CWD.L Regulatory News (CWD)

Countrywide plc

('Group'/the 'Company')

Preliminary statement of annual results for the year ended 31 December 2018

2018 A YEAR OF RESET AND SIGNIFICANT OPERATIONAL PROGRESS

2018 was a year of reset for the Group. Significant progress was made on the implementation of our "back to basics" principle in Sales and Lettings first announced in early 2018 and the Company's recapitalisation, completed in August 2018, ensured that we have the right long-term capital structure in place to focus on our three-year turnaround plan.

Operational progress in building back industry expertise within Sales and Lettings has supported growth in the register(1) of properties available for sale, improved the pipeline(2) of agreed sales in the UK and increased income from complementary services:

As a result, we are pleased to report the Group's underlying trading (excluding £2.2 million of net charges unrelated to current trading) was in line with the Board's expectations at £34.9 million with net debt of £70.7 million and net debt to adjusted EBITDA of 2.2x.

FINANCIAL RESULTS FOR THE TWELVE MONTHS ENDED 31 DECEMBER 2018

Commenting on the results and outlook, Executive Chairman, Peter Long said:

"We have been encouraged by the progress made in 2018 in resetting the business as part of our return to growth strategy. The principles within "back to basics" in Sales and Lettings resulted in growth in the register and the sales pipeline in the UK, coupled with an increase in market share of listings.

We encountered market weakness in Q4 due to the further uncertainties surrounding Brexit which is affecting both our sector and consumer confidence as a whole. These headwinds have continued into 2019. As a result, we are experiencing further slow-down in residential and commercial property transactions particularly in London and the South, which will affect our H1 EBITDA by some £3 - £5 million. Whilst we expect full year EBITDA to be broadly in-line with 2018 (after mitigating the impact of the ban on tenant fees of £9 million), it is contingent on recovering the H1 shortfall in our traditionally stronger H2. As a Group we are in a stronger position than we have been for some considerable time with sound business fundamentals and, despite the difficult market conditions we are facing, we remain confident in delivering our turnaround."

Enquiries:

Analysts and investors

Himanshu Raja, Chief Financial Officer investor@countrywide.co.uk

Media

Natalie Gunson press.office@countrywide.co.uk Tel: +44 (0)7721 439043

Michael Sandler/Dan de Belder, Hudson Sandler Tel: +44 (0)207 796 4133

Conference call and Notes to Editors:

The Company will be hosting a teleconference at 9:00am (GMT) this morning to discuss the results with slides available by registering at:

https://webcast.merchantcantoscdn.com/webcaster/dyn/4000/7464/7467/111483/Lobby/default.htm. This will be available to listen into by dialling +44 (0)20 3003 2666 or 0808 109 0700, password Countrywide. A recording of the webcast will be available for seven days by dialling +44 (0)20 8196 1998 - pass code: 2308662#. For further information on Countrywide plc, please visit our corporate website at www.countrywide.co.uk.

This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the business we operate. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this document and, unless otherwise required by applicable law, the Company undertakes no obligation to update or revise these forward-looking statements. Nothing in this document should be construed as a profit forecast. The Company and its directors accept no liability to third parties in respect of this document save as would arise under English law.

(1) Register is the available number of properties for sale

(2) Pipeline represents the sum of the total future fees from agreed sales subject to contract in the hands of solicitors

(3) Earnings before interest, tax, depreciation, amortisation, exceptional items, employment-linked contingent consideration, share-based payments and share of profits from joint venture, referred to hereafter as adjusted EBITDA (see note 4 for reconciliation)

(4) Excludes exceptional items, amortisation of acquired intangibles, employment-linked contingent consideration and share-based payments (net of taxation impact for basic EPS)

(5) Restated from prior year following the adoption of IFRS 15 and the correction of a prior year error (see note 2)

EXECUTIVE CHAIRMAN'S STATEMENT

2018 was undoubtedly one of the most challenging years that the Group has faced. It was one where, to ensure the future success of our business, we made extensive management changes, reset our strategy and implemented a capital refinancing plan. These measures allowed us to put in place the strategic levers for our three-year turnaround plan.

The retail-centric strategy, centralised decision-making and significant investment in head-office based functions that was introduced in the business in October 2015, together with a significant increase in the Group's indebtedness as a result of acquisitions, dividend payments and share buybacks, resulted in a sharp loss of market share within Sales and Lettings and decline in profitability that overshadowed the stronger performance in other areas of the Group.

In January 2018, following a Board review of the business, the former chief executive left the Company and I was appointed executive chairman. We were in the fortunate position that within the Group we have an industry expert, Paul Creffield, who at that time was responsible for our B2B division but prior to 2015 had led our successful Sales and Lettings business in London. He was appointed group operations director and immediately began to strengthen our Sales and Lettings team both through internal promotion and external appointments, a number of whom returned to the business having left under the previous management. In August, I was delighted to announce that Paul would be promoted to group managing director and join the Board.

In August, we also announced a capital refinancing plan which resulted in us raising £125 million (after deduction of commissions, fees and expenses) by way of a firm placing and placing and open offer. We sought to make the fundraising as inclusive as we could for all shareholders and know that some retail investors were disappointed by the structure of the capital raising. To secure the future of the Company, however, we had no alternative but to raise the capital in the way that we did. This was a substantial fundraising and I would like to thank all shareholders, both existing and new, who have shown confidence in the Group's strategy and turnaround plan.

Financial results

I am pleased to report that in this year of reset for the Group, and against a backdrop of increasing geo-political and economic uncertainty we have delivered financial results in line with the Board's expectations. Two fundamental areas of focus have been on restoring listings and building the pipeline within our Sales and Lettings business, both of which we have achieved. In terms of the pipeline, having started the year 19% down on the previous year we ended 2018 with the pipeline flat year-on-year. Pleasingly the UK, excluding London, which accounts for 64% of this business unit's income, finished the year up 5%.

Income for the year reduced from £673 million to £627 million. Adjusted EBITDA at £33 million was £33 million lower than the prior year and includes £2 million of net charges, unrelated to current trading. The Group's underlying trading was £35 million. Loss for the year stood at £218 million (2017: £207 million) and adjusted earnings per share (EPS) was 0.6 pence versus 8.7 pence in 2017.

As stated in August, the Group does not expect to pay dividends in the medium term and there will, therefore, be no dividend for the 2018 financial year.

Three-year recovery plan

We have reset the strategy for the Group, under-pinned by a "back to basics" principle within Sales and Lettings. Our business is led by experienced industry experts and now that we have a sensible long-term capital structure in place, we are focused on our three-year turnaround. Rigorous planning by our teams gives the Board confidence that, in the normal course of business, we have a sound three-year plan which sets the Group up for long-term future success.

Our strategy, comprising five pillars, outlined below, will be covered in greater detail within the Annual Report:

Board changes

At the conclusion of the Annual General Meeting in April 2018, Richard Adam stepped down from the Board. On 1 October Mark Shuttleworth joined the Board. An experienced finance leader, he has considerable restructuring and turnaround experience. On 1 January 2019, Mark took on the role of chair of the Group Audit and Risk Committee.

