SFE.L Regulatory News (SFE)

19 March 2020

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

Safestyle UK plc

("Safestyle" or the "Group")

Final Results 2019

Laying strong foundations for continued performance improvement and sustainable growth

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 2019.

Financial and operational highlights

1 Underlying gross profit is defined as reported gross profit before non-underlying items4 and is included as an alternative performance measure in order to aid users in understanding the ongoing performance of the Group.

2 Underlying gross margin % is defined as underlying gross profit divided by revenue and is included as an alternative performance measure in order to aid users in understanding the ongoing performance of the Group.

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

4 Non-underlying items consist of non-recurring costs, share-based payments and the Commercial Agreement amortisation. See Financial Review for more detail.

5 Net Cash is cash and cash equivalents less borrowings.

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

· Group restored to profitability in the middle of the year with strong progress made on phase two of the Turnaround Plan (see CEO's Statement), which is now complete and which has achieved improvements in revenues and gross margin alongside reduced overheads.

· The year end order book increased by 24% above 2018's closing position through accelerated order intake in November and December driven by intentionally increased lead generation investment, which has held back the 2019 profit outcome.

· Volume of frames installed increased by 3.3% to 190,252 (2018: 184,184).

· Average unit sales price up 5.0% to £678 (2018: £646).

· Improvement in market share (as measured by FENSA) to 8.5% (2018: 7.8%).

· Business transformation has also accelerated, improving further in customer service, safety, compliance and internal management processes.

Outlook

· The Group has had a strong start to 2020, with both sales and profit ahead of the last year and the business well positioned for delivery of our forecast.

· However, the COVID-19 pandemic is creating significant uncertainty across the UK and international economy.

· The business has responded to the situation rapidly and is equipped to deal with the probable short-term adverse impact because of its improved net cash position, underpinned by a committed facility to October 2021 alongside a leaner cost base.

· To preserve cash, the previously announced c.£3m marketing investment has been now deferred.

· The Board is now focused on the wellbeing of staff, protecting the business and providing the best service possible in the current context.

· The overall effect of the current uncertainty on the Group is, at the current time, difficult to quantify. For this reason, the audit opinion will contain an emphasis of matter in respect of going concern as a result of COVID-19, although the audit opinion will remain unqualified. Notwithstanding these concerns, the Directors confirm that, after due consideration, they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and have continued to adopt the going concern basis in preparing the financial statements.

Commenting on the results, Mike Gallacher, CEO said:

"The results for 2019 announced today show good progress in our turnaround plan. The business has started strongly in 2020 but is now facing into the challenges posed by the COVID-19 pandemic.

We are responding rapidly with the twin aims of protecting our people and customers, while providing the best service possible through the crisis. Our contingency planning was conducted early and our responses are being executed with huge support from our staff and agents.

Our results show that during 2019 the business restored profitability and closed the year with a healthy order book and having laid strong foundations for continued performance improvement and sustainable growth. Our intent remains to build the business for the long-term benefit of shareholders with our trusted value brand whilst consolidating our position as the UK's No 1 choice for Windows and Doors."

A conference call for analysts for the 2019 Final Results will be held today at 9.30 am. If you would like to join, please contact FTI Consulting at safestyle@fticonsulting.com or using the details below in order to access the registration details. 

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 or www.safestyle-windows.co.uk.

Chairman's Statement

Summary of performance

I am pleased to report that the Group made strong progress in its Turnaround Plan in 2019. Profitability was achieved in the second quarter of the year and this momentum continued into Q3. In Q4, sales order intake accelerated in November and December, causing additional lead generation costs; whilst this reduced 2019's profits, it has strengthened the year end order book which increased by 24% above 2018's closing position.

Revenue increased by 8.4% to £126.2m (2018: £116.4m). This, combined with a higher gross margin and reduced overheads, delivered a significantly improved underlying (loss) before taxation1 of £(1.5)m compared to £(8.7)m in 2018. Reported (loss) before taxation was a loss of £(3.8)m, an improvement of £12.4m when compared to the loss of £(16.3)m in 2018. Basic EPS for the period improved to (4.0)p from (16.1)p in 2018.

Non-underlying items2 reduced significantly to £2.3m (2018: £7.5m). The 2019 items include restructuring costs of £1.1m (2018: £1.2m) and impairment of right-of-use property leases of £0.7m as the Group simplified its organisation structure and reduced its overhead cost base.

