SFE.L Regulatory News (SFE)

15 September 2016

This announcement contains inside information

Safestyle UK plc

Unaudited Interim Results for the six months ended 30 June 2016

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 2016.

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

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

· Volume of frames installed increased by 5.7% to 149,742 (H1 2015: 141,712)

· Continued growth in market share to 10.0% at 30 June 2016 (End 2015: 9.5%)

· Leads generated from media and on-line marketing grew by 26% to 39,118 (H1 2015: 31,095)

· Average unit sales price up 4.7% to £556 (FY 2015: £531)

· New sales offices opened in Guildford and Norwich

· Pre-tax operating cash flow of £9.8 million (2015: £8.7 million)

Commenting on the results, Steve Birmingham, CEO said:

"I am pleased to report that Safestyle UK has delivered another record performance in the first half of 2016 in which our revenue, market share and profit all increased. We have continued to build on the positive momentum generated last year and the Group's cash conversion and balance sheet remain strong. Furthermore, we continue to execute on our strategy of increasing market share and expanding geographically, with new sales branches opened in Guildford and Norwich.

So far in H2 we have seen no change in demand which might be attributed to June's Brexit vote. Order intake since the half year has increased on the previous year, albeit at a lower rate than in the first half due to more challenging comparatives.

We have entered the second half of 2016 in a strong position and the Board remains confident of making further progress and delivering a full year outturn in line with management expectations."

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

Summary of Performance

I am pleased to report that Safestyle UK has continued to perform well in the six months ended 30 June 2016.

Revenue was up 12.8% to £83.5 million (H1 2015: £74.0 million) as we continued to increase our market share in the period to 10.02% (9.46% as at 31 December 2015), according to FENSA installations data. Order intake was up 19.7% and we closed the period with a record half-year order book.

Profit before tax increased by 8.9% to £9.5 million (H1 2015: £8.8 million), after including an unusually high charge related to LTIP share options granted at the time of the company's IPO in 2013, and exercised during the period, of £1.05 million (H1 2015: £0.22 million). Underlying EBITDA was up 16.5% at £11.1 million. EPS for the period is up marginally to 9.4p, reflecting both the option expense and the increased number of shares in issue as a result of the April 2016 exercise of share options and the October 2015 warrant exercise.

The business continues to convert profit into cash, with H1 2016 cash conversion (the ratio of net cashflow from operating activities before taxation to underlying EBITDA) for the period at 88%, compared with 91% for FY 2015. The Group's balance sheet is robust with cash of £23.6 million at 30 June 2016 (£16.5 million as at 31 December 2015). The special dividend of £5.6 million announced with the 2015 full year results was paid on 11 July 2016 alongside the final dividend of £5.6 million.

Interim Dividend

We will pay an interim dividend of 3.75 pence per share, an increase of 10.3%, on 31 October 2016. The record date will be 30 September 2016.

Business Review

The market in which the Group operates contracted by 2.2% by volume in H1 2016 (according to FENSA data), albeit with some recovery in Q2, which we expect will continue in Q3. Our own order intake has been very strong in the first half of the year. The second half has started on plan, with the three new frame colours introduced at the beginning of June being well received and current order intake shows growth in line with our expectations. We remain encouraged by the demand for our conservatory refurbishment program which remains on target.

We note the caution expressed by many commentators about the short-term market outlook for RMI related expenditure. We are pleased that we continue to trade well in an uncertain market place, and see some signs of returning consumer confidence. Taking into consideration the record low interest rates in the UK, we consider that the long-term prospects for enhanced RMI expenditure by the homeowner are robust.

Our continued market outperformance reflects our outstanding quality and value proposition, reinforced by our broad product range and ongoing development, geographic expansion, an effective digital strategy, and a market leading finance proposition.

Investment in our new factory extension at Wombwell, South Yorkshire, has commenced, and we are currently on time and on budget. The facility is scheduled to be operational in summer 2017.

Outlook

Our expectation is that the market will show some modest volume growth for the rest of 2016. We expect to continue to gain market share in H2, reflecting our strong order book at 30 June 2016 and our continued sales performance.

The business is well positioned and we expect to deliver a full year outturn in line with management expectations.

RS Halbert

Chairman

15 September 2016

Finance Review

Revenue

Revenue for the period was £83.5 million against £74.0 million for the same period last year, representing growth of 12.8%. The key factors underpinning this growth were:

· 26.0% growth in leads generated from direct response from 31,095 to 39,118

· 5.7% growth in the volume of frames installed from 141,712 to 149,742

· 6.9% growth in average unit price from £520 to £556 ex VAT

The price list increase implemented at the start of the year to counterbalance the additional costs of the new consumer finance products has been secured. Unit prices have been further boosted by the sale and installation of 208 conservatory upgrades in the first 6 months of the year.

Gross margin

The basis of calculating gross margin has been changed from the beginning of this year 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 4.

On this basis gross profit increased by 11.9% in the period from £25.2 million in 2015 to £28.2 million in 2016. Gross margin suffered a small drop from 34.1% in the first half of 2015 to 33.7% for the same period in 2016.

The gross margin reduction is in line with expectations. The price list increase from 1 January 2016 almost offset the additional cost of the consumer finance products introduced on 1 June 2015. Average sales prices increased steadily through the first half as the pre-increase order book was installed, supporting expectations that gross margin will continue to improve in the second half of the year.

Other operating expenses

Other operating expenses for the period were £18.7 million (2015: £16.5 million), an increase of 13%. Employer National Insurance costs of £0.9 million were incurred in the period as a result of the exercise in April 2016 of LTIP options granted when the company floated in 2013.

The business continued to invest in building its brand profile, particularly in the south of England, and spent an additional £0.6 million in TV advertising.

Salary costs increased by £0.6 million as a result of the annual pay award and continued investment in organic growth.

EBITDA, PBT and EPS

Underlying EBITDA before share based payments was £11.1 million for the period (H1 2015: £9.5 million), an increase of 17%. PBT increased by 8% from £8.8 million in H1 2015 to £9.5 million but this was impacted by the one-off cost £0.9 million from the LTIP exercise.

Basic earnings per share for the period were 9.4p compared to 9.1p for the same period last year. The value for the first half of 2016 has been impacted by the one-off LTIP cost and by the dilution effect on the weighted average number of shares of both the LTIP exercise and the October 2015 warrant exercise. The basis for these calculations are detailed in note 6 to the accounts.

Cash

The cash balance at 30 June 2016 was £23.6 million, an increase of £7.1 million in the period.

Pre-tax operating activities generated £9.8 million (2015: £8.7 million). Capital expenditure in the period was £1.0 million. £0.7 million of this total related to the factory expansion project.

Dividends

The Board is declaring an interim dividend of 3.75p per share. The dividend will be paid on 31 October 2016 to shareholders on the register at close of business on 30 September 2016.

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 2016.

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 2015 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 2016 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 2015.

The condensed consolidated interim financial information should be read in conjunction with the annual financial statements for the period ended 31 December 2015 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 2015.

3 Going concern

The Group has considerable financial resources and has prepared forecasts that show the Group is expected to continue to trade strongly. 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 2015.

Reclassification of costs

In the current year costs of £3.0m (H1 2015: £2.3m, 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.

5 Dividends

A final dividend for the year end 31 December 2015 of 6.8 pence per ordinary share totalling £5,630,847 was paid on 11 July 2016.

A special dividend for the year end 31 December 2015 of 6.8 pence per ordinary share totalling £5,630,847 was also paid on 11 July 2016.

A proposed interim dividend for the half year end 30 June 2016 of 3.75 pence per ordinary share will be paid on 31 October 2016.

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 the management's best estimate of the full year effective tax rate based on expected full year profits to 31 December 2016. The effective tax rate applied in the period was 20.13% (period ended 30 June 2015: 19.4%) which compares to the standard corporation tax rate of 20.00%. The main reason for the effective tax rate being higher than the standard rate is due to movements in deferred tax relating to capital allowances and share based payments.

Reductions in the UK corporation tax rate from 23% to 21% (effective 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July 2013. Further reductions to 19% (effective 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015. This will reduce the Group's future current tax charge accordingly. The deferred tax asset at 30 June 2016 has been calculated based on these rates.

8 Share Based Payments

At 30 June 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 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.

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:

8 Share Based Payments (continued)

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.

8 Share Based Payments (continued)

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.

8 Share Based Payment (continued)

The total share-based expense comprises:

9 Charges relating to exercised LTIP options

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.

10 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 2016 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. We have read the other information contained in the half-yearly report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

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 IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly report has been prepared in accordance with IAS 34 Interim Financial Reporting 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.

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. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) 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.

Conclusion

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 June 2016 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the AIM Rules.

Ian Beaumont

for and on behalf of KPMG LLP

Chartered Accountants

1 Sovereign Square,

Sovereign St,

Leeds

LS1 4DA

15 September 2016