SUR.L Regulatory News (SUR)

Lakehouse plc

Full year results for the year ended 30 September 2016

Restructured business positions Group for turn-around transition period

Bob Holt, Chairman of Lakehouse, the support services group, commented:

"FY16 has been a challenging year for Lakehouse but one we believe will prove to be transformational, having focused on reviewing the strategy of the Group, stabilising operational performance with a view to improvement and controlling costs at every level, whilst retaining a high quality of client service.

We have taken tough decisions to exit some business streams within Property Services alongside bringing in a new management team to stabilise operations in the remainder of the division and reset the dial. The core businesses of Compliance, Energy Services and Construction are well established, excellent businesses who have a clear vision of what needs to be delivered.

Looking forward, our strategy will be evolutionary but we are confident that, with our newly stabilised Group, the long term fundamentals of the commercial markets in which we operate will provide us opportunities to deliver consistent performance, grow sustainably and to return value to shareholders.

The new year has started satisfactorily and current trading is in line with management expectations."

Financial overview:

As previously reported, revenue and profitability principally reflect the under-performance of the Property Services division, formerly Regeneration, together with the impact of carbon pricing reductions within Energy Services, offset in part by the successful contribution of recent acquisitions

Ø Underlying2 revenues of £305.8m (2015: £336.6m); statutory revenues of £333.8m (2015: £340.2m)

Ø Underlying EBITA1 of £10.9m (2015: £22.2m), representing a margin of 3.6% (2015: 6.6%)

Ø Underlying2 profit before tax of £9.9m (2015: £21.6m)

Ø Statutory operating loss of £31.7m (2015: profit £4.6m)

Ø Statutory loss before tax of £33.3m (2015: profit of £3.2m)

Ø Underlying2 basic earnings per share of 5.2p (2015: 13.7p); statutory basic loss per share of 18.6p (2015: earnings per share 1.9p)

Ø Underlying operating cash conversion3 of 121%; statutory operating cash outflow 171%

Ø Businesses acquired since IPO have been integrated well and contributed £60.0m of revenues and £5.5m of underlying EBITA year on year

Ø New contract wins in Q4 within Energy Services and Compliance, securing recurring annual revenues of £15m per annum

Ø Group order book of £543m (2015:£595m) reflects caution in bidding within Property Services; however value of frameworks increased from £1.3bn to £1.6bn in the year

Ø Forward visibility of revenues were 87% of forecast revenue for FY17 at November 2016 (like for like 2015: 77%)

Ø Net debt of £20.6m (2015: net cash £6.6m)

Ø Board proposes a final dividend of 0.5p per share, taking the total to 1.5p for the year (2015: 1.9p)

Outcome of the operating review:

Ø Operating Profit includes £12.2m of Exceptional and Other Items, reflecting management action taken to address the challenges faced by the Group

Ø In addition, a £19.2m Exceptional non-cash goodwill and intangible assets impairment charge has been incurred, predominantly in relation to impairment of goodwill in Property Services

Strategic progress:

Ø Reviews of operations and strategy complete and actions taken to enable the Group to move forward in a stronger and more focused state

Ø Substantially new operational management team in place within Property Services

Enquiries

Notes to editors:

Lakehouse plc is an asset and energy support services group that constructs, improves, maintains and provides services to homes, schools, public and commercial buildings with a focus on the UK public sector and regulated markets. The Group was founded in 1988 and is headquartered in Romford, Essex. It employs 2,250 staff from 33 offices throughout the UK. We deliver services through four divisions:

· Compliance, which delivers a range of regulated and legislated services, primarily to local authority and housing association clients

· Energy Services, which provides domestic insulation, energy efficiency products and advice, primarily for social housing landlords, the "Big Six" key independent energy companies and Scottish Government

· Property Services, which provides planned refurbishment, repair and maintenance and responsive maintenance for social housing providers

· Construction, which delivers extension, refurbishment, rationalisation and new build works, primarily in the education market and with a particular focus on schools

Definitions

1. EBITA is earnings before interest, tax and amortisation of acquisition intangibles. Underlying EBITA is defined as operating profit before deduction of Exceptional and Other Items, as outlined in note 3 and on the face of the Statement of Comprehensive Income. Underlying EBITA is the same as "Operating profit before exceptional and other items" on the face of the Statement of Comprehensive Income, but used as terminology in light of being a key performance measurement for management in the Group.

2. As set out in the income statement, other underlying numbers are stated before Exceptional and Other Items (discussed further in note 3). In the case of underlying revenue, this excludes amounts from businesses being exited and, for the current year, revenues associated with the Smart Meter mobilisation period. Underlying profit after tax and underlying earnings per share are net of an imputed tax charge.

3. Underlying operating cash conversion is operating cash flow, plus the cash impact of Exceptional and Other Items (discussed further in notes 3 and 12), as a percentage of underlying EBITA.

Executive Chairman's Statement

Introduction

I was appointed to the Board in July 2016, following the earlier departure of a number of executive and non-executive directors and with the business facing a number of operational challenges. Since my appointment, I have looked to structure the business so as to continue delivering a quality service to our customers whilst building a platform for more consistent performance and sustainable growth. I am pleased to report that the management of the Group have embraced the changes implemented and I believe that the market outlook for the range of services the Group provides is strong.

It would be remiss of me not to pay tribute to Steve Rawlings, the founder of Lakehouse, who sadly passed away in July 2016. Steve was the architect for the great progress achieved by Lakehouse in its formative years. I should also like to thank those directors since departed from the Board for their contribution to the Group during a difficult period.

My initial focus has been on reviewing the strategy of the Group and stabilising operational performance with a view to improvement and controlling costs at every level. We are focusing the businesses on markets where we can operate effectively and creating an environment where entrepreneurship is allowed to prosper. Importantly, I believe a small central function is right for a group like Lakehouse, where we rely on our leaders in the Group's Divisions to take decisions and drive the business forward on a day to day basis.

Our decision to withdraw from self-delivered externals work within Property Services was clear, as we had fallen short operationally at a number of levels. Following this restructuring, I felt that renaming what was known as the "Regeneration" Division as "Property Services" better reflected the services we will be offering moving forward. We have brought in new management who understand the core risks in this market, from pricing, through operational management to controls and processes and they are doing an excellent job in returning Property Services to an acceptable level of performance. This will, however, take time and we took a very cautious approach to bidding for new work in the second half of the year in this Division as we sought to stabilise operations. We are therefore setting modest expectations in the near term.

We are fortunate that the other three Divisions, Compliance, Energy Services and Construction have excellent business models, underpinned by strong and experienced management and with a strong pipeline of opportunity.

Whilst the Group's order book has declined from £595m to £543m this reflects our focus on managing risk within Property Services. Our value of frameworks however increased from £1.3bn to £1.6bn which we expect to provide a strong workflow in the future.

Trading performance

The trading performance for the year was disappointing with underlying EBITA of £10.9m (2015: £22.2m) on underlying revenues of £305.8m (2015:£336.6m, which includes £28.4m of revenues from businesses being exited, which are reported within Other Items in the 2016 accounts). Reported total Group statutory revenues were £333.8m (2015: £340.2m) with an operating loss of £31.7m (2015: £4.6m profit), reflecting a number of significant one-off cost items in the year.

Businesses acquired since IPO have been integrated well and contributed £60.0m of revenues and £5.5m of underlying EBITA year on year. This includes the results of Aaron Heating Services and Precision Lift Services which were acquired towards the start of this financial year for a total consideration of £16.8 million.

As part of the operational review, the Board took the decision that it was not sustainable to continue with the provision of directly delivered externals work within the Property Services division and this business is being exited. The £6.6m of pre-tax contract losses from this business are significant and reported within Other Items in the 2016 accounts. The comparative figure of £2.5m for FY15 relates to the previous exit from our former Development business.

We also felt it important to highlight the significant £2.5m investment we have made in smart metering within Energy Services, predominantly training its workforce to the highest standard of regulation. We see our smart metering business providing significant growth opportunities in the medium term.

Inevitably with the level of change we have experienced this year, we have seen one-off events that led to £3.1m of net Exceptional Items. We also recognised a £19.2m impairment against goodwill and intangible assets, predominantly in relation to the Property Services business, in light of its financial performance.

I have stressed to the team that the New Year marks a transition from the old world to the new and I want us to now look forward collectively with confidence in the future.

Lakehouse has undergone a number of changes during 2016 and I am pleased that we have come out of a very challenging period as a strong and focused Group. I have stressed to the Group's leadership that our overriding objective has to be to deliver on our promises, financially as a public listed company, but without compromising on protecting our employees or falling short in levels of customer service. If we do this, it will give our invested stakeholders - clients, customers, communities, financial partners, people, shareholders and suppliers - the confidence to support the Group and participate in its future growth and success.

Strategy

Lakehouse has an established strategy and although FY16 has been challenging for the Group, significant elements of our strategy have been very successful and I am satisfied that the future strategy for the Group will be one based on evolution rather than radical change. However, it is critical that everyone within our business appreciates the importance of delivering on our promises as without this passion and commitment, any strategy counts for nothing.

