Safestyle UK PLC

Final Results for Financial Year 2020

RNS Number : 4132T
Safestyle UK PLC
25 March 2021
 

25 March 2021

 

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018.  Upon the publication of this announcement via the Regulatory Information Service, this inside information is now considered to be in the public domain.

 

Safestyle UK plc

 

("Safestyle" or the "Group")

 

Final Results for Financial Year 2020

 

Strong recovery and return to profitability in H2

 

2021 financial performance expected to be significantly ahead of market expectations

 

Safestyle UK plc (AIM: SFE), the leading UK-focused retailer and manufacturer of PVCu replacement windows and doors for the homeowner market, today announces its final results for financial year 20201.

 

Financial and operational highlights

 

 

 FY 2020

FY 2019

 

£m

£m

% change

Revenue

113.2

126.2

(10.3)%

Gross profit

28.5

31.9

(10.8)%

Gross margin %2

25.1%

25.3%

(13)bps

Underlying (loss) before taxation3

(4.8)

(1.5)

(213.4)%

Non-underlying items4

(1.4)

(2.3)

39.5%

(Loss) before taxation

(6.2)

(3.8)

(60.6)%

EPS - Basic

(4.3p)

(4.0p)

(7.5)%

Net cash5

7.6

0.4

 

 

1 The financial statements are presented for the year ended on the closest Sunday to the end of December.  This date was 3 January 2021 for the current reporting year and 29 December 2019 for the prior year.  All references made throughout these accounts for the financial year 2020 are for the period 30 December 2019 to 3 January 2021 and references to the financial year 2019 are for the period 31 December 2018 to 29 December 2019.  

2 Gross margin % is defined as gross profit divided by revenue.

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

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

5 Net cash is cash and cash equivalents less borrowings.

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

 

Operational

 

· Staff, consumer and business protection was paramount through 2020 with COVID-safe practices in place across our sites and in home.

·     Growth in order intake exceeded the 15% growth in revenue in H2 and generated a strong order book at year end, 83% larger than 2019.

·     This large order book has supported sustained operations during the January 2021 cessation of in home sales & door  canvass.

·     Post H1 lockdown, operations were resilient with no site closures and continued manufacturing and installation activity thoughout H2, into Q1 2021.

·     Capacity increases in H2 were enabled by increases in headcount across survey, manufacturing, customer services and installations.

· Market share (as measured by FENSA) rose to 9.2% from 8.4% in 2019.

· Good progress made on operational KPIs, with average price per frame up 3.8% to £704 and average order value up by 4.1% to £3,474, with the trend continuing in Q1 2021.

·     Continued progress on the Group's sustainability programme with CO2 emissions per frame installed reducing by  6.1%.

·   Tangible delivery on the Group's strategic priorities despite the challenging backdrop, including modernising the Safestyle brand, improving the national sales and depot network and sustaining progress in compliance. 

 

Financial

 

·     Progressive increase in revenue comparisons in H2 with Q3 being 9% ahead of prior year and Q4 being 20% ahead of prior year.

· The impact of cessation of operations in H1 resulted in a £(6.0)m loss across the March to May period with underlying profit before taxation achieved of £0.3m in H2 after material investment in order book.

·     The Group received £1.8m from the Government's Coronavirus Job Retention Scheme ('CJRS') which partly reduced the first half loss.

· The business undertook a Placing of New Shares in April which raised £8.2m net of directly attributable costs of £0.3m to strengthen the Group's balance sheet which allowed a strong restart of operations in late May and a strong year end position, with year-end net cash of £7.6m (2019: £0.4m). 

 

Outlook

 

· 2021 started with immediate disruption to sales as in-home selling and canvass operations were halted.

· Restrictions have now eased and the Group is seeing a good recovery of sales momentum from 2020. 

· Despite the impact the lockdown has had on order intake thus far in 2021, management actions and investment in the order book in 2020 have underpinned a good level of manufacturing and installations activity in the first quarter of 2021.  This has minimised further disruption to our customers and many areas of the business.

· Revenue has grown by double digits in Q1 2021 and levels of profitability have increased versus 2020 exit rate.

· The order book continues to remain ahead of the prior year although it has been run down in the first quarter and converted into profit and cash.

· In summary, the Group has had a good start to 2021 and will achieve the highest level of profitability in Q1 for any quarter since 2017 while also maintaining a healthy installation pipeline. 

· The UK Government has set out its roadmap for cessation of all restrictions by the end of June 2021 and based on this plan, the Board expects there to be no further significant interruption to our operations.

· Despite the uncertain operating environment, the Board expects to see good levels of demand for its products and is recapturing the order intake momentum achieved in the second half of 2020 now restrictions on sales activities have been lifted.

· As a result of this encouraging start to the year, the Board expects 2021 financial performance to be significantly ahead of market expectations.

· The Board also expects to revisit its dividend policy later in 2021 assuming that the Group has returned to a consistent delivery of profitability.

 

Commenting on the results, Mike Gallacher, CEO said:

 

"I am extremely proud of the way that our colleagues responded to what was a year with unparalleled challenges, at all times keeping a constant focus on health and safety while remaining committed to delivering for our customers.

 

Having taken decisive action to support the business during the period, we saw a strong recovery in the second half of the year with good order intake growth and a step up in operational capacity, as customer demand remained robust. By the end of 2020, our order book was 83% larger than 2019's closing position, which has given us a strong platform to maintain momentum at the beginning of the current financial year in spite of the external disruption.

 

Notwithstanding the uncertain operating environment, as a result of the strategic and operational progress we have made along with our strong order book, cash position and market leading brand, the Board now expects the Group's 2021 financial performance to be significantly ahead of market expectations.

 

Our intention remains as before the crisis; to build long term value for shareholders by consolidating our position as the UK's number 1 choice for replacement windows and doors."

 

A conference call for analysts and investors for the 2020 Final Results will be held today at 9.30 am. If you would like to join, please contact FTI Consulting at [email protected] or using the details below in order to access the registration details.

 

Enquiries:

 

Safestyle UK plc

Mike Gallacher, Chief Executive Officer

Rob Neale, Chief Financial Officer

 

 

via FTI Consulting

Zeus Capital Limited (Nominated Adviser & Joint Broker)

Dan Bate / D aniel Harris / Dominic King

 

Tel: 0203 829 5000

Liberum Capital Limited (Joint Broker)

Neil Patel / Jamie Richards

 

Tel: 0203 100 2100

FTI Consulting (Financial PR)

Alex Beagley / James Styles / Sam Macpherson

 

Tel: 0203 727 1000

 

 

About Safestyle UK plc

 

The Group is the leading retailer and manufacturer of PVCu replacement windows and doors to the UK homeowner market.  For more information please visit www.safestyleukplc.co.uk or www.safestyle-windows.co.uk.

 

CEO's Statement

 

2020 has been an extraordinary trading year, with huge levels of disruption and sustained uncertainty.  Despite this, the business has emerged strongly, building momentum in H2 and making progress on our core strategic priorities.  I am immensely proud of the response of our staff who showed enormous flexibility and resilience in responding to the sustained challenges the business faced during 2020.

 

The business started the year with good growth sustained from Q4 2019 but our priorities shifted rapidly in Q1 to a focus on protecting our staff, customers and the business through the pandemic.  Our results in H1 were impacted significantly by the cessation of business operations between March and the end of May.  However, as a result of the support of shareholders and our lenders in April, the business was able to recapture its strong momentum in H2, delivering double-digit revenue growth of 15% while also growing the order book by 83%.  The strong order book has allowed us to entirely mitigate the disruption caused by the interruption in sales and canvass operations during Q1 2021.

 

COVID-19 response

 

The business began contingency planning in February and this ensured a rapid cessation of operations on 23 March, in line with government guidance.  The hibernation of the business at that point encompassed canvassing, in-home sales, survey, processing, manufacturing and installations.  We retained a small remote selling team together with a skeleton customer service function.  This enabled us to minimise our cash outflow during this period of uncertainty.

 

The support of shareholders and our lenders during April was critical given the business was still recovering financially from 2018.  The funds provided allowed the business to emerge strongly from the first lockdown in May and navigate the further disruption arising from the second lockdown in November.

 

Within the business we developed COVID-safe practices that allowed our offices and factories to operate without interruption from May, with key staff split into socially distanced bubbles and extensive use of remote working.  Staff operating in customers' homes were subject to new working practices, with the mandatory use of face masks and other personal hygiene measures.  Again, this approach enabled us to sustain our business operations through H2.

 

The COVID-safe measures taken in 2020 carried cost and inevitably drove a level of inefficiency but were successful in allowing us to operate commercially throughout H2, while also protecting our staff and maintaining the confidence of our customers.

 

Generating momentum through the turbulence - H2 performance

 

Furnished with the support of shareholders, the phased restart was rapid and we quickly found that consumer demand was strong.  The strength of the market reflected the multiple restrictions on other forms of consumer spending and was seen across the wider Repair, Maintenance and Improvement (RMI) sector.

 

In response to this growth we invested in expanding our capacity across survey, processing, manufacturing and installations.  The resulting capacity increase lagged the growth in sales but delivered revenue growth of 15% in H2.  This meant our order book grew by 83% versus 2019 as we exited the year, setting us up for a strong start to 2021.

 

During H2 we also made significant progress in driving margin, with reduced complexity, reduced finance subsidy costs and enhanced management of discounting, all of which contributed to a 3.8% year on year improvement in average frame price.  This partially offset the financial impact of building the order book in H2 and it is contributing to the improved financial performance for Q1 2021. 

 

Progress on strategic priorities

 

Despite the challenges of 2020, I am pleased that we were able to make progress against our longer term strategic agenda with some critical milestones achieved.

 

Improving our national sales and depot network : Q1 saw the arrival of our new Commercial Director Gary Pickering and the recruitment of a new regional sales leadership team during H1.  These appointments have enabled an acceleration in the transformation of our sales and canvass functions, supported by sophisticated and transparent management information.

 

In Q4 we were also able to launch our new training programme for our self-employed branch managers, an initiative that will continue in 2021 as all managers will be required to complete the programme.  This is the first structured national training programme of its sort at Safestyle and it is supported by clarified responsibilities and a new pay structure aligned to business results.

 

Concurrently our installations network embarked on a parallel programme, again establishing a new leadership team and updating our national depot network through a series of closures and openings across the UK.

 

Sustaining momentum in compliance and customer service : While COVID safety was our prime focus in 2020, we completed a number of key actions that further developed our business compliance.  These included the development of our new canvass app, which now enables tracing of all sales leads, and the recruitment of a new Data Compliance Manager to embed and audit our practices.

 

The progress made on improving customer service was hampered during 2020 as we sought to mitigate the impact of significant supply disruption during Q3.  This was caused by a combination of restart challenges with two key suppliers, industry-wide raw material constraints and global shipping disruption.  These challenges were not unique to Safestyle, but they demonstrated the difficulty of recovering from this type of issue and the importance of maintaining a smooth and robust supply chain.

 

Modernising our value brand : We progressed two elements during 2020; brand development and establishing a digital competitive advantage.  Our appointment of 'Journey Further' as our new digital agency has proved successful as we have leveraged our scale to bring best in class practices to our digital marketing work.  Our brand work, which seeks to build on the investment of the past, will be used to shape our TV investment and brand experience in the years ahead.

 

As we move into 2021 and embed the progress that has been made through the turnaround programme we have updated and refreshed our key strategic objectives for 2021 and beyond.  These will be:

 

Delivering our financial roadmap : Reshaping our financial performance to deliver sustained improvements in profitability through a combination of revenue growth, margin improvement and measured investment.

 

Levelling up / standardising depots & branches : Building on and embedding the work done to date on improving the consistency of local performance using Standard Operating Procedures ('SOPs'), role descriptions, effective management reporting and performance management for all our branches and depots.

 

Driving profitable growth : This encompasses our planned brand investment, building a digital competitive advantage, developing consumer insight and expanding our national sales footprint.

 

Transforming our customer experience : Our ratings and feedback show that the majority of customers have a seamless experience.  However, we know that we can do better, using technology and improved communications to address customer issues more rapidly.  We will support this by embedding the use of Net Promotor Score (NPS) customer interviews, which we recently introduced to the business.

 

Embedding compliance and sustainability : I am pleased that we have made great progress in these areas, but we also want to drive further improvements at Safestyle and throughout the wider industry.  We have embedded sustainability into our operations and now recycle 95% of all materials removed from a customer's home as part of their installation.

 

The Group's CO2 emissions per frame installed in 2020 have reduced by 6.1% versus 2019.  The Group has achieved ongoing reductions in energy consumption through its furnace energy usage reduction programme.  This has reduced energy consumption for what is a significant component of our manufacturing process by over 25% at like for like operating levels.

 

The Group is also now halfway through replacing its leased van fleet, representing 333 vans in total.  This will be fully completed by the middle of 2021.  Each new van produces 8% less CO2 emissions than the previous model which will make an important contribution to our programme of reducing the impact on the environment of our business.

 

Moreover, our existing impressive environmental initiatives will be broadened and form part of our consumer offer. 

 

These priorities will be supported by the key enabling initiatives of developing our people, our culture and our systems.

 

Together, these initiatives set an exciting direction for the business, aimed at sustaining improved financial delivery, growth and continued modernisation of the business.

 

Current trading & outlook

 

Our deliberate strategy of building a large order book has enabled us to entirely mitigate the impact of the further restrictions on sales and canvass that came with the third national lockdown in January 2021.  This has meant that despite geographic and national interruptions we have been able to maintain our survey, processing, manufacturing and installations operations.  As a result, we have now reduced our order book to a more normalised level (which is still c.20% higher than the prior year) and further strengthened our cash position.

 

During Q1 we have taken the opportunity to improve our customer service levels, with further investments in call centre staffing and in resolving the backlog of service issues that were caused by the first lockdown and the significant supply-chain disruption in Q3.  Our intent is to enter Q2 having put the operational challenges of 2020 fully behind us as we focus on accelerating the transformation of the business and delivering improved financial results.

 

Clearly the outlook remains uncertain, but I am optimistic that the progress made by the business will allow us to maximise any opportunity that comes as the economy reopens.  Our intention remains as before the crisis: to build long term value for shareholders by consolidating our position as the UK's number 1 choice for replacement windows and doors.

 

As a result of this encouraging start to the year, the Board expects 2021 financial performance to be significantly ahead of market expectations.

 

Mike Gallacher

Chief Executive Officer

25 March 2021

 

Financial Review

 

Financials

2020

2019

 

 Underlying

Total

 Underlying

Non-underlying items1

Total

Change in underlying %

£000

£000

£000

£000

£000

£000

Revenue 

113,191

 

113,191

126,237

 

126,237

   (10.3)%

Cost of sales

(84,732)

 

(84,732)

(94,337)

 

(94,337)

  10.2%

Gross profit

28,459

 

28,459

31,900

 

31,900

   (10.8)%

Other operating expenses3

(32,057)

(1,399)

(33,456)

(32,018)

(2,314)

(34,332)

   (0.0)%

Operating (loss)

(3,598)

(1,399)

(4,997)

(118)

(2,314)

(2,432)

(2,949.2)%

Finance income

1

 

1

2

 

 2

(50.0)%

(Finance costs

(1,161)

 

(1,161)

(1,402)

 

(1,402)

17.2%

(Loss) before taxation4

(4,758)

(1,399)

(6,157)

(1,518)

(2,314)

(3,832)

(213.4)%

Taxation

 

 

1,103

 

 

526

 

(Loss) for the year

 

 

(5,054)

 

 

(3,306)

 

 

Basic EPS (pence per share)

 

 

