Safeguard Scientifics Annual Report 2018

Plain-text annual report

Safestyle UK plc Safestyle UK plc Annual Report 2018 The UK’s No.1 for replacement windows and doors Financial Overview Contents Revenue (£m) 2016 159.4 2017 158.6 -1% 2018 116.4 -27% Underlying Proﬁt / (Loss) Before Taxation¹ (£m) 2016 2017 2018 20.5 15.1 -27% (8.7) -158% Reported Proﬁt / (Loss) Before Taxation (£m) 2016 2017 19.3 13.8 -29% 2018 (16.3) -218% Net Cash² (£m) 2016 13.5 2017 11.0 -18% 2018 0.3 -98% Average Installed Order Value (£) 2016 3,103 2017 3,232 2018 3,319 Average Frame Price (£) 2016 2017 2018 565 608 646 Frames Installed 2016 288,460 2017 265,716 -8% 2018 184,184 -31% 4% 3% 8% 6% 01 Welcome page and Financial Overview Strategic Report 06 14 18 26 34 40 What we do Chairman’s Statement CEO’s Statement Financial Review Risk Management Corporate Social Responsibility 44 Our People Governance 50 52 54 64 67 Board of Directors Audit Committee Report Directors’ Remuneration Report Directors’ Report Independent Auditor’s Report Financials 76 77 78 79 80 Consolidated Income Statement Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements ¹ See the Financial Review for deﬁnition of underlying proﬁt / (loss) before taxation ² See the Financial Review for deﬁnition of net cash Annual Report & Accounts 2018 01 Safestyle UK plc Gold Trusted Service Award 2018 For achieving a service rating of at least 4.5 out of 5 stars during the year Highly Recommended Composite front door “Really happy with service provided, the quality of the product and the ability to pay over a two year period. I had a new composite front door installed and from start to ﬁnish Safestyle provided an excellent service”. Fair price with big beneﬁts! “Was visited by a very pleasant sales person. I was able negotiate a fair price, for a very good product. Which was installed in less than three weeks, by a very competent ﬁtter. Who left my property in a clean and tidy state. He was a pleasure to have around the property. So much so I've had a second job done with the same amount of satisfaction and feel the beneﬁt of replacing old draughty doors and windows”. Kay in London David Moore in Leicester Security and style A job well done “All the way through it was a pleasure to deal with Safestyle UK. From the Sales Rep, Surveyor and the Fitter, they all worked well to ensure nothing was a problem and a new replacement door was ﬁtted which we are very thankful for”. “The men involved with the work were all polite and worked with little disruption to us. They kept good time and when the job was ﬁnished they made sure everything was clean and tidy, with nothing left for me to dispose of. The ofﬁce staff were also easy to understand and friendly in their conversations”. John Cooper in Maidstone Alun Laugharne in Cornwall Thank you to all at Safestyle Safestyle does the business “Surveyor and ﬁtter were very helpful and did a great job. The area was left clean and tidy with no evidence of removal of old ﬁttings. No damage, no re-decorating to do. Obvious to recommend to anyone, not just friends and family”. “The ﬁtting and workmanship was excellent and I will certainly have Safestyle back to complete the rest of my windows in the future. I can't praise Safestyle enough, from a number of choices I had I plumped for your company and wow you delivered”. Lou Barber in Southampton Harry Clayton in Lancaster Annual Report & Accounts 2018 03 Safestyle UK plc Strategic Report 06 14 18 26 34 40 What we do Chairman’s Statement CEO’s Statement Financial Review Risk Management Corporate Social Responsibility 44 Our People Safestyle UK plc Our Nationwide Branches & Depots We currently have 36 sales branches and 13 installation depots across the UK Operation Headlines 1 Head Ofﬁce 1 Manufacturing Facility 13 Installation Depots 36 Sales Branches 36 Sales Branches Our 36 sales branches spread our inﬂuence out across the country to generate enquiries on which our appointments team can capitalise. 13 Installation Depots Our 13 Installation Depots are the hubs from which our ﬁtting operation can efﬁciently service our customers' orders. Our expert ﬁtting teams visit their branch each day to unload and reload their vehicles, connect with the nerve centre of the company and set off to fulﬁl the day's orders. Annual Report & Accounts 2018 07 Safestyle UK plc Strategic Report Governance Financials The Customer Journey We are proud to be the UK's largest supplier of replacement windows and doors to the UK homeowner market. We control all aspects of the customer journey from start to ﬁnish which creates a personalised and long-term relationship with each of our customers. G N I T E K R A M 1 S E L A S 2 We generate thousands of appointments through various marketing channels with potential customers each year We help thousands of customers navigate the complexity of options that they face when changing their windows or doors Y E V R U S 3 We survey over 50,000 properties to precisely specify products ready for bespoke manufacture I G N R U T C A F U N A M N O I T A L L A T S N I 4 5 I E C V R E S 6 Efﬁciently manufacture customer speciﬁc, high quality, energy saving products in Barnsley and distribute to 13 installation depots Expertly install the new windows and doors before recycling the items we replace in 1,000 homes per week Complete peace of mind on every installation with our ten year warranty period 08 Annual Report & Accounts 2018 Annual Report & Accounts 2018 09 Safestyle UK plc Strategic Report Governance Financials How Many Windows? When you multiply together the number of different window types, designs, colours and other options, you won't believe the number of different windows we can offer our customers... 4 Window Types X 141 Window Designs X Casement Tilt & Turn Sash Flush Sash 10 Window Colours X Classic White Irish Oak Slate Grey Cream Anthracite 4 Mila Pro Linear Handle Options Mila Hero Monkey Tail Pear Drop White Woodgrain Golden Oak Rosewood Chartwell Black Woodgrain X 12 Lead Designs OR 18 Decorative Glass OR 10 Privacy Glass X Clear Glass Autumn Sycamore Tafetta Arctic 6 Handle Colours White Black Polished Chrome Satin Gold Chrome Pewter X 3 PVC Window Sills X Equal Sight Lines 2 Hardwood Softwood Equal Sight Lines Non-Equal Sight Lines Florielle Mayﬂower Stippolyte Cotswold Everglade = 243,648,000 Window choices... and every one made bespoke to the customer’s individual size 10 Annual Report & Accounts 2018 Annual Report & Accounts 2018 11 Safestyle UK plc Strategic Report Governance Financials How Many Composite Doors? When you multiply together the number of different door types, designs, colours and other options, you won't believe the number of different doors we can offer our customers... 16 Composite Door Types X 11 Outside Colours X 2 Inside Colours X Cantebury Cheltenham Exeter Gloucester Oxford Richmond Stratford Warwick White Black Blue Chartwell Cream White Same as Outside 10 Frame Colours 3 X Outside Above Window Options Toplight Windsor Florence Milano Roma Siena Turin Venice Verona Duck Egg Green Grey Oak Red Rosewood Classic White Irish Oak Slate Grey White Golden Oak Arched Head Rosewood Cream Chartwell Green Black Anthracite Or none 20 Privacy or X Coloured Glass Options 5 Flag Window Options Full Three Quarters Half Side Panel X Or None 2 Spy Hole Options X 3 Letter Plate Options X 5 Knockers X Urn Lion Head Scroll 5 Handle Options X Standard Handle Pad Handle Pro Style Handle With Or without X 2 Safety Chain Options Low Middle Oval Victorian Scroll Cranked Long Bar Handle Curved Handle Or none Options vary depending on the door design X 6 Furniture Colours X 2 Thumb Turn Options White Black Gold With With Chrome Brushed Chrome Pewter Or Without Or Without = 3,801,600,000 Door choices... ... and every one made to measure to every customer’s speciﬁcations 12 Annual Report & Accounts 2018 Annual Report & Accounts 2018 13 Safestyle UK plc Strategic Report Governance Financials Chairman’s Statement Summary of performance 2019 represents a key year for our turnaround after 2018 saw an unprecedented period of disruption and change for Safestyle that signiﬁcantly impacted the ﬁnancial performance of the Group. We have started 2019 well and are encouraged by our sales order intake for the ﬁrst part of the year, which has continued the momentum achieved in late 2018. Much of 2018 was severely impacted by the activities of an aggressive new entrant, NIAMAC Developments Ltd (“NIAMAC”) (trading as SafeGlaze UK), which affected all areas of the Group's operations and which resulted in the Group taking legal action to protect itself in May 2018. This event, combined with a backdrop of a challenging consumer environment, resulted in a severe decline in our ﬁnancial performance in the year. Revenue was down 26.6% to £116.4m (2017: £158.6m) with underlying (loss) / proﬁt before taxation¹ a loss of £(8.7)m as compared to a £15.1m proﬁt in 2017. Reported (loss) / proﬁt before taxation was a loss of £(16.3)m (2017: proﬁt of £13.8m). Basic EPS for the period was down from 13.1p to (16.1)p. There were also signiﬁcant non- underlying items² incurred in the year of £7.5m (2017: £1.3m). These consist of costs principally associated with litigation, restructuring, the Commercial Agreement (see below) and a ﬁne from the Health and Safety Executive (“HSE”) following prosecution for an incident which occurred in March 2017. The Group settled its legal action against NIAMAC in September 2018 and subsequently entered into a Commercial Agreement (see below) which led to a recovery in the contracted workforce across our canvass, sales, surveying and installations operations at the start of November. Linked to this upturn in workforce, the Group invested signiﬁcantly in lead generation, commissions and associated overheads prior to the end of the year. Whilst this investment is expected to result in a quicker recovery than would otherwise have been the case, it occurred too late in the year to improve the ﬁnancial performance for 2018. Nonetheless, as I mentioned above, sales order intake for the ﬁnal two months of 2018 saw a step change in performance compared to the majority of the year and I am pleased to report that the ﬁrst part of 2019 has continued this positive momentum, with a performance that is ahead of the comparative period in 2018. The Group is now focused on a rapid return to proﬁtability. A detailed three phase turnaround plan was developed in the second half of the year which has clearly-deﬁned projects and milestones that are designed to stabilise the Group, rebuild sales and margins and manage costs effectively. The ﬁrst phase of the turnaround, involving the stabilisation of the Group, was 14 Annual Report & Accounts 2018 ¹ See the Financial Review for deﬁnition of underlying (loss) / proﬁt before taxation ² See the Financial Review for deﬁnition and detail of non-underlying items successfully completed in the year. The second phase, which is to return the Group to proﬁtability and to improve operational efﬁciencies, is well underway. The third phase, aimed at accelerating growth, will begin in 2020. Litigation The Group has invested heavily in building its leading market position over many years and whilst the Group welcomes healthy competition in the market, it is committed to protecting its brand, its reputation, and its staff. As such, in May 2018, the Group issued a claim seeking injunctive relief and damages against NIAMAC and a number of named individuals. The claim was made in the Business and Property Courts of England & Wales, on the Intellectual Property list. considered to be passing off, the misuse of conﬁdential information, unlawful means conspiracy and malicious falsehood. Safestyle also applied for urgent interim relief, pending the trial of the matter. As a result of interim applications to the Court, a series of injunctions were put in place in May and subsequently in July. On 3 September 2018, the Group announced that it had settled the claim against all parties with a number of appropriate undertakings made by NIAMAC to the Court. Further details of the settlement were kept conﬁdential. NIAMAC was subsequently placed into administration on 30 October 2018. The Board is pleased that this matter is closed and the restoration of the Group to proﬁtability is now our focus. The claim asked the Court to determine whether Safestyle was entitled to injunctive relief and damages from what the Group Commercial Agreement Shortly after the announcement that the litigation had been settled, the Group entered into an agreement with Mr M. Misra, who was a party to the Group's dispute involving NIAMAC. Whilst the full detail of the agreement is conﬁdential, it encompasses 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 the period to quarter 4 2020 and Safestyle's trading performance in 2019. Subject to satisfying the strict terms of the agreement, the consideration will take 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. Both the allotment of shares and payment of the cash, if any, would only be made in quarter 4 2020. Annual Report & Accounts 2018 15 Safestyle UK plc Strategic Report Governance Financials Chairman’s Statement Balance Sheet and Dividend Directorate changes As part of phase one of its turnaround plan, the Group secured a £7.5m committed ﬁnance facility in October 2018, which will remain in place to October 2020. This facility is designed to support the Group's working capital needs in the short term. The net cash position at the end of the year was £0.3m with an additional £3m of the facility remaining unutilised. To ensure that the Group maintains suitable liquidity for the immediate future, the Board does not propose a ﬁnal dividend for the year (2017: £nil). The Board will continue to assess the possibility of resuming payment of a dividend; this would be linked to increases in the Group's net cash levels and delivery of the turnaround plan. There have been a number of changes to the Board this year and the following appointments were made in 2018: Ÿ Mike Gallacher was appointed as Chief Executive Ofﬁcer on 1 May 2018. I, Alan Lovell, was appointed as Non-executive Chairman on 16 July 2018. Ÿ Ÿ Rob Neale was appointed as Chief Financial Ofﬁcer on 16 July 2018. Ÿ Fiona Goldsmith joined the Board as a Non-executive Director and Chair of the Audit Committee on 17 September 2018. Julia Porter joined the Board as a Non-executive Director on 5 November 2018. Ÿ These new appointees joined Chris Davies, a Non-executive Director who will retire from the Board after the May AGM. I would sincerely like to thank Chris for his service to the Group since ﬂotation, particularly during 2018 when the Group and the Board was going through a challenging period. I am pleased with how the new Board is working and I am conﬁdent that the considerable breadth and depth of the Board's experience will underpin our plans to return Safestyle to proﬁtability and deliver value to our shareholders. These appointments replaced longstanding Executive Directors Steve Birmingham and Mike Robinson who left the Group in the ﬁrst half of the year along with the previous Chairman, Steve Halbert and Non-executive Director Peter Richardson. Most recently, on 5 March 2019, Giles Richell, Chief Operating Ofﬁcer, resigned from both his Executive role and Board Directorship. Giles's role will not be replaced and his reporting lines will revert to the senior leadership team as the Group works to simplify its organisational structure and recover its overhead position. Looking ahead / outlook 2019 represents a key year for our turnaround from which the Board and the Executive team are conﬁdent, despite the backdrop of weaker consumer conﬁdence, that we can emerge stronger for the future. We reported before the close of 2018 that in the last two months of the year, following the recovery in our contracted workforce numbers, the Group achieved an improved sales order intake that was inline with the comparative period for 2017, signalling a step-change in the performance seen for the majority of the year. As I have previously described, our sales order intake performance for the ﬁrst part of 2019 has sustained the momentum from late 2018; this represents an encouraging start to the year. We are well-invested in our manufacturing facilities and are focussed on implementing our turnaround plan to modernise our operations and develop a more efﬁcient and professional business, whilst retaining as much as possible of what made the Group successful in the past. Finally and most importantly, in such a year of uncertainty and adversity, I would sincerely like to thank all our colleagues for their unparalleled hard work, tenacity and commitment. A C Lovell Chairman 21 March 2019 “Our sales order intake performance for the ﬁrst part of 2019 has sustained the momentum from late 2018; this represents an encouraging start to the year.” 16 Annual Report & Accounts 2018 Annual Report & Accounts 2018 17 Safestyle UK plc Strategic Report Governance Financials CEO’s Statement Summary The business faced a unique and challenging operating context in 2018, but I am pleased to say that, through the dedication and hard work of our people, we ended the year with our business stabilised and trading position materially improved. Nonetheless, much of 2018 was spent combating the impact of a well-funded and aggressive competitor, NIAMAC, trading as SafeGlaze UK. NIAMAC rapidly took over 30% of our self-employed agents as well as some key managerial and specialist staff. Safestyle responded with appropriate legal action and we reached an early out of court settlement during the third quarter of our ﬁnancial year. By the end of 2018, the business had experienced a signiﬁcant recovery in its contracted workforce across its canvass, sales, surveying and installations operations, resulting in a signiﬁcantly improved sales order intake in the ﬁnal two months of the year. 2018 has also seen needed advances in our Health, Safety and Compliance practices and signiﬁcant progress in our Digital Transformation initiative, all of which I am conﬁdent will support our leading position in the market in the future. In summary, our business model remains simple and focussed. We have a strong and recognised brand, one of the sector's leading production facilities, along with committed and skilled people across all areas of the organisation. I would like to thank all our staff and self- employed agents for their hard work through such an unusual set of circumstances. Business review The NIAMAC issue impacted the business in three ways; the rapid loss of both key permanent staff and revenue driving self-employed agents, cost increases associated with retaining staff and agents and the cost of litigation and the diversion of management time. These factors combined led to a fall in turnover of 26.6% to £116.4m (2017: £158.6m) and an underlying loss before taxation¹ of £(8.7)m (2017: Proﬁt of £15.1m). After 13 consecutive years of market share gains, our market share decreased to 8.2% (from 10.7% in 2017) reﬂecting a 28.3% drop in installations from 59,983 to 42,995. We were able, however, to increase our average frame sales price by 6.2% to £646 and our average installed order value by 2.7% from £3,232 to £3,319. Turnaround plan Faced with the challenges outlined above, the business developed a three phase turnaround plan in mid- 2018. The plan has 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 aimed at stabilising the business through taking immediate legal action to address the NIAMAC issue, putting in place robust funding to support the turnaround process and establishing a new Board. After the initial success in our legal case we then reached an early out of court settlement, 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. Accordingly, the ﬁrst phase of the turnaround plan was completed by October 2018. As a result, the business is now engaged in the second phase of the plan through 2019 which is to return the business to proﬁtability. Our work will be focussed on rebuilding our branches and organisation, improving margins, addressing costs, recovering operational KPIs and driving growth. A key element of the plan includes delivering a step change in our compliance, working closely with regulatory and industry bodies to strengthen our processes and controls. The third phase of the plan will start in 2020, when the business plans to step up investment in our brand and the Group's core capabilities, establish new revenue streams and capitalise on our Digital Transformation. 18 Annual Report & Accounts 2018 ¹ See the Financial Review for deﬁnition of underlying (loss) / proﬁt before taxation Annual Report & Accounts 2018 19 Safestyle UK plc Strategic Report Governance Financials CEO’s Statement Health, safety and compliance Since late 2017, the business has initiated a step change in its approach to managing Health and Safety with signiﬁcant investment in additional resource, new processes, training and equipment. Our prime focus has been on the most signiﬁcant risk for our people, working at height. This followed a working at height incident with one of our people, earlier in 2017, for which the Group received a signiﬁcant ﬁne from the HSE in 2018. The transformation in our approach has been reinforced by additional audits and management reporting. Given the scale and nature of our operations, close management is 20 Annual Report & Accounts 2018 needed to monitor compliance with relevant Fair Trading and Consumer legislation. During 2018, West Yorkshire Trading Standards (“WYTS”) took the Group to court over a number of historical incidents. As a result of this, the new business leadership team has put in place a comprehensive series of actions while aiming to establish an effective and collaborative partnership with WYTS. Good progress has been made on this at the time of writing. The Board and Executive team will continue to monitor and adapt our business practices as beﬁts our leading position in the market and a generally stricter regulatory environment. Modernisation I am pleased to report that we made good progress during the year with our ambitious Digital Transformation project. At the start of 2018, the ﬁrst phase of this project, Electronic Lead Generation, was launched. In August 2018, the second phase, Electronic Contract, was put in place. Before these changes, all our self-employed sales representatives carried paper price lists and entered orders onto forms which were then faxed to head ofﬁce every day. They have all now been equipped with a tablet with a sales process that ensures quick and accurate pricing and an immediate digital contract submission process. For our door canvass and sales agents, this represents the largest single change for Safestyle since ﬂotation and the smooth implementation of the programme in such challenging circumstances is one of the major successes in 2018. This programme has enabled simpliﬁcation and delivered some cost savings within the business. Moreover, the new real time sales data ﬂow gives us a detailed, data- driven understanding of our sales performance through a rich source of Management Information which will deliver performance-improving insights in the years ahead. During 2019, we will consolidate the implementation of the system changes we have already made and further expand them into other parts of the business as we develop our digital capability. Outlook Clearly, as a UK consumer-facing business, we are not alone in experiencing signiﬁcant headwinds in 2019. There is of course a great deal of speculation and some uncertainty about the impact that Brexit will have on UK consumer conﬁdence, along with the impact that it may also have on our supply chain and input costs. The actions and steps taken by the Board to mitigate speciﬁc Brexit risks are described in the Risk Management section. Nevertheless, we are conﬁdent in the underlying strength of the Safestyle business model and we are encouraged that our sales order intake performance for the ﬁrst part of 2019 has sustained the momentum from late 2018. With an experienced Board and Executive team now in place, our focus is on delivering phase two of our turnaround plan, preparing the ground for accelerating our growth and ﬁnancial performance in 2020. M Gallacher Chief Executive Ofﬁcer 21 March 2019 Annual Report & Accounts 2018 21 Safestyle UK plc Strategic Report Governance Financials Turnaround plan The business developed a three phase turnaround plan in June 2018. This plan consisted of three phases focused respectively on stabilising the business, returning the business to proﬁtability and ﬁnally, accelerating growth. Phase one Stabilising the business June to October 2018. There were three key elements of this initial stabilisation phase delivered during 2018. Leadership: The Board and Executive team experienced high levels of turnover in early 2018, with the illness of the outgoing CEO preventing an effective handover, the subsequent loss of two Chairmen and the concurrent retirement of the long-serving CFO. In the midst of a hugely challenging business position the gaps in senior leadership needed to be addressed and hence, led by Chris Davies (Senior Non-executive Director), the business moved swiftly to appoint experienced leaders to the Board. 22 Annual Report & Accounts 2018 Alan Lovell was appointed as Chairman in July concurrent with the arrival of our new CFO, Rob Neale. Fiona Goldsmith (Non- executive Director) was appointed in September and Julia Porter (Non- executive Director) also joined the Board in November. The Executive team was strengthened with the appointments of industry veteran Martin Troughton as Marketing Director (formerly Marketing Director at Everest Home Improvements and previously Anglian Home Improvements) and Andrew Parkinson as Sales Director (formerly Operations Director at Provident Financial Group). Legal case: Early in quarter two, it became clear that the aggressive challenge from NIAMAC required a legal response aimed at protecting our brand, our people and our business model. Over the previous decade, Safestyle has made considerable investment in building a nationally recognised brand and we could not allow consumers to be confused by the SafeGlaze UK brand name. Phase two Return to proﬁtability As a result, in May 2018 we sought immediate injunctive protection and lodged a series of claims with strong support from major shareholders. Our claims met with early success, providing protection to the business and led in due course to a number of court orders being made, including one requiring NIAMAC to change its SafeGlaze UK brand name. While the business was conﬁdent about the expected ﬁnal outcome of our court case we were pleased to reach an early out of court settlement with NIAMAC, allowing the management team to refocus its efforts with the case successfully concluded and behind us. Financing: To underpin the next phases of the turnaround plan and support the Group's working capital needs, a £7.5m committed ﬁnance facility was obtained in October 2018, which will remain in place until October 2020. With the conclusion of our legal case, funding in place and the arrival of a new leadership team, the business moved into the second phase of our turnaround plan. This phase is focussed on returning the business to proﬁtability. This phase will run through 2019 and the key elements are: Rebuilding our staff & self- employed workforce: The business made progress on rebuilding staff and agent numbers through the second half of the year and this accelerated in the fourth quarter with the return of former agents following NIAMAC going into administration. Integrating large numbers of agents carried some cost, but supported a clear step up in our sales and installation volumes as we exited 2018. Deliver top line growth: Fuelled by the return of a signiﬁcant number of agents and strong investment in demand generation, sales order intake grew to similar levels to those seen in the same six week period last year. Our plan for 2019 shows an improvement versus 2018 with a strong recovery in Door Canvass and sustained growth in Media demand generation. In addition, we will be making selective above the line investments, using new TV copy which was aired to support the sales campaign at the start of 2019. 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. We expect these costs to normalise and for our margin performance to improve. Operational effectiveness and cost: The business has experienced signiﬁcant cost increases since 2017, shaped by a combination of costs associated with the disruption caused by NIAMAC and investment into key areas of the business. Our focus during phase two of our turnaround plan is to recover large components of the cost shape we had during 2017. We also aim to make progress on basic operational metrics such as 'right ﬁrst time installation,' ﬂeet and transport costs, frame and door remakes, lead conversion rates and cancellation rates. All of these have clear plans in place for improvement during 2019. Compliance: We operate in an increasingly regulated industry. This is evident from the 2018 ﬁnes relating to historical Health & Safety and Trading Standards issues. As a direct result we have now established effective working relationships with WYTS as we move to put in place the right management processes and standards. We also continue our focus on the management of our main Health & Safety risks, with industry-leading practices and equipment. Annual Report & Accounts 2018 23 Safestyle UK plc Strategic Report Governance Financials Turnaround plan Phase three Accelerate growth Phase three of our turnaround plan will focus on accelerating our growth from a base of proﬁtable and sustainable operations. The key elements of this part of our programme are; Brand investment: We plan to recharge our brand investment with stepped-up investment in TV advertising and lead generation. We will aim to achieve a leading Share of Voice in the industry with effective TV copy. Capability development: We will broaden our initial investments in our staff with the establishment of a 24 Annual Report & Accounts 2018 Technical Training Academy and selective investment in management development. technology to enable business improvements and deliver cost savings. Compliance: We will continue to focus on compliance and continuously live our values around customer service, integrity and safety. M Gallacher Chief Executive Ofﬁcer 21 March 2019 New business: We will be making selective investments in new growth opportunities, encompassing New Product Development and geographic expansion, as well as exploring near adjacent opportunities. Our focus will be on growing our core business and this growth will not come at the expense of increasing complexity or diverting from our strong and simple core business. Modernisation: As referenced above, the Digital Transformation of the business will continue with a strong emphasis on harnessing Annual Report & Accounts 2018 25 Safestyle UK plc Strategic Report Governance Financials Financial Review Financials Underlying £’000 116,426 (89,748) 26,678 (35,287) (8,609) 7 (142) (8,744) Revenue Cost of sales Gross proﬁt Other operating expenses Operating (loss) / proﬁt Finance income Finance costs (Loss) / proﬁt before taxation Taxation (Loss) / proﬁt for the year Ÿ Basic EPS (pence per share) Ÿ Diluted EPS (pence per share) Cash and cash equivalents Loan facility Net cash¹ 2018 Non- underlying items £’000 Total Underlying £’000 £’000 2017 Non- underlying items £’000 158,552 (107,133) 51,419 (36,379) 15,040 35 (10) 15,065 (1,251) (1,251) (1,251) (801) (801) (6,717) (7,518) (7,518) 116,426 (90,549) 25,877 (42,004) (16,127) 7 (142) (16,262) 2,964 (13,298) (16.1)p (16.1)p 4,163 (3,903) 260 Change in underlying (26.6%) 16.2% (48.1%) 3.0% (157.2%) (80.0%) (1320.0%) (158.0%) Total £’000 158,552 (107,133) 51,419 (37,630) 13,789 35 (10) 13,814 (2,986) 10,828 13.1p 13.0p 10,975 - 10,975 ¹ Net cash is cash and cash equivalents less loan facility. ² Underlying gross proﬁt 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 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) / 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. KPIs 2018 2017 Change % Average Order Value (£ inc VAT) Average Frame Price (£ inc VAT) Frames installed units Orders installed Frames per order 3,319 646 184,184 42,995 4.28 3,232 608 265,716 59,983 4.43 2.7% 6.2% (30.7%) (28.3%) (3.3%) Financial and KPI headlines Ÿ Frames installed declined by 30.7% to 184,184 units with a similar decline of 28.3% for orders installed to 42,995. Ÿ Average frame price improved by 6.2% to £646 as a result of price actions and a larger mix of higher average priced composite guard doors. Ÿ Revenue decreased by 26.6% to £116.4m, largely as a result of the signiﬁcant decline in installation volumes for the majority of the year linked to the NIAMAC disruption. Ÿ Underlying gross proﬁt² declined by 48.1% to £26.7m with the decline in revenue described above further compounded by higher commission costs, an increase in lead generation investment (speciﬁcally in digital media), a growth in installation- related materials and access solutions equipment and ﬁnally, higher (mix-driven) consumer ﬁnance subsidies. Reported Gross Proﬁt declined by 49.7% to £25.9m. Ÿ Underlying other operating expenses³ reduced by 3% to £35.3m with reductions in TV advertising offset by increased Factory and IT capital investment-driven depreciation, an increase in costs linked to rebuilding the Board and management team, and investment in compliance, customer service and IT systems and infrastructure costs. Ÿ Reported other operating expenses increased by 11.6% to £42.0m with the increase largely attributable to £7.0m of non- recurring costs in 2018 (see note 7 for full breakdown). Ÿ Finance costs include costs of the borrowing facilities from November 2018. Ÿ Underlying (loss) / proﬁt before 4 taxation was a loss of £(8.7)m for the year (2017: proﬁt of £15.1m). Ÿ Non-underlying items were £7.5m in the year, full details of which are provided on the following pages of this Financial Review. Ÿ Reported (loss) / proﬁt before taxation was a loss of £(16.3)m (2017: proﬁt of £13.8m) which is attributable to the decline in gross proﬁt due to the trading performance in the year, coupled with a £7.0m increase in non- recurring costs versus 2017. Ÿ Net cash¹ was £0.3m versus the prior year position of £11.0m. 26 Annual Report & Accounts 2018 Annual Report & Accounts 2018 27 Safestyle UK plc Strategic Report Governance Financials Financial Review Underlying performance measures As described in the Chairman's Statement, the Group has faced an unprecedented series of events. These events have given rise to a number of signiﬁcant non- underlying items in the year. Consequently, adjusted measures of underlying gross proﬁt, underlying other operating expenses and underlying (loss) / proﬁt before taxation have been presented as the primary measures of ﬁnancial performance. Adoption of these measures means that non- underlying items are excluded to enable a meaningful evaluation of the performance of the Group from year to year. Non-underlying items consist of non-recurring costs, share-based payments and Commercial Agreement amortisation. A full breakdown of these items with details are 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 28 Annual Report & Accounts 2018 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. These alternative measures are entirely consistent with how the Board monitors the ﬁnancial performance of the Group. Revenue Revenue for the period was £116.4m compared to £158.6m last year, representing a decline of 26.6%. The key performance drivers were as follows: Ÿ Leads generated from direct response media increased by 2.8%. However, leads from other sources, particularly canvass which was signiﬁcantly disrupted by the NIAMAC issues during the year, declined by 60% for the full year. Ÿ Signiﬁcantly, in the last two months of the year, following the recovery of the workforce described in the Chairman's Statement, the Group experienced a marked improvement in lead generation with total leads only 3.9% lower than the same period last year. Ÿ Conversion of leads into orders improved by 16.1% versus 2017, which was driven by the increased mix of digital media leads that convert at an improved rate compared to other lead sources. This improvement in conversion went some way to offsetting the reduction in total leads described above. Ÿ For the full year, there was a 28.3% decline in the volume of orders installed from 59,983 to 42,995 which was largely driven by the decline in our workforce due to the NIAMAC disruption. Ÿ A reduction in the number of frames installed also occurred, predominantly for the same reason as above, with a 30.7% decline from 265,716 to 184,184 frames, resulting in a slight reduction in number of frames installed per order of 3.3% to 4.28. Ÿ The average order value including VAT increased by 2.7% to £3,319 and the average frame price increased by 6.2% from £608 to £646. Some price increases were implemented during the year. Whilst the Group remains focussed on maintaining a competitive price point, the price increases were required to negate margin pressures in a number of areas along with the impact of Sterling weakness and commodity and silicone inﬂation. These price changes, together with an increased share of higher value composite doors and coloured frames, resulted in the overall average price increase observed. Ÿ This favourable average price impact was partially offset by an increase in uptake of our consumer ﬁnance products, the impact of which is deducted from revenue. Underlying gross proﬁt Underlying gross proﬁt reduced by 48.1% in the period to £26.7m (2017: £51.4m). Underlying gross margin percentage reduced to 22.9% (2017: 32.4%). £11.7m of the reduction in underlying gross proﬁt is attributable to the decline in installation volumes described above. The other main drivers of the lower gross proﬁt and diluted gross margin percentage are as follows: Ÿ There has been an increased utilisation of traditional scaffolding solutions to ensure our teams are working safely at height. Ÿ The change of mix generated via direct response media drove an adverse cost per order effect despite an improved lead to order conversion rate. The mix effect was compounded in FY18 by a signiﬁcant year on year increase in 'Pay Per Click' rates which were driven by increased online competition. The increase in digital media costs was partially offset by savings in TV advertising investment which is included within underlying operating expenses. Ÿ Agent commission costs as a percentage of sales increased in the year. The single largest driver was the business responding to the more competitive recruitment environment. In the last two months of the year, following the recovery of the workforce, this effect was ampliﬁed by investing in lead generation and installer training ahead of the installation activity occurring. Annual Report & Accounts 2018 29 Safestyle UK plc Strategic Report Governance Financials Financial Review Underlying other operating expenses Underlying other operating expenses decreased by 3% versus 2017. There were reductions in the amount invested in TV advertising, which partially offset the higher investment in digital media referred to above. There were increases in other overhead areas as follows: Ÿ Ÿ Depreciation increased due to factory and IT capital investment in the last 2 years; Ÿ Salary and related costs increased despite cost reductions in some operational areas as a result of the Digital Transformation project. These savings have been offset by investment in Health & Safety, 30 Annual Report & Accounts 2018 Customer Service, HR and Installation workforce management as well as costs associated with the rebuild of the Board and Executive team. A key component of the turnaround plan is for the Group to simplify its organisational structure and recover its overhead position during 2019. IT licensing and infrastructure costs also increased in the year as a result of the Digital Transformation project, the rollout of technology across the branch network and the implementation of improved network security and resilience. Underlying (loss) / proﬁt before taxation Underlying (loss) / proﬁt before taxation was a loss of £(8.7)m in the period (2017: a proﬁt of £15.1m). This is before the non-underlying items described below. Non-underlying items A total of £7.5m has been separately treated as non-underlying items for the year (2017: £1.3m). These consist of £7.8m of non-recurring costs, a £0.4m shared based payment credit and £0.1m of Commercial Agreement (Intangible Asset) amortisation. The following table provides the full breakdown: Non-underlying items Non-underlying items Product guarantee provision Non-recurring costs charged to cost of sales (note 7) Litigation costs Restructuring and operational costs Fines Onerous leases Commercial Agreement costs Commercial Agreement service fee Non-recurring pay awards Dilapidations provision Non-recurring costs charged to other operating expenses (note 7) Total non-recurring costs Equity-settled share based payment (credit) / charges (note 31) Commercial Agreement amortisation (note 14) 2018 £000 801 801 1,912 1,167 1,079 294 311 1,000 635 618 7,016 7,817 (374) 75 2017 £000 - - - 830 - - - - - - 830 830 421 - Total non-underlying items 7,518 1,251 The single largest non-recurring item is £1.9m of costs related to the NIAMAC litigation in the year as described in the Chairman's statement. This matter is now closed and there will be no continuation of these costs into 2019. Included within the 'Fines' category is a ﬁne from the HSE of £0.9m following prosecution for a working at height accident in March 2017. Since early 2017, the Group has taken signiﬁcant steps to avoid a reoccurrence. These measures include an increased use of scaffolding, investment in other market-leading solutions for working safely at height, establishing a new Group Health and Safety Function managed by an experienced manager and signiﬁcantly increasing safety audits alongside numerous other process improvements. The remaining £0.2m within the 'Fines' category relates to a ﬁne for 13 infringements brought by WYTS across a period of 2½ years between 2015 and early 2017. As a business, we view the conduct and behaviour of our representatives of the utmost importance and we are now pro- actively working in partnership with WYTS to ensure compliance with customer standards across the business. The Commercial Agreement service fee is the assessed fair value of the consideration payable under the terms of the Commercial Agreement that has been attributed to services received in the year. As part of a review by management of provisions made for the Group's future obligations, a revision to the estimates used for future product guarantee claims and the creation of a dilapidations provision has been made which management consider more accurately reﬂect the Group's obligations in these two areas. The full impact of this change in estimate has been recorded in the Consolidated Income Statement for the current year. However, included in non-recurring costs is the impact on the prior year had this change in estimate been retrospectively applied being £0.8m in relation to the change in product guarantee provision estimate (recognised in cost of sales) and £0.6m in relation to the dilapidation provision change in estimate (recognised in other operating expenses). Both of these amounts have been excluded from underlying results as management believes recording the full charge in 2018 distorts assessment of the underlying performance for the year. Further detail of all non-recurring costs is contained in note 7. Finally, in addition to the items classiﬁed as non-recurring costs on the Consolidated Income Statement, the share based payment (credit) / charge and the amortisation of the intangible asset created as a result of the Commercial Agreement have 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. Annual Report & Accounts 2018 31 Safestyle UK plc Strategic Report Governance Financials Financial Review Earnings per share Basic earnings per share for the period were a loss of (16.1)p compared to 13.1p proﬁt for the prior year. The basis for these calculations is detailed in note 9. Net cash and cashﬂow As part of phase one of its turnaround plan, the Group secured a £7.5m committed ﬁnance facility in October 2018, which will remain in place to October 2020. This facility is designed to support the business and underpin the turnaround of the Group. The structure of the facility is that of a £4.5m term loan, which was drawn on completion of the deal and a £3m revolving credit facility that can be utilised as required over the next two years to support any ongoing working capital needs. At the year-end, cash and cash equivalents were £4.2m (2017: £11.0m). After deducting the loan facility of £3.9m, which is stated net of arrangement fees, net cash¹ of the Group was £0.3m at the end of the year (2017: £11.0m). Investment in the Digital Transformation project in the year represented the largest component of capital investment in the period. No dividends were paid in 2018 (2017: £9.4m) which, combined with the movements above, resulted in a net cash outﬂow in the year of £(6.8)m (2017: outﬂow of £(2.5)m. Net cash (outﬂow) / inﬂow from operating activities, including the cashﬂow impact of non-underlying items, was an outﬂow of £(8.8)m (2017: inﬂow of £11.7m). Capital expenditure in the year on property, plant and equipment and software was £1.9m, a considerable reduction on the £4.7m spend in 2017 which included £2.4m related to the factory expansion. Dividends The Board is not proposing a ﬁnal dividend for this year (2017: £nil per share). R Neale Chief Financial Ofﬁcer 21 March 2019 32 Annual Report & Accounts 2018 ¹ Net cash is cash and cash equivalents less loan facility Annual Report & Accounts 2018 33 Safestyle UK plc Strategic Report Governance Financials Risk Management Risk management The Board's strategy is to grow the business organically and, if appropriate, through carefully planned acquisitions. This section sets out the Group's risk management processes and the principal risks and uncertainties that the Board consider to be material and may have a signiﬁcant impact on the Group's ﬁnancial performance. Approach to risk The Board has ultimate responsibility for setting the Group's risk appetite and for the effective monitoring and management of risk. The Board recognises risk can be ﬂuid and can change unexpectedly with signiﬁcant consequences on the performance of the business. The Group recognises ISO 31000: 2018 standards and processes. ISO 31000 is a framework that facilitates the development of a risk management strategy which effectively identiﬁes and mitigates risks, thereby enhancing the likelihood of an organisation achieving its objectives and increasing the protection of its assets. The overarching goal is to develop a risk management culture where employees and stakeholders are aware of the importance of monitoring and managing risk. An annual assessment of key risks is performed by senior management and presented to the Board. A risk register is maintained and regularly reviewed by the senior management team. All risks are assessed and scored, taking into consideration the likelihood of the event occurring and its consequence. Once the risks have been assessed, appropriate mitigation actions are determined for each key risk identiﬁed and where necessary, senior management responsibility allocated. Principal risks and uncertainties Risk description Mitigation Regulatory The Group operates in a highly regulated sector including, quite correctly, consumer protection and consumer credit regulations. Should the Group be found liable for breaches of these regulations or any others the business could face ﬁnancial or existential consequences. Reputation with customer base As the UK's largest provider of replacement windows and doors, the Group's success is affected by its reputation with its customer base. Should the Group's reputation fall, fairly or otherwise, future performance could be adversely impacted. The Group has a wide ranging set of programmes of appropriate training to ensure legal compliance and minimise mistakes. This is supported with comprehensive record keeping and audit trails. The Group also ensures that a large number of orders are quality checked by head ofﬁce with each customer. An overarching compliance committee also meets on a monthly basis to ensure all regulatory requirements are being met. The Group recognises the importance of providing excellent customer service and continues to invest in improving its systems and processes in this regard. The Group operates a rigorous customer complaints process in order to identify issues early and put corrective actions in place. The Group is accredited to a ISO 10002 Customer Satisfaction and Complaints Handling standard. On-line reviews and social media comments are constantly reviewed and responses made promptly to maintain the Group's reputation. Risk Description Mitigation Market and competition The Group operates in a competitive market which is exposed to the UK's economic performance and general consumer conﬁdence. Reasonably low barriers to entry exist for new competitors to be established on a regional scale which could disrupt the market locally. Currency exposure Although the Group does not export products and has no material foreign currency exposure, it does purchase materials that are manufactured outside the UK. The weakness in Sterling since the EU referendum result has therefore increased operating costs. As Brexit negotiations progress, there is a risk that Sterling could weaken further with a potential negative impact on performance. Technology The Group is investing in its IT systems and infrastructure to ensure that it can continue to operate efﬁciently and take advantage of ever-improving technology. The Group understands and accepts the need to further develop the IT security and capacity planning strategy. A failure in the Group’s IT systems could result in a loss of information, cause signiﬁcant disruption and lead to a material ﬁnancial loss. The Group has a strong brand and has historically taken market share in tough market conditions as a value-based company. The Board believe the Group remains well placed to compete effectively against both existing and new competitors in the long term because of its people, speed and modern manufacturing facility. Furthermore, for a new competitor to establish signiﬁcant scale and an efﬁcient operating model, substantial capital investment would be required. Regular research on consumer conﬁdence and the health of the brand are undertaken including benchmarking of the competition to ensure the Group maintains its leading market position. The increased costs as a result of Sterling weakness are likely to have been suffered by all competitors. Indeed, the Group’s exposure to adverse currency movements are possibly less than those faced by other companies by virtue of the fact that the majority of the manufacturing processes occur in the UK. Component and material prices denominated in foreign currencies represent only a small proportion of the Group’s overall costs and the Group has increased its prices to ensure that these increases are fully recovered. The Group believes that its competitive market position has not been negatively impacted as a result of these price increases. Over the previous year, the Group has continued to invest further in the resilience of its systems, including replacement web and email ﬁltering as well as new anti-virus protection. There is a disaster recovery procedure in place and there has also been the installation of an automated cross site back-up and replication facility which means that recovery in the event of a signiﬁcant system outage should take place within a few hours. The Group will continue to review and develop its IT security strategy alongside the renewal, development and improvement of the IT system architecture. 34 Annual Report & Accounts 2018 Annual Report & Accounts 2018 35 Safestyle UK plc Strategic Report Governance Financials Risk Description Mitigation Risk Management Risk Description Mitigation Data security and data privacy The Group’s operations are subject to increasingly complex regulatory requirements relating to data security and data privacy which will protect customers and their data. The Group takes data security and privacy extremely seriously and recognises the value in changes to individual privacy rights brought about by regulatory changes implemented by the General Data Protection Regulation ('GDPR') and Data Protection Act 2018. A major breach of regulations could result in signiﬁcant reputational damage and ﬁnancial loss. Facilities management The Group is heavily dependent on its physical infrastructure. Signiﬁcant business disruption could follow as a result of interruption caused by natural occurrence or other events. At the start of the year, an information audit was carried out to identify and assess the personal information undergoing processing by the Group. Records of processing activities are maintained in accordance with Article 30 of the GDPR, with ways of working reviewed and improvements implemented as appropriate. Our Data Subject Access Request procedures have been updated to accommodate the latest guidance. We have also embedded data protection impact assessments into our processes and have developed our policies to ensure they meet the regulatory requirements of the GDPR. A Data Protection Ofﬁcer ('DPO') has been appointed to provide advice and guidance in data privacy matters and to maintain development in that key business area. Awareness is pivotal to data security and so a rolling training and awareness programme has been implemented to ensure staff and representatives are informed of their responsibilities, requirements and expectations. The Group is focussed on creating safe operating environments to ensure the protection of people, property, information and reputation providing the framework in which the Group operates. The Group has an Incident Management Plan with facility and business function-speciﬁc business continuity plans. Plans capture natural events, critical infrastructure outage and malicious acts. Mitigation measures include a robust physical and technical security plan. Reliance on key suppliers The Group relies upon certain key suppliers. If relationships with such suppliers are not maintained, there could be potential short term disruption to the Group’s business, in particular in respect of the suppliers of PVCu to the manufacturing plant. Although alternative suppliers are readily available to provide the supplies required by the Group, any disruption to supply transition between suppliers may adversely impact the Group’s performance. Reliance on key equipment The Group relies on certain key manufacturing equipment. Although most of the manufacturing equipment has back-up capacity there are some machines that have no in-house back-up. In the event of signiﬁcant downtime on these machines there is a risk of short term disruption and increased costs. Dependence on key personnel The current and future success of the Group is reliant on the recruitment and retention of the right people with the right capabilities. The Group has a relatively small management team and the loss of key individuals or the inability to attract appropriate personnel could impact on its ability to execute its business strategy successfully and provide quality services to its customers, which could negatively impact upon the Group's future performance. The Group maintains strong working relationships with key suppliers through regular review meetings and open communication channels. A risk register that includes all suppliers, both direct and indirect, is regularly reviewed and actions that emerge from this process are taken to negate any potential impact. In addition, robust contractual arrangements are maintained and supplier performance is constantly monitored against agreed standards. In the event of signiﬁcant disruption to supply, alternative suppliers have been identiﬁed and a documented disaster recovery process is in place to minimise the impact on performance. The Group has an experienced maintenance and engineering team on site at its manufacturing facility and it operates a preventative maintenance programme for all key equipment. For the critical machines identiﬁed there is a either a critical spares holding or an availability plan whereby the Group has sourced suppliers capable of manufacturing the required products. The Group has a documented disaster recovery process in place to minimise the impact on performance. Site security is of a high standard and operates 24/7 throughout the year. The Group maintains competitive and attractive employment terms and conditions, and takes proactive steps to maximise job satisfaction. The Group incentivises key management through performance related pay in the short term and through share options for medium and long term retention. The Group also continues to develop its Senior Management Team using its performance appraisal process which also facilitates personal development and succession planning. 36 Annual Report & Accounts 2018 Annual Report & Accounts 2018 37 Safestyle UK plc Strategic Report Governance Financials Risk Management Risk Description Mitigation Risk Description Mitigation Credit risk The Group derives revenue from sales to individual customers. There is a general risk of default, particularly over cash sales as opposed to ﬁnance sales. The Group mitigates its exposure to credit risk through close monitoring of the trade debtors ledger through a dedicated collections team. A provision is recognised over debts deemed to have a risk of recoverability. In cases of signiﬁcantly aged receivables, the Group will pursue legal action and seek to obtain a charge over the customer's property. Self-employed individuals The Group uses the services of a large number of self-employed individuals for marketing, sales, surveying and installation purposes. These individuals are engaged on standard form self-employed agreements. There is a risk of potential claims for employee or worker status, resulting in additional costs for the Group. Legislation and case law are evolving in this area and could have an impact on self-employed status. By their very nature self- employed individuals are not required to give notice and are, generally, less loyal than employees leading to higher levels of turnover and short term resource gaps. Health & safety The Group’s operations take place in a diverse range of domestic operating environments. In 2018, there were 43k installations, of which approximately 50% involve working at height. These operations require on- going management of health and safety risks in order to ensure a safe working environment for our employees and others we engage with. A failure to manage these risks may give rise to signiﬁcant potential liabilities. The Group obtains conﬁrmation from the individual of self-employed status. The Group respects the rights of self–employed people to self-determine their working hours. The Group constantly monitors developments in legislation and case law and will respond as necessary to any changes. Where roles are identiﬁed that require much greater management control and inﬂuence, the terms of engagement are reviewed and amended as necessary. Historically, excluding what the Group believes was an exceptional set of events in 2018, retention of agents has not been a signiﬁcant issue for the Group due to the opportunities that the scale of the business can provide. In order to reduce self-employed individuals' turnover, the Group aims to offer updated and attractive commission plans and incentives. The Group continues to focus on improving its safety performance whilst minimising health and safety risks. The Group continues to concentrate its resources in managing its highest risk activity which continues to be working at height. Whilst the Group continues to ﬁnd alternative solutions to avoid or minimise the need to work at height, it is still leading the industry with the use of the Tetra ladder safety system, which complements an existing range of working at height solutions. There are dedicated health and safety professionals who provide expert knowledge and guidance to the business. Continual and increased investment and improvement in induction, training, education and inspection programmes contributes to a safe working environment. Health and Safety performance is reviewed regularly by the Board to ensure suitable preventative and corrective actions are implemented. Liquidity risk Liquidity risk is the risk that the Group will have insufﬁcient funds to meet its ﬁnancial obligations as they fall due. Brexit risk Brexit risk reﬂects the potential impact of the UK's decision to leave the EU on the Group’s operations and ﬁnancial position. The Group prepares a detailed weekly cashﬂow forecast that is reviewed by its Directors which looks forward 3 months. This forecast identiﬁes any emerging liquidity challenges in order that they can be managed proactively. The Group has implemented a clearly-deﬁned and detailed forecasting process that provides the basis for longer-term cashﬂow and liquidity forecasting. Sensitivities are applied to the Group’s forecasts to ensure that unexpected events can be withstood and managed within the liquidity available. The Group has also secured continuity and ﬂexibility of funding through a committed banking facility. A weekly assessment of the Group’s facility covenant compliance is performed. The Group’s objective when managing its liquidity is to protect the Group’s ability to continue as a Going Concern whilst providing a sustainable return to shareholders. Brexit remains the subject of negotiation between the UK Government and the EU and the full implications are unclear. The Directors believe the following points are of most importance to the Group: Ÿ The impact on materials imported by the Group from overseas, in terms of both increased tariff levels and potential customs delays. Most notably, the PVC proﬁles the Group uses to manufacture its window frames and the composite door slabs that are imported from South Korea. Ÿ The Group has taken steps to ensure our supplier partners have built up increased stock levels in the UK ahead of the Brexit deadline at the end of March. Ÿ The impact of Sterling volatility during this period of political uncertainty for which the mitigation is as described in the 'Currency Exposure' risk. Ÿ The impact on consumer conﬁdence may result on customers delaying or cancelling their purchase. Once again, the Directors believe that the mitigating factors to this risk are as described in the 'Market and competition' risk which focus on the Group’s strong brand and its positioning as a value-based company with scale and manufacturing cost advantages. Ÿ The Group is not heavily reliant on freedom of movement of people within the EU to maintain its workforce and therefore expects very little impact should the rules governing this principle change. 38 Annual Report & Accounts 2018 Annual Report & Accounts 2018 39 Safestyle UK plc Strategic Report Governance Financials Corporate Social Responsibility Closed Loop Recycling As part of our ongoing Corporate Social Responsibility commitment, we've reﬁned our recycling programmes to the point where we can re-use 95% of the waste we remove from a house, reducing landﬁll to an absolute minimum. We care about our planet and do everything we can to look after it. 01 OUT WITH THE OLD IN WITH THE NEW 02 OLD WINDOWS TAKEN AWAY 03 MATERIALS SORTED OUT OUR LORRIES COME BACK FULL Our team of expert ﬁtters install a beautiful new set of windows for the happy customer. All the old windows (and any other waste) are loaded onto the van and brought back to the Safestyle depot. We sort and separate the plastics from the glass from the rubber etc., ready to go back the factory. VIRGIN PVCU OFF CUTS 8 tonnes of virgin PVCu offcuts and trim every month go back into making new frames 06 NEW BESPOKE WINDOWS ARE BORN 05 THE NEW GLASS IS MADE 04 EXPERTLY RECYCLED With the help of highly-skilled craftsmen and state-of-the-art machinery, new windows are precision-made to your exact order. The old glass, (called 'cullet') is crushed and recycled. Every month, we make 80 tonnes of it into brand new glass, with newer, modern properties. The separate materials arrive at our dedicated recycling centre in Yorkshire. Whatever we can't use ourselves, we send to a recycler who can. Rather than drive our lorries back to the depot empty, we converted them all to carry waste materials. This means they now have an important job to do, saving 200,000 miles of fuel per year when they would have been empty. PACKING IT IN We use a Grab Machine to pick, crush and compact the old PVCu, so that where our lorries used to carry 4 tonnes, they can now carry 16! Which means we can cut 5 lorries per day down - saving 250,000 miles in transport each year. WHY WE REUSE GLASS CULLET The main ingredient of ﬂat glass is SiO2 (silica sand) which is superheated to a very high melting temperature (about 1700°C). Adding the glass cullet accelerates the process, and the sand melts at a lower temperature saving on fuel and power – and of course keeping costs down. GLASS CULLET 80 tonnes of glass cullet per month goes back into the manufacturing process. POST CONSUMER PLASTIC WOOD METAL A huge 500 tonnes of plastic from old windows is recycled into drainpipes and plastic decking, etc. All the wood we recycle is made into pellet fuels for Biomass heating systems. 5 tonnes of metal per month are melted down and reused. 40 Annual Report & Accounts 2018 Annual Report & Accounts 2018 41 Safestyle UK plc Strategic Report Governance Financials Corporate Social Responsibility S A F E S T Y L E GIVING Safestyle giving As part of Safestyle's corporate social responsibility (CSR), 'Safestyle Giving' was established in 2017 to be the face of our CSR activities and charitable endeavours. Safestyle has for many years supported local charities and worthwhile causes; this was an opportunity to establish a dedicated committee to manage, support and showcase the many positive contributions the business and its workforce undertake. The Safestyle Giving committee has split its funding into several categories to maximise the level of support it can offer. This has included an annually nominated charity from both the manufacturing 42 Annual Report & Accounts 2018 and head ofﬁce sites, with the respective charities each receiving a ﬁxed amount spread throughout the year, combined with ongoing business support including, but not limited to social media and online support and direct staff engagement. In addition to the nominated charities, Safestyle has annually selected an environmental cause which reﬂects and supports Safestyle's environmental credentials. In 2018 the environmental charity Colne Valley Tree society received a £1000 donation and staff support in its mission to support the creation and management of woodland in and around the Colne Valley area. 2018 also saw a £1000 donation to a local animal charity (Bradford Cat Watch Rescue) following a successful one off media campaign by Safestyle to raise awareness of their work within the local community. A dedicated budget has been set aside to support any fundraising efforts undertaken by Safestyle employees or its wider workforce. All colleagues are welcome to apply with company donations limited to £250 to ensure multiple people and causes can beneﬁt from the fund. Finally Safestyle has set aside a budget for external charitable applications requesting one off donations or local causes requiring business support. Throughout 2018, organisations beneﬁting from Safestyle grants included, but are not limited to, Bradford Central FoodBank, Buttercup Children’s Trust, The Cellar Trust, Simon on the Streets, Bone Cancer Research Trust and MND Association. We look forward to continuing this valuable work in 2019. Gender pay report Safestyle is committed to taking actions in the best interests of its people and that truly reﬂect our values of integrity, quality, passion, customer service, simplicity, safety and team working. We take pride in recruiting and promoting our colleagues based entirely on their skills, competencies and abilities, and in ensuring that our decisions encourage equality and diversity amongst our workforce. Historically we have employed a greater number of men than women in senior positions which creates a gender pay gap. Addressing this will take time, but we are committed to encouraging more women to join our organisation, and to develop within it. We are pleased to report that our 2017 Gender Pay Gap Report (for HPAS Ltd Trading as Safestyle UK) showed our headcount split as 14.46% women to 85.54% men; by 2018 we had moved this to 20.6% and 79.4% respectively. The percentages of women in each pay quartile has also increased. In addition, the median Gender Pay Gap decreased from 23% to 15% over the last 12 months, whilst the proportion of females receiving a bonus rose from 18% to 30%. Whilst not reportable as part of our Gender Pay obligations we are delighted that a number of women have been appointed to key roles in the last 12 months. We are conﬁdent that the increased presence of women in our organisation will encourage more female applications. Annual Report & Accounts 2018 43 Safestyle UK plc Strategic Report Governance Financials Safestyle People Values Simplicity We focus on the essentials and reduce complexity. Safety We do everything safely and responsibly. Team-working We are committed to an environment in which all our people act together with consistency, respect, trust and compassion. Integrity We are honest, open, ethical and fair. We do the right thing. Quality What we do, we do well. Good enough is never enough. Passion We are enthusiastic and determined to do our best. Customer service We treat our customers as we want to be treated. We put our customers ﬁrst. The engagement and effectiveness of our people is one of the key enablers to the achievement of our objectives all of which must be achieved whilst being true to our values. this, effective communication, engagement, training and development are of paramount importance. Communication & engagement Our People Vision is to make Safestyle UK plc a successful business that our colleagues are proud to be part of. The events of 2018 took their toll on many of our colleagues from those who remained with Safestyle and worked above and beyond to rise to the unprecedented challenges, to those who joined SafeGlaze and to those who then later returned to us. We certainly enter 2019 proud of our people and their resilience and tenacity. Our People Mission is to drive the delivery of an excellent customer experience through right ﬁrst time performance from colleagues who know that their contribution is valued, and who are respected, motivated and engaged. To achieve We believe that it is important to have genuine two-way communication between the business and its colleagues. We have made progress in breaking down the silo mentality of the past but the journey is not yet over and strong communication has a key part to play. At our manufacturing facility we have constructive relationships with our Trade Union colleagues and an established suite of communication and engagement activities across the site. This includes digital news screens, shift/daily/weekly/monthly activity brieﬁngs, listening lunches, and regular business and performance reviews. However, effectively communicating and engaging a diverse, part employed/part self-employed workforce in remote locations across the country is more of a challenge. The events of 2018 brought this into sharp focus. Improvement in the quality, quantity and method of our communication and engagement activities is therefore a current key focus. As the business started to stabilise in the last quarter of 2018 we re- launched our “Team Magazine” and our Workplace Digital Platform, increased our management visits to all remote sites, introduced video messaging from the CEO, increased our colleague brieﬁngs, and began work on a communication strategy for 2019 commencing with a Senior Managers Conference in January. Learning & development The development of our people is an important factor in the continued rebuilding of our business. Equipping our colleagues with the right skills to operate effectively, more efﬁciently, and in compliance with the increasing regulatory environment is essential to our success. In 2018 we reviewed and enhanced the training for our Installers, and with additional investment launched the Safestyle Advanced Technical Competency programme supplemented by additional training in the use of Tetra, easi-dec, health & safety, and asbestos awareness. We have received some great feedback from delegates thus far with comments including (I liked) “being educated and having the support to strive forward and better myself within the Company.” This programme continues to be rolled out in 2019. ensure that all Safestyle Surveyors achieve this qualiﬁcation by the end of 2019. In support of our Customer Service value – “We treat our Customers as we want to be treated. We put our Customers ﬁrst” – 2018 saw the launch of a Group-wide training programme entitled Treating Customers Fairly. This has already been delivered to all Sales Agents and is currently being rolled out to all Canvassers and all Operations and Head Ofﬁce colleagues. To ensure the ongoing focus on treating customers fairly the programme has been incorporated into our upgraded induction programmes for both PAYE and self- employed colleagues. For our Surveyors, many of whom prove their skills through “grandfather rights”, we have chosen the NVQ Level 3 route which is valid for 5 years and is a step above the Minimum Technical Competence required. Starting in 2018 we aim to Supporting our increased investment in customer care, and the additional resource in our Call Centre, we have set a standard for our call handlers at an advanced level of qualiﬁcation. Over 12 months, utilising our Apprenticeship Levy fund all of our Call Centre Advisors will complete the NVQ Level 2 Customer Service Practitioner qualiﬁcation. In addition to the above, where appropriate we proactively support colleagues to achieve professional qualiﬁcations to assist them in their roles. 2019 will also see the Group focus on ﬁrst line manager development. We recognise that many of our management population are long-serving industry/Safestyle colleagues who have been under invested in from a training and development point of view. This journey commenced in 2018 with the launch of an E- Learning programme opening up opportunities for development across a wide group of colleagues with management responsibilities. This will be enhanced in 2019 by a series of ﬁrst line manager workshops. 44 Annual Report & Accounts 2018 Annual Report & Accounts 2018 45 Safestyle UK plc Strategic Report Governance Financials A Business in Balance with a Diversity of Roles Like a machine of many parts, we all work together to drive Safestyle forward - but when we focus on our own job, perhaps we never have time to understand how others work. So what do our colleagues' days look like? Read on and ﬁnd out... GENERATING LEADS GURNAK UPPALL Door Canvasser Leeds Branch Q: What is your typical day? At 10am, I pick the Canvassers up and share results from the day before. On prop for the daytime knock, finding where the day will be more productive. I knock around 50 doors an hour. Doing the full A-Z pitch every time, quick and succinct. Don't take up too much time. Pick up Canvassers for a break and recharge at 4pm we start the evening knock. More private houses, working people. Sticking to exactly the same bread and butter pitch. At 6pm we recce for the next day's prop and go through the app to ﬁnd potential areas. 7:00pm finish, drop the Canvass team home. 8:00pm get results from Branch. Q: What are the challenges you face? Awkward or irate customers. Those who've had a bad experience with other window companies. Q: Most important thing I do? Be professional, conduct myself in a manner to be proud of and hit my targets. Q: How do I measure success? By learning from the bad experiences and improving on the good. 46 Annual Report & Accounts 2018 ASIF JAWED Sales Representative Birmingham Branch Q: What is your typical day? 9am log in, cup of tea, tablet in hand and when the ﬁrst lead comes through, check the mirror to make sure I'm looking sharp and then I'm on the road. I use my own unique pitch, honed from 7 years experience at Safestyle and moulded to every customer. I'll usually perform a market and product demonstration for each customer if I can. I ﬁnish when I've exhausted the last lead of the day. Q: What are the challenges you face? Overcoming pre-judged opinions of a Sales Rep, overcoming customer's affordability whilst remembering I'm here to make money too. Q: Most important thing I do? Representing Safestyle is a proud achievement. I treat everyone fairly and uphold the company’s values. Q: How do I measure success? Knowing I've met the customer's requirements and they're satisﬁed with my service, the product and the price. Commission! Having hit the 100k club numerous times, I'll never forget the sound advice of a former manager “A lead is like a scratch card. You must scratch it with your pitch”. SELLING LEADS WINDOW SURVEY AARON TIMPERLEY Surveyor North West Region Q: What is your typical day? 7.00-7.30am download e-surveys, print run sheets and contracts. Start contacting my customers for that day and head to ﬁrst appointment. Introduce myself to customer, show ID if required. Work from room to room checking each frame individually. Draw out each frame to speciﬁcations on contract, start measuring and documenting any access issues, asbestos and other potential problems. Go through survey paperwork with the customer, then I go home, print photos, ﬁll out paperwork for each job and package ready for posting. Q: What are the challenges you face? Convincing customers of my legitimate reasons for changing frame designs. Requested time slots not being passed on to me. Q: Most important thing I do? Provide a professional service that boosts customer conﬁdence, Safestyle’s ethics and quality of products. Q: How do I measure success? How few queries I get regarding the surveys I've completed. JAMIE KERRIGAN Quality Manager Barnsley Factory Q: What is your typical day? I ofﬁcially start at 8am, but most days arrive around 6.30am to get set up and understand all the quality information and KPIs from the previous day. What my day involves: Running the quality function at the factory, managing the Remakes Department, heading up the Technical Management at the factory & the New Product Introduction and meeting to review the last 24 hours performance. From this meeting we take any variances against target and put actions in place to rectify or support. Understanding how the Quality Department can better support Manufacturing in achieving key goals. Q: What are the challenges you face? Understanding why we have unknown quality variances each day. Q: Most important thing I do? Support the Manufacturing plant with all technical and quality issues. Q: How do I measure success? We review KPI targets against variance each day, so we know if we're on target, we aim to make an improvement, whether that is to a process or by helping a colleague. PRECISION MANUFACTURING BRANCH ORGANISATION PAUL CLARKSON Branch Manager Leeds Branch Q: What is your typical day? 8:30-9am update rep board, clock reps in and issue morning appointments. Plan the day ahead: how many appointments? What areas? Check all survey fees have been handed in from the previous day and ﬁnance applications completed. Discuss weekly and monthly ﬁt with sales support, individual meetings with reps if required. Update reps on incentives, price changes and all other info from Head Ofﬁce. Q: What are the challenges you face? Keeping staff motivated, wage queries and the daily challenge of bringing in enough business. Q: Most important thing I do? Make sure everyone in our branch represents Safestyle UK in the right way. Make sure everyone's happy and motivated to achieve daily targets! Q: How do I measure success? Knowing I did all I could possibly do for my team. Doing 50k in a day and only 40% of your staff contributing isn't a success. Doing 50k in a day and everybody contributing, now that's success! KEV ADLAM Installer Darlington Depot Q: What is your typical day? 6.30am get to the depot and unload van from previous day. Load up new frames, collect ancillaries and check van stocks. Travel to job, introduce ourselves to customers. Measure all apertures to ensure correct sizes before ﬁtting. Lay dust sheets and remove old frames. Fit new Safestyle products, clean and ﬁnish to a high standard. Load van with old frames and demonstrate new windows and doors to the customer. Call the ofﬁce to conﬁrm ﬁnish and payment. Q: What are the challenges you face? Managing customers' expectations and fears as many haven't been through this process before. Being the face of the company and dealing with any problems that may occur. Q: Most important thing I do? Carrying out our work to a high standard, leaving customers satisﬁed with no remedial works required and ensuring payment and paperwork are in order. Q: How do I measure success? Leaving customers totally satisﬁed with the products and service. Knowing we've done a job that’s good enough to be in my own house. EXPERT INSTALLATION ««««« Annual Report & Accounts 2018 47 Safestyle UK plc Governance 50 52 54 64 67 Board of Directors Audit Committee Report Directors’ Remuneration Report Directors’ Report Independent Auditor’s Report Safestyle UK plc Strategic Report Governance Financials Board of Directors Alan Lovell Non-Executive Chairman Alan joined the board as Non- Executive Chairman on 16 July 2018. He has held numerous listed company directorships, both executive and, more recently, non- executive. Alan has been the Non- Executive Chairman of Flowgroup plc since 2017, National Chairman of the Consumer Council for Water since 2015, and was appointed as Senior Non-Executive Director at SIG plc in July 2018. He was a Non- Executive Council Member of Lloyd's of London from 2007 to 2016, the Senior Independent Director of Sweett Group plc between 2014 and 2016 and was Chairman of professional radio technology company Sepura plc which was successfully sold to Hytera Communications Corporation Limited in May 2017. Alan was also appointed as a Non- Executive Director and Chairman of the Restructuring Committee of Carillion plc as part of an attempt to put together a rescue package for the company during its ﬁnal 10 weeks of trading. Alan has a huge 50 Annual Report & Accounts 2018 breadth of experience, including both strategic and complex situations, with a particular focus on companies undergoing turnaround or business improvement initiatives. In his executive career, Alan was Chief Executive Ofﬁcer of six companies, most recently Tamar Energy Limited (2011-2013) and Inﬁnis Limited (2006-2009), both in the waste-to-energy sector, consumer goods group Dunlop Slazenger (1997-2004) and three in the construction sector, Jarvis plc (2004-2006), Costain Group plc (1992-1997) and Conder Group plc (1989-1992). Mike Gallacher Chief Executive Ofﬁcer Mike joined the Board as Chief Executive Ofﬁcer on 1 May 2018 and has over 20 years' commercial and operational experience of building and managing businesses in the UK and internationally. He brings signiﬁcant expertise in operational strategy, business development and performance improvement. Mike was most recently CEO of First Milk Limited, the UK major dairy company owned by British family farms, where he developed and implemented a major restructuring and turnaround strategy that delivered a £30 million improvement in business proﬁtability in 24 months. This was recognised as the 'Financial Restructuring of the Year 2016' by the Institute of Turnaround Management. Prior to First Milk, Mike held a number of senior roles at Mars Inc., including UK Managing Director for Mars Petcare. He also led signiﬁcant business turnarounds in Asia for Mars, as well as working in regional leadership positions across both Asia Paciﬁc and Europe. Prior to Mars, he was a British Army Ofﬁcer for eight years. Rob Neale Chief Financial Ofﬁcer Rob joined the board as Chief Financial Ofﬁcer on 16 July 2018. He was previously Head of Leisure Travel Finance at Jet2.com and Jet2 Holidays, a division of AIM-listed Dart Group plc where he worked since 2013. As Head of Leisure Travel Finance, Rob was responsible for providing all aspects of ﬁnance support to both the commercial and operational areas of the Leisure Travel business that operates under the brands of Jet2.com and Jet2holidays. Rob's early career included roles as Commercial Finance Director for Europe, Africa and ANZ for ghd, a designer, manufacturer and supplier of professional hair styling products. He also served as Finance Director for Stanley UK, part of The Stanley Works Inc group, a $4.5 billion NYSE-listed company, now called Stanley Black & Decker Inc. Rob is a Chartered Accountant and started his career at Arthur Andersen. Christopher Davies Non-Executive Director Chris joined the Safestyle Board in December 2013. In addition to the customary duties and responsibilities of a Non-Executive Director, he is Chairman of the Remuneration Committee. A former FTSE 250 CEO at SIG plc, Chris has extensive Board, commercial and operational experience from his successful executive career in the construction, manufacturing and support services sectors. Chris is also a Non- Executive Director of France Bonhomme. Fiona Goldsmith Non-Executive Director Fiona joined the Safestyle Board in September 2018. She was most recently a Non-executive Director, and Chair of the Audit Committee, at Walker Greenbank PLC from December 2008 to June 2018. Fiona is a Chartered Accountant who started her career with KPMG, where for nine years she focused on the retail and leisure sectors in various roles. She then moved to First Choice Holidays plc, where she became European Finance Director. From 2004 until 2008 she was Finance Director of Land Securities Trillium, a division of Land Securities Group plc. Fiona is the Chair of the Audit Committee at Safestyle. Julia Porter Non-Executive Director Julia Porter is an experienced marketing leader, advisor, mentor and board director. Her non- executive career includes Chair of DMA (Direct Marketing Association) and board member of Origin Housing and Freeview (UK’s largest free to air digital TV platform). Her consulting roles include strategic advice for business start ups as well as marketing and CRM/data strategy consulting and accessible practitioner led GDPR advice. Her executive experience includes stints at Guardian News & Media, Getty Images, ITV and IPC Magazines. She holds an MBA from London Business School. Annual Report & Accounts 2018 51 Safestyle UK plc Strategic Report Governance Financials Audit Committee Report The objective of the Committee is to provide oversight and governance to the Group's ﬁnancial reports, its internal controls and processes in place, its risk management systems and the appointment and relationship with the external auditor. This report provides details of the role of the Audit Committee and the work it has undertaken during the year and at its clearance meeting in March 2019 when this annual report and ﬁnancial statements were approved. Principal duties The principal duties of the Committee are to: Ÿ Oversee the integrity of the Group's ﬁnancial statements and public announcements relating to ﬁnancial performance. Ÿ Advise on the clarity of disclosure and information contained in the Annual Report and Accounts. Ÿ Ensure compliance with applicable accounting standards and review the consistency of methodology applied. Ÿ Review the adequacy and effectiveness of the internal control and risk management systems. Ÿ Oversee the relationship with the external auditor, reviewing performance and advising the board on their appointment and remuneration. Ÿ Ensure appropriate arrangements in place for individuals to raise concerns regarding breach of conduct and legal and regulatory compliance. Committee membership The following Directors served on the Committee during the year: Steve Halbert 1 January 2018 to 23 April 2018 Chris Davies 1 January 2018 to 31 December 2018 Peter Richardson 1 January 2018 to 29 May 2018 Fiona Goldsmith 17 September 2018 to 31 December 2018 Julia Porter 5 November 2018 to 31 December 2018 Terms of reference These where adopted by the Board on 11th December 2013, and are available on the Group website. The terms of reference are reviewed annually. Meetings The Committee meets three times per year; in March and September being the appropriate time to review the Annual Report and Accounts and the interim report respectively, and in November to review and agree the Audit plan for the year ahead. At meetings the ﬁndings of the external audit are discussed, and the effectiveness of the Group's system of internal controls and risk management is reviewed. The Committee supports the Board in carrying out its responsibilities in relation to ﬁnancial reporting, risk management and assessing internal controls. The need for an internal audit support is considered. At this stage the Committee does not believe that the size of the Group warrants having an Internal Audit department, however external resource will be used to on a project basis where this is considered appropriate. The Committee also manages the relationship with the external auditor. The Committee undertook the following activities during the course of the year: Financial reporting The Committee reviews the half year and annual ﬁnancial statements and matters raised by management and the auditors. Ÿ The accounting policies used are consistent both year on year and across the Group (other than as disclosed in note 1 of the ﬁnancial statements). Ÿ The methods used to account for signiﬁcant transactions are appropriate. Ÿ The ﬁnancial statements give a true and fair view and the disclosures made are balanced and understandable. Ÿ Appropriate estimates and judgements have been used, taking into account the views of the external auditor. Ÿ The appropriate accounting standards have been The Company Secretary acts as secretary to the Committee. applied. External audit The Chief Executive Ofﬁcer, Chief Financial Ofﬁcer and the Chairman of the Board usually attend meetings by invitation, along with representatives from the external auditor. The report and ﬁnancial statements were audited by KPMG LLP following that ﬁrm's appointment as statutory auditor in 2013. The Committee considers several areas when reviewing the external auditor appointment namely their performance in discharging the audit, the scope of the audit and terms of engagement, their independence and objectivity and their reappointment and remuneration. The Committee reviews the objectivity and independence of the auditors when considering reappointment. The external auditor reports to the Committee on actions taken to comply with professional and regulatory requirements and is required to rotate the lead audit partner every ﬁve years. KPMG provide a range of other services which include tax compliance and advisory services. To ensure auditor objectivity and independence, the Committee has adopted a policy on the engagement of external auditors for the provision of non-audit services, which include ﬁnancial limits above which the Audit Committee must approve. Any non-audit fees above £10,000 per engagement must be approved by the chairman of the Audit Committee before the work commences. Details of fees paid to KPMG during the year are disclosed in note 6 of the ﬁnancial statements. The Committee had discussions with the external auditor on audit planning, fees, accounting policies, audit ﬁndings and internal controls. The effectiveness of the audit was assessed through the review of audit plans, reports and conclusions and through discussions with management and the external auditor. The Committee has conﬁrmed it is satisﬁed with the independence, objectivity and effectiveness of KPMG and has recommended to the Board that the auditors be reappointed, and there will be a resolution to this effect at the forthcoming Annual General Meeting. Signiﬁcant areas of judgement Within its terms of reference, the Committee monitors the integrity of the annual and interim reports, including a review of the signiﬁcant ﬁnancial reporting issues and judgements contained in them. At its meetings in September 2018 and March 2019 the Committee reviewed the Group's results and other information provided by the Chief Financial Ofﬁcer to support the Directors' going concern statements. The Committee also considered a paper prepared by the external auditor, which included signiﬁcant reporting and accounting matters. Accounting for the Commercial Agreement The Committee reviewed the assumptions underlying the accounting treatment of the commercial agreement. The accounting treatment required careful consideration as it is covered by several different accounting standards; IFRS 2, IFRS 3, IAS 38 and IAS 37. The shares which could become due under the terms of the agreement have been accounted for in accordance with IFRS 2 'Share Based Payments'. The fair value of the shares has been determined by reference to the fair value of the equity investment. This gives rise to an intangible asset of £2.3m which is being amortised over 5 years. This is the period of the non-compete included within the commercial agreement and is the period over which the Board believes that the business will beneﬁt. KPMG concurs with this treatment. Under the terms of the commercial agreement there is also the potential to pay cash payments of up to £2m dependent on certain performance targets. The Board believes that the commercial essence of the agreement is that the beneﬁts from these payments will also arise over a 5- year period. Whilst this is the commercial reality, the accounting standards require us to account for our best estimate, at this stage, of the amounts to be paid and to charge the cost to the accounts in the year. Accordingly, the Committee is satisﬁed that the amount charged to non-underlying costs is appropriate and in accordance with current accounting principles. Going concern The Audit Committee, and the Board, reviewed the ﬁnancial information prepared by management to support the fact that it is appropriate to adopt the going concern basis of preparation for the Group. This included ﬁnancial forecasts which reﬂected current trading and anticipated performance for the next 12 months. These forecasts were then sensitised to reﬂect reasonable possible adverse effects which could arise. This included considering the possible downturn in consumer demand which could result from Brexit uncertainty. The Group's covenants were then assessed against these downside sensitivities. The Committee also considered mitigating actions proposed by management including proposed reductions in discretionary spend. The Committee is satisﬁed that it is appropriate to prepare the Group's ﬁnancial statements on the going concern basis. Further information is provided in note 2. The Committee considered the appropriateness of the following areas of signiﬁcant judgement, complexity or estimation in the ﬁnancial statements. F Goldsmith Chair of the Audit Committee 21 March 2019 Revenue recognition and trade receivables Historically Revenue recognition and the recoverability of trade receivables has been a key area of focus during the audit. During the year the Committee spent time with management addressing historical issues. Signiﬁcant improvements in the controls over revenue recognition were implemented during the year. KPMG and the Committee is satisﬁed that the Group's criteria for revenue recognition has been correctly adopted. 52 Annual Report & Accounts 2018 Annual Report & Accounts 2018 53 Safestyle UK plc Strategic Report Governance Financials Directors’ Remuneration Report Statement from the Chairman of the Remuneration Committee Dear Shareholder 2018 was an exceptionally difﬁcult year for the business and I set out below in full how the Remuneration Committee responded to those challenges in respect of remuneration. These details were shared with our major shareholders in November 2018 and the overall feedback we received was supportive. The Annual Report on Remuneration is subject to an advisory vote at the 2019 Annual General Meeting as in the prior year. Our remuneration policy was approved under an advisory vote at the 2017 AGM. It has not been reproduced here but is available in our 2017 Annual Report. Review of the 2018 ﬁnancial year The Group faced some exceptional challenges in 2018, which have been well publicised and which were resolved towards the end of the year, but which over the course of 2018 required some immediate decisions to ensure that we retained a functioning Board and Executive team. The departures of Steve Birmingham and Mike Robinson, respectively our previous CEO and CFO, had been planned for and 54 Annual Report & Accounts 2018 announced well in advance. Our new CEO, Mike Gallacher joined us at the start of May, just three weeks before the legal proceedings against our insurgent competitor were launched, the preparation for which proved hugely demanding for the management team, in terms of both time and complexity, at a point when the operational challenges were accelerating. The scale and nature of the task had turned into something very different to what it had appeared to be when our new CEO accepted the role. The newly appointed CFO, Rob Neale, was not due to be in place for another two months, and there was no Chairman. As the only remaining Non-executive director, my priorities were clear - to stabilise and secure the senior team, the two new members of which had been recruited before the scale of the crisis became apparent, and to rebuild the Non-Executive contingent of the Board, in order that the Group could continue trading, successfully ﬁght the legal battle, and in due course commence the process of sustainable recovery. I am pleased to be able to report that all this we achieved. In order to secure the management team and recruit a Chairman of Alan Lovell's calibre it was necessary to put in place reward and share award arrangements that fall outside of our Policy, which in other circumstances would not have been contemplated, and which will not be repeated. I can say without hesitation that the new senior team and Board are experienced and high quality individuals and represent a step change for the business. The arrangements for reward which were adopted in 2018 in order to support our business priorities, are as follows: Executive directors Salary The salary of £275k for Mike Gallacher and £175k for Rob Neale, were set as part of the competitive recruitment process at a level required to secure them, based on the role they were exiting and other offers in the market. Pension Pension contribution for Rob Neale is in line with arrangements for the previous senior management team, at 8% of salary. Mike Gallacher does not receive a company pension contribution. Variable pay By the time our new CEO arrived it had become apparent that we were in exceptional circumstances, and certain emergency measures were required to tie the executive team into the business and to recognise the huge additional commitment they were required to take on, as outlined above. Accordingly: There was for 2018 a maximum bonus opportunity of 100% of annual salary, in line with the Policy. This has been pro-rated for Rob Neale, given the later date on which he started. Bonus was not pro-rated for Mike Gallacher. The bonus was based on a number of targets set against the backdrop of the turnaround situation of the year. This differs to our practice over recent years under which 70% of the bonus was based on PBT performance and 30% personal objectives. It is our intention to return to this model in 2019, but as events unfolded in 2018 it was clear that this was wholly inappropriate given the crisis facing the business and the uncertainty of its future. Rewarding short term delivery of key actions required to secure and stabilise the business was much more relevant in the year. All of the Executives were called upon to make an exceptional contribution in 2018, and all of them took on responsibilities and workload way beyond their customary duties. The bonus levels awarded reﬂect the Board's assessment that the individuals achieved a high level of success in delivering on their agreed short term targets, further details of which are provided on page 59. This commitment to the business, the drive and hard work of our management team, should be recognised and commended by shareholders. They have worked incredibly hard, and faced untold pressure, to get us to the credible position we are in today. A further sum was made available for the CEO to reﬂect the supplementary duties which he was being asked to undertake in the absence of a full Board (notably, including a Chairman) and recognising the extraordinary hours and pressures he was required to deal with. This sum for additional duties equates to c.36% of his annual base pay. It does not impact bonus or LTIP awards which are awarded on base pay only, and is not pensionable. It was agreed by the Committee at a critical point in our legal battle and before we had secured our Chairman. It was an exceptional payment in an exceptional year, and will not be repeated. Share awards Under our Policy our usual award for the LTIP is up to 100% of base salary, although in 2017 the award was 80%. There is an overall maximum of 200% for exceptional circumstances, including on recruitment. Recognising the exceptional circumstances, awards were granted under the LTIP to the CEO at 160% of salary and the other executive directors at 120% of salary. These are linked to absolute EPS targets for the year ended 31 December 2020, which have been set at a threshold performance (at which 25% of the LTIP award vests) of 5.80p and for maximum performance at 9.66p, with straight line vesting in between. The Committee considers these targets to be very stretching, particularly in the light of the signiﬁcant ﬁnancial loss in 2018 and current market uncertainty as we rebuild the business under our new Board. In addition there is an overall business performance underpin which provides the Committee with discretion to reduce the level of vesting if that were to be appropriate. Malus and clawback triggers apply to the awards. Annual Report & Accounts 2018 55 Safestyle UK plc Strategic Report Governance Financials Directors’ Remuneration Report Statement from the Chairman of the Remuneration Committee Chairman and NEDs In September we appointed Fiona Goldsmith to the Board as NED and Chair of the Audit Committee, and her fees of £47k per annum are in line with Safestyle's established fee structure. Similarly, in November we announced the appointment of Julia Porter as NED with annual base fees of £42k. We were delighted to secure Alan Lovell as our Chairman, who has a wealth of experience in supporting companies in a distressed or turnaround situation. Alan's fee was set at £120k which reﬂects his experience and knowledge, was benchmarked to the market, and was required in order to secure him to the role. Since joining the Board Alan has already made a signiﬁcant contribution to the security and future well-being of Safestyle. He has so far personally acquired 130,000 shares and has committed to purchase further shares to bring the total of his personal investment to a minimum of £120,000, i.e. equivalent to his annual fee. To match this commitment, we agreed to grant Alan nil cost options over 250,000 shares, with a face value at the time of his appointment equating also to c.£120,000. 56 Annual Report & Accounts 2018 The terms of this option are as follows: Ÿ 50% of the award will vest two years after joining the Board (July 2020) and 50% will vest after three years (July 2021). Ÿ There are no ﬁnancial targets but there is a general business performance underpin so that the Committee has discretion to reduce or lapse the awards that would vest if the level of vesting is not appropriate in the context of the underlying performance of the business. Ÿ Change in control provisions apply so that the awards are pro- rated for time in the event of a such an event, but the Committee retains discretion to over-ride this if appropriate. Ÿ Good leaver deﬁnitions are death, disability and any other reason at the discretion of the Committee but in the event of being a good leaver, there is no default early vesting (apart from death), although the Committee has discretion to allow early vesting if appropriate. Ÿ The same malus and clawback provisions which apply under the LTIP apply to these awards. We are not seeking to replicate this arrangement for our other Non- executives, and recognise that it is unusual to grant share awards to the Chairman. In arriving at this arrangement we sought to deliver a competitive package that was attractive enough to secure someone of Alan's calibre, whilst ensuring that there was alignment to shareholder interests and an incentive to make a personal investment in the Group. To avoid any conﬂicts of interest we have not made these options performance related, and we have included tranched vesting to act as a retention mechanism whilst also encouraging sustained share price improvement. We have also included good governance practices as outlined above. For completeness, I should make clear that in my own case, notwithstanding the signiﬁcant additional workload and responsibilities in recent months in helping steer the Group to calmer waters, I had sought no adjustment to my annual fees. However, the new Board prevailed upon me to accept fees equating to twice my customary rate for the second half of 2018 in recognition of my very high time commitment. Changes to the Board As mentioned above, Mike Robinson and Steve Birmingham stepped down from the Board during the year as part of an agreed timeline for exit. No 2018 bonus was awarded and neither was granted PSP awards in 2018. Their salary, pension and beneﬁts were paid to the date they left the Group, and then ceased. In addition, Steve Birmingham is receiving payment of £120,000 in equal monthly instalments for pay in lieu of his unexpired notice period. Both Mike and Steve were treated as good leavers under the 2015 Executive Share Option Plan (“ESOP”) and the 2017 Performance Share Plan (“PSP”) recognising their long term commitment and personal contribution to the Group. The ESOP award made in 2016 and which was due to vest with respect to performance in the year ended 31 December 2018 will lapse in full as the threshold performance conditions were not met. The only outstanding unvested share award which they therefore hold is the 2017 award made under the PSP. We recently announced that Giles Richell has stepped down from the Board and is leaving the Group during 2019 as part of a redundancy process. The terms of Giles' exit are in line with the Group's redundancy policy. I have also announced my intention to retire from Safestyle, having served over ﬁve years as a Non- executive director. I will step down at the May AGM and leave the business in very capable hands, with a strong and experienced Board in place. My successor as Chair of the Remuneration Committee will be Julia Porter. Looking forward to 2019 I expect 2019 to be a stable year in which we can fully apply our usual remuneration Policy. Salary will remain unchanged for our executives and there will be no increase to fees for the non- executive directors or the Chairman. The bonus maximum for Executives will be maintained at 100% of salary and will be based 70% on PBT and 30% on strategic and personal objectives, as was the case in previous years. Awards under the Performance Share Plan will reﬂect usual Policy at 80% of salary. We are currently reviewing the associated performance criteria & targets and these will be disclosed in full in the 2019 Remuneration Report. I anticipate that these will continue to be based on EPS but we are seeking to ensure that we have robust three year ﬁgures for the purposes of target setting. Summary I fully recognise that certain of the decisions made in 2018 fall outside of our Policy (on which shareholders have had an advisory vote in the past), but the urgency of the situation meant that it was impossible to consult at the time. I do hope shareholders will understand that if I and the Remuneration Committee had not acted with urgency and decisiveness in the way we did in their interest, it is highly unlikely that the Group would have had a realistic prospect over time of rebuilding shareholder value. I therefore hope that you will support our advisory vote on remuneration at the AGM. Chris Davies Chairman of the Remuneration Committee 21 March 2019 Annual Report & Accounts 2018 57 Safestyle UK plc Strategic Report Governance Financials Directors’ Remuneration Report Annual Report on Remuneration 2018 Remuneration Individual elements of remuneration Base salary The annualised base salaries for 2018 and 2017 and the salary increases which took effect from 1 January 2018 are as set out below: 2018 base salary £,000 2017 base salary £,000 % increase The table below details the elements of remuneration received by each Director for the ﬁnancial year ended 31 December 2018, and the total remuneration received by each Director for that ﬁnancial year and also for the ﬁnancial year ended 31 December 2017. M Gallacher R Neale G Richell 275 175 175 n/a n/a 159 n/a n/a 9.8% 2018 Salary and fees £’000 Beneﬁts¹² Annual bonus Long term incentives Pension £’000 £’000 £’000 £’000 Supplemental salary and 7, fees¹ 7 £’000 Total remuneration 2018 £’000 Total remuneration 2017 £’000 Executive Directors M Gallacher¹ R Neale² G Richell³ S J Birmingham 4 M J Robinson 5 Total Non-Executive Directors A C Lovell 6 C J Davies 7 8 F Goldsmith J Porter 9 R S Halbert 10 P Richardson 11 Total 183 81 175 121 66 626 55 48 16 7 19 46 191 11 6 13 15 4 49 - - - - - - - 250 100 164 - - 514 - - - - - - - - - - - - - - - - - - - - - 6 15 10 5 36 - - - - - - - 100 - - - - 544 193 367 146 75 100 1,325 - 24 - - - - 24 55 72 16 7 19 46 215 n/a n/a 163 219 184 566 n/a 48 n/a n/a 74 43 165 Remuneration in 2018 (and for Giles Richell in 2017) reﬂects a part year as follows: 1 2 3 4 5 6 7 8 9 10 11 12 M Gallacher was appointed to the Board on 1 May 2018. In 2018, as set out in the Chairman of the Remuneration Committee’s statement, he received an additional supplemental payment of £100k. R Neale was appointed to the Board on 16 July 2018. G Richell was appointed to the Board on 13 February 2017. S J Birmingham retired and stepped down from the Board on 13 September 2018. M J Robinson resigned and stepped down from the Board on 31 May 2018. A C Lovell was appointed to the Board as Chairman on 16 July 2018. In recognition of the services provided by C J Davies during 2018, additional fees were awarded by the Chairman of the Board. Further details are in the Chairman of the Remuneration Committee’s statement. F Goldsmith was appointed to the Board on 17 September 2018. J Porter was appointed to the Board on 5 November 2018. R S Halbert resigned from the Board on 23 April 2018. P Richardson resigned from the Board on 29 May 2018. Beneﬁts include car allowance, private fuel and private medical insurance. The increase for Giles Richell was fully communicated in the 2017 Remuneration Report and reﬂected his increased role and responsibilities and the COO's personal development in role. Annual incentive plan No bonuses were paid to SJ Birmingham or M Robinson. Bonus opportunities were awarded to the current executive team equal to 100% of salary (based on the full year for M Gallacher and G Richell) and from June for R Neale, recognising his considerable time commitment to the business before he formally joined in July. The full year bonus formed part of the recruitment arrangements agreed with M Gallacher in recognition of bonus foregone at his previous employment. These bonuses were based solely on strategic objectives, centred on the turnaround plan with measures around stabilising the business, a return to proﬁt, staff retention and managing risk. The targets and achievements against those are set out below: Director Performance metrics Bonus opportunity (% of annual salary) Performance achieved Bonus earned (% of annual salary) M Gallacher Delivery of the Turnaround plan, plus other operational targets including leading the legal action, managing compliance & regulatory issues and building a capable new management team 100% 100% of Turnaround element, 67% of Other Objectives element 91% R Neale Delivery of the Turnaround plan, plus other operational targets including leading a reﬁnancing project and the cost-saving & efﬁciency drive 100% 100% of Turnaround element, 94% of Other Objectives element 98% (pro- rated for 7 months) G Richell Delivery of the Turnaround Plan, plus other operational targets including factory & installation performance, Health & Safety and digital transformation 100% 100% of Turnaround element, 75% of Other Objectives element 94% This was an exceptional year which required exceptional performance and a unique response from the Remuneration Committee. The bonus opportunity will return to its more usual structure in 2019, with 70% of the total available dependent on Proﬁt before Tax (PBT) performance, and the remaining 30% dependent on strategic and personal objectives. These targets and performance against will be disclosed in the 2019 Remuneration Report. Long term incentives Awards vested during the ﬁnancial year Market value options granted in April 2016 to S J Birmingham and M J Robinson under the 2015 ESOP were due to vest in respect of average EPS growth over the three years to 31 December 2018. These targets were 5% average annual growth for threshold performance (at which level 50% of the options vest) and 10% average annual growth for maximum performance. The threshold EPS growth target was not met and no long term incentive awards vested. 58 Annual Report & Accounts 2018 Annual Report & Accounts 2018 59 Safestyle UK plc Strategic Report Governance Financials Directors’ Remuneration Report Annual Report on Remuneration Awards granted during the ﬁnancial year The following awards were granted during the year under the Safestyle UK 2017 Performance Share Plan 2018 Type of award Date of grant Percentage of salary Number of shares Exercise price Performance period Non-Executive Directors M Gallacher R Neale G Richell Nil cost option 18 June 2018 15 August 2018 18 June 2018 160% 120% 120% 733,333 350,000 350,000 £nil 1 January 2018 - 31 December 2020 The vesting of each option is subject to the satisfaction of performance conditions based on stretching Earnings per Share (EPS) growth targets over the three year performance period to 31 December 2020. The targets are as follows. Adjusted underlying EPS for the year ending 31 December 2020 (%) Percentage of PSP award vesting¹ 9.66p 5.80p 100% 25% ¹For EPS below 5.80p no amount vests. Straight-line vesting between threshold and maximum. On 20 December 2018 the Group granted awards over 250,000 shares to Alan Lovell. In making the grant, the Remuneration Committee considered the importance of Alan's signiﬁcant experience and guidance to the Group in the implementation of its turnaround plan. The awards are structured as nil cost options. They are exercisable as to 50% from 16 July 2020 and the balancing 50% from 16 July 2021, subject to Mr Lovell's continued appointment. The awards are not subject to ﬁnancial targets but are subject to a general business performance underpin so that the Remuneration Committee has discretion to reduce or lapse the awards that would vest if the level of vesting is not appropriate in the context of the underlying performance of the business. In addition, malus and clawback provisions apply to the awards. Payments made to former Directors during the year and payments for loss of ofﬁce during the year No payments were made to former directors during the year. For SJ Birmingham and MJ Robinson no 2018 bonus was awarded. Salary, pension and beneﬁts were paid to the date that both stepped down from the Board and no further payments were made. Both were treated as good leavers under the 2015 Executive Share Option Plan and the 2017 Performance Share Plan recognising their long term commitment and contributions to the Group. The award made in 2016 under the ESOP and which was due to vest with respect to performance in the year ended 31 December 2018 lapsed in full as the threshold performance conditions were not met. The only outstanding unvested share award which they therefore hold is the 2017 award made under the PSP. Under the terms of his exit agreement, Steve Birmingham is receiving £120,000 in equal monthly payments for pay (covering salary and beneﬁt) in lieu of his unexpired notice period. Statement of Directors' shareholding and share interests 31 December 2018 Number 31 December 2017 Number Executive Directors M Gallacher R Neale G Richell S J Birmingham M J Robinson A C Lovell C J Davies F Goldsmith J Porter R S Halbert P Richardson 50.000 0 0 n/a n/a 130,000 160,000 20,000 0 n/a n/a n/a n/a 0 2,799,846 316,499 n/a 145,000 n/a n/a 100,000 15,620 The interests of each individual, who served as a director of the Group during the year, as at 31 December 2018 in the Group's share schemes were as follows: Director Plan Date of grant Exercise price Options held at 31 December 2017 Options granted in the period Options exercised in the period² Options lapsed in the period Options held at 31 December 2018 and status Safestyle UK plc 2015 ESOP 1 April 2015 £1.7875 97,902 S J Birmingham Safestyle UK plc 2015 ESOP 28 April 2016 £2.6838 66,585 Safestyle UK 2017 PSP Safestyle UK plc 2015 ESOP Safestyle UK plc 2015 ESOP Safestyle UK 2017 PSP Safestyle UK 2017 PSP Safestyle UK 2017 PSP M J Robinson G Richell 10 April 2017 £nil 47,935 1 April 2015 £1.7875 85,594 28 April 2016 £2.6838 58,220 10 April 2017 £nil 41,913 10 April 2017 £nil 41,913 18 June 2018 £nil M Gallacher Safestyle UK 2017 PSP 18 June 2018 £nil R Neale Safestyle UK 2017 PSP 13 August 2018 A C Lovell (Non-Executive Director) Individual Share Agreement 20 December 2018 £nil £nil - - - - - - - - - - - 350,000 733,333 350,000 250,000 - - - - - - - - - - - (97,902) nil - - 66,585¹ 47,935¹ (85,594) nil - - - - - - - 58,220¹ 41,913¹ 41,913¹ 350,000¹ 733,333¹ 350,000¹ 250,000² 60 Annual Report & Accounts 2018 ¹ Unvested subject to performance conditions linked to EPS ² Unvested subject to time and an overall business performance underpin Annual Report & Accounts 2018 61 Safestyle UK plc Strategic Report Governance Financials Directors' Remuneration Report voting at the 2018 AGM The table below sets out the voting outcome at the Group's AGM held on 30 May 2018 in respect of the resolution to approve the Directors' Remuneration Report contained in the Group's 2017 Annual Report and Accounts. Votes for % for Votes against % against Total votes cast Votes withheld (abstentions) Approval of Directors' Remuneration report 45,309,576 99.998% 1,037 0.002% 45,310,613 1,560 Approval This Report was approved by the Board on 21 March 2019 and signed on its behalf by: C J Davies Chairman of the Remuneration Committee 21 March 2019 Directors’ Remuneration Report Annual Report on Remuneration Implementation of Directors' Remuneration Policy for the ﬁnancial year commencing 1 January 2019 Information on how the Group intends to implement the Directors' Remuneration Policy for the ﬁnancial year commencing on 1 January 2019 is set out below. Salary / fees No salary increase for the executives, the Chairman or the Non Executives during 2019. Salary increase for the wider PAYE workforce will be no more than 2%. Annual incentive plan The Executive Directors' annual bonus structure for 2019 will reﬂect our usual bonus structure which was in place for 2017. Each Executive Director will have an annual bonus opportunity of up to 100% of base salary based on delivering against stretching PBT targets (as regards 70% of the opportunity) and a range of strategic and personal objectives (as regards the remaining 30%) to provide a balanced scorecard approach to measuring and rewarding management performance during the year. As with the 2017 annual incentive plan, proﬁt will be measured before share based payments and exceptional costs. For delivering on plan, the PBT element of the annual cash incentive will deliver 50% of the potential linked to PBT (i.e. 35% of salary). The strategic and personal objectives will be tailored to each individual and will focus around key performance metrics in the 2019 plan to deliver our strategy and return the Group to proﬁtability. These include building a wider and more effective management team below the Board, a step change in levels of customer service after the events of 2018, improvements in ﬁt efﬁciency and factory remakes, establishment of new forecasting, planning and operational control systems, delivery of signiﬁcant overhead savings and implementation of an Internal Audit programme. Maximum vesting of the potential linked to PBT (i.e. 70% of salary) will be realised upon achieving PBT stretch performance in excess of our Plan which will be disclosed retrospectively in the 2019 Annual Report on Remuneration, where further detail of performance against the objectives will also be provided. LTIP Awards will be granted to the Executive Directors under the 2017 Performance Share Plan at 80% of salary. Details of the awards and the targets will be disclosed in the 2019 Remuneration Report. Consideration by the Directors of matters relating to Directors' remuneration The Remuneration Committee is composed of the Group's independent Non-Executive Directors, C J Davies (Chairman), Alan Lovell, Fiona Goldsmith and Julia Porter. Executive Directors only attend meetings by invitation. The Committee's key responsibilities are: reviewing the on-going appropriateness and relevance of remuneration policy; Ÿ reviewing and approving the remuneration packages of the Executive Directors; Ÿ Ÿ monitoring the level and structure of remuneration of the senior management; and Ÿ production of the annual report on the Directors' remuneration. Advisors During the ﬁnancial year, the Committee received independent advice from Deloitte LLP. Deloitte is a founder member of the Remuneration Consultants Group and voluntarily operates under its code of conduct in its dealings with the Committee. 62 Annual Report & Accounts 2018 Annual Report & Accounts 2018 63 Safestyle UK plc Strategic Report Governance Financials Directors’ Report The Directors present their annual report and audited ﬁnancial statements of the Group for the year ended 31 December 2018 Registered ofﬁce Shareholder communication The Board is committed to maintaining good communication with both institutional and private investors. Dialogue with fund managers, institutional investors and analysts to discuss performance and future prospects is actively pursued. The Annual General Meeting provides an opportunity for shareholders to address questions to the Chairman and the Board directly. Risk management and internal controls The Board has overall responsibility for the Group's system of internal controls and for reviewing the effectiveness of this system. It should be recognised that such a system is designed to manage rather than eliminate the risk of failure to achieve the business objectives and can only provide reasonable, and not absolute, assurances against material misstatement or loss. The registered ofﬁce of Safestyle UK plc is 47 Esplanade, St Helier, Jersey, JE1 0BD. Directors' indemnities and insurance Principal activities Safestyle UK plc is an AIM listed company. The Group's principal activities are the sale, manufacture and installation of replacement PVCu windows and doors for the UK homeowner market. Safestyle UK plc indemniﬁes its ofﬁcers and ofﬁcers of its subsidiary companies against liabilities arising from the conduct of the Group's business, to the extent permitted by law, by the placing of directors' and ofﬁcers' insurance. The insurance policy indemniﬁes individual directors' and ofﬁcers' personal legal liability and cost for claims arising out of actions taken in connection with Group business. Business review Directors' responsibilities The directors are responsible for preparing the ﬁnancial statements in accordance with applicable law and IFRS as adopted by the EU. Company law requires the directors to prepare Group ﬁnancial statements for each ﬁnancial year which give a true and fair view of the state of affairs of the Group and of the proﬁt or loss of the Group for that year. In preparing those ﬁnancial statements, the directors are required to: select suitable accounting policies and then apply them consistently; Ÿ Ÿ make judgements and estimates that are reasonable, relevant and reliable; Ÿ state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the ﬁnancial statements; Ÿ assess the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and Ÿ use the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the ﬁnancial position of the Company and to enable them to ensure that the ﬁnancial statements comply with the Companies (Jersey) Law 1991. They are responsible for such internal control as they determine is necessary to enable the preparation of ﬁnancial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Chairman's statement, the Chief Executive's statement and the Financial Review on pages 26 to 33 report on the Group's performance during the year and future developments. Dividends The directors do not propose a ﬁnal dividend for the year. Governance Safestyle UK plc is an evolving organisation and one that has ethics, integrity and high standards of corporate governance as key priorities. The Board has adopted the Quoted Companies Alliance (QCA) Corporate Governance Code (2018) as its Governance Framework. The Board understands its responsibility in managing the business for the long-term beneﬁt of its stakeholders, through effective and efﬁcient decision making and acknowledges the importance of the ten principles set out within the QCA code. An overview of the Group's corporate governance procedures is given below. The Board The Group is controlled through a Board of Directors which, at 31 December 2018 comprised a non-executive chairman, three executive directors and three non-executive directors. The non-executive chairman and the non- executive directors are considered to be independent and bring a wide range of experience and provide a strong balance to the executive directors. The Board meets at least 9 times a year and is responsible, amongst other things, for business strategy, approval of interim and annual ﬁnancial results, approval of annual budgets, approval of major capital expenditure and the framework of internal controls. Audit Committee The Audit Committee report on pages 52 to 53 to provides details regarding the Audit Committee members and its responsibilities. Remuneration Committee The Chairman of the Remuneration Committee is Chris Davies with Alan Lovell, Fiona Goldsmith and Julia Porter as the other non-executive members. The Committee reviews the performance of the executive directors and determines their terms and conditions of service, including their remuneration and the grant of options. The Remuneration Committee meets at least once a year. Nomination Committee The Chairman of the Nomination Committee is Alan Lovell with Chris Davies, Fiona Goldsmith and Julia Porter as the other non-executive members. The Committee identiﬁes and nominates for the approval of the Board candidates to ﬁll board vacancies as and when they arise. The Nomination Committee will meet at least once a year. 64 Annual Report & Accounts 2018 Annual Report & Accounts 2018 65 Safestyle UK plc Strategic Report Governance Financials Directors’ Report Substantial shareholdings As at 8 March 2019 the Group has been advised of the following interests in more than 3% of its ordinary share capital. Name Number % Name Alantra Asset Management Cambridge Global Asset Mgt Standard Life Janus Henderson Investors Invesco 15,266,125 8,446,452 6,650,259 5,180,706 4,775,000 18.44% 10.20% 8.03% 6.26% 5.77% Otus Capital Mgt Invesco Asset Mgt Ruffer Steve Birmingham Number % 4,485,351 3,987,465 2,800,000 2,799,846 5.42% 4.82% 3.38% 3.38% Going concern For the purposes of assessing the appropriateness of the preparation of the Group's accounts on a going concern basis, the directors have considered the current cash position, available banking facilities and forecasts of future trading through to 31 December 2020, including performance against ﬁnancial covenants. Further disclosure of the factors considered are given in the basis of preparation note to the accounts. Having considered this information, the Directors have a reasonable expectation that the Group has adequate resources to continue to trade for the foreseeable future. Consequently, the Directors continue to adopt the going concern basis of preparation in preparing the ﬁnancial statements for the year ended 31 December 2018. Auditors The Board has decided to put forward a resolution to reappoint KPMG LLP as auditors at the forthcoming AGM of the Group. Statement of disclosure of information to auditors As at the date this report was signed, so far as each of the Directors is aware, there is no relevant information of which the auditor is unaware and each Director has taken all steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the auditor is aware of that information. Approved by the Board of Directors and signed on behalf of the Board on 21 March 2019 Rob Neale Chief Financial Ofﬁcer 21 March 2019 66 Annual Report & Accounts 2018 Annual Report & Accounts 2018 67 Safestyle UK plc Strategic Report Governance Financials 68 Annual Report & Accounts 2018 Annual Report & Accounts 2018 69 Safestyle UK plc Strategic Report Governance Financials 83, 84 87 94 98 87 96 70 Annual Report & Accounts 2018 Annual Report & Accounts 2018 71 Safestyle UK plc Strategic Report Governance Financials 72 Annual Report & Accounts 2018 Annual Report & Accounts 2018 73 Safestyle UK plc Financials 76 77 78 79 80 Consolidated Income Statement Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Safestyle UK plc Strategic Report Governance Financials Consolidated Income Statement for the year ended 31 December 2018 Revenue Cost of sales Gross profit¹ Other operating expenses² Operating (loss) / profit³ Finance income Finance costs Net finance (costs) / income (Loss) / profit before taxation Underlying (loss) / profit before taxation before non-recurring costs, Commercial Agreement amortisation and share based payments Non-recurring costs Commercial Agreement amortisation Share based payments (Loss) / profit before taxation Taxation (Loss) / profit for the year Basic EPS (pence per share) Diluted EPS (pence per share) Note 2018 £000 2017 £000 2,5 116,426 158,552 (90,549) (107,133) 25,877 51,419 (42,004) (37,630) (16,127) 13,789 7 (142) (135) 35 (10) 25 (16,262) 13,814 (8,744) (7,817) (75) 374 (16,262) 2,964 (13,298) (16.1)p (16.1)p 15,065 (830) - (421) 13,814 (2,986) 10,828 13.1p 13.0p 6 12 7 14 31 13 9 9 ¹ Gross proﬁt in 2018 includes £801k of non-recurring costs. Adjusting for this gives underlying gross proﬁt of £26,678k. See Financial Review for details. ² Other operating expenses in 2018 includes £7,016k of non-recurring costs, £374k of share based payments credit and £75k of Commercial Agreement amortisation. Adjusting for these gives underlying other operating expenses of £35,287k. See Financial Review for details. ³ Operating loss in 2018 includes £7,817k of non-reccuring costs, £374k of share based payments credit and £75k of Commercial Agreement amortisation. Adjusting for these gives an underlying operating loss of £8,609k. See Financial Review for details. There is no other comprehensive income for the period. All operations were continuing throughout all periods. The accompanying notes form part of the ﬁnancial statements. Consolidated Statement of Financial Position at 31 December 2018 Assets Intangible assets - Trademarks Intangible assets - Goodwill Intangible assets - Software Intangible assets - Other Property, plant and equipment Deferred taxation asset Non-current assets Inventories Current taxation asset Trade and other receivables Cash and cash equivalents Current assets Total assets Equity Called up share capital Share premium account Profit and loss account Common control transaction reserve Total equity Liabilities Trade and other payables Corporation taxation liabilities Deferred taxation liability Provision for liabilities and charges Current liabilities Provision for liabilities and charges Borrowing facility Non-current liabilities Total liabilities Total equity and liabilities Note 14 14 14 14 15 16 17 18 19 20 21 22 23 23 24 2018 £000 504 20,758 1,346 2,188 14,213 693 2017 £000 504 20,758 786 - 14,975 28 39,702 37,051 2,416 2,287 4,478 4,163 2,032 - 4,559 10,975 13,344 17,566 53,046 54,617 828 81,845 13,347 (66,527) 828 81,845 24,712 (66,527) 29,493 40,858 15,286 - 53 1,123 10,864 776 90 599 16,462 12,329 3,188 3,903 7,091 1,430 - 1,430 23,553 13,759 53,046 54,617 The accompanying notes form part of the ﬁnancial statements. The ﬁnancial statements were approved by the Board of Directors and authorised for issue on 21 March 2019 and were signed on their behalf by: R Neale Chief Financial Ofﬁcer 76 Annual Report & Accounts 2018 Annual Report & Accounts 2018 77 Safestyle UK plc Strategic Report Governance Financials Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows for the year ended 31 December 2018 for the year ended 31 December 2018 Share capital Share premium Proﬁt and loss account £000 £000 £000 Balance at 1 January 2017 Total comprehensive income for the year Transactions with owners recorded directly in equity: Issue of shares Buy back of shares Equity settled share based payment transactions (see note 31) Corporation taxation relief taken to reserves Dividends 828 - 81,979 - 2 (2) - - - 256 (390) - - - 22,052 10,828 - - 421 747 (9,336) Common control transaction reserve £000 (66,527) - - - - - - Total equity £000 38,332 10,828 258 (392) 421 747 (9,336) Balance at 31 December 2017 Total comprehensive (loss) for the year Transactions with owners recorded directly in equity: Equity settled share based payment transactions (see note 31) Deferred taxation asset taken to reserves (see note 16) Equity settled Commercial Agreement (see note 14) 828 - 81,845 - 24,712 (13,298) (66,527) - 40,858 (13,298) - - - - - - (374) 44 2,263 - - - (374) 44 2,263 Balance at 31 December 2018 828 81,845 13,347 (66,527) 29,493 The accompanying notes form part of the ﬁnancial statements. Cash flows from operating activities (Loss) / profit for the year Adjustments for: Depreciation of plant, property and equipment Amortisation of intangible fixed assets Finance income Finance expense Loss on sale of plant, property and equipment Equity settled share based payments (credit) / charge Taxation (credit) / expense (Increase) / decrease in inventories Decrease in trade and other receivables Increase / (decrease) in trade and other payables Increase / (decrease) in provisions Hire purchase interest paid Other interest paid Taxation paid Net cash (outflow) / inflow from operating activities Cash flows from investing activities Acquisition of property, plant and equipment Acquisition of subsidiary Interest received Proceeds from sale of property, plant and equipment Acquisition of intangible fixed assets 2018 £000 2017 £000 (13,298) 10,828 1,715 400 (7) 142 42 (374) (2,964) (14,344) (384) 81 4,422 2,282 6,401 - (142) (142) (757) (8,842) (1,028) (30) 7 33 (855) 1,489 241 (35) 10 - 421 2,986 15,940 144 1 (1,120) (367) (1,342) (10) - (10) (2,880) 11,708 (4,075) - 35 - (612) Net cash outflow from investing activities (1,873) (4,652) Cash flows from financing activities Proceeds from loans and borrowings Proceeds from the issue of ordinary shares Purchase and cancellation of ordinary shares Payment of hire purchase and finance leases Dividends paid Net cash inflow / (outflow) from financing activities Net (decrease) in cash and cash equivalents Cash and cash equivalents at start of year 3,903 - - - - 3,903 (6,812) 10,975 - 258 (392) (70) (9,336) (9,540) (2,484) 13,459 Cash and cash equivalents at end of year 4,163 10,975 The accompanying notes form part of the ﬁnancial statements. 78 Annual Report & Accounts 2018 Annual Report & Accounts 2018 79 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements General information The ﬁnancial statements set out herein are in respect of Safestyle UK plc (the Company) and its subsidiaries (the Group) for the year ended 31 December 2018. Safestyle UK plc is a publicly listed company incorporated in Jersey. The company's shares are traded on AIM. The company 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 company is not required to present parent company information. 1 Basis of preparation The Group's ﬁnancial statements for the year ended 31 December 2018 (“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 statement 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. Ÿ Ÿ IFRS 9 Financial Instruments (effective 1 January 2018) IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018) (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): Ÿ Ÿ Ÿ Amendments to IFRS 9 Financial Instruments (effective 1 January 2019) Ÿ Annual Improvements to IFRSs – 2015-2017 Cycle (effective 1 January 2019) IFRS 16 Leases (effective 1 January 2019) IFRIC 23 Uncertainty over Income Taxation Treatments (effective 1 January 2019) IFRS 9 Financial instruments - Impairment of ﬁnancial assets IFRS 9 replaces the 'incurred loss' model in IAS 39 with an 'expected credit loss' (“ECL”) model. The new impairment model applies to ﬁnancial assets measured at amortised cost. The Group has elected to measure loss allowances for trade receivables at an amount equal to lifetime ECLs. Impact of the new impairment model The Group has determined that the application of IFRS 9's impairment requirements at 1 January 2018 does not require an adjustment to the impairment allowance recognised at 31 December 2017. The previous basis of estimating irrecoverable losses is consistent with the methodology prescribed under IFRS 9. The following table provides further detail about the calculation of ECLs related to trade receivables on the adoption of IFRS 9. The Group considers the model and some of the assumptions used in calculating these ECLs as key sources of estimation uncertainty. Weighted average loss rate Debt over 1 yr old Speciﬁc Debtors to be written off Standing Orders Debt less than 1 yr old 100.0% 100.0% 33.0% 4.9% IFRS 15 Revenue from contracts with customers Impact of implementing IFRS 15 IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced IAS 18 Revenue. The Group has adopted IFRS 15 with effect from 1 January 2018. The Group primarily earns revenues from the sale, design, manufacture and installation of domestic double-glazed replacement windows and doors. Product sales revenues are recognised once the goods have been installed. The Group is satisﬁed that their treatment of Revenue complies with the remit of IFRS 15 'Revenue from contracts with customers'. Revenue is currently recognised when a service is delivered and when the contract is completed in accordance with the policy in note 2. The Group has conﬁrmed that any changes to accounting required to meet this standard are not material to the ﬁnancial results of the group. It has not been necessary to restate results previously presented. IFRS 16 Leases IFRS 16 Leases will have a material impact on the reported assets, liabilities and income statement for the Group. The standard will be applied for accounting periods starting after 1 January 2019, therefore the Group's ﬁrst ﬁnancial year that is impacted will be the year ending 31 December 2019. The Directors have performed a review of the effect of IFRS 16 on the Group and the indicative impact is to increase ﬁxed assets in the range of £9.5m to £11.5m at 31 December 2018, being the present value of future lease obligations with a corresponding increase in liabilities. The cash ﬂow impact is nil. A reliable estimate of the ﬁnancial impact on the Group's consolidated results is dependent on a number of unresolved areas, including; reﬁnement of approach to discount rates, and estimates of lease-term for leases with options to break and renew and the approach is yet to be subject to audit. In addition, the ﬁnancial impact is dependent on the facts and circumstances surrounding the lease portfolio at the time of transition. For these reasons, it is not yet practicable to determine a reliable estimate of the ﬁnancial impact on the Group as at 31 December 2018. 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 to 31 December 2018. The actual trading cut off date of the year-end ﬂuctuates year on year and is based on the nearest Sunday to the end of December. 2 Summary of signiﬁcant accounting policies 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 £13.3m in the year to 31 December 2018 (FY17: £10.8m proﬁt). The Group entered into a two year ﬁnancing arrangement on 26 October 2018 for £7.5m. The ﬁnance facility includes certain covenants, including a minimum EBITDA to be tested on a cumulative monthly basis. As at 31 December 2018, £4.5m term loan was fully drawn on the facility and in the period to 13 March 2019, £2.5m of the revolving credit facility has also been drawn. The Group had net debt of £2.5m at the end of February 2019. This increase in net debt since the year-end was expected with the ﬁrst quarter representing the peak period for lead generation investment. 80 Annual Report & Accounts 2018 Annual Report & Accounts 2018 81 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements Intangible ﬁxed assets Goodwill Goodwill is stated at cost less any accumulated impairment losses. Goodwill is not amortised but is tested annually for impairment. 2 Summary of signiﬁcant accounting policies (continued) Going concern (continued) The Directors have prepared forecasts covering the period to December 2020, built from the detailed Board approved budget for 2019. The 2019 Budget includes a number of assumptions in relation to sales volume growth and margin improvements. The Directors have considered reasonably possible downside sensitivity scenarios including a 10% reduction in sales and no margin growth in 2019, offset by mitigating actions within the control of management including reductions in areas of discretionary spend. As part of this assessment the Directors have considered the potential impact from Brexit on the forecasts namely in terms of supply chain availability and pricing and the impact on the wider economy, potentially impacting sales of the Group's product. These forecasts, including the reasonably possible downside scenarios with mitigating actions, show that the Group will continue to operate with sufﬁcient headroom within the revised facility terms in place for the duration of the facility agreement (expires October 2020). Based on the above, whilst recognising the challenges in the turnaround plan, the directors have reasonable expectation that the Group and company has adequate resources to continue in operational existence for the foreseeable future and therefore continue to adopt the going concern basis of accounting in preparing the annual ﬁnancial statements. Non-recurring costs 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. Foreign currencies Functional and presentational currency (a) Items included in the ﬁnancial statements are measured using the currency of the primary economic environment in which the Group operates (“the functional currency”) which is UK Sterling (£). The ﬁnancial statements are presented in UK Sterling (£), which is the Group's presentational currency. Transactions and balances (b) Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in net proﬁt or loss in the statement of comprehensive income. Non monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Revenue recognition Revenue is recognised at the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of business and is shown net of Value Added Taxation. The Group primarily earns revenues from the sale, design, manufacture and installation of domestic double-glazed replacement windows and doors. Product sales revenues are recognised once the goods have been installed. Survey fees are recognised at the point at which they become non-refundable. The Group received no commissions for introducing ﬁnance products to customers in 2018, only paying subsidies which are recognised as a reduction to revenue. Revenue from maintenance is recognised on completion of the work carried out. Employee beneﬁts Obligations for contributions to deﬁned contribution pension plans are recognised as an expense in the income statement when they are due. Intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and less accumulated impairment losses. The trademark is considered to have an indeﬁnite useful life because there is no foreseeable limit to the period over which the asset is expected to generate net cash inﬂows for the business. The trademark is not amortised but is tested annually to determine whether there is any indication of impairment. Other intangible assets that are acquired by the Group, which have ﬁnite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses. The non-compete element of the Commercial Agreement has been 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 has been measured based on the fair value of the consideration that the Group expects to issue under the terms of the agreement. Amortisation of other intangibles is done on a straight-line basis over the estimated useful economic lives of the particular asset categories as follows: Software development Commercial Agreement 25% on cost 20% on cost Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is charged so as to write off the costs of assets over their estimated useful lives, on the following basis: Leasehold improvements Plant and machinery Ofﬁce and computer equipment Mobile devices Motor vehicles 25% on cost 15% on cost 20% to 33.3% on cost 50% on cost 25% reducing balance Assets in the course of construction are not depreciated. The gain or loss arising on the disposal of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the statement of comprehensive income. Impairment The carrying amounts of the Group's assets, other than inventories and deferred taxation assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. For goodwill, assets that have an indeﬁnite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised (not relating to other intangible assets speciﬁcally) are allocated ﬁrst to reduce the carrying amount of any goodwill allocated to the cash-generating unit and then, to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash-generating unit is the group of assets identiﬁed on acquisition that generate cash inﬂows that are largely independent of the cash inﬂows from other assets or groups of assets. The recoverable amount of assets or the cash-generating unit is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash ﬂows are discounted to their present value using a pre taxation discount rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the asset. For an asset that does not generate largely independent cash inﬂows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. 82 Annual Report & Accounts 2018 Annual Report & Accounts 2018 83 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 2 Summary of signiﬁcant accounting policies (continued) Impairment (continued) An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Inventories Inventories are stated at the lower of cost and net realisable value. Work in progress comprises direct materials, labour costs, site overheads and other attributable overheads. Bank and other borrowing Interest bearing borrowings, bank and other borrowings are carried at amortised cost. Finance charges, including issue costs are charged to the income statement using an effective interest rate method. Provisions A provision is recognised in the balance sheet if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outﬂow of economic beneﬁts will be required to settle the obligation. Provisions are determined by discounting the expected future cash ﬂows at a pre-tax rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the liability. A provision for warranties is recognised when the underlying products are sold, based on historical service call data and a weighting of possible outcomes against their associated probabilities. A provision for property dilapidations is recognised across the life of the property lease to cover the contractual dilapidations charges that the Group estimates will be payable on exit of the lease. A provision for the Commercial Agreement is in place for the cash consideration that the Group expects to issue under the terms of the Commercial Agreement as described in the Chairman’s Statement. Financial instruments Financial assets and ﬁnancial liabilities are recognised in the consolidated statement of ﬁnancial position when the Group becomes party to the contractual provisions of the instrument. Financial assets are de-recognised when the contractual rights to the cash ﬂows from the ﬁnancial asset expire or when the contractual rights to those assets are transferred. Financial liabilities are de- recognised when the obligation speciﬁed in the contract is discharged, cancelled or expired. Equity instruments Cash and cash equivalents Cash and cash equivalents comprise cash on hand, demand deposits, restricted cash paid over to various counterparties as collateral against relevant exposures and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insigniﬁcant risk of changes in value. Trade and other payables Trade payables are initially measured at their fair value and are subsequently measured at their amortised cost using the effective interest rate method; this method allocates interest expense over the relevant period by applying the “effective interest rate” to the carrying amount of the liability. Financial liabilities – Non-current borrowings Borrowings, including advances received from related parties are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Taxation Income taxation on the proﬁt or loss for the year comprises current and deferred taxation. Income taxation is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Deferred taxation is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and the amounts used for taxation purposes. Deferred taxation is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable proﬁt, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they probably will not reverse in the foreseeable future. The amount of deferred taxation provided is based on the carrying amount of assets and liabilities, using the prevailing taxation rates. The deferred taxation balance has not been discounted. Current taxation is the expected taxation payable on the taxable income for the year, using prevailing taxation rates enacted or substantively enacted at the reporting date, and any adjustment to taxation payable in respect of previous years. Leases Amounts payable under operating leases are charged to operating expenses on a straight line accruals basis over the lease term. Share based payments The grant-date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The amount recognised as an expense is adjusted to reﬂect the number of awards for which the related service is expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service condition at the vesting date. For share-based payment awards with non-vesting conditions, the grant-date fair value of the share-based payment is measured to reﬂect such conditions and there is no true-up for differences between expected and actual outcomes. For share based transactions with parties other than employees, the fair value of the goods or services received and the length of the vesting period is estimated. An expense is recognised for the fair value of the goods or services over the speciﬁed vesting period or service with a corresponding increase in equity. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Dividends Dividends are only recognised as a liability to the extent that they are declared prior to the year end. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less the expected credit loss (ECL) allowance. Appropriate loss allowances for estimated irrecoverable amounts are recognised in the statement of comprehensive income at an amount equal to lifetime ECLs. Lifetime ECLs are the ECLs that result from all possible default events expected over the life of a ﬁnancial instrument. Interest income is recognised by applying the effective interest rate, except for short term receivables when the recognition of interest would be immaterial. ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash ﬂows due to the entity in accordance with the contract and the cash ﬂows that the Group expects to receive). 84 Annual Report & Accounts 2018 Annual Report & Accounts 2018 85 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 3 Financial risk management Financial risk factors Group's activities expose it to a variety of ﬁnancial risks: market risk, credit risk and liquidity risk. Group's overall risk management programme focuses on the unpredictability of ﬁnancial markets and seeks to minimise potential adverse effects on its ﬁnancial performance. Risk management is carried out by the Board of Directors. They identify and evaluate ﬁnancial risks in close co-operation with key employees. Market risk 3.1 Market risk is the risk of loss that may arise from changes in market factors such as commodity prices, interest rates and foreign exchange rates. Credit risk 3.2 Credit risk is the ﬁnancial loss to Group if a customer or counterparty to ﬁnancial instruments fails to meet its contractual obligation. Credit risk arise from Group's cash and cash equivalents and receivables balances. Liquidity risk 3.3 Liquidity risk is the risk that Group will not be able to meet its ﬁnancial obligations as they fall due. This risk relates to Group's prudent liquidity risk management and implies maintaining sufﬁcient cash. The Board monitors forecasts of Group's liquidity and cash and cash equivalents on the basis of expected cash ﬂow. Capital risk management Group is funded principally by equity and a long term borrowing facility. The components of shareholders' equity are as follows: Ÿ The share capital and the share premium account arising on the issue of shares. Ÿ The retained surplus/deﬁcit reﬂecting ﬁnancial result incurred to date. Group funds its expenditures on commitments from existing cash and cash equivalent balances, primarily received from issuances of shareholders' equity. There are no externally imposed capital requirements. Group's objective when managing capital is to maintain adequate ﬁnancial ﬂexibility to preserve its ability to meet ﬁnancial obligations, both current and long term. The capital structure of Group is managed and adjusted to reﬂect changes in economic circumstances. Financing decisions are made by the Board of Directors based on forecasts of the expected timing and level of capital and operating expenditure required to meet Group's commitments and development plans. Fair value estimation The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values because of the short term nature of such assets and the effect of discounting liabilities is negligible. 4 Accounting estimates and judgements In preparing these ﬁnancial statements, management has made estimates that affect the application of the Group's accounting policies and the reported amounts of assets, liabilities, income 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. Judgements Information about judgements made in applying accounting policies that have the most signiﬁcant effects on the amount recognised include the following notes: Note 14 Intangible assets; judgement about the substance and accounting for the Commercial Agreement. Note 23 Provisions for liabilities and charges; judgement about the substance and accounting for the Commercial Agreement. Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties at 31 December 2018 that have a signiﬁcant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities in the next ﬁnancial year is included in the following notes: Note 23 Recognition and measurement of provisions; key assumptions about the likelihood and magnitude of an outﬂow of resources in relation to the Commercial Agreement. The assessment of whether trade receivables are recoverable is subject to estimation uncertainty. An allowance for impairment is made for estimated irrecoverable amounts. Further details can be found in note 18. Other sources of estimation uncertainties Product guarantees provisions The Group gives guarantees against all its products, which in the majority of cases covers a period of 10 years. The level of provision required to cover the expected future costs of rectifying faults and the future rate of product failure arising within the guarantee period is subject to estimation uncertainty. Further details can be found in note 23. Dilapidations provision The Group has a number of operating leases in relation to properties, where there is a contractual obligation to undertake remedial works at the end of the lease term. The level of provision required to cover the expected future costs of dilapidations is subject to estimation uncertainty around expected costs and management intention. Further details can be found in note 23. 5 Segmental information The Directors consider that there are no identiﬁable business segments that are engaged in providing individual products or services or a group of related products and services that are subject to risks and returns that are different to the core business. The information reported to the Group's Board of directors for the purposes of resource allocation and assessment of performance is based wholly on the overall activities of the Group. The Group has therefore determined that it has only one reportable segment under IFRS8, which is “the sale, design, manufacture, installation and maintenance of domestic, double-glazed, replacement windows and doors”. The Group's revenue and results and assets for this one reportable segment can be determined by reference to the Group's statement of comprehensive income and statement of ﬁnancial position. The Group's carries out all of its activities in the UK and as such only has a single geographic segment. During the periods of the ﬁnancial statements, no customer generated more than 10 per cent of total revenue. 86 Annual Report & Accounts 2018 Annual Report & Accounts 2018 87 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 6 Expenses and auditor's remuneration Included in profit are the following: Depreciation of plant, property and equipment: Owned assets Amortisation of intangibles assets Loss on disposal of plant, property and equipment Operating lease rentals: Hire of plant and machinery Rent payable on land and buildings Auditor's remuneration: Audit of financial statements relating to subsidiaries Audit of financial statements relating to parent Other services relating to taxation 7 Non-recurring costs Product guarantee provision Non-recurring items charged to cost of sales Litigation costs Restructuring and operational costs Fines Onerous leases Commercial Agreement costs Commercial Agreement service fee Non-recurring pay awards Dilapidations provision Non-recurring items charge to other operating expenses Total non-recurring items 2018 £000 2017 £000 1,715 400 42 3,396 1,488 70 30 12 1,397 241 - 3,255 1,336 42 44 10 Note 2018 £000 2017 £000 a b c d e f g h i 801 801 1,912 1,167 1,079 294 311 1,000 635 618 7,016 7,817 - - - 830 - - - - - - 830 830 e) f) g) h) i) Onerous leases represent an accrual for all rental costs up until the ﬁrst lease break date for properties that were closed in the year. Commercial Agreement costs are expenses incurred in securing the Commercial Agreement referred to in the Chairman's Statement. These costs consist of legal advisor fees and a set of one-off payments made as part of the contractual terms of the ﬁnal agreement. Commercial Agreement service fee is the assessed fair value of the consideration payable under the terms of the Commercial Agreement that has been attributed to services received in the year. Non-recurring pay awards relate to the bonus payments made to executives as described in the Statement from the Chairman of the Remuneration Committee. These have been classiﬁed as non-recurring as they were paid to reﬂect the supplementary duties undertaken in a period of signiﬁcant disruption and reward delivery of key actions required to secure and stabilise the business and are not linked to proﬁt performance. These payments were only awarded due to the unprecedented events the Group experienced in 2018 and will not be made again. The accounting policy for providing for exit obligations on leased property, principally dilapidations, has also been assessed in the year. In previous years, no provision has been made for these. Management have now concluded that a provision is appropriate based on new circumstances during the year, a strategic review by management, the existence of an obligation and the ability to reliably estimate it. Were a provision to have been applied in prior years, the cumulative charge to the end of 2017 would have been £618k. 8 Dividends The aggregate amount of dividends paid comprises: 2016 Final dividend paid of £0.075 (2015: £0.075) per ordinary share 2017 Interim dividend paid of £0.0375 (2016: £0.0375) per ordinary share No final dividend in relation to 2017 was declared and no dividends were declared in 2018. 9 Earnings per share Basic earnings per ordinary share (pence) Diluted earnings per ordinary share (pence)* a) Basic earnings per share 2018 £000 - - - 2017 £000 6,224 3,112 9,336 2018 2017 (16.1) (16.1) 13.1 13.0 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. i) (Loss) / proﬁt attributable to ordinary shareholders (basic) 2018 £000 2017 £000 As part of a review by management of provisions made for the Group's future obligations, a revision to the estimates used for future product guarantee claims has been made which management consider more accurately reﬂects the Group’s obligations. Included in non-recurring costs is the impact on the prior year had this change in estimate been retrospectively applied. (Loss) / proﬁt attributable to ordinary shareholders (13,298) 10,828 Litigation costs are expenses incurred as a result of the NIAMAC litigation referred to in the Chairman's Statement. These costs are predominantly legal advisor's fees. ii) Weighted-average number of ordinary shares (basic) 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. In issue during the year Fines relate to the HSE and WYTS ﬁnes described in the Financial Review and related legal representation fees. a) b) c) d) 88 Annual Report & Accounts 2018 No. of shares ‘000 82,809 No. of shares ‘000 82,883 Annual Report & Accounts 2018 89 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 9 Earnings per share (continued) b) Diluted earnings per share *Due to net loss for the period, dilutive loss per share is the same as basic. 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. i) (Loss) / proﬁt attributable to ordinary shareholders (diluted) 2018 £000 2017 £000 (Loss) / proﬁt attributable to ordinary shareholders (13,298) 10,828 ii) Weighted-average number of ordinary shares (basic) Effect of conversion of share options and share consideration No. of shares ‘000 82,809 2,270 No. of shares ‘000 82,883 396 85,079 83,279 The average market value of the Group's shares for the purpose of calculating the dilutive effect of share options was based on quoted market prices for the period during which the options were outstanding. 10 Key management remuneration Key management personnel, as disclosed under IAS24 (Related Party Disclosures), have been identiﬁed as the Board of Directors and other senior operational management. A summary of key management remuneration is as follows: Salary, bonus and other beneﬁts Pensions Share based payments and associated costs Compensation on loss of ofﬁce Total remuneration 2018 £000 2,356 64 201 19 2,640 2017 £000 1,292 82 246 354 1,974 Details of long term incentive plans can be found in note 31. Detailed disclosures of individual remuneration, pension entitlements and share options, for the Directors who served during the year are as follows: Board Remuneration 2018 Executive directors M Gallacher R Neale G Richell S J Birmingham M J Robinson Non-executive A C Lovell C J Davies F Goldsmith J Porter R S Halbert P Richardson 2017 Executive directors S J Birmingham M J Robinson G Richell Non-executive C J Davies R S Halbert P Richardson Salary and fees £000 Beneﬁts £000 Annual bonus £000 LTIP Pension £000 £000 Total £000 183 81 175 121 66 55 48 16 7 19 46 817 184 159 141 48 74 43 649 11 6 13 15 4 - - - - - - 49 20 12 11 - - - 43 350 100 164 - - - 24 - - - - 638 - - - - - - - - - - - - - - - - - - - - - - - - - - - 6 15 10 5 - - - - - - 36 15 13 11 - - - 39 544 193 367 146 75 55 72 16 7 19 46 1,540 219 184 163 48 74 43 731 M Gallacher was appointed to the Board on the 1st May 2018 and his fees therefore reﬂect a part year. R Neale was appointed to the Board on the 16th July 2018 and his fees therefore reﬂect a part year. G Richell was appointed to the Board on the 13th February 2017 and his fees in the prior year therefore reﬂect a part year. S J Birmingham resigned from the Board on the 13th September 2018 and his fees therefore reﬂect a part year. M J Robinson resigned from the Board on the 31st May 2018 and his fees therefore reﬂect a part year. A C Lovell was appointed to the Board on the 16th July 2018 and his fees therefore reﬂect a part year. F Goldsmith was appointed to the Board on the 17th September 2018 and her fees therefore reﬂect a part year. J Porter was appointed to the Board on the 5th November 2018 and her fees therefore reﬂect a part year. R S Halbert resigned from the Board on the 23rd April 2018 and his fees therefore reﬂect a part year. P Richardson resigned from the Board on the 29th May 2018 and his fees therefore reﬂect a part year. The interests of each individual who served as a director of the Group during the year, as at 31 December 2018 in the Group's share schemes, were as follows: S J Birmingham M J Robinson G Richell M Gallacher R Neale A C Lovell Plan Options held at start of period Options granted in period Options exercised in period Options lapsed in period Options held at end of period LTIP 2015 LTIP 2016 LTIP 2017 LTIP 2015 LTIP 2016 LTIP 2017 LTIP 2017 LTIP 2018 LTIP 2018 LTIP 2018 Individual 97,902 66,585 47,935 85,594 58,220 41,913 41,913 - - - - 440,062 - - - - - - - 350,000 733,333 350,000 250,000 1,683,333 - - - - - - - - - - - - (97,902) - - (85,594) - - - - - - - (183,496) - 66,585 47,935 - 58,220 41,913 41,913 350,000 733,333 350,000 250,000 1,939,899 90 Annual Report & Accounts 2018 Annual Report & Accounts 2018 91 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 11 Staff numbers and costs The average monthly number of persons (including directors) employed by the Group during the year analysed by category, were as follows: Manufacturing Sales and distribution Administration The aggregate payroll costs Wages and salaries Social security costs Other pension costs (see note 27) Share based payments (credit) / expenses (see note 31) The analysis of Directors' remuneration is shown in the Directors Remuneration Report on page 54. 12 Finance costs On loan facility On ﬁnance leases and hire purchase contracts 2018 Number 2017 Number 316 96 312 724 2018 £000 19,409 1,886 777 (374) 21,698 2018 £000 142 - 142 361 118 332 811 2017 £000 20,044 1,943 589 421 22,997 2017 £000 - 10 10 13 Taxation Recognised in the Consolidated Income Statement Current taxation Current taxation on income for the period Adjustments in respect of prior periods Total current taxation Deferred taxation Origination and reversal of timing differences Effect of change in taxation rate Adjustments in respect of prior periods Total deferred taxation (see notes 16 and 22) 2018 £000 2017 £000 (2,461) 155 (2,306) (658) - - (658) 2,805 - 2,805 180 (11) 12 181 Total taxation (credit) / expense (2,964) 2,986 Reconciliation of effective taxation rate Current taxation reconciliation (Loss) / proﬁt for the year Total taxation (credit) / expense (Loss) / proﬁt excluding taxation Expected taxation (credit) / charge based on the standard rate of corporation taxation in the UK of 19.00% (2017: 19.25%) Effects of: Expenses not deductible for taxation purposes Share based payments Adjustments to taxation charge in respect of prior periods Effect of change in taxation rate Total taxation (credit) / expense (13,298) (2,964) 10,828 2,986 (16,262) 13,814 (3,090) 2,659 143 (127) 155 (45) 326 - 12 (11) (2,964) 2,986 A reduction in the UK corporation taxation rate from 21% to 20% (effective from 1 April 2015) was substantively enacted on 2 July 2013. Further reductions to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015, and an additional reduction to 17% (effective 1 April 2020) was substantively enacted on 6 September 2017. This will reduce the Group’s future current tax charge accordingly. The deferred taxation asset at 31 December 2018 has been calculated based on these rates. 92 Annual Report & Accounts 2018 Annual Report & Accounts 2018 93 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 14 Intangible assets Cost At 1 January 2018 Additions Disposals Transfer At 31 December 2018 Amortisation At 1 January 2018 Charge for the year Disposals At 31 December 2018 Goodwill Trademark Software £000 £000 £000 Assets under the course of construction £000 Commercial Agreement Total £000 £000 20,758 30 - - 20,788 - 30 - 30 504 - - - 504 - - - - 1,717 - - 579 2,296 1,094 295 - 1,389 623 907 163 855 - (579) 439 - - - - 163 439 - 2,263 - - 2,263 - 75 - 75 23,142 3,148 - - 26,290 1,094 400 - 1,494 - 2,188 22,048 24,796 NBV at 31 December 2017 NBV at 31 December 2018 20,758 20,758 504 504 The goodwill is allocated to one cash generating unit (“CGU”) being Style Group Holdings Ltd. Management have performed impairment reviews on the carrying value of the goodwill at 31 December 2018 and 31 December 2017. For the review at 31 December 2018, the recoverable amount of the CGU has been determined from value in use calculations based on cash ﬂow projections covering a two year period to 31 December 2020 which is then rolled forward for 10 years. The assessment was performed on a value in use basis using a 7% discount rate and the following year's budget as approved by the Board, followed by a forecast for 2020 used for the recent reﬁnancing with no further growth into the future. The key assumptions underpinning these forecasts are based on historical sales trends and costs adjusted for up to date information, including pricing changes, product mix and headcount. Management does not currently believe that any reasonably possible change in the key assumptions on which assessments of recoverable amounts have been based would cause the carrying amount of goodwill to exceed its recoverable amount. The trademark represents the Safestyle trademark which was acquired in 2010. The trademark is considered to have an indeﬁnite useful life because there is no foreseeable limit to the period over which the asset is expected to generate net cash inﬂows for the business. The trademark is not amortised but is tested annually to determine whether there is any indication of impairment and is included in the review above. The Commercial Agreement represents the fair value of the shares consideration that the Group expects to issue under the terms of the Commercial Agreement as described in the Chairman's statement for the non-compete services to be received. The Commercial Agreement is in place for a 5 year period, therefore the cost is amortised over the 5 year period. Management considered an alternative accounting treatment allowed under IFRS2, whereby the cost of the non-compete would be expensed over the vesting period of the shares, being 4 years. This would have the effect of removing the intangible asset of £2,188k from the balance sheet and therefore reduce the risk of future impairment. Management determined that the most appropriate accounting treatment was the recognition of an intangible asset. 15 Plant, property and equipment Freehold property Leasehold improvement Plant and machinery Ofﬁce and computer equipment Motor vehicles Assets under the course of construction Total £000 £000 £000 £000 £000 £000 £000 Cost At 1 January 2018 Additions Transfers Disposals At 31 December 2018 Depreciation At 1 January 2018 Charge for the year Disposals At 31 December 2018 NBV at 31 December 2017 NBV at 31 December 2018 9,281 - 219 - 9,500 413 185 - 598 8,868 8,902 16 Deferred taxation asset 337 - 88 - 425 58 101 - 159 279 266 10,147 - 546 (708) 9,985 4,963 1,167 (635) 5,495 5,184 4,490 1,440 - 217 (2) 1,655 863 262 - 1,125 577 530 8 - - - 8 6 - - 6 2 2 65 1,028 (1,070) - 23 - - - - 21,278 1,028 - (710) 21,596 6,303 1,715 (635) 7,383 65 23 14,975 14,213 Balance at beginning of period Credit / (debit) to the Consolidated Income Statement for the period Share based payments to reserves Balance at end of period The deferred taxation asset provided in the ﬁnancial statements at 17% (2017: 17%) is as follows: Losses Share based payments There are no unrecognised taxation losses (2017: £nil). 17 Inventories Raw materials and consumables Work in progress Finished goods The above amounts are stated net of inventory provisions. Stock recognised in cost of sales during the period was £21,264k (2017: £27,061k). 2018 £000 28 621 44 693 2018 £000 609 84 693 2017 £000 180 (152) - 28 2017 £000 - 28 28 2018 £000 2017 £000 1,702 53 661 2,416 1,644 44 344 2,032 94 Annual Report & Accounts 2018 Annual Report & Accounts 2018 95 Safestyle UK plc Strategic Report Governance Financials 19 Cash and cash equivalents Notes to the Consolidated Financial Statements 18 Trade and other receivables Cash and cash equivalents Balance at end of period 2018 £000 4,163 4,163 2017 £000 10,975 10,975 Trade receivables (net of provisions) Other receivables Prepayments and accrued income 2018 £000 2,184 22 2,272 4,478 2017 £000 1,713 - 2,846 4,559 Contractual payment terms with the Group's customers are typically zero days. Payment is due upon installation and in the event of a customer default, a trade receivable arises. The above receivables are shown net of the following provisions for doubtful debts. Opening provision against trade receivables Provision utilised in year Expensed in year Closing provision for trade receivables 2018 £000 1,045 (573) 734 1,206 2017 £000 842 (532) 735 1,045 Included in the above analysis of receivables are the following amounts which are past due and for which we have not made any speciﬁc provision: < 1 month overdue 1-2 months overdue 2-3 months overdue 3-12 months overdue > 1 Year Total receivables 2018 £000 2018 £000 2018 £000 2017 £000 2017 £000 2017 £000 624 416 327 1,015 1,008 3,390 (19) (18) (5) (156) (1,008) (1,206) 605 398 322 859 - 2,184 608 338 212 861 739 2,758 (8) (23) (46) (229) (739) (1,045) 600 315 166 632 - 1,713 The range of reasonably possible outcomes within the next ﬁnancial year is that debtors provided for of £1,206k may be recovered in full or some of the unprovided debtors may become irrecoverable. All of the Group's cash and cash equivalents are at ﬂoating interest rates and are denominated in UK Sterling (£). The Directors consider that the carrying value of cash and cash equivalents approximates to their fair value. For details of the Group's credit risk management policies, refer to note 25. Included within cash and cash equivalents is £1,575k (2017: £13k) of cash which is restricted by the Group's merchant acquirers as collateral and is paid to the Group after a set period of deferral days. 20 Share capital Authorised 77,777,777 Ordinary Shares @ 1p each 97,223 Ordinary Shares @ 1p each on 17 July 2015 2,367,143 Ordinary Shares @ 1p each on 22 October 2015 2,564,427 Ordinary Shares @ 1p each on 22 April 2016 177,513 Ordinary Shares @ 1p each on 02 May 2017 2,201 Ordinary Shares @ 1p each on 09 May 2017 3,302 Ordinary Shares @ 1p each on 01 June 2017 4,128 Ordinary Shares @ 1p each on 01 June 2017 90,000 Ordinary shares @ 1p each cancelled on 03 October 2017 90,000 Ordinary shares @ 1p each cancelled on 04 October 2017 15,000 Ordinary shares @ 1p each cancelled on 05 October 2017 10,182 Ordinary Shares @ 1p each on 20 November 2017 Allotted, issued and fully paid 77,777,777 Ordinary Shares @ 1p each 97,223 Ordinary Shares @ 1p each on 17 July 2015 2,367,143 Ordinary Shares @ 1p each on 22 October 2015 2,564,427 Ordinary Shares @ 1p each on 22 April 2016 177,513 Ordinary Shares @ 1p each on 02 May 2017 2,201 Ordinary Shares @ 1p each on 09 May 2017 3,302 Ordinary Shares @ 1p each on 01 June 2017 4,128 Ordinary Shares @ 1p each on 01 June 2017 90,000 Ordinary shares @ 1p each cancelled on 03 October 2017 90,000 Ordinary shares @ 1p each cancelled on 04 October 2017 15,000 Ordinary shares @ 1p each cancelled on 05 October 2017 10,182 Ordinary Shares @ 1p each on 20 November 2017 2018 £000 2017 £000 778 1 24 25 2 - - - (1) (1) - - 828 778 1 24 25 2 - - - (1) (1) - - 828 778 1 24 25 2 - - - (1) (1) - - 828 778 1 24 25 2 - - - (1) (1) - - 828 96 Annual Report & Accounts 2018 Annual Report & Accounts 2018 97 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 21 Trade and other payables Trade payables Other taxation and social security costs Other payables Accruals and deferred income 22 Deferred taxation liability Balance at beginning of period (Credit) / debit to the Consolidated Income Statement for the period Balance at end of period The deferred taxation asset provided in the financial statements at 17% (2017: 17%) is as follows: Capital allowances in excess of depreciation 23 Provisions for liabilities and charges 2018 £000 5,921 2,905 2,305 4,155 2017 £000 3,571 2,423 3,022 1,848 15,286 10,864 2018 £000 90 (37) 53 53 53 2017 £000 61 29 90 90 90 Dilapidations Product guarantees Commercial Agreement Total 2018 £000 2017 £000 2018 £000 2017 £000 2018 £000 2017 £000 2018 £000 2017 £000 24 Borrowing facilities The Group has entered into a borrowing facility during 2018. The total borrowing facilities available at 31 December 2018 were as follows: Amounts drawn down Facilities available Nominal interest rate Year of maturity 2018 £000 2017 £000 2018 £000 2017 £000 Term bank loan Revolving credit facility Less: Prepaid arrangement fees² LIBOR + 7% LIBOR + 7%¹ 2020 2020 4,500 - (597) 3,903 - - - - 4,500 3,000 - 7,500 - - - - ¹Interest is charged at a rate of LIBOR +3.5% on all undrawn amounts on the revolving credit facility. ²Prepaid arrangement fees relate to legal, advisory and facility arrangement fees in relation to the borrowing facility. These fees are prepaid and amortised over the 2 year term of the facility. 25 Financial instruments The Group is exposed to the risks that arise from its use of ﬁnancial instruments. This note describes the objectives, policies and processes of the Group for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these ﬁnancial statements. Capital risk management The Group manages its capital to ensure that it will be able to continue as a going concern while maximising the return to stakeholders. The Group is funded principally by equity although loans have been utilised during the review period of this ﬁnancial statements. As at 31 December 2018, £4,500k of loans were outstanding (2017: £nil). The capital structure of the Group consists of equity, comprising issued share capital. The Group has no externally imposed capital requirements. In order to maintain or adjust the capital structure, the Group may return capital to shareholders or issue new shares. The principal ﬁnancial instruments used by the Group, from which ﬁnancial instrument risk arises are as follows: Ÿ Trade and other receivables Ÿ Trade and other payables Ÿ Cash and cash equivalents The carrying value of these ﬁnancial instruments is considered to approximate to their fair value. Financial assets At the reporting date, the Group held the following ﬁnancial assets: 2018 £000 2,184 22 4,163 6,369 2017 £000 1,713 - 10,975 12,688 Balance at beginning of year Utilised in year Provided in year Balance at end of year Current Non current Balance at end of year - - 767 767 279 488 767 - - - - - - - 2,029 (1,197) 1,712 2,544 844 1,700 2,544 2,396 (1,180) 813 2,029 599 1,430 2,029 - - 1,000 1,000 - 1,000 1,000 - - - - - - - 2,029 (1,197) 3,479 4,311 1,123 3,188 4,311 2,396 (1,180) 813 2,029 599 1,430 2,029 Trade receivables Other receivables Cash and cash equivalents Financial liabilities Dilapidations – The Group has a portfolio of leased properties that sales branches and installation depots operate from. Historically upon exiting a property lease, the Group has incurred contractual dilapidations charges from the landlord to cover the wear and tear repair costs from the Group's tenancy. The dilapidation provision is estimated on the property size, its use as either a sales branch or installation depot, and the historical charges incurred upon exiting similar properties. Product guarantee - The Group gives guarantees against all its products, which in the majority of cases covers a period of 10 years. A product guarantee provision is made for the expected future costs of rectifying faults arising within the guarantee period and then discounted at 7% to a net present value. Commercial Agreement - The provision for the Commercial Agreement represents the cash consideration that the Group expects to issue under the terms of the Commercial Agreement as described in the Chairman's statement. The cash consideration of between £nil and £2,000k is payable in October 2020. 98 Annual Report & Accounts 2018 At the reporting date, the Group held the following ﬁnancial liabilities, all of which were classiﬁed as other ﬁnancial liabilities: Trade payables Other payables Borrowing facility 2018 £000 5,921 2,305 3,903 12,129 2017 £000 3,571 3,022 - 6,593 Annual Report & Accounts 2018 99 Safestyle UK plc Strategic Report Governance Financials 26 Commitments At 31 December, the future minimum lease payments under non-cancellable leases were payable as follows: Notes to the Consolidated Financial Statements 25 Financial instruments (continued) Market risk The Group is not materially exposed to changes in foreign currency exchange rates or interest rate movements. Trade receivables totalling £531k (2017: £545k) are secured by charges against the debtors' property. Credit risk Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in ﬁnancial loss to the Group. Credit risk arises principally from the Group's cash balances and trade and other receivables. The concentration of the Group's credit risk is considered by counterparty. The Group gives careful consideration to which organisation it uses for its banking services in order to minimise credit risk. The Group has a signiﬁcant concentration of cash held in accounts with one large bank in the UK, an institution with an A credit rating (long term, as assessed by Moody's). The amounts of cash held on deposit with that bank at each reporting date can be seen in the ﬁnancial assets table above. All of the cash and cash equivalents held with that bank at each reporting date were denominated in UK Sterling. Motor vehicles: Less than one year Between two and five years Plant and machinery: Less than one year Between two and five years Land and buildings Less than one year Between two and five years More than five years 2018 £000 2017 £000 2,907 1,136 198 146 1,431 4,428 2,224 12,470 2,765 3,457 127 115 1,495 4,982 2,971 15,912 Lease costs of £4,884k (2017: £4,591k) are recognised in the consolidated statement of comprehensive income. The nature of the Group's business and current stage of its development are such that individual customers can comprise a signiﬁcant proportion of its trade and other receivables at any point in time. The Group mitigates the associated risk by close monitoring of the debtor ledger. 27 Pension costs At 31 December 2018, the Group's trade receivables balance was £2,184k (2017: £1,713k). The carrying amount of ﬁnancial assets recorded in the ﬁnancial statements represents the Group's maximum exposure to credit risk without taking account of the value of any collateral obtained. In the Directors' opinion, there has been some impairment of trade receivables during the year in the trade receivable provisions table in note 18. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method less the expected credit loss (ECL) allowance. Appropriate loss allowances for estimated irrecoverable amounts are recognised in the statement of comprehensive income at an amount equal to lifetime ECLs. Lifetime ECLs are the ECLs that result from all possible default events expected over the life of a ﬁnancial instrument. ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash ﬂows due to the entity in accordance with the contract and the cash ﬂows that the Group expects to receive). Liquidity risk management Liquidity risk is the risk that the Group will encounter difﬁculty in meeting its ﬁnancial obligations as they fall due. Ultimate responsibility for liquidity risk management rests with the Board of Directors. The Board manages liquidity risk by regularly reviewing the Group's cash requirements by reference to short term cash ﬂow forecasts and medium term working capital projections. In addition, a regular assessment is made of the Group's banking facility covenant compliance. At 31 December 2018, the Group had £4,163k (31 December 2017: £10,975k) of cash reserves. After deducting the Loan facility of £3,903k, which is stated net of arrangement fee, net cash of the Group was £260k at the end of the year. The £3,000k revolving credit facility was undrawn at the end of the year. The net debt position on 21 March 2019 is £2,855k. Foreign currency risk management Historically, the Group's exposure to foreign currency risk has been limited, all of its invoicing and the majority of its payments are in UK Sterling. There are no balances held in foreign currencies at each reporting date and it has made no payments in foreign currencies other than US dollar and Euro. Accordingly, the Board has not presented any sensitivity analysis in this area as it is immaterial. Maturity of ﬁnancial assets and liabilities The Group's borrowing facility matures in October 2020. All of the Group's other non-derivative ﬁnancial liabilities and its ﬁnancial assets at each reporting date are either payable or receivable within one year. The charge for the period amounts to £777k (2017: £807k) and relates to contributions paid into a money purchase scheme in the period. 28 Group companies Safestyle UK plc holds more than 20% of the share capital of the following companies: Principal activity Country of incorporation Class of shares % held by parent Holding company Holding company Home improvements and double glazing contractors Dormant Dormant Dormant Home improvements and double glazing contractors England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 Style Group Holdings Limited Style Group Limited* HPAS Limited* Windowstyle UK Limited* Safestyle UK Limited* Style Group Europe Limited* Safeglaze (Milnrow) Ltd* / ** *Owned Indirectly The registered address of all companies is Style House, 14 Eldon Place, Bradford, BD1 3AZ. ** Safeglaze (Milnrow) Ltd was acquired in July 2018. The subsidiary has not traded during the period of ownership and therefore nothing is included in the consolidated financial statements for this subsidiary. 29 Related party transactions During the year ended 31 December 2018 there were no related party transactions, other than transactions with subsidiaries. During the year, Safestyle UK plc charged management charges to subsidiaries of £3.2m (2017: £2.4m) and received no dividends (2017: £9.4m). At the year-end, total amounts receivable from subsidiaries were £9.6m (2017: £9.3m). Transactions with key management personnel are shown in note 10. 30 Ultimate controlling party Safestyle UK plc is quoted on the stock exchange (AIM) and ultimate control is exercised by the shareholders. 100 Annual Report & Accounts 2018 Annual Report & Accounts 2018 101 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 31 Share based payments At 31 December 2018 the Group had the following share based payment arrangements: LTIPS The Group operates an equity-settled Long Term Incentive Plan (”LTIP”) remuneration scheme for Directors and certain management (“LTIP 2016”, “LTIP 2017” & “LTIP 2018”). On 18 June 2018, 1,333,333 options were granted (“LTIP 2018”). On 15 August 2018, a further 350,000 options were granted (also “LTIP 2018”). Finally, on 19 October 2018, a further 1,104,830 options were granted (also “LTIP 2018”). All schemes require a combination of speciﬁc performance based criteria and remaining an employee for a minimum period. The numbers of share options in existence during the year were as follows: Outstanding at start of period Granted during the year Issued in the year Lapsed in the year Outstanding at end of period Exercisable at end of period SAYE On 8 May 2018 the Group launched a new share save (SAYE) scheme (“SAYE 2018”) in addition to the existing schemes (“SAYE 2016” and “SAYE 2017”) for employees. All schemes allow employees to acquire a certain number of shares at a discount of 20% of the share price prior to the invitation to join the scheme, using amounts saved under a 'Save As You Earn' savings contract. The “SAYE 2015” vested within the period and no shares have been issued. The numbers of share options in existence during the year were as follows: 2018 2017 Number of share options Weighted average exercise price Number of share options Weighted average exercise price 204,125 794,139 - (194,972) 803,292 - £2.10 £0.49 - £1.92 £0.57 - 423,382 128,205 (197,236) (150,226) 204,125 - £1.49 £2.40 £1.30 £1.68 £2.10 - Outstanding at start of period Granted during the year Issued in the year Cancelled in the year Lapsed in the year Outstanding at end of period Exercisable at end of period 2018 2017 Number of share options Weighted average exercise price Number of share options Weighted average exercise price 907,359 2,788,163 - - (471,922) 3,223,600 - £1.51 - - - £0.37 £0.17 - 1,030,134 348,210 - - (470,985) 907,359 - £2.18 - - - £1.86 £1.51 - Options are valued using the Black-Scholes option pricing model. The following information is relevant in the determination of the fair value of the options granted during the period. LTIP 2018 LTIP 2017 LTIP 2016 Grant date Vesting date Lapsing date Risk free interest rate Expected volatility Expected option life (in years) Weighted average share price after adjusting for PV of dividends Weighted average exercise price Weighted average fair value of options granted Dividend yield Remaining contractual life 19/10/2018 18/06/2021 19/10/2028 0.85% 60.90% 2.67 £0.57 15/08/2018 18/06/2021 15/08/2028 0.75% 51.90% 2.84 £0.33 18/06/2018 18/06/2021 18/06/2028 0.78% 47.10% 3.00 £0.56 10/04/2017 10/04/2020 10/04/2027 0.15% 33.60% 3.00 £3.04 29/04/2016 29/04/2019 29/04/2026 1.22% 36.93% 3.00 £2.67 £0.00 56.60p 0.00% 9.81 £0.00 33.00p 0.00% 9.63 £0.00 55.90p 0.00% 9.47 £0.00 256.00p 5.71% 8.28 £2.68 65.79p 3.60% 7.25 At the grant date there was limited share price history for the Group on which to calculate volatility. Volatility was therefore estimated using both Safestyle and companies classiﬁed in the 'Home Improvement Retailers' subsector on the London Stock Exchange. Options are valued using the Black-Scholes option pricing model. The following information is relevant in the determination of the fair value of the options granted during the year. Grant date Vesting date Lapsing date Risk free interest rate Expected volatility Expected option life (in years) Weighted average share price after adjusting for PV of dividends Weighted average exercise price Weighted average fair value of options granted Dividend yield Remaining contractual life SAYE 2018 SAYE 2017 SAYE 2016 08/05/2018 01/06/2021 01/12/2021 0.92% 48.50% 3.35 £0.59 £0.49 24.70p 0.00% 2.92 25/04/2017 01/06/2020 01/12/2020 0.21% 34.17% 3.35 £3.14 £2.51 68.60p 5.53% 1.92 01/04/2016 01/05/2019 01/11/2019 0.56% 32.88% 3.35 £2.81 £2.25 71.93p 3.40% 0.84 At the grant date there was limited share price history for the Group on which to calculate volatility. Volatility was therefore estimated using both Safestyle and companies classiﬁed in the 'Home Improvement Retailers' subsector on the London Stock Exchange. Alan Lovell Options On 20 December 2018, as described in the statement from the Chairman of the Remuneration Committee, the Group issued 250,000 options to its Chairman, Alan Lovell. The numbers of share options in existence during the year were as follows: Outstanding at start of period Granted during the year Issued in the year Lapsed during the period Outstanding at end of period Exercisable at end of period 2018 2017 Number of share options Weighted average exercise price Number of share options Weighted average exercise price - 250,000 - - 250,000 - - - - - - - - - - - - - - - - - - - 102 Annual Report & Accounts 2018 Annual Report & Accounts 2018 103 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements Notes 31 Share based payments (continued) Options are valued using the Black-Scholes option pricing model. The following information is relevant in the determination of the fair value of the options granted during the year. Grant date Vesting date Lapsing date Risk free interest rate Expected volatility Expected option life (in years) Weighted average share price after adjusting for PV of dividends Weighted average exercise price Weighted average fair value of options granted Dividend yield Remaining contractual life Alan Lovell Options 20/12/2018 16/07/2021 20/12/2028 0.73% 63.50% 2.57 £0.86 £0.00 86.30p 0.00% 9.98 20/12/2018 16/07/2020 20/12/2028 0.71% 76.50% 1.57 £0.86 £0.00 86.30p 0.00% 9.98 At the grant date there was limited share price history for the company on which to calculate volatility. Volatility was therefore estimated using both Safestyle and companies classiﬁed in the 'Home Improvement Retailers' subsector on the London Stock Exchange. The total share-based (credit) / expense comprises: Equity settled - LTIP Equity settled - SAYE Equity settled - Alan Lovell Options 32 Contingent liability 2018 £000 (2) (375) 3 (374) 2017 £000 351 70 - 421 During 2017 there was an incident during installation which led to a reportable injury. The Health & Safety Executive (“HSE”) has carried out an investigation into the case. The HSE has stated that, at this time, it does not intend to prosecute the Group following its thorough investigation and consequently, management has not recognised a provision in these ﬁnancial statements. 104 Annual Report & Accounts 2018 Annual Report & Accounts 2018 105

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