I have been particularly pleased with the performance of the businesses we have brought into the Group through acquisition, which, with our existing operations, have allowed us to build market-leading Compliance and Energy Services divisions. The services offered by these businesses are complementary and offer considerable growth potential through increased penetration of our extensive client base together with the geographic opportunities offered by a national footprint.

In our Construction division, we have a business that is very focused on its core education and public buildings markets and is highly experienced in delivery. This means that we can earn excellent returns on capital, whilst remaining cost competitive for clients.

It is important that we deliver on the strategy for these three Divisions as much of the narrative concerning the Group in the past year has surrounded Property Services. This Division has had its historical issues but under new and capable management and with modest expectations for growth, I am confident we can focus on the improvements in operational delivery that will allow this business to thrive in the future and deliver value for all stakeholders.

The Group has a cohesive structure, with leading positions in key markets, based on delivering a core range of services where there is sustainable demand. We will look to build on these strengths in developing the Group moving forward.

Dividend

The Board is looking to adopt a progressive dividend policy which recognises shareholder need whilst retaining sufficient capital for future growth. The Board propose a final dividend of 0.5p per share for the year which, subject to shareholder approval, will be paid on 6 April 2017 to shareholders on the register at 10 March 2017. This represents a total dividend of 1.5p per share for the year (2015: 1.9p).

People

We continue to invest in our people, giving them the skills they need to deliver for our customers and advance their own careers. Without doubt this has been a difficult period for all stakeholders and I want to thank everyone in Lakehouse for their hard work, commitment and contribution in difficult circumstances.

Outlook

The Board has now been settled and management have taken action to address the problems faced by Property Services, which will comprise a far smaller part of the Group in the future. The Board looks forward to working together with its staff and wider stakeholders to build on the significant potential we have across the Group to deliver future growth and returns for our investors.

Bob Holt

Executive Chairman

Operational Review

Financial performance

Underlying revenue was 9.2% lower at £305.8m (2015: £336.6m) and underlying EBITA declined by 50.9% to £10.9m from £22.2m in the prior year, representing a margin of 3.6% (2015: 6.6%). The self-delivered externals businesses being exited, which are reported in Other Items in FY16, made a £2.4m profit on revenues of £28.4m for the comparative period in FY15, when they were included within the underlying results. The decline in underlying EBITA over and above this reflected a £8.4m fall in Property Services, together with the £3.0m year on year impact from a reduction in carbon pricing for energy efficiency measures. The results included a full year contribution from Orchard Energy (acquired in July 2015) and Sure Maintenance (acquired in September 2015), together with 11 months from Aaron Heating Services and nine months from Precision Lift Services. Year on year, the full year impact of these acquisitions contributed an estimated £60.0m in revenues and £5.5m of underlying EBITA.

Statutory revenue was 1.9% lower at £333.8m (2015: £340.2m). Operating losses were £31.7m (2015: £4.6m operating profit), after Exceptional and Other Items, being Other Items of £9.1m (2015: £2.5m), net Exceptional Items of £3.1m (collectively totalling £12.2m), impairment of goodwill and intangible assets acquired of £19.2m (2015: £nil) and amortisation of acquisition intangibles of £11.2m (2015: £6.5m), which are discussed further in the Financial Review below and Note 3.

Underlying profit before tax was £9.9m, down 54.2% (2015: £21.6m) and underlying profit after tax was £8.2m (2015: £17.5m), resulting in underlying basic earnings per share of 5.2p (2015: 13.7p). Loss before tax was £33.3m (2015: profit before tax £3.2m) and loss after tax was £29.3m (2015: profit after tax £2.4m), resulting in basic losses per share of 18.6p (2015: earnings of 1.9p).

Looking forward

During the final quarter of the year the Group had a successful period of contract awards. In our Energy Services and Compliance businesses we secured recurring revenues of £15m per annum and our contracting businesses were awarded £20m of new work. We are pleased to have visibility over 87% of forecast revenues for the current year (as at November 2016), compared to 77% at the same point in FY16.

The Group's order book stood at £543m at 30 September 2016, a 9% reduction on the prior year of £595m, which reflects our focus on managing risk within Property Services. Our value of frameworks however increased from £1.3bm to £1.6bn which, with a sales pipeline of £3.2bn (2015: £2.8bn), we expect to provide a strong workflow in the future.

As we discuss below, our Compliance, Energy Services and Construction Divisions are all excellent businesses that have performed very well in difficult circumstances. We are confident that under new leadership, improved operational disciplines and selective bidding, the Property Services business will recover and prosper.

The Board recognises the Group has performed below investor expectations this year, however our managers and staff have continued to listen to clients, win work, deliver excellent service and pay our supply chain promptly. This shows the resilience of the Group and the Board would like to register its thanks to staff, clients, suppliers and our financial partners for their ongoing support and commitment in the year.

Compliance

 (29% of Group Underlying Revenue)

The Compliance Division comprises planned and responsive maintenance, installation and repair services predominantly to local authority and housing association clients, in the areas of gas, fire and electrical, water and air hygiene and lifts. These services cover clients' social housing and public building assets, as well as industrial and commercial properties. The Division is seeing the benefits of a wider pool of clients and mandatory services that provide significant future opportunities.

Overall, revenue increased by 149% to £91.0m (2015: £36.6m), with the contribution from acquisitions an estimated £56.1m. EBITA increased 37% at £6.2m (2015: £4.5m), resulting in an underlying EBITA margin of 6.8%, down by 550 ppt, reflecting the expected mix impact from our new acquisitions and unexpected performance challenges in our Allied Protection (Fire) business, discussed further below. We expanded our Gas Compliance services with the acquisitions of Sure Maintenance in September 2015 and Aaron Heating Services in November 2015. Precision Lift Services was acquired in December 2015 to complete the range of services offered by the Division. Integration is a key focus of the Group and the acquired businesses are all performing well, contributing approximately £4.2m of EBITA year on year. We are seeing the benefit of operational improvements and procurement savings in the enlarged Division, which we expect will see margins improve towards our long term target of high single to low double digit percentages.

Gas Compliance

The three Gas Compliance businesses (Sure, Aaron and K&T) make up some three quarters of the Division and had a strong year, albeit with differing characteristics. K&T has historically operated within the dense metropolitan areas of London, while Sure and Aaron worked in the wider geographic regions of the North West and East Anglia respectively. K&T has enjoyed higher margins as a result of higher engineer efficiency and procurement leverage, which we have carried over into Sure and Aaron with considerable success during 2016. We have seen an improvement in margins during the year in both businesses, arising mainly from procurement savings; keener materials pricing has also allowed us to secure profitable work that these businesses would have historically struggled to win.

We are seeing the benefits of the extensive geography served by the three Gas Compliance businesses and expect future growth to come from filling in territorial gaps and providing adjacent services to clients. We also anticipate future margin improvement through better fleet utilisation, benchmarking engineer performance and seeking to provide a best in class service.

During the year, Gas Compliance secured a number of notable wins. These included gas servicing and maintenance for Brighton and Hove City Council over five years to September 2020; gas servicing and maintenance and a separate heating installation contract for Havebury Housing Partnership over three years to May 2019 and mechanical and electrical maintenance over three years for the Salvation Army. We also re-secured a key contract installation and maintenance framework for Flagship Housing (to 2018).

Other Compliance

Our other Compliance businesses represent the balance of the Division and comprise Allied Protection (Fire), H2O Nationwide (Air & Water) and Precision Lift Services (Lifts).

H2O Nationwide performed very well as we succeeded in developing a social housing client base, which was core to our strategy on acquiring the business. During the year, H2O Nationwide won a key framework for the South East Consortium which enabled them to secure works for social housing client Moat Homes; we also secured a three year water hygiene monitoring contract for the London Borough of Redbridge in the period. H2O Nationwide has historically been focused on industrial and commercial clients and management performed extremely well in mobilising the new social housing contracts, whilst preserving client service.

Precision Lift Services made a slow start under our ownership as a small number of new key contracts were delayed but the business saw significant improvement towards the end of the year as these contracts were brought on and mobilised. Precision Lift Services was successful in securing contracts with Brentwood Borough Council, the London Borough of Wandsworth, South Essex Homes and Southend Borough Council during the year. We remain optimistic with regards to the future opportunities for this business.

Allied Protection had a poor year, with a £2m adverse movement in profits. This was largely due to the non-repeat of significant volumes of project work delivered in 2015 as two key clients unexpectedly withdrew budgets. We saw some recovery in this work towards the end of the year, albeit less than expected and in the absence of sufficient volume, margins were very weak. Given the nature of the work involved, our service and repair business has historically been operated at a lower margin and a focus on operational improvement saw a pleasing improvement in the year. We tend to secure project work where the Group has a long term service and repair contract, so this is an important development for Allied's future. We were successful in securing several key contracts including a five year emergency lighting and fire alarm testing contract for London Borough of Hammersmith and Fulham, a six year contract for Guinness Partnership Ltd providing fire safety equipment and maintenance and a contract providing door set installation for Canterbury City Council over three years to January 2018. These contracts both provide scale for further margin improvement and opportunity to build the projects pipeline among a broader base of major clients.

