SFE.L Regulatory News (SFE)

21 September 2017

Safestyle UK plc

("Safestyle" or the "Group"))

Unaudited interim results for the six months ended 30 June 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 interim results for the six months ended 30 June 2017.

Financial and Operational 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

· Volume of frames installed decreased by 6.8% to 139,612 (H1 2016: 149,742)

· Average unit sales price up 6.0% to £599 (FY 2016: £565)

· Continued growth in market share to 11.2% at 30 June 2017 (End 2016: 10.2%)

· Leads generated from media and on-line marketing grew by 9.1% to 42,680 (H1 2016: 39,118)

· New installation depot opened in South Wales

· Completed our new factory extension at Wombwell, South Yorkshire, on time and on budget

· Pre-tax operating cash flow of £8.3 million (H1 2016: £9.8 million)

Commenting on the results, Steve Birmingham, CEO said:

"The first half of 2017 was an increasingly challenging market however Safestyle increased revenue and market share albeit at a higher cost than historically. As a result, we have experienced a decline in profits in what was the severest contraction of our market since 2008/09.

"So far in H2 we have maintained our order intake in line with the previous year and have already commenced a number of initiatives to reduce our cost base.

"The Group's cash conversion and balance sheet remain strong and the Board is confident of outperforming the market and gaining market share based on our differentiators of price competitiveness, promotional finance offers, quality energy efficient products and outstanding manufacturing capability."

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

The markets in which Safestyle operates have become more challenging in recent months, and it is with this backdrop that the Group reports its trading performance for the six months ended 30 June 2017.

Revenue was up 1.4% to £82.5 million (H1 2016: £81.4 million, having been restated following a review of accounting policies in the run up to the introduction of IFRS 15 Revenue Recognition - see Finance Review and Note 4). FENSA statistics show the rate of market decline in H1 2017 accelerated from a Q1 reduction of 2.4% to 17.2% in Q2, and we believe this significantly steeper rate of decline has continued into the first two months of Q3. Our response has been to protect revenues and gain market share, which now stands at 11.2% at 30 June 2017, which has increased the costs of lead generation and conversion into orders. Order intake was up 1.8% for the first 6 months of the year.

Profit before tax declined to £8.8 million (H1 2016: £9.5 million), with underlying EBITDA down 11.7% at £9.8 million. EPS for the period was down from 9.4p to 8.3p. The results reflect the increased cost of delivering sales revenues, and our underlying EBITDA margin declined from 13.6% to 11.8%.

The business continues to successfully convert profit into cash, with H1 2017 cash conversion (the ratio of net cashflow from operating activities before taxation to underlying EBITDA) for the period at 85%, compared with 88% for H1 2016. The Group's balance sheet is robust with cash of £17.7 million at 30 June 2017 (£13.5 million as at 31 December 2016).

Interim Dividend

We have declared an interim dividend of 3.75 pence per share which will be paid on 6 November 2017 (2016: 3.75p). The record date will be 29 September 2017.

Business Review

The sharp decline in our market has created a number of challenges and opportunities, and we have chosen to protect revenue despite the associated increased costs of lead generation and providing customer finance. We have seen a steady increase in the proportion of customers taking up our promotional finance offers with no deterioration in acceptance rates. Longer term, we continue to regard the potential for enhanced RMI expenditure by the homeowner to be positive, notwithstanding the short term weakness caused by the current uncertain economic outlook for consumers.

We have continued to evolve our business and in the period we have further developed our brand messaging, invested in our infrastructure, and continued to develop our conservatory replacement offer and product range.

We have completed our new factory extension at Wombwell, South Yorkshire, on time and on budget. This is a major step in ensuring we have the UK's leading production facilities. The facility is now fully operational and we expect to deliver manufacturing productivity gains throughout the remainder of the year.

Share Buyback

Our balance sheet is strong and we continue to generate cash. Whilst we take a cautious approach to long term planning, we have previously stated that the Board is committed to returning excess capital to shareholders where our cash resources are materially in excess of investment requirements. With the Company's major investment into its factory extension now complete, we will review this further when we announce our 2017 Full Year results in March 2018 but are today making a separate announcement on a share buy-back programme of up to £2.5m.