Encouragingly, the improving performance trajectory described above continued into the first part of 2020 as the Group moved into phase three of its Turnaround Plan, which is the last, but also the longest phase of the plan.

Balance sheet and dividend

The Group has a £7.5m committed finance facility, the term of which was extended during the year by 12 months to October 2021, which will support the Group's working capital needs over the next few years.

The net cash3 position at the end of the year improved to £0.4m (2018: £0.3m).

The Board does not propose a final dividend for the year (2018: £nil) which will underpin the maintenance of suitable liquidity levels in the immediate future. The Board will revisit the dividend policy once further progress has been made in the Turnaround Plan.

Outlook

Our strategic plan for 2020 is now paused as the business faces into the unprecedented challenges caused by the COVID-19 pandemic. While huge uncertainties exist, our starting position as we go into this crisis is strengthened by recent strong trading performance and the capable Executive Team now in place.

The situation is moving rapidly and our aims will be to protect our people, our customers and the business as we move through, and in due course out, of this crisis.

The overall effect of the current uncertainty on the Group is, at the current time, difficult to quantify. For this reason, the audit opinion will contain an emphasis of matter in respect of going concern as a result of COVID-19, although the audit opinion will remain unqualified. Notwithstanding these concerns, the Directors confirm that, after due consideration, they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and have continued to adopt the going concern basis in preparing the financial statements.

The Board believes that our business is now much better equipped to deal with the probable short-term adverse impact because of the Group's improved net cash position, which is underpinned by a committed facility to October 2021 alongside a leaner cost base as a result of the actions taken as part of the Turnaround Plan. Inevitably, a number of our strategic investments are now on hold (totalling c.£3m in 2020). The Board believes that it is prudent to defer all possible financial commitments possible until after the impact of COVID-19 is more fully understood and we can plan with a higher degree of certainty.

With the above as context and acknowledging the material uncertainty that this creates, the Board still targets making progress in 2020 although remains cautious about the degree to which previously anticipated growth can be achieved.

Finally, I must once again stress that the progress we have made would not have been at all possible without our skilled colleagues who all work with relentless dedication across the entire business. Right now that dedication is being demonstrated further as they address the challenges of COVID-19. I would once again like to thank them all for their continued commitment to Safestyle.

Alan C Lovell

Chairman

19 March 2020

CEO's Statement

Summary

During 2019 the business recovered strongly, delivering improvements in margin, costs and profitability, while also growing ahead of the market (as measured by FENSA) in an uncertain domestic consumer context. Our growth was balanced, coming from both volume and price across all lead sources. In addition, the business transformation accelerated, improving further in customer service, safety, compliance, and internal management processes.

Following the challenges of 2018, we started 2019 with an almost entirely new Executive Team and our progress gathered pace through the year as the team bedded into their roles. While the focus has been on business recovery, substantial changes have taken place internally as we embed our sales digitalisation process, which has been the biggest change within the business seen to date. The performance visibility resulting from this project will be a key enabler of 'levelling up' performance across sales, an initiative which will be at the heart of our strategy through 2020/21.

Our industry has changed significantly in recent years and this resulted in the business being impacted by regulatory issues in 2017 and 2018. The business has responded to the challenge robustly and 2019 saw compliance embedded across all parts of the business. As market leader it is essential that we operate to the highest ethical standards and we will continue to work closely with regulators to ensure best practice.

The business is now heavily engaged in phase three of its Turnaround Plan, focused on building our value brand and embedding the transformation already underway. This will be a multiyear process that will deliver a branded business that is modern, compliant and a clear market leader.

Phase two - Return to Profitability

The focus of phase two of our Turnaround Plan in 2019 was to return to monthly profitability. Continuous progress was made through the year as actions taken by management positively impacted profitability. The Group achieved an underlying (loss) before taxation1 for the full year of £(1.5)m (2018: loss of £(8.7)m) with profitability restored in Q2 and increased in Q3. Our Q4 exit rate profitability was reduced by a decision to invest behind our strong year end sales momentum and this led to a stronger order book at the end of the year which was 24% higher than at the end of 2018.

Improvements in profitability were driven by revenue growth and higher gross margin percentage which increased by 240bps versus 2018, with the year on year improvement higher at 300bps for H2. In addition, measured restructuring and cost controls helped recover our cost base towards 2017 levels, with a £2.8m (excluding the impact of IFRS16 adoption) reduction in underlying operating expenses2 year on year.