The other Compliance businesses have significant opportunities to cross-sell within the client base of our Gas Compliance companies and we saw considerable success to that effect during the year including a five year fire alarm and emergency lighting systems for the London Borough of Kensington Chelsea and fire compartmentation works for Wandle Housing, both K&T Heating clients. In addition K&T Heating introduced H2O Nationwide and Lakehouse to Arun District Council, resulting in successful tenders for works including a renewables and roofing scheme and plant room Legionella testing. Precision Lift Services is already carrying out projects for Notting Hill Housing and London Borough of Tower Hamlets, both existing clients of K&T Heating and Allied Protection. Additionally the other Compliance businesses are beginning to secure a broader geographic client base, with Allied winning a 5 year £1m contract with Accord Housing (Nottingham) and H2O securing a four year contract with Alliance Homes via the West Works framework.

Looking forward

Compliance now includes 108 frameworks, up considerably from 56 at 30 September 2015, with an aggregate potential value of £447m (30 September 2015: £88m). The Compliance Divisional board is now well established and we believe we have created a market leading business, offering a range of specialist services which frequently have important regulatory drivers for the Group's clients. This is an area where the Group has considerable expertise and capability and with the benefits of increasing scale and broadening range of complimentary and adjacent services, the Board expects the Compliance Division to deliver attractive returns, relative to the Group average, over time.

Energy Services

(22% of Group Underlying Revenue)

Energy Services provides a range of energy efficiency services for social housing and private homes through its Everwarm subsidiary. Everwarm also uses these services to deliver carbon emissions savings for energy companies, enabling them to meet their legislative targets. In addition, the division offers renewable technologies, smart metering services through Providor and energy brokerage and consultancy through Orchard Energy, to customers throughout the UK.

Revenue decreased by 0.9% to £67.4m (2015: £68.0m), with the year on year benefit of the Orchard Energy acquisition approximately £3.9m. EBITA decreased by 16.1% to £8.0m (2015: £9.6m), with the Orchard Energy acquisition contributing approximately £1.3m year on year. This resulted in an underlying EBITA margin of 11.9%, which was 220 ppt lower than last year, the major factor being the impact of carbon pricing as discussed below. In addition, we closed the Energy South business during the year, which was managed by the Property Services team, but reported segmentally as part of Energy Services in 2015 when we reported revenues of £7.3m and profits of £1.1m within underlying items.

Everwarm

We saw, as expected, 2016 evolving as a transitional year prior to the new Energy Company Obligation ("ECO") policy commencement in April 2017. As the current ECO policy moved into its final phase we saw a stabilisation in carbon prices, with the results and margins in Everwarm in line with management expectations and resulting in a £3.0m decrease in underlying EBITA year on year.

The Group holds a one-third share in the Warmworks joint venture, along with Changeworks and the Energy Saving Trust. Warmworks operates the HEEPS programme, which is now fully mobilised and performing very well. We discussed at the half year that whilst volumes have been growing steadily within Warmworks, referrals to Everwarm were behind expectations. These pleasingly picked up during the second half and we expect further improvement in 2017.

Providor Metering

We were delighted to announce in August 2016, the award of a £37m contract with Scottish Power for the installation of domestic smart meters across Northern Scotland, Wales and North West England. The Group expects to install more than 450,000 meters over the course of the contract's five year term. We have also secured smart meter contracts with Utilita, Ovo and E, the former two also mobilising during the year. Total mobilisation costs of £2.5m have been reported as an Other Item in the Consolidated Statement of Comprehensive Income, as highlighted in August. This has been a complicated logistics process and the Providor team have done a terrific job in achieving above average levels of operational performance under our new contracts.

Disappointingly, Providor's major customer acquired two of its competitors during the year, bringing this capability in house. This led to the unexpected cancellation of anticipated work, with the most profitable activities moving first. We have taken a provision against our exit from those activities and other non-profitable work streams within Exceptional and Other items, discussed in the Financial Review and Note 3.

In light of such a rapid transformation for Providor, the Group expects FY17 to be one of consolidation for its metering activities as we seek to deliver top quartile performance for our clients on our smart metering contracts. The Group remains encouraged by demand in the metering market and expects this to increase as the challenges faced by utility companies intensify.

Orchard Energy

Orchard Energy, our energy procurement and advisory services business, had an excellent year with monthly contract brokerage signings exceeding £0.7m per month on average during the second half of the year. We continue to grow these activities, in addition to our advisory and water utility services offerings, which we expect to help drive growth in 2017, along with geographic opportunities.

Divisional contract position

In addition to the wins in Providor and Orchard discussed above, Energy Services was awarded places on frameworks during the year including the provision of energy efficiency measures for the London Housing Consortium and energy saving measures and insulation systems for Luton Borough Council (both to 2020). Other notable wins in the year include a four year framework with the Scottish Government to provide non-domestic energy works to December 2019, a solid wall project for Fife Council (Kirkcaldy) and bathroom replacement works for Aberdeenshire.

Looking forward

Energy Services is now on 36 frameworks, up from 32 at 30 September 2015, with an aggregate value of £427m (30 September 2015: £294m).

As previously reported, in relation to bidding insulation contracts, the energy efficiency sector is exceptionally complex. Everwarm has class-leading levels of compliance in submitting claims, which is fundamental to earning an adequate return, an understanding which we do not see among all market participants. Notwithstanding a slow pace of evolution, we continue to believe that the English market represents a significant future opportunity for the Division, given the Group's long standing customer relationships and experience in delivering these services, not least Scottish Government's Home Energy Efficiency Programme for Scotland ("HEEPS").

Energy Services delivers specialist works and has high levels of expertise in complex markets and should over time, deliver a consistently high return. Given the transitional nature of the market and mobilisation of smart metering services, we expect 2017 to be one of consolidation for the Division. We remain optimistic about the future prospects for Energy Services and expect opportunities to arise from the new ECO transitional period, prior to the full programme in 2018, together with the deregulation of the water market from April 2017. This, with our continuing involvement in the UK domestic smart meter installation programme, underpins a sizeable proportion of Divisional revenue growth from 2018.

Property Services

(32% of Group Underlying Revenue)

Property Services provides planned and responsive maintenance services for social housing clients, which are mainly local authorities and housing associations. The Division operates through two businesses:

At the half year, we highlighted operational challenges in our directly delivered externals business managing growth in this work, in particular inventory, staff and site contractors. This business comprised two departments - Roofing and Energy South (managed by the Lakehouse Property Services team, but reported in 2015 segmentally as part of Energy Services). In May 2016, we instigated an operational improvement programme, focused on managing a balanced position of risk and return on capital. The conclusion was to close both departments as the risks of delivering this work directly were too great and, following the operational review, it was determined by the Board to exit these operations. The total losses on the contracts within these businesses are expected to amount to £6.6m pre-tax (on revenues of £25.3m), which have been excluded from the underlying result and reported as Other Items.

Property Services revenue was £98.1m in the year, down £63.6m (39.3%). Businesses being exited and reported within Other Items in 2016, recorded revenues of £21.1m within underlying revenues in the comparative period. Underlying EBITA declined by £9.7m (92.6%) to £0.8m, resulting in an underlying EBITA margin of 0.8%, which was 570 ppt lower than last year. Businesses being exited in 2016 made profits of £1.3m in the comparative period, where they were reported within the underlying results. The balance of £8.4m related to a deterioration in both performance and the trading environment during the year.

As reported in February 2016, the 1% rent cap imposed on social landlords has had a significant impact on our market as clients sought to cut costs in response. This has taken a number of forms - some budgets simply were cut, procurement under frameworks delayed and certain clients sought to fragment frameworks in the expectation that multiple suppliers on individual lots would improve competitiveness. We have responded to this change in market dynamics by challenging the return on capital at a client level and withdrawing from contracts that are not economic. We have also taken the opportunity to review our staff base, particularly in parts of the business where performance was not adequate. With new leadership in this Division and a focus on those relationships where we can earn an acceptable return, we expect to move forward as a smaller, leaner and more focused business.

Lakehouse Property Services

As a result of difficult market conditions, as well as the previously reported operational issues, Lakehouse Property Services has had an exceptionally difficult year. The Board has taken action to address this by withdrawing from some activities and restructuring the cost base. The focus of the businesses is to deliver high levels of client service whilst ensuring returns are acceptable through strong operational management and we are very encouraged by the approach taken by the new management team.

The major contributors to the reduction in revenues and margins in the year arose from the previously announced cessation of the Hackney contract in 2015, together with lower revenues from Camden. Camden re-procured their planned maintenance framework in multiple lots during the year, seeking cost savings by directly managing a wide and diverse supply chain themselves. We were successful in securing positions on half of the lots but future work will be subject to successfully tendering individual works; when seeking to participate, we will ensure this offers an adequate balance of risk and return for the business.

Notwithstanding a reduction in bidding activity in the year, Lakehouse Property Services nevertheless had a number of good wins, including a place on Fusion21's national kitchen and bathroom installation works framework to March 2020 and places on the major works framework for the London Boroughs of Southwark (until 2019), Newham (until 2021) and Barking and Dagenham (until 2021) and separate internal and external frameworks for the Vale of Aylesbury Housing Trust. We also won a significant number of contracts including fire safety works for the London Borough of Ealing, two one-year contracts with Wandsworth Council for window and roof renewals and an external refurbishment contract for two social housing blocks with Portsmouth City Council.