(4.3)p

 

 

(4.0)p

 

Diluted EPS (pence per share)

 

 

(4.3)p

 

 

(4.0)p

 

 

Cash and cash equivalents

 

 

11,705

 

 

4,435

 

Borrowings

 

 

(4,127)

 

 

(3,991)

 

Net cash2

 

 

7,578

 

 

444

 

 

KPIs

FY 2020

FY 2019

Change %

H2 2020

YOY Change %

H1 2020

YOY Change %

Revenue £000

113.2

126.2

(10.3)%

71.1

15.0%

42.1

(34.7)%

Gross margin %5

25.1%

25.3%

(13)bps

26.3%

165bps

23.1%

(271)bps

Average Order Value (£ inc VAT)

3,474

3,337

  4.1%

3,494

3.6%

3,440

4.1%

Average Frame Price (£ ex VAT)

704

678

3.8% 

714

3.6%

688

3.0%

Frames installed - units

163,617

190,252

(14.0)% 

100,920

10.6%

62,697

(36.6)%

Orders installed

39,789

46,412

(14.3)% 

24,735

10.5%

15,054

(37.4)%

Frames per order

4.11

4.10

0.0%

4.08

0.0%

4.16

1.1%

 

The Group's financial performance measures and KPIs in 2020 were adversely impacted by the cessation of installation activity for nine weeks in H1 as a result of the COVID-19 pandemic and lockdown period.

 

In the first half of the year, the Group made an underlying profit before taxation of £0.9m for the first two months of the year before the business entered a temporary lockdown in late March to the end of May where it incurred losses totalling in excess of £6m. 

 

The second half of the year saw the Group return to profitability, despite the ongoing disruption and cost of working in a challenging context and material investment in the Group's order book which closed the year 83% higher than 2019. 

 

This Financial Review details the changes in the financial measures of the business across the year within the above context and draws particular attention to how the revenues and operating costs changed between the first and second half of the year.

 

Financial and KPI headlines

 

· Revenue declined by 10.3% to £113.2m for the full year, the decrease entirely attributable to the cessation of operations in H1 with Q3 and Q4 revenues increasing versus the prior year by 9.3% and 20.8% respectively.

· Frames installed decreased by 14.0% to 163,617, the decline again fully attributable to the first half disruption.  

· The Group continues to improve average frame price, achieving a 3.8% increase in the year due to a focus on discount management and a small annualisation effect of 2019 price increases.  This average price improvement was achieved despite a reduced mix of higher average-priced composite guard doors which was 7.6% in 2020 compared to 9.2% in 2019.

· The Group also made changes to its consumer finance portfolio in the last part of the year which has maintained a strong promotional finance offering, but which has resulted in a reduction in finance subsidies of £0.8m.  This benefit will increase in FY21 when the impact is annualised. 

· In H1, gross profit declined by 41.5% to £9.7m and gross margin percentage reduced by 271bps to 23.1%, which is again attributable to the volume decline described above although the impact was partially offset by £0.7m of a total £1.8m reclaim under the Government's Coronavirus Job Retention Scheme ('CJRS') with the remainder included within operating expenses as described below.  

· H2 gross profit improved versus the prior year by 22.7% to £18.7m with the growth attributable to the increased installation volumes.  Gross margin percentage in the second half increased by 165bps versus H2 2019 to 26.3% due to the combination of a higher average price per frame as described above and a year on year reduction in the cost of lead generation (a reduced rate) in the second half of the year.  The second half gross profit and gross margin percentage improvement would have increased further were it not for the investment into the closing order book described above. 

· Underlying other operating expenses3 for the year were the same as the prior year.  There was a reduction in H1 operating expenses as a result of no investment in TV advertising and a £1.1m reclaim under the CJRS.  H2 operating expenses increased year on year due to costs associated with many of the Group's COVID-safe measures - such as PPE and cleaning - coupled with higher operational capacity costs to support the revenue growth and to increase our customer-facing headcount.

· Reported other operating expenses reduced by £0.9m (2.6%) to £33.5m as a result of the items described above along with a year on year reduction in non-recurring costs following completion of the actions taken as part of the cost reduction initiatives in 2019.

· Finance costs have decreased year on year as a result of reduced borrowing costs due to lower utilisation (and thus lower fees) in relation to the £3m revolving credit facility.

· Underlying (loss) before taxation4 was £(4.8)m for the year (2019: loss of £(1.5)m).  As described above, the loss was generated in H1, totalling £(5.1)m, before the Group returned to profitability in H2. 

· Non-underlying items were £1.4m for the period (2019: £2.3m), full details of which are provided on the following pages of this Financial Review and therefore reported (loss) before taxation was £(6.2)m versus £(3.8)m in 2019.

· Net cash2 improved to £7.6m versus £0.4m at the end of last year.  The improved cash position is despite the losses incurred in the first half of the year and is predominantly the result of a successful Placing of New Shares in April 2020 which raised net proceeds of £8.2m and the agreed deferral of £2.5m of VAT payments originally payable during the lockdown period which will be paid in 2021.

 

1 See the non-underlying items section in this Financial Review

2 Net cash is cash and cash equivalents less borrowings

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

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

5 Gross margin % is gross profit divided by revenue

 

Underlying performance measures

 

In the course of the last three years, the Group has encountered a series of unprecedented and unusual challenges.  These gave rise to a number of significant non-underlying items in 2018 and consequential items continued into 2019 as the Group addressed the impact of these challenges, predominantly as part of its Turnaround Plan.  The impact of COVID-19 in 2020 has also given rise to a material non-underlying item in the form of a holiday pay accrual which is described in detail below.

 

Consequently, adjusted measures of underlying other operating expenses and underlying (loss) before taxation have been presented as the primary measures of financial performance.  Adoption of these measures results in non-underlying items being excluded to enable a meaningful evaluation of the performance of the Group compared to prior periods. 

 

These alternative measures are entirely consistent with how the Board monitors the financial performance of the Group and the underlying profit / (loss) before taxation is the basis of performance targets for incentive plans for the Executive Directors and senior management team.

 

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

 

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

 

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

 

Revenue

 

Revenue for the year was £113.2m compared to £126.2m last year, representing a decrease of 10.3% for the year as a result of the cessation of installation activity across late March, April and the majority of May.  The year on year revenue performance up to the end of February represented year on year growth of 3.4% with Q3 and Q4 growth of 9.3% and 20.8% respectively which depicts the improving trajectory either side of the lockdown period.

 

Frames installed volume represented a similar decline of 14.0% to 163,617 frames installed compared to 190,252 in the prior year.  The revenue decline reduction was less than this volume decline as a result of improvements in the following areas:

 

· The average frame price increased by 3.8% to £704 (2019: £678).  The impact of an annualisation benefit of modest list price increases in 2019 alongside a larger benefit coming from reduced discount levels were the major drivers of the improvement. 

·     The improvement in the average frame price was also despite a reduced mix of higher average-priced composite guard doors which reduced to 7.6% of installed volumes (2019: 9.2%).

· The above favourable average price gains were further augmented by a reduction in the finance subsidy costs linked to our consumer finance offering.  These reductions follow a successful set of changes to our promotional finance portfolio late in 2020 which generated a £0.8m benefit in the second half of the year.  The Group continues to sell over 43% of its products alongside a consumer finance agreement which represents a flattening of a trend that has been steadily rising over the last five years. 

· The metric of the average number of frames per order remained consistent with 2019 which halts the declining trend of the last two years and follows the rebalancing of mix out of higher-value composite doors.

· Finally, the average order value also improved by 4.1% to £3,474.  Progress in these operational KPIs remains a critical area of ongoing focus for the Group as it continues to target an improving quality of revenue into 2021.

 

Gross profit

 

Gross profit decreased by 10.8% to £28.5m while the gross margin percentage declined by (13)bps to 25.1% (2019: 25.3%).  In the first half of the year, t he gross margin percentage reduced by (271)bps versus the prior period to 23.1% before improving year on year for the second half of the year by 165bps to 26.3% (H2 2019: 24.7%). 

 

The reduction in installation volumes described above was the main contributor to the year on year reduction in gross margin and the dilution of gross margin percentage in H1.  The additional factors behind the trends of first half dilution and subsequent improvement in gross margin percentage in the second half of the year were as follows:

 

· Prior to the lockdown, the Group was continuing to experience increased costs per leads generated as a result of continued competition driving up 'Pay Per Click' and other digital marketing channel costs.  Moving into the middle of the first half, despite the cessation of installation activities, the Group continued, albeit on a much-reduced scale, to respond via remote-selling methods to customer enquiries during the lockdown period.  These enquiries were generated with minimal levels of investment as compared to spend prior to the lockdown.   

 

· Following the restart of operations, the Group experienced a strong consumer response as it stepped up its lead generation activities across all lead sources and although the costs per lead increased as volumes grew when compared to the very low levels during lockdown, these were still lower than the first two months of the year.  The Group's cost to order intake ratio across the second half was 10.2% lower than H2 2019. 

 

· This beneficial rate effect was more than offset by the Group driving order intake levels that exceeded the level of installation activity which resulted in an order book at the year end that was 83% ahead of the prior year.  This investment diluted the gross margin percentage across the year.

 

· Aside from the above, gross margin in the first half was impacted favourably by a £0.7m reclaim under the CJRS scheme from the UK Government to contribute to the costs of the Group's furloughed factory employees. 

 

· Despite this assistance, the Group continued to incur some fixed costs in H1 that could not be fully mitigated during the lockdown such as leased equipment costs.  In addition, as the business restarted its factory in late May, the initial few weeks of operation were part of a staged return to work plan which inevitably resulted in a lower level of productivity than normal whilst COVID-secure ways of working were fully embedded.  Both of these factors diluted H1 gross margin. 

 

· In the second half of the year, the growth in installation revenues, the reduction in finance subsidies and the continued improvement in average price per frame increased the gross margin percentage above that of 2019. 

 

· Gross margin in H2 would have recovered more strongly were it not for the lead generation effect described previously alongside the Group investing in recovering its warranty and service backlog that built up during the lockdown period.  This investment is expected to carry on in the early part of 2021 before reducing to pre-COVID levels in the latter stages of the year.

 

Underlying other operating expenses

 

Underlying other operating expenses were consistent versus 2019 across the full year. 

 

· There were reductions in the amount invested in TV advertising of £0.7m which partially offset the increased investment in digital media lead generation channels referred to above. 

· In addition to the amount received and included within gross margin, the Group also received £1.1m in the first half of the year for its CJRS reclaim for furloughed staff costs that are expensed within underlying other operating expenses.  Half of the amount reclaimed was for staff furloughed in April with the remaining half spread across May and June.  This reducing reclaim profile after April reflects the gradual return to work of furloughed staff through the second half of May with 60% of staff returned to work by the end of May and 93% by the end of June.

· Alongside the furlough support, the benefits of the 2019 cost reduction activities reduced H1 operating expenses versus H1 2019 by a further £1.0m.  However, as the Group moved into the second half of the year, as described in the CEO's statement, the high levels of demand resulted in the Group taking steps to increase its operational capacity.  This equated to an increased cost in the second half of the year of £0.5m as the Group re-opened a previously-closed depot in Crawley and a new installation depot in Nottingham alongside growing headcount across surveying, order processing, installations and customer services.

· The Group also incurred bonus costs of £1.0m in relation to the H2 bonus scheme that was introduced to incentivise a rapid restart of the business, delivering profit alongside the building of a strong order book. 

· IT licensing and infrastructure costs increased by £0.3m versus the prior year as the rollout of technology across the Group continued, most notably the implementation of Office 365 and Microsoft Teams which proved crucial to underpin remote working during the lockdown and to enable a phased return to office working after restrictions were lifted.

· Finally, costs associated with the Group's response to implementing COVID-19 safeguards including enhanced cleaning routines for offices, the provision of Personal Protective Equipment ('PPE') to the workforce and providing safety screens around workstations totalled £0.4m in the year.

Underlying (loss) before taxation

 

Underlying (loss) before taxation was £(4.8)m (2019: loss of £(1.5)m), although profitability was achieved either side of the lockdown period as described above.  This loss is before the non-underlying items described below.

 

Non-underlying items

A total of £1.4m has been separately treated as non-underlying items for the year (2019: £2.3m).  The prior period included £1.8m of costs related to restructuring activities and asset impairment as part of phase two of the Turnaround Plan. 

 

The current year's costs consist of £0.5m of non-recurring costs (2019: £1.9m), a £0.4m shared based payment charge (2019: £0.0m) and £0.5m (2019: £0.5m) of Commercial Agreement (Intangible Asset) amortisation.  The table below shows the full breakdown of these items:

 

Non-underlying Items

2020

2019

£000

£000

 

 

 

Holiday pay accrual

470

  -

Litigation costs

  74

  -

Restructuring and operational costs

266

  1,058

Impairment of right-of-use assets

-

  692

Modification of right-of-use assets and liabilities

5

-

Reversal of prior year impairment of right-of-use assets

(292)

-

Commercial Agreement service fee

-

  (13)

IT project impairment

-

  113

 

 

 

Total non-recurring costs (note 5)

523

  1,850

 

 

 

Equity-settled share based payment charge

424

12

Commercial Agreement amortisation

452

  452

 

 

 

Total non-underlying items

1,399

  2,314

 

The holiday pay accrual of £0.5m has arisen as a result of the impact of the shutdown of operations and resultant extension of 2020 leave entitlement to the end of 2021 which is in line with the Government's recommendation.  This has significantly increased the level of deferred holiday entitlement at the year end which has been recognised as an accrual and which will reverse in full in 2021.  This item has been excluded from the underlying performance measures to ensure performance of the business is not skewed by both the expense in 2020 or its subsequent full release in 2021.

 

Litigation costs of £0.1m are expenses incurred as a result of an ongoing legal dispute between the Group and an ex-agent.  These costs were predominantly legal advisor's fees.

 

In 2020 and 2019, the Group incurred restructuring and non-recurring operational costs of £0.3m and £1.1m respectively which reduced the Group's overheads in some areas.  In addition, in 2019, the Group recognised an impairment of right-of-use assets of £0.7m following closure of an installation branch and a sales office in the period.  The installation branch was re-opened in 2020 as the Group increased its capacity levels and consequently, £0.3m of the prior year's impairment charge has been reversed.

 

The receipts in relation to the CJRS described earlier in this Financial Review have not been classified as a non-recurring item on the basis that these partially offset the wage costs of unproductive labour in the lockdown period.

 

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

 

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

 

The Commercial Agreement service fee was originally assessed in 2018 at a £1.0m fair value as the consideration payable under the terms of the Commercial Agreement that was attributed to services received in 2018.  Following conclusion of the 2019 year, the value of the services received was confirmed based on the actual performance in 2019, and the provision for consideration to be paid was reduced by £13k to £987k.  This amount was paid and four million ordinary shares of 1 pence each were issued in October 2020 in accordance with this agreement.

 

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

 

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

 

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

 

Earnings per share

 

Basic earnings per share for the period were a loss of (4.3)p compared to a loss of (4.0)p for the prior year.  The basis for these calculations is detailed in note 6.

 

Net cash and cashflow

 

A key aspect of the Group's response to the COVID-19 pandemic to mitigate the impact on the Group's liquidity as a result of the cessation of revenue-driving activity was to raise funds via a share Placing.

 

The Placing was completed at the end of April with net proceeds of £8.2m raised.  Alongside this injection of additional liquidity, the Group also secured a two year extension to its existing borrowing facilities until October 2023.  Covenant waivers for the lockdown period and reductions in covenant targets for the remainder of the facility were also secured. 

 

At the end of the year, net cash was £7.6m (2019: £0.4m).  £4.5m of the Group's £7.5m facility, being that of the term loan, remains fully drawn with the remaining £3.0m revolving credit facility undrawn. 

 

Net cash inflow from operating activities, including the cashflow impact of non-underlying items, was £3.4m (2019: £4.5m).  This inflow was despite the losses in the year as a result of favourable working capital movements.  The most significant increase is attributable to the agreed deferral of payments originally due in May 2020 to HRMC totalling £2.5m.  This deferral will be paid from March 2021 in line with HMRC's deferral repayment scheme.  Since the restart of operations, the Group has not continued to defer any further tax payments owed to HMRC and, with the exception of this deferred amount, continues to pay all liabilities as they fall due.

 

The other working capital benefit within operating cashflows is driven by an increase in payments on account for customer deposits received in line with the growth in the order book of £2.6m.  This effect has been partially offset by outflows driven by increases in buffer stock levels for PVCu profile which have been built as part of mitigation against any potential supply chain disruption.

 

Capital expenditure of £0.6m increased from £0.4m in 2019.  Some capital expenditure was deferred as part of the Group's response to the pandemic, but the Group continued with its investment programme to replace and upgrade IT hardware. 

 

After the £8.2m proceeds in relation to the share Placing and the lease payments of £3.7m on leased assets (2019: £3.6m), net cash inflow in the period was £7.3m (2019: £0.3m).

 

Dividends

 

The Board does not propose a final dividend for the year (2019: £nil) which will underpin the maintenance of suitable liquidity levels in the immediate future.  The Board expects to revisit its dividend policy later in 2021 assuming that the Group has returned to a consistent delivery of profitability.    

 

Rob Neale

Chief Financial Officer

25 March 2021

 

Consolidated income statement for the year ended 3 January 2021

 

 

 

 

2020

2019

 

 

 

  Note

£000

£000

 

 

 

 

 

 

 

 

Revenue 

3

113,191

126,237

 

 

 

 

 

 

 

 

Cost of sales

 

(84,732)

(94,337)

 

 

 

 

 

 

 

 

Gross profit

 

28,459

31,900

 

 

 

 

 

 

 

 

Expected credit losses expensed

 

(890)

(477)

 

 

Other operating expenses 1

 

(32,566)

(33,855)

 

 

 

 

 

 

 

 

Operating (loss)

 

(4,997)

(2,432)

 

 

 

 

 

 

 

 

Finance income

 

1

2

 

 

Finance costs2

 

(1,161)

(1,402)

 

 

 

 

 

 

 

 

Net finance costs

 

(1,160)

(1,400)

 

 

 

 

 

 

 

 

(Loss) before taxation

 

(6,157)

(3,832)

 

 

 

 

 

 

 

 

Underlying (loss) before taxation before non-recurring costs, Commercial Agreement amortisation and share based payments

 

(4,758)

(1,518)

 

 

 

 

 

 

 

 

Non-recurring costs

5

(523)

(1,850)

 

 

Commercial Agreement amortisation

 

(452)

(452)

 

 

Share based payments

 

(424)

(12)

 

 

 

 

 

 

 

 

(Loss) before taxation

 

(6,157)

(3,832)

 

 

 

 

 

 

 

 

Taxation

 

1,103

526

 

 

 

 

 

 

 

 

(Loss) for the year

 

(5,054)

(3,306)

 

 

 

 

 

 

 

 

Basic EPS (pence per share)

6

(4.3p)

(4.0p)

 

 

Diluted EPS (pence per share)

 6

(4.3p)

(4.0p)

 

 

 

 

 

 

 

 

1 Other operating expenses includes £523k of non-recurring items, £452k of Commercial Agreement amortisation and £424k of share based payments.  Adjusting for these gives underlying other operating expenses of £31,167k (2019: £31,541k).  See Financial Review for details.

2 Finance costs includes £487k of lease related interest costs (see right-of-use assets and liabilities note).

 

 

There is no other comprehensive income for the period.

 

All operations were continuing throughout all periods.

 

2019 represents the year ended 29 December 2019.

 

Consolidated statement of financial position as at 3 January 2021

 

 

 

 

 

2020

2019

 

 

 

Note

£000

£000

Assets

 

 

 

 

 

Intangible assets - Trademarks

 

 

 

504

504

Intangible assets - Goodwill

 

 

 

20,758

20,758

Intangible assets - Software

 

 

 

850

1,122

Intangible assets - Other

 

 

 

1,284

1,736

Property, plant and equipment

 

 

 

11,475

12,633

Right-of-use assets

 

 

10

8,004

6,012

Deferred taxation asset

 

 

 

1,980

886

 

 

 

 

 

 

Non-current assets

 

 

 

44,855

43,651

 

 

 

 

 

 

Inventories

 

 

 

4,545

2,725

Trade and other receivables

 

 

7

5,663

3,999

Cash and cash equivalents

 

 

 

11,705

4,435

 

 

 

 

 

 

Current assets

 

 

 

21,913

11,159

 

 

 

 

 

 

Total assets

 

 

 

66,768

54,810

 

 

 

 

 

 

Equity

 

 

 

 

 

Called up share capital

 

 

9

1,368

828

Share premium account

 

 

 

89,495

81,845

Profit and loss account

 

 

 

5,347

10,009

Common control transaction reserve

 

 

 

(66,527)

(66,527)

 

 

 

 

 

 

Total equity

 

 

 

29,683

26,155

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Trade and other payables

 

 

8

21,929

15,384

Lease liabilities

 

 

10

2,524

2,482

Deferred taxation liability

 

 

 

-

17

Provision for liabilities and charges

 

 

 

1,118

990

 

 

 

 

 

 

Current liabilities

 

 

 

25,571

18,873

 

 

 

 

 

 

Provision for liabilities and charges

 

 

 

1,801

1,891

Lease liabilities

 

 

10

5,586

3,900

Borrowings

 

 

 

4,127

3,991

 

 

 

 

 

 

Non-current liabilities

 

 

 

11,514

9,782

 

 

 

 

 

 

Total liabilities

 

 

 

37,085

28,655

 

 

 

 

 

 

Total equity and liabilities

 

 

 

66,768

54,810

 

2019 represents the financial position at 29 December 2019.

 

Consolidated statement of changes in equity for the year ended 3 January 2021

 

 

 

Share capital

Share premium

Profit and loss account

Common control transaction reserve

Total equity

 

£000

£000

£000

£000

£000

 

 

 

 

 

 

Balance at 31 December 2018

828

81,845

13,347

(66,527)

29,493

 

 

 

 

 

 

Total comprehensive (loss) for the period

 

 

(3,306)

 

(3,306)

 

 

 

 

 

 

Transactions with owners recorded directly in equity:

 

 

 

 

 

Deferred taxation asset taken to reserves

  -

  - 

(44)

  - 

(44)

Equity settled Commercial Agreement

-

  - 

12

  - 

12

Balance at 29 December 2019

828

81,845

10,009

(66,527)

26,155

 

 

 

 

 

 

Total comprehensive (loss) for the period

  - 

  - 

(5,054)

  - 

(5,054)

Transactions with owners recorded directly in equity:

 

 

 

 

 

Issue of new shares

500

8,000

  - 

  - 

8,500

Transaction costs relating to the issue of new shares

  - 

(350)

  - 

  - 

(350)

Deferred taxation asset taken to reserves

  - 

  - 

8

  - 

8

Issue of shares - Commercial Agreement

40

  - 

(40)

  - 

  - 

Equity settled share based payment transactions

  - 

  - 

424

  - 

424

Balance at 3 January 2021

1,368

89,495

5,347

(66,527)

29,683

 

Consolidated statement of cash flows for the year ended 3 January 2021

 

 

 

 

 

 

 

2020

 

2019

 

Note

£000

 

£000

Cash flows from operating activities

 

 

 

 

(Loss) for the year

 

(5,054)

 

(3,306)

Adjustments for:

 

 

 

 

Depreciation of plant, property and equipment

 

1,559

 

1,666

Depreciation of right-of-use assets

10

3,745

 

4,322

Amortisation of intangible fixed assets

 

880

 

904

Reversal of impairment loss

10

(292)

 

-

Modification of right-of-use assets and liabilities

10

5

 

-

Finance income

 

(1)

 

(2)

Finance expense

 

1,161

 

1,402

IT project impairment

 

 - 

 

113

Equity settled share based payments charge

 

424

 

12

Taxation (credit)

 

(1,103)

 

(526)

 

 

1,324

 

4,585

(Increase) in inventories

 

  (1,820)

 

(309)

(Increase) / decrease in trade and other receivables

 

(1,664)

 

479

Increase in trade and other payables

 

6,545

 

98

Increase / (decrease) in provisions

 

38

 

(1,430)

IFRS 16 prepaid lease costs

 

-

 

(413)

IFRS 16 onerous leases

 

-

 

67

 

 

3,099

 

(1,508)

Other interest (paid)

 

(986)

 

(1,079)

Taxation received

 

-

 

2,540

Net cash inflow from operating activities

 

3,437

 

4,538

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

Acquisition of property, plant and equipment

 

(401)

 

(86)

Interest received

 

1

 

2

Acquisition of intangible fixed assets

 

(156)

 

(341)

Net cash (outflow) from investing activities

 

(556)

 

(425)

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

Proceeds from issue of share capital

 

8,500

 

-

Transaction costs relating to the issue of share capital

 

(350)

 

-

Proceeds from loans and borrowings

 

2,000

 

2,500

Repayment of borrowings

 

(2,000)

 

(2,500)

Transaction costs relating to loans and borrowings

 

(39)

 

(235)

Payment of lease liabilities

10

(3,722)

 

(3,606)

Net cash inflow / (outflow) from financing activities

 

4,389

 

(3,841)

 

 

 

 

 

Net inflow in cash and cash equivalents

 

7,270

 

272

Cash and cash equivalents at start of year

 

4,435

 

4,163

 

 

 

 

 

Cash and cash equivalents at end of year

 

11,705

 

4,435

 

           

2019 represents the year ended 29 December 2019.

Statement of compliance

Whilst the financial information included in this Preliminary Announcement has been prepared on the basis of the requirements of International Financial Reporting Standards (IFRSs) in issue, as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS.

 

The financial information set out above does not constitute the company's statutory accounts for the financial years 2020 or 2019 but is derived from those accounts.  Statutory accounts for 2019 have been delivered to the registrar of companies with the Jersey Financial Statements Commission (JSFC), and those for 2020 will be delivered in due course.  Grant Thornton UK LLP has reported on those accounts.  Their report for 2020 was (i) unqualified, (ii) did not include a reference of any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 113B (3) or (6) of the Companies (Jersey) Law 1991.  KPMG LLP has reported on the 2019 accounts.  Their report was (i) unqualified, (ii) contained a material uncertainty in respect of going concern to which the auditor drew attention by way of emphasis without modifying their report and (iii) did not contain a statement under section 113B (3) or (6) of the Companies (Jersey) Law 1991. 

 

Safestyle UK plc is a public listed group incorporated in Jersey.  The Group's shares are traded on AIM.  The Group is required under AIM rule 19 to provide shareholders with audited consolidated financial statements.  The registered office address of the Safestyle UK plc is 47 Esplanade, St Helier, Jersey JE1 0BD.

 

The Group is not required to present parent company information.

2  Basis of preparation

The Group's financial statements for the financial year 2020 ("financial statements") have been prepared on a going concern basis under the historical cost convention and are in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and the International Financial Reporting Standards Interpretations Committee interpretations issued by the International Accounting Standards Board ("IASB") that are effective or issued and early adopted as at the time of preparing these financial statements.

Safestyle UK plc was incorporated on 8 November 2013.  On 3 December 2013 Safestyle UK plc acquired Style Group Holdings through a share for share exchange.  This was accounted for as a common control transaction.  The result of this is that the financial statements of Style Group Holdings have been included in the Group consolidated financial statements of Safestyle UK plc at their book value at the IFRS transition date of 1 January 2010 with the assumption that the Group was in existence for all the periods presented.  The excess of the cost at the time of acquisition over its book value has been recorded as a common control transaction reserve.

The accounting policies set out below have unless otherwise stated, been applied consistently to all periods presented in these financial statements.

The preparation of financial statements requires Management to exercise its judgement in the process of applying accounting policies.  The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to these financial statements are disclosed in note 4.

 

(a) New and amended standards adopted by the Group

The Group has adopted the following new standards and amendments for the first time.  Unless otherwise stated, they have not had a material impact on the financial statements.

· Definition of a Business (Amendments to IFRS 3)

· Definition of Material (Amendments to IAS 1 and IAS 8)

· Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7)

· Amendments to References to the Conceptual Framework (Various Standards)

· COVID-19 Rent Related Concessions (Amendments to IFRS 16)

 

(b) New standards, amendments and interpretations issued but not effective and not early adopted.

At the date of approval of these financial statements, the following standards, amendments and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases have not yet been adopted by the EU):

· Amendments to IFRS 17 Insurance Contracts (Amendments to IFRS 17 and IFRS 4)

· References to the Conceptual Framework

· Proceeds before Intended Use (Amendments to IAS 16)

· Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37)

· Annual Improvements to IFRS Standards 2018-2020 Cycle (Amendments to IFRS 1, IFRS 9, IFRS 16, IAS 41)

· Classification of Liabilities as Current or Non-current (Amendments to IAS 1)

 

Basis of consolidation

Subsidiaries are entities that the Company has power over, exposure or rights to variable returns and an ability to use its power to affect those returns.  In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. 

The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases.

Intragroup transactions and balances are eliminated on consolidation.

Year end

The financial statements are presented for the year ended on the closest Sunday to the end of December.  This date was 3 January 2021 for the current reporting year and 29 December 2019 for the prior year.  All references made throughout these accounts for the financial year 2020 are for the period 30 December 2019 to 3 January 2021 and references to the financial year 2019 are for the period 31 December 2018 to 29 December 2019.

Going concern

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

 

The Group made a statutory (loss) of £(5.1)m in the financial year 2020 (2019: (loss) of £(3.3)m) and had net current liabilities of £(3.7)m at the end of financial year 2020 (2019: net current liabilities of £7.7m).  As detailed in the Financial Review, the Group incurred losses in the first half of the year due to the temporary cessation of operations as a result of the COVID-19 pandemic.  The Group returned to profit in the second half of the year whilst at the same time building a record level installation pipeline.

 

The Group obtained additional shareholder funding in April 2020 through the raising of £8.2m via a share placing which strengthened the Group's cash position during the lockdown period and facilitated a return to profitability in H2 2020.  The Group also has banking facilities which consist of a £4.5m term loan and a £3.0m revolving credit facility.  This facility matures in October 2023 having been extended by two years during 2020.  The finance agreement contains certain covenants, including a minimum EBITDA to be tested on a cumulative monthly basis which was revised during 2020 and included a covenant waiver for the loss-making period in H1 2020.  The subsequent minimum EBITDA for covenant compliance was also reduced for the remainder of 2020 and for all subsequent years.  The covenant target for FY23 is lower than the target originally agreed for FY21.  By the end of financial year 2020, covenant headroom had increased significantly to £1.9m which has further increased in the first 2 months of FY21.  As at the end of financial year 2020, the £4.5m term loan was fully drawn on the facility, while the revolving credit facility was unutilised.  This remains the case at the date of signing the accounts.  In addition, the Group's net cash position was £7.4m at the end of February 2021 (February 2020: net cash of £0.1m).

 

The Directors have prepared forecasts covering the period to December 2022.  The forecasts include a number of assumptions in relation to sales volume, pricing, margin improvements and overhead investment.  The Directors believe they have taken a cautious approach to the forecast for 2021 with the core assumptions for order intake representing a decline of 7.4% versus the levels achieved in H2 2020.  However, revenues are forecast to grow, facilitated by the strong order book the Group carried into the start of FY21 which, along with a number of margin-improving initiatives, forecasts considerable headroom above EBITDA covenant targets alongside growth in net cash and liquidity.

 

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

 

The Group's cash flow forecasts and projections, taking account of reasonably possible changes in trading performance excluding the potential impact of COVID-19 (which is considered below), offset by mitigating actions within the control of management including reductions in areas of discretionary spend, show that the Group will be able to operate within the level of its facilities and associated covenants for the period to at least the end of 2022.  The Group has started the year well, with revenues and profits significantly ahead of the pre-lockdown period in FY20 which the directors believe further supports this basis of preparation.

 

The uncertainty as to the future impact on the Group of the COVID-19 outbreak has been separately considered as part of the directors' consideration of the going concern basis of preparation.  As described in the CEO's Statement and Financial Review, the COVID-19 pandemic had a material impact on the Group's performance in H1 2020 which required the directors to take swift actions to protect the business and increase its cash and liquidity reserves.  These actions were successful and the Group restarted operations quickly and successfully in May 2020 and since then has been operating safely and profitably despite the impact of ongoing restrictions that have affected normal ways of working.

 

The Directors have incorporated their considerations regarding the continuing impact of potential COVID-19 restrictions on the Group in their scenario modelling although also note that these restrictions are reducing as the successful vaccination programme gathers pace.  In preparing this analysis, a number of scenarios were modelled which included a 26% drop in written sales versus H2 20 performance levels.  In this scenario, mitigating actions within the control of management, including reductions in areas of discretionary spend have been modelled with the result being that despite this reduction in written sales, the Group would grow covenant headroom in FY21 and increase its net cash balance.

 

In March 2020, the Directors highlighted it was difficult to predict the overall outcome and impact of COVID-19 and the duration of disruption to written and fitted sales activity.  The Directors now highlight the current and improving operating context which, alongside the outcomes in the scenarios modelled, underpin the Director's conclusion that the risk of the liquidity requirements of the business exceeding the total quantum of facilities available are now deemed remote.

 

Based on the above indications and work prepared, the Directors believe that it is appropriate to prepare the financial statements on a going concern basis.

3  Summary of significant accounting policies

Revenue recognition

 

The Group earns revenue from the design, manufacture, delivery of, and installation of domestic double-glazed replacement windows and doors.

 

There are five main steps followed for revenue recognition:

Identifying the contract with a customer

Identifying the performance obligations

Determining the transaction price

Allocating the transaction price to the performance obligations; and

Recognising revenue when or as an entity satisfied performance obligations.

 

The various stages of the performance obligations are the design, manufacture, delivery of and installation of domestic double-glaze d replacement windows and doors.

 

In applying the principal of recognising revenue related to satisfaction of performance obligations under IFRS 15, the Group considers that the final end product is dependent upon a number of services in the process that may be capable of distinct identifiable performance obligations.  However, where obligations are not separately identifiable, in terms of a customer being unable to enjoy the benefit in isolation, the standard allows for these to be combined.  The Group considers that in the context of the contracts held these are not distinct. As such the performance obligations are treated as one combined performance obligation and revenue is recognised in full, at a point in time, being on completion of the installation.

 

Revenue is shown net of discounts, sales returns, charges for the provision of consumer credit and VAT or other sales related taxes.  Revenue is measured based on the consideration specified in a contract with a customer.

 

There is no identifiable amount included in the final price for a warranty, as the Group provides a guarantee on all installations.

 

Payments received in advance are held within other creditors, as a contract liability.  The final payment is due on installation.  

 

A survey fee is paid at the point of agreeing the contract and the customer has up to 14 days, defined in the contract to change their minds.  If the customer changes their mind after this cooling off period, the Group has the right to retain this survey fee and as such revenue for this is recognised at the point in time that this becomes non-refundable.

 

Recycling Income

The Group recognises the income from the sale of materials for recycling.  The income is recognised when the materials are collected by the recycling company which represents the completion of the performance obligation.

Government grants

Grants under the Coronavirus Job Retention Scheme (CJRS) that compensate the Group for expenses incurred are recognised in profit or loss in staff costs on a systematic basis in the periods in which the expenses are recognised.

4  Accounting estimates and judgements

When preparing the Group's consolidated financial statements, management makes a number of judgements, estimates and assumptions about the recognition and measurement of assets, liabilities, revenue and expenses.

Actual results can differ from these estimates.  Estimates and underlying assumptions are reviewed on an ongoing basis.  Revisions to estimates are recognised prospectively.

 

Significant management judgements

The following are the judgements made by management in applying the accounting policies of the Group that have the most significant effect on these consolidated financial statements.

 

Recognition of deferred taxation assets

The extent to which deferred taxation assets can be recognised is based on an assessment of the probability that future taxable income will be available against which the deductible temporary differences and taxation loss carry-forwards can be utilised.  The deferred taxation asset of £1,980k has been recognised on the basis that the Group is forecasting to make sufficient levels of profits in future periods.  

 

Estimation uncertainty

Impairment of goodwill

In assessing impairment, management estimates the recoverable amount of each asset or cash generating unit based on expected future cash flows and uses an appropriate rate to discount them.  Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate.  A discount rate of 10% has been applied to the impairment assessment calculation.  This was calculated and compared to the discount rates disclosed by a range of comparable quoted companies.  Management used judgement in the decision to use a discount factor of 10%.

 

Dilapidations provision

The Group has a portfolio of leased properties that sales branches and installation depots operate from.  A dilapidations provision is provided for leased properties where the lease agreement contains a contractual obligation to undertake remedial works at the end of the lease term and where wear-and-tear or damage on the property has occurred.  The calculation of the estimate is based on historical experience of cost to rectify upon exiting similar properties.  The estimated costs are subject to estimation uncertainty as the final payment agreed may differ to the estimated cost given the process whereby dilapidations are negotiated.

 

Product guarantee provision

The Group guarantees all of its products, which in the majority of cases covers a period of 10 years.  The provision is calculated to cover the cost of fulfilling any guanratee work to its customers and is based on the expected future costs of rectifying faults and the future rate of product failure arising within the guarantee period.  The level of provision required to cover this cost is subject to estimation uncertainty.

 

Expected credit loss for trade receivables

The Group assesses, on a forward-looking basis, the expected credit losses associated with its trade receivables.  This is based on historical experience, external indicators and forward - looking information to calculate the expected credit losses.  

5  Non-recurring costs

 

2020

2019

 

 

£000

£000

Note

 

 

 

 

 

 

 

 

Holiday pay accrual

470

  -

a

Litigation Costs

  74

  -

b

Restructuring and operational costs

266

  1,058

c

Impairment of right-of-use assets

-

692

d

Modification of impairment of right-of-use assets

5

-

e

Reversal of prior year impairment of right-of-use assets

(292)

-

f

Commercial Agreement service fee

-

  (13)

g

IT project impairment

-

113

h

 

 

 

 

Total non-recurring costs

523

 1,850

 

 

 

 

 

 

 

 

 

a)  The holiday pay accrual has arisen as a result of the impact of the shutdown of operations and resultant extension of 2020 leave entitlement to the end of 2021.  This has significantly increased the level of deferred holiday entitlement at the year end which has recognised as an accrual and which will reverse in full in 2021.  This item has been excluded from the underlying performance measures to ensure performance of the business is not skewed by both the expense in 2020 or its subsequent full release in 2021.

b)  Litigation costs are expenses incurred as a result of an ongoing legal dispute between the Group and an ex-agent.  These costs are predominantly legal advisor's fees.

c)  Restructuring and operational costs are expenses incurred, including redundancy payments, as a result of changes being made to reduce the cost structure of the business.

d)  Impairment of right-of-use asset costs relate to vacating properties recognised as assets under IFRS 16 where the lease commitment extended beyond 2019.

e)  Modification of right-of-use assets and liabilities relates to the closure of properties identified as right-of-use assets and liabilities during the period.

f)  Reversal of prior year impairment of right-of-use assets is the reversal of an impairment charge made in 2019 following closure of the Crawley installation depot which was subsequently reopened in 2020.

g)  Commercial Agreement service fee was the assessed fair value of the consideration payable under the terms of the Commercial Agreement that was attributed to services received.  The provision was adjusted based on the actual performance in 2019 and a £13k reduction to the original provision was made.

h)  IT project impairment charge represented the impairment of a capital investment made in a new electronic survey system that was stopped following results of field trials.

6  Earnings per share

 

 

 

 

 

2020

2019

 

 

 

 

 

 

 

Basic earnings per ordinary share (pence)

 

 

 

 

(4.3)

(4.0)

Diluted earnings per ordinary share (pence)*

 

 

 

 

(4.3)

(4.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

a) Basic earnings per share

 

 

 

 

 

 

The calculation of basic earnings per share has been based on the following (loss) attributable to ordinary shareholders and weighted-average number of shares outstanding.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

i) (Loss) attributable to ordinary shareholders (basic)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

2019

 

 

 

 

 

 000

 000

 

 

 

 

 

 

 

(Loss) attributable to ordinary shareholders

 

 

 

 

(5,054)

(3,306)

 

 

 

 

 

 

 

ii) Weighted-average number of ordinary shares (basic)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

No. of shares

No. of shares

 

 

 

 

 

'000

'000

In issue during the year

 

 

 

 

117,749

82,809

 

 

 

 

 

 

 

 

b) Diluted earnings per share

 

 

 

 

*Due to net loss for the period, dilutive loss per share is the same as basic.

 

 

 

 

 

 

 

7  Trade and other receivables

 

 

 

 

 

2020

2019

 

 

 

 000

 000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade receivables (net of ECL allowance)

 

 

 

 

2,111

1,702

Other receivables

 

 

492

16

Prepayments

 

 

 

 

3,060

2,281

 

 

 

 

 

 

 

 

 

 

 

 

5,663

3,999

 

Contractual payment terms with the Group's customers are typically zero days.  Payment is due upon installation.  The above receivables are shown net of the ECL allowance.

 

 

 

 

 

2020

2019

 

 

 

 

 

 000

 000

 

 

 

 

 

 

 

Opening provision against trade receivables

 

 

 

 

1,072

1,206

Provision utilised in year

 

 

 

 

(245)

(611)

Expensed in year

 

 

 

 

890

477

 

 

 

 

 

 

 

Closing provision for trade receivables

 

 

 

 

1,717

1,072

 

8  Trade and other payables

 

 

 

 

 

2020

2019

 

 

 

 

 

 000

 000

 

 

 

 

 

 

 

Trade payables

 

 

 

 

7,036

6,675

Other taxation and social security costs

 

 

 

 

5,563

2,167

Other creditors and deferred income

 

 

 

 

5,025

3,197

Accruals

 

 

 

 

4,305

3,345

 

 

 

 

 

 

 

 

 

 

 

 

21,929

15,384

9  Share capital

 

 

 

Share Capital

Allotted, issued and fully paid

£000

 

 

Balance at 29 December 2019

828

 

 

50,000,000 Ordinary Shares @ 1p each on 28 April 2020

500

4,000,000 Ordinary Shares @ 1p each on 23 October 2020

40

 

 

Balance at 3 January 2021

1,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                       

10  Right-of-use assets and lease liabilities

 

 

Properties

Motor Vehicles

Equipment

Total

 

 

 

 

 

 

 

Assets

 

 

 

 

 

At 31 December 2018

6,088

3,360

293

9,741

 

Additions

219 

  374

  - 

593

 

Depreciation

(1,140)

(2,540)

(155)

(3,835)

 

Impairment

(487)

  - 

  - 

(487)

 

At 29 December 2019

4,680

1,194

138

6,012

 

Additions

1,265

4,376

251

5,892

 

Depreciation

(1,104)

(2,457)

(184)

(3,745)

 

Reversal of impairment

292

-

-

292

 

Modification

(363)

(79)

(5)

(447)

 

At 3 January 2021

4,770

3,034

200

8,004

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

At 30 December 2019

5,046

1,193

143

6,382

 

Modification

(367)

(75)

-

(442)

 

Payment

(1,371)

(2,639)

(199)

(4,209)

 

Additions

1,265

4,376

251

5,892

 

Interest

326

141

20

487

 

At 3 January 2021

4,899

2,996

215

8,110

 

 

 

 

 

 

 

Reconciliations of movements of liabilities to cash flows arising from financial activities

 

 

 

 

 

 

 

 

At 30 December 2019

  5,046

  1,193

  143

  6,382

 

Changes from financing cash flows

 

 

 

 

 

Payment of lease liabilities

(1,045)

(2,498)

(179)

(3,722)

 

Total changes from financing cash flows

(1,045)

(2,498)

(179)

(3,722)

 

 

 

 

 

 

 

Other changes

 

 

 

 

 

New leases

1,265

4,376

251

5,892

 

Lease modification

(367)

(75)

-

(442)

 

Interest expense

326

141

20

487

 

Interest paid

(326)

(141)

(20)

(487)

 

Total liability-related other changes

898

4,301

251

5,450

 

 

 

 

 

 

 

At 3 January 2021

4,899

2,996

215

8,110

 

 

 

 

Liabilities - classification

 

 

 

 

 

 

 

Properties

Motor Vehicles

Equipment

Total

 

 

Current (<1 year)

1,263

1,145

116

2,524

 

 

Long term (>1 year)

3,636

1,851

99

5,586

 

 

 

4,899

2,996

215

8,110

 

 

 

 

 

 

The interest expense recognised in the profit and loss statement is in the table above.  No expenses relating to short-term leases and low value leases has been recognised.  The total cash outflow for leases is £4,209k.  This comprises the payment of lease liabilities of £3,722k and the interest paid of £487k.

 

The Group has a number of leases within the business including properties for installation depots and sales branches, vehicles and plant & equipment.  With the exception of short-term leases and leases of low-value underlying assets, each lease is reflected in the consolidated statement of financial position as a right-of-use asset and a lease liability.  Leases are either non-cancellable or may only be cancelled by incurring a substantive termination fee.  For leases relating to properties, the Group must keep those properties in a good state of repair and return the properties to their original condition at the end of the lease.

                     

 

11  Contingent liability

The Group uses the services of a large number of self-employed individuals for marketing, sales, surveying and installation purposes.  As disclosed last year, the Group is currently involved in a compliance review by HMRC in respect of the employment status of these individuals.  This review has been ongoing for over three years although there has been no contact from HMRC in over a year on this matter.  The Group has operated this self-employed model consistently for a number of years and there has been no material change to the underlying business model during this time.  The Group continues to monitor developments in legislation and case law and has sought professional advice to ensure the rules are being applied correctly.  The Group believes that its approach in this area is comparable with many other companies operating in this industry and wider sector where the use of selfemployed agents and contractors is the primary source of specialised resource.  Furthermore, the Group is aware that HMRC has previously assessed some of its self-employed agents and has recovered unpaid taxes from these individuals on that basis.  The Group will continue to work with HMRC to respond to any further queries and believes that it has followed professional advice and applied the requirements diligently.

 

Although there has been no communication received on this matter from HMRC in the last 12 months, the Group will continue to treat this compliance review as an ongoing and open matter.  Whilst this remains open, the Group acknowledges that there is a potential risk of employee status findings by HMRC in respect of one or more groups of self-employed workers, however the Group continues to believe that the chance of this is unlikely based on the facts and circumstances set out above.  It continues to be impracticable to indicate any potential financial impacts of any status rulings at this time.

 

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