Outlook

Our expectation is that the market will continue to be weak for at least the remainder of 2017. Consumer confidence has declined, and our outlook is therefore cautious. We expect to continue to gain market share in H2, although sales will continue to be expensive to win and we expect operating margins to be challenging. While market conditions remain at the current low level we will continue to challenge our cost base for efficiencies, though the impact of cost elimination will primarily benefit 2018 and beyond.

We are determined that Safestyle will deliver out performance in its market and gain market share, based on our geographic spread, product range and commercial offerings.

RS Halbert

Chairman

21 September 2017

Finance Review

Revenue

Revenue for the period was £82.5 million against £81.4 million restated for the same period last year, representing growth of 1.4%. The key factors underpinning this growth were:

· 9.1% growth in leads generated from direct response from 39,118 to 42,680

· 6.8% decline in the volume of frames installed from 149,742 to 139,612

· 8.3% growth in average unit price from £553 to £599 ex VAT

The price list increase implemented at the start of the year to counterbalance the additional raw material costs resulting from the reduction in the value of Sterling has been secured. Unit prices have been further boosted by growth in higher value items including conservatory upgrades, composite doors and coloured frames.

A review of accounting policies in the run up to the adoption of IFRS15 has led to the revenue from goods relating to financed products to be shown net of the charges incurred in those sales. Previously these were shown as a cost of sale and the results of 30 June 2016 and 31 December 2016 have been restated to reflect these. This amounted to £1.7 million in H1 2017 and £2.2 million in the same period for 2016. There was no impact to the profit and net assets within these periods.

Gross margin

Gross profit reduced by 2.5% in the period to £27.5 million (H1 2016: £28.2 million). Gross margin has reduced to 33.3% (H1 2016: 34.6%).

The price list increase from 1 January 2017 more than offset the inflation in raw material costs resulting from Sterling weakness but other direct costs have also seen increases which have led to a dilution in gross margin. In particular, online marketing costs have seen a significant increase with the cost of lead acquisition increasing by 19% against the same period last year reflecting increased competition for leads in a tough market.

In addition, manufacturing costs were higher as a result of the planned disruption during the transfer of equipment into the new factory. This was completed on time and the second half of the year will benefit from the expected productivity and quality benefits.

Other operating expenses

Other operating expenses were unchanged for the period at £18.7 million (H1 2016: £18.7 million). Savings in charges related to the exercise of options in the prior year were offset by other costs as the business continued to invest in building its brand profile, developing its IT infrastructure and strengthening its management team.

EBITDA, PBT and EPS

Underlying EBITDA (as defined in the financial and operating highlights) was £9.8 million for the period (H1 2016: £11.1 million), a decrease of 11.7%. PBT decreased by 7.4% from £9.5 million in H1 2016 to £8.8 million.

Basic earnings per share for the period were 8.3p compared to 9.4p for the same period last year. The basis for these calculations is detailed in note 6 to the accounts.

Cash

The cash balance at 30 June 2017 was £17.7 million, an increase of £4.2 million since the year end.

Pre-tax operating activities generated £8.3 million (2016: £9.8 million). Capital expenditure in the period was £3.2 million of which £2.4 million related to the factory expansion.

Dividends

The Board is declaring an interim dividend of 3.75p per share. The dividend will be paid on 6 November 2017 to shareholders on the register at close of business on 29 September 2017.

Condensed consolidated interim statement of comprehensive income

All operations were continuing throughout all periods.

Condensed consolidated interim statement of financial position

Condensed consolidated interim statement of changes in equity

Condensed consolidated interim statement of cash flows

Notes to the interim financial information

1 General information

The condensed interim financial information set out herein is in respect of Safestyle UK plc and its subsidiaries (the Group) for the period ended 30 June 2017.

Safestyle UK plc is a public listed company incorporated in Jersey. The registered office address of Safestyle UK plc is 47 Esplanade, St Helier, Jersey JE1 0BD.

The financial information presented for the year ended 31 December 2016 is not the statutory accounts for that financial year. These accounts have been reported on by the company's auditor. The report of the auditor was unqualified and did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report.

 The company is not required to present parent company information.

2 Basis of preparation

The condensed consolidated interim financial information for the period ended 30 June 2017 has been prepared in accordance with IAS 34, 'Interim financial reporting' as adopted by the European Union.

Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the last annual consolidated financial statements as at and for the year ended 31 December 2016.

The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the period ended 31 December 2016 which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

The accounting policies adopted in the condensed interim financial information are consistent with those set out in financial statements for the period ended 31 December 2016.

3 Going concern

The Group has considerable financial resources and has prepared forecasts that show the Group is expected to continue to trade solidly. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully.

The assessment of the Group's ability to execute its strategy by funding future working capital requirements involves judgement. The Directors monitor future cash requirements to assess the Group's ability to meet these funding requirements.

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

4 Significant accounting policies

Accounting estimates

In preparing this condensed consolidated interim financial report, significant judgments made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December 2016.

Revenue recognition

A review of accounting policies in the run up to the adoption of IFRS15 has led to the revenue from goods relating to financed products to be shown net of the charges incurred in those sales. Previously these were shown as a cost of sale and the results of 30 June 2016 and 31 December 2016 have been restated to reflect these. The effect on revenue in the period was £1,735k (£2,188k 30 June 2016, £3,681k 31 December 2016).

There is no effect on the overall gross margin or operating profit for the Group within these periods.

5 Dividends

A final dividend for the year end 31 December 2016 of 7.5 pence per ordinary share totaling £6,224,219 was paid on 10 July 2017.

A proposed interim dividend for the half year end 30 June 2017 of 3.75 pence per ordinary share will be paid on 6 November 2017.

6 Earnings per share

a) Basic earnings per share

b) Diluted earnings per share

7 Taxation

The condensed interim financial information includes a tax charge based on management's best estimate of the full year effective tax rate. The effective tax rate applied in the period was 22.19% (period ended 30 June 2016: 20.13%) which compares to the standard corporation tax rate of 20.00%.

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 2017. This will reduce the Group's future current tax charge accordingly. The deferred tax asset at 30 June 2017 has been calculated based on these rates.

8 Share based payments

At 30 June 2017 the Group had the following share based payment arrangements:

LTIP

The Group operates an equity-settled LTIP remuneration scheme for Directors and certain management ("LTIP 2015", "LTIP 2016" & "LTIP 2017").

On 10 April 2017, a further 348,210 options were granted ("LTIP 2017"). All 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-Scholes 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 2017 the company launched a new share save (SAYE) scheme ("SAYE 2017") in addition to the existing schemes ("SAYE 2013", "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 "SAYE 2013" matured within the period and as of the 30 June 2017, 183,016 options were issued at a price of 130.8 pence per share from 198,714 options granted.

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:

9 Seasonality

Order intake is subject to small seasonal fluctuations with higher demand in the first and fourth quarters as a result of seasonal weather factors. The business can, within limits, smooth this demand by flexing its order book and aims to level load its operations to minimize costs. As a result revenues and profits would normally be similar for both halves of the year.

INDEPENDENT REVIEW REPORT TO SAFESTYLE UK PLC

We have been engaged by the company to review the condensed set of financial statements in the half-yearly report for the six months ended 30 June 2017 which comprises the Condensed Consolidated Interim Statement of Comprehensive Income, the Condensed Consolidated Interim Statement of Changes in Equity, the Condensed Consolidated interim Statement of Financial Position, the Condensed Consolidated Interim Statement of Cash Flows and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly report for the six months ended 30 Junsafe 2017 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the AIM Rules.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

The half-yearly report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly report in accordance with the AIM Rules.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU. 

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly report based on our review

The purpose of our review work and to whom we owe our responsibilities

Ian Beaumont

for and on behalf of KPMG LLP

Chartered Accountants

1 Sovereign Square,

Sovereign St,

Leeds

LS1 4DA

21 September 2017