Foster

Foster has faced very different challenges from Lakehouse Property Services this year. Operational performance and client service remained good through the year and Foster was successful in re-securing its position on the key Eastern Procurement framework for responsive repairs and voids to May 2020, planned internal works to September 2019 and roofing works to May 2020, which was important for its future prospects. However, a number of Eastern Procurement members drastically cut or withdrew budgets and the mix of remaining work resulted in Foster seeing a significant fall in profitability during the year.

Whilst it was important for Foster to re-secure its place on the Eastern Procurement Framework for planned maintenance throughout the East Anglia region, the management team undertook an active drive to diversify the service offering to existing and new clients in the region. Refurbishing student accommodation has been, and continues to be, a productive work stream, with future works at the University of East Anglia being negotiated off the back of the scheme undertaken this year. Similar works have been undertaken in Cambridge this year at Tripos Court for Flagship Housing Association on behalf of Cambridge University. There are a large number of military bases in the region that will provide future opportunities, such as Bodney Army Camp where we won a programme of major upgrading works in the year and will continue to be targeted.

Foster sought also to grow into the Midlands and to expand its responsive maintenance business. Neither performed as we had hoped, mainly due to a lack of scale. Recognising this at an early stage, we reorganised the Midlands business by absorbing ongoing contracts into existing departments and have become more selective in bidding within the region. We are reviewing all commercial options to improve returns from responsive maintenance.

During the year Foster Property Services was awarded places on ten important frameworks, including Efficiency East Midlands (to February 2020), South East Consortium (to 2020), Fusion 21 and the United Lincolnshire NHS trust (to 2018). In addition, Foster secured several significant works contracts including Central Bedfordshire Kitchen and Bathroom refurbishment programme and the design and construction of the Wade House housing block for Havebury Housing Partnership.

As part of the operational review of Property Services during the year, we identified a number of areas for potential improvement in Foster, especially with regard to materials and cash management. We also concluded there was a need to simplify the management structure and now have a smaller, ambitious team to take the business forward.

We conducted a review of the value of capitalised goodwill attaching to Foster at year end. In light of current trading performance and the re-basing of the profitability achievable on key frameworks, such as the Eastern Procurement Framework, we concluded that the forecast level of profitability in this business does not support continued recognition of the goodwill balance. We therefore wrote down the entire goodwill balance of £17.4m, details of which are outlined below in the Financial Review and notes 3 and 7.

Looking forward

We are being highly selective in taking on further work in Property Services, which is evidenced in the reduction in the Group's total order book. Property Services is now on 71 frameworks, up against 53 at 30 September 2015 but with an aggregate value of £370m (down against 30 September 2015: £540m).

With the significant number of challenges and management changes within the year it is reassuring that we have managed to secure positions on some key frameworks within our core operating regions providing future opportunities with clients who have money to spend. Our new management teams are focused on building on Lakehouse's reputation for winning and delivering works successfully for our clients and managing an adequate balance of risk and return. Property Services is a Division which under the right leadership, provides the Group with strong customer relationships and good forward visibility on revenues. Looking forward, the Board believes that this is a business which under new management, strong operational control and selective bidding, should be capable of delivering a consistent mid to high single digit return. 

Construction

(17% of Group Underlying Revenue)

Construction is a public buildings services business that delivers extension, refurbishment, rationalisation and new build works, primarily in the education market, with a particular focus on schools.

Revenue decreased by 29.1% to £52.1m (2015: £73.4m). EBITA decreased by 25.5% to £3.6m (2015: £4.8m). This resulted in an underlying EBITA margin of 6.9%, which was 30 ppt higher than in the prior year, reflecting an improved contract mix and tight commercial management of our contracts.

We discussed at the half year that factors under the control of our clients had caused a reduction in revenues and this had a similar impact for the full year. The principal cause has been a move from single stage to two stage procurement. The difference between the two contractual structures means that we will be awarded a contract but can then face a significant period before mobilising as a result of the need to address a number of project considerations, which can include planning, review of design / affordability and project-specific matters such as rights of way, land purchase and environmental factors. This is good from a risk management perspective, but very frustrating when reporting performance as we saw 17 projects delayed by these factors. We estimate that this directly reduced our revenues by one third in the year, with a consequential impact on EBITA and cash. These projects are all live or will be mobilized in the first half of the new financial year and as a consequence, we head into 2017 with a very strong order book.

The Construction team has a disciplined approach to bidding and contract management, with a strong and long-serving workforce who have an excellent grasp of commercial considerations on their projects. This allowed us to earn excellent margins of 6.9% on our contracts during the year and to see few of the commercial disputes that we have experienced in Property Services.

In light of the opportunities that have presented themselves, our typical project range has moved upwards in the year, with works secured having an average value of £3.5m to £4m (2015: £2.5m to £3.0m). We had significant success in securing major frameworks in the year, including Essex County Council's four-year school expansion programme to April 2020 and Kent County Council's education, public buildings and commercial framework to September 2019. Key contract wins in the year included:

Looking forward

The number of frameworks declined to 29 from 40 as at 30 September 2015, reflecting our plans as we sought to focus on key clients where we can build predictability into the business model and to bid selectively on projects where we can earn an adequate return on capital. The frameworks had an aggregate value of £353m (30 September 2015: £420m), representing a 16% higher average value per framework. These frameworks provide more than enough opportunity for the Construction Division to continue to grow, whilst maintaining an acceptable rate of return. We remain excited about the prospects for Construction in a market with strong underlying growth fundamentals.

Financial review

The Operational Review provides a detailed overview of our trading performance during the year. This Financial Review therefore covers other aspects of the Statement of Comprehensive Income, Statement of Financial Position and Cash Flows.

Trading overview

Group underlying revenue in the year decreased by 9.2% to £305.8m (2015: £336.6m), principally reflecting the year on year impact of businesses being exited and the wider decline in Property Services, partially offset by the impact of acquisitions. Underlying EBITA decreased to £10.9m (2015: £22.2m). We exclude Exceptional and Other Items in calculating underlying EBITA to provide a more appropriate view of underlying operating performance. Underlying EBITA margins fell to 3.6% in the year against 6.6% in FY15. The decline in underlying EBITA reflected a £9.7m fall in Property Services (discussed in the Property Services review above), together with the £3.0m year on year impact from a reduction in carbon pricing for energy efficiency measures. As discussed in the Operational Review above, the results for the year included a full year contribution from acquisitions of an estimated £60.0m in revenues and £5.5m of underlying EBITA.

Operating expenses increased 37.1% to £32.6m in the year (2015: £23.7m) reflecting the new businesses acquired in the past 18 months. Central costs increased by 6.5% to £7.7m (2015: £7.2m), reflecting the full year costs of being a listed company, together with higher costs associated with the infrastructure required to accommodate recent acquisitions. As part of the operational review conducted in May 2016, we concluded that a number of services historically delivered centrally would be best managed at a divisional level. This led to more than 100 staff either being redeployed or exiting the Group, as we seek to maintain a lean central structure going forward.

We reported an operating loss of £31.7m (2015: profit of £4.6m) in light of the charges for Exceptional and Other Items discussed below. The loss after tax was £29.3m (2015: profit of £2.4m).

Exceptional and Other Items, including amortisation of acquisition intangibles

Exceptional and Other Items in the year reduced the Group's profit before tax by £43.2m (2015: £18.4m) and related to the following items:

Contract losses on businesses being exited

At the half year, we highlighted operational challenges in our directly delivered externals business within Property Services managing growth in this work, in particular inventory, staff and site contractors. This business comprised two departments - Roofing and Energy South (managed by the Lakehouse Property Services team, but reported in 2015 segmentally as part of Energy Services). In May 2016, we instigated an operational improvement programme, focused on managing a balanced position of risk and return on capital. The conclusion was to close both departments as the risks of delivering this work directly were too great and, following the operational review, it was determined by the Board to exit these operations. The total losses on the contracts within these businesses are expected to amount to £6.6m pre-tax (on revenues of £25.3m), which have been excluded from the underlying result and reported as Other Items. These activities made a £2.4m profit on revenues of £28.4m in 2015, when they were included within the underlying results.

The comparative figure for 2015 of £2.5 million represented further costs incurred on certain legacy contracts of our now ceased social housing development business (reported under the Construction Division).

Smart metering mobilisation costs

The Group made encouraging progress within Providor (acquired in May 2015) in mobilising its domestic smart meter installation programme with Scottish Power and other leading utilities. Engineer efficiency is a key performance indicator in this activity and we have seen steady improvement each month, since mobilisation in July 2016. The £2.5m cost incurred in the year (on revenues of £2.8m) was in line with the expectations set out in August 2016 and represented costs associated with training and retaining engineers in Providor, along with mobilisation complexities associated with planning work, documenting installations, inventory management and systems development. We remain confident of the future prospects for this business.

Exceptional Items

Acquisition costs comprise legal, professional and other expenditure in relation to acquisition activity during the year and amounted to £0.6m (2015: £0.8m). Contract costs, which were £nil in FY16 (2015: £2.9m), represented exceptional remediation expenses associated with the resolution of historic matters on a specific contract in 2015 ("The Contract").

Impairment of receivables of £2.6m (2015: £nil) reflects the provision taken against receivables in relation to a small number of contract settlements on which there is a range of possible outcomes for the Group in terms of both cash flow and impact on the Income Statement. This predominantly relates to a sum receivable within Property Services relating to The Contract, discussed above. This is a matter that has been ongoing since 2014 and does not reflect underlying trading in the year. A small element related to the withdrawal from industrial and commercial metering activities, discussed above in the Energy Services operational review. The provisions were made in line with the Group's accounting policy for receivables, but highlighted as an Exceptional Item in light of their unusual nature. Management will continue to seek a full and advantageous settlement for the Group.

We incurred a £2.5m charge in relation to restructuring and EGM costs in the year. In May 2016, we indicated an operational improvement programme would be initiated by the Board to focus initially on the Property Services Division, in which we made significant progress during the second half of the year. The Group recorded a £1.0m exceptional cost to cover the costs of redundancy for over 100 staff associated with this exercise, which included the rationalisation of certain central functions. There has also been a great deal of change at Board level this year and the Group took a charge of £1.5m associated with the departure of former directors, the two Extraordinary General Meetings held during the year and other one-off expenses. The prior year item of £0.8m related to the write-off of certain fixed assets and legal fees in relation to reshaping the Group structure.

Release of deferred consideration of £2.6m (2015: £nil) represented the renegotiation of sums due to the former owners of H2O Nationwide Limited (£0.6m) and no further sums being due to the former owners of Providor Limited (£1.5m) and Sure Maintenance Limited (£0.5m), in light of the requisite performance conditions under the Sale and Purchase Agreement not being met.

IPO costs of £nil (2015: £4.1m) comprised legal, professional and incidental expenditure incurred in relation to the IPO in March 2015.

Impairment of goodwill and intangible assets acquired

Impairment of goodwill and intangible assets acquired was £19.2 million for the year (2015: £nil) relating predominantly to the write-down of £17.4m of goodwill in relation to Foster. The impairment of Foster reflected the reduced actual and expected performance of this business, discussed above in the Property Services operational review. The £1.8m balance related to value attaching to the contract with a major industrial and commercial customer in Providor, who cancelled work unexpectedly during the year. Although we succeeded in replacing these revenues with the Scottish Power contract, accounting standards require us to review carrying values based on the historic customer base alone. Accordingly, this is not necessarily indicative of management expectations of the prospects for Providor.

Amortisation of acquisition intangibles was £11.2 million (2015: £6.5 million), with the increase reflecting a full year impact of Providor, Orchard Energy and Sure Maintenance together with the acquisitions of Aaron Heating Services and Precision Lift Services during the year.

Accelerated amortisation of financing costs

Finance costs of £nil (2015: £0.4m) represented the write-off of unamortised costs on the term loan we replaced with a new revolving credit facility in December 2014, ahead of the IPO.

Unwinding discount of deferred consideration

Unwinding discount of deferred consideration reflects the present value of deferred sums, discounted at a post-tax rate of 8.5%, due on outstanding payments for acquisitions.

All items discussed above in relation to "Exceptional and Other items" are considered non-trading because they are not part of the underlying trading of the Group and in the case of Exceptional Items, impairment of goodwill and accelerated amortisation of finance costs are not expected to recur year to year. Contract losses on businesses being exited relate to businesses that have been closed and smart metering mobilisation costs reflect the one-off nature of mobilising our new domestic smart metering programme, which we expect will carry on into the first half of the year to 30 September 2017.

Finance expense

The total finance expense for the year represented the interest charged on our debt facilities (net of finance income), together with the amortisation of debt raising costs, which totalled £1.0m (2015: £0.6m).

The total finance expense of £1.6m included the unwinding of discounts on deferred consideration figure of £0.6m (2015: £0.4m), discussed above and treated as a non-operating item.

Tax

The tax charge on underlying profit before tax of £9.9m was £1.7m, representing an effective rate of 17.3%, which compares with the statutory corporation tax rate of 20%. The difference was due to prior year tax adjustments.

The effective tax rate on the statutory loss before tax for the year was 12.1% which is lower than the UK statutory corporation tax rate of 20% due to a combination of permanent differences together with the enacted reductions in the UK corporation tax rate and prior year credits. The increase in permanent differences from £2.0m to £15.2m is due to a non-deductible impairment of goodwill relating to Foster Property Maintenance of £17.4m and non-taxable income of £2.6m relating to a release of deferred consideration. 

Our net cash tax payment for the year was £0.3m for continuing operations (2015: a statutory credit of £2.7m), reflecting carried forward tax losses. During the year, the Group has received the anticipated cash tax refund from HMRC which formed the corporation tax receivable on the 30 September 2015 balance sheet. The Group has also made tax payments on account during the year. As these payments on account are no longer expected to be required as the Group has generated a tax loss, this has resulted in a net receivable with regard to corporation tax as at 30 September 2016.

The net deferred tax asset as at 30 September 2016 was £0.2m (2015: liability of £1.9m), with the movement mainly relating to acquisition intangibles, where a credit of £3.1m to the P&L was offset by an additional £1.5m deferred tax liability in relation to the acquisition intangibles of Aaron Heating Services and Precision Lift Services.

In the year, the Group has increased its gross tax losses but due to a reduction in the UK's corporation tax rate, the carried forward tax credit reduced from £3.1m to £2.6m. The carried forward tax losses mainly arose on the exercise of share options at the time of the IPO and were eligible for Group tax relief. The credits to set up the deferred tax asset arising on these tax losses were recognised in equity and as such, the tax charges and credits relating to the utilisation of these will also be recognised in equity. Therefore, this should not impact the Group's effective tax rate. The remaining tax credit relates to four Group companies and may be utilised over a period of greater than one financial year.

The Group has recognised a deferred tax asset arising on tax losses of £2.6m on the basis of a combination of taxable temporary differences (£0.1m) and forecast taxable profits (£2.5m) which is consistent with the Board's anticipation of improving profitability as outlined above.

Earnings per share

Underlying basic earnings per share were 5.2p (2015: 13.7p), based on underlying earnings of £8.2m (2015: £17.5m). Underlying earnings are stated after adding back £37.4m of Exceptional and Other Items (after tax).

Our statutory losses for the year were £29.3m (2015: statutory earnings of £2.4m). Based on the weighted average number of shares in issue during the year of 157.5m, this resulted in basic losses per share of 18.6p (2015: basic earnings per share 1.9p).

Further details are contained in note 6.

Dividend

The Board has proposed a final dividend for the year of 0.5p per share, which is in addition to the interim dividend of 1.0p paid in the year. This represents a total dividend payable for the year of 1.5p (2015: 1.9p).

Subject to approval at the AGM, the final dividend will be paid on 6 April 2017 to shareholders on the register at the close of business on 10 March 2017.

Cash flow performance

Our underlying operating cash flow for the year was an inflow of £13.2m (2015: £25.6m), reflecting a strong underlying cash conversion of 121% (2015: 115%). We calculate underlying operating cash conversion as cash generated from operations, excluding the cash impact of Exceptional and Other Items, divided by underlying EBITA. We believe this measure provides a consistent basis for comparing cash generation consistently over time. On a statutory basis, we saw an operating cash outflow of £3.0m (2015: inflow of £19.1m), representing an outflow of 171% (2015: inflow of 97%).

As we highlighted at the half year, the timing of revenues, method of contract delivery and customer contractual terms can all have an impact on working capital and consequently, cash conversion. Generally, as revenues rise under a packaged subcontractor model, there is a cash benefit, as we are paid more quickly by our clients than we pay our supply chain (referred to as "net negative work in progress"); conversely as revenues fall, we may find payments to subcontractors do not fall in proportion to lower revenues, resulting in negative work in progress turning positive and a cash outflow. We therefore felt the cash impact of the poor performance in Property Services and contract delays in Construction during the year and whilst the former is likely to be permanent, we expect the delays in Construction to be temporary and so see some recovery as revenues pick up. We have also seen increased financial and resourcing pressure faced by clients, making it harder to reach reasonable account settlements. After an operating outflow of £11.4m (outflow of £8.7m after taking account of the cash impact of Exceptional and Other Items) in the first half of the year, we saw a strong cash performance across every division in the second half, with the net operating outflow reducing to £3.0m for the full year and an underlying inflow of £13.2m after taking account of the cash impact of Exceptional and Other Items.

After factoring in the matters highlighted above, together with the impact of the Exceptional and Other Items in the Statement of Financial Position at the year end, we expect to continue to target an average annual operating cash conversion of 80% over the long term.

Net debt

Our net debt balance stood at £20.6m at 30 September 2016 (2015: net cash of £6.6m). This increase reflected predominantly, payments for acquisitions of £17.7m, the £1.1m owed to the former owner of our Manor Road housing development (discussed in provisions below) and £4.6m in respect of the dividends paid during the year. The balance was accounted for predominantly by a £3.0m net operating cash outflow, which included a £16.2m cash cost of Exceptional Items, discussed further in note 12.

