Preliminary Results

RNS Number : 1406C

LSL Property Services

02 March 2011

 



For immediate release

2 March 2011

LSL Property Services plc ("LSL")

PRELIMINARY ANNOUNCEMENT

LSL Property Services plc, a leading provider of residential property services incorporating both estate agency and surveying businesses, announces preliminary results for the year ended 31^st December 2010.

Highlights

Financial

§  Group revenue increased by 31% to £206.6m (2009: £157.7m) driving a 13% increase in Underlying Group Operating Profit⁽¹⁾ to £31.9m (2009: £28.3m). Underlying Operating Margin⁽²⁾ was 15.5% (2009: 17.9%)

§  Like-for-like⁽³⁾ Group revenue increased by 16% to £182.4m (2009: £157.7m) with a corresponding 24% improvement in like-for-like Underlying Group Operating Profit to £35.1m (£2009: £28.3m). Like-for-like Underlying Group Operating Margin increased from 18.0% to 19.3%

§  Net exceptional profit of £10.2m (2009: cost £0.4m) arising from an exceptional profit of £16.0m on the acquisition of the HEAL Business⁽³⁾ and other exceptional costs of £5.8m

§  Profit before tax before exceptional items increased by 52% to £25.8m (2009: £17.0m)

§  Basic earnings per share of 33.6p (2009: 11.4p). Adjusted Basic Earnings Per Share⁽⁴⁾ increased by 16% to 21.0p (2009: 18.1p)

§  Final dividend proposed of 5.9p per share. Total dividend for the full year increased 56% to 8.4p (2009: 5.4p)

Balance Sheet

§  Significant cash generation with net cash from operations, before payment of exceptional costs, of £35.7m (2009: £30.8m)

§  Strong balance sheet with net debt reduced by £20.8m to £4.9m at 31^st December 2010 (31^st December 2009: £25.7m). £75m banking facility extended to 2014

Surveying Performance 

§  Underlying Operating Profit increased by 16% to £27.3m (2009: £23.5m)

§  Further growth in revenue, profit and market share despite total mortgage approvals falling by 7%⁽⁵⁾

Estate Agency and Related Services

§  Underlying Operating Profit increased by 7% to £7.2m (2009: £6.7m)

§  Like-for-like Underlying Operating Profit increased by 56% to £10.4m (2009: £6.7m)

§  Like-for-like revenue growth supported by improved contribution from lettings up 8% to £23.3m (2009:£21.6m) and financial services income (excluding Home of Choice and Pink Home Loans⁽⁶⁾) up 6% to £11.8m (2009:£11.0m)

§  HEAL Business successfully integrated and delivered close to expectations in a challenging market. Returned a profit of £0.4m during the second half of 2010 after first half loss of £3.6m

Key Developments

§  First full year of the expanded Santander surveying contract performing well

§  Strengthened market position in Estate Agency following the successful acquisition and integration of 206 HEAL branches and St Trinity Asset Management

§  LSL now transformed into one of the largest UK mortgage intermediaries following the acquisitions of Home of Choice and Pink Home Loans⁽⁷⁾

§  Significant investment in new organic growth initiatives focused on growing market share and longer term profitability in Estate Agency and extending Surveying services to the private survey market.

--------------------------------------------------------------------------------------------------------------------------------

⁽¹⁾    Underlying Operating Profit is before exceptional costs, amortisation of intangible assets and share based payments

⁽²⁾    Underlying Operating Margin is Group Operating Profit before exceptional costs, amortisation and share based payments shown as a percentage of turnover

⁽³⁾    Like-for-like is total Group revenue excluding the impact of Halifax Estate Agencies Limited (HEAL) branches and St Trinity Asset Management (together referred to as "HEAL Business") acquired January 2010.

⁽⁴⁾    The calculation of the Adjusted Basic Earnings per Share is given in note 3.

⁽⁵⁾    Bank of England Total Mortgage Approval for 2010

⁽⁶⁾    Pink Home Loans includes Advance Mortgage Funding Limited and BDS Mortgage Group Limited

⁽⁷⁾    Source: Mortgage Strategy Network Report January 2011

Commenting on today's announcement, Roger Matthews, Chairman, said:

"The Group made excellent progress in a market where transaction levels are circa 50% of historic normal levels. LSL still has a cautious view of the market for 2011 in view of the ongoing shortage of available mortgage finance and broader well documented economic challenges. However, we are confident that the Group can build on the market share gains made in 2010 and grow the business even in these market conditions.

With a very strong balance sheet, we are well placed to grow both organically and through further acquisitions in the current market and deliver further substantial growth when transactions volumes recover."

For further information, please contact:

Simon Embley, Group Chief Executive Officer

Steve Cooke, Group Finance Director

LSL Property Services plc                                                                                   0203 215 1015

Richard Darby, Nicola Cronk, Helen Chan

Buchanan Communications                                                                                0207 466 5000

An analysts' briefing will be held today at 12.30pm at the offices of Buchanan Communications, 45 Moorfields, London, EC2Y 9AE.

Notes to Editors:

LSL Property Services plc is one of the leading residential property services group of companies in the UK, whose principal activities are: Surveying; and Estate Agency and Related Services. It provides a broad range of services to its clients who are principally mortgage lenders, as well as buyers and sellers of residential properties. For further information, please visit our website: www.lslps.co.uk.

Chairman's Statement

Introduction

We are delighted to report excellent progress in 2010 with Underlying Operating Profit increasing strongly by 13% to £31.9m despite further market contraction during the year. Both the Estate Agency and Surveying Divisions have contributed significant profit growth and Halifax Estate Agencies Limited ("HEAL") has been successfully integrated into the Estate Agency Division. On a like for like basis, excluding the HEAL Business acquired in January 2010, Underlying Group Operating Profit increased by 24% to £35.1m (2009: £28.3m).

Transaction volumes worsened again during 2010 and remain subdued at a low point in the cycle. Mortgage approvals for house purchase deteriorated in the second half of the year compared to the first and at 575,000 for the full year were 4% lower than 2009 (2009: 597,000) and less than half the historic norm of 1.2m per annum. Remortgage activity was extremely weak and at 328,000 for the full year was also 4% lower than 2009 (2009: 343,000). As a consequence total mortgage approvals fell by 7% in 2010 to 1.2m (2009: 1.3m).

Against this challenging backdrop the LSL business model has performed extremely well. The Estate Agency and Surveying Divisions have both grown market share and Estate Agency in particular has been driven by another strong contribution from its counter cyclical income streams. Furthermore, the Group has strengthened the positions of all of its core businesses in 2010. The expansion of the Santander contract in Surveying has consolidated our market leadership. In Estate Agency the acquisition of HEAL Business has given LSL the UK's second largest Estate Agency branch network, the largest lettings network and market leadership in the repossessions market. The Estate Agency business also acquired Home of Choice and Pink Home Loans and as a result the Group is now one of the largest financial services intermediary networks in the UK, focusing on mortgage and protection advice.

During 2010 the Group started to implement a strategy to drive further organic growth in both Estate Agency and Surveying.  In Estate Agency, the plans focused on improving market share and profitability by branch through investment in the branches, people and a new call centre to increase branch instruction levels. In Surveying, we remain committed to providing excellent quality and service levels to all lender clients and, in addition, have launched new products to extend our surveying services to private buyers.

Financial Results

Group revenue increased by 31% to £206.6m (2009: £157.7m) and Underlying Group Operating Profit increased 13% to £31.9m (2009: £28.3m). However, the result included an Operating Loss of £3.2m for the HEAL Business without which like-for-like Group revenue increased by 16% to £182.4m (2009: £157.7m) and like-for-like Underlying Group Operating Profit increased by 24% to £35.1m (2009: £28.3). Like-for-like Underlying Group Operating Margin increased from 17.9% to 19.3%, a level which is more than 2% higher than that achieved during the 2006/2007 period of peak transaction volumes.

The HEAL Business operating result was very close to our expectations at the time of the acquisition despite the deterioration in the market and it is pleasing to see that the HEAL Business contributed a profit of £0.4m in the second half. Overall the Estate Agency Division increased Underlying Operating Profit from £6.7m to £7.2m even with the HEAL Business loss included. If the HEAL Business loss is excluded, Underlying Operating Profit increased to £10.4m and Underlying Operating Margin was 10% (2009: 8%). This was an exceptional performance given the continued decline in housing transaction volumes and was underpinned by strong profitability in asset management and lettings.

The Surveying Division has again significantly outperformed the market. Whilst total mortgage approvals fell by 7%, Surveying revenue increased by 16% and Underlying Operating Profit increased by 16% to £27.4m (2009: £23.5m) with Underlying Operating Margin of 34% (2009: 34%).

The Group produced £30.7m (2009: £29.9m) of operating cashflow even after capital expenditure of £5.0m (2009: £0.7m) which was mostly on branch refurbishment. Cashflow was driven by the high levels of profit from both Divisions. Net debt reduced from £25.7m in December 2009 to £4.9m in December 2010.

The acquisition of the HEAL Business contributed to an overall net exceptional profit of £10.2m (2009: exceptional loss £0.4m), resulting in an overall profit before tax and amortisation of £44m (2009: £25.2m). The net exceptional profit of £10.2m (2009: loss of £0.4m) comprised an exceptional profit of £29.8m as a result of the acquisition of the HEAL Business for £1 offset by exceptional costs of £19.6m, of which £13.8m related to the HEAL Business, £2.8m to increasing the Professional Indemnity ("PI") provision and £2.0m to finance costs. Amortisation during the year was £8.1m (2009: £8.6m) giving a profit before tax of £36.0m (2009: £16.6m). The profit after tax was £34.5m (2009: £11.7m). Adjusted earnings per share ("EPS") increased by 16% to 21.0p (2009: 18.1p).

Dividend

As a result of the strong operating performance, continued reduction in net debt and the Board's view of the future prospects of the business a final dividend of 5.9p per share will be proposed to shareholders at the forthcoming AGM, bringing the total dividend for 2010 to 8.4p per share. This represents a 40% payout ratio (based on adjusted EPS of 21.0p per share) and a 56% increase on the 2009 dividend of 5.4p per share.  The proposed dividend payment is in line with our previously stated policy of applying a dividend pay out ratio of between 30% to 40% of Underlying Group Operating Profit after interest and tax. The ex dividend date for the final dividend is 30^th March 2011, with a record date of 1^st April 2011, and a payment date of 27^th April 2011. Shareholders have the opportunity to elect to reinvest their cash dividend and purchase existing shares in LSL through a Dividend Reinvestment Plan.

Developments

The Surveying market remains at a low point in the cycle with total mortgage approvals of 1.2m, down 7% on 2009 (2009: 1.3m). However, our Surveying Division has improved its market position as a result of a number of recent contract extensions which were achieved through continued focus on service levels for existing clients. In particular there has been an initiative to support and contribute to revised risk management strategies for a number of clients. The expanded Santander contract, which came on stream in December 2009, has made a significant contribution to the 2010 result not only in terms of revenue but also through driving operational efficiency across the division. Late in the fourth quarter e.surv Chartered Surveyors commenced the marketing of private survey services to home buyers (as opposed to lenders). Despite low transaction volumes and the seasonal slowdown in the quarter, early feedback and penetration rates of these services are promising.

PI claims in the market have continued at high levels as a result of higher repossession rates relating to valuations undertaken in the 2004 to 2007 period. PI claims are monitored extremely carefully and the provision (net of payouts) has been increased by £3.4m in the period with a total provision at the year end of £10.9m (2009: £7.5m).

Our Estate Agency Division has continued to advance strongly especially through the acquisition of the HEAL Business for which LSL was awarded the 'Deal of the Year' award at the Quoted Company Awards. The HEAL Business was fully integrated during the year with 206 branches re-branded to Your Move, Reeds Rains and Intercounty. The cost base of the ex HEAL branches has been right-sized to just under £28m and significant progress has been made in growing lettings and financial services income streams. Between the first quarter and the last quarter, lettings income has increased nearly two-fold and financial services income has gone up by a factor of four. This compares to growth in the original Your Move and Reeds Rains branches over the same period of 12% for lettings and 35% for financial services. The HEAL Business showed dramatically improved performance over the year as had been planned. After a loss of £3.6m in the first half the HEAL Business delivered a profit of £0.4m in the second half of 2010 and is expected to make a significant contribution once lettings and financial service income streams are more fully developed and housing transaction volumes return to more normal levels.

Overall market share in Estate Agency increased from 2.7% in 2009 to 4.5% and on a like-for-like basis excluding the HEAL Business, market share increased from 2.7% to 3.3%. These gains were partly driven by a refurbishment programme which covered all branches and there has also been targeted investment in additional headcount and marketing. With exchange income constrained by the challenging market conditions, the Division has continued to drive counter cyclical income including lettings which grew by 14% in the year (like-for-like 8%). The asset management business benefitted from the creation of St Trinity Asset Management (following the acquisition of the asset management business as part of the HEAL Business) and total income was £13.9m (2009: £9.3m).

The Group intends to continue investment in the Estate Agency Division in order to further build market share in advance of improvement in transaction volumes. During the final quarter of 2010 a new call centre ("The Bridge") was built to support the Estate Agency branches and the quality of branch management was improved through both training and recruitment. We continue to plan further investment in branch headcount and marketing in 2011. "The Bridge" is already producing good results although P&L benefits in 2011 will be held back by cost of investment. The continued development of lettings, financial services and other income streams in the ex-HEAL branches together with the combined market share growth initiatives should generate a material uplift in Estate Agency profits in the longer term.

During 2010 we made a step change in our financial services offer within the Estate Agency Division through two major acquisitions. In May the business and assets of Home of Choice, now rebranded to First Complete, was acquired for total consideration of £0.4m. Pink Home Loans was acquired in November 2010 for a cash consideration of £1.6m. LSL's expanded financial services business is now one of the largest intermediary networks in the UK focused on mortgage and protection advice. Profitability of the new business will be constrained until such time as the mortgage market improves but importantly these acquisitions significantly strengthen LSL's relationship with its key lender clients.

There have also been a number of smaller acquisitions within the Estate Agency Division which have increased our exposure in the South East region and expanded our counter-cyclical business. Templeton LPA, a Law of Property Act fixed charge receiver, and Goodfellows, a seven branch agency chain in South London were acquired for £0.4m and £1.0m respectively.

Board

As previously announced there were a number of significant changes to the Board during the year. Paul Latham, retired from his role as Group Deputy CEO to become a Non Executive Director and in June 2010 Alison Traversoni and David Newnes joined the Board as Executive Director for Surveying and Executive Director for Estate Agency respectively. Steve Cooke joined the Board as Group Finance Director in July 2010 and Dean Fielding has retired from the Board.  The Board has currently three Non Executive Directors, excluding the Chairman, two of whom are independent.

Following the changes made during the year, the Board is well qualified to lead the business through the next stages of its ambitious growth plans.

People

During 2010, the Group expanded significantly through both investing in our existing businesses and acquisitions. As a result, we have a large number of new colleagues either recruited to support our organic growth plans or who have joined the Group through an acquisition made during the year, and I would like to extend a warm welcome to them all. Overall, the number of Group employees increased by 1,205 to 4,490 (2009: 3,285).

Our success in providing the best possible service to our customers is dependent on the skills and enthusiasm of all our employees. Great commitment has been shown this year in the face of extremely challenging market conditions and I would like to thank all of them for their efforts.

I am also very pleased to report that e.surv Chartered Surveyors, our largest surveying business, was awarded The Sunday Times Best Companies - One to Watch Award.

Current Trading and Outlook

The Group made excellent progress in a market where housing transaction levels are circa 50% of historic normal levels. LSL still has a cautious view of the market for 2011 in view of the ongoing shortage of available mortgage finance and broader well documented economic challenges. However, we are confident that the Group can build on the market share gains made in 2010 and grow the business even in these market conditions. Further marketing of private surveys in our Surveying Division and the success of our market share plans for the Estate Agency businesses will be central to delivering this growth. In addition, the HEAL branches will continue to develop their lettings and financial services income streams and we can expect our asset management business to continue to make a significant contribution in an environment of low transaction volumes.

Activity levels to the end of February 2011 are in line with our expectations with no sign of a recovery in market volumes. Early results from our organic growth initiatives are on target with strong positive feedback from clients and from within the business.

The Group has a very strong balance sheet with net debt of only £4.9m and an available debt facility of £75m. We are well placed to grow both organically and through further acquisitions in the current market and to deliver further substantial growth when transaction volumes recover.

Roger Matthews

2^nd March 2011

Business Review  - Surveying Division

Financial	2010	2009	%  change
	£m	£m
Turnover	80.9	70.0	16%
Expenditure	(53.5)	(46.5)	15%
Underlying Operating Profit	27.3	23.5	16%
KPIs
Profit margin %	34%	34%	-
Jobs Performed 000s	531	439	21%
Income per job £	153	159	(4)%
Professional Indemnity insurance provision £m	10.9	7.5	45%

Surveying Division Performance

The Surveying division increased turnover by 16% to £80.9m (2009: £70.0m) against a market decline of 7% in total mortgage approvals to 1.2m (2009: 1.3m). The increase in revenue drove a 16% increase in Underlying Operating Profit to £27.3m (2009: £23.5m) with the Underlying Operating Profit margin holding steady at 34% (2009: 34%).

Total job numbers increased by 21% to 531,000 (2009: 439,000) with much of the increase being driven by the expanded Santander contract coming on stream in December 2009. Average fee across all contracts was lower by 4% reflecting the market conditions and job mix.

Expenditure increased by 15% compared to 2009, which was in line with the increase in turnover (2009: £46.5m). The cost movement reflected the variable costs across our key contracts. In addition, there was an increase in PI Insurance costs as provisioning relating to the 2004 to 2007 trading period was increased.

Surveying Developments

2010 saw a full year of benefit from the expanded Santander contract. Looking forward, the contract offers an excellent opportunity to leverage Surveying assets across the Group in what continues to be very uncertain market conditions.

The C&G contract contributed £13.6m of turnover in 2010 compared to £15.5m in 2009 due to a combination of the market decline in total mortgage approvals and the impact of Lloyds Banking Group's mortgage strategy.

The Division has a number of key relationships which are managed both on an exclusive basis and through panel management arrangements. We remain committed to providing excellent quality and service levels to all lender clients. Feedback from our clients is consistently positive and we particularly differentiate our service on measures including turnaround time for valuations reflecting our use of innovative technology and the flexibility of our panel management arrangements.One of the key factors that lenders use in assessing service is the support provided in relation to the management of risk faced by lenders. Here, the Surveying Division's risk management arrangements have been widely acknowledged by its customer base as being market leading and unique. Further, during 2010, e.surv Chartered Surveyors was a finalist for the MPF European Practice Management Awards for Risk Management. It achieved this award because it was able to demonstrate that it has an integrated and embedded approach to risk management.

In December 2010, e.surv Chartered Surveyors trialled exclusively with the Royal Institution of Chartered Surveyors ("RICS") the RICS Condition Report, which is aimed at the private survey market.  This product is being sold alongside our existing private survey services, such as the RICS HomeBuyer Report and Building Survey.

In the medium term we expect to be able to capitalise on what is a significant opportunity to claim our share of the current private survey market and also to expand the market.  The Group is in an excellent position to do this by leveraging its unrivalled distribution network covering our major lender clients, the Group's Estate Agency network including the new "Bridge" call centre and the principal Surveying brands of e.surv Chartered Surveyors and Barnwoods.

The cost of PI claims relating to valuations carried out between 2004 to 2007 remains a key risk for the business. While the six year statutory limit on claims means that we are now clear from receiving new claims for 2004, there has been a steady flow of new claims during 2010 for the 2004 to 2007 period. As a result the Group has increased its PI provision from £7.5m to £10.9m.

During the year, the Group disposed of its 14.19% stake in Hometrack Data Systems Limited for consideration of £3.9m which was the carrying value of the investment in the accounts at 31^st December 2009.

e.surv Chartered Surveyors Achievements/Awards 2010 & 2011

e.surv Chartered Surveyors, LSL's largest surveying business, has achieved a number of awards:

Sunday Times - Best Companies 2011 - one to watch

IIP Accreditation

The Investors In People accreditation was achieved at e.surv Chartered Surveyors' Head Office location in Kettering.

Mortgage Strategy Awards

e.surv Chartered Surveyors was awarded the Best Surveyor/Valuer award at the Mortgage Strategy Awards.

Mortgage Strategy Awards 2011 - Finalist for Best Surveyor/Valuer

MPF European Practice Management Awards for Risk Management

e.surv Chartered Surveyors was listed as a finalist at the MPF European Practice Management Awards for Risk Management. It achieved this award because it has an integrated and embedded approach to risk management promoted by the e.surv Chartered Surveyors Board and with active involvement from it. In granting the award, MPF commented on the internal audit team and IT resources, concluding that they are dedicated to driving continuous improvement.

The MPF noted that Board support is maintained by having risk management as a standard item on meeting agendas and senior executives taking individual responsibility for the management and control of key risks. The reporting process is simple, clear and effective. In delivering the award, MPF commented:

"To ensure that e.surv Chartered Surveyors benefits from good risk management, they have embedded it in a number of their business management processes. This is an excellent example of moving beyond basic compliance to adding value to their business."

BSi ISO 9001 Accreditation Extended

During 2010, e.surv Chartered Surveyors secured an extension to its ISO 9001:2008, which it originally secured in 1996,  e.surv Chartered Surveyors again conformed 100% to the requirements of the internationally recognised standard, when independently reviewed by the leading global provider of standards and certification body,  British Standards Institution (BSi).

ISO 9001:2008 is the internationally recognised standard for quality management systems, maintained by the International Organisation for Standardisation.  The standard requires companies to adhere to procedures covering all key processes in their business: monitoring processes to ensure they are effective; keeping adequate records; checking output for defects, with appropriate and corrective action where necessary; regularly reviewing individual processes and the quality system itself for effectiveness; and facilitating continual improvement.  One of the goals of this standard is to improve effectiveness via process performance metrics - numerical measurement of the effectiveness of tasks and activities.  ISO 9001 also requires companies to track customer satisfaction.

Business Review - Estate Agency Division and Related Services

			Actual - including HEAL Business				Like For Like - excluding HEAL Business
			2010	2009	% change		2010	2009	% change
			£m	£m			£m	£m
Exchange fees		£m	52.4	33.0	59%		40.3	33.0	22%
Financial services income*		£m	18.6	12.5	49%		16.1	12.5	29%
Lettings income		£m	24.6	21.6	14%		23.3	21.6	8%
Asset management income		£m	13.9	9.3	49%		9.0	9.3	(4)%
Other income		£m	16.2	11.3	43%		12.9	11.3	14%
Total income		£m	125.7	87.7	43%		101.6	87.7	16%
Expenditure		£m	(118.5)	(81.0)	46%		(91.2)	(81.0)	13%
Underlying Operating Profit		£m	7.2	6.7	7%		10.4	6.7	55%
KPIs
Exchange units			25,766	16,327	58%		19,232	16,327	18%
Market Share			4.5%	2.7%	67%		3.3	2.7	22%
Underlying Operating Margin			5.7%	7.6%	(25)%		10.3	7.6	36%

*  Financial services income on a like-for-like basis as given in the table above includes revenue from Home of Choice and Pink Home Loans, which was acquired during the year.  Excluding these, the financial services income increased by 6% to £13.3m from £12.5m.

Note - 'Other income' includes franchising income, conveyancing services, EPCs, Home Reports, utilities and other products and services to clients of the branch network.

Estate Agency Performance

The Estate Agency Division acquired the HEAL Business in January 2010 and the HEAL Business trading has had, as expected, a significant impact on overall performance. Therefore the results are presented on both an actual and like-for-like basis (excluding HEAL Business).

Estate Agency delivered an excellent performance in 2010 even though the market declined still further from what were already extremely low transaction levels. The number of mortgage approvals for house purchase fell by 4% to 575,000 (2009: 597,000) which compares to historic normalised levels of 1.2m. Transactions fell steadily during the year such that volumes in the second half of 2010 were 6% lower than in the first half of 2010 and were 16% lower than the second half of 2009.

Total Estate Agency income increased by 43% to £125.7m (2009: £87.7m) and on a like-for-like basis by 16% to £101.6m (2009: £87.7m). Underlying Operating Profit increased by 7% to £7.2m (2009: £6.7m). However, this included trading losses for the newly acquired HEAL Business without which, on a like-for-like basis, Underlying Operating Profit was 55% higher at £10.4m (2009: £6.7m). As a result Underlying Operating Margin increased from 7.6% to 10.3% which was a very robust performance in such tough market conditions.

HEAL Business
			2010	2010	2010
			Total	H2	H1
			£m	£m	£m
Exchange fees		£m	12.0	6.3	5.7
Total income		£m	24.2	13.5	10.7
Expenditure		£m	(27.4)	(13.1)	(14.3)
Underlying Operating Profit		£m	(3.2)	0.4	(3.6)
KPI
Exchange units			6,534	3,500	3,034

The plan for the HEAL Business, which was acquired in January 2010, has been delivered despite the deterioration in the market. The HEAL Business made a £3.6m loss in the first half of 2010 and this has been followed by a profit of £0.4m for the second half. The improvement has been driven partly by further cost reductions but mostly by increasing lettings and financial services revenue. At the time of the acquisition, HEAL Business exchange fee income was already at a comparable level to the other LSL businesses but lettings and financial services were lagging significantly. These offers were rolled out to all ex HEAL branches during the year and as a result from lettings, financial services and other income has increased by 50% from £2.9m to £4.3m between the first and second half of 2010.

The improvement is even more dramatic on a quarterly comparison. Between the first and last quarter of 2010, lettings income has nearly increased two-fold and financial services income has gone up by a factor of four. This compares to growth in the original Your Move and Reeds Rains branches over the same period of 12% for lettings and 30% for financial services.

However, the level of lettings financial services and other income per branch is still behind the other LSL Estate Agency branches and this gap represents a significant opportunity for 2011.

Estate Agency Branches

Your Move, Reeds Rains and the LSLi brands all outperformed the market during 2010. Excluding the ex HEAL branches, exchange units were 18% higher than 2009 and exchange fee income increased by 22% to £40.3m (2009: £33.0m).   Every branch was refurbished during 2010 and there was additional investment in headcount and marketing all of which contributed to a market share increase on a like-for-like basis from 2.7% to 3.3%. If the HEAL Business is included, Group market share now stands at 4.5%.

Counter Cyclical Income

The counter cyclical income streams of lettings and asset management have been particularly important to the Group in depressed market conditions. During 2010 like-for-like lettings income grew by an impressive 8% and now accounts for 23% of income in the non ex HEAL branches.

The asset management business is dependent on the repossessions market which fell by 5% to 36,300 repossessions in 2010 (2009: 39,300). On a like-for-like basis asset management income fell by 4% so market share did increase slightly. The Group only started up its asset management business in 2008 but it has grown rapidly and now, including the newly created St Trinity Asset Management business, total asset management income contributes 11% of total Estate Agency revenue.

Financial Services

The Group's financial services offer has been transformed by the acquisition of Home of Choice and Pink Home Loans during the year. These businesses have not contributed materially to the 2010 operating profit and yet like-for-like financial services income increased by 6% to £13.3m (2009: £12.5m). Once the mortgage market improves, financial services will become a very significant income line for the Group. A key objective for 2011 is to complete the integration of the new financial services businesses and roll out a new simplified operating model across the Group.

Developments

2010 was a year of repositioning the Estate Agency business ready to take advantage of organic growth opportunities and for market recovery in due course. The HEAL Business acquisition is proving to be a significant source of added shareholder value. The deal brought in net cash as well as a business that returned to profit in the second half of the year and the Group now has the second largest agency branch network in the UK (by reference to the number of branches). The St Trinity Asset Management business was also acquired as part of the HEAL Business and as a result LSL is a market leader in residential asset management in the UK. The third part of the Estate Agency business offer is financial services and the addition of Home of Choice and Pink Home Loans makes the Group one of the largest intermediary broking networks for mortgage and protection products in the country (by reference to the number of appointed representatives - source: Mortgage Strategy Network Report January 2011).

The other main development during 2010 was that the Estate Agency business began to execute a plan to drive organic growth, improving market share both in total and especially in the higher value market segments. Firstly, all branches were refurbished during the year and the full lettings and financial services offer was rolled out to the ex HEAL branches. In addition a major programme of training and recruitment has been undertaken to ensure that each branch has management and staff with the right skills to grow the business. There has also been investment in marketing and headcount to deliver higher levels of instructions and a new call centre, "The Bridge", has been built to help generate instructions for the branches.

The size of the opportunity over the next three to five years is significant. Benchmarking has shown that Your Move and Reeds Rains currently list around 50 instructions fewer per annum than the best of the competition. Furthermore, Your Move and Reeds Rains typically sell properties at around the national average house price of circa £160,000 source: RightMove January 2011). The impact on profitability of moving into higher price segments by using for example the Your Move 'Premier' or Reeds Rains 'Cream' marketing packages are substantial. Overall the size of the opportunity to be targeted is significant at around £30,000 - £50,000 profit per branch.

Early signs of progress have been very encouraging. The key performance measure is market share growth measured on a local basis both in total and for specific higher property price segments. During the second half of 2010, LSL market share increased to 5.0% compared to 4.0% in the first half of the year.  Since it began operating in early January 2011, the Bridge has made good progress delivering instructions into branches.

2011 promises to be an exciting year for the Estate Agency Division as we expect to make good progress in building an enhanced market position.

Awards 2010 & 2011:

The Estate Agency businesses, achieved the following industry awards demonstrating LSL's continued commitment to customer services:

1.         Your Move:

a.         Property Professional Awards:            Best National Estate Agency

b.         Sunday Times Estate Agency of the Year Awards:     

i.          Bronze - Best Financial Services provider joint winner - with Reeds Rains

ii.         Bronze - Best Estate Agency Franchise

c.         Sunday Times Lettings Estate Agency of the Year Awards:

            i.          Silver - Best Lettings Franchise

ii.         Silver - Best Lettings Customer Service

iii.        Silver - Best Lettings Training & Development

iv.         Bronze - Best Large Lettings Agency

v.          Bronze - Best Lettings Technology Online

d.         Estate Agent and Letting Agent of the Year Awards (ESTAs) 2010 by RICS, Home Let and Estate Agency Today:

            i.          Bronze - Best Large Estate Agency Chain

ii.         Bronze - Best Large Lettings Agency

2.         Reeds Rains:

            Sunday Times Estate Agency of the Year Awards - Bronze - Best Financial Services Provider - joint winner with Your Move.

3.         Phillip Green & Partners (a trading name of ICIEA Ltd)

            Sunday Times Estate Agency of the Year Awards:

            i.          Gold - Best Small Estate Agency South East

ii.         Silver - Best Small Estate Agency UK

4.       Pink Home Loans

          2011 Mortgage Strategy Awards - Finalist in the Best Mortgage Network Category

5.       Linear Financial Services

                2011 Mortgage Strategy Awards - Best Broker for Protection

6.         First Complete

            2011 Mortgage Strategy Awards - Finalist in the Best Mortgage Network Category

 

Regulation

First Complete, Advance Mortgage Funding and BDS Mortgage Group are all directly authorised by the FSA in relation to the sale of mortgage, pure protection and general insurance products.  During 2010, Your Move cancelled its permission and became an appointed representative of First Complete, along with Reeds Rains who ceased to be an appointed representative of Openwork. This restructuring was undertaken to simplify LSL's financial services operating model. Linear has become an Appointed Representative of Advance Mortgage Finding for mortgage and insurance business and continues to also be an appointed representative of Openwork (for investment business) and Reeds Rains has also remained an appointed representative of Letsure for the sale of rent indemnity insurance.

As a result of Linear's appointments by Openwork, LSL has a small indirect shareholding of Openwork.

Business Review - Financial Review

The key drivers of the financial performance of LSL are summarised below.

Income statement

Revenue

Revenue increased by 31% to £206.6m in the year ended 31^st December 2010 (2009: £157.7m) due to the impact of the HEAL Business acquisition and also market share gains in both Estate Agency Division and Surveying Division as mentioned in the segment review.

Operating Expenses excluding exceptional costs, amortisation and share based payment

Operating Expenses increased by 36% to £176.3m (2009: £129.9m).  This was mainly due to an increase in employee related costs due to recruitment of additional colleagues to support our organic growth and also colleagues who have joined the Group through an acquisition made during the year.  Average full time equivalent employees during the year was 3,649 (2009: 2,534).

Underlying Operating Profit

Underlying Operating Profit was £31.9m (2009: £28.3m) with the Underlying Operating Profit margin of 15.5% (2009: 17.9%).  Like-for-like Underlying Operating Margin increased from 17.9% to 19.3%. 

Exceptional Items

Exceptional profit in the year ended 31^st December 2010 amounted to £10.2m (2009: costs of £0.4m).  Exceptional profit was mainly due to negative goodwill arising on the HEAL Business acquisition as net assets of £29.8m were acquired for £1.  This exceptional profit was offset by exceptional costs of £19.6m, of which £13.8m related to the HEAL Business reorganisation undertaken to right size the cost base, £2.8m to increasing the PI provision and £2.0m to finance costs. 

Net Financial Costs

Net financial costs (excluding exceptional finance costs) amounted to £2.2m (2009: £2.2m).  The finance costs did not decrease in line with the decrease in net debt due to the existence of the interest rate swap (entered into in April and May 2009) which fixed the interest at an average of 2.93% on £25m of debt.  In view of the low level of net debt of the Group at 31^st December 2010, LSL are currently reviewing the exit options available to cancel the interest rate swap.  However, no decision has been made in this regard as at the date of approval of the financial statements.

The exceptional finance cost is £2.0m.  Of this, £1.1m relates to discontinuance of hedge accounting on interest rate swap and £0.9m relates to arrangement fees and costs relating to the extension of the banking facility to March 2014.

Taxation

The effective rate of corporation tax for the year was 4.0% (2009: 29.3%).  The effective tax for 2010 was very low due to the impact of non-taxable negative goodwill arising on the HEAL Business acquisition.  After excluding the effect of negative goodwill the effective tax rate is 23.2% (2009: 29.3%). The effective tax rate is still low due to the impact of non-taxable income on profit made on disposal of the investment in Hometrack Data Systems Limited

Adjusted Basic Earnings Per Share

The Adjusted Basic Earnings Per Share (as calculated in note 3) is 21.0p (2009: 18.1p). The Directors consider this provides a better and more consistent indicator of the Group's underlying performance.

Balance Sheet

Capital Expenditure

Total capital expenditure in the year amounted to £5.0m (2009: £0.7m). The capital expenditure predominantly comprised expenditure on refurbishment of the Estate Agency branches.

Financial Structure

As at 31^st December 2010 net debt was £4.9m (2009: £25.7m). LSL has a £75.0m revolving credit facility in place till March 2014 (2009: £75.0m) 

Cash Flow

The business is cash generative and has low capital expenditure requirements.  The Group generated net cash from operations before exceptional cost payment of £35.7m (2009: £30.8m). The improved cash generation is due principally to increased profitability and a positive movement in working capital.

Net Assets

The net assets as at 31^st December 2010 were £68.1m (2009: £45.9m).

Treasury & Risk Management

LSL has an active debt management policy and due to the cash generative nature of the business and the cash acquired on the HEAL Business acquisition, the Group's net debt position at 31st December 2010 is £4.9m (2009: £25.7m).  As mentioned under Net Financial Costs above, the Group is currently reviewing the exit options available with respect to the interest rate swaps. LSL does not hold or issue derivatives or other financial instruments for trading purposes.

International Financial Reporting Standards (IFRS)

The Financial Statements have been prepared under IFRS as adopted by the European Union. LSL commenced reporting under IFRS from 1^st January 2005.

Principal Risks & Uncertainties

The Board continually identify, evaluate and manage material risks and uncertainties which could adversely affect the business, operating results and financial condition of LSL. These risks are recorded and managed through a risk register, and the principal risks and uncertainties identified are:

§  The continued volatility and uncertainty of the UK housing market. In particular, transaction volumes (both house purchase and remortgage), house prices and the availability of credit which will adversely affect the profitability and cash flow of all our key brands and businesses.

§  Loss of key surveying or corporate services clients or contracts at their renewal date or significant reduction in volumes, either as a result of adverse market conditions, market consolidation, competition or inadequate service delivery.

§  Liability for inaccurate professional services advice to clients (e.g. inaccurate valuations) together with the risk that LSL fails to maintain appropriate risk management arrangements.

§  Failure to effectively deliver and manage the integration and expansion of newly acquired or created businesses and initiatives into the Group.

§  Being subjected to investigations or enforcement action (including any fines) by a regulator resulting in the loss of any licences or permissions necessary for the performance of the Group business. The reputation and profitability of LSL could be adversely affected by the actions of one or a limited number of employees or franchisees.

§  Failure or interruptions of information technology services on which the Group is reliant for operationalperformance and financial information.

§ The development of alternative products and services in competition with traditional estate agency and surveying services - for example web based estate agency or Automated Valuation Models in relation to surveying.  

§  Changes in legislation or regulation (e.g. Mortgage Market Review) or Government policy may impact on business results or the UK housing market in general.

Further information relating to the management of these risks and uncertainties is set out in the Corporate Governance Review (Internal Controls) of the Annual Report.

Relationships

The Corporate Social Responsibility (CSR) statement in the Annual Report details the arrangements for all Group companies in relation to: Employment (including Equal Opportunities); Health, Safety & Welfare, Environmental and Social and Community Interests (including social and ethical issues).

Other than our shareholders, the Group's performance and value are influenced by other stakeholders, principally our customers, suppliers, employees, Government and our strategic partners. The Group's approach with all these parties is founded on the principles of open and honest dialogue based on a mutual understanding of needs and objectives. For example:

§  Lenders' relationships are managed via dedicated account managers.

§  Employees are managed and consulted both on an individual basis and via representative groups with LSL recognising Unite as an employee representative body.

§  Group companies participate in relevant trade associations and industry groups, such as RICS, the Association of Mortgage Intermediaries, the National Association of Estate Agents, the Association of Residential Lettings Agents, The National Federation of Property Professionals and The Property Ombudsman, because these give us genuine access to customer views and decision makers in government and other regulatory bodies.

§  Further, the Group aims to build partnerships with the communities in which it operates and to offer support in addition to providing employment and training, using local services and suppliers where possible and paying taxes.

Environmental Matters

LSL recognises that the environment has an intrinsic value, central to the quality of life and underpins economic development.  LSL understands that its stakeholders are interested in how LSL manages its impact on the environment and how it is performing. Further, stakeholders may also provide LSL with views and opinions which can strengthen LSL's approach to environmental management. Accordingly, LSL is committed to communicating on environmental matters with all interested parties and to report on progress at regular intervals via the website (www.lslps.co.uk). Appropriate guidance and training is also provided to all employees to ensure they have an awareness of their impact on the environment and the role that they play in managing the impact.

Group Income Statement

for the year ended 31 December 2010

		2010	2009
	Note	£'000	£'000
Revenue	2	206,607	157,703
Operating expenses:
Employee and subcontractor costs		(115,763)	(80,100)
Establishment costs		(14,891)	(10,991)
Depreciation on property, plant  and equipment		(1,748)	(1,407)
Other		(43,960)	(37,374)
		(176,362)	(129,872)
Rental income		1,690	488
Group operating profit before exceptional costs, amortisation and share-based payments	2	31,935	28,319
Share-based payments		(298)	(532)
Amortisation of intangible assets		(8,077)	(8,635)
Exceptional profit/(loss)	4	12,189	(400)
Gain on sale of available-for-sale financial assets		3,923	-
Group operating profit		39,672	18,752
Dividend income		516	24
Finance income		5	54
Finance costs		(2,228)	(2,221)
Exceptional finance costs	4	(2,007)	-
Net financial costs		(3,714)	(2,143)
Profit before tax		35,958	16,609
Taxation	6
- related to exceptional costs		4,911	112
- others		(6,334)	(4,974)
		(1,423)	(4,862)
Profit for the year		34,535	11,747
Attributable to     - Owners of the parent     - Non-controlling interest		34,500 35	11,747 -
Earnings per share expressed in pence per share:
Basic	3	33.6	11.4
Diluted	3	33.4	11.4

Group Statement of Comprehensive Income

for the year ended 31 December 2010

		2010	2009
	Note	£'000	£'000
Profit for the year		34,535	11,747
Recycling of unrealised gains reserve		(3,900)	-
Net deficit on cash flow hedge		-	(87)
Recycling of cash flow hedge		87	-
Income tax effect		(24)	24
		63	(63)
Other comprehensive loss for the year, net of tax		(3,837)	(63)
Total comprehensive income for the year, net of tax		30,698	11,684
Attributable to     - Owners of the parent     - Non-controlling interest		30,663 35	11,684 -

Group Balance Sheet

as at 31 December 2010

		2010	2009
	Note	£'000	£'000
Non-current assets
Goodwill	8	74,742	66,472
Other intangible assets		17,613	22,895
Property, plant and equipment		13,850	2,077
Financial assets		1,097	4,052
Deferred tax asset		-	621
Total non-current assets		107,302	96,117
Current assets
Trade and other receivables		25,136	20,052
Cash and cash equivalents	7	338	858
Total current assets		25,474	20,910
Total assets		132,776	117,027
Current liabilities
Financial liabilities	7	(92)	(993)
Trade and other payables		(45,085)	(33,209)
Current tax liabilities		(258)	(2,183)
Provisions for liabilities and charges		(584)	(748)
Total current liabilities		(46,019)	(37,133)
Non-current liabilities
Financial liabilities	7	(5,155)	(25,573)
Trade and other payables		-	(27)
Deferred tax liability		(2,183)	-
Provisions for liabilities and charges		(11,309)	(8,437)
Total non-current liabilities		(18,647)	(34,037)
Net Assets		68,110	45,857
Equity
Share capital		208	208
Share premium account		5,629	5,629
Share-based payment reserve		1,014	2,259
Treasury shares		(3,139)	(2,805)
Unrealised gain reserve		-	3,900
Hedging reserve		-	(63)
Retained earnings		64,363	36,729
Equity attributable to owners of parent		68,075	45,857
Non-controlling interests		35	-
Total equity		68,110	45,857

Group Cash Flow Statement

for the year ended 31 December 2010

			31 December 2010		31 December 2009
		Note	£'000	£'000	£'000	£'000
Cash generated from operating activities
Profit before tax				35,958		16,609
Adjustments to reconcile profit before tax to net cash inflows from operating activities
Negative goodwill		4	(29,825)		-
Exceptional operating costs (excluding negative goodwill and share-based payments)			17,636		358
Gain on sale of available-for-sale financial asset			(3,923)		-
Amortisation of intangible assets			8,077		8,635
Dividend income			(516)		(24)
Finance income			(5)		(54)
Finance costs			2,228		2,221
Exceptional finance costs			2,007		-
Share-based payments			298		574
				(4,023)		11,710
Group operating profit before amortisation and share-based payments				31,935		28,319
Depreciation			1,748		1,407
Gain on sale of property, plant and equipment			(17)		6
				1,731		1,413
Decrease/(increase) in trade and other receivables			4,679		(6,128)
(Decrease)/increase in trade and other payables and provisions			(2,675)		7,233
				2,004		1,105
Cash generated from operations pre exceptional costs				35,670		30,837
Exceptional operating costs paid			(17,636)		(232)
Exceptional finance costs paid			(924)	(18,560)	-	(232)
Cash generated from operations				17,110		30,605
Interest paid			(1,957)		(2,397)
Tax paid			(3,485)		(3,578)
				(5,442)		(5,975)
Net cash generated from operating activities				11,668		24,630
Cash flows from investing activities
Cash acquired on purchase of subsidiary undertaking			25,946		-
Purchase of subsidiary undertakings			(3,742)		(150)
Dividends received			516		54
Interest received			5		24
Purchase of property, plant and Equipment			(4,982)		(662)
Proceeds from sale of property,  plant and equipment			738		13
Purchase of available-for-sale financial assets			(195)
Proceeds from sale of available-for-sale financial asset			1,961		-
Net cash generated from/(expended on) investing activities				20,247		(721)

Group Cash Flow Statement (continued)

for the year ended 31 December 2010

			31 December 2010		31 December 2009
	Note		£'000	£'000		£'000	£'000
Cash flows from financing activities
Repayment of loans			(23,692)			(23,698)
Purchase of treasury shares (net of consideration received on reissue of treasury shares)			(597)			-
Dividends paid			(8,146)			-
Net cash used in financing activities				(32,435)			(23,698)
Net (decrease)/increase in cash and cash  equivalents				(520)			211
Cash and cash equivalents at the beginning of the year				858			647
Cash and cash equivalents at the end of the year				338			858

Group Statement of changes in equity

for the year ended 31 December 2010

Year ended 31 December 2010

	Share capital	Share premium account	Share- based payment reserve	Treasury shares	Unrealised gains reserve	Hedging reserve	Retained earnings	Total equity	Minority interest	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 January 2010	208	5,629	2,259	(2,805)	3,900	(63)	36,729	45,857	-	45,857
Profit for the year	-	-	-	-	-	-	34,500	34,500	35	34,535
Other comprehensive income	-	-	-	-	(3,900)	63	-	(3,837)	-	(3,837)
Total comprehensive income	208	5,629	2,259	(2,805)	-	-	71,229	76,520	35	76,555
Purchase of treasury shares	-	-	-	(1,007)	-	-	-	(1,007)	-	(1,007)
Reissuance of treasury shares	-	-	(1,543)	673	-	-	1,280	410	-	410
Share-based payments	-	-	298	-	-	-		298	-	298
Dividend payment	-	-	-	-	-	-	(8,146)	(8,146)	-	(8,146)
At 31 December 2010	208	5,629	1,014	(3,139)	-	-	64,363	68,075	35	68,110

Year ended 31 December 2009

	Share capital	Share premium account	Share- based payment reserve	Investment in treasury shares	Unrealised gains reserve	Hedging reserve	Retained earnings	Total equity
	£'000	£'000	£'000	£'000	£'000		£'000	£'000
At 1 January 2009	208	5,629	531	(2,934)	3,900	-	26,395	33,729
Change in accounting policy	-	-	1,413	-	-	-	(1,413)	-
Restated balance	208	5,629	1,944	(2,934)	3,900	-	24,982	33,729
Profit for the year	-	-	-	-	-	-	11,747	11,747
Other  comprehensive loss	-	-	-	-	-	(63)	-	(63)
Total comprehensive income	-	-	-	-	-	(63)	11,747	11,684
Reissuance of treasury shares	-	-	(109)	129	-	-	-	20
Share-based payments	-	-	424	-	-	-	-	424
At 31 December 2009	208	5,629	2,259	(2,805)	3,900	(63)	36,729	45,857

Notes to the Preliminary Results

The financial information in this preliminary announcement does not constitute LSL's statutory financial statements for the year ended 31 December 2010 but has been extracted from the financial statements, and as such, does not contain all information required to be disclosed in the financial statements prepared in accordance with IFRS.

Statutory financial statements for this year will be filed following the Annual General Meeting. The auditors have reported on these financial statements. Their report was unqualified and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006

1      Basis of preparation

The accounting policies adopted are consistent with those of the previous financial year except for the adoption of new Standards and Interpretations as of 1 January 2010 which are applicable to the Group, as noted below:

IFRS 3 (revised) Business Combinations

The amendment to IFRS 3 changes the treatment of acquisition-related costs and contingent consideration relating to acquisitions after 1 January 2010. The standard also changes the treatment of non-controlling interests (formerly minority interests) with an option to recognise these at full fair value as at the acquisition date and a requirement for previously held non-controlling interests to be fair valued as at the date control is obtained, with gains and losses recognised in the income statement.

Some of the key features of the revised IFRS3 include:

-           Acquisition-related costs to be expensed and not included in the purchase price;

-           Contingent consideration to be recognised at fair value on the acquisition date (with subsequent changes recognised in the income statement and not as a change to goodwill); and

-           Changes to the accounting treatment of step acquisitions.

Revised IFRS 3 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009.

The Group treated theacquisition-related costs in respect of acquisitions made in the year ended 31 December 2010 as exceptional costs and these were expensed to the income statement.

IAS 27R Consolidated and Separate Financial Statements

The revision to this Standard requires the Group to attribute losses to non-controlling interests even if this results in the non-controlling interest having a deficit balance. This change is applicable prospectively and the controlling shareholder will not be able to recover any past losses absorbed under the old rules.

The revision of the Standard had no material effect on the results for the year ended 31 December 2010.

The amendments to the following standards below did not have any impact on the accounting policies, financial position or performance of the Group:

Ø IAS 39            Financial Instruments: Recognition and Measurement - Eligible hedged items

Ø IFRIC 12        Service Concession Arrangements

Ø IFRIC 15        Agreements for the Construction of Real Estate

Ø IFRIC 17        Distribution of Non-cash Assets to Owners

Ø IFRIC 18        Transfers of Assets from Customers

Ø Improvements to IFRSs (issued 2009)

2. Segment analysis of revenue and operating profit

For management purposes, the Group is organised into business units based on their products and services and has two reportable operating segments as follows:

·     The estate agency and related services provides services related to the sale and letting of housing via a network of high street branches. In addition, it provides repossession asset management services to a range of lenders. It also sells mortgages for a number of lenders and sells life assurance and critical illness policies, etc for a number of insurance companies via the estate agency branch and Linear network.  It also operates as a mortgage and insurance distribution company providing products and services to financial intermediaries.

·     The surveying and valuation segment provides a professional survey service of domestic properties to various lending corporations and individual customers.

No operating segments have been aggregated to form the above reported operating segments.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the group financial statements. Head office costs, group financing (including finance costs and finance incomes) and income taxes are managed on a group basis and are not allocated to operating segments.

The geographic segment has not been reported separately as all the revenue and expense arises in the United Kingdom and all assets are situated in the United Kingdom.

Operating segments

The following table presents revenue and profit information regarding the Group's operating segments for the financial year ended 31 December 2010 and financial year ended 31 December 2009 respectively.

Year ended 31 December 2010

	Estate agency and related  services £'000	Surveying and valuation services £'000	Unallocated £'000	Total £'000
Income statement  information
Segmental revenue	125,672	80,934	-	206,606
Segmental result:
- before exceptional costs,         amortisation and share-based           payments	7,236	27,301	(2,602)	31,935
- after exceptional costs,
amortisation and share-based           payments	20,447	22,139	(2,914)	39,672
Dividend income				516
Finance income				5
Finance costs				(2,228)
Exceptional finance costs				(2,007)
Profit before tax				35,958
Taxation				(1,423)
Profit for the year				34,535

2. Segment analysis of revenue and operating profit (continued)

Year ended 31 December 2009	Estate agency and related services £'000	Surveying and valuation services £'000	Unallocated £'000	Total £'000
Income statement  information
Segmental revenue	87,655	70,048	-	157,703
Segmental result:
- before exceptional costs, amortisation
and share-based payments	6,705	23,554	(1,940)	28,319
- after exceptional costs, amortisation
and share-based payments	4,910	15,782	(1,940)	18,752
Dividend income				24
Finance income				54
Finance costs				(2,221)
Profit before tax				16,609
Taxation				(4,862)
Profit for the year				11,747

3. Earnings per share

Basic earnings/(loss) per share amounts are calculated by dividing net profit/(loss) for the period attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period.

Diluted earnings/(loss) per share amounts are calculated by dividing the net profit/(loss) attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

	Profit after tax £'000	Weighted average number of shares	2010 Per share amount Pence	Profit after tax £'000	Weighted average number of shares	2009 Per share amount  Pence
Basic EPS	34,500	102,777,043	33.6	11,747	102,818,875	11.4
Effect of dilutive share options	-	418,857	-	-	360,830	-
Diluted EPS	34,500	103,195,900	33.4	11,747	103,179,705	11.4

There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements.

3. Earnings per share (continued)

Adjusted basic and diluted EPS

The Directors consider that the adjusted earnings shown below give a better and more consistent indication of the Group's underlying performance:

	2010 £'000	2009 £'000
Group operating profit before exceptional costs, share-based payments and amortisation (excluding minority interest)	31,900	28,319
Net finance costs (excluding exceptional costs)	(1,707)	(2,143)
Normalised taxation	(8,654)	(7,541)
Adjusted Profit after tax1 before exceptional costs, share-based payments and amortisation	21,539	18,635

¹ This represents adjusted profit after tax attributable to equity holders of the parent. Tax has been adjusted to exclude the prior year tax adjustments, and the tax impact of exceptional items, amortisation and share-based payments.

Adjusted basic and diluted EPS

	Adjusted profit after tax2 £'000	Weighted average number of shares	2010 Per share amount Pence	Adjusted profit after tax1 £'000	Weighted average number of shares	2009 Per share amount Pence
Adjusted Basic EPS	21,539	102,777,043	21.0	18,635	102,818,875	18.1
Effect of dilutive share options	-	418,857	-	-	360,830	-
Adjusted Diluted EPS	21,539	103,195,900	20.9	18,635	103,179,705	18.1

² This represents adjusted profit after tax attributable to equity holders of the parent

4. Exceptional profit and other exceptional costs

	2010	2009
	£'000	£'000
Exceptional profit arising through acquisition of HEAL Business:
Negative goodwill arising on acquisition	29,825	-
Employee costs
Redundancy costs due to branch closures and business reorganisation of the acquisition
	(7,730)	-
Other
Acquisition and re-branding costs	(6,125)	-
Exceptional profit arising through acquisition of HEAL Business	15,970	-
Other exceptional costs:
Employee costs
Redundancy costs due to branch closures and business reorganisation	(756)	(232)
Accelerated share-based payments	-	(42)
Other
Impairment of goodwill	-	(126)
Others	(133)	-
Acquisition related costs	(96)	-
Provision for professional indemnity claims	(2,796)	-
Total operating exceptional profit/(costs)	12,189	(400)
Finance costs
Banking and legal fees incurred for extension of facility	(924)	-
Interest rate swap (see note below)	(1,083)	-
	(2,007)	-
Net exceptional profit/ (cost)	10,182	(400)

During April and May 2009, the Group entered into three fixed interest rate swap arrangements with their banker for a total principal amount of £25m to hedge against potential increase in future LIBOR payable on the Revolving Credit Facility (RCF).  In 2009 this hedge was treated as cash flow hedge and accounted for under hedge accounting. 

The terms of the interest rate swap agreements are now not expected to match the terms of the commitments due to the reduction in the RCF utilisation during 2010. The cash flow hedge of the expected future interest payment was assessed to be ineffective and as at 31 December 2010 an unrealised loss of £ 1,083,000 relating to the hedging instrument that arose in the period is included in the income statement as exceptional finance costs.

During 2009, property-careers.com Limited ceased trading and an impairment review was conducted in accordance with the accounting policy. As a result of this impairment review, the entire value of goodwill in intangible assets of £126,000 was impaired. In addition, some employee costs were incurred due to the cessation of trading of this operation.

5.     Dividends paid and proposed

	2010	2009
	£'000	£'000
Declared and paid during the year:
Equity dividends on ordinary shares:
2009 full year: 5.4 pence	5,567	-
2010 Interim: 2.5 pence	2,579	-
	8,146	-
Dividends on ordinary shares proposed (not recognised as a liability as at 31 December):
Equity dividends on ordinary shares:
Dividend: 5.9 pence per share (2009 - 5.4 pence)	6,064	5,555

6.     Taxation

The major components of income tax (credit)/charge in the group income statements are:

		2010	2009
		£'000	£'000
UK corporation tax	- current year	1,280	5,615
	- adjustment in respect of prior years	281	401
		1,561	6,016
Deferred tax:
Origination and reversal of temporary differences		(966)	(603)
Impact of rate change on deferred tax		(80)
Adjustment in respect of prior year		908	(551)
Total deferred tax		(138)	(1,154)
Total tax charge in the income statement		1,423	4,862

Income tax credited directly to equity is £24,000 (2009 - charged £24,000) which relates to deferred tax on the net loss on the cash flow hedge.

On 22 June 2010 the UK government announced proposals to reduce the main rate of corporation tax from 28% to 24% over four years with effect from 1 April 2011.  As of 31 December 2010 only the reduction to 27% has been enacted.  In addition changes to the capital allowances regime were proposed including a reduction in the rate of capital allowances on plant and machinery additions form 20% to 18% with effect from 1 April 2012.  If these proposals had been substantially enacted, the deferred tax liability at 31 December 2010 would have reduced by £217,000.

6.     Taxation (continued)

Factors affecting tax charge for the year

The tax assessed in the profit and loss account is lower (2009 - higher) than the standard UK corporation tax rate, because of the following factors:

	2010	2009
	£'000	£'000
Profit on ordinary activities before tax	35,958	16,609
Tax charge on ordinary activities multiplied by rate of corporation tax rate in the UK of 28% (2009 - 28%)	10,068	4,651
Non taxable negative goodwill on acquisition	(8,351)	-
Non taxable income	(145)	(26)
Non taxable profit on disposal of available for sale financial asset	(1,098)	-
Benefit of deferred tax asset not previously recognised	(998)	-
Disallowable expenses	796	387
Impact of rate change on deferred tax	(80)	-
Others	42	-
	234	5,012
Prior period adjustments - current tax	281	401
Prior period adjustment - deferred tax	908	(551)
Total taxation charge	1,423	4,862

7.     Analysis of net debt

	2010	2009
	£'000	£'000
Interest bearing loans and borrowings
-       Current	92	993
-       Non-current	5,155	25,573
	5,247	26,566
Less: cash and short-term deposits	(338)	(858)
Net debt at the end of the year	4,909	25,708

During the year, the Group has repaid £23.6m (2009 - repaid £22.7m) of the revolving credit facility. The utilisation of this revolving credit facility may vary each month as long as this does not exceed the maximum £75m facility. The banking facility was renewed for a period till March 2014.  The revolving credit facility is repayable when funds permit.

8.     Acquisitions during the year

Year ended 31 December 2010

The Group acquired the following businesses during the year:

a.     Halifax Estate Agencies Limited

On 15 January 2010, the Group completed the acquisition of the entire share capital of Halifax Estate Agencies Limited (HEAL) for the consideration of £1 (one pound).  The HEAL network, comprising 218 estate agency branches, were absorbed into the main brands within LSL, namely Your Move, Reeds Rains and Intercounty. The acquisition also brought HEAL's asset management business into the LSL Group.

The fair value of the identifiable assets and liabilities of HEAL as at the date of acquisition were:

	Fair value recognised on acquisition
	£'000
Customer relationships	2,500
Property, plant and equipment	8,928
Financial assets (investments)	750
Trade and other receivables	5,623
Cash and cash equivalents	25,946
Trade and other payables	(10,816)
Deferred tax liabilities	(3,106)
Total identifiable net assets acquired	29,825
Purchase consideration	-
Negative goodwill	(29,825)

 

Analysis of cash flow on acquisition	£'000
Transaction costs (including rebranding) (included in cash flows from operating activities)	(6,125)
Net cash acquired with the subsidiary (included in cash flows from investing activities)	25,946
Net cash flow on acquisition	19,821

Transaction costs (including rebranding costs) have been expensed and are included under exceptional costs (see note 7).

From the date of acquisition to 31 December 2010, HEAL assets have contributed to £24.2m of revenue and £3.2m loss before tax of the Group.  If the combination had taken place at the beginning of the year, the consolidated group operating profit (before exceptional costs, amortisation and share-based payments) would have been lower by £1.1m and revenue would have been higher by £0.8m.

b.     Home of Choice and Advance Mortgage Funding Limited

On 7 May 2010, the Group completed the acquisition of the trade and assets of Home of Choice Limited (HoC) from administrators for a total consideration of £0.4m.  HoC is a multi-tied specialist mortgage network provider to approximately 500 self employed mortgage advisers with extensive financial services expertise and knowledge of the mortgage market.  Subsequent to acquisition, the trade and assets of Home of Choice were integrated into First Complete Limited.

On 1 December 2010, the Group completed the acquisition of 100% of the issued capital of Advance Mortgage Funding Limited (AMF) and its subsidiary BDS Mortgage Group Limited (BDS) (together trading as Pink Home Loans).  AMF operates as a mortgage and insurance distribution company providing products and services to financial intermediaries, while BDS operates as a mortgage and insurance network and packager.

8.  Acquisitions during the year (continued)

(b) Home of Choice and Advance Mortgage Funding Limited (continued)

The provisional fair value of the identifiable assets and liabilities of HoC and Pink Home Loans as at the dates of acquisition were:

	Provisional fair value recognised on acquisition
	£'000
Intangible assets (brand)	180
Property, plant and equipment	112
Deferred tax asset	206
Trade and other receivables	1,931
Trade and other payables	(5,631)
Financial liabilities	(750)
Total identifiable net liabilities acquired	(3,952)
Purchase consideration	2,400
Goodwill arising on acquisition	6,352
Purchase consideration discharged by:
Cash	1,990
Deferred consideration	410
Total	2,400

The goodwill of £4,146,000 for Home of Choice and £2,386,000 for Pink Home Loans comprises certain intangible assets that cannot be individually separated and reliably measured from the acquiree due to their nature.  These items include the expected value of synergies, self employed mortgage advisors, appointed representative network and an assembled workforce.  Goodwill is allocated entirely to Estate Agency and related activities segment.  Goodwill relating to Home of Choice is expected to be deductible for income tax purposes as this is a trade and asset acquisition and this does not represent goodwill arising on consolidation.

From the date of acquisition to 31 December 2010, Home of Choice and Pink Home Loans have together contributed to £2,842,000 of revenue and £12,000 to profit after tax of the Group.  If the combination had taken place at the beginning of the year, the consolidated group operating profit (before exceptional costs, amortisation and share-based payments) would have been lower by £954,000 and revenue would have been higher by £4,653,000.

c.     Other acquisitions

During 2010 the Group also acquired: 

·      the entire share capital of Templeton LPA Limited (Templeton) on 8 February 2010 for a total consideration of £454,000 of which £362,000 was paid in cash and a further £92,000 is deferred consideration payable in January 2011.

·      the assets of the estate agency, land and new home and lettings business of Goodfellows Group plc (Goodfellows) on 28 May 2010 for a cash consideration of £1,030,000.  Goodwill on this is included as part of LSLi Limited.

·      Lettings business of Phillip Green Estate Agents for  a cash consideration of £360,000 in June 2010 (referred to as PG Lettings below). Goodwill on this is included as part of LSLi Limited.

8.  Acquisitions during the year (continued)

(c) Other acquisitions (continued)

The combined fair values of the identifiable assets and liabilities as at the date of acquisition of the above three acquisitions were:

	£000
Intangible assets (brand)	115
Property, plant and equipment	220
Trade and other receivables	246
Trade and other payables	(283)
Deferred tax liability	(16)
Total identifiable net assets acquired	282
Purchase consideration	1,844
Goodwill arising on acquisition	1,562
Purchase consideration discharged by:
Cash	1,752
Deferred consideration	92
Total	1,844
Analysis of cash flow on acquisition
Transaction costs (included in cash flows from operating activities)	(55)
Cash consideration	(1,752)
	(1,807)

From the dates of acquisition to 31 December 2010, Templeton, Goodfellows and PG Lettings have together contributed to £3,120,000 of revenue and £182,000 to profit after tax of the Group.  If the combination had taken place at the beginning of the year, the consolidated group operating profit (before exceptional costs, amortisation and share-based payments) would have been higher by £165,000 and revenue would have been higher by £1,326,000.

9.   Annual General Meeting (AGM)

The AGM will be held at the London offices of LSL, 1 Sun Street, London EC2A 2EP on 20th April 2011 starting at 2.30pm.

 

END

 

 

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