Lsl Prop Regulatory News (LSL)

· Highly resilient Revenue and Underlying Operating Profit performance in the context of challenging residential market conditions. Group Revenue up 4%, Group Underlying Operating Profit1 down 4% to £35.9m (2017: £37.5m) and Group Adjusted EBITDA down 3% to £41.6m (2017: £42.7m).

· Proposed final dividend of 6.9p bringing full year dividend to 10.9p per share at the upper end of the range of our stated policy.

· Leading market positions: market leader in Surveying, second largest combined networks in Financial Services, and market leading positions in Estate Agency.

· Overall Estate Agency Division income up 3% year-on-year and operating profit down 24% reflecting the effect of operational gearing on lower Residential Sales exchange volumes which more than offset the benefits from Financial Services income and Lettings income growth.

· Overall Surveying Division revenue up 9% year-on-year benefitting from the new Lloyds Bank plc contract with operating profit up 8%.

· Write-down of LSL investment in Yopa by £12.2m

· Net Bank Debt of £32.1m (2017: £30.0m) and low level of gearing5 at 0.8x EBITDA (2017: 0.7x).

Commenting on today's announcement, Simon Embley, Chairman, said:

"The Group delivered a highly resilient revenue and Underlying Operating Profit performance in 2018 despite challenging residential property market conditions. We continue to deliver a range of proactive self-help initiatives demonstrating the breadth of opportunity across the Group.

Market conditions in 2019 have been notably softer than the equivalent period in 2018, whilst LSL's financial performance so far in 2019 has been marginally behind the Board's expectations. Nevertheless, at this early stage in the year, the Board's current expectation is that the Group will deliver a full year Underlying Operating Profit in line with its prior expectations, as the business is expected to continue to benefit from the range of LSL's ongoing self-help measures.

We continue to remain cautious on the residential property market outlook for 2019 given the current uncertainty over the UK and global political and economic environment and the potential impact on UK consumer confidence.

The Group has a robust balance sheet with relatively low levels of gearing and is highly cash generative at an operational level. The Board remain confident of the opportunities for further positive progress for the Group."

Estate Agency Financials

· Strong growth in Financial Services income of 17% year on year (organic growth 1%) reflecting the acquisition of two mortgage brokers: PTFS and RSC

· Steady growth of recurring income with Lettings income increasing 4% year-on-year (organic growth: 3%)

· Six lettings book acquisitions were made during 2018, in line with LSL's stated strategy, for a total consideration of £1.9m

· Residential Sales exchange revenue down by 9% reflecting challenging residential property market conditions

· Marsh & Parsons delivered a good revenue performance despite a challenging London market. Total revenue was down 2% year-on-year as Lettings income continued to perform positively with growth of 4% largely offsetting the 13% fall in Residential Sales exchange revenue. Full year operating profit fell to £2.3m (2017: £3.9m). Adjusted EBITDA was £3.4m (2017: £4.9m)

· Reshaping of the Your Move and Reeds Rains branch networks commenced in February 2019.

· LSL retains a strong position in its traditional Estate Agency business. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that Estate Agency branches will continue to remain core to providing the service our customers expect

· LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of £20.0m for Yopa has been written down through reserves by £12.2m to £7.8m as at 31st December 2018 to reflect the Board's assessment of fair value

Surveying Financials

· The Surveying Division delivered strong revenue and operating profit performance with revenue growth of 9%, operating profit growth of 8% and strong operating margins of 29.3% (2017: 29.4%). Revenues included a material contribution in the second half from the successful commencement of the Lloyds Bank plc surveying and valuation services relationship.

· Continued positive progress in settling historic Professional Indemnity (PI) claims with an exceptional provision release of £2.2m in 2018 as claims were settled below previous expectations

Change to segment reporting

· To reflect the growth and increased importance of LSL's Financial Services businesses, effective from 1st January 2019, LSL will report three segments: Estate Agency, Financial Services and Surveying

This announcement has been determined to contain inside information.

For further information, please contact:

Notes:

1. Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4 to the Financial Statements)

2. Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 4 to the Financial Statements)

3. Refer to Note 6 to the Financial Statements for the calculation

4. Refer to Note 10 to the Financial Statements for the calculation

5. Operational gearing is defined as Net bank Debt divided by Group Adjusted EBITDA2

Notes on LSL:

LSL is a leading provider of residential property services to its key customer groups. Services to consumers include: residential sales, lettings, surveying, conveyancing support, and mortgage, pure protection and general insurance brokerage services. Services to mortgage lenders include: valuations and panel management services, and asset management and property management services. For further information, please visit LSL's website: lslps.co.uk

Introduction

The Group delivered a highly resilient revenue and operating profit performance in 2018 despite challenging residential property market conditions. Group Underlying Operating Profit1 of £35.9m in 2018 was 4% below the prior year (2017: £37.5m) with Group Adjusted EBITDA2 down 3%. Group Revenue in 2018 grew by 4% to £324.6m (2017: £311.5m) reflecting overall growth in both Divisions.

We continue to deliver a range of proactive self-help initiatives demonstrating the breadth of opportunity across the Group. These initiatives included the material contract win for the supply of surveying and valuation services to Lloyds Bank plc, the acquisitions in our Financial Services business of PTFS and RSC, the acquisition of a c.35% holding in Mortgage Gym, a digital mortgage marketplace business, and the recommencement of our lettings book acquisition programme with six lettings books acquired during the period.

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks and operations announced on 5th February 2019 demonstrate our commitment to evolve our business model to adapt to changes in the landscape and customer demands in order to drive value for our Shareholders.

The Your Move and Reed Rains future focus on 144 keystone branches is to create a platform that will benefit from their larger scale, enabling us to invest in people and technology with the aim of providing enhanced levels of service to our customers whilst ensuring operational performance is optimised by competing more effectively in local markets. Delivering the ways of working programme into Your Move and Reeds Rains is expected to deliver material improvement in Your Move and Reeds Rains operating profit, assuming no material change in market conditions.

LSL retains a strong position in its traditional Estate Agency business. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that Estate Agency branches will continue to remain core to providing the service our customers expect.

LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of £20.0m for Yopa has been written down through reserves by £12.2m to £7.8m as at 31st December 2018 to reflect the Board's assessment of fair value.

Dividend

The Board continues to support our previously communicated dividend policy, to apply a dividend pay-out ratio of between 30% to 40% of Group Underlying Operating Profit1 after interest and tax. The Board has reviewed the policy while considering the risks and capital management decisions facing the Group.

Adjusted Basic Earnings Per Share for 2018 was 27.2 pence, a decrease of 4% on the prior year (2017: 28.3 pence). The Board has a positive view of the future prospects for the business whilst also being mindful of the uncertain economic and political landscape which has an impact on consumer sentiment. The proposed dividend payment is at the upper end of the range of our stated policy and a final dividend of 6.9 pence per share (2017: 7.3 pence per share) will be proposed to Shareholders at the forthcoming AGM, giving a total dividend for 2018 of 10.9 pence per share (2017: 11.3 pence per share). The ex-dividend date for the final dividend is 21st March 2019 with a record date of 22nd March 2019 and a payment date of 7th May 2019. The last date for election is 5th April 2019.

Corporate Governance and Board

The Board remains committed to high levels of corporate governance and during 2018, LSL has complied in all respects with the UK Corporate Governance Code (April 2016 edition). We note the publication of the revised UK Corporate Governance Code and Guidance on Board Effectiveness which was published in July 2018 and will apply to LSL from 1st January 2019. We have begun the implementation of actions to reflect the 2018 Code in our corporate governance arrangements, including the implementation of measures to support greater stakeholder engagement (including workforce engagement) and the development of LSL's culture, purpose and values. Further details on the steps we are taking are contained in our Corporate Governance Report.

In relation to 2018, as Chairman, I am responsible for leadership of the Board, and I have together with my fellow directors reviewed the effectiveness of the Board and its Committees. The 2018 annual evaluation exercise had regard to the requirements of both the 2016 and 2018 editions of the Code and its associated guidance. In particular, we reviewed the composition of the Board and its Committees and our succession arrangements. Following this review we concluded that we have the appropriate balance of skills, independence and knowledge of the Group together to enable the Board to discharge its duties and responsibilities effectively. The evaluation also considered other matters such as leadership, division of responsibilities, meeting arrangements, and included a review of the annual evaluation process itself.

Details of our corporate governance arrangements and the recommendations arising from the 2018 evaluation exercise are contained within the Corporate Governance Report of the Annual Report and Accounts 2018 together with details of how we have implemented recommendations which arose from the 2017 evaluation exercise.

I would like to take this opportunity to thank Kumsal Bayazit Besson who has been a Non Executive Director since September 2015 and who intends to resign from the Board and its Committees with effect from the 2019 AGM. Kumsal has made a significant contribution during her tenure as a Director and she is leaving LSL to focus on her new role as CEO of Elsevier.

I would also like to welcome Darrell Evans, who joined the Board and its Committees as a Non Executive Director on 28th February 2019. Darrell joins LSL with significant experience in Financial Services and he is currently the Chief Commercial Officer at the Co-Operative Bank plc.

The Nominations Committee will, on behalf of the Board, review the Board's composition during 2019.  Details relating to all our Directors are included in The Board section of the Annual Report and Accounts 2018 and our website.

Outlook

Market conditions in 2019 have been notably softer than the equivalent period in 2018, whilst LSL's financial performance so far in 2019 has been marginally behind the Board's expectations. Nevertheless, at this early stage in the year, the Board's current expectation is that the Group will deliver a full year Underlying Operating Profit in line with its prior expectations, as the business is expected to continue to benefit from the range of LSL's ongoing self-help measures.

We continue to remain cautious on the residential property market outlook for 2019 given the current uncertainty over the UK and global political and economic environment and the potential impact on UK consumer confidence.

The Board currently expects to see a material reduction in the volume of house purchase transactions compared to the prior year. Mortgage costs continue to be low by historic standards and mortgage availability remains good. The medium to longer term fundamentals of the UK housing market remain solid.

The final arrangements for the planned exit from the European Union are uncertain. In the eventuality that the outcome leads to a changed impact on consumer confidence and our business, we will update our Shareholders.

Although Brexit and the current political environment continues to create uncertainty, the Group has a robust balance sheet with relatively low levels of gearing and is very cash generative at an operational level.

LSL continues to execute on its stated strategy and we are confident that LSL, with its market leading brands, broad portfolio of residential property services and the benefits from the proactive self-help measures, remains well positioned to perform well given a range of potential market conditions, in order to maximise Shareholder value. The Board remain confident of the opportunities for further positive progress for the Group.

Simon Embley

Chairman

5th March 2019

Note 1 Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4 to the Financial Statements).

Note 2 Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property plant and equipment (as defined in Note 4 to the Financial Statements).

Group Chief Executive's Review

2018 Overview

In the context of challenging market conditions, the Group delivered a highly resilient performance in 2018, underpinned by a continuing range of self-help measures delivered across the Group.

Group revenues for the year ended 31st December 2018 increased by 4% to £324.6m (2017: £311.5m) reflecting overall growth in both Divisions, with Estate Agency revenue up 3% and Surveying revenue up 9%. Group Underlying Operating Profit1 was down 4% to £35.9m (2017: £37.5m), and Group Adjusted EBITDA2 was down 3% to £41.6m (2017: £42.7m). Profit before tax of £23.1m was down 42% compared to the prior year (2017: £40.1m).

The Group has a strong balance sheet with closing Net Bank Debt at 31st December 2018 of £32.1m (2017: £30.0m) and low level of gearing3 at 0.8 times Group Adjusted EBITDA (2017: 0.7 times). The modest increase in Net Debt in 2018 is after incurring total cash consideration of £11.8m for the funding of two Financial Services acquisitions (PTFS and RSC), one Financial Services investment (Mortgage Gym) and six lettings books acquisitions during the year. LSL also maintained the payment of dividends to Shareholders during the year.

The Group generated strong cash from operations of £36.9m (2017: £41.5m) converting 103% of Group Underlying Operating Profit to cash-flow from operations (pre PI and exceptionals) (2017: 117%). 

In the Estate Agency Division, we continued to invest in the growing parts of our businesses and delivered strong year-on-year revenue growth in Lettings (+4%) and Financial Services (+17%). In the Surveying Division, we delivered strong operating profit growth (+9%) and strong margins (29.3%).

During 2018, we continued to execute on our stated strategy and made positive progress across the Group as follows:

· In May 2018, we were pleased to announce the material contract win for the supply of surveying and valuation services to Lloyds Bank plc. The initial performance of this contract is in line with expectations

· During 2018, LSL continued its strategy to evaluate selective acquisitions and completed two Financial Services related acquisitions, PTFS and RSC which are both performing in line with expectations. These acquisitions support LSL's stated strategy of enhancing its position as a leading mortgage distributor and are an excellent fit with our existing Financial Services businesses. LSL also acquired a c.35% holding in Mortgage Gym, a digital mortgage marketplace business in July 2018

· During 2018, LSL restarted its lettings book acquisition programme with six lettings books acquired during the period

Reshaping Your Move and Reeds Rains branch networks

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks and operations announced on 5th February 2019 are proceeding in line with expectations. The Your Move and Reeds Rains branch networks have been reduced from 308 to 144 keystone branches following the closure and merging of 81 neighbouring branches into the keystone branch network, the franchising of 39 branches and the closure of 44 branches.

Delivering the ways of working programme into Your Move and Reeds Rains is expected to deliver material improvement in Your Move and Reeds Rains operating profit, assuming no material change in residential property market conditions.

The Market in 2018

The UK residential property market was subdued in 2018. Approvals for house purchases4 in 2018 were down by 1.9% with the decline in market transactions continuing to be more substantial in London and the South East5. Total mortgage approvals4 increased by 0.6% in 2018, with the increase in remortgage approvals of 3.9% offsetting the fall in house purchase approvals. The increase in remortgage approvals included strong growth in the first half of 2018 (+7.9%) compared to the same period in 2017 reflecting an increase in remortgage activity due to the widely anticipated interest rate increase announced by the Bank of England in May 2018. Second half mortgage activity in 2018 was broadly flat against the same period in 2017.

Average house prices6 in England and Wales grew by 0.1% (2017: 3.9%) to £305,284 with a decline in Greater London (-1.1%). Excluding Greater London and the South East, the average increase was 1.0%.

The proportion of residential housing stock available for sale with online and hybrid estate agents sector continued to grow modestly on a year-on-year basis, increasing from 7% in 2017 to 8% in 20187.

Total gross mortgage lending in 2018 was £269bn8 (2017: £261bn). The proportion of mortgage lending in the market placed through intermediaries increased to 71% in 2018 (2017: 68%)9.

Following market declines in the repossession market in the past few years, market repossessions volumes declined in 2018, reducing by 9.2% to 6,75010 total repossessions as interest rates remained historically low and this was the lowest number since 1981.

Our market position

LSL continues to hold market leading positions in its core Estate Agency business comprising 12 Estate Agency subsidiaries: Your Move, Reeds Rains, LSLi group (9 companies) and Marsh & Parsons. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that our Estate Agency branches will continue to remain core to providing the service our customers expect.

In Your Move and Reeds Rains, the newly established keystone network of 144 branches are situated in core locations across the UK and generally have larger teams of dedicated experts in Residential Sales, Lettings and Financial Services roles than the average Your Move and Reeds Rains branches previously had in place.

The ambition for these keystone branches is to create a platform that will benefit from their larger scale, enabling us to invest in people and technology with the aim of providing enhanced levels of service to our customers whilst ensuring operational performance is optimised by competing more effectively in local markets. Our commitment to the new IT platform and investment in enhanced technology is intended to give these Your Move and Reeds Rains branches the opportunity to cover a wider geography and benefit from further scale.

Marsh & Parsons continues to implement its well established strategy of expanding its branch network with a focus on locations outside prime Central London. During 2018 we opened one new Marsh & Parsons branch in Chiswick, in outer prime Central London, which is performing in line with expectations.

The LSLi group of companies today operate 57 owned branches and they will continue with their existing strategy to develop the nine well established local companies in their existing markets in the South East of England. In addition, in 2019 the LSLi group of companies will continue to actively evaluate opportunities for lettings book acquisitions.

LSL has continued to monitor the progress of the Government's review of tenant fees which sets out to ban letting fees paid by tenants in the private rented sector and capping tenancy deposits in England and Wales. The Government has confirmed that the legislation will come into effect on 1st June 2019. In response to the change in legislation, LSL has made the necessary preparations to ensure these changes will be fully implemented across all of LSL's Estate Agency brands. We have also put in place a range of commercial measures in lettings across our Estate Agency brands to optimise future organic revenue growth.

In Financial Services, during 2018 the Group arranged total mortgage lending of £29.0bn (2017: £21.0bn). Measured by the number of appointed representatives, as at 31st December 2018, LSL's overall combined broker networks are the second largest in the UK11. Financial Services income represented 27% of total Group Revenue in 2018 (2017: 24%) demonstrating LSL's growing position as a leading financial services distributor.

Our Surveying Division became the clear market leader in 2018, maintaining strong relationships with many of the UK's largest lenders. During 2018 LSL was awarded a material contract to supply surveying and valuation services to Lloyds Bank plc. The five year contract included the transfer to e.surv of the existing Lloyds Bank plc surveyors and back-office employees. LSL's Surveying Division is the UK's largest provider of residential valuation services nationwide and is the largest employer of surveyors in the UK5 with 503 qualified operational surveyors as at 31st December 2018.

Yopa

LSL retains a strong position in its traditional Estate Agency business. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that Estate Agency branches will continue to remain core to providing the service our customers expect.

LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of £20.0m for Yopa has been written down through reserves by £12.2m to £7.8m as at 31st December 2018 to reflect the Board's assessment of fair value.

Change to Segment reporting

LSL's Financial Services revenue has grown materially in recent years, through both organic growth and selective acquisitions. LSL's Financial Services Revenue CAGR over the 5-year period, 2014 to 2018, has been 19%, representing approximately 27% of total Group revenue in 2018, compared to 14% in 2013.

The Board has carried out a review of the structure of the financial information it requires in order to assess the performance of the Group, allocate resources and assist in investor understanding of the underlying performance trends and drivers of value.

To reflect the growth and increased importance of LSL's Financial Services businesses, the Board has decided to update the Group segmental reporting effective from 1st January 2019.

The Group currently reports two segments: Estate Agency and Related Services and Surveying and Valuation. Services. From 1st January 2019 LSL will report three segments: Estate Agency; Financial Services; and Surveying and Valuation Services. The Financial Services segment will incorporate all LSL's Financial Services businesses. The Estate Agency segment will primarily incorporate the results from the Estate Agency networks (Your Move, Reeds Rains, LSLi and Marsh & Parsons) and Asset Management. The Surveying and Valuation Services segment is unchanged.

The 2018 and 2017 financial results contained within this Preliminary announcement are on the previous segment reporting basis.

Strategy

LSL remains committed to delivering on our stated strategy which now includes the separate Financial Services segment:

Estate Agency

· Ambition to achieve £80k-£100k profit per branch12 in the medium term based on the expectation of a normalised level of market transactions

· Ambition to expand the number of Marsh & Parsons branches to a total of 36 in the medium term, particularly outside prime Central London

· Grow recurring and where market conditions permit counter-cyclical income streams

· Evaluate selective acquisitions of Residential Sales businesses and Lettings books

Financial Services

· Enhance LSL's position as a leading distributor of mortgage and non-investment insurance products

· Consistent delivery of appropriate outcomes for consumers with a focus on "best practice" standards of regulatory compliance

· Enhancement of technology solutions to improve the customer experience and operational efficiency

· Evaluate further selective Financial Services acquisitions

Surveying and Valuation Services

· Optimise contract performance and revenue generation from business to business customers

· Achieve further improvement in efficiency and capacity utilisation

· Use technology to target further improvements in customer satisfaction and performance

· Continue the graduate training programme

LSL performance in 2018

Estate Agency Division

Total Estate Agency income of £254.8m (2017: £247.4m) increased by 3%. This increase resulted from the consistent execution of our strategies with strong growth in both Lettings income (+4%) and in Financial Services Income (total growth +17%, organic growth +1%). Operating profit being down 24% reflects the effect of operational gearing on lower residential exchange volumes which more than offset the benefits from Financial Services income and Lettings income growth

Residential Sales exchange income

Residential Sales exchange income decreased by 9% to £69.9m (2017: £76.6m) due primarily to the final quarter of 2017 residential property market conditions impacting opening 2018 pipelines and subdued activity during 2018. Residential Sales exchange income was also impacted by selective branch closures in the final quarter of 2017 (2% of wholly owned branch network).

LSL has remained extremely disciplined in its Residential Sales exchange fee strategy throughout 2018. Average LSL Estate Agency Residential Sales exchange fee (£) per unit increased by 1% to £3,071 (2017: £3,042).

Lettings income

In 2018 we delivered growth in Lettings income of 4% (organic growth: 3%). Lettings income represented 30% of total Estate Agency Division income in 2018 (2017: 30%).

In line with our stated strategy, we restarted our lettings book acquisition programme during 2018 and acquired six lettings books in 2018 for a total consideration of £1.9m. The lettings books are performing in line with expectations and have been successfully integrated into the Estate Agency network.

Financial Services

Total Financial Services income grew strongly again with 17% year-on-year growth in 2018. Adjusting for the acquisitions of Personal Touch Financial Services and RSC New Homes in the first quarter of 2018, we delivered organic growth of 1% which was slightly higher than the market as measured by Total Mortgage Approvals. Financial Services income increased as a proportion of the Estate Agency businesses and represented 34% of total Estate Agency Division income in 2018 (2017: 30%) reflecting our continuing strategy to enhance LSL's position as a leading distributor of mortgage and non-investment insurance products.

In 2018, LSL further strengthened its position as a leading distributor of mortgage and non-investment insurance products and LSL delivered strong overall growth in the value of mortgage completions which were up 38% to £29.0bn in 2018 (2017: £21.0bn). LSL's market share is estimated to be 8% of the total market value of mortgage completions13.

Marsh & Parsons

LSL estimates that Residential Sales volumes in the prime Central London market reduced by 15% to 20% in 2018 with Greater London house prices falling by 1.1%. Given the overall challenging prime Central London market, Marsh & Parsons delivered a resilient top line performance with revenue down by 2% in 2018 to £33.5m (2017: £34.3m).

Marsh & Parsons Residential Sales income fell by 13% in 2018 which represents a solid performance in light of the overall prime Central London market conditions. We are pleased with the Lettings performance with income growth of 4%. Lettings revenue now represents 63% of Marsh & Parson's total revenue (2017: 59%).

Expenditure at Marsh & Parsons was broadly flat year-on-year reflecting the increased staff costs of the Chiswick office opened in April 2018 and the full year impact of the two office openings in 2017, being largely offset by lower costs in a number of expenditure categories. Full year operating profit fell to £2.3m (2017: £3.9m). Adjusted EBITDA was £3.4m (2017: £4.9m). Profit in 2017 included a gain on sale of property of £0.7m (2018: £nil).

We continued with our branch expansion strategy in 2018, opening one new branch during the year in the outer prime Central London location of Chiswick. We are pleased with the performance of this new branch. This takes our total number of Marsh & Parsons branches to 28 as at 31st December 2018.

Our ambition remains to expand the number of Marsh & Parsons branches to a total of 36 in the medium term, particularly outside prime Central London. Outer prime Central London has not been as negatively impacted by subdued market conditions as prime Central London and Marsh & Parsons is looking to expand its branch footprint in outer prime Central London locations.

Estate Agency profit per branch (Your Move, Reeds Rains and LSLi)

Operating profit per owned branch in 2018 was £18,300 (2017: £32,000) due to the impact of the challenging residential sales market conditions on Residential Sales exchange income partly offset by growth in Financial Services income and Lettings income.

Surveying Division

The Surveying Division delivered strong revenue performance increasing by 9% to £69.8m (2017: £64.1m), which included a material contribution in the second half from the successful commencement of the Lloyds Bank plc surveying and valuation services relationship, up 25% year on year. The first half was down 6% year on year, impacted by market conditions and lender mix.

The Surveying Division delivered strong growth in operating profit of 8% to £20.4m (2017: £18.9m) and continued to deliver strong operating margins of 29.3% in 2018 (2017: 29.4%).

Total number of jobs performed during the year was 366k (2017: 309k) with income per job of £191 (2017: £207). The total number of qualified operational surveyors at 31st December 2018 was 503, an increase of 182 over 2017 due primarily to the transfer to e.surv of the existing Lloyds Bank plc surveyors as part of the contract awarded to e.surv during May 2018, to supply surveying and valuation services to Lloyds Bank plc. The initial performance of the contract for the supply of surveying and valuation services to Lloyds Bank plc is in line with expectations.

Our on-going graduate programme continues to be successful and assists in alleviating the impact of capacity constraints in the market.

In 2018 the Group continued to make positive progress in addressing historic claims and there has been a net £2.2m exceptional gain and reduced PI Costs payments of £1.7m during 2018 compared to the previous year (2017: £3.3m).

Our customers

Our continued focus on providing the best service to our customers has been recognised in 2018 with numerous industry awards including:

· Marsh & Parsons: UK Property Awards 2018: Best Estate Agency Marketing, London - Gold Award, Best Real Estate Agency London - Gold Award, Best Lettings Agency, London - Gold Award. International Property Awards 2018: Best Estate Agency Marketing, UK - Gold Award, Best Estate Agency, UK - Gold Award, Best International Real Estate Agency, UK - Gold Award. London Magazine Club Awards 2018: Advertising Campaign of the Year - Silver Award. Creative Pool Awards 2018: Bronze for Photography.

· Davis Tate: Best Estate Agent Guide 2018: (*) Abingdon, Burghfield, Shinfield and Wantage - Rated Highly (Sales) and Rated Excellent (Lettings), Henley and Pangbourne - Rated Highly (Sales) and Rated Exceptional (Lettings), Didcot and Reading - Rated Highly (Lettings), Goring - Rated Excellent (Lettings), Wallingford - Rated Excellent (Sales) and Rated Excellent (Lettings, Woodley - Rated Exceptional (Sales) Sonning Common and Twyford - Rated Exceptional (Sales) and Rated Exceptional (Lettings).

· Frost's: The Negotiator Awards: Lettings Agency of the Year (2-5 branches) - Gold Award. The ESTAS - Estate Agency of the Year Awards: Letting Agent (rated by tenants), Hertfordshire and Middlesex - Silver Award, Letting Agent (rated by landlords), Hertfordshire and Middlesex - Silver Award.

· Thomas Morris: Guild of Property Professionals 2018: Lettings (East Anglia) - Gold Award, Sales (East Anglia) - Gold Award. Fine & Country Awards 2018:  Best Property Presentation and Best Overall Operator. The ESTAS - Estate Agency of the Year Awards: Best Local Agency in Central England, Letting Agent (rated by tenants), East of England - Silver Award.  The 2018 all Agents Awards: Best Estate Agent in East of England - Gold Award. Relocation Agent Network: Best Agent in East Anglia and Essex, Customer Relocation Award - Winner. The Negotiator Awards 2018: Lettings Agency of the Year (6-9 branches) - Gold Award, Estate Agency of the Year (6-9 branches) - Gold Award, Community Champion of the Year - Silver Award, East of England Agency of the Year - Silver Award. Agents Giving Awards 2018:  Best Team/Company Fundraiser. Best Estate Agent Guide 2018(*) : East of England (Lettings) - Gold Award, East of England (Sales) - Gold Award, Outstanding Contribution To Estate Agency - Simon Bradbury.

· e.surv Chartered Surveyors: Money Age Awards 2018: Mortgage Surveyor of the Year. Mortgage Introducer Awards 2018: Best Survey/Valuation Business

· LSL Financial Services: Precise Mortgage Awards: Best Distribution Group 2018. Lifetime Achievement Award - David Copland.

(*) As judged and announced in 2018

Post balance sheet events

On 5th February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5th February 2019, LSL expects to incur an exceptional P&L charge of approximately £14m in 2019 and £1m in 2020, with cash costs amounting to approximately £12m over the three years from 2019 to 2021 including approximately £9m cash costs in 2019. 

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks announced on 5th February 2019 has reduced the total number of Your Move and Reeds Rains branches from 404 to 279 of which 144 are owned keystone branches and 135 are franchised.

Our people

The continued success of our business model is attributable to, and underpinned, by our strong brands and excellence in the delivery of high levels of customer services by our colleagues in our Estate Agency, Financial Services and Surveying businesses. I would like to take this opportunity to thank all my colleagues across our businesses for their professionalism and dedication during 2018. I look forward to working with my colleagues to deliver a successful year in 2019.

Outlook

Market conditions in 2019 have been notably softer than the equivalent period in 2018, whilst LSL's financial performance so far in 2019 has been marginally behind the Board's expectations. Nevertheless, at this early stage in the year, the Board's current expectation is that the Group will deliver a full year Underlying Operating Profit in line with its prior expectations, as the business is expected to continue to benefit from the range of LSL's ongoing self-help measures.

We continue to remain cautious on the residential property market outlook for 2019 given the current uncertainty over the UK and global political and economic environment and the potential impact on UK consumer confidence.

The Board currently expects to see a material reduction in the volume of house purchase transactions compared to the prior year. Mortgage costs continue to be low by historic standards and mortgage availability remains good. The medium to longer term fundamentals of the UK housing market remain solid.

The final arrangements for the planned exit from the European Union are uncertain. In the eventuality that the outcome leads to a changed impact on consumer confidence and our business, we will update our Shareholders.

Although Brexit and the current political environment continues to create uncertainty, the Group has a robust balance sheet with relatively low levels of gearing and is very cash generative at an operational level.

LSL continues to execute on its stated strategy and we are confident that LSL, with its market leading brands, broad portfolio of residential property services and the benefits from the proactive self-help measures, remains well positioned to perform well given a range of potential market conditions, in order to maximise Shareholder value. The Board remain confident of the opportunities for further positive progress for the Group.

Ian Crabb

Group Chief Executive Officer

5th March 2019

Note 1 - Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4 to the Financial Statements).

Note 2 - Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 4 to the Financial Statements)

Note 3 - Operational gearing is defined as Net Bank Debt divided by Group Adjusted EBITDA (Group Adjusted EBITDA is Group Underlying Operating Profit (Note 4 to the Financial Statements) plus depreciation on property plant and equipment).

Note 4 - Bank of England for "House Purchase Approvals" and "Total Mortgage Approvals" - January 2019.

Note 5 - LSL estimates and including Land Registry regional data - February 2019.

Note 6 - LSL Property Services/ACADATA HPI - February 2019.

Note 7 - LSL sources/data analysis.

Note 8 - UK Finance 'New mortgages by purpose of loan' - February 2019 (excluding product transfers).

Note 9 - UK Finance 'New mortgages sold by intermediaries' - February 2019.

Note 10 - UK Finance 'Possessions on mortgaged properties' - February 2019.

Note 11 - Which-Network - network performance figures - January 2019.

Note 12 - The profit per branch methodology has been consistently applied since the profit per branch ambition of £80k-£100k was first announced by LSL in March 2014. Profit per branch is calculated for Your Move, Reeds Rains and the LSLi owned branches and excludes Marsh & Parsons.

Note 13- LSL's market share is calculated using gross mortgage completions excluding product transfers

Notes:

1 'Other income' includes franchising income, conveyancing services, EPCs, Home Reports, utilities and other products and services to clients of the branch network.

2 Refer to Note 4 to the Financial Statements for the calculation.

3 Bank of England for "House Purchase Approvals" and "Total Mortgage Approvals" - January 2019.

4 HMRC Stats "Monthly property transactions completed in the UK with value of £40,000 or above" - January 2019.

5 UK Finance 'Possessions on mortgaged properties' - February 2019.

Estate Agency Division performance

Year-on-year income growth in the Estate Agency Division was 3%. Lettings income and Financial Services income showed positive growth with Residential Sales performance reflecting market conditions.

Residential Sales exchange income 

Residential Sales exchange income decreased by 9% to £69.9m (2017: £76.6m), average fees per unit increased by 1% to £3,071 (2017: £3,042). Residential Sales exchange volumes fell by 10%.

Lettings income 

As in 2017, Lettings income grew in each quarter of the year as LSL continued to focus on this recurring revenue stream. Lettings growth for the year was 4% (organic: 3%).

Financial Services income

Total Financial Services income is delivered through the Estate Agency Division's branches, Group First, RSC (acquired in March 2018), Personal Touch Financial Services (acquired in January 2018) and the intermediary networks trading as PRIMIS and grew strongly again with 17% year-on-year growth in 2018 (organic: 1%).

Other income

Other income fell by 5% year-on-year in large part due to a fall in conveyancing income due to lower Residential Sales transaction volumes.

Asset Management

Asset Management maintained its market position in a smaller repossessions market.

Estate Agency Division operating margin

The Estate Agency Division Underlying Operating Margin was 8.1% in 2018 (2017: 10.9%).

Branch numbers

Breakdown of LSL's Estate Agency branches as at 31st December 2018 and 31st December 2017:

The total number of Estate Agency branches reduced by fourteen in 2018, following the closure of six owned branches and six franchise branches and the opening of one new branch in Marsh & Parsons and the merging of three into existing local branches.

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks announced on 5th February 2019 has at the 5th March 2019 reduced the total number of Your Move and Reeds Rains branches from 404 to 279 of which 144 are owned keystone branches and 135 are franchised.

Your Move and Reeds Rains branch summary:

Notes:

1 Refer to Note 4 to the Financial Statements for the calculation.

2 Full Time Equivalent (FTE).

3 Bank of England for "House Purchase Approvals" and "Total Mortgage Approvals" - January 2019.

Surveying Division performance

Surveying Division revenue increased by 9% to £69.8m (2017: £64.1m), with total number of jobs performed during the year of 365,504 (2017: 309,499).

First half revenue was down by -6% year on year, impacted by market conditions and lender mix. In May 2018 the Surveying Division announced the successful negotiation of a material contract to supply surveying and valuation services to Lloyds Bank plc, with e.surv becoming the lead supplier for the Lloyds Bank plc group of companies with instructions commencing from September 2018. This led to an improved second half performance with revenue up 25% year-on-year.

The decrease in income per job to £191 (2017: £207), a reduction of 8% year-on-year, was offset by strong cost control leading to improved profit performance. As a result, the Surveying Division delivered an increase in Underlying Operating Profit1 to £20.4m (2017: £18.9m), maintaining profit margin at 29.3% (2017: 29.4%).

The total number of qualified operational surveyors at 31st December 2018 was 5032, an increase of 182 against the 2017 position due to the transfer of Lloyds Bank plc surveyors into e.surv.

In 2019 the Surveying Division will continue to focus on its successful graduate training programme, which assists in alleviating the impact of capacity constraints in the market. 

At 31st December 2018 the total provision for PI Costs was £12.4m (2017: £15.9m). In 2018 Surveying Division continued to make positive progress in addressing these historic claims. There was an exceptional gain of £2.2m during the year.

Income Statement

Group Revenue

Revenue increased by 4.2% to £324.6m in the year ended 31st December 2018 (2017: £311.5m).

Other operating income

Other income of £557k (2017: £555k) for the year ended 31st December 2018 was in line with previous year and comprised of rental income.

Gain on sale of property, plant and equipment

There was a small gain of £34k (2017: £668k) in the year ended 31st December 2018 resulting from the disposal of a commercial property.

Income from joint ventures and associates

Income from joint ventures and associates was £259k (2017: £1,583k) as challenging residential property market conditions impacted the financial performance of the joint ventures and LSL recognised its share of the early-stage costs of the newly acquired interest in Mortgage Gym.

Total operating expenses

Total operating expenses increased by 4.6% to £289.6m (2017: £276.8m). Increases in the Estate Agency Division were primarily a result of the acquisition of PTFS and RSC in the first quarter of 2018. Surveying operating expenses were ahead of prior year in the second half of 2018 due primarily to the transfer to e.surv of the existing Lloyds Bank plc surveyors and back-office employees as part of the contract awarded to e.surv during May 2018, to supply surveying and valuation services to the Lloyds Bank plc group.

Group Underlying Operating Profit

Group Underlying Operating Profit1 decreased by 4.3% to £35.9m (2017: £37.5m) with an Underlying Operating Margin of 11.1% (2017: 12.0%).

On a statutory basis, the Group operating profit decreased to £25.4m (2017: £42.1m) largely reflecting the impact of exceptional items. In 2018 there were net exceptional cost of £3.0m compared to the 2017 financial results which included an exceptional gain on the disposal of LSL's share in GPEA (£5.6m) and a net exceptional gain on historic PI claims (£3.7m).

Group Adjusted EBITDA

Group Adjusted EBITDA2 decreased by 2.7% to £41.6m (2016: £42.7m) with the decreased Group Underlying Operating Profit being slightly offset by an increased depreciation charge of £5.7m (2017: £5.2m).

Share-based payments

The share based payment charge of £349k (2017: £47k) in 2018 consists of a charge in the period of £1.3m offset by the lapse of the 2016 LTIP scheme as well as adjustments for leavers in the period.

Amortisation of intangible assets

The amortisation charge for 2018 was £5.3m (2017: £4.1m). The increase in 2018 is mainly a result of the amortisation of in-house software in both PTFS and e.surv.

Exceptional items

Total 2018 net exceptional cost of £3.0m including a £2.2m PI Costs exceptional provision release (H1: £1.2m, H2 £1.0m) as claims were settled below previous expectations and £5.2m of exceptional costs, the majority of which were in relation to initial one-off transition and integration costs for the contract to supply surveying and valuation services to Lloyds Bank plc (£3.2m) and also restructuring costs in the Estate Agency Division including planned restructuring costs incurred following the acquisition of PTFS (£2.0m).

The exceptional gain in 2017 consisted of a £5.6m gain on the sale of the Group's share in GPEA and a £3.7m gain relating to the historic PI Costs provision.

Net financial costs

Net financial costs amounted to £2.3m (2017: £2.0m). The finance costs related principally to interest and fees on the RCF. Additional costs relate to the unwinding of discounts on provisions and contingent consideration.

Taxation

The UK corporation tax rate reduced to 19% with effect from 1st April 2017. A future UK corporation tax of 17% has been enacted and is effective from 1st April 2020, and this is the rate at which deferred tax has been provided (2017: 17%). Corporation tax is recognised at the headline UK corporation tax rate of 19% (2017: 19.25%).

The effective rate of tax for the year was 22.5% (2017: 16.7%). The effective tax rate for 2018 is higher than the headline UK tax rate for a number of reasons, including non-deductible costs in relation to contingent consideration and the depreciation of assets which do not qualify for capital allowances.

Deferred tax credited directly to other comprehensive income is £0.0m (2017: £0.6m). Income tax credited directly to the share based payment reserve is £0.0m (2017: £0.0m).

In 2018 corporation tax payments of £6.9m (2017: £11.1m) were made which is greater than the current year corporation tax charge of £5.9m (2017: £7.5m). This is a result of two quarterly payments being made in the year in respect of the year ended 31st December 2017 liability - which is higher than the corporation tax charge for the year ended 31st December 2018.

Basic Earnings Per Share

The Basic Earnings Per Share was 17.4 pence (2017: 32.6 pence). The Adjusted Basic Earnings Per Share3 is 27.2 pence (2017: 28.3 pence), a decrease of 3.9% which is in line with the decrease in Group Underlying Operating Profit1.  

The Group seeks to present a measure of underlying performance which is not impacted by the unevenness in profile of exceptional gains and exceptional costs, contingent consideration, amortisation and share-based payments.  The Directors consider that the adjustments made to exclude the after tax effect of exceptional items, contingent acquisition consideration and amortisation provides a better and more consistent indicator of the Group's underlying performance.

Balance sheet

Goodwill

In 2018 goodwill has increased by £7.8m to £159.7m (2017: £151.9m). The increase is due to the acquisitions of PTFS (£0.3m), RSC (£7.1m) and the lettings book acquisitions (£0.4m).

Other intangible assets and Property, plant and equipment

Total capital expenditure in the year amounted to £6.0m (2017: £5.6m) which includes expenditure of £1.1m (2017: £0.6m) for new software which has been treated as an intangible asset.

Financial Assets

LSL holds financial assets of £11.6m (2017: £25.3m); the decrease in the year is a result of the revaluation of LSL's shareholding in Yopa and the exercise and subsequent sale of the ZPG warrants in October 2018.

LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of £20m for Yopa has been written down by £12.2m to £7.8m as at 31st December 2018 to reflect the Board's accounting assessment of fair value. LSL has elected to recognise any changes to fair value through the Statement of Other Comprehensive Income (i.e. reserves) and not through the P&L account in accordance with IFRS 9.

Joint ventures, investments and associates

The Group has two joint ventures and one associate: a 33.3% (2017: 33.3%) interest in TM Group, whose principal activity is to provide property searches, a 50% (2017: 50%) interest in LMS whose principal activity is to provide conveyancing panel management services. LMS and TM Group are held in the balance sheet at £8.2m and £1.5m respectively (2017: £8.3m and £1.2m)

During the second half of 2018, LSL acquired a 34.69% interest in Mortgage Gym, a digital mortgage marketplace, for cash consideration of £4.1m. Mortgage Gym is held in the balance sheet at a value of £3.6m as at 31st December 2018 (2017: nil) reflecting the original investment of £4.1m and the post-tax loss of £0.5m in the period.

Financial Liabilities

Net Bank Debt

As at 31st December 2018 Net Bank Debt was £32.1m (2017: £30.0m) and Shareholders' funds amounted to £142.6m (2017: £148.6m) with a balance sheet gearing of 22.5% (2017: 20.2%). The increase in Net Bank Debt4 incorporated acquisitions made in the year (PTFS, RSC and six Lettings Books) which totalled £7.7m along with the investment in Mortgage Gym of £4.1m. The 2018 gearing level was 0.8 times5 Group Adjusted EBITDA (2017: 0.70 times).

Bank facilities

In January 2018, LSL extended its bank facility until May 2022. The facility includes a £100m RCF (2017: £100m). During the period under review, the Group complied with all of the financial covenants contained within the facility.

Deferred and contingent consideration

Within financial liabilities LSL has £2.1m of deferred consideration (2017: £0.1m) and £15.0m (2017: £9.1m) of contingent consideration. The deferred consideration relates primarily to the acquisition of PTFS and this has been settled since the balance sheet date. The contingent consideration relates primarily to Group First (£9.5m) and RSC (£4.8m).

Provisions for liabilities:

Professional indemnity (PI) claim provision

At 31st December 2018, the total provision for historic PI Costs was £12.4m (2017: £15.9m). In 2018 the Group continued to make positive progress in addressing historic claims and there has been a net £2.2m exceptional gain.

Onerous lease

As at 31st December 2018 LSL held onerous lease provisions of £130k (2017: £210k).

Net assets

The Group's net assets as at 31st December 2018 were £142.6m (2017: £148.6m).

Statement of cash-flows

The Group generated strong cash from operations of £36.9m (2017: £41.5m) converting 103% of Group Underlying Operating Profit to cash-flow from operations (pre PI and exceptionals) (2017: 117%). The decrease in conversion from 2017 is primarily related to the increase in trade receivables of £3.8m (2017: decrease of £1.7m) resulting from significant growth in the surveying business in quarter four. Provisions also decreased by £3.6m (2017: decrease of £5.4m) due to the positive progress in addressing historic PI claims.

Treasury and risk management

LSL has an active debt management policy. LSL does not hold or issue derivatives or other financial instruments for trading purposes. Further details on the Group's financial commitments as well as the Group's treasury and risk management policies are set out in this Report.

Post balance sheet events

On 5th February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5th February 2019, LSL expects to incur an exceptional P&L charge of approximately £14m in 2019 and £1m in 2020, with cash costs amounting to approximately £12m over the three years from 2019 to 2021 including approximately £9m cash costs in 2019. 

International Financial Reporting Standards (IFRS)

The Financial Statements have been prepared under IFRS as adopted by the European Union.

1. Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4 to the Financial Statements).

2. Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 4 to the Financial Statements)

3. Refer to Note 6 to the Financial Statements

4. Refer to Note 10 to the Financial Statements for the calculation.

5. Operational gearing is defined as Net bank Debt divided by Group Adjusted EBITDA2

Principal Risks and Uncertainties

LSL has an overall framework for the management of risks and internal controls to mitigate the risks. Through this framework, the Board (which has overall accountability and responsibility for the management of risk and is supported by the Audit & Risk Committee) on a regular basis identifies, evaluates and manages the principal risks and uncertainties faced by the Group; as well as areas which could adversely affect its business, operating results and financial condition.

Management of risk appetite

During 2018, in line with the FRC's Guidance on 'Risk Management, Internal Control and Related Financial and Business Reporting', the Board continued to manage the Group's risk appetite through the risk appetite framework to ensure continued compliance with the 2016 Code and the related FRC guidance (published in 2014). The Board through its established processes expresses and reviews the types and level of risk which it is willing to take or accept to achieve LSL's strategy and business plans; and to support consistent, risk-informed decision making across the Group.

The risk appetite framework was developed following the approval by the Directors of a risk framework policy which included defining individual risk appetite statements for LSL's principal risks and uncertainties, and for key decisions made by the Board. These statements provide parameters within which the Board typically expects LSL's businesses to operate, facilitating structured consideration of the risk and reward trade-off for the decisions made around how the Group conducts business. This includes monitoring risk measures and the identification of actions needed to bring any specific outlying areas of risk within target levels.

During 2018, the Group has continued to take steps to enhance the existing risk framework within each of the Group's subsidiary businesses, including the maintenance of risk appetite measures by each subsidiary. Each year, each subsidiary business quantifies their highest ranked risk areas and routinely provide the Audit & Risk Committee with graphical management information to facilitate the tracking of risk status versus tolerance by the subsidiary boards and divisional governance committees. The framework continues to improve the visibility of action plans to address any core risk areas considered outside tolerance.

Risk management activities in 2018 included a 'deeper-dive' on information security risk and a business-wide questionnaire was issued to enable the Audit & Risk Committee to compare how well risk management practices are embedded at each subsidiary business, with a view to identifying any areas for improvement. These developments have in turn served to provide a more robust means for evaluating the capture and measurement of risk factors within the Group's established risk appetite framework.

The framework covers a wide range of risks, which reflect the nature of LSL's businesses and acknowledges that there is not a 'one size fits all' approach to establishing risk parameters. During 2019, LSL will continue to review the framework to ensure it remains in line with emerging best practice and continues to foster the maturity of risk appetite routines at both LSL and its subsidiary businesses.

The Board has established clear risk parameters, whilst at the same time fostering an environment within which innovation and entrepreneurial activities can thrive. Where there is any proposal to shift the Group significantly closer to or outside agreed risk parameters, this is discussed and is subject to Board approval before commencing any activities to ensure that appropriate mitigation controls are put into place.

On-going evolution of the risk management framework is carried out as part of an on-going cycle of continual improvement, and remains a key priority for the Audit & Risk Committee and the Board in 2019. Further, during 2018 the Audit & Risk Committee and Board commenced a review of the Group's risk management framework to ensure it reflects the requirements of the 2018 Code and the FRC's Guidance on Board Effectiveness (also published in 2018) and this work will continue during 2019.

Developing the financial viability statement

Assessment of prospects

The Group's business model and strategy are central to an understanding of its prospects, and details are included in Strategy and Business Model sections of the Annual Report and Accounts 2018.

Through organic growth, selective acquisitions and a delivery of high quality services to customers, the Group's key objective is to build market leading positions and ultimately deliver long-term Shareholder value.

Prospects of the Group are assessed by the Board throughout the year at its meetings, including a particular focus during the strategic planning process. This process includes an annual review of the on-going plan, led by the Group Chief Executive Officer and Group Chief Financial Officer in addition to the relevant business functions involved.

The Directors participate fully in the annual planning process by means of a Board meeting and part of the Board's role is to consider whether the plan continues to take appropriate account of the changing external environment including macroeconomic, political, regulatory and technical changes.

This process allows the Board to produce strategic objectives and detailed financial forecasts over a three year period. The latest updates to the on-going plan were finalised in December 2018. This considered the Group's current position and its prospect of operating over the three year period ending 31st December 2021, and reaffirmed the Group's stated strategy. Furthermore, the Group's future prospects have been further strengthened with the extension of the RCF which was renewed in January 2018 for a period up to May 2022.

Brexit

Since the 2016 EU referendum result, LSL has been monitoring Brexit developments to assess the impact on LSL. 'Brexit' is a subset entry within the Group's risk appetite framework and in addition during 2018 LSL has conducted a specific impact assessment in relation to Brexit which was completed in line with FRC guidance.

The impact assessment considered whether LSL will be impacted directly by the outcome of the negotiations between the UK and the EU, for example due to regulatory changes or due to changes that may impact our employees or whether the impact would be indirect, i.e. resulting from the broader economic uncertainties. The Group concluded that whilst LSL is not directly impacted by the Brexit negotiations due mainly to its UK based business model it is indirectly impacted by the impact that the continued economic uncertainty has on the housing market.

This approach has ensured that Brexit developments are being formally monitored, and the risk status regularly reassessed with reactive action plans identified to respond to the effects of on-going uncertainties and the outcomes of the UK and EU negotiations and any transitional period arrangements.

These practices will continue throughout 2019 as the UK progresses to the Brexit date of 29th March 2019, along with wider consideration of the likely impacts of other major economic and political events, and their influence on viability assessment modelling.

The Group's principal risks and uncertainties are set out below. The Board reviewed LSL's principal risks and uncertainties when assessing the Group's prospects, and noted that none of these individual risks would, in isolation, compromise the Group's prospects. See the Directors' Report in the Annual Report and Accounts 2018 for details of how Brexit was taken into account in the completing the going concern assessment.

Assessment of viability

Although the strategic plan reflects the Directors' best estimate of the prospects of the Group in accordance with provision C.2.2 of the 2016 Code (which is now contained in the 2018 Guidance on Board Effectiveness), the Directors have assessed the viability of the Company over a longer period than the 12 months required by the 'going concern' provision.

For the purposes of assessing the viability of the Group, it was determined that a three year period ending on 31st December 2021 should be used, as this corresponds with the Board's strategic planning cycle. This assessment has been made with reference to the Group's current position and prospects, the Board's risk appetite and the Group's principal risks and uncertainties.

A number of severe but plausible scenarios were considered and two of these were modelled in detail with input from a cross a functional group of senior managers, including representatives from the finance teams.

The following scenarios were modelled:

· severe downturn in the UK housing market close to the level seen in 2008 during the last recession caused by Brexit and/or political uncertainties; and

· a data breach causing a regulatory fine and reputational damage, with the potential loss of customers.

Detailed assumptions for each scenario were built up and modelled by month across the three year period. The models measured the downside impact on revenue and the management action which would be taken to retain cash reserves and maintain the operating capacity of the business as a result of the stress scenarios.

Assumptions were also made for the potential growth of LSL's recurring income and counter-cyclical businesses, notably Lettings and Asset Management, and the extent to which some activities, such as Lettings, tend to be less affected through the cycle. The modelling and assumptions took account of the broad range of services across a wide geography which allows some protection from the impact of stress scenarios.

The results from the stress testing indicated that the Group would be able to withstand the financial impact of each scenario and therefore continue to operate and meet its liabilities, as they fall due, over the three year period ending 31st December 2021.

Furthermore the Board also considered it appropriate to prepare the Financial Statements on the going concern basis, as explained in the Basis of Accounting paragraph in the Principal Accounting Policies section contained within the Annual Report and Accounts 2018.

The Audit & Risk Committee oversaw the process by which the Directors reviewed and discussed the assessment undertaken by the Management Team in proposing the viability statement.

The Directors' financial viability statement is contained in the Report of the Directors section of the Annual Report and Accounts 2018.

Risk management and internal controls framework

LSL's risk management and internal controls framework for 2018 included:

• ownership of the risk management and internal controls framework by the Board, including a risk framework policy, supported by the Group Chief Financial Officer, the Company Secretary, the Head of Risk and Internal Audit and the Group Financial Controller;

• a network of risk owners in each of LSL's businesses with specific responsibilities relating to risk management and internal controls, including maintenance of detailed risk analyses;

• the documentation and monitoring of risks are recorded and managed through risk appetite measures which undergo regular reviews and scrutiny by subsidiary boards, divisional governance committees and the Head of Risk and Internal Audit;

• the Board routinely identifies, reviews and evaluates the principal risks and uncertainties which may impact the Group as part of the planning and reporting cycle to ensure that such risks are identified, monitored and mitigated in addition to carrying out specific risk assessments as part of its decision-making processes;

• the development and application of LSL's risk appetite statement and associated framework (for further details on steps taken during the year, see the Audit & Risk Committee Report included in the Annual Report and Accounts 2018); and

• reporting by the Chairman of the Audit & Risk Committee to the Board on any matters which have arisen from the Audit & Risk Committee's review of the way in which LSL's risk management and internal control framework has been applied together with any breakdowns in, or exceptions to, these procedures.

The risk framework includes the following:

• a risk framework policy;

• a boardroom culture which promotes risk assessment and management in decision-making;

• determination of risk appetite, with management and mitigation of risks in line with risk appetite tolerances;

• assessment of prospects and viability;

• review of the effectiveness of the risk management and internal control systems; and

• going concern confirmation (for LSL's going concern disclosure see the Report of the Directors included in the Annual Report and Accounts 2018).

During 2019 the areas of focus will be to develop underlying subsidiary risk appetite metrics policies.

During 2018, the Directors carried out a robust assessment of the principal risks and uncertainties facing the Group, including those that threaten the Group's business model, future performance, solvency or liquidity. The Directors believe that the assessment which has been completed is appropriate to the complexity, size and circumstances of the Group, which is a matter of judgement of the Board and has been supported by the Management Team.

The Directors also carried out a risk appetite assessment exercise which involved the evaluation of continually evolving aspects of risk management. During 2018, this included further strategic responses to the threat of external technology-based business models, integration planning for newly acquired business activities, articulation of risk appetite tolerances with action plans to counter key aspects of information security risk, implementing responses to a fast changing regulatory environment (including new GDPR and tenant welfare requirements) and consideration of major scenarios of further external political and economic change on the UK housing market including the impact of Brexit.

The identified risks may change over time due to changes in business models, performance, strategy, operational processes and the stage of development of the Group in its business cycle as well as with changes in the external environment. This robust assessment is focused on the principal risks and uncertainties and it differs from the review of the effectiveness of the systems of risk management and internal controls.

In accordance with the requirements of the 2016 and 2018 Codes, this Report includes descriptions of principal risks and uncertainties together with a high level explanation of how they are being managed or mitigated. This includes clear descriptions of the risks together with an evaluation of the likelihood of a typical risk event crystallising and its possible impact. Mitigating steps and any significant changes to specific areas of risk are also referred to within the tabular summary.

As noted above, this robust analysis of principal risks and uncertainties has also contributed to the Group's viability statement which is included within the Report of the Directors. The Directors have also considered the impact if risks coincide, namely a combination of non-principal risks and uncertainties could potentially represent a single compound principal risk or uncertainty.

The Group also faces other risks which, although important and subject to regular review, have been assessed as less significant and are not listed in this Preliminary Results Announcement or the Annual Report and Accounts 2018. This may include some risks which are not currently known to the Group or that LSL currently deems as immaterial, or were included in previous Annual Report and Accounts and, through changes in external factors and careful management, are no longer deemed to be as material to the Group as a whole.

However, these risks may individually or cumulatively also have a material adverse effect together with other risk factors which are beyond the direct control of LSL, and may have a material adverse impact on LSL's business, results of operations and/or financial condition. The risk management framework and procedures in place can only provide reasonable but not absolute assurance that the principal risks and uncertainties are managed to an acceptable level.

Further information relating to how LSL managed these risks and uncertainties during 2018 is set out in the Audit & Risk Committee Report (Internal Controls) of the Annual Report and Accounts 2018.

Principal risks and uncertainties

Group Income Statement

for the year ended 31st December 2018

Group Statement of Comprehensive Income

for the year ended 31st December 2018

Group balance sheet Company No. 05114014

as at 31st December 2018

The Financial Statements were approved by and signed on behalf of the Board by:

Ian Crabb Adam Castleton

Group Chief Executive Officer Group Chief Financial Officer 

5th March 2019 5th March 2019

Group Statement of Cash-Flows

for the year ended 31st December 2018

Group Statement of Changes in Equity

Year Ended 31st December 2018

During the year ended 31st December 2018, the Trust acquired nil LSL Shares. During the period 15,966 share options were exercised relating to LSL's various share option schemes resulting in the Shares being sold by the Trust. LSL received £20,000 on exercise of these options

Group Statement of Changes in Equity

Year Ended 31st December 2017