While the trajectory of quarterly improvement matched our expectations, the absolute level of profitability delivered was below our original plan due to marginally lower top line growth and the higher year end investment. The former was the outcome of structuring the Door Canvass department for the long term which has included utilising new technology and further embedding compliance. Despite this, the business grew revenues by 8.4% year on year, with the second half of the year's growth accelerating to 10.6%. In a broadly flat market this performance delivered solid share gain (as measured by FENSA) to 8.5%.

In addition, 2019 saw the business start to benefit from the Digital Transformation programme launched in 2018. The breadth and detail of management information available is enabling a step change in how we can identify, analyse and drive performance in sales. Combined with our fast-paced culture this change will be critical for our strategy of 'levelling up' our sales performance nationally in 2020.

The experiences of 2018 highlighted our need to adapt to the breadth of changes in our regulatory environment and 2019 saw us initiate fundamental changes to deliver this. Our collaboration with West Yorkshire Trading Standards has been hugely beneficial and has accelerated our focus on treating consumers fairly. We also made significant changes to adapt our processes to new Data Protection laws, including the introduction of new technology and internal audit processes. Together with sustained progress on Health and Safety, the business now aims to ensure that both our values and regulatory compliance are at the core of our business processes. 

Phase three - Accelerating Growth & Embedding Transformation

In 2020 the business plan moved into Phase Three. The objectives of this phase included both accelerating growth and embedding the fundamental changes initiated during 2018.

Clearly in the context of COVID-19 much of the strategic activity and investment will be deferred. However, as the economy comes out of the crisis we will aim to drive the following strategic priorities:

Improving the National Sales and Depot Network. There are significant variances across the UK in the performance of our sales branches and installation depots. Levelling up the performance of each location through implementing role model sites, supported by clear standard operating procedures and consistent training will deliver huge benefits. This will be a two-year process and will leverage the excellent management information now available.

Sustaining Momentum in Compliance and Customer Service. The business is determined to provide excellent customer service and has made significant progress in 2019, cutting installation quality issues by c.30%. Concurrently, we aim to continue to embed our new compliance standards while working with the wider industry participants to establish these standards across the industry.

Modernising our Value Brand. During 2020 we aim to update our value brand, setting a new and clear identity as we move beyond the 'Buy One, Get One Free' communication message. Having done this work, our plan includes a return to mass media brand investment in H2 2020.

While the duration of the COVID-19 crisis is uncertain, these key strategies will focus our efforts for the next two years and support the continued development of our financial delivery.

Current trading

The business has started strongly in 2020, but is now facing into the challenges posed by the COVID-19 pandemic.  The Executive Team and Board has responded rapidly with the twin aims of protecting our people and customers, while providing the best service possible through the crisis.  Our contingency planning was conducted early and our responses are being executed with excellent support from our staff and agents.

Our immediate focus for the months ahead will be on managing our business through the pandemic crisis.  Our long-term intent remains the same; to build the business for the long-term benefit of shareholders with our trusted value brand whilst consolidating our position as the UK's No 1 choice for Windows and Doors.

Mike Gallacher

Chief Executive Officer

19 March 2020 

Financial Review

Financial and KPI headlines

· Revenue rose by 8.4% to £126.2m, which is attributable to a 3.3% increase in frames installed to 190,252 and a 5.0% improvement in the average frame price to £678 (2019: £646) as a result of price actions and a 0.2ppts increase in the mix of higher priced composite guard doors. These positive trends were partially offset by higher consumer finance subsidy costs.

· Underlying gross profit3 improved by 19.6% to £31.9m with the increase in revenue combining with reduced costs across commissions, access solutions and installation-related materials. Lead generation costs (predominantly in digital media) partially offset these reductions, in part due to higher costs per lead versus the prior year, coupled with investment in sales order intake in Q4 that increased the closing order book by 24% versus the prior year. Underlying gross profit is the same as reported gross profit in 2019.

· Underlying other operating expenses4 reduced by 9.3% to £32.0m with reductions in the overhead cost base achieved following restructuring and other cost-reduction initiatives. H2 underlying other operating expenses were £15.3m, a year on year reduction versus H2 2018 of £2.0m (11.7%). 

· Reported other operating expenses reduced by 18.3% to £34.3m with the decrease attributable to both the cost reduction actions described above, along with a reduction of £4.4m in non-underlying items1.

· Finance costs represented £0.9m of interest and fees payable on borrowings along with £0.5m of interest on lease liabilities following the adoption of IFRS 16 Leases.