Colleagues

The future success of Countrywide not only lies with its sound financial structure, but also its robust and deliverable growth plan. Just as important, are the colleagues across the Group who, in very trying circumstances, not only in 2018 but also in previous years, have shown dedication and commitment to our Group.

Some very tough decisions have needed to be taken, and the results achieved would not have been possible without a fantastic team of colleagues, who will continue to play an integral part in our future success.

On behalf of the Board, I would like to personally thank our colleagues for all their efforts. I am confident that in Countrywide we have a first-class team who will help restore our growth and retain our leading position in the market place.

Outlook

We have been encouraged by the progress made in 2018 in resetting the business as part of our return to growth strategy. The principles within "back to basics" in Sales and Lettings resulted in growth in the register and the sales pipeline in the UK, coupled with an increase in market share of listings.

We encountered market weakness in Q4 due to the further uncertainties surrounding Brexit which is affecting both our sector and consumer confidence as a whole. These headwinds have continued into 2019. As a result, we are experiencing further slow-down in residential and commercial property transactions particularly in London and the South, which will affect our H1 EBITDA by some £3 - £5 million. Whilst we expect full year EBITDA to be broadly in-line with 2018 (after mitigating the impact of the ban on tenant fees of £9 million), it is contingent on recovering the H1 shortfall in our traditionally stronger H2. As a Group we are in a stronger position than we have been for some considerable time with sound business fundamentals and, despite the difficult market conditions we are facing, we remain confident in delivering our turnaround.

GROUP MANAGING DIRECTOR'S STATEMENT

2018 was certainly a year of change not only for the Company but also for me personally. At the start of the year we identified that our strategy required resetting. Following management changes early in 2018, I assumed the role of group operations director, assuming responsibility for our Sales and Lettings business and spearheading our "back to basics" principle. In August I became group managing director, continuing our reset and return to profitable growth.

All this could not have been achieved without the help and dedication of our colleagues across the Group and I want to take this opportunity to thank everyone for their commitment and drive to support our turnaround.

We are clearly trading against a tough external environment that is well covered in the media, most notably coverage around house prices, transaction numbers and Brexit. All this results in uncertainty in people's minds, impacting on sentiment and causing some reticence amongst homebuyers and sellers. Against that backdrop, I am delighted that we have been able to build back our register of available stock and pipeline of fees in our UK Sales and Lettings business.

Our diversity in the property services sector benefits us and in particular I would call out an excellent performance by our Hamptons lettings business where we saw income increase by 5% year on year and units under management also up 4% year on year against a market that is decreasing in size.

Our three-year recovery plan progress

As our executive chairman, Peter Long, has commented, our three-year plan comprises of five key pillars and I am delighted to be able to report on progress against each of these:

1. "Back to basics" in Sales and Lettings 

We advised the market at the beginning of the year of our intention to build back staffing and expertise in our Sales and Lettings business at regional, area and branch level. We shared our plan to separate our service lines of Sales and Lettings to report into dedicated management to help us achieve the right level of support and direction for each business area. I am delighted to say that this has been achieved, and at regional level we now have 89 regional directors in post, all of whom are very experienced in their fields of operation. We also welcomed back over 300 colleagues who had previously left the business.

We have decentralised our business and significantly reduced our overheads and re-invested the cost savings to fund the build back in front-office and experienced staff. In addition, our local management have been empowered with marketing and people budgets so they can better react to local market conditions.

As a result, we have seen our market share of listings grow from 7.29% at the beginning of 2018 to 7.73% in December. This translates through to our UK trading Sales business seeing their register of available stock up 9% year on year.

2. Income from complementary services

In a tough trading environment, we are well placed with our Group businesses to improve sales of complementary services which include; conveyancing and the provision of mortgages, insurance and protection products to both our buyers and sellers. We stated that this will be a core focus for us. We entered 2018 with complementary services income generated by our Sales business at 38p for every £ generated in Sales income. I am delighted to state that at the end of 2018 we achieved an average throughout the year of 44p in the £, an increase of 16%. We intend to build upon this success over the next three years.

3. Cost efficiency

Our plan is to invest in our IT infrastructure and applications which have lacked investment over the years. As a result, the operating costs grew dramatically on an aged IT estate. We also committed to invest in our processes and contact centres to modernise and improve customer service alongside reducing operating costs. This is a three-year programme and I'm pleased to say we are tracking in line with the plan.

We have also committed to reducing further our central overheads and driving efficiency from our central functions. During 2018 we reduced our central function costs by 14% year on year and we expect further savings over the three-year plan period.

4. Continued growth in B2B and Financial Services

Our B2B businesses delivered a resilient performance in 2018. Our Conveyancing business is starting to see their pipeline grow and will benefit from the additional instructions through the complementary services offered to customers. Our commercial business, Lambert Smith Hampton, is experiencing significant slowdown in its transactional market as a result of the political and economic uncertainty surrounding Brexit. The new homes business is particularly exciting as we have been winning many new schemes that will mature through to release and sale in 2019 that will boost our exchange numbers moving ahead.

Our Surveying business was affected in Q4 as mortgage lending by our key clients reduced, but since Christmas we are seeing a significant upturn in their lending. Overall the Surveying business delivered a good performance in a challenging market and we are well positioned for 2019.

Prior to 2018 we experienced an overall decline in the focus of our Financial Services business within Sales and Lettings. This was largely due to the amount of changes in the UK Sales and Lettings business, and as a result we have seen a reduction in our mortgage and protection consultant (MPC) headcount this year. This has impacted performance in our core branch-based Financial Services business but we are confident this will return as headcount is being built back and an improved retention plan introduced. Other specialist network and Financial Services businesses moved ahead year on year. I am also delighted to report that in 2018, we placed over £20 billion of mortgage business, a new record for the group. We expect further growth in this exciting business as we launch further initiatives to improve the penetration of our remortgage business for customers who previously obtained their mortgage through us. As we sell more properties, this will deliver further opportunity to grow the written mortgage numbers.

5. Financial discipline and cash flow

Good progress has been made on our approach to working capital management and an investment committee now oversees our investments. We are prioritising investment into our IT estate, contact centre modernisation and our branch network.

Debt collection has received strong focus through 2018 and debtor days have reduced in our commercial business, Lambert Smith Hampton.

The capital refinancing, together with our focus on working capital management, resulted in net debt for the full year down to £70.7 million and net debt to adjusted EBITDA ratio of 2.2x.

Summary

Significant progress was made in 2018 as we reset the strategy and delivered a capital refinancing plan that gives us the stability and flexibility to execute our three-year turnaround plan. Having built back our industry expertise and staffing levels within our Sales and Lettings business, we now have a register and pipeline that is in positive territory and gives us the solid trading base to move forward. External factors will continue to challenge the industry, but the long-term UK housing market fundamentals remain strong. As we look ahead long-term, we believe that we have the right strategy in place to maximise these opportunities.

SEGMENTAL RESULTS

 (1)Earnings before interest, tax, depreciation, amortisation, exceptional items, employment-linked contingent consideration, share-based payments and share of profits from joint venture, referred to hereafter as 'adjusted EBITDA' (see note 4 for reconciliation)

(2)Restated from prior year following the adoption of IFRS 15 and the correction of a prior year error (see note 2)

SEGMENTAL VOLUMES

SALES AND LETTINGS

Summary

At the heart of our "back to basics" principle in Sales and Lettings was to build back industry expertise to support the growth in the register of properties available for sale, to grow the pipeline of agreed sales in the UK and to improve income from complementary services. The build back of industry expertise is now largely complete with experienced MDs for the North, South and Hamptons International, and our Premier & City business; and we have a full complement of staffing and separate sales and lettings expertise at regional and branch management level. At a territory level, we have seven seasoned managing directors now in place supported by 89 regional managers.

Sales

We are encouraged by the progress we have made in "back to basics" and in the growth in the register and the pipeline in the UK. The register of properties available for sale in UK Sales and Lettings was up 9% year on year. The pipeline of agreed sales awaiting exchange of contracts in UK Sales and Lettings was up 5% having begun the year down 21%.

Our estate agency income fell by 16% year on year, principally the result the lower entry pipeline of sales agreed as we ended 2017. Our Central London brands of Hamptons International and John D Wood have outperformed the market decline, compared to the overall decline in the Central London market.

Lettings

Our lettings performance was resilient, with an overall income decline of just 1% compared with the decline of 8% in 2017. Our London lettings business grew by 1%, a good performance in a challenging market, that helped offset a 3% decline in the UK. Properties under management were 86,415, an overall decline of 3% in line with the market which has seen private landlords exit the market as a result of stamp duty land tax and other tax changes.

Income from complementary services 

Our income from complementary services, comprising Financial Services and Conveyancing delivered by our branch network, has increased from 38 pence to 44p in the £. This is the additional income driven from this activity expressed as an amount compared to each £ of income from sales exchanged income.

FINANCIAL SERVICES

Summary

Operating review

In 2018 the UK mortgage market grew by approximately 3% year on year, with overall gross lending finishing at £269 billion1 (2017: £261 billion). In comparison, Countrywide mortgages completed grew 15% from £17.7 billion in 2017 to £20.3 billion in 2018.

Financial Services income was £83.9 million (2017: £87.3 million), with another year of strong double digit income growth across the combined The Buy to Let Business (TBTLB), Mortgage Bureau and Mortgage Intelligence channels offset by lower transactional volumes from estate agency sales which were impacted by a loss of fee earning consultants in the branches.

Mortgage Intelligence (MI) operates a network and club for third party Appointed Representatives (AR) and Directly Appointed (DA) mortgage brokers respectively. MI provides regulatory oversight for sales made by the network and assists both the network and the club through arranging mortgage and insurance deals with our panels of lenders and insurance providers. The network firms employ over 400 regulated individuals, all of whom are contracted to sell only the financial products arranged by MI. In 2018, MI generated £12.5 billion (2017: £10.2 billion) of gross mortgage distribution from the club and the network.

TBTLB conducts our specialist business in the buy to let sector, and now also handles customers who wish to transact by phone. The business has experienced growth from both its strong existing customer relationships and reputation in the buy to let market, as well as from new telephony referrals from our Sales and Lettings branch network and customer contact centre. As a result of the continued expansion, the business increased its gross distribution to £1.8 billion (2017: £1.5 billion), an increase of 2% year on year.

Mortgage Bureau is our specialist new build mortgage brokerage. In 2018 Mortgage Bureau has focused on building its relationship with other Group new build businesses, as well as on independent growth from its direct relationships with new build developers. As a result, the business has increased its gross distribution to £0.9 billion (2017: £0.8 billion); an increase of 16% year on year.

In April we launched a new General Insurance product with our strategic partner, AXA. Rated 5 stars by Defaqto the new product represents excellent quality and value for our customers.

[1] Source: Bank of England 2019

B2B

Summary

Operating review

Income across our B2B business was down 3% with another good performance in surveying and valuations, and conveyancing offset by a slower market for new homes and a slower commercial transactional property market for our Lambert Smith Hampton business.

Surveying

Our Surveying business delivered another year of growth in both income and adjusted EBITDA and significantly improved service delivery to our lender clients. This position was strengthened in 2018 with key contract retentions including Santander, alongside key contract wins including Coventry Building Society and in the expanding market of equity release where we renewed our long-term contract with Just Retirement.

The Surveying business continues to help lead the industry with the introduction of new technologies and new valuation approaches to better assess property risk for its lender clients. Following the substantial investments in the IT technology infrastructure within our business, service levels to our client base have improved, which resulted in an improved turnaround time of our mortgage valuations by 27% to under 4.5 days, when comparing Q4 2017 and Q4 2018.

Conveyancing

The business continued to build on successes in prior years in improving customer service, and in 2018 saw another record year as measured by the customer through our Net Promoter Score (NPS) of +54 (up from +38 in 2017). In this regard the business celebrated another award winning year winning 5 awards, including the What Mortgage Award - Best Legal Services Provider, Best Conveyancing Service at the Money Facts Awards and the Best Conveyancer at the Mortgage Strategy Awards 2018.

Land & New Homes and Asset Management

Whilst our land and new home business sold over £1.2 billion of new homes in 2018, the rate of completions and house exchanges was impacted by the slower market for second hand homes in the UK. Pleasingly, the closing register finished 49% higher than the closing register in 2017.

Lambert Smith Hampton (LSH)

In the face of the uncertain economic and political environment, our commercial business, Lambert Smith Hampton, saw a resilient performance with overall income down 4%, with excellent contract retention in a difficult market. Consulting services were robust, down only 1%, with most consultancy divisions showing increased income.

Whilst capital markets were up 10%, assisted by the 3% year on year increase in UK investment transactions, overall transactional services were down 6% reflecting the substantial uncertainty in key sectors.

GROUP FINANCIAL REVIEW

Introduction

2018 marked a significant year for the Group. The previous four years had seen an increase in the Group's indebtedness as a result of acquisitions, dividends and share buybacks and the material decline in profitability resulting from the sharp loss of market share.

Our firm placing and placing and open offer announced on 2 August 2018 raised net proceeds of £125 million. Net debt at the end of the year was £71 million, with a net debt to adjusted EBITDA ratio of 2.2x compared with the £212 million of net debt we carried at 30 June 2018. The Group now has a sustainable capital structure and covenant package and we are grateful to shareholders and our lender group for their support to underpin the Group's recovery. We remain committed to reducing leverage to 1x in the medium term.

Overall Group income fell by 7% to £627.1 million which is a resilient performance against the backdrop of both a challenging market and the previously reported 19% opening pipeline deficit in Sales at the beginning of 2018.

The Group's adjusted EBITDA for the year ended 31 December 2018 was £32.7 million (2017: £65.6 million), and includes £2.2 million of net charges, not related to current trading, arising from a review of the carrying value of certain assets and liabilities.

The Group's underlying trading (excluding £2.2 million of net charges unrelated to current trading) was in line with the Board's expectations at £34.9 million.

Our statutory results were further impacted by restructuring and significant impairment charges relating to historical acquisitions, resulting in a loss for the year of £218.2 million.

The Group incurred net exceptional charges of £245.4 million comprising principally non-cash impairment charges of £218.0 million, with further movements for: strategic and restructuring costs of £12.8 million; onerous lease provisions of £6.1 million; £5.2 million restitution of trust funds ; and financing costs of £6.5 million, offset by £3.2 million of exceptional income in relation to professional indemnity (see note 10).

Finance costs, before exceptional items, have decreased by £4.2 million during the year as a result of reduction in our borrowings following the proceeds from the capital refinancing plan in August 2018. Net debt has reduced during the year by £125.8 million to £70.7 million, with net debt to adjusted EBITDA ratio of 2.2x.

Prior year retained earnings have been restated for the impact of the following: £(0.9) million credit in respect of the adoption of IFRS 15 'Revenue from contracts with customers' (see note 2(c)); and £3.6 million debit in respect of the correction of a prior year error in respect of the restitution of trust funds following legal advice received during preparation of results for the first half of the year (see note 2(d)).

In respect of the trust funds, having received further legal advice in the second half of 2018, the Group now understands that all, rather than some, of the historical and untraceable funds arising from the Lettings business for the period from 2008-2017 should be held in trust under a separate client account. As a result, the Group has transferred an additional £5,185,000 into a separate client account in December 2018 in full restitution of these client funds. This further advice during the latter part of 2018 has caused a change in the accounting estimate taken at 30 June 2018 and, given the magnitude of the increase in charge, this has been treated as an exceptional cost.

Summary of results

2018 results were principally influenced by the previously announced opening pipeline deficit of 19% which resulted in our income in the Sales and Lettings business for the full year down 9% and adjusted EBITDA declining 96% to £1.2 million (2017: £27.4m). The Group saw an improved second half performance and finished the year with a growth in the register of properties available for sale and stronger pipeline in our UK Sales and Lettings business.

Income in our B2B businesses was £213.3 million, down 3% and adjusted EBITDA down 21% to £27.9 million, with another year of good performance in our surveying and valuations business and in conveyancing. The decline in profitability reflected in part non-current trading items of £1.1 million (from the net charges of £2.2 million noted above) relating to impairment of receivables and the effect of slower market for new homes and a slower commercial transactional property market in particular in the second half. Our land and new homes business finished the year with a register that was up 49% year on year and a stronger pipeline of properties sold subject to contract.

Financial Services income was £83.9 million, down 4%, and adjusted EBITDA of £16.6 million, down 16% with another year of strong double digit income growth across the combined The Buy to Let Business, Mortgage Bureau and Mortgage Intelligence channels offset by lower transactional volumes from estate agency sales.

Within Group, we took the difficult decision to right size the head office functions and to unwind the centralisation that had been introduced since 2015; which provided the opportunity to reinvest some £6 million in the front line.

Income statement

Reconciliation of statutory operating profit and adjusted EBITDA (see note 4)

1 Earnings before interest, tax, depreciation, amortisation, exceptional items, employment-linked contingent consideration, share-based payments and share of profits from joint venture, referred to hereafter as 'adjusted EBITDA' (see note 4 for reconciliation)

2 Restated from prior year following the adoption of IFRS 15 and the correction of a prior year error (see note 2)

Contingent consideration

Contingent consideration of £6.1 million (2017: £3.9 million) relates to previous acquisitions where the consideration arrangements require the vendors to remain in employment and as such have been treated as a post-combination employment expense; they are being accrued over the relevant periods specific to each of the agreements, with commitments extending out to 2021.

Certain elements of this contingent consideration are also subject to performance conditions being satisfied, with target adjusted EBITDA levels which must be achieved in order to realise the full payment, with a reduced payment made if targets are not fully met. Accruals for contingent consideration are therefore reviewed each period as future earn-out assumptions are revisited and any credits to the income statement in respect of downward revisions to estimates are reported in the same way.

Share-based payments

The share-based payment charge to the income statement of £1.9 million (2017: £1.8 million) before National Insurance credit of £0.2 million (2017: £0.2 million) comprises: a decreased charge in respect of annual nil-cost option grants under the three year long term incentive plan (LTIP) to senior managers amounting to £0.2 million (2017: £0.8 million) as a result of aligning non-market conditions to underlying performance across grants; share incentive plan (SIP) charges of £0.9 million (2017: £0.9 million) arising from employee participation and new SAYE charges of £0.5 million incurred following implementation of the scheme from May 2018 after cessation of the SIP scheme; and deferred bonus share plan charges of £0.3 million (2017: £0.1 million).

The Group has seen a significant decline in profitability since 2014 and therefore the impact of truing up for non-market conditions, matching reward to performance, has seen the share-based payment charge reduce accordingly since 2014, becoming a less material feature of the income statement after the vesting of all elements of the IPO scheme in March 2016. However, as the Group is now in a turnaround situation, it is anticipated that the incentivisation of performance will result in future LTIP awards which, provided Group performance meets these targets, will see the share-based payment charge continue to increase and could reintroduce material volatility into the income statement.

Depreciation and amortisation

Our depreciation and amortisation charge continues to be separated to indicate the depreciation and amortisation that relates to assets purchased for use in the business and amortisation arising on those intangible assets that have been recognised as a result of business combinations. The underlying depreciation and amortisation charge decreased by £10.2 million to £17.5 million. This was principally due to the impairments in 2017 and June 2018 decreasing the value of assets giving rise to a charge. The depreciation charge was £10.2 million (2017: £17.2 million).

Amortisation of acquired intangibles has decreased to £4.9 million (2017: £5.8 million) following impairments in 2017 and in June 2018. As previously signposted, following the impairments in 2017 and H1 2018, we reviewed the useful economic lives of our brands and from 1 July 2018 adopted finite lives of fifteen years in respect of all of our brand names.

Exceptional income

During H1 2018 the Group received exceptional income of £3.2 million (2017: £nil) from a professional indemnity claim settled in the Group's favour of £2.1 million; and a professional indemnity provision release of £1.1 million following reassessment of our claims position.

Exceptional costs

Significant operational progress has been made with the strategy and turnaround plan during the year. However, the continued subdued external environment and the effects of the weaker opening pipeline which became apparent after conclusion of the 2018 business planning process, have resulted in further impairment charges. Cash flows driving the current impairment review align to the latest three year strategy and turnaround plan that has been endorsed by the Board.

Exceptional costs incurred in the year amounted to £248.5 million (2017: £225.9 million) and comprise items that have resulted in cash charges of £21.1 million and £227.4 million of non-cash charges as follows:

Professional indemnity provisions

During 2018 the Group received reduced numbers of professional indemnity valuation claims, in line with expectations, and achieved closure of challenging cases. Estimating the liability for PI claims is highly judgemental and we updated our financial models to reflect the latest inputs and trends and took advice from our panel of lawyers in respect of open claims. The progress made during the year on some individually significant claims, aligned with the low level of claims made, resulted in some unwinding of the provision.

Interest

Our drawdown on bank borrowing facilities decreased from £210 million at the prior year end to £85 million at 31 December 2018, principally as a result of the payment of net proceeds of £125 million arising from our equity raise on 30 August 2018 being applied to the revolving credit facility.

Taxation

A tax charge of £1.0 million (2017: £5.9 million) was recognised on underlying profits of £5.4 million (2017: £26.1 million) which represents an effective tax rate of 17.5 % (2017: 22.5%). The Group also recognised an exceptional tax credit of £35.5 million (2017: £9.7 million) on losses before tax of £258.1 million (2017: £237.2 million) which results in an overall tax credit for the year of £34.5 million (2017: £3.8 million). This represents an effective tax credit rate of 13.7% (2017: 1.8%). 

The principal reason for the tax credit is the £214.3 million impairment of intangible and tangible assets which resulted in unwind of the related deferred tax liability.

Countrywide's business activities operate predominantly in the UK. All businesses are UK tax registered apart from a small operation in Ireland. We act to ensure that we have a collaborative and professional relationship with HMRC and continue to receive a low risk rating. We conduct our tax compliance with a generally low risk approach whilst endeavouring to maintain shareholder value and optimise tax liabilities. Tax planning is done with full disclosure to HMRC when necessary and being mindful of reputational risk to the Group. Transactions will not be undertaken unless they have a business purpose or commercial rationale. 

In addition to our corporation tax contribution, our businesses generate considerable tax revenue for the Government in the UK. For the year ended 31 December 2018, we will pay corporation tax of £nil (2017: £1.4 million) on profits for the year; we collected employment taxes of £129.2 million (2017: £128.7 million) and VAT of £80.5million (2017: £87.7 million), of which the Group has incurred £38.8 million and £2.8 million (2017: £36.4 million and £3.0 million) respectively. Additionally we have paid £11.4 million (2017: £11.8 million) in business rates and collected £33.7million (2017: £38.7 million) of stamp duty land tax though our conveyancing business.

The total tax contribution of the Group was £296.4 million (2017: £307.7 million), which includes both taxes borne of £53.0 million (2017: £52.6 million) and taxes collected totalling £243.4 million (2017: £255.1 million).

Profit for the year - underlying and statutory

The Group reported underlying profit attributable to equity holders ("underlying earnings") of £4.5 million (2017: £20.2 million), a decrease of 78% for the year ended 31 December 2018. The Group's statutory loss after tax of £218.2 million (2017: loss of £207.3 million) is after net exceptional costs of £245.4 million (2017: £225.9 million), contingent consideration charges of £6.1 million (2017: £3.9 million), share-based payment charges, after National Insurance credit, of £1.7 million (2017: £1.6 million) and non-cash charges of £4.9 million for amortisation of acquisition-related intangible assets (2017: £5.8 million) related to historical acquisitions, together with the corresponding tax effect.

Earnings per share

Adjusted earnings per share declined to 0.6 pence (2017: 8.7 pence). Statutory basic earnings per share declined to a loss of 30.8 pence (2017: 89.3 pence). These are based on the weighted average number of shares in issue of 707.6 million (2017: 232.3 million), following the issue of 1.4 billion shares on 30 August 2018. A reconciliation of the basic and underlying earnings per share is provided in note 13.

Cash flow

In the statutory cash flow, cash generated from operations decreased by £60.9 million to an outflow of £2.8 million for the year (2017: inflow of £58.1 million), principally driven by a reduction in adjusted EBITDA of £32.9 million. This was exacerbated by the unwind, during the first half of the year, of cyclical cash management practices previously undertaken, which involved the delay in supplier payments at 31 December 2017 until after the year end, amounting to £17.9 million.

The non-GAAP cash flow represented shows operating cash flow conversion of 69% (2017: 104%) of adjusted EBITDA, which when corrected for these cyclical cash management practices would deliver an operating cash flow conversion rate of 124% (2017: 77%). Continued focus has been brought to bear on working capital management, delivering reductions in the debtors days within our commercial business unit.

Capital expenditure has been focused primarily on computer software. During the first half of the year, the Group disposed of its interest in unlisted residential property fund units for proceeds of £15.8 million. Exceptional cash flows of £14.0 million mainly comprise: £4.2 million of redundancy costs; £6.7 million of transformation project consultancy charges and £5.0 million of payments for the restitution of trust funds offset by £2.1 million of professional indemnity claim settlement receipts.

The £140 million proceeds arising from the firm placing and placing and open offer, net of the transactional costs of £14.9 million, were used to reduce the balance on the revolving credit facility and reduce leverage.

1 Restated from prior year following the adoption of IFRS 15 and correction of a prior year error (see note 2)

Net debt

At 31 December 2018, the Group had net debt (including finance lease liabilities) of £70.7 million (31 December 2017: £196.4 million as restated following net debt amendments in respect of the correction of a prior year error - see note 20) with a net debt to adjusted EBITDA ratio of 2.2x (31 December 2017: 3.0x as restated).

Net debt reflects a decrease of £125.8 million principally due to the net proceeds received in respect of the firm placing and placing and open offer undertaken on 30 August 2018 (see note 26).

The Board has previously acknowledged the need to bring the leverage ratio down to the Group's medium term target of below 1x. The net debt reconciliation is provided in note 20.

Net debt maturity and changes to committed bank facilities

In August 2018 the Company agreed an amendment, extension and restatement agreement relating to its term and revolving credit facility with its lender partners which provides the Company with the financial flexibility to invest in the business as it takes action to restore the Sales and Lettings business back to profitable growth. The Group reduced its borrowing facility to a £125 million RCF repayable in September 2022.

Going concern

The Board's assessment in relation to going concern is included in note 2 to the financial information.

The directors have confirmed that, after due consideration, they have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Dividend

Given the scale of challenge required to turn around the Sales and Lettings business and the desire to invest in cost and growth initiatives to build a sustainable and profitable business for the long term, whilst remaining committed to reducing our leverage, the Board has decided that there will be a nil dividend recommendation for 2018 (2017: nil pence).

In assessing any future dividends, the Board will consider: the future investment needs of the business; and maintaining appropriate levels of gearing.

Other information

Tenant fees

The draft Tenant Fees Bill in November 2017 sets out the government's approach to banning lettings fees paid by tenants. This will take effect from 1 June 2019. We estimate that, after mitigation, this will have £9 million impact on adjusted EBITDA in 2019. The Group has an extensive programme of activity to ensure that we are fully compliant with the new legislation as well as plans to mitigate the effect of the ban.

Pensions

As at 31 December 2018 the net defined benefit scheme liabilities were £4.6 million (2017: £5.6 million). The reduction in the scheme liabilities of £2.8 million exceeded the reduction in the value of the scheme assets.

Pension contributions of £2.0 million (2017: £2.0 million) were made in the year, in line with the payment profile agreed with the trustees in 2016 and which remains in place for another two years.

Tax strategy

The Group's Board approved strategy in relation to tax is published on our investor relations website in line with HMRC guidelines.

PRINCIPAL RISKS AND UNCERTAINTIES

There are a number of risks and uncertainties facing the business in the forthcoming financial year. The Board has reconsidered the risks and uncertainties listed below:

These risks and uncertainties and mitigating factors are described in more detail on pages 14 to 16 of the Countrywide plc financial statements for the year ended 31 December 2017 (a copy of which is available on the Group's website).

Having reconsidered these, the Board considers that they remain the principal risk areas facing the Group. In 2017 we had identified 'Financing and capital structure' as a new principal risk but the Board consider this risk to have been significantly reduced by the August 2018 capital refinancing.

The result of the EU referendum has increased the overall level of macroeconomic uncertainty, which could have an effect on property prices, mortgage approvals and volume of transactions as outlined under 'market risk'.

APPROVAL

This report was approved by the board of directors on 7 March 2019 and signed on its behalf by:

Peter Long

Executive chairman

7 March 2019

Consolidated income statement

For the year ended 31 December 2018

1 Adjusted EBITDA is a non-GAAP measure of earnings before interest, tax, depreciation, amortisation, exceptional items, contingent consideration, share-based payments and share of profits/(losses) from joint venture

2 Restated from prior year following the adoption of IFRS 15 and correction of a prior year error (see note 2)

Consolidated statement of comprehensive income

For the year ended 31 December 2018

1 Restated from prior year following the adoption of IFRS 15 and correction of a prior year error (see note 2)

Consolidated statement of changes in equity

For the year ended 31 December 2018

1 Restated from prior year following the adoption of IFRS 15 and correction of a prior year error (see note 2)

2 Restated from prior year following the adoption of IFRS 9 and IFRS 15 and correction of a prior year error (see note 2)

Consolidated balance sheet

As at 31 December 2018

1 Restated from prior year following the adoption of IFRS 15 and correction of a prior year error (see note 2)

Consolidated cash flow statement

For the year ended 31 December 2018

1 Restated from prior year following the adoption of IFRS 15 and correction of a prior year error (see note 2)

2 Net cash generated from operating activities includes £18,392,000 (2017: £6,060,000) of net cash expended on exceptional items. Cash flows from financing activities

include £647,000 (2017: £Nil) of net cash expended on exceptional items, as discussed in note 10

3 Includes £10,094,000 of cash payments in respect of the restitution of trust funds (see notes 2 and 10)

Notes to the financial statements

1. General information

Countrywide plc ('the Company'), and its subsidiaries (together, 'the Group'), is the leading integrated, full service residential estate agency and property services group in the UK, measured by both revenue and transaction volumes in 2018. It offers estate agency and lettings services, together with a range of complementary services, and has a significant presence in key areas and property types which are promoted through locally respected brands.

The Company is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the UK (registered number: 08340090). The address of its registered office is Greenwood House, 1st Floor, 91-99 New London Road, Chelmsford, Essex CM2 0PP.

2. Accounting policies

The preliminary announcement does not constitute full financial statements.

The results for the year ended 31 December 2018 included in this preliminary announcement are extracted from the audited financial statements for the year ended 31 December 2018 which were approved by the directors on 7 March 2019. The auditor's report on those financial statements was unqualified. It did not include a statement under S498(2) or 498(3) of the Companies Act 2006.

The 2018 annual report is expected to be posted to shareholders and included within the investor relations section of our website on 22 March 2019 and will be considered at the Annual General Meeting to be held on 30 April 2019.The financial statements for the year ended 31 December 2018 have not yet been delivered to the Registrar of Companies.

 (a) Going concern

These financial statements have been prepared on a going concern basis, which assumes that the Group will be able to meet its liabilities when they fall due.

In assessing the Group's ability to continue as a going concern, the Board has reviewed the Group's cash flow and profit forecasts which have been stress tested with various assumptions regarding future housing market volumes. The Group's performance is dependent on a number of market and macroeconomic factors including the impact on customer confidence and transactional volumes in the UK housing market from interest rate changes and government policies which are inherently difficult to predict. Specifically, a range of assumptions underpin the profit and cash flow forecasts for the period to 31 December 2020, including: the continued build back of the Group's register of properties available for sale and the pipeline; mitigation of the potential impact of new government legislation banning lettings tenancy fees; and successful realisation of internal corporate cost saving initiatives currently underway.

The directors have confirmed that, after due consideration, they have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

(b) Accounting policies

In preparing this preliminary announcement the same accounting policies, methods of computation and presentation have been applied as those set out by Countrywide plc annual financial statements for the year ended 31 December 2017. The accounting policies drawn up in accordance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as endorsed by the European Union.

The accounting policies adopted in the preparation of this preliminary announcement are consistent with those of the previous financial year, except for those referenced in 2(c) below.

The preparation of the consolidated financial information in conformity with IFRS requires the use of certain critical accounting estimates and requires management to exercise judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement to complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3.

(c) New standards, amendments and interpretations

Standards, amendments and interpretations effective and adopted by the Group

The following new standards effective for the first time for the financial year beginning on or after 1 January 2018 have had a material impact on the Group.

IFRS 9 'Financial instruments'

IFRS 9 'Financial instruments' addresses the classification, measurement and recognition of financial assets and financial liabilities.

Classification and measurement

The Group has applied the requirements of IFRS 9 to instruments owned at 1 January 2018 and has not applied the requirements to instruments that had already been derecognised prior to 1 January 2018. Comparative amounts have not been restated.

As at the date of initial application of IFRS 9, the Group has elected to apply the fair value through profit or loss option for all of its non-controlling equity interests that were classified as available-for-sale under IAS 39. There is no impact on the classification and measurement of the other financial assets, and no change in the accounting for financial liabilities, held by the Group.

On transition, £1,967,000 of gains previously recorded within 'Other reserves' in relation to the Group's holding in the investment property fund have been reclassified to retained earnings. The asset was subsequently disposed of during the year.

Impairment

The impairment model under IFRS 9 reflects expected credit losses, as opposed to only incurred credit losses under IAS 39. Under the impairment approach under IFRS 9, it is not necessary for a credit event to have occurred before credit losses are recognised. Instead, an entity always accounts for expected credit losses and changes in those expected credit losses, which will be updated at each reporting date.

As at 1 January 2018, the Group reviewed and assessed existing financial assets, amounts due from customers, for impairment using reasonable and supportable information that is available without undue cost or effort in accordance with the requirements of IFRS 9 to determine the credit risk. An additional credit allowance of £1,202,000 has been recognised against retained earnings net of its related deferred tax impact, at £974,000 (see note 2(d)).

The additional loss allowance recognised upon the initial application of IFRS 9 as disclosed above resulted entirely from a change in the measurement attribute of the loss allowance relating to the financial assets.

In determining the expected credit losses for these assets, the Group have taken into account the historical default experience and the financial position of the counterparties in estimating the likelihood of default of each of these financial assets occurring within their loss assessment time horizon.

IFRS 15 'Revenue from contracts with customers'

IFRS 15 'Revenue from contracts with customers' establishes principles for determining when and how revenue arising from contracts with customers should be recognised. An entity should recognise revenue when it transfers goods or services to a customer based on the amount of consideration to which the entity expects to be entitled from a customer in exchange for fulfilling its performance obligations.

Management has undertaken a detailed assessment of all contracts and revenue streams across all business units using the five-step approach specified by IFRS 15: identify the contract(s) with the customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognise revenue when (or as) a performance obligation is satisfied.

The Group generates revenue and other income from external customers mainly in the UK from three main types of business: Sales and Lettings, Financial Services and Business to Business (B2B). Management is required to take all relevant factors and circumstances into account when determining the revenue recognition methods that appropriately depict the transfer of control of goods or services to the customer for each performance obligation. This requires management to make certain judgements, including: the determination of the performance obligations in the contract; whether the Group is acting as principal or agent; the estimation of any variable consideration in determining the contract price; the allocation of the price to the performance obligations inherent in the contract; and an appropriate method of recognising revenue. Other key considerations comprise the appropriate accounting treatment of any costs incurred to obtain the contract and the treatment of any costs incurred to fulfil a contract.

In determining the appropriate method of recognising revenue, management is required to make judgements as to whether performance obligations are satisfied over a period of time or at a point in time. For performance obligations that are satisfied over a period of time, judgements are made as to whether the output method or the input method is more appropriate to measure progress towards complete satisfaction of the performance obligation. If performance obligations are not satisfied over time, the Group recognises revenue at a point in time.

The adoption of IFRS 15 has impacted the financial statements as follows:

The Group adopted IFRS 15 on 1 January 2018 and has elected to restate comparative information from prior periods (see note 2(d)). The Group has applied the practical expedients under which contracts that began or ended in 2017, or contracts that were completed prior to 1 January 2017, have not been restated.

New standards and interpretations not yet adopted

Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2018 reporting periods and have not been early adopted by the Group. None of these new standards or interpretations are expected to have a material impact on the consolidated financial statements of the Group, with the exception of the following:

IFRS 16 'Leases'

IFRS 16 'Leases' deals with the definition of a lease and recognition and measurement of leases and establishes principles for disclosures. The standard is effective for accounting periods beginning on or after 1 January 2019. The Group will adopt IFRS 16 for the year ending 31 December 2019.

IFRS 16 distinguishes leases and service contracts on the basis of whether an asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and are replaced by a model where a right of use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all are on balance sheet), except for short term leases and leases of low value assets.

The right of use asset is initially measured at cost and subsequently measured at cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. The classification of cash flows will also be impacted as operating lease payments under IAS 17 are presented in operating cash flows; whereas under the IFRS 16 model, the lease payments are split into a principal and an interest portion which will be presented as financing and operating cash flows respectively. In addition, extensive disclosures are required by IFRS 16.

As at 31 December 2018, the Group has non-cancellable operating lease commitments of £105,690,000. IAS 17 does not require the recognition of any right of use asset or liability for future payments for these leases; instead, certain information is disclosed as operating lease commitments in the full financial statements. A preliminary assessment indicates that these arrangements will meet the definition of a lease under IFRS 16, and hence the Group will recognise a right of use asset and a corresponding liability in respect of these leases unless they qualify for low value or short term leases upon the application of IFRS 16.

The new requirement to recognise a right of use asset and a related lease liability is expected to have a significant impact on the amounts recognised in the Group's consolidated balance sheet. Whilst the IFRS 16 assessment is ongoing it is not practicable to quantify the impact. It is likely the Group will follow a modified transition approach.

In contrast, for finance leases where the Group is a lessee, as the Group has already recognised an asset and a related finance lease liability, and in cases where the Group is a lessor (for the sub-let of properties), the directors do not anticipate that the application of IFRS 16 will have a significant impact on the amounts recognised in the Group's consolidated financial statements.

(d) Prior year error correction in respect of the restitution of trust funds

The Group holds money on behalf of parties to property transactions. For example, the Group holds deposits made by lessees of properties. Generally, the Group does not recognise client money on its consolidated balance sheet. However, the Group deposits client money in interest-bearing accounts and recognises the interest component as finance income in the Group's consolidated income statement.

The Group takes all practical and reasonable measures to identify the ownership of the funds and to trace and return funds in a timely manner. Historically, funds that remained untraceable and were more than six years old were recognised in the Group's consolidated income statement as other income and an indemnity was put in place by Countrywide Group plc to the underlying subsidiary entities to ensure that any claims arising subsequently on these funds would be met by Countrywide Group plc. In practice, less than 1% of the funds released have ever been claimed and paid out.

At the half year, following a management review of client accounting, and having received legal advice on the treatment of funds, the Group understood that some of these historical and untraceable funds arising from the Lettings business for the period from 2008 to 2017 should be held in trust under a separate client account. A liability of £4,681,000 in respect of certain untraceable funds for such period was therefore recognised in the Group's balance sheet in the 2018 condensed consolidated interim report, £4,456,000 of which was recognised as a prior year error correction, along with a related reduction in retained earnings net of deferred tax‎. These funds were transferred into a separate client account in August 2018. Additional investigation and further legal guidance during the second half of 2018 resulted in a revision to the accounting estimate. Accordingly, a further charge of £5,185,000 has been recognised as an exceptional cost in H2 2018. As a result, management has transferred an additional £5,185,000 into a separate client account in December 2018 in full restitution of these client funds.

The tables below show the impact of the adoption of IFRS 15 and the impact of the prior year error correction on the balance sheets as at 1 January 2017 and 31 December 2017, and on the income statement and cash flow statement for the year ended 31 December 2017. The impact of the adoption of IFRS 9 is shown on the balance sheet as at 1 January 2018.

3. Critical accounting judgements and key sources of estimation uncertainty

In application of the Group's accounting policies, which are described in note 2, the directors are required to make judgements (other than those involving estimations) that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities and the disclosure of contingent assets and liabilities. These estimates and associated assumptions are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates, given the uncertainty surrounding the assumptions and conditions upon which the estimates are based.

The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both the current and future periods.

Critical judgements in applying the Group's accounting policies

The following are critical judgements, apart from those involving estimations (which are dealt with separately below), that the directors have made in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

Exceptional items

Certain items are presented separately in the income statement as exceptional where, in the judgement of the directors, they need to be disclosed separately by virtue of their nature, size or incidence in order to obtain a clear and consistent presentation of the Group's underlying business performance. Further details of material, non-recurring items the directors have disclosed as exceptional items, including the costs of restructuring the business, are provided in note 10.

Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Impairment of goodwill and indefinite life intangible assets

Determining whether goodwill and indefinite life intangible assets are impaired requires an estimation of the value in use of the cash generating units to which the assets have been allocated. Calculating the cash flows requires the use of judgements and estimates that have been included in our strategic plans and long range forecasts. In addition, judgement is required to estimate the appropriate interest rate to be used to discount the future cash flows. The data necessary for the execution of the impairment tests is based on management estimates of future cash flows, which require estimating revenue growth rates and profit margins. Further details of impairment reviews are set out in note 14.