Banking arrangements

We had drawn £21m under our revolving credit facility at the year end. At the date of issuing this report we had drawn £28m, reflecting our normal winter working capital requirements. Royal Bank of Scotland ("RBS") remain very supportive of the Group and to show our commitment to managing our banking arrangements within our means and also to reduce the cost of non-utilisation fees, we requested that RBS reduce our Revolving Credit Facility ("RCF") to £40m and further reduce the facility to £35m in April 2017. We agreed this formally in a variation to our RCF in January 2017, which included a revision to our banking covenants reflecting the lower earnings expectations of the Group, but at a higher rate of interest. We retain a £5m overdraft facility

These revised arrangements provide the Group with funding support that will ensure the Group is able to plan for future growth, particularly in bidding with confidence on new contracts.

Balance sheet

The principal items in our Balance Sheet are goodwill, intangible assets and working capital.

The principal movement in net assets reflected a reduction of £14.2m in goodwill and intangibles, reflecting £11.2m in amortisation of acquisition intangibles and £19.2m in impairment charges, discussed above and in notes 3, 7 and 8, offset in part by £15.0m of additional acquired goodwill & intangibles relating to acquisitions made in the year, discussed in note 13.

Net current assets (excluding cash) rose to £7.3m (30 September 2015: £1.7m). The acquisitions of Aaron Heating Services and Precision Lift Services contributed £2.3m, with the balance of the increase relating predominantly to a £6.0m reduction in net negative work in progress relating to packaged subcontractors to £12.0m (30 September 2015: £18.0m). This arose from a reduction in revenues in our Property Services business and the timing of projects in Construction, both of which employ packaged subcontractor models and are in line with the trends highlighted at the half year.

Deferred consideration on acquisitions is analysed below.

Provisions

Provisions as at 30 September 2016 stood at £4.9m (30 September 2015: £6.4m). During the year, we utilised £3.2m of provisions in line with our expectations, with £1.1m due to the former owner of the land at our Manor Road housing development, £1.5m in relation to specific costs of the Contract (discussed in Exceptional Items above) and £0.6m of other items. We provided a further £0.8m in relation to specific risks and also recognised £0.9m as part of fair value accounting on acquisitions for potential risks and liabilities.

Further details are set out in note 11.

Acquisitions

The Group made two acquisitions in the year:

Further details are set out in Note 13.

Deferred consideration

A number of the acquisitions made by the Group in recent years incorporate deferred consideration as part of the transaction terms, some of which depend on the performance of the businesses post-completion.

The table below shows the movement in the total discounted deferred consideration payable and the amount outstanding at the year end.

Risks

The Board considers strategic, financial and operational risks and identifies actions to mitigate those risks. Key risks and their mitigation are disclosed in the annual report for the year ended 30 September 2016, discussed in note 1 ("2016 Annual Report").

As we discussed above in Exceptional Items, we provided against certain receivables under the Group's accounting policy. We are pursuing legal avenues with regard to full recovery in relation to these matters, but consider it important to maintain a prudent basis of accounting.

We are conscious that unbilled balances represent a significant risk in our industry and we conducted a thorough review of recoverability at the year end, providing against uncertain items where necessary.

We continue to manage a number of potential risks and uncertainties, including claims and disputes, which are common to other similar businesses which could have a material impact on short and longer term performance. The Board remains focused on the outcome of a number of contract settlements on which there is a range of outcomes for the Group in terms of both cash flow and impact on the Statement of Comprehensive Income.

Going Concern statement

The Directors acknowledge the Financial Reporting Council's 'Going Concern and Liquidity Risk: Guidance for Directors of UK Companies' issued in October 2009. The Group's business activities, together with factors likely to affect its future development, performance and position are set out in the 2016 Annual Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the financial review above and in the 2016 Annual Report. In addition, Note 31 to the consolidated financial statements within the 2016 Annual Report includes details of the Group's approach to financial risk management, details of its financial instruments and hedging activities, and its exposure to credit risk and liquidity risk. In assessing the Group's ability to continue as a going concern, the Board reviews and approves the annual budget and three year plan, particularly for the following 16 months, including forecasts of cash flows, borrowing requirements and covenant headroom. The Board reviews the Group's sources of available funds and the level of headroom available against its committed borrowing facilities and associated covenants. The Group's financial forecasts, taking into account possible sensitivities in trading performance, indicate that the Group will be able to operate within the level of its committed borrowing facilities and within the requirements of the associated covenants for the foreseeable future. RBS remain very supportive of the Group and to show our commitment to managing banking arrangements within our means and also reduce the cost of non-utilisation fees, we requested that RBS reduce our RCF to £40m and further reduce the facility to £35m in April 2017. We agreed this formally in a variation to our RCF in January 2017, which included a revision to our banking covenants reflecting the lower earnings expectations of the Group, but at a higher rate of interest. The facility will mature in December 2018, albeit RBS has the option to extend this to December 2019. The Directors have a reasonable expectation that the Group has adequate resources to continue its operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis of accounting in preparing the Annual Report and Accounts.

Viability statement

The Directors have considered section C.2.2 of the 2014 Corporate Governance Code and, taking account of the Group's current position, prospects and principal risks, confirm they have a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, over the three year period to 30 September 2019. A three year period is considered appropriate in light of the lifecycle of the Group's order book, beyond which, management has less visibility. This assessment was performed alongside the Group's consideration of principal risks and annual three year financial planning process.

The Group performs a series of risk reviews during the year, managed through a Risk Committee and included in monthly operational reviews conducted with each division; the outcome is presented to the Audit Committee twice annually for review and challenge. This ensures that all matters of significance are considered and key risks brought to the attention of the Board.

The Group's three year financial plan ('Plan') is built on a bottom-up basis by business and segment and utilises the data provided in the Group's order book, framework contracts and opportunity pipeline. The Plan is reviewed in detail with each division through a series of reviews and tested for a range of sensitivities, which quantify the principal risks facing the business, including contract losses, financial shortfalls and increased working capital demands. Management consider such risks insofar as they possess or can determine the information to do so, and there will always be an element of inherent uncertainty, particularly as regard matters outside their direct control, such as Government policy, client procurement policies and potential claims and disputes brought against the Group by others. Sensitivities are also tested against available banking facilities to ensure sufficient headroom and remaining compliant with banking covenants. In this assessment, we assumed RBS agrees to a renewal of our banking facilities in December 2018.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

For the year ended 30 September 2016

Responsibility statement of the directors on the annual report

This responsibility statement below has been prepared in connection with the company's full annual report for the year ended 30 September 2016. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge that:

1. The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole;

2. The strategic report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and

3. The annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.

This responsibility statement was approved by the board of directors on 24 January 2017 and signed on its behalf by:

Jeremy Simpson

Chief Financial Officer

24 January 2017

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 30 September 2016

The accompanying notes are an integral part of this consolidated statement of comprehensive income.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

At 30 September 2016

The financial statements of Lakehouse plc (registered number 09411297) were approved by the board of directors and authorised for issue on 23 January 2017. They were signed on its behalf by:

J J C Simpson

Director

The accompanying notes are an integral part of this consolidated statement of financial position.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 30 September 2016

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 30 September 2016

The accompanying notes are an integral part of this consolidated statement of cash flows.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2016

1. Basis of Preparation and significant accounting policies

Lakehouse plc is a company incorporated in the United Kingdom under the Companies Act, registered number 09411297. The address of the registered office is 1 King George Close, Romford, Essex RM7 7LS.

The consolidated financial statements are presented in Pounds Sterling because that is the currency of the primary economic environment in which the Group operates.

These results for the year ended 30 September 2016 are an excerpt from the Annual Report & Accounts 2016 and do not constitute the Group's statutory accounts for 2016 or 2015. Statutory accounts for Lakehouse plc for the year to 30 September 2015 have been delivered to the Registrar of Companies, and the Lakehouse plc statutory accounts for the year to 30 September 2016 will be delivered by 31 January 2017. The Auditor has reported on both those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under Sections 498(2) or (3) of the Companies Act 2006 or equivalent preceding legislation.

Whilst the financial information included in this Annual Results Release has been prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the European Union (EU), this announcement does not itself contain sufficient information to comply with IFRS. Full financial statements that comply with IFRS are included in the Annual Report & Accounts 2016 which will be available at www.lakehouse.co.uk.

The accounting policies adopted are consistent with those followed in the preparation of the Lakehouse plc Group's Annual Report & Accounts for the year ended 30 September 2015 except for the adoption of IFRS 10, IFRS 12 and IAS 28 'Investment entities', IAS 1 'Disclosure Initiative', IAS 27 'Equity Method in Separate Financial Statements', IAS 16 and IAS 38 'Clarification of Acceptable Methods of Depreciation and Amortisation', IFRS 11 'Accounting for Acquisitions of Interests in Joint Operations', IAS 16 and IAS 41 'Bearer Plants' and IAS 19 'Defined Benefit Plans: Employee Contributions'. The adoption of these standards has had no impact on the results or financial position of the Group.

The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. The Directors regard the foreseeable future as no less than 12 months following publication of its annual financial statements, so in practical terms, 16 months from the statement of financial position date. Please see further information for the Directors assessment in the financial review.

Underlying business performance

The Group believes that the measure of underlying EBITA and presentation of underlying operating profit, profit before tax, profit after tax and earnings per share provide useful information on underlying trends to shareholders. These measures are used by the Group for internal performance analysis and incentive compensation arrangements for employees.

The terms "underlying EBITA", '"underlying", "contract losses on businesses being exited" and "exceptional items" are not defined terms under IFRS and may therefore not be comparable with similarly titled profit measures reported by other companies. It is not intended to be a substitute for, or superior to, GAAP measurements of profit.

The term "underlying" refers to the relevant measure being reported for continuing operations excluding Exceptional and Other Items, (which include amortisation of acquisition intangibles). EBITA is earnings before interest, tax and amortisation of acquisition intangibles. Adjusted EBITA is stated before Exceptional and Other Items.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

2. Operating segments

The Group's chief operating decision maker is considered to be the Board of Directors. The Group's operating segments are determined with reference to the information provided to the Board of Directors in order for it to allocate the Group's resources and to monitor the performance of the Group.

The Board of Directors has determined an operating management structure aligned around the four core activities of the Group, with the following operating segments applicable:

· Compliance: focused on gas, fire, electrics, air and water and lift compliance activities, where we contract predominantly under framework agreements. Services comprise the following:

- installation, maintenance and repair-on-demand of gas appliances and central heating systems;

- compliance services in the areas of fire protection and building electrics;

- air and water hygiene solutions; and

- service, repair and installation of lifts

· Energy Services: we offer a range of services in the energy efficiency sector, including external, internal and cavity wall insulation, loft insulation, gas central heating and boiler upgrades. The services are offered under various energy saving initiatives including the Energy Company Obligation ("ECO") and the Scottish Government's HEEPS ("Home Energy Efficiency Programme for Scotland") Affordable Warmth programme. Clients include housing associations, social landlords, local authorities and private householders and we have trading relationships with the "big six" and other leading utility suppliers. We also provide renewable technologies, metering services and energy advisory and brokerage services to customers throughout the UK.

· Property Services: formerly called "Regeneration" and focused on planned and responsive maintenance services for social housing. A significant part of our services is the project managing delivery and ongoing resident liaison in delivering planned services such as new kitchens, bathrooms, roofs and windows. The segment also has a small responsive maintenance business. We contract with customers predominantly under framework agreements, where the number of suppliers will vary from one to a small group. The segment formerly included a directly delivered 'externals' business that the Board decided to close in 2016.

· Construction: focused on small to medium sized building projects, normally under framework agreements with an emphasis on the education sector. The business targets refurbishment projects for public buildings with a typical value of £3.5m to £4.0m and tends to avoid large scale building projects. The segment also formerly included a social housing development business, which we exited in 2015 and in relation to which, contract losses were disclosed separately in the prior year so as not to distort the underlying trading position of the Group and the Construction segment.

The accounting policies of the reportable segments are the same as those described in the accounting policies section.

All revenue and profit is derived from operations in the United Kingdom only.

The profit measure the Group used to evaluate performance is Underlying EBITA. Underlying EBITA is defined as operating profit before deduction of exceptional and other items, as outlined in note 3 and on the face of the Statement of Comprehensive Income.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

2. Operating segments (continued)

The Group accounts for inter-segment trading on an arm's length basis. All inter-segment trading is eliminated on consolidation.

The following is an analysis of the Group's revenue and Underlying EBITA by reportable segment:

Intra segment trading comprises services provided by the Compliance segment for the Property Services segment and are charged at prevailing market prices.

The improvement to IFRS 8 issued in April 2009 clarified that a measure of segment assets should be disclosed only if that amount is regularly provided to the chief operating decision maker.

None of the Group's major customers accounted for more than 10% of Group revenue for 2016 or 2015.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

3. Exceptional and other items, including amortisation of acquisition intangibles

Exceptional and other items in the year reduced the Group's profit after tax by £37.5m and relate to the following items:

Contract losses on businesses being exited

At the half year, we highlighted operational challenges in our directly delivered externals business managing growth in this work, in particular inventory, staff and site contractors. This business comprised two departments - Roofing and Energy South (managed by the Lakehouse Property Services team, but reported in 2015 segmentally as part of Energy Services). In May 2016, we instigated an operational improvement programme, focused on managing a balanced position of risk and return on capital. The conclusion was to close both departments as the risks of delivering this work directly were too great and, following the operational review, it was determined by the Board to exit these operations. The total losses on the contracts within these businesses are expected to amount to £6.6m pre-tax (on revenues of £25.3m), which have been excluded from the underlying result and reported as Other Items. These activities made a £2.4m profit on revenues of £28.4m in 2015, when they were included within the underlying results. The comparative figure for 2015 was £2.5m, representing further costs incurred on certain legacy contracts of our now ceased social housing development business (reported under the Construction division)).

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

3. Exceptional and other items, including amortisation of acquisition intangibles (continued)

Smart metering mobilisation costs

Smart metering mobilisation costs of £2.5m (revenue of £2.8m) (2015: £nil) represent costs associated with training and retaining engineers, along with mobilisation complexities to do with planning work, documenting installations, inventory management and systems development. These are very significant in the context of the profits of the Energy Division and are non-recurring costs to be incurred at the start of the contract, as such; they have been separately highlighted as an 'Other Item'.

Exceptional costs and income

Acquisition costs comprise legal, professional and other expenditure in relation to acquisition activity during the year and amounted to £0.6m (2015: £0.8m).

Contract costs of £nil (2015: £2.9m) relate to exceptional remediation expenses associated with the resolution of historic matters on a specific contract ("The Contract").

Impairment of receivables of £2.6m (2015: £nil) reflects the provision taken against receivables in relation to a small number of contract settlements on which there is a range of possible outcomes for the Group in terms of both cash flow and impact on the Statement of Comprehensive Income. This predominantly relates to a sum receivable within Property Services relating to the Contract, discussed above. This is a matter that has been ongoing since 2014 and does not reflect underlying trading in the year. A small element related to the withdrawal from industrial & commercial metering activities, discussed above in the Energy Services operational review. The provisions were made in line with the Group's accounting policy for receivables, but highlighted as an Exceptional Item in light of their unusual nature. Management will continue to seek a full and advantageous settlement for the Group.

We incurred a £2.5m charge in relation to restructuring and EGM costs in the year. In May 2016, we indicated an operational improvement programme would be initiated by the Board to focus initially on the Property Services division, in which we made significant progress during the second half of the year. The Group recorded a £1.0m exceptional cost to cover the costs of redundancy for the staff associated with this exercise, which included the rationalisation of certain central functions. There has also been a great deal of change at the Board level this year and the Group took a charge of £1.5m associated with exiting former directors, the two Extraordinary General Meetings held during the year and other one-off expenses. The prior year item of £0.8m related to the write-off of certain fixed assets and legal fees in relation to reshaping the Group structure.

IPO costs of £nil (2015: £4.1m) comprise legal, professional and incidental expenditure incurred in relation to the IPO in March 2015.

Release of deferred consideration of (£2.6m) (2015: £nil) relates to the renegotiation of sums due to the former owners of H2O Nationwide Limited (£0.6m) and no further sums being due to the former owners of Providor Limited (£1.5m) and Sure Maintenance Limited (£0.5m), in light of the requisite performance conditions under the Sale and Purchase Agreement not being met.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

3. Exceptional and other items, including amortisation of acquisition intangibles (continued)

Impairment of goodwill and intangible assets acquired

Impairment of goodwill and intangible assets acquired was £19.2m for the year (2015: £nil) relating to the write-off of £17.4m of Goodwill in relation to Foster Property Maintenance Limited and £1.8m in relation to the contract with a major industrial & commercial customer, previously recognised in acquisition intangibles associated with Providor Limited. Further background is provided in the Financial Review, together with notes 7 and 8.

Amortisation of acquisition intangibles

Amortisation of acquisition intangibles was £11.2m for the year (2015: £6.5m), with the increase reflecting a full year impact of H2O Nationwide, Providor, Orchard Energy and Sure Maintenance together with the acquisitions of Aaron Heating Services and Precision Lift Services during the year.

Accelerated amortisation of financing costs

Finance costs of £nil (2015: £0.4m) represent the write-off of unamortised costs on the term loan we replaced with a new revolving credit facility in December 2014, ahead of the IPO.

Unwinding discount of deferred consideration

Unwinding discount of deferred consideration reflects the present value of deferred sums. Contingent consideration is discounted at a post-tax rate of 8.5%, due on outstanding payments for acquisitions. Non-contingent deferred cash consideration is discounted at a post-tax rate of between 2% and 3%.

All items discussed above in relation to "Exceptional and Other items" are considered non-trading because they are not part of the underlying trading of the Group and in the case of Exceptional Items, impairment of goodwill and accelerated amortisation of finance costs are not expected to recur year to year. Contract losses on businesses being exited relate to businesses that have been closed and smart metering mobilisation costs reflect the one off nature of mobilising our new domestic smart metering programme.