· Underlying (loss) before taxation5 was £(1.5)m for the year (2018: loss of £(8.7)m). Non-underlying items were £2.3m in the year, a reduction of £5.2m versus 2018, leading to a reported (loss) before taxation of £(3.8)m (2018: loss of £(16.3)m).

· Net cash2 also improved to £0.4m versus the prior year position of £0.3m.

1See later section in this Financial Review

2Net cash is cash and cash equivalents less borrowings

3Underlying gross profit is defined in the ‘Underlying performance measures’ section below and the reconciliation between this measure and the GAAP measure is shown in the ‘Financials’ table at the front of this Financial Review

4Underlying other operating expenses are defined in the ‘Underlying performance measures’ section below and the reconciliation between this measure and the GAAP measure is shown in the ‘Financials’ table at the front of this Financial Review

5Underlying (loss) before taxation is defined in the ‘Underlying performance measures’ section below and the reconciliation between this measure and the GAAP measure is shown in the ‘Financials’ table at the front of this Financial Review

6Underlying gross margin % is defined as underlying gross profit divided by revenue

Underlying performance measures

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

Consequently, adjusted measures of underlying gross profit, underlying other operating expenses and underlying (loss) before taxation have been presented as the primary measures of financial performance. Adoption of these measures means that non-underlying items are excluded to enable a meaningful evaluation of the Group's performance from year to year.

These alternative measures are entirely consistent with how the Board monitors the financial performance of the Group and the underlying profit / (loss) before taxation measure is the performance target for the annual incentive plan described in the Directors' Remuneration Report.

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

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

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

Revenue

Revenue for the year was £126.2m compared to £116.4m in 2018, representing an improvement of 8.4%. Year on year revenue growth in H2 was 10.6%, representing the improving year on year performance as the year progressed. The key performance drivers were as follows:

· A 7.9% improvement in the volume of orders installed from 42,995 to 46,412, as the business recovered from the decline in sales and installation workforce levels in 2018.

· Alongside the increase in installations, the number of frames installed also increased by 3.3% to 190,252 from 184,184 which therefore represents a slight reduction in the number of frames installed per order of 4.2% to 4.10. This dilution was largely driven by an increased mix of installations of higher average-priced composite doors in H2 which typically represent a lower unit count per job. This trend was reversed in H2, with the mix of composite doors declining, which in turn led to a commensurate increase in frames per order of 2.4% versus H2 2018.

· Average order value including VAT increased by 0.5% to £3,337 which is despite the lower number of frames per order. The increased order value was largely the result of the annualisation effect of price increases made in late 2018 together with an increased mix of higher value composite doors and coloured frames. During 2019, the Group enacted minimal price increases to ensure it maintained its value-based proposition and lower price point relative to the competition.

· Continuing the trend of recent years, favourable average price gains were partially offset by an increase in uptake of 0% interest-free consumer finance offering, which drives higher subsidy costs with the Group's consumer finance provider partners.

Underlying gross profit

Underlying gross profit improved by 19.6% to £31.9m while the underlying gross margin percentage increased by 240bps to 25.3% (2018: 22.9%). The improvement versus 2018 in both these measures is a result of the following:

· The 3.3% increase in frames installed improved gross margin by £1.0m (3.8%) which, alongside the increase of 5.0% in the average price per frame, represented the largest components behind the improvement in both the gross profit and gross margin %.

· The Group achieved an improvement in many of the material cost ratios within cost of sales which includes commissions, access solutions and installation materials. The improvements in these areas were achieved through balancing the workforce with activity levels, whilst improving processes and establishing additional controls on material ordering.

· Improvements in quality metrics and increased reliability of the product across the 10-year warranty period resulted in a reduction in the warranty provision required.

· The above margin-enhancing factors were partially offset by the marginal costs of growing the number of leads to fuel the growth of the business. The volume-related element of the investment supported higher revenue in the year whilst also driving a 24% growth in the closing order book versus 2018. However, alongside this, 2019 continued the trend seen in recent years of higher costs per each lead across all channels, albeit most notably within the digital lead generation channel. 

As referred to in the Chairman's statement, the Group is targeting a recovery to a more balanced mix of digital and above the line investment in 2020 and beyond, to drive brand awareness and reverse the trend of increasing costs in the more expensive lead generation channels.

Underlying other operating expenses

Underlying other operating expenses decreased by £3.3m (9.3%) versus 2018, with the reduction increasing in H2 to 11.7% versus the 6.9% reduction of H1. The improving trend was largely a result of the impact of many of the cost reduction initiatives implemented as part of phase two of the Turnaround Plan. Expanding into more detail, the main changes were as follows:

· A reduction of £0.7m in fixed marketing investment, the largest component being TV advertising. All of the year on year reduction occurred in H1, predominantly as a result of a larger TV campaign run at the start of 2018 that was not repeated at the same activity level in 2019.

· Salary and related costs decreased versus 2018 as the Group simplified its organisational structure and reduced its fixed cost as part of the Turnaround Plan and efficiency drive. The benefit of these reductions were larger in H2 as the actions took place across H1.

· Recruitment costs reduced versus 2018, which saw larger recruitment fees as part of the search for new senior management and executive directors.

· IT licensing and infrastructure costs increased versus 2018, which is a result of both the full year effect of the license fees for the Digital Transformation project and also the fees following the implementation of Office365, which is an up to date and more resilient operating system for all users.

· Adoption of IFRS 16 Leases reduced underlying other operating expenses by £0.5m with a corresponding increased interest charge of £0.5m as described in the Financial and KPI Headlines section above (see note 1 for more details).

Underlying (loss) before taxation

Underlying (loss) before taxation was £(1.5)m (2018: loss of £(8.7)m), although profitability was achieved throughout the middle of the year. This loss is before the non-underlying items described below.

Non-underlying items

A total of £2.3m has been separately treated as non-underlying items for the year, which represents a marked reduction when compared to the £7.5m reported in 2018. This reflects the transition from the unusual events and associated costs incurred in 2018, to the costs predominantly incurred as part of phase two of the Turnaround Plan in 2019.

The non-underlying items consisted of £1.8m (2018: £7.8m) of non-recurring costs, a £0.0m share-based payment charge (2018: credit of £0.4m) and £0.5m (2018: £0.1m) of Commercial Agreement (Intangible Asset) amortisation. The following table provides the full breakdown:

The largest non-recurring item in 2019 was £1.1m related to people restructuring costs which reduced the Group's aforementioned overhead levels. In addition, the Group recognised an impairment of right-of-use assets of £0.7m following closure of an installation branch and a sales office in the period. Finally, project costs of £0.1m represented the impairment of a capital investment made in a new electronic survey system that was stopped following results of field trials.

Included within the 'Fines' category in 2018 was a fine from the Health and Safety Executive ("HSE") of £0.9m following prosecution for a working at height accident in March 2017. Last year the Group also reported there was another contingent liability linked to a second reportable incident which also occurred in 2017. The HSE confirmed in 2019 that, following completion of its thorough investigation, it would not take any further action on this matter.

The Commercial Agreement costs and service fees in 2018 arose as a result of an agreement entered into in 2018 with Mr M. Misra which encompassed a five year non-compete agreement and the provision of services by Mr Misra in support of the continued recovery of Safestyle. The Group agreed consideration with Mr Misra subject to the satisfaction of both clear performance conditions by him over 5 years and Safestyle's trading performance in 2019.

Subject to satisfying the strict terms of the agreement, the consideration takes the form of an allotment by Safestyle to Mr Misra of four million ordinary shares of 1 pence each in the capital of the Group and a payment of cash consideration of between £nil and £2.0 million. Both the allotment of shares and payment of the cash would only be made in October 2020.

The Commercial Agreement service fee of £1.0m in 2018 was the assessed fair value of the consideration payable under the terms of the Commercial Agreement that was attributed to services received in 2018. Following conclusion of the 2019 year, the value of the services received was re-assessed, based on the actual performance in 2019, and the provision for consideration to be paid has been reduced by £13k.

The non-compete element of the Commercial Agreement has been accounted for as an intangible asset on the basis that it is an identifiable, non-monetary item without physical substance, which is within the control of the entity and is capable of generating future economic benefits for the entity. The intangible asset was measured based on the fair value of the consideration that the Group expects to issue under the terms of the agreement and is being amortised over 5 years which matches the term of the non-compete arrangement.

Further detail of all non-recurring costs is contained in note 5.