Certain items are presented separately in the income statement as exceptional where, in the judgement of the directors, they need to be disclosed separately by virtue of their nature, size or incidence in order to obtain a clear and consistent presentation of the Group's underlying business performance. Further details of material, non-recurring items the directors have disclosed as exceptional items, including the costs of restructuring the business, are provided in note 10.

Professional indemnity provisions

When evaluating the impact of potential liabilities arising from claims against the Group, the Group takes legal and professional advice to assist it in arriving at its estimation of the liability taking into account the probability of the success of any claims and also the likely development of claims based on recent trends.

The Group has made provision for claims received under its professional indemnity insurance arrangements. The provision can be broken down into three categories:

The estimate of these provisions by their nature is judgemental. The three key inputs, claim rate, claim liability rate and average loss, are very sensitive to any change in trends.

Claim rate - the number of claims received compared to the number of surveys performed.

The number of valuation claims continued to decline significantly throughout 2018 to historically low levels. There is a possible risk that a significant rise in mortgage interest rates could lead to an increase in repossessions and potential losses being incurred by the lenders. While there is uncertainty around the future of the UK economy as the Government deals with Brexit, there are no macroeconomic indicators that this is a reasonable likelihood in the short term and the directors do not consider it appropriate to provide for additional claims due to macroeconomic changes. During 2018 we experienced a modest decrease in the rate of claims received. It should be noted that a 10% increase in the valuation claim rate applied to all surveys could lead to a £0.4 million increase in the provision for future claims.

Claim liability rate - the number of claims closed with a loss compared to the number of closed claims.

Our claim handlers and panel lawyers robustly defend all our claims and as a result they have achieved a number of successes throughout 2017 and 2018 where clients have withdrawn their claim. In 2018 we did see a modest increase to the claim liability rate but owing to the low volumes of claims this has not had a material impact on the overall provision.

The liability rate is sensitive to changes in experience and therefore we have used the average liability rate for claims closed over three years as the most appropriate claim liability rate to estimate the provision for those claims already received. A 10% increase in the average liability rate applied to open claims at the end of the year and unreported claims anticipated would impact the provision for claims already received by £0.4 million.

Average loss - the average of total incurred losses for closed claims.

Average losses on claims settled have reduced by 7% in 2018 versus prior year (based on weighted average across the various claim populations). Applying a 10% increase in the average loss to the open claims received would increase the total provision required for this population (the IBNER) by £0.1 million.

Onerous lease provisions

Onerous lease provisions with a present value of £6.1 million were recognised in relation to economic outflows arising from onerous contracts in respect of loss making branches (at the direct contribution level), unwinding over periods up to 2026 (comprising £4.2 million in respect of onerous lease provisions and £1.9 million in respect of dilapidations provisions - see note 23). The economic outflows in relation to these loss making branches will continue to be monitored to ensure that provisions are unwound in line with the losses being reported within operating results, or released in full when a branch is forecast to be profitable on turnaround, or ceases to become an onerous contract due to other circumstances, for example if a branch is sublet or a lease is renegotiated so that cash flows become positive.

The liability is dependent on the status of each lease and there is no correlation between lease and poor performance. Since the liability is based on the lower of the future anticipated operating losses and the contractual commitment to the end of the lease there is the possibility for the losses for some of those branches to deteriorate and therefore the provision would increase up to the level of the lease commitment. This would add an additional £1.4 million to the provision.

Restitution of trust funds

As described in note 2(d), a liability of £4,681,000 in respect of certain untraceable funds for prior years was recognised in the Group's balance sheet in the 2018 condensed consolidated interim report, £4,456,000 of which was recognised as a prior year error correction, along with a related reduction in retained earnings net of deferred tax‎. These funds were transferred into a separate client account in August 2018. Having received further legal advice in the second half of 2018, the Group now understands that all of these historical and untraceable funds arising from the Lettings business for the period from 2008-2017 should be held in trust under a separate client account. As a result, management has transferred an additional £5,185,000 into a separate client account in December 2018 in full restitution of these client funds. This change in advice during the latter part of 2018 has caused a change in the accounting estimate taken at 30 June 2018, and been treated as an exceptional cost. The estimate is therefore based on full restitution of all such funds.

4. Segmental reporting

Management has determined the operating segments based on the operating reports reviewed by the Board that are used to assess both performance and strategic decisions. Management has identified that the Board is the chief operating decision maker in accordance with the requirements of IFRS 8 'Operating segments'.

The change to the Group's segmental presentation in 2018 is aligned with management's current internal financial reporting framework (including monthly management information reports reviewed by the directors, and the Board as the chief operating decision maker) and the basis on which decisions for allocation of resources and assessing performance of segments is undertaken.

The Board considers the business to be split into three main types of business generating revenue: Sales and Lettings, Financial Services and Business to Business (B2B), and 'all other segments' comprising central head office functions.

The Sales and Lettings network combines estate agency and lettings operations. Estate agency generates commission earned on sales of residential property and Lettings earns fees from the letting and management of residential properties and fees for the management of leasehold properties. The Financial Services division receives commission from the sale of insurance policies, mortgages and related products under contracts with financial service providers. Business to Business (B2B) services comprise all lines of business which are delivered to corporate clients, including Surveying Services, Conveyancing Services and revenue from Lambert Smith Hampton. Surveying Services generates surveying and valuation fees which are received primarily under contracts with financial institutions with some survey fees being earned from home buyers. Conveyancing Services generates revenue from conveyancing work undertaken from customers buying or selling houses through our network. Lambert Smith Hampton's revenue is earned from commercial property consultancy and advisory services, property management and valuation services. Other income generated by head office functions relates primarily to sub-let rental income or other sundry fees.

The Board assesses the performance of the operating segments based on a measure of adjusted EBITDA. This measurement basis excludes the effects of exceptional items, share-based payment charges and related National Insurance contributions, employment-linked contingent consideration and income from joint ventures. Finance income and costs are not allocated to the segments, as this type of activity is driven by the central treasury function which manages the cash and debt position of the Group.

The revenue from external parties reported to the Board is measured in a manner consistent with that in the income statement.

Revenue and other income from external customers arising from activities in the UK was £624,810,000 (2017: £670,407,000) and that arising from activities overseas was £2,261,000 (2017: £2,371,000).

The assets and liabilities for each operating segment represent those assets and liabilities arising directly from the operating activities of each business unit. Pension assets and liabilities, and liabilities arising from the revolving credit facility and related derivative financial instrument, are not allocated to operating segments but allocated in full to 'All other segments' within the segmental analysis as they are managed by central Group functions. Non-current assets attributable to the UK of £334,595,000 (2017: £571,848,000) are included in the total assets in the tables on the following pages. Non-current assets of £825,000 (2017: £922,000) are attributable to the overseas operations. The equity investment in joint venture is disclosed within 'All other segments' and is £1,464,000 (2017: £2,982,000).

The financial assets at fair value through profit or loss are disclosed within 'All other segments' (£153,000 (2017: £17,085,000 available-for-sale financial assets)).