REG - Safestyle UK PLC - Interim Results
22/09/2022 07:01
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RNS Number : 2112A Safestyle UK PLC 22 September 2022
This announcement contains inside information for the purposes of Article 7 of
the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law
by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is
disclosed in accordance with the Group's obligations under Article 17 of MAR.
22 September 2022
Safestyle UK plc
("Safestyle" or the "Group")
Interim Results 2022
Strong balance sheet and strategic investment programme will position Group
for long-term growth
Safestyle UK plc (AIM: SFE), the leading UK-focused retailer and manufacturer
of PVCu replacement windows and doors for the homeowner market, today
announces its interim results for the six months ended 3 July 2022(1) (H1).
Financial and operational highlights
H1 2022 H1 2021 H1 22 v H1 21 % change
Revenue 78.3 73.0 7.2%
Gross Profit 19.4 23.5 (17.7%)
Gross margin % 24.75% 32.23% (748bps)
Underlying (loss) / profit before taxation(2) (1.4) 5.1 n/a
Non-underlying items(3) (1.4) (0.8) (86.5%)
(Loss) / profit before taxation (2.8) 4.3 n/a
EPS - Basic (1.5)p 2.6p n/a
Net cash(4) 13.0 14.4 n/a
Interim dividend per share 0.4p - n/a
1) The interim financial statements are presented for the period ended on the
closest Sunday to the end of June. This date was 3 July 2022 for the current
reporting period and 4 July 2021 for the prior period. All references made
throughout to H1 2022 are for the period 3 January 2022 to 3 July 2022 and
references to H1 2021 are for the period 4 January 2021 to 4 July 2021.
Underlying (loss) / profit before taxation is defined as reported (loss) /
profit before taxation before non-underlying items and is included as an
2) alternative performance measure in order to aid users in understanding the
ongoing performance of the Group.
3) Non-underlying items consist of non-recurring costs, share-based payments and
the Commercial Agreement amortisation.
4) 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.
Headlines
· H1 revenue growth of 7.2%, order intake (sales) growth of 11.7%
and order book growth of 17.7%.
· Return to dividend payments, with an interim dividend declared of
0.4p per share.
· Net cash increased to £13.0m from £12.1m at year-end.
· H1 underlying profit reduction due to the c.£4m impact of a
cyber-attack in Q1.
· The business initiated a £5m strategic investment programme
(versus 2021) that includes TV advertising, new business development, the
Safestyle Academy (for new fitters) and a range of actions to improve our
customer experience and reduce our cost of quality.
· Order book investment of £1.7m plus cost push on materials and
lead generation spend have reduced H1 gross margins; price increases expected
to mitigate these in H2.
· We continue to make progress on our ESG agenda and remain on track
to achieve our 2025 targets with a further 1% reduction in CO(2) per frame and
waste to landfill decreasing to 4% in this first half.
Outlook
· The business expects its strong value proposition, consumer
finance options and its products' energy efficiency benefits to mitigate what
may be an uncertain consumer market in H2 and beyond.
· Softer sales at the height of an unusually hot summer in the UK
drove a decision to invest in an earlier return to TV, with a focused message
on value and energy efficiency.
· Record temperatures in late July also caused some disruption to
our factory fulfilment performance for c.2 weeks which impacted customer
service and installation volumes during Q3; the factory is now operating
normally.
· H2 revenues are forecast to accelerate to double-digit growth and
will support gross margin percentages back above 30%.
· Our strategic investment programme will be sustained through H2
and covered at our forthcoming Capital Markets Day (detailed below).
· The Board forecasts that the Group's underlying performance will
still be profitable for H2 and for the full year. After the impact of the
factors above, although we anticipate revenue exceeding expectations, we now
expect full year underlying profit will be no lower than £1.0m. The Board
have, however, decided not to reduce the pace or quantum of our investment
following delays caused by a prolonged period of turbulence.
· As the national value player in our industry, we believe we are
well placed to attract consumers in tougher economic times and have traded
resiliently through previously difficult economic periods.
· Having returned to a dividend payment at the half year, the Group
targets a progressive dividend policy in line with its capital allocation
policy.
Commenting on the results, Mike Gallacher, CEO said:
"The business has delivered a good trading performance in the first half,
achieving revenue growth of 7.2% against an increasingly difficult economic
backdrop. Despite the obvious financial impact of the cyber-attack, it is
pleasing to see our net cash position remains strong, increasing to £13.0m at
period end with the Group's order book also growing by 17.7% over the first
half, representing a closing position that was 17.6% ahead of the prior
period. This supports our ability to act on our long-standing intent to
return to paying dividends to shareholders.
In 2022 we emerged from a sustained period of turbulence and have now
initiated a multi-year strategic investment programme. For 2022, this
represents a £5m investment versus 2021 and it encompasses a full year return
to TV advertising (£2.5m), the initiation of an important new business
development project (£0.7m), the launch of the new Safestyle Academy which
has prioritised training new window fitters (£0.8m), the roll out of Standard
Operating Procedures ('SOPs') across our depot network and a range of
investments behind improving our customer experience and reducing our quality
costs. This programme is designed to modernise the business, drive growth
and build sustainable competitive advantage over the medium term. More
details will be shared at our Capital Markets Day which is scheduled to take
place on 16(th) November 2022. We remain committed to sustaining these
strategic investments through the coming years.
Looking ahead, notwithstanding the challenging macro-economic conditions, we
still expect the business to deliver both an (underlying) profitable full year
and positive cashflow from operations. As a result of the challenges in Q3
caused by the unusually hot weather and the Board's commitment to our
strategic investment programme, we now expect full year underlying profit will
be no lower than £1.0m. As ever, the Group remains keenly focused on
advancing our strategic priorities and believe these investments will leave us
well positioned to deliver sustainable long-term performance for our
shareholders."
Enquiries:
Safestyle UK plc via FTI Consulting
Mike Gallacher, Chief Executive Officer
Rob Neale, Chief Financial Officer
Zeus (Nominated Adviser & Joint Broker) Tel: 0203 829 5000
Dan Bate / James Edis (Investment Banking)
Dominic King (Corporate Broking)
Liberum Capital Limited (Joint Broker) Tel: 0203 100 2100
Neil Patel / Jamie Richards
FTI Consulting (Financial PR) Tel: 0203 727 1000
Alex Beagley / Sam Macpherson / Amy Goldup
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 (http://www.safestyleukplc.co.uk) or
www.safestyle-windows.co.uk.
CEO's Statement
H1 saw the delivery of strong revenue growth, increasing by 7.2% with order
intake (sales) up 11.7% versus the prior period. As a result, our order book
grew by 17.7% in H1 and our net cash position moved to £13.0m. As indicated
previously our financial performance in H1 was materially impacted by a
cyber-attack at the end of January. This was predominantly caused by the
delay to a planned pricing move designed to keep pace with inflationary cost
push coming through. As a result, the business saw planned profits for H1
reduced by c.£4.0m to a loss of (£1.4m), albeit profitability recovered
rapidly to planned levels in May and into June.
Input costs in H1 reflect the highest levels of inflation in many years,
increasing year on year by over 20% in some cases. The main causes were due
to rising energy costs being passed on by our suppliers as well as higher raw
material, staffing and fuel costs. As we have demonstrated in the last few
years, we have moved promptly to mitigate the impact of these costs on our
margins through proactive price changes alongside careful cost management.
Whilst the cyber-attack caused a delay, we implemented our Q1 price increase
early in Q2 and the effect of this began to come through in our revenues in
the latter part of the quarter. Our systems are now operating normally. We
expect to continue to respond to cost pressures as necessary while also
ensuring that our offering maintains its value proposition for our customers.
The growth in the order book through H1 represents an investment of £1.7m.
The business also initiated a multi-year strategic investment programme in H1
equating to a £2.1m increase in operating expenses versus H1 2021. This
spend consisted of £0.9m of TV spend, alongside further growth in people
costs, IT, training and customer service investment. The strong cash
position of the business has supported this growth in line with our strategic
priorities.
Trading & Operations
The 11.7% growth in order intake (sales) delivered during H1 reflected the
success of our largest TV campaign since 2017. The campaign communicated a
new, modernised brand proposition and a strong value message and was fronted
by David Seaman MBE. The £0.9m investment in H1 allowed us to sustain the
campaign and ensure its impact was maximised across the market and was
supported by an aligned digital marketing campaign.
We continue to make significant progress leveraging our scale in digital
marketing, supported by the excellent agency we appointed in 2020.
Increasing the use of Artificial Intelligence ('AI') and other optimisation
strategies will continue to be essential to help offset the rising levels of
digital marketing rate inflation.
Our processing, installations and customer service levels were impacted by the
cyber-attack in the early part of the year. Despite this, revenue increased
7.2% in H1 with a return to volume growth of 2% in Q2. The business now
operates 14 depots, an increase of 2 since 2020 in order to support both a
broader footprint and improved medium-term fit capacity.
Dividend
We are pleased to report a return to dividend payments with the Board
approving an interim dividend of 0.4p per share (H1 2021: £nil) and an
intention to adopt a progressive dividend policy going forward. Further
details of the dividend including a dividend timetable are included in the
Financial Review further below.
Strategic Priorities
After a number of years of turbulence, 2022 saw us initiate an ambitious £5m
(versus 2021) strategic investment programme aimed at supporting the medium
and long-term performance of the business. It remains important to share our
strategic roadmap at our Capital Markets Day scheduled for 16(th) November
2022.
For H1 2022 the strategic investment programme included the following specific
activities:
Delivering Profitable Growth: Rebuilding our brand is a key element of our
growth strategy. Between 2018 and 2021, brand investment was significantly
scaled back, driving up digital marketing costs and impacting our national
brand awareness. Our return to national TV in 2022 is therefore a strategic
investment that, when sustained, will drive awareness, reduce cost and drive
volume growth. In addition, we have modernised the brand, leveraging
proprietary industry market research which was conducted during 2020-2021.
Transforming our Customer Experience: Delivering a consistent and good
customer experience across the regions has been a consistent barrier to scale
across our industry. Our approach is based on designing and implementing
robust business processes, supported by modern IT systems and effective
training. This is a phased multi-year initiative, with an early focus on
customer service levels through investing in modernising our call centre and
implementing Net Promoter Score (NPS) across the installations network.
A key element of this programme is the launch of the Safestyle Academy,
initially focused on training new window fitters. Our 12-month programme is
the largest such programme in the UK and will deliver regular cohorts of
well-trained window fitters to the business, addressing the current skill
shortages across the UK and embedding the Safestyle approach to customer
service. The first cohort from this programme will graduate before the end
of the year.
Levelling up our Depots and Branches: As our business grows, we need to ensure
that we develop and implement SOPs that close the range of performance across
our network. During H1 we rolled out our new SOPs across installations and
developed our first training programme for depot management. This training
will be deployed across our installations management population during H2.
IT as an Enabler: Early modernisation of our systems helped to mitigate the
impact of the sophisticated cyber-attack we experienced in Q1. Over the next
two years, our focus will be to modernise our legacy systems, including
implementing a modern CRM system, which will transform our customer
experience.
Our ESG agenda: The business takes its broader responsibilities seriously and
has introduced a temporary monthly cost of living allowance was announced for
Q4 2022 and Q1 2023 for selected groups of staff to mitigate some of the
impact of the current cost of fuel increases.
I am delighted that we have also sustained progress in our environmental
agenda and can confirm that we are on track to achieve our 2025 targets with a
further 1% reduction in CO(2) per frame versus FY 2021 and waste to landfill
decreasing further to 4%. The key remaining breakthrough to reduce our
carbon emissions further is electrifying the Group's vehicle fleet which
requires both the vehicle technology and infrastructure. We have also
commenced our Scope 3 audits of our 10 largest suppliers and we will be able
to share more details on this in our 2022 Annual Report next year.
Business Outlook
The economic and consumer outlook will remain challenging in H2, with consumer
confidence levels at a 40-year low and inflation at a corresponding high.
Against this context, we are confident in leveraging both our clear value
proposition and the relevance of our product at a time of high household
energy costs. This proposition is supported by market leading finance
options and a credible 10-year warranty.
Following a strong H1, order intake performance in Q3 slowed at the height of
an unusually hot summer although our order book mitigated the impact on
revenue. Record temperatures in late July caused some disruption to our
critical manufacturing equipment and subsequently to our order fulfilment
levels for c.2 weeks into mid-August. As referenced above, the factory is
back to operating normally and measures are in place to ensure that if we
experience similar temperature levels in the future, it will not have the same
impact.
Our response to the softer market was to bring forward the second phase of our
2022 TV campaign into August with a key message around energy efficiency.
Early signs are that this has helped stimulate demand and we have returned to
value growth in August, although volumes are still marginally behind the prior
year. If we do see weakening consumer demand across the industry in the
months ahead, it will be even more critical to sustain our TV campaign
investment.
We continue to forecast double-digit revenue growth in H2 due to a combination
of volume delivery and price progression which in turn we forecast to drive
gross margin percentages back above 30% with a return to underlying profits
for both the second half of the year and also for the full year. This
performance will be despite protecting our investment agenda, including
further investment in new business development. These activities and
initiatives will be covered during our Capital Markets Day.
Overall, we still expect to deliver both a full year underlying profit and
positive cashflow from operations despite the £4m impact of the cyber-attack
and the strategic investment programme. Although we anticipate revenue
exceeding expectations, we now expect full year underlying profit will be no
lower than £1.0m after the Q3 challenges and the increased new business
development investment described above.
Our view, supported by our current performance, remains that as the national
value player in our industry we are well placed to attract consumers in
tougher economic times while still progressing our financial performance and
investing for the medium-term.
Mike Gallacher
Chief Executive Officer
22 September 2022
Financial Review
H1 2022 H1 2021
Underlying Non-underlying items(3) Total Underlying Non-underlying items(3) Total H1 22 v H1 21 change in underlying %
Financials £000 £000 £000 £000 £000 £000
Revenue 78,250 78,250 72,980 72,980 7.2%
Cost of sales (58,886) (58,886) (49,456) (49,456) (19.1%)
Gross Profit 19,364 19,364 23,524 23,524 (17.7%)
Other operating expenses(1) (19,943) (1,429) (21,372) (17,838) (766) (18,604) (11.8%)
Operating (loss) / profit (579) (1,429) (2,008) 5,686 (766) 4,920 n/a
Finance costs (833) (833) (628) (628) (32.6%)
(Loss) / profit before taxation(2) (1,412) (1,429) (2,841) 5,058 (766) 4,292 n/a
Taxation 807 (729)
(Loss) / profit for the period (2,034) 3,563
Basic EPS (pence per share) (1.5)p 2.6p
Diluted EPS (pence per share) (1.5)p 2.5p
Cash and Cash equivalents 17,327 18,600
Borrowings (4,305) (4,193)
Net Cash(4) 13,022 14,407
KPIs for the period H1 2022 H1 2021 H1 22 v 21 change
Gross margin %(5) 24.75% 32.23% (748bps)
Average Order Value (£ inc VAT) 4,300 4,020 7.0%
Average Frame Price (£ ex VAT) 832 764 8.9%
Frames installed - units 94,525 96,241 (1.8%)
Orders installed 21,946 21,958 (0.1%)
Frames per order 4.31 4.38 (1.6%)
Some of the Group's KPIs have been further broken down in the table below into
quarterly measures to aid the understanding of performance trends within the
period.
KPIs by quarter Q1 2022 Q1 2021 Q1 22 v Q1 21 change Q2 2022 Q2 2021 Q2 22 v Q2 21 change
Revenue 36.7 34.7 5.8% 41.6 38.3 8.5%
Average Order Value (£ inc VAT) 4,149 3,874 7.1% 4,443 4,164 6.7%
Average Frame Price (£ ex VAT) 820 741 10.7% 843 787 7.0%
Frames installed - units 44,875 47,542 (5.6%) 49,650 48,699 2.0%
Orders installed 10,641 10,907 (2.4%) 11,305 11,051 2.3%
Frames per order 4.22 4.36 (3.3%) 4.39 4.41 (0.3%)
H1 2022's financial performance was significantly impacted by the consequences
of the cyber-attack which caused a delay to the implementation of a planned
January price increase and also reduced installation volumes during the period
when the Group's normal processes were curtailed. The price increase was
implemented in late April which, alongside a return to normal processing
capacity levels, resulted in installation volume returning to year on year
growth in Q2 with the Group also returning to an underlying profit before
taxation in May and June.
Alongside the financial impact of the cyber-attack, H1 also includes a number
of material investments that underpin the Group's medium-term strategic
priorities. These include a £0.9m spend on the H1 TV campaign alongside
further investment in customer service resource, installations capacity,
training and IT.
Finally, as described in the CEO's statement, order intake grew by 11.7% over
the prior period which resulted in the order book increasing by 17.7%, closing
the half 17.6% higher versus the end of H1 2021. The costs associated with
this growth in the order book totalled £1.7m and gross margins are expected
to increase in H2 as the order book unwinds over the coming months.
The Group made an underlying loss before taxation(3) of £(1.4)m for the
period due to the above factors. Net cash(4) grew by £0.9m from the year
end position to £13.0m.
Financial and KPI headlines
· Revenue increased to £78.3m, growth of 7.2% on H1 21.
· Frames installed declined by 1.8% versus H1 21 to 94,525, albeit
frames installed in Q2 grew by 2.0% over 2021 as the business recovered from
the disruption caused by the cyber-attack.
· Average frame price has continued to increase this year, with growth
of 8.9% achieved versus H1 21 to £832. This increase largely signals the
carry through of price actions in 2021. As referenced in the CEO's
statement, planned price increases this year were delayed until Q2 as a result
of the cyber-attack. The Group has continued to increase its prices to keep
pace with cost inflation. Higher-priced composite guard doors reduced year
on year from 7.4% to 6.6% which represents a mild negative mix effect on the
average frame price.
· Gross profit reduced by 17.7% versus H1 21 to £19.4m. Gross
margin percentage(5) reduced by 748bps to 24.75%. H1 21 represents a strong
comparative with the gross margin percentage positively influenced by lower
lead generation costs due to favourable market conditions alongside a benefit
of the order book reducing during the period. This year, lead generation
costs have returned to more normalised (and thus higher) levels and the order
book grew through the first half with the associated costs of delivering this
expensed in H1. In addition, the delay to the price increase described above
adversely impacted gross margin percentage in H1 as inflation of input costs
came through. The gross margin percentage is expected to increase back
above 30% as the order book unwinds and recent price increases feed through
into the Group's revenues.
· Underlying other operating expenses(1) for the period increased by
£2.1m (11.8%) over H1 21 due to a £0.9m investment in the H1 TV campaign,
wage inflation and increased investment in customer service resource,
installations capacity, training and IT.
· Underlying (loss) / profit before taxation was a loss of £(1.4)m for
the period (H1 21: profit of £5.1m) due to the impact on H1 financial
performance of the cyber-attack, order book growth and the Group's investment
agenda.
· Non-underlying items(1) totalled £1.4m (H1 21: £0.8m) with the
increase a result of the non-recurring costs associated with recovery from the
cyber-attack. Consequently, after non-underlying items, reported (loss) /
profit before taxation was a loss of £(2.8)m versus a profit of £4.3m in H1
21.
· Net cash improved to £13.0m compared to £12.1m at the end of the
prior year. The improved cash position at the end of the period is a result
of working capital timing partially offset by the loss for the year to date.
(1) 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
(2) Underlying (loss) / profit 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
(3) See the non-underlying items section in this Financial Review
(4) Net cash is cash and cash equivalents less borrowings
(5) Gross margin % is gross profit divided by revenue
Underlying performance measures
In the course of the last four years, the Group has faced a series of
unprecedented and unusual challenges. These gave rise to a number of
significant non-underlying items starting in 2018 with consequential items in
2019 as the Group addressed the impact of these challenges, predominantly as
part of its Turnaround Plan. The impact of COVID-19 in 2020 also gave rise
to a material non-underlying item in the form of a holiday pay accrual. The
costs of recovering from the cyber-attack in H1 22 are also treated as
non-underlying costs. Further details are provided below in this Financial
Review.
As a consequence of these items, adjusted measures of underlying other
operating expenses and underlying (loss) / profit before taxation have been
presented as the 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 (loss) / profit
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. Non-recurring costs are excluded because
they are not expected to repeat in future years. These costs are therefore
not included in these alternative 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 these alternative performance measures as such changes would
again potentially distort the evaluation of the Group's performance year to
year.
Finally, Commercial Agreement amortisation is also excluded from these
alternative 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 period was £78.3m compared to £73.0m for H1 21, representing
an increase of 7.2%. In the first quarter of the year, year on year revenue
growth was 5.8% increasing to 8.5% growth in Q2 with this improving revenue
trajectory reflecting the recovery from the January cyber-attack.
Frames installed volumes reduced by 1.8% versus H1 21 to 94,525 with the
impact of the cyber-attack reducing volumes between January and April although
the Group returned to volume growth in the second quarter of 2%, as it
recovered fully from the disruption this caused. As with the prior year, the
revenue growth exceeds the volume performance as a result of the following:
· The average frame price increased by 8.9% year on year to £832 (H1
2021: £764). The price performance in H1 largely represents the exit rate
of price from 2021. The Group had to delay implementation of planned list
price increase from January to April and thus the full effect of this will
only come through in the second half results.
· The project to reduce the Group's finance subsidy costs which are
incurred as part of its consumer finance offering over the last 18 months is
now complete. The ongoing expectation is that finance subsidy costs are
expected to be minimal as we go forward, whilst we also strive to ensure that
we have a market-leading set of affordable payment options available to our
customers.
· The average number of frames per order has remained broadly the
same year on year at 4.31 with the Group continuing to drive a healthy average
order size which, alongside the average frame price growth described above,
has resulted in an increase in the average order value over H1 21 of 7.0% to
£4,300.
Gross profit
Gross profit was £19.4m, a reduction of 17.7% over H1 21. The Group's gross
margin percentage reduced by 748bps to 24.75% versus H1 21's strong
comparative of 32.23%.
This reduced year on year gross margin percentage is despite the higher
average price described above and is a result of the slightly lower
installation volume with the other significant elements being as follows:
· Despite the operational disruption on installations and customer
service as a result of the cyber-attack, the Group achieved order intake
growth of 11.7% over H1 21. The Group's order book increased by 17.7% over
H1, representing a closing position that was 17.6% ahead of the prior
period. The cost associated with driving this growth totals £1.7m within
gross margin for H1 22 which will unwind as the order book is fitted out in
future periods.
The order intake growth, investment and consequential impact on gross margin
in the period is in contrast to the movement in the order book in H1 21 which
was reduced by 8.3% from its record opening high levels at the start of 2021
and equated to a £0.4m gross margin benefit in H1 21. These order book
changes alone represent a year on year swing in gross profit of £2.1m which
is c.50% of the total year on year reduction in gross profit.
· Alongside the order book changes described above, H1 22
represented a more normalised cost for lead acquisition costs versus a
comparative in H1 21 that was buoyed by a strong consumer response following
the restart of all selling activities when the third national COVID lockdown
was ended in early 2021. The consequential rate increase back to these
normalised levels represents a cost of £1.8m versus H1 2021 levels across the
first half.
The focus within the sales and marketing teams remains to ensure that the
balance between good conversion, volume, discount levels and cancellation
rates is optimised.
· Finally, the rising cost push linked to rising input costs including
PVCu profile, glass, installation materials, scaffolding, fuel and contractor
costs represent a year on year rate increase of £5.5m. This is marginally
higher than the £5.3m benefit of the increased average frame rate and
highlights the pace at which cost increases have come through this year. The
price actions enacted in April and also into H2 22 are to ensure the Group
mitigates this cost headwind whilst also striving to deliver value to its
customers.
Underlying other operating expenses
Underlying other operating expenses were £19.9m which includes TV investment
of £0.9m and is an increase of £2.1m (11.8%) over H1 21. Excluding the TV
spend, the increase of other operating expenses was £1.2m (6.7%). The key
factors behind this increase are as follows:
· Wage inflation represents the largest single driver of the year on
year cost increase. The costs of a 3% annual payrise for most staff have
been incurred alongside higher % increases for a number of colleagues to
underpin attraction and retention of people at all levels of the organisation.
· Furthermore, commensurate with the Group's strategic priorities, we
have continued to grow our customer service resource levels and invest in
installations capacity in the last 18 months. The opening of the Milton
Keynes depot in August 2021 alongside increased operational headcount are the
other main drivers of the year on year increase in operating expenses.
· Finally, the Group continues its ongoing investment in IT,
recruitment and training as key enablers of the Group's strategic
priorities. The ongoing investment in upgrading and implementing new IT
systems is part of the technology roadmap. This has already delivered
benefits including the continuation of operations throughout the pandemic and
critically helped to mitigate the full potential impact of the cyber-attack in
January 2022.
Underlying (loss) / profit before taxation
Underlying (loss) before taxation was £(1.4)m versus a profit in H1 21 of
£5.1m. 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 (H1 2021: £0.8m). The current period's total consists of £0.9m of
non-recurring costs (H1 21: £0.1m), a £0.3m share based payment charge (H1
21: £0.5m) and £0.2m (H1 21: £0.2m) of Commercial Agreement (Intangible
Asset) amortisation. The table below shows the full breakdown of these
items:
H1 2022 H1 2021
£000 £000
Holiday pay accrual (release) (72) (88)
RSA related costs 12 -
Restructuring and operational costs 96 96
Litigation Costs 23 33
Cyber incident-related costs 945 -
Impairment of right-of-use assets 27 -
Modification of right-of-use assets and liabilities (112) 12
Total non-recurring costs (note 4) 919 53
Commercial Agreement amortisation 226 226
Equity-settled share based payment charges 284 487
Total non-underlying items 1,429 766
The holiday pay accrual arose as a result of the impact of the shutdown of
operations and resultant extension of 2020 leave entitlement which, for some
employees, is up to March 2023. The release in the current reporting period
represents a partial-unwinding of the original accrual booked in 2020 due to
the deferred holiday subsequently taken in the year.
The Group incurred £0.1m (H1 21: £0.1m) of restructuring and non-recurring
operational costs which reduced the Group's overheads in some areas. £0.9m
of separately identifiable cyber incident-related costs are included in
non-recurring costs in relation to the incremental costs incurred as part of
the recovery from the cyber-attack. Finally, a credit of £0.1m has been
recognised in relation to the early termination of leases on six properties
identified as right-of-use assets in the period.
As reported in the last four years, the Commercial Agreement 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.
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 five years which matches the term of the non-compete
arrangement.
Share based payment charges reduced versus H1 21 with this year representing a
more normalised charge with the prior period higher due to charges in relation
to the Restricted Share Award granted in October 2020 that vested in June
2021.
The items classified as non-recurring costs in the Consolidated Income
Statement, the share based payment charges 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) / profit 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 (1.5)p for the period
compared to a profit of 2.6p in H1 21. Diluted earnings per share were a
loss of (1.5)p (H1 21: profit of 2.5p). The basis for these calculations is
detailed in note 5.
Net cash and cashflow
The Group has increased its net cash during the period, closing at £13.0m
compared to £12.1m at the end of 2021. £4.5m of the Group's £7.5m
facility, being that of the term loan, remains drawn with the remaining £3.0m
revolving credit facility undrawn. The current facility expires in October
2023.
Net cash inflow from operating activities, including the cashflow impact of
non-underlying items, was £3.7m (H1 2021: £9.2m). The inflow for the
period, although reduced versus the prior period which reflects the reduction
in H1 profits as described above, reflects the strong operating cashflow model
of the Group. In addition, H1 each year typically contains a timing benefit
within working capital, most notably related to the timing of quarterly VAT
payments.
Partially offsetting this positive profit net cash inflow was capital
investment of £0.6m (H1 21: £0.2m), representing the ongoing investment in
the Group's infrastructure and systems as well as some maintenance capex for
the manufacturing facility.
Dividends and capital allocation policy
The Board has approved an interim dividend of 0.4p per share (H1 2021: £nil)
signalling a return to the dividend list for the first time since 2017 as part
of the Group's capital allocation policy. As reported previously, the
Board's policy is to firstly utilise surplus cash to fund forthcoming
strategic initiatives. Subsequent to that, the policy is to return surplus
cash to shareholders through the restoration of a progressive dividend
followed by buyback programmes and latterly, special dividends in order to
maximise returns to our shareholders.
The return to a dividend signals the Board drawing a line under the turbulence
of the past few years and the intention for a progressive dividend policy from
here. The interim dividend will be paid on 28 October 2022 to shareholders
on the register on 30 September 2022 and will have an ex-dividend date of 29
September 2022.
Rob Neale
Chief Financial Officer
22 September 2022
Consolidated Income Statement
Unaudited Unaudited Audited
Note 6 months ended 6 months ended 12 months ended
3rd Jul 2022 4th Jul 2021 2nd Jan 2022
£000 £000 £000
Revenue 78,250 72,980 143,251
Cost of sales (58,886) (49,456) (99,496)
Gross profit 19,364 23,524 43,755
Expected credit losses expensed (348) (269) (362)
Other operating expenses (21,024) (18,335) (35,807)
Operating (loss) / profit (2,008) 4,920 7,586
Finance costs 6 (833) (628) (1,623)
(Loss) / profit before taxation (2,841) 4,292 5,963
Underlying (loss) / profit before taxation before non-recurring costs, (1,412) 5,058 7,613
Commercial Agreement amortisation and share based payments
Non-recurring costs 4 (919) (53) (511)
Commercial Agreement amortisation (226) (226) (452)
Share based payments (284) (487) (687)
(Loss) / profit before taxation (2,841) 4,292 5,963
Taxation 807 (729) (1,188)
(Loss) / profit for the period (2,034) 3,563 4,775
Earnings per share
Basic (pence per share) 5 (1.5)p 2.6p 3.5p
Diluted (pence per share) 5 (1.5)p 2.5p 3.4p
There is no other comprehensive income for the period.
All operations were continuing throughout all periods.
Consolidated Statement of Financial Position
Unaudited Unaudited Audited
Note 6 months ended 6 months ended 12 months ended
3rd Jul 2022 4th Jul 2021 2nd Jan 2022
£000 £000 £000
Assets
Intangible assets - Trademarks 504 504 504
Intangible assets - Goodwill 20,758 20,758 20,758
Intangible assets - Software 1,103 856 870
Intangible assets - Other 606 1,058 832
Property, plant and equipment 10,589 11,089 10,811
Right-of-use assets 10,578 11,119 11,146
Deferred taxation asset 1,847 1,433 1,053
Non-current assets 45,985 46,817 45,974
Inventories 5,457 4,785 5,298
Trade and other receivables 6,985 5,828 4,880
Cash and cash equivalents 17,327 18,600 16,351
Current assets 29,769 29,213 26,529
Total assets 75,754 76,030 72,503
Equity
Called up share capital 1,389 1,384 1,386
Share premium account 89,495 89,495 89,495
Profit and loss account 9,127 9,258 10,893
Common control transaction reserve (66,527) (66,527) (66,527)
33,484 33,610 35,247
Liabilities
Trade and other payables 7 23,400 23,576 18,052
Lease liabilities 4,332 3,814 4,104
Corporation taxation liabilities 159 177 159
Provision for liabilities and charges 1,333 1,102 1,274
Current liabilities 29,224 28,669 23,589
Provision for liabilities and charges 2,219 2,079 2,109
Lease liabilities 6,522 7,479 7,327
Borrowing facility 4,305 4,193 4,231
Non-current liabilities 13,046 13,751 13,667
Total liabilities 42,270 42,420 37,256
Total equity and liabilities 75,754 76,030 72,503
Consolidated Statement of Changes in Equity
Share capital Share premium Profit and loss account Common control transaction reserve Total equity
£000 £000 £000 £000 £000
Balance at 3 January 2021 1,368 89,495 5,347 (66,527) 29,683
Total comprehensive profit for the period - - 3,563 - 3,563
Transactions with owners recorded directly in equity:
Equity settled share based payment transactions - - 358 - 358
Deferred taxation asset taken to reserves - - 6 - 6
Issue of new shares 16 - (16) - -
Balance at 4 July 2021 1,384 89,495 9,258 (66,527) 33,610
Total comprehensive profit for the period - - 1,212 - 1,212
Transactions with owners recorded directly in equity:
Issue of new shares 2 - (2) - -
Deferred taxation asset taken to reserves - - (2) - (2)
Corporation taxation taken to reserves - - 98 - 98
Equity settled share based payment transactions - - 329 - 329
Balance at 2 January 2022 1,386 89,495 10,893 (66,527) 35,247
Total comprehensive (loss) for the period - - (2,034) - (2,034)
Transactions with owners recorded directly in equity:
Issue of new shares 3 - (3) - -
Deferred taxation asset taken to reserves - - (13) - (13)
Equity settled share based payment transactions - - 284 - 284
Balance at 3 July 2022 1,389 89,495 9,127 (66,527) 33,484
Consolidated Statement of Cash Flows
Unaudited Unaudited Audited
6 months ended 6 months ended 12 months ended
Note 3 Jul 2022 4 Jul 2021 2 Jan 2022
£000 £000 £000
Cash flows from operating activities
(Loss) / profit for the period (2,034) 3,563 4,775
Adjustments for:
Depreciation of plant, property and equipment 699 756 1,473
Depreciation of right-of-use assets 1,851 1,835 3,882
Amortisation of intangible fixed assets 438 426 842
Impairment of right-of-use assets 27 - 122
Modification of right-of-use assets and liabilities (112) 12 (83)
Finance expense 6 833 628 1,623
IT project impairment - - 14
Equity settled share based payments charge 284 358 687
Taxation (credit) / charge (807) 729 1,188
1,179 8,307 14,523
(Increase) in inventories (159) (240) (753)
(Increase) / decrease in trade and other receivables (2,105) (165) 783
Increase / (decrease) in trade and other payables 7 5,348 1,647 (3,877)
Increase in provisions 8 262 195
3,092 1,504 (3,652)
Other interest (paid) (599) (563) (1,250)
Net cash inflow from operating activities 3,672 9,248 9,621
Net cash (outflow) from investing activities
Acquisition of property, plant and equipment (477) (197) (809)
Acquisition of intangible fixed assets (445) (377) (424)
Net cash (outflow) from investing activities (922) (574) (1,233)
Cash flows from financing activities
Proceeds from issue of share capital - - -
Payment of lease liabilities (1,774) (1,779) (3,742)
Net cash (outflow) from financing activities (1,774) (1,779) (3,742)
Net inflow in cash and cash equivalents 976 6,895 4,646
Cash and cash equivalents at start of period 16,351 11,705 11,705
Cash and cash equivalents at end of period 17,327 18,600 16,351
Notes to the interim financial information
1 General information and basis of preparation
The interim financial information for the six months ended 3 July 2022 and for
the six months ended 4 July 2021 does not constitute statutory financial
statements and is neither reviewed nor audited. The comparative figures for
the year ended 2 January 2022 are not the Group's consolidated statutory
accounts for that financial year but are extracted from those accounts which
have been reported on by the Group's auditor and delivered to the Registrar of
Companies. The report of the auditor was (i) unqualified and (ii) did not
contain a statement with reference to Articles 113B of Companies (Jersey) Law
1991
The condensed consolidated interim financial information for the period ended
3 July 2022 has been prepared in accordance with IAS 34, 'Interim financial
reporting' as adopted by the European Union.
Selected explanatory notes are included to explain events and transactions
that are significant to an understanding of the changes in financial position
and performance of the Group since the last annual consolidated financial
statements as at and for the year ended 2 January 2022.
The condensed consolidated interim financial information should be read in
conjunction with the annual financial statements for the year ended 2 January
2022 which have been prepared in accordance with International Financial
Reporting Standards ("IFRS") as adopted by the European Union.
The accounting policies adopted in the condensed interim financial information
are consistent with those set out in the financial statements for the year
ended 2 January 2022.
Period-end
These interim financial statements are presented for the first 26 weeks of the
financial year which ended on 3 July 2022 for the current year and ended on
the 4 July 2021 for the first half comparative period of the prior year. All
references made throughout these accounts for H1 2022 are for the period 3
January 2022 to 3 July 2022. References to H1 2021 are for the period 4
January 2021 to 4 July 2021.
2 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 £2.0m in the 6 months to 3 July 2022 (June
21: £3.6m profit) and had net current assets of £0.5m (June 2021: £0.5m).
As described in the financial review, H1 2022's financial performance was
significantly impacted by the consequences of the cyber-attack which caused a
delay to the implementation of a planned January price increase and also
reduced installation volumes during the period when the Group's normal
processes were curtailed. The price increase was implemented in late April
which, alongside a return to normal processing capacity levels, resulted in
installation volume returning to year on year growth in Q2 with the Group also
returning to underlying profit before taxation in May and June. Despite the
loss for the period, the Group's net cash position improved from £12.1m to
£13.0m as a result of working capital timing partially offset by the loss for
the year to date.
The banking facilities in place remain in place with a £4.5m term loan and a
£3.0m revolving credit facility which mature in October 2023. During 2022,
a revised covenant has been agreed with the facility provider which replaces
the minimum EBITDA that was historically tested on a monthly basis. A
springing covenant is now in place whereby EBITDA is not tested when net cash
is positive. Throughout the period to 3 July 2022, the term loan was fully
drawn whilst the revolving credit facility remained undrawn. This remains
the case at the date of this announcement.
The Directors have prepared forecasts covering the period to December 2023.
The forecasts include a number of assumptions in relation to sales volume,
pricing, margin improvements and overhead investments. Whilst the Directors
believe the assumptions to be sensible, the operating environment is exposed
to a number of risks which could impact the actual performance achieved in
2022 and 2023. These risks include, but are not limited to, reducing
consumer confidence due to the general economic conditions, delivering the
required levels of order intake as consumers are impacted by rising inflation
and the Group's ability to maintain margins given the rising input costs. 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 Directors have considered the Group's strengthened financial position
alongside a number of possible downside scenarios. Even with scenarios which
have modelled significant reductions in activity, the resultant cash flow
forecasts and projections show that the Group will be able to maintain a net
cash position (and thus headroom) in excess of £10m and therefore not trigger
the springing covenants of the borrowing facility. As such, the Directors
have concluded that the risk of the liquidity requirements of the business
exceeding the total quantum of facilities available remain remote.
Based on the above, the Directors believe that it remains appropriate to
prepare the financial statements on a going concern basis.
3 Significant accounting policies
Revenue recognition
The Group earns revenues 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-glazed replacement windows and
doors.
In applying the principle 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 and 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.
In addition to the above, the Group recognises revenue from the sale of
materials for recycling. The revenue is recognised when the materials are
collected by the recycling company which represents the completion of the
performance obligation. The Group has determined that this revenue is
derived from its ordinary activities and as such this balance is recognised
within revenue.
Non-recurring items
Items that are either material because of their nature, non-recurring or whose
significance is sufficient to warrant separate disclosure and identification
within the consolidated financial statements are referred to as non-recurring
items. The separate reporting of non-recurring items is important to provide
an understanding of the Group's underlying performance.
4 Non-recurring costs
Unaudited Unaudited Audited
6 months ended 6 months ended 12 months ended
3 July 2022 4 July 2021 3 January 2022
Non-recurring costs consist of the following: £000 £000 £000
Holiday pay accrual (release) (72) (88) (79)
RSA related costs 12 - 147
Restructuring and operational costs 96 96 300
Litigation costs 23 33 90
Cyber incident-related costs 945 - -
Impairment of right-of-use assets 27 - 122
Modification of right-of-use assets and liabilities (112) 12 (83)
IT project impairment - - 14
919 53 511
The holiday pay accrual arose as a result of the impact of the shutdown of
operations and resultant extension of 2020 leave entitlement which, for some
employees, is up to March 2023. The release in the current reporting period
represents a partial-unwinding of the original accrual booked in 2020 due to
the deferred holiday subsequently taken in the year.
RSA related costs are the employer related taxes associated with the issue of
Restricted Share Award scheme during the year.
Restructuring and operational costs are expenses incurred, including
redundancy payments, as a result of changes being made to reduce the cost
structure to the business.
Litigation costs are mainly 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.
Cyber incident-related costs are in relation to the separately identifiable
incremental costs incurred as part of the recovery from the cyber-attack.
Impairment of right-of-use assets relate to the closure of the properties
identified as assets under IFRS 16.
Modification of right-of-use assets and liabilities relate to the closure of
the properties identified as right-of-use assets during the period.
IT project impairment charge represented the impairment of a capital
investment made in a new electronic survey system that was stopped following
the results of field trials.
For further detail on the 2021 non-recurring charges, please refer to the 2021
Annual Report.
5 Earnings per share
Unaudited Unaudited Audited
6 months ended 6 months ended 12 months ended
3 July 2022 4 July 2021 2 January 2022
Basic (loss) / profit per share (pence) (1.5)p 2.6p 3.5p
Diluted (loss) / profit per share (pence) (1.5)p 2.5p 3.4p
a) Basic earnings per share
The calculation of basic earnings per share has been based on the following
profit attributable to ordinary shareholders and weighted-average number of
shares outstanding.
Unaudited Unaudited Audited
6 months ended 6 months ended 12 months ended
3 July 2022 4 July 2021 2 January 2022
£000 £000 £000
(Loss) / profit attributable to ordinary shareholders (2,034) 3,563 4,775
Weighted-average number of ordinary shares (basic)
No of shares '000 No of shares '000 No of shares '000
In issue during the period 138,628 136,946 137,753
b) Diluted earnings per share
The calculation of diluted earnings per share has been based on the following
profit attributable to ordinary shareholders and weighted-average number of
ordinary shares outstanding after adjustment for the effects of all dilutive
potential ordinary shares.
Unaudited Audited
6 months ended 12 months ended
4 July 2021 2 January 2022
£000 £000
Profit attributable to ordinary shareholders 3,563 4,775
No of shares '000 No of shares '000
Weighted-average number of ordinary shares (basic) 136,946 137,753
Effect of conversion of share options and share consideration 5,808 3,589
Weighted-average number of ordinary shares (diluted) at period end 142,754 141,342
The loss per ordinary share and diluted loss per share for H1 2022 are equal
because share options are only included in the calculation of diluted earnings
per share if their issue would decrease the net profit per share.
6 Finance costs
Unaudited Unaudited Audited
6 months ended 6 months ended 12 months ended
3 July 2022 4 July 2021 2 January 2022
£000 £000 £000
On borrowing costs 327 287 593
Unwind of discount on provisions 161 - 269
On lease liabilities 345 341 761
833 628 1,623
7 Trade and other payables
Unaudited Unaudited Audited
6 months ended 6 months ended 12 months ended
3 July 2022 4 July 2021 2 January 2022
£000 £000 £000
Trade payables 9,112 6,500 7,118
Other taxation and social security costs 4,465 7,023 3,169
Other creditors and deferred income 5,901 5,088 4,747
Accruals 3,922 4,965 3,018
23,400 23,576 18,052
Trade payables represents the total amounts payable by Safestyle as part of
normal business operations.
Other taxation and social security costs have reduced versus 4 July 2021 as a
result of the repayment of the VAT deferral scheme to HMRC highlighted in the
2021 Annual Report.
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