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

IFRS 16

IFRS 16 is effective for this year and requires the total commitments of all leases (both finance and operating leases) to be recognised on the balance sheet. The impact of adopting the standard is:

· on the balance sheet, an additional lease liability of £6.4m and right-of-use assets of £6.0m have been recognised;

· in the income statement, the impact on the operating (loss) is a £0.5m benefit as rental payments are now replaced with depreciation on the right-of-use assets. However, higher finance costs of £0.5m relating to the lease liability offsets the above benefit which combined results in a reduction of £0.0m in the overall reported or underlying (loss) before taxation compared with the previous basis of accounting for leases; and finally,

· there is no cash flow impact.

Earnings per share

Basic earnings per share for the period were a loss of (4.0)p compared to a loss of (16.1)p for the prior year. The basis for these calculations is detailed in note 7.

Net cash and cashflow

As reported last year, the Group secured a £7.5m committed finance facility in October 2018, which consisted of a £4.5m term loan that was drawn on completion of the deal and a £3.0m revolving credit facility that can be utilised as required over the term of the arrangement. I am pleased to report that this facility was extended for a further year to end in October 2021. This facility will continue to underpin the working capital needs of the business and provide considerable liquidity for the next two years.

At 31 December 2019, the revolving credit facility was undrawn in its entirety and cash and cash equivalents were £4.4m (2018: £4.2m). After deducting borrowings of £3.9m (2018: £4.0m), which are stated net of arrangement fees, net cash of the Group was £0.4m at year end (31 December 2018: £0.3m).

Net cash inflow / (outflow) from operating activities, including the cashflow impact of non-underlying items, was an inflow of £4.8m (2018: outflow of £(8.8)m).

Capital expenditure in the year on property, plant and equipment and software was £0.4m, (2018: £1.9m) which represents a considerable reduction on the spend compared to the prior year which included the investment in the Digital Transformation project. The focus in 2019 was on embedding the systems and processes related to the Digital Transformation project implemented in 2018. Looking ahead, the Group plans to continue to invest in improving and modernising its IT infrastructure and systems to ensure security, stability and resilience whilst also facilitating improved processes and efficiency.

Receipt of a £2.5m tax refund from HMRC follows a tax reclaim against the reported losses in 2018.

No dividends were paid in the year (2018: £nil) which, combined with the movements above, resulted in a net cash inflow in the year of £0.3m (2018: outflow of £(6.8)m).

Dividends

As the Group moves into phase three of its Turnaround Plan, the Board will focus on continuing to increase the Group's net cash position and consequently does not propose a final dividend for this year (2018: £nil per share).

Net cash update post balance sheet date

As at 19 March 2020, £2.0m of the revolving credit facility has been drawn down, leaving £1.0m of the facility undrawn. The Group had net cash at the end of February 2020 of £0.1m (Feb 2019: net debt of £(2.5)m).

Rob Neale

Chief Financial Officer

19 March 2020

Consolidated income statement for the year ended 31 December 2019

Consolidated statement of financial position as at 31 December 2019

Consolidated statement of changes in equity for the year ended 31 December 2019

Consolidated statement of cash flows for the year ended 31 December 2019

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 financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2019 or 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the registrar of companies with the Jersey Financial Statements Commission (JSFC), and those for 2019 will be delivered in due course. The auditor has reported on those accounts. Their report for 2019 was (i) unqualified, (ii) contains a material uncertainty in respect of going concern to which the auditor drew attention by way of emphasis without modifying their report and (iii) did not contain a statement under section 113B (3) or (6) of the Companies (Jersey) Law 1991. Their report for the accounts of 2018 was (i) unqualified, (ii) did not include a reference of any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 113B (3) or (6) of the Companies (Jersey) Law 1991.

Safestyle UK plc is a public listed group incorporated in Jersey. The Group's shares are traded on AIM. The Group 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 Group is not required to present parent company information.

2 Basis of preparation

The Group's financial statements for the year ended 31 December 2019 ("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 accounting policies set out below have unless otherwise stated, been applied consistently to all periods presented in these financial statements.

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 4.

(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.

· IFRS 16 Leases (effective 1 January 2019)

· IFRIC 23 Uncertainty over Income Taxation Treatments (effective 1 January 2019)

· Annual Improvements to IFRSs - 2015-2017 Cycle (effective 1 January 2019)

(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):

· Amendments to References to the Conceptual Framework in IFRS Standards (effective 1 January 2020)

· Amendments to IAS 1 and IAS 8 (effective 1 January 2020)

· Amendments to IFRS 7, IFRS 9 and IAS 39 (effective 1 January 2020)

Changes in significant accounting policies

IFRS 16 Leases transition

The Group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17.

Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining Whether an Arrangement contains a Lease. The Group now assesses whether a contract is or contains a lease based on the new definition of a lease. Under IFRS 16, a contract is, or contains a lease, if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration.

On transition to IFRS 16, the Group elected to apply the practical expedient to continue to apply the outcome of the assessments made under IAS17 of which transactions are leases. It applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed. The definition of a lease under IFRS 16 has been applied only to contracts entered into or changed on or after 1 January 2019.

On transition, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of the remaining lease payment, discounted at the Group's incremental borrowing rate as at 1 January 2019. Right-of-use assets are measured at an amount equal to the lease liability and adjusted for any prepayment in place.

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

- Applied the exemption not to recognise right-of-use assets and liabilities for leases with less than 12 months of lease term.

- Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.

- Safestyle has decided to rely on its view of whether leases are onerous applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application as an alternative to performing an impairment review.

- Applied the low value exemption when defining right-of-use assets and liabilities.

Impact on financial statements

On transition to IFRS 16, the Group recognised additional right-of-use assets and additional lease liabilities. The impact on transition is summarised below.

Impact for the period

As a result of initially applying IFRS 16, in relation to the leases that were previously classified as operating leases, the Group recognised £9,741k right-of-use assets and £9,395k of liabilities as at 1 January 2019.

Also in relation to those leases under IFRS 16, the Group has recognised depreciation and interest costs, instead of operating lease expense. In relation to leases under IFRS 16, during the year, the Group recognised £3,835k of depreciation charges and £526k of interest costs from these leases. The P&L impact of adopting IFRS 16 versus accounting under IAS 17 is a cost of £42k in 2019.

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.

Year end

The financial statements are presented for the year to 31 December 2019. The actual trading cut-off date for the year-end fluctuates year on year and is based on the nearest Sunday to the end of December.

Going concern

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

The Group made a statutory (loss) of £(3.3)m in the year to 31 December 2019 (2018: (loss) of £(13.3)m) and had net current liabilities of £7.7m at 31 December 2019 (2018: net current liabilities of £3.1m). The Group is financed by a £4.5m term loan and a £3.0m revolving credit facility, which matures in October 2021, after being extended by one year during 2019. The finance agreement contains certain covenants, including a minimum EBITDA to be tested on a cumulative monthly basis, which has been revised during 2019 such that the minimum EBITDA for covenant compliance has been reduced in 2019 and 2020. As at 31 December 2019, the £4.5m term loan was fully drawn on the facility, while the revolving credit facility was unutilised. At the end of February 2020, £2.0m of the revolving credit facility has been drawn down and the Group's net cash position was £0.1m (February 2019: net debt of £2.5m).

The Directors have prepared forecasts covering the period to December 2021, built from the detailed Board approved budget for 2020. The forecasts include a number of assumptions in relation to sales volume and pricing growth, and margin improvements.

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

The Group's cash flow forecasts and projections, taking account of reasonably possible changes in trading performance excluding the potential impact of COVID-19 (which is considered below), offset by mitigating actions within the control of management including reductions in areas of discretionary spend, show that the Group will be able to operate within the level of its facilities and associated covenants for a period of at least the duration of the facility agreement. The Group has started the year well, with profit and order intake ahead of prior year which the directors believe further supports this basis of preparation.

The uncertainty as to the future impact on the Group of the recent COVID-19 outbreak has been separately considered as part of the directors' consideration of the going concern basis of preparation. Thus far, the Group has not observed any material impact in trading performance due to COVID-19. In the downside scenario analysis performed, the directors have considered the reasonably plausible impact of the COVID-19 outbreak on the Group's trading and cash flow forecasts. In preparing this analysis, a number of scenarios were modelled ranging from a 30% drop in written and fitted sales both in April and May 2020, followed by a recovery through June, to a total loss of written and fitted sales for April 2020 followed by a recovery through the first half of May 2020. In each scenario, mitigating actions within the control of management, including reductions in areas of discretionary spend, have been modelled, but no fixed cost reductions have been assumed. It is difficult to predict the overall outcome and impact of COVID-19 at this stage and the duration of disruption to written and fitted sales activity could be longer than anticipated. However, under the scenarios modelled, there is a risk of breaching the Group's financial covenants and in a scenario where a total loss of written and fitted sales extends beyond the end of April 2020 there is a risk of the liquidity requirements of the business exceeding the total quantum of facilities available.

The directors note the financial support commitment made by the UK Government as part of a £330bn funding package to support businesses on 17 March 2020. Whilst there is still uncertainty around this, the directors believe, based on the initial details circulated as part of the announcement, that the Group would qualify for financial support.

Based on the above indications the directors believe that it remains appropriate to prepare the financial statements on a going concern basis. However, the specific downside scenario detailed above would indicate the existence of a material uncertainty which may cast significant doubt on the Group's ability to continue as a going concern and that the Group may, as a consequence, be unable to realise its assets and discharge its liabilities in the normal course of business.

The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate.

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.

3 Summary of significant accounting policies

Non-recurring items

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

Revenue recognition

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

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

Revenue on sale of windows and doors

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

Survey fees

The survey fee is payable in advance of the survey being carried out. For customers that proceed with the contract to purchase, the amount received is treated as an advance payment and is recognised as revenue when the installation services are provided. For customers that do not proceed to purchase, the amount received for survey fees is recognised at the point at which the survey fee becomes non-refundable, which is after a period of time defined in the contract.

Leases (policy applicable from 1 January 2019)

The Group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17.

At the inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

As a lessee

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Group by the end of the lease term or the cost of the right-of-use asset reflects that the Group will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

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

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

- fixed payments, including in-substance fixed payments;

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

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

- the exercise price under a purchase option that the Group is reasonably certain to exercise,

- lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and

- penalties for early termination of a lease unless the Group is reasonably certain not to terminate early.

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

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, to the extent that the right-of-use asset is reduced to nil, with any further adjustment required from the remeasurement being recorded in profit or loss.

Short-term leases and leases of low-value assets

The Group has elected not to recognise right-of-use assets and lease liabilities for lease of low-value assets and short-term leases. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

4 Accounting estimates and judgements

In preparing these financial statements, management has made estimates that affect the application of the Group's accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results can differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.

Assumptions and estimation uncertainties

The assessment of whether trade receivables are recoverable is subject to management judgement. An allowance for impairment is made for estimated irrecoverable amounts.

Other sources of estimation uncertainties

Product guarantees 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 is subject to estimation uncertainty.

Dilapidations provisions

The Group has a number of leases in relation to properties, where there is a contractual obligation to undertake remedial works at the end of the lease term. The level of provision required to cover the expected future costs of dilapidations is subject to estimation uncertainty around expected costs and management intention. Further details can be found in note 9.

Recoverability of deferred taxation asset

The deferred taxation asset of £886k has been recognized on the basis that the Group is forecasting to make sufficient levels of profits in future periods in line with the Turnaround Plan.

5 Non-recurring costs

6 Dividends

No final dividend in relation to 2019 was declared and no dividends were paid or declared in 2018.

7 Earnings per share

8 Taxation

A reduction in the UK corporation tax rate from 19% to 17% (effective from 1 April 2020) was substantively enacted on 6 September 2016, and the UK deferred taxation asset / (liability) as at 31 December 2019 has been calculated based on this rate. In the 11 March 2020 Budget it was announced that the UK taxation rate will remain at the current 19% and not reduce to 17% from 1 April 2020. This will have a consequential effect on the Group's future tax charge. If this rate change had been substantively enacted at the current balance sheet date the deferred tax asset would have increased by £104k.

9 Provisions

Dilapidations - The Group has a portfolio of leased properties that sales branches and installation depots operate from. Historically upon exiting a property lease, the Group has incurred contractual dilapidations charges from the landlord to cover the wear and tear repair costs from the Group's tenancy. The dilapidation provision is estimated on the property size, its use as either a sales branch or installation depot, and the historical charges incurred upon exiting similar properties.

Product Guarantee - The Group gives guarantees against all its products, which in the majority of cases covers a period of 10 years. A warranty provision is made for the expected future costs of rectifying faults arising within the guarantee period and then discounted at 9% to a net present value.

Commercial Agreement - The provision for the Commercial Agreement represents the cash consideration that the Group expects to issue under the terms of the Commercial Agreement as described in the Financial Review. The cash consideration is confirmed at £987k and is payable in October 2020. As there is no estimation involved, the £987k is recognised as an accrual.

10 IFRS 16

The interest expense recognised in the profit and loss statement is in the table above. No expenses relating to short-term lease and low-level leases has been recognised.

The total cash outflow for leases is £4,132k. This comprises the payment of lease liabilities of £3,606k and the interest paid £526k.