

127

119

246

Discount using the incremental borrowing rate as at 31 March 2019

(6)

(3)

(9)

Discounted using the incremental borrowing rate as at 31 March 2019

121

116

237

Lease payments made pre March 2019 relating to post March 2019 Period

(4)

-

(4)

Commitments disclosed as at 31 March 2019 for which underlying assets and leases became active during year ended 31 March 2020, so included within additions in the year

-

(94)

(94)

Maintenance Costs in Lease commitments

 

(6)

(6)

Short term leases

 

(8)

(8)

Lease Liabilities recognised as at 1 April 2019

 

117

8

125

 

Billings

Billings represents the value of goods and services shipped and invoiced to customers during the year and is recorded net of VAT, rebates and discounts.  Billings is an alternative performance measure, which the directors believe provides a more meaningful measure of the level of activity of the Group than revenue.  This is due to revenue from multi-retailer redemption products being reported on a 'net' basis, whilst revenue from single retailer redemption products and other goods are reported on a 'gross' basis.

 

The reconciliation between billings and revenue is as follows:

 

 

2020 

2019 

 

£'000 

£'000 

Billings

419,857 

426,901 

Multi-retailer redemption products - gross to net revenue recognition

(306,574)

(315,305)

Timing of revenue recognition

(559)

(1,202)

Revenue

112,724 

110,394 

 

 

(5)  Key judgements and estimates

The preparation of financial statements in conformity with IFRS requires the use of estimates and judgements that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

 

Judgements

In applying the accounting policies, management has made the following judgements:

 

Pensions

The Group has two defined benefit pension schemes where the fair value of plan assets exceeds the present value of the scheme liabilities. The Group has determined, based on an evaluation of the rules of each of the pension schemes and legal advice, that it has a right to a refund during the life of the plan or when the plan is settled, that is not conditional upon factors beyond the entity's control.

 

Revenue

In applying the principles of IFRS 15, management have considered whether the Group is a principal or agent when it supplies multi-retailer redemption products.  Having assessed the nature of the Group's contractual relationships with retailers, the directors have concluded that the Group acts as an agent in exchange for a service fee as it does not control the transfer of goods or services by the retailer to the product holder upon redemption.  This results in 'net' revenue recognition as described in the revenue recognition accounting policy.

 

For cardholder fees and breakage associated with multi-retailer redemption products, the Group acts as a principal in its contractual relationship with the product holders.  This results in 'gross' revenue recognition as described in the revenue recognition accounting policy.

 

Under IFRS 15, entities are required to disclose disaggregated revenue information to illustrate how the nature, amount, timing and uncertainty about revenue and cash flows are affected by economic factors.  Management have considered this requirement and have disclosed information with regard to type of good or service, market or type of customer, timing of transfer of goods or services and geographical region.  Management believe that this level of disaggregation is sufficient to satisfy the disclosure requirements of the standard.

 

Unredeemed cards

The directors have assessed the features of the Group's multi-retailer redemption products and concluded that unredeemed balances on corporate gifted cards do not meet the definition of a financial liability within the scope of IFRS 9.  This is because the cards have expiry dates after which the card cannot be redeemed.  The cards can also be redeemed with the Group for certain goods or services and cannot be redeemed in cash.  As a result, the liabilities relating to these products are not within the scope of IFRS 9 and are instead measured in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.  

 

Land and buildings

An assessment was made whether the property asset at Valley Road was an asset held for sale at 30 September 2019. As the sale of the property was considered to be highly probable within 12 months, the property was classified as an asset held for sale. At 31 March 2020, a reassessment of this position took place and all of the criterial were met for the property to continue to be classed as an asset held for sale.  This assessment included an exception to the one-year rule being taken under IFRS 5.9, as the COVID-19 pandemic had delayed the sale of the asset.

 

Determining the lease term of contracts with renewal and termination options - Group as lessee

The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

 

The Group has one lease contract that includes extension and termination options. This is the new lease of floor 3 and 4, 20 Chapel Street Liverpool. The Group included the renewal period as part of the lease term, as in the year the Group has relocated the majority of its operations to the newly leased site in Liverpool City Centre. As a result of this, the lease extension is reasonably certain to be exercised.

 

Estimates

The key assumptions and other sources of estimation uncertainty at the reporting date are described below:

 

Provisions for unredeemed vouchers and cards

A provision is made in respect of unredeemed vouchers and cards. The provision is calculated by estimating anticipated amounts payable to retailers on redemption and the expected timing of payments. Historical data over a number of years and current trends are regularly reviewed and are used to prepare these estimates. Any differences to the estimates may necessitate a material adjustment to the level of the provision held in the statement of financial position. Management have considered the sensitivities of the key estimates and do not foresee that any likely change in these estimates will have a material impact on the size of the provision.

 

In the updated base case scenario, card and vouchers redemptions are assumed to decrease against the prior year redemptions for the same period by 50 per cent in Q1, 30 per cent in Q2, and then catch up to cumulative normal levels in Q3 and Q4, making up the Q1 and Q2 shortfall.

 

Post year end redemptions for the first quarter of the financial year ended 31 March 2021 have been lower than the 50 per cent decrease on prior year levels forecasted by the Group. The actual decrease in voucher redemptions was 80 per cent, and the actual decrease in card redemptions was 62 per cent, when compared to the corresponding quarter in the prior year. However, as redemptions are continuing to increase, and given that the base case scenario assumes a catch up by the end of the financial year, any impact of this would be negligible.

 

Breakage

For multi-retailer redemption products where the end user has no right of redemption (corporate gifted cards), the Group may expect to earn a breakage amount.  In order to calculate the expected breakage amount, the Group estimates how many products will be fully redeemed and how many will be partially redeemed.  For those which are partially redeemed, the Group estimates projected balances remaining on the products at expiry.  Historical data and current trends regarding patterns of redemption and expiry are used to prepare the estimates.  As redemption behaviour may differ by market, historical data and current trends are reviewed at this level.  If the expected level of breakage were to change by 0.1 per cent, the impact on revenue for the reporting period would be £0.2m.  Management have considered the sensitivity of this estimate and do not foresee that any likely change to the estimate will have a material impact on either the level of deferred income held in the statement of financial position or the amount of revenue for the reporting period.

 

Deferred income - Love2shop voucher redemption timing

Revenue for multi-retailer redemption products is recognised in proportion to actual redemption timing, generating deferred income balances until the point of redemption.  For Love2shop vouchers, there is a time delay between the point of redemption and when they are physically returned to the Group for validation and accounting purposes.  To negate the effects of this delay, an adjustment is made at the end of the reporting period, which estimates the value of vouchers already redeemed but not yet returned to the Group and records the associated revenue.  Historical data over a number of years and current trends are used to prepare the estimate.  Management have considered the sensitivity of this estimate and do not foresee that any likely change to the estimate will have a material impact on either the level of deferred income held in the statement of financial position or the amount of revenue for the reporting period.

 

Assets held for sale - Value of Valley Road site

A valuation was carried out as at 31 March 2020 in order to determine the fair value less costs to sell of the Valley Road site. This valuation was carried out on a vacant possession basis. This valuation resulted in the value of the asset being written down to £3,153k. Any differences to this estimate may necessitate a material adjustment to the value of the assets held for sale in the statement of financial position.

 

Goodwill

Goodwill arising on acquisition represents the difference between the consideration and the fair value of net assets acquired. Goodwill is not amortised, but is reviewed annually for impairment and whenever events or changes in circumstances indicate that the carrying value of the goodwill may not be receivable. The impairment review relies on a number of assumptions (see note 9 for details). Any differences to the assumptions made may necessitate a material adjustment to the level of goodwill held in the statement of financial position.

 

Other intangible Assets

At each reporting date the Group reviews the carrying value of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. The assessment of costs capitalised as intangible assets to generate future economic benefits: Judgement is applied in assessing whether costs incurred, both internal and external, will generate future economic benefits. Significant judgements and estimates are applied in determining the carrying value of the assets, including assumptions made in respect of the status of the programme each asset relates to, and there may be a range of possible outcomes when a programme is complex.

 

Incremental borrowing rate (IBR)

The Group cannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. This rate was determined to be 5.25 per cent.

 

 

(6) Segmental analysis

The Group's operations are divided into two principal operating segments:

 

· Consumer - which represents sales to consumers, utilising the Group's Christmas savings offering and our website, highstreetvouchers.com; and

· Corporate - comprising sales to businesses, offering primarily sales of the Love2shop voucher, flexecash® cards, Mastercards and e-codes in addition to other retailer vouchers.

 

All other segments are those items relating to the corporate activities of the Group which it is felt cannot be reasonably allocated to either business segment. 

 

The amount included within the elimination column reflects products sold by the corporate segment to the consumer segment.  They have been included in elimination so as to show the total revenue for both segments.

 

Finance income, finance costs and taxation are not allocated to individual segments as they are managed on a Group basis.

 

 

 

Consumer

 

Corporate

All other segments

 

Elimination

 

Group

2020

£'000

£'000

£'000

£'000

£'000

Billings

 

 

 

 

 

External billings

222,207 

197,650 

419,857 

Inter-segment billings

171,933 

(171,933)

Total billings

222,207 

369,583 

(171,933)

419,857 

 

 

 

 

 

 

Revenue

 

 

 

 

 

External revenue

62,447 

50,277 

112,724 

Inter-segment revenue

22,797 

(22,797)

Total revenue

62,447 

73,074 

(22,797)

112,724 

 

 

 

 

 

 

Results

 

 

 

 

 

Segment operating profit/(loss)

5,327 

6,581 

(5,512)

 

6,396 

Finance income

 

 

 

 

1,481 

Finance costs

 

 

 

 

(177)

Profit before taxation

 

 

 

 

7,700 

Taxation

 

 

 

 

(2,189)

Profit

 

 

 

 

5,511

 

All other segments loss comprises primarily of staff costs and professional fees.

 

In arriving at segment operating profit/(loss) exceptional costs have been charged to the segments as follows:

 

 

 

Consumer

 

Corporate

All other segments

 

 

Group

 

£'000

£'000

£'000

 

£'000

Impairment of obsolete stock

124 

 

124 

Impairment of goodwill

434 

882 

 

1,316 

Redundancy costs

224 

199 

 

423 

Impairment of Valley Road site

1,813 

 

1,813 

 

An analysis of the Group's external revenue is as follows:

 

 

 

Consumer

 

Corporate

 

 

 

Group

 

£'000

£'000

 

 

£'000

Revenue from contracts with customers

 

 

 

 

 

Goods - Single retailer redemption products

31,227 

30,915 

 

 

62,142 

Other goods

6,153 

87 

 

 

6,240 

Services - Multi-retailer redemption products

 

22,591 

 

15,279 

 

 

 

37,870

Other services

2,386 

3,985 

 

 

6,371 

Other

90 

11 

 

 

101 

 

 62,447

50,277 

 

 

112,724 

 

The majority of revenue from contracts with customers is recognised at a point in time.

 

The Group has elected not to report on segment assets and liabilities as this information is not provided to the Chief Operating Decision Maker (CODM) and is not relevant to the CODM's decision making. In respect of Appreciate Group plc the CODM is regarded as the executive members of the Board of directors. Since the last reporting period the Group no longer segments the Statement of Financial Position due to rationalisation of accounting processes.

 

 

 

Consumer

 

Corporate

All other segments

 

Elimination

 

Group

2019

£'000

£'000

£'000

£'000

£'000

Billings

 

 

 

 

 

External billings

232,096 

194,805 

426,901 

Inter-segment billings

134,714 

(134,714)

Total billings

232,096 

329,519 

(134,714)

426,901 

 

 

 

 

 

 

Revenue

 

 

 

 

 

External revenue

58,886 

51,508 

110,394 

Inter-segment revenue

38,204 

(38,204)

Total revenue

58,886 

89,712 

(38,204)

110,394 

 

 

 

 

 

 

Results

 

 

 

 

 

Segment operating profit/(loss)

6,809 

7,789 

(4,866)

 

9,732 

Finance income

 

 

 

 

1,572 

Finance costs

 

 

 

 

Profit before taxation

 

 

 

 

11,304 

Taxation

 

 

 

 

(2,422)

Profit

 

 

 

 

8,882 

 

All other segments loss comprises primarily of staff costs and professional fees.

 

In arriving at segment operating profit/(loss) exceptional costs have been charged to the segments as follows:

 

 

 

Consumer

 

Corporate

All other segments

 

 

Group

 

£'000

£'000

£'000

 

£'000

Impairment of Valley Road site

1,210 

 

1,210 

 

An analysis of the Group's external revenue is as follows:

 

 

 

Consumer

 

Corporate

 

 

 

Group

 

£'000

£'000

 

 

£'000

Revenue from contracts with customers

 

 

 

 

 

Goods - Single retailer redemption products

30,487 

25,137 

 

 

55,624 

Other goods

7,431 

80 

 

 

7,511 

Services - Multi-retailer redemption products

 

19,062 

 

22,049 

 

 

 

41,111 

Other services

1,892 

4,227 

 

 

6,119 

Other

14 

15 

 

 

29 

 

58,886 

51,508 

 

 

110,394 

 

The majority of revenue from contracts with customers is recognised at a point in time.

 

(7) Taxation

 

2020

£'000

 

2019

£'000

Charge for the year - current and deferred

 

2,189

 

2,422

 

Comments on the effective tax rate can be found in the Financial Review.

 

(8) Earnings per share

The calculation of basic and diluted EPS is based on the profit on ordinary activities after taxation of £5,511,000 (2019: £8,882,000) and on the weighted average number of shares, calculated as follows:

 

 

2020

 

2019

Basic EPS - weighted average number of shares

186,347,228

 

185,964,433

Diluting effect of employee share options

-

 

112,540

Diluted EPS - weighted average number of shares

186,347,228

 

186,076,973

 

650,337 shares have been considered anti-dilutive during the year, that could potentially dilute basic EPS in the future.

 

(9)   Goodwill

 

£'000

Cost - Actual or deemed

 

At 31 March 2019 and 2020

5,048 

 

 

Impairment

 

At 1 April 2019

2,880 

Impairment in year

1,368 

At 31 March 2020

4,248 

 

 

Net book amount

 

At 31 March 2020

800 

At 31 March 2019

2,168 

 

 

Cost - Actual or deemed

 

At 31 March 2018 and 2019

5,048 

 

 

Impairment

 

At 1 April 2018

2,863 

Impairment in year

17 

At 31 March 2019

2,880 

 

 

Net book amount

 

At 31 March 2019

2,168 

At 31 March 2018

2,185 

 

 

Goodwill at

1 April 2019

 

Additions

 

Impairment

Goodwill at

31 March 2020

CGUs

£'000

£'000

£'000

£'000

Consumer

1,286 

(486)

800 

Corporate

882 

(882)

Net book amount

2,168 

(1,368)

800 

 

The Group tests annually for impairment of goodwill. The recoverable amounts of CGUs are determined using value in use calculations, which are considered higher than the fair value less costs to sell.

 

Consumer - Family (£739,000) & Country Hampers Franchisee (£61,000)

The key data and assumptions in the value in use calculations were as follows:

▪ The final order position for the previous Christmas.

▪ The base case scenario gross margins. These margins are forecast to be maintained going forward.

▪ Average agent retentions forecast. These are based on historical performance of agent retention achieved.  Historically, such forecasts have been materially correct. An additional 12 per cent fall in retention has been factored into the forecast for the year ended 31 March 2021 to reflect the current trading environment (an 11 per cent fall in retention per year is typically used, which has been increased to 23 per cent for the year ended 31 March 2021).

▪ Base case scenario revenue. This is based on average historical order value and average agent retention rates which have been extrapolated forward 10 years.  The generally high retention values for customers supports the adoption of a 10 year customer life cycle value as being appropriate for the business.  No revenue growth has been factored into the data used in the calculation (2019: nil).

 

The resulting cash flows were discounted using a weighted pre-tax discount rate of 16.54 per cent (2019: 6.25 per cent).

 

The impairment in the year of £434,000 (2019: nil) against the Family Franchisee goodwill represents the impact of excluding hamper contribution from the value in use calculations combined with a higher pre-tax discount rate. This is included within exceptional costs in the Consumer segment.

 

A sensitivity analysis was performed where changes in key assumptions were tested, those being changes in pre-tax discount rate and retention of agents.

 

An increase in pre-tax discount rate of 1 per cent would lead to further impairment of an additional £23,000.

A decrease in retentions of 1 per cent (to 78 per cent for the year ended 31 March 2021 and 88 per cent per year after this) would lead to further impairment of an additional £32,000.

 

The impairment in the year of £52,000 (2019: £17,000) against the Country Hampers Franchisee goodwill represents the reduction in agents that were originally acquired from Country Hampers. This is included within administrative expenses.

 

Corporate - Fisher Moy International (£nil)

The key assumptions in the value in use calculations were as follows:

▪ Forecast revenue. This is based on the current order book, average customer retention and expected new business, which has been extrapolated forward 10 years. This has been sensitised to consider the worst case scenario impact of COVID-19. No revenue growth has been factored into the calculation.

▪ Forecast gross margins. These are based on forecasts of profit resulting from the forecast revenue, which have been sensitised to consider the worst case scenario impact of the COVID-19 pandemic on the business for the coming year.  These margins have then been forecast to be maintained going forward.

 

The resulting cash flows were discounted using a pre-tax discount rate of 16.54 per cent (2019: 6.25 per cent).

 

Management have carefully considered the base case forecast, the worst case sensitivities, the customer base (which consists of one dominant customer) and the entity specific circumstances relating to its industry.

 

In light of these considerations, there has been an impairment in the year of £882,000, which reduces the Corporate Goodwill to a value of £nil (2019: £882,000). This is recognised as an exceptional item in the year ended 31 March 2020.

 

(10) Property, plant and equipment

 

Land and buildings

Leasehold improvements

Fixtures and equipment

 

Vehicles

 

Total

 

£'000

£'000

£'000

£'000

£'000

Cost of valuation

 

 

 

 

 

At 1 April 2019

15,636 

3,996 

20 

19,652 

Additions at cost

1,649 

279 

1,928 

Transfer to Assets held for sale

(14,531)

(14,531)

Disposals

(33)

(33)

At 31 March 2020

1,105 

1,649 

4,242 

20 

7,016 

 

 

 

 

 

 

Accumulated depreciation

 

 

 

 

 

At 1 April 2019

10,620 

2,799 

17 

13,436 

Charge in year

50 

57 

403 

511 

Impairment

163 

163 

Transfer to Assets held for sale

(9,728)

(9,728)

Disposals

(28)

(28)

At 31 March 2020

1,105 

57 

3,174 

18 

4,354 

 

 

 

 

 

 

Net book amount

 

 

 

 

 

At 31 March 2020

1,592 

1,068 

2,662 

At 31 March 2019

5,016 

1,197 

6,216 

 

 

 

 

 

 

Cost of valuation

 

 

 

 

 

At 1 April 2018

15,636 

8,261 

20 

23,917 

Additions at cost

371 

371 

Disposals

(4,636)

(4,636)

At 31 March 2019

15,636 

3,996 

20 

19,652 

 

 

 

 

 

 

Accumulated depreciation

 

 

 

 

 

At 1 April 2018

9,176 

7,041 

16 

16,233 

Charge in year

234 

394 

629 

Impairment

1,210 

1,210 

Disposals

(4,636)

(4,636)

At 31 March 2019

10,620 

2,799 

17 

13,436 

 

 

 

 

 

 

Net book amount

 

 

 

 

 

At 31 March 2019

5,016 

1,197 

6,216 

At 31 March 2018

6,460 

1,220 

7,684 

 

At 30 September 2019, an assessment was made as to whether the Valley Road property was an Asset held for sale. All of the criteria were met, and the property was transferred from Property, plant and equipment to Assets held for sale (see note 12).  Prior to the transfer to Assets held for sale the property was impaired by £163,000.

 

During the year, the Group relocated its head office to Liverpool city centre. There were several additions to Property, plant and equipment which relate to fit-out costs and equipment purchased for the new office. These have been classed as leasehold improvements.

 

(11) Inventories

 

2020

2019

 

£'000

£'000

Raw materials

35 

252 

Finished goods

2,805 

4,322 

 

2,840 

4,574 

 

The cost of inventories recognised as an expense in the year is £55,103,000 (2019: £52,435,000).

 

The write down of inventories recognised as an expense in the period is £184,000 (2019: £49,000).

 

Following the announcement in August 2020 that the Group would be consulting on the closure of the packing operations, including hamper packing, the Group impaired raw materials and finished goods stock held at 31 March 2020 by £124,000, which is included within the £184,000 as detailed above. 

 

(12) Assets held for sale

 

2020 

2019 

 

£'000 

£'000 

Transfer from property, plant and equipment

4,803 

Impairment

(1,650)

 

3,153 

 

An assessment was carried out at 30 September 2019 as to whether the Valley Road property was an Asset held for sale.  All of the criteria were met, and since that time the property has been classed as such. Depreciation was stopped at this point and the property was held at fair value.  As at 31 March 2020 a reassessment of this position took place and all of the criteria were met for the property to continue to be classed as an Asset held for sale.  This assessment included an exception to the one-year rule being taken under IFRS 5.9, as the Covid-19 pandemic had delayed the sale of the asset, meaning that the sale may not occur within the original 12-month period. This exception was allowable as the Group has taken the necessary actions to respond to this change in circumstance and the asset remains available for immediate sale.

 

A valuation was carried out as at 31 March 2020 in order to determine the fair value less costs to sell of the asset.  This resulted in an impairment of £1,650,000.  This impairment was in addition to an impairment of £163,000 made prior to the transfer of the property to Assets held for sale, taking the total impairment in the year to £1,813,000.

 

(13) Leases

 

Group as a lessee

The Group leases many assets including land and buildings and plant and machinery. Information about leases for which the Group is a lessee is presented below.

 

Right of Use Assets

 

Land and buildings

Plant and equipment

 

Total 

 

 '000

 '000

£'000 

Cost or valuation

 

 

 

At 1 April 2019

117 

125 

Additions

3,904 

67 

3,971 

Disposals

(18)

(18)

At 31 March 2020

4,003 

75 

4,078 

 

 

 

 

Accumulated depreciation

 

 

 

At 1 April 2019

Charge in year

268 

17 

285 

Disposals

(6)

(6)

At 31 March 2020

262 

17 

279 

 

 

 

 

Net book amount

 

 

 

At 31 March 2020

3,741 

58 

3,799 

 

The increase in land and buildings right of use assets (ROUAs) in the period is the result of the new lease of floors 3 and 4, 20 Chapel Street Liverpool.  The increase in plant and equipment ROUAs in the period is the result of the leasing of forklift trucks for our Valley Road warehouse facilities.

 

There are no securities held or financial covenants required to be maintained in respect of these leases.

 

There is a dilapidation provision of £50,000 related to the Chapel Street lease.  The debit is held within leasehold improvements in Property, plant and equipment (note 10), and the credit with Trade and other payables.

 

Lease liabilities

 

Land and buildings

Plant and equipment

 

Total 

 

 '000

 '000

£'000 

At 1 April 2019

117 

125 

New leases

4,063 

67 

4,130 

Interest expense

174 

177 

Lease payments

(61)

(20)

(81)

At 31 March 2020

4,293 

58 

4,351 

 

The cost relating to variable lease payments that do not depend on an index or a rate amounted to £nil in the period.

 

There were no leases with residual value guarantees or leases not yet commended to which the Group is committed.

 

Maturity Analysis - contractual undiscounted cash flows

 

 

 

£'000 

Less than one year

 

 

219 

One to five years

 

 

1,662 

More than five years

 

 

4,555 

Undiscounted lease liabilities at 31 March 2020

 

 

6,436 

 

Lease liabilities included in the statement of financial position

 

 

 

£'000 

Current

 

 

219 

Non-current

 

 

4,132 

Discounted lease liabilities at 31 March 2020

 

 

4,351 

 

Amounts recognised in the statement of profit or loss

 

 

 

£'000 

Interest on lease liabilities

 

 

177 

Expense relating to short-term leases (included within administrative expenses)

10 

Expense relating to leases of low value assets excluding short term leases (included within administrative expenses)

 

Variable lease payments not included in the measurement of lease liabilities

Gain arising from subletting Right of Use Assets

 

 

(1)

Total amount recognised in the statement of profit or loss for the year ended 31 March 2020

187 

 

Amounts recognised in the statement of cash flows

 

 

 

£'000 

Total Cash Outflows for leases for the year ended 31 March 2020

 

 

81 

 

i. Real estate leases

The Group leases land and buildings for its head office and regional offices. The lease for the Group's head office runs for 10 years, and regional offices for between 3 to 10 years. The head office lease includes an option to renew the lease for a period of up to 5 years at the end of the contract term.

 

Extension options

The 10 year head office lease contains an extension option of 5 years. Where practicable, the Group seeks to include extension options in new leases to provide operational flexibility. The extension options held are exercisable only by the Group and not by the lessors. The Group assesses at lease commencement whether it is reasonably certain to exercise the extension options. The Group reassesses whether it is reasonably certain to exercise the option if there is a significant event or significant change in the circumstances within its control.  The head office has been accounted for on the basis that the extension option will be taken and is therefore accounted for on a 15 year basis. There are no other extension options, and there are no termination options expected to be exercised.

 

ii. Other leases

The Group adopted IFRS16 on 1st April 2019. At that date the Group were leasing plant and machinery within leases that had less than 6 months left to run. These leases are short term. The Group elected not to recognise right-of-use-assets and lease liabilities for these leases.

 

The Group also leases storage space for sales displays. The value of this lease is less than one thousand pound per year. These leases are of low value under IFRS16 definition. The Group elected not to recognise right-of-use-assets and lease liabilities for these leases.

 

Group as a lessor

Lease Income from lease contracts in which the Group acts as a lessor is as below.

 

i. Operating Lease

The Group sub-leases part of an office building in Oxford that it leased in February 2018. As at the 1 April 2019 the Group had sublet a portion of this office space. The Group had previously classified this lease income as operating lease income, because the lease does not transfer substantially all the risks and rewards incidental to the ownership of the assets. Due to the fact that at 1 April 2019 the lease had only 3 months left the income was treated in the accounts as operating lease income. This was accounted for within other income.

 

 

Land and buildings

Plant and equipment

 

Total 

 

 '000

 '000

£'000 

Operating lease income year ended 31 March 2020

 

ii. Finance Lease

In November 2019 the Group sublet a further portion of its Oxford office building. The Group has classified the sub-lease as a finance lease, because the sub-lease is for the whole remaining term of the head lease, which ends 31 January 2021. The £18,000 disposal of ROUA and £6,000 disposal of accumulated depreciation in the ROUA table in this note reflect the derecognition of the sub-leased portion of the office.

 

 

Land and buildings

Plant and equipment

 

Total 

 

 '000

 '000

£'000 

Finance lease income year ended 31 March 2020

 

The following table sets out a maturity analysis of lease receivables, showing the undiscounted lease payments to be received after the reporting date.

 

Finance Leases maturity analysis - contractual undiscounted cashflows

 

 

 

£'000 

Less than one year

 

 

One to five years

 

 

Total undiscounted lease payments receivable as at 31 March 2020

 

 

 

 

 

 

Unearned finance income

 

 

-

 

 

 

 

Net investment in the lease as at 31 March 2020

 

 

 

These are included within other receivables.

 

(14) Employees and directors

During the year there were redundancy costs of £423,000 which relate to a one-off redundancy exercise. The driving force behind this exercise was the shift in the business strategy towards digital products.

 

(15) Dividends

Amounts recognised as distributed to equity holders in the year:

 

2020 

2019 

 

£'000 

£'000 

Interim dividend for the year ended 31 March 2019 of 1.05p (31 March 2018 : 1.00p)

1,957 

1,855 

Final dividend for the year ended 31 March 2019 of 2.15p (31 March 2018 : 2.05p)

4,006 

3,813 

 

5,963 

5,668 

 

Due to the outbreak of the Covid-19 pandemic, the Group decided it was prudent not to pay the interim dividend of 1.05p per share in respect of the financial year ended 31 March 2020 which was due to be paid on 6 April 2020.  The Group have now been able to further assess forecast scenarios, current trading, trends since year end and reverse stress tests.  Given the UK trading conditions continue to be uncertain, the Board do not consider it prudent to recommend a dividend for this financial year.

 

(16) Reconciliation of profit for the year to net cash inflow from operating activities

 

 

 

2020

 

2019 

 

 

£'000

 

£'000 

Profit for the year

 

5,511 

 

8,882 

 

 

 

 

 

Adjustments for:

 

 

 

 

Tax

 

2,189 

 

2,422 

Interest income

 

(1,481)

 

(1,572)

Interest expense

 

177 

 

- 

Research and development tax credit

 

(54)

Depreciation and amortisation

 

1,659 

 

1,394 

Impairment of property, plant and equipment/assets held for sale

 

1,813 

 

1,210 

Impairment of other intangibles

 

21 

 

Impairment of goodwill

 

1,368 

 

17 

Loss on sale of property, plant and equipment

 

 

- 

Decrease in other financial assets

 

200 

 

Decrease/(increase) in inventories

 

1,734 

 

(766)

Decrease/(increase) in trade and other receivables

 

2,968 

 

(1,589)

Decrease in trade and other payables

 

(1,578)

 

(877)

(Decrease)/increase in provisions

 

(4,484)

 

10,274 

Increase in monies held in trust

 

(3,442)

 

(12,259)

Movement in retirement benefit obligation

 

(44)

 

(215)

Translation adjustment

 

18 

 

(3)

Taxes paid on share-based payments

 

 

(116)

Share-based payments

 

233 

 

126 

Net cash inflow from operating activities

 

6,866 

 

6,874 

 

(17) Subsequent events

Sale of Valley Road Birkenhead

In December 2018 the Group announced a new strategy that included relocating the head office from Birkenhead to Liverpool city centre to an office environment that allowed for more collaborative working and was better positioned to improve retention of staff and recruitment of new talent.  In September 2019 the business successfully relocated the majority of staff to Liverpool with some operational departments remaining in Birkenhead.  At this point, the net asset value of the property situated in Birkenhead was transferred from property, plant and equipment to assets held for sale on the Group balance sheet.  This property was owned by Budworth Properties Limited, a Group subsidiary.  On 10 August 2020 Budworth Properties Limited was sold to HP (Valley Road) Limited for £3.2m and as part of the transaction the Group has leased back space for the small number of remaining operational staff.  The balance sheet reflects the expected disposal of this asset, which is classified as an asset held for sale, following the previously announced impairment charge to the statement of profit or loss of £1.8m.  The value of the disposal supports the recognised carrying value as at 31 March 2020, meaning no further impairment charge is necessary.

 

Proposed closure of packing operations

In July 2020, the Group announced to customers that it would not be supplying hampers and merchandise for 2020 due to health and safety concerns relating to the ability to pack these products within social distancing rules and the risk of receiving components due to shortages in stock or distribution problems following the impact of Covid-19. In August 2020 the Group announced to staff that it was commencing a period of consultation about the proposed closure of our packing business including hamper packing, third party packing and provision of storage. If this decision is confirmed, following a period of consultation with staff, it is expected that operation of the packing business will cease by the end of 2020.  As the company owning the land and buildings at Valley Road where the hamper packing business is based has been sold and a short term lease has been taken to allow the wind down of the business, no charge is expected in the financial statements for 2020/21.  Following consultation with staff, if no suitable alternative employment can be found, any redundancy costs will be charged to the statement of profit or loss and treated as exceptional costs.  The net cost of this, excluding any customer cancellations or margin erosion from switching to alternative products, is expected to be approximately £0.3m.  Within the financials statements for the year ended 31 March 2020 we have already recognised a charge of £0.1m to write down the associated stock products held at year end to their net realisable value.  This charge has been recognised as an exceptional charge in the period (see note 11). There are no other expected costs relating to this decision.

 

Bank financing

We have completed a bank financing exercise, securing a 5 year revolving credit facility (RCF) with Santander of £15m plus an additional uncommitted accordion of £10m. This facility will provide the additional financial flexibility to protect against downside risk in the short term; whilst enabling longer term growth, as well as investing in the continued switch to digital products.  The RCF has 3 covenant requirements, as detailed within the going concern statement.

 

Government support

Since 31 March the Group has taken advantage of both the Government's Job Retention Scheme and deferral of VAT payments. 

 

(18) Responsibility Statement

 

To the best of each director's knowledge:

 

the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

 

the management report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

 

 

(19) The financial information set out above does not constitute the Group's statutory accounts for the years ended 31 March 2020 or 2019 but is derived from those accounts.

 

Statutory accounts for 2019 have been delivered to the registrar of companies.  The auditor, Ernst & Young LLP, has reported on the 2019 accounts; the report (i) was unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.  

 

The statutory accounts for 2020 will be delivered to the registrar of companies following the AGM. The auditors have reported on these accounts; their report is unqualified and does not include a statement under either section 498(2) or (3) of the Companies Act 2006.

 

The annual report will be posted to shareholders on or before 7 September 2020 and will be available from that date on the Group's website: www.appreciategroup.co.uk.

 

-ends


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