Safestyle UK plc (LON: SFE), the leading UK-focussed retailer and manufacturer of PVCu replacement windows and doors for the homeowner market, today announced its interim results for the six months ended 30th June 2019.
Financial and operational highlights
| Unaudited | Unaudited | ||
| 6 months ended | 6 months ended | ||
| 30-Jun-19 | 30-Jun-18 | ||
| £m | £m | % change | |
| Revenue | 64.41 | 60.54 | 6.40% |
| Gross profit | 16.64 | 14.57 | 14.20% |
| Gross margin % | 25.80% | 24.10% | 177bps |
| Underlying (loss) before taxation1 | -0.83 | -3.41 | 75.70% |
| Non-underlying items2 | -1.65 | -2.24 | 26.30% |
| (Loss) before taxation | -2.48 | -5.65 | 56.10% |
| EPS – Basic | (2.8p) | (5.7p) | 50.90% |
| Net (debt) / cash3 | -0.64 | 4.58 |
1 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.
2 Non-underlying items consist of non-recurring costs, share-based payments and the Commercial Agreement amortisation.
3 Net (debt) / cash is cash and cash equivalents less loan facility.
A reconciliation between the terms used in the above table and those in the financial statements can be found in the Financial Review.
· Turnaround on track – The implementation of phase two of the three phase turnaround is making good progress; the focus for phase two is returning the Group to profitability.
· Profitability achieved from Q2 – The business returned to profitability in Q2 2019 with levels forecast to increase in H2.
· Gross profit increased by £2.1m (14.2%) to £16.6m and gross margin % of 25.8% improved by 177 basis points (bps) versus H1 2018 (24.1%) and 417bps versus H2 2018 (21.7%).
· Underlying (loss) before taxation1- loss reduced by £2.6m (75.7%) to £(0.8)m.
· Reported (loss) before taxation – loss reduced by £3.2m (56.1%) to £(2.5)m.
· Revenue growth – Revenue up 6.4% to £64.4m (H1 2018: £60.5m) and up 15.3% versus H2 2018.
· Volume recovery – Frames installed of 98,966 broadly in line with H1 2018 of 99,491 and representing a 16.9% improvement on H2 2018.
· Gaining market share – Market share as measured by FENSA now recovering; at 8.6% in H1 2019 (H2 2018: 7.0%)* with continued share recovery expected for H2.
· Balanced growth – Growth achieved across all three lead generation channels with a focus on cost effectiveness and compliance.
· Value improvement – Average price per frame up 8.6% versus H1 2018 to £669.
· Cost control – Improvements in operational efficiencies and cost reductions in a number of areas underpinned the recovery in profitability.
*The market share figures for last year included in the 2018 Results Presentation and those referred to in the July 2019 trading statement have been updated and restated following a revision to the dataset from FENSA. The market share growth referred to in the July 2019 trading statement of 19.5% versus H2 2018 has increased to 22.9%.
Outlook
Since the Group’s AGM Statement on 16 May 2019, management has continued to make good progress on phase two of its turnaround plan with the results for the first half of the year as expected. There has been improvement in many of the Group’s core KPIs and a return to a small profit has been achieved in Q2.
Despite a challenging market where consumer demand appears soft across the Repair, Maintenance and Improvement (RMI) market, the Board expects a further increase in profitability during Q3 and into Q4 of this year. The Board remains highly focussed on ensuring that the trajectory of performance is carried through into 2020 with the aim to achieve acceleration in growth in revenue and profitability next year as part of phase three of the Group’s turnaround plan.
To ensure the Group maintains its current momentum through the end of the year into Q1 2020, the Board is anticipating an increase in the levels of investment required in lead generation versus those previously projected and when compared to those of previous years. The Board also expects revenue to be marginally below previous expectations, although still expects double-digit growth in H2 versus the prior year alongside continued gains in market share. Consequently, the Board now expects a small underlying loss before taxation of c.£0.5m for the full year.
Looking further ahead, the Board remains confident that these actions will give the Group the best possible base from which to accelerate its revenue, margin and profit growth in 2020 as part of phase three of the turnaround plan. The Board therefore remains comfortable with market expectations for 2020.
Commenting on the results, Mike Gallacher, Safestyle UK plc CEO said:
“We are making strong progress on delivery of the second phase of our three phase turnaround plan. We have increased our revenues, improved our margins and reduced costs and as a result the Group returned to profitability in Q2. We expect this to continue into Q3 and the momentum to be sustained through to the end of the year.
The Board and I are hugely encouraged by the progress we are making as we look to turnaround the performance of our business and build on our position as the UK market leader in the RMI industry. We believe we have an enviable position in this market with a strong, recognisable brand and a great value proposition. We also have highly skilled and dedicated people across the entire organisation.
There remains a lot of hard work to do, but it is rewarding that we are beginning to see the results of the work completed so far. We remain wholly focussed on modernising the business, improving customer service, strengthening our processes and leveraging technology whilst striving to make the business the industry benchmark in all areas of compliance. We believe delivery of these objectives, along with a relentless focus on maximising opportunities for growth, will position Safestyle for success in the years to come.”
CEO’s Statement
Summary
The first half of 2019 has seen a significant recovery in the financial performance of the business driven by a balanced combination of volume growth, margin improvement and significant cost reductions. As a result, the business returned to profit in the second quarter and we expect this performance to continue in H2.
The focus for phase two of our turnaround plan has been on cash and profit, hence I am pleased that we have also been able to deliver good revenue growth, with the business gaining market share in H1. Major changes in our lead generation practices as a result of both GDPR and improvements in our regulatory compliance limited the scale of this growth and signal our intention to build solid foundations for sustainable growth over the long term.
Our cost base has been reduced by an annualised rate of over £2m through the simplification of management layers, general cost saving initiatives and the creation of leaner organisation structures across the business. Having taken these actions, we have now re-established our cost base at close to 2017 levels. The remaining additional costs relate to essential additional resource in HR, Health and Safety and Compliance.
Margins have been driven up by selective pricing moves that have consolidated our position as the value player of the three major national operators in the category. Improvements visible in H1 have continued in Q3 and, together with changes to our commissions structure, will drive improvements in our financial shape in Q4 and into 2020.
The basic operations of the business were significantly impacted during 2018 and, combined with the pressing need to establish robust and repeatable business processes, much effort has been focussed on embedding long-term operational improvements. These actions, together with a focus on enhancing the customer experience, represent a continuing transformation within the business. The changes are critical in providing the foundations for sustainable future growth.
Business Overview
While the market has been subdued through H1 with limited volume growth, Safestyle gained market share (as measured by FENSA) versus H2 2018, moving from 7.0% to 8.6% for H1 2019. Revenue grew by 6.4% versus H1 2018 and 15.3% versus H2 2018. We expect the current level of revenue growth to sustain through H2 2019.
Average Frame rates increased by 8.6% versus H1 2018 with Average Order Value remaining stable, largely due to the mix effect of higher demand for composite doors. Frames installed were in line with H1 2018, increasing by 16.9% versus H2 2018 and we again expect this to be sustained in H2 2019.
The financial shape of the business has progressed rapidly with a £2.6m (75.7%) improvement in underlying (loss) before taxation1 year on year and a £4.5m (84.4%) improvement in the same measure between H2 2018 and H1 2019. The business has moved into profitability in H1 and is now showing sustained monthly improvements as margin enhancement, cost control and volume growth combine to drive profitability.
Our cash position has been closely managed through the turnaround programme, following the facility agreement with Aurelius in H2 2018. The business is now cash generative.
1 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.
Turnaround Plan
The Executive Team developed a three phase turnaround plan in June 2018. The plan had clearly defined projects and milestones designed to stabilise the business in 2018, before returning it to profitability in 2019 and then accelerating growth in 2020.
The first phase of the turnaround plan was completed at the end of 2018 and successfully stabilised the business; taking legal action to address the NIAMAC legal case, putting in place financing to support the turnaround whilst establishing a new Board and strengthening the Executive team. We reached an early out of court settlement with NIAMAC, albeit after significant costs were incurred due to the scale and complexity of the legal action. Concurrently, new funding was quickly put in place and a series of highly experienced appointments were made to rebuild the Board and to bolster the Executive Team.
The second phase of the turnaround plan has been progressing well, with the central aim of restoring profitability to the business in a way that is balanced between cost effective revenue growth alongside the need for compliance. The key elements of phase two of our plan have been;
Embedding Regulatory Compliance and Health and Safety: Safestyle operates in an increasingly regulated industry and this requires a robust approach to our ways of working. The need to upgrade our systems and processes was clear from the fines received during 2017 and 2018 relating to historic Advertising, Communications, Health & Safety and Trading Standards issues. The Board and Executive Team are determined to establish best practice in this new operating context through working collaboratively with the relevant regulators.
Good progress was made in H1 2019, governed by a new Compliance Team and supported, in particular, by close engagement with West Yorkshire Trading Standards (WYTS). Actions have encompassed the development and delivery of new training for staff, the introduction of new feedback processes, new controls and processes and regular case reviews.
The introduction of GDPR has continued to drive significant change in our sales and lead generation operations. The resulting new policies and practices have increased cost and reduced growth during H1. However, as an Executive Team, we are determined to embed robust compliance across the business, in order to eliminate regulatory issues and build a solid foundation for long term growth.
Improving Margins: During 2018, margins were negatively impacted by a number of factors. These include commission costs which rose due to the competitive landscape, increased digital lead generation costs and higher overheads due to investment in compliance, customer service and IT systems. During H1, progress was made on most of these elements, however digital lead costs did not reduce as expected, with continuing competitive pressure sustaining the increasing cost trend of recent years.
The business continued to take selective price increases in H1 while the increases implemented in H2 2018 continue to flow through to the benefit of gross profit in H1 2019. We are focussed on maintaining our competitive position as the lowest cost national player in the category.
Operational effectiveness and cost: Significant additional costs were added to the business from late 2017. During H1 2019, we firmly addressed our cost base which will deliver annualised savings in excess of £2m versus 2018 exit rates. This has included the removal of additional layers of management and a number of specific senior management positions. The business has also responded well to improved financial controls with savings being generated widely across the business including fuel costs, property maintenance, material suppliers, fleet costs and sourcing.
During the period, we established project teams and gained momentum on a number of critical KPIs that had deteriorated since 2017. These include ‘Right First Time’ installation, the number of remakes and mis-measures and cancellation rates. These projects will continue into H2 and will be supported by embedded processes and metrics as we move into 2020.
Our Digital Transformation programme, delivered in 2018 despite the challenging context, remains the largest single change since the business was listed. The pace of change has continued with the introduction of new technology into our Telephone Canvass and Sales call centres. Work to embed and leverage this technology continues with benefits now being delivered.
One of our largest opportunities continues to be the levelling up of branch and sales rep performance enabled by targeted training. The prevalence of detailed performance data is transforming our ability to drive this and offers benefits that will flow through over coming years.
Rebuilding our staff & self-employed workforce: The business experienced a rapid loss of self-employed agents across canvass, sales and installations during H1 2018. These numbers have now substantially recovered with a 32% increase in canvassers, a 20% increase in sales reps and an 11% increase in installation teams versus the end of H1 2018. The business has worked to balance our self-employed workforce to support our ability to both fit current written sales and serve the regions cost effectively.
In addition to addressing headcount numbers, H1 2019 saw significant training activity aimed at improving the skills and capabilities of our self-employed agents. A new sales rep induction programme was launched and all installation teams received customer service training. These initiatives have been supported with improved communication, monitoring tools and regular customer feedback for installation teams. Further developments, such as a new App for door canvassers, are also planned for H2 2019.
Delivering Growth: Supported by increased headcount, revenue grew by 6.4% versus H1 2018 and by 15.3% versus H2 2018. Good growth on Media-generated business was supported by a limited TV campaign in H1. The business has also achieved growth through internal telephone canvassing, despite significant changes to our working practices.
The growth from our door canvass lead generation activities of 22.3% versus H1 2018 has been limited by a range of changes to our practices aimed at focusing our teams on compliance and established best practice. The business remains committed to growing our strong and highly professional door canvass force as a sustainable source of competitive advantage, unlocking latent consumer demand.
Outlook
The focus for H2 2019 remains phase two of our turnaround plan, recovering the business to sustainable levels of profitability to then achieve an acceleration of our growth in 2020. The business has made significant progress in H1 whilst also managing huge internal changes driven by new compliance requirements and the implementation of new technology. Combined, the work being done now will establish strong foundations for our future growth, building on the powerful and simple business model that has been successful in the past.
Our current performance trajectory is showing the results of the turnaround plan and points to further progress in our financial results in 2020.
Mike Gallacher
Chief Executive Officer
19 September 2019