Risk Management

We continue to manage a number of potential risks and uncertainties, including claims and disputes, which are common to other similar businesses which could have a material impact on short and longer term performance. The Board remains focused on the outcome of a number of contract settlements on which there is a range of outcomes for the Group in terms of both cash flow and impact on the Statement of Comprehensive Income.

In quantifying the likely out turn for the Group, the key judgements and estimates will typically include:

· an estimation of liability based on commercial and / or legal assessment;

· fair value assessment of a Statement of Financial Position item; and

· a commercial assessment of potential further liabilities.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

4. Tax on (loss) / profit on ordinary activities

Factors that may affect future charges

The Finance (No 2) Act 2015, which provides for reductions in the main rate of corporation tax from 20% to 19% effective from 1 April 2017 and to 18% effective from 1 April 2020, was substantively enacted on 26 October 2015. Subsequently, the Finance Act 2016, which provides for a further reduction in the main rate of corporation tax to 17% effective from 1 April 2020, was substantively enacted on 6 September 2016. These rate reductions have been reflected in the calculation of deferred tax at the statement of financial position date.

The closing deferred tax asset at 30 September 2016 has been calculated at 17%, reflecting the tax rate at which the deferred tax asset is expected to be utilised in future periods.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

5. Dividends

The proposed final dividend for the year ended 30 September 2016 of 0.5p per share amounting to £0.8m and representing a total dividend of 1.5p for the full year (2015: 1.9p per share), will be paid on 6 April 2017 to the shareholders on the register at the close of business on 10 March 2017. The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

6. Earnings per share

The calculation of the basic and diluted earnings per share is based on the following data:

The weighted average number of Ordinary shares in issue during the year excludes those accounted for in the own shares reserve.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

7. Goodwill

Goodwill arising on consolidation represents the excess of the fair value of the consideration transferred over the fair value of the Group's share of the net assets of the acquired subsidiary at the date of acquisition.

The adjustments relating to businesses acquired in the previous year relate to finalisation of fair value accounting within 12 months of being acquired.

Goodwill is not amortised but is reviewed for impairment on an annual basis or more frequently if there is an indication that goodwill may be impaired. Goodwill acquired in a business combination is allocated to cash generating units ("CGUs") according to the level at which management monitors that goodwill. 

Goodwill is carried at cost less accumulated impairment losses.

The carrying value of goodwill is allocated to the following CGUs:

An asset is impaired if its carrying value exceeds the unit's recoverable amount which is based upon value in use. At each reporting date impairment reviews are performed by comparing the carrying value of the CGU to its value in use. At 30 September 2016 the value in use for each CGU was calculated based upon the cash flow projections of the latest board approved three-year forecasts together with a further two years estimated and an appropriate terminal value based on perpetuity. This is discussed further below.

Future budgeted and forecast profits are estimated by reference to detailed bottom-up budgeting process undertaken by the Group.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

7. Goodwill (continued)

The estimated growth rates are based on past experience and knowledge of the individual sector's markets. The Directors believe that the Group's core markets of social housing, public buildings, education and energy services, underpinned by Government policy, will continue to present strong growth opportunities for the CGUs outlined above respectively. Management believe that future growth in these markets is underpinned by a number of factors including:

· A pipeline of new tenders

· Further opportunities to work with other group companies

· Client demand for safe buildings; and

· Adjacent market opportunities.

The assumptions used in the impairment reviews at 30 September 2016 are outlined below:

For years one to three the value in use calculation is based on the latest board approved three-year forecasts, which is adjusted for non-cash items. The growth rates applied in these first three years varies by business, but sit in a range between 1% and 29% for revenue growth. The growth rate applied to the cash flows in years four and five was 2% (2015: 2%). A terminal growth rate of 1% (2015: 1%) was applied. The pre-tax discount rate applied was 11.4% (2015: 10.3%), with the post-tax discount rate being 8.5% (2015: 8.5%). A sensitivity analysis has been completed; this was based on a reduction in revenue of 20% per year, a reduction in operating profit margin of between 1 and 3% and an increase in the discount rate of 1%. The directors consider that reasonably possible changes in the key assumptions would not cause the carrying amount to exceed its recoverable amount.

As outlined in our trading statement of 1 February 2016, the Group is operating against a backdrop of active cost reductions taking place within client organisations, resulting in part from a requirement for social landlords to reduce rents by 1% p.a. for the next four years. This was particularly felt within the Property Services division. Despite our success in securing positions on key frameworks, including resecuring Eastern Procurement, the expected level of tenders from these frameworks has not materialised at the rate previously expected. On reviewing the expected cash flows for Foster Property Maintenance, management concluded that they were not sufficient to maintain any Goodwill. There was no Goodwill elsewhere in the Property Services division.

Following a detailed review, and based on the latest board approved three-year forecasts (which assume modest revenue growth of approximately 1% per year and some marginal EBITA improvement) and a growth rate in EBITA of 1.5% in years four and five with a terminal growth rate of 0.75% the goodwill in Foster Property Maintenance was written off in the year, resulting in a charge of £17.4m; the determined remaining recoverable amount of CGU was £2.9m which was determined with reference to a 'value in use' basis. The pre-tax discount rate used was 12.5% (2015: 10.3%), reflecting the increased level of risk associated with the forecast trading position. A 100 basis point increase in the discount rate would reduce the value in use by 8%, whereas a 50 basis point adjustment to the years 4 to 5 growth rates or the terminal growth rate would have a 3% impact on the value in use.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

8. Other intangible assets

Contracted customer order book

The value placed on the order book is based upon the cash flow projections over the contracts in place when a business is acquired. Due to uncertainties with trying to forecast revenues beyond the contract term, the Directors have valued contracts over the contractual term only. The value of the order book is amortised over the remaining life of each contract which typically range from one to five years.

As we outlined in our trading statement of 2 August 2016, the Group's former major metering customer, in the industrial and commercial sector, decided to take installation in house during the year, following a number of acquisitions among our competitors. The customer contract had been valued at £1.8m within the contracted customer order book in Providor Limited and in light of the customer's action, this sum was impaired during the year, in light of no further cash flows being anticipated to arise from this arrangement.

Customer relationships

The value placed on the customer relationships are based upon the non-contractual expected cash inflows forecast on the base business over and above contracted revenues. The value of customer relationships is amortised over five years.

Non-compete agreement

The value placed on the non-compete agreements are based upon the non-compete clause and knowledge and know-how of the former owners of the acquired businesses. The value of non-compete is amortised over five years.

The annual post-tax discount rate employed in the calculation of the acquisition intangibles is 13.00% (2015: 13.00%) which is higher than the Group WACC used for impairment purposes to reflect the added risks associated with the valuation of an intangible asset in isolation from a business.

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

9. Borrowings

In December 2014, the Group renegotiated its bank facilities to provide an overdraft facility of £5m together with a Revolving Credit Facility ("RCF") of £30m, which was extended to £45m in December 2015. The Group agreed a variation to the RCF in January 2017 with Royal Bank of Scotland reduce the RCF to £40m and further reduce the facility to £35m in April 2017. The variation to the RCF included a revision to the banking covenants, which reflect the lower earnings expectations of the Group, and a higher rate of interest.

10. Net debt

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

11. Provisions

Property development

Property development costs represent sums due to the former owners of the land relating to the Manor Road housing development under the terms of the sale. This sum was paid in October 2015.

Legal and other

Other costs relate to property dilapidation obligations, potential contract settlement costs and other potential legal settlement costs. The largest figure relates to the potential contract settlement costs which have been made on management review of contractual obligations faced on legacy contracts and include The Contract costs referred to in note 3. These are expected to result in an outflow of economic benefit over the next one to three years.

The Group continue to manage a number of potential risks and uncertainties, including claims and disputes, which are common to other similar businesses which could have a material impact on short and longer term performance. The Board remains focused on the outcome of a number of contract settlements on which there is a range of outcomes for the Group in terms of both cash flow and impact on the Statement of Comprehensive Income.

In quantifying the likely out turn for the Group, the key judgements and estimates will typically include:

· an estimation of liability based on commercial and / or legal assessment

· fair value assessment of a Statement of Financial Position item

· a commercial assessment of potential further liabilities

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 30 September 2016

12. Cash (used in) / generated from operations

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended 30 September 2016

13. Business Combinations

2016 acquisitions:

Aaron Heating Services Limited

On 2 November 2015 the Group acquired the entire share capital of Aaron Heating Services Limited for consideration as detailed below. Aaron Heating Services Limited's principal activity is that of installation and maintenance of plumbing and heating systems. 

The acquisition of Aaron Heating Services complemented the Group's existing gas compliance businesses: K&T Heating, which operates in London and the South East, and Sure Maintenance, which operates in the North of England and the Midlands. The acquisition will allow Lakehouse to extend its geographic footprint in the gas servicing and maintenance market to provide national coverage to key clients, as well as provide opportunities for adjacent services.

The effect of the acquisition on the Group's assets and liabilities were as follows: