SFE.L Regulatory News (SFE)

23 March 2017

Safestyle UK plc

Final Results 2016

Continued market share growth and a good start to 2017

Safestyle UK plc (AIM: SFE), the leading UK-focused retailer and manufacturer of PVCu replacement windows and doors for the homeowner market, today announces its final results for the 12 months ended 31 December 2016.

Financial Highlights

* Underlying EBITDA is defined as earnings before interest, tax, depreciation, amortisation and share based payments charges

** Underlying PBT is defined as earnings before taxation and share based payments charges

*** Cost of sales restated to reflect lead generation costs previously stated as other operating expenses

The company uses underlying measures where it believes the removal of significant, one-off items provides a truer picture of the company's performance to shareholders.

Operational Highlights

· Volume of frames installed increased by 3.2% to 288,460 (2015: 279,453)

· Continued growth in market share to 10.2% at 31 December 2016 (2015: 9.5%)

· Leads generated from media and on-line marketing grew by 23% to 73,686 (2015: 59,965)

· Average unit sales price up 6.4% to £565 (2015: £531)

· New sales offices opened in Guildford and Norwich

· Pre-tax operating cash flow of £21.1 million (2015: £18.2 million)

· 12th consecutive year of market share growth

Commenting on the results, Steve Birmingham, CEO said:

"I am delighted to report that Safestyle UK has yet again achieved record sales and profitability in 2016. We have continued to execute on our strategy of increasing market share which increased to 10.2% at the year end (2015: 9.5%).

Our investment in the expansion of our manufacturing facility is near to completion and remains on plan and on budget.

So far in 2017 order intake is up 4% against strong prior year comparatives. This broadly reflects the increase in our selling prices and more than offsets the higher raw material costs resulting from the weaker pound following the EU referendum.

We have entered 2017 in a market leading position. Moreover, whilst mindful of the uncertainty in the macroeconomic outlook, our strong balance sheet, excellent cash generation and differentiated product offering leaves us well positioned to build on our competitive advantages. The Board remains confident of delivering growth over the year ahead."

Enquiries:

About Safestyle UK plc

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

Chairman's Statement

I am pleased to report the Group's results for the year ended 31 December 2016.

Summary of Financial Performance

The Group has delivered record revenue and profit. Revenue increased 9.5% to £163.1m (2015: £148.9m), delivering profit before tax of £19.3m, up 9.7% (2015: £17.6m). Earnings per share increased 6.7% to 19.0p (2015: 17.8p).

The Group continued to gain market share (as measured by FENSA installations), which is now 10.2%, and against strong H2 2015 comparatives we grew revenue and profit before tax by 6.3% and 11.3% respectively.

Factory Expansion Plans

Our factory expansion plans are well advanced with the new production facility and key items of plant now operational. We are delighted with the project's progress, which remains on schedule and on budget. The facility is scheduled to be fully operational in summer 2017.

Balance Sheet and Final Dividend

The business continues to be highly cash generative with 2016 cash conversion (the ratio of net cash inflow from operating activities before taxation to underlying EBITDA) at 98% (2015: 95%). Our balance sheet is strong with £13.5m net cash at 31 December 2016 having paid a special dividend during the year of £5.6m and incurred £4.6m of expenditure on our factory extension.

The Board recommends, subject to approval at the Annual General Meeting to be held on 18 May 2017, a final dividend of 7.5p per share payable to ordinary shareholders registered on 16 June 2017. Together with our interim dividend of 3.75p per share which has already been paid, this takes the total proposed ordinary distributions up to 11.25p per share, representing cover of circa 1.7 times.

Looking Ahead

Whilst macroeconomic factors have introduced an element of uncertainty into the general outlook for RMI demand, our proposition is resilient and we remain confident of our ability to outperform the market. Our business is focused on delivering market share gains through our differentiated customer proposition, leading product offering and low cost production.

We have well-invested manufacturing, a compelling finance offering, a broadened energy efficient product range, market leading digital media performance and a strong after sales service. We continue to invest in our production resources, our brand, our sales technology, branch network and our people. In this regard, I am delighted that Giles Richell joined the Board as Chief Operating Officer in February 2017 to build on the positive momentum achieved over the past year.

Order intake through 2016 was strong. In 2017 to date we have more than mitigated currency and other cost pressures through price increases. We continue to expand our UK footprint and the Board looks forward to further growth in 2017.

Finally, I would like to thank our colleagues for their contribution to our continued success.

RS Halbert

Chairman

23 March 2017

CEO Statement

I am pleased to report that Safestyle UK achieved record sales and profitability in 2016 and is well placed to continue its progress in 2017.

Business Review

In 2016 Safestyle's market share (as measured by FENSA installations) increased for the twelfth consecutive year to 10.2% (from 9.5% in 2015) consolidating our sector leading position. During the period we carried out a record 62,989 installations (up 4.7% on 2015) consisting of 288,460 window and door frames (up 3.2% on 2015). Our average frame sales price excluding VAT increased by 6.4% to £565 and our average installed order value increased from £2,963 to £3,103. This strong operational performance resulted in increased revenue, up 9.5% to £163.1m (2015: £148.9m) and underlying profit before tax up 13.9% to £20.5m (2015: £18.0m).

We continued to expand our sales branch network during the year with new sales branch openings in Guildford and Norwich. In addition we added an installation depot in South Wales in February 2017 to increase our capacity and customer service levels in that region and now have a network of 36 sales branches and 13 installation depots across the UK. There still remain significant opportunities to widen our sales network and over the course of 2017 we will remain focused on identifying further locations in which we are relatively underrepresented in relation to our target customer base.

We have continued to increase our activity in generating enquiries from lower cost digital media and direct response channels which accounted for 41% of all orders in 2016 compared to 37% in 2015. Lead generation from our traditional door canvassing remains an important part of the marketing mix and the value of business from this source increased by 9% in 2016. Our planned increased investment in direct and digital marketing will remain an important factor during 2017 as we aim to continue growing our market share and reducing average lead generation costs.

The weakness in Sterling following the EU referendum resulted in industry wide increased raw material costs in the second half of 2016. However we have been able to fully offset these costs through an increase in our prices from 1st January 2017. Going forward the strength of our market position, low cost manufacturing capabilities as well as our track record in delivering sustainable price increases leaves us well positioned to manage any further input cost pressures.

Factory Expansion Plan on Target

We are pleased that construction of the new factory which commenced in 2016 is nearing completion and is progressing to plan and budget. We have received and installed the new glass toughening furnace, high speed cutting table and high speed IGU line. By June 2017 we will have transferred the existing glass manufacturing process to the new factory. The manufacturing of both the frames and double glazed units on a single site will reduce handling, improve quality, increase efficiency and enhance capacity as the Group broadens its product range and continues to grow its market share.

Product and Other Developments

Following the launch and proof of concept of our conservatory upgrade product in 2015, growth accelerated during 2016 and we installed 551 conservatory upgrades against our target of 450. We are pleased with the progress made and expect continued growth of this exciting area in 2017 as the contribution from this revenue stream increases.

The new premium products and colours we introduced in 2016 have steadily gained traction and are contributing to our broader product offering and appeal.

As part of our strategy to further improve our sales effectiveness in 2016 we provided all of our sales representatives with digital tablets which contain a range of sales presentation aids, including finance application results whilst in the customer's home. We have received positive feedback from our sales representatives and in 2017 will continue to develop software tools for both our sales and canvass forces which aim to make the sales process more efficient.

Outlook

Whilst we anticipate the macroeconomic outlook to remain uncertain, the long-term fundamental drivers underpinning the UK RMI market remain robust. Our proven track record in growing market share and implementing price increases means we are well positioned, as market leader, to build on the momentum achieved over the past year.

During 2017 we will continue our drive to grow market share and develop our sales branch network. We continue to invest in our manufacturing equipment and look forward to achieving a key milestone when the major expansion of our factory is complete.

We have already experienced strong growth following our entry into the conservatory refurbishment market and expect further growth in 2017.

Our robust cash generation and strong financial position enables the Group to continue to make substantial investment in its infrastructure without compromising returns to shareholders.

We believe that our broad range of energy efficient products, attractive promotional consumer finance options and low-cost value proposition are compelling differentiators in a highly fragmented market and will continue to separate Safestyle from its competitors.

The Group again delivered record results in 2016 and it is our intention to continue our successful growth in 2017.

SJ Birmingham FCA

Chief Executive Officer

23 March 2017

Financial Review

Revenue

Revenue for the period was £163.1 million against £148.9 million for the same period last year, representing growth of 9.5%. Average unit prices increased by 6.4% in the year from £531 to £565. This followed a price list increase implemented at the start of 2016 to counterbalance the additional costs of the new consumer finance products introduced in June 2015. It also reflected the growth in conservatory upgrades with a total of 551 installations during the year and a change to the timing of revenue recognition for survey fees that increased sales by £0.3 million in the period.

The volume of frames installed in 2016 was 288,460, an increase of 3.2% over the previous year (2015: 279,453). Average order value also showed encouraging growth from £2,963 (inc VAT) in 2015 to £3,103 in 2016.

Leads generated from direct response continued to be the engine for growth. Leads from this source were 73,686 in the year compared to 59,965 in 2015, an increase of 22.9%.

Gross margin

The basis of calculating gross margin has been changed from the beginning of 2016 and the prior period comparatives have been restated accordingly. Marketing costs that are directly linked to lead generation and previously included as 'Operating expenses' have been reclassified as 'Cost of sales', as explained in note 2.

On this basis gross profit increased by 11.9% in the period from £49.7 million in 2015 to £55.6 million in 2016. As was indicated in the half year results gross margin continued to improve in the second half of the year, ending the year at 34.1% compared to 33.4% in the full year 2015. As expected average sales prices were higher in the second half, more than offsetting the increased costs from the impact of Sterling weakness.

Other operating expenses

Other operating expenses in 2016 were £36.4 million (2015: £32.2 million), an increase of 13.0%. The costs in the period included one-off Employer National Insurance costs of £0.9 million which were incurred as a result of the exercise in April 2016 of LTIP options granted when the company floated in 2013.

An increase in the provision for doubtful debts impacted operating costs in the period by £0.7 million. The majority of the increase relates to outstanding debts over 1 year old. Much of this debt has been secured with a charge over the customers' property. The recent rate of recovery has been very slow and it has been decided to make a full provision for these amounts,

Other overhead costs grew at a slower rate than revenues and resulted, despite the above costs, in the pre-tax profit margin increasing slightly to 11.9% (2015: 11.8%).

Profit and EPS

Profit before tax increased by 9.7% from £17.6 million in 2015 to £19.3 million in 2016. This was after charging share based payments of £1.2 million in 2016 (2015: £0.4 million), the current year being impacted by the one-off cost of £0.9 million from the LTIP exercise. Underlying PBT before share based payments was £20.5 million for the period (2015: £18.0 million), an increase of 13.9%.

Basic earnings per share for the period were 19.0p compared to 17.8p for the same period last year. The value for 2016 has been impacted by the one-off LTIP cost and by the dilution effect on the weighted average number of shares of the LTIP exercise and 2015 warrant exercise. The basis for the calculation is detailed in note 6 to the accounts.

Cash

The cash balance at 31 December 2016 was £13.5 million, a reduction of £3.0 million in the period. This was after paying total dividends of £14.4 million (2015: £7.5 million), including a special dividend of £5.6 million (2015: Nil).

Operating cashflow in the year was £17.2 million, up £2.6 million from the previous year. This was helped by a reduction in the working capital level which reduced by £0.5 million compared to a £0.9 million increase in 2015.

Capital expenditure in the period was £5.9 million (2015: £1.6 million). The factory expansion, including the new glass furnace, accounted for £4.6 million of this year's investment. This leaves a balance of £2.7 million still to be spent on this project which is scheduled to complete in Q2 2017.

Dividends

The Board is proposing a final dividend of 7.5p per share subject to approval of shareholders at the AGM. The dividend will be paid on 10 July 2017 to shareholders on the register at close of business on 16 June 2017.

MJ Robinson

Chief Financial Officer

23 March 2017

Consolidated statement of comprehensive income for the year ended 31 December 2016

Consolidated statement of financial position as at 31 December 2016

Consolidated statement of changes in equity for the year ended 31 December 2016

Consolidated statement of cash flows for the year ended 31 December 2016

Notes to the financial statements

1 Statement of compliance

Whilst the financial information included in this Preliminary Announcement has been prepared on the basis of the requirements of International Financial Reporting Standards (IFRSs) in issue, as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS.

The Group expects to publish full Consolidated Financial Statements in March 2017. The financial information set out in this Preliminary Announcement does not constitute the Group's Consolidated Financial Statements for the years ended 31 December 2016 or 2015, but is derived from those Financial Statements. Statutory Financial Statements for 2016 will be delivered to the registrar of companies with the Jersey Financial Services Commission (JFSC), following the Company's Annual General Meeting. The auditor, KPMG LLP, has reported on the 2016 Financial Statements. Their report was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and did not contain statements under Section 113B (3) or (6) of the Companies (Jersey) Law 1991.

Safestyle UK plc is a public listed company incorporated in Jersey. The company's shares are traded on AIM. The company is required under AIM rule 19 to provide shareholders with audited consolidated financial statements. The registered office address of the Safestyle UK plc is 47 Esplanade, St Helier, Jersey JE1 0BD.

The company is not required to present parent company information.

Basis of preparation

The Group's financial statements for the year ended 31 December 2016 ("financial statements") have been prepared on a going concern basis under the historical cost convention and are in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and the International Financial Reporting Standards Interpretations Committee interpretations issued by the International Accounting Standards Board ("IASB") that are effective or issued and early adopted as at the time of preparing these financial statements.

Safestyle UK plc was incorporated on 8 November 2013. On 3 December 2013 Safestyle UK plc acquired Style Group Holdings through a share for share exchange. This was accounted for as a common control transaction. The result of this is that the financial statements of Style Group Holdings have been included in the group consolidated financial statement of Safestyle UK plc at their book value at the IFRS transition date of 1 January 2010 with the assumption that the group was in existence for all the periods presented. The excess of the cost at the time of acquisition over its book value has been recorded as a common control transaction reserve.

The preparation of financial statements requires Management to exercise its judgement in the process of applying accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to these financial statements are disclosed in note 3.

(a) New and amended standards adopted by the Group

The Group has adopted the following new standards and amendments for the first time. Unless otherwise stated, they have not had a material impact on the financial statements.

· Clarification of Acceptable Methods of Depreciation and Amortisation - Amendments to IAS 16 and IAS 38

· Annual Improvements to IFRSs - 2012-2014 Cycle

· Disclosure Initiative - Amendments to IAS 1

 (b) New standards, amendments and interpretations issued but not effective and not early adopted

At the date of approval of these financial statements, the following standards, amendments and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases have not yet been adopted by the EU):

· IFRS 9 Financial Instruments (effective 1 January 2018)

· IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018)

· Recognition of Deferred Tax Assets for Unrealised Losses - Amendments to IAS 12 (not yet endorsed)

· Disclosure Initiative - Amendments to IAS 7 (not yet endorsed)

· Clarifications to IFRS 15 Revenue from Contracts with Customers (not yet endorsed)

· Classification and Measurement of Share-based Payment Transactions - Amendments to IFRS 2 (not yet endorsed)

· IFRS 16 Leases (not yet endorsed)

The Group is currently considering the implication of those standards not yet endorsed and has completed an initial assessment of the impact. It is anticipated the impact of IFRS 9 on the financial position and performance of the Group will be minimal and effects will principally relate to amendment and extension of current disclosures. The Board is aware of the effective dates and will continue to review the potential impact on the financial statements. In respect of IFRS 16 the Group is undertaking an assessment of the impact of this standard on the financial position of the Group. This is expected to result in a material change given the annual value of operating lease costs. In respect of IFRS 15 the Group is undertaking an assessment of the impact given the addition clarity provided by the standard.

Basis of consolidation

Subsidiaries are entities that the Company has power over, exposure or rights to variable returns and an ability to use its power to affect those returns. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases.

Intragroup transactions and balances are eliminated on consolidation.

Responsibility Statement

The Statement of Directors' Responsibilities is made in respect of the full Annual Report and Accounts not the extracts from the financial statements required to be set out in this Announcement.

The Directors confirm that to the best of our knowledge:

The Group Consolidated Financial Statements, contained in the 2016 Annual Report and Financial Statements prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and loss of the Group; and

· The Strategic Report contained in the 2015 Annual Report and Financial Statements includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

Cautionary Statement

This Report contains certain forward looking statements with respect to the financial condition, results, operations and business of Safestyle UK plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements and forecasts. Nothing in this Report should be construed as a profit forecast.

2 Summary of significant accounting policies

Revenue recognition

Revenue is recognised at the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of business and is shown net of Value Added Tax. The Group primarily earns revenues from the sale, design, manufacture and installation of domestic double-glazed replacement windows and doors. Product sales revenues are recognised once the goods have been installed. Survey fees are recognised at the point at which they become non-refundable. The Group received no commissions for introducing finance products to customers in 2016, only paying subsidies which are recognised as a cost of sale. Revenue from maintenance is recognised on completion of the work carried out.

Change in accounting policy

During the year the revenue recognition policy was voluntarily updated to recognise survey fees at the point at which they become non-refundable. Previously this income was deferred until the goods were installed and was held within accruals and deferred income. The impact in current year financial statements was to increase revenue by £0.3m. The directors do not consider that the change in accounting policy is material to the users of the accounts and consequently have not restated the comparatives for the effect of this change. The effect in 2015 would have been to increase revenue by £0.4m; this amount was recognised in 2016 in line with the old accounting policy.

Reclassification of costs

In the current year costs of £6.0m (FY 2015: £4.8m) relating to the cost of generating of customer leads were reclassified as a 'cost of sale', previously these were classed as 'other operating expenses'. The board of Directors decided this reflected the 'true nature' of the cost. There is no resulting change to operating profit in the period and there are no prior year adjustments to profit. The previous year's figures have been restated to allow comparison with the current year.

3 Accounting estimates and judgements

Details of the Group's significant accounting judgements and critical accounting estimates are set out in these financial statements and include:

Recoverability of trade receivables

The assessment of whether trade receivables are recoverable requires judgement. An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows.

Warranty provisions

The Group gives guarantees against all its products, which in the majority of cases covers a period of 10 years. The level of provision required to cover the expected future costs of rectifying faults and the future rate of product failure arising within the guarantee period requires judgement.

4 Dividends

5 Equity settled share based payments charges

On 22 April 2016 the LTIP 2013 options were exercised resulting in an employer's national insurance contribution charge of £920k and £27k of associated charges. These have been shown within 'operating profit' but excluded from 'EBITDA before share based payments and charges relating to exercised LTIP options' on the face of the statement of comprehensive income.

6 Earnings per share

7 Taxation

A reduction in the UK corporation tax rate from 21% to 20% (effective from 1 April 2015) was substantively enacted on 2 July 2013. Further reductions to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015, and an additional reduction to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016. This will reduce the company's future current tax charge accordingly. The deferred tax asset at 31 December 2016 has been calculated based on these rates.

8 Share capital

During the year 2,564,427 ordinary shares of £0.01 each were issued relating to the 2013 LTIP scheme at an exercise price of £1.00 per share, settled in cash. £25,644 was credited to share capital and £2,538,783 was credited to the share premium account. All the members vested their options resulting in the issue of 2,564,427 new shares out of 3,986,110 originally granted. The remaining shares are not exercisable under the criteria used in the issue of the shares and the LTIP 2013 has now closed.

9 Share Based Payments

At 31 December 2016 the Group had the following share based payment arrangements:

LTIPS

The Group operates an equity-settled LTIP remuneration scheme for Directors and certain management ("LTIP 2013", "LTIP 2015" & "LTIP 2016").

The only vesting condition attached to the LTIP 2013 scheme was that the individual must remain an employee of the Group for a minimum period. The LTIP 2013 options vested on 5 December 2015. On 22 April 2016 all the members exercised their options resulting in the issue of 2,564,427 new shares out of 3,986,110 originally granted. The remaining shares are not exercisable under the criteria used in the issue of the shares and the LTIP 2013 has now closed.

On 29 April 2016, a further 448,523 options were granted ("LTIP 2016"). The LTIP 2015 and 2016 schemes require a combination of specific performance based criteria and remaining an employee for a minimum period.

The numbers of share options in existence during the year were as follows:

Options are valued using the Black-Schools option pricing model. The following information is relevant in the determination of the fair value of the options granted during the period.

At the grant date there was limited share price history for the company on which to calculate volatility. Volatility was therefore estimated using both Safestyle and companies classified in the 'Home Improvement Retailers' subsector on the London Stock Exchange.

SAYE

On 1 April 2016 the company launched a new share save (SAYE) scheme ("SAYE 2016") in addition to the existing schemes ("SAYE 2014" and "SAYE 2015") for employees. All schemes allow employees to acquire a certain number of shares at a discount of 20% of the share price prior to the invitation to join the scheme, using amounts saved under a 'Save As You Earn' savings contract.

The numbers of share options in existence during the year were as follows:

Options are valued using the Black-Scholes option pricing model. The following information is relevant in the determination of the fair value of the options granted during the year.

At the grant date there was limited share price history for the company on which to calculate volatility. Volatility was therefore estimated using both Safestyle and companies classified in the 'Home Improvement Retailers' subsector on the London Stock Exchange.

The total share-based expense comprises: