Safeguard Scientifics Annual Report 2019

Plain-text annual report

safestyleukplc.co.uk Safestyle UK plc Annual Report & Accounts 2019 Safestyle UK plc Safestyle UK plc Annual Report 2019 The UK’s No.1 for replacement windows and doors³ Financial Overview Contents Revenue (£m) 2017 158.6 2018 116.4 2019 126.2 -27% 8% Underlying proﬁt / (loss) before taxation¹ (£m) 2017 2018 2019 15.1 (8.7) -158% (1.5) 83% Reported proﬁt / (loss) before taxation (£m) 2017 13.8 2018 (16.3) -218% 2019 (3.8) 76% Net cash² (£m) 2017 11.0 2018 0.3 -98% 2019 0.4 71% Average installed order value (£) 2017 3,232 2018 3,319 2019 3,337 Average frame price (£) 2017 2018 2019 608 646 678 Frames installed 2017 265,716 2018 184,184 -31% 2019 190,252 3% 3% 1% 6% 5% 01 Welcome page and Financial Overview Strategic Report 06 20 22 24 30 36 What we do Chairman’s Statement CEO’s Statement Financial Review Risk Management Corporate Social Responsibility 38 Our People Governance 46 48 50 58 61 Board of Directors Audit Committee Report Directors’ Remuneration Report Directors’ Report Independent Auditor’s Report Financials 68 69 70 71 72 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 ³ Based on Fensa data Annual Report & Accounts 2019 01 Safestyle UK plc Safestyle UK leading the way in customer reviews Not only do we have the most reviews, more customers rate us excellent than any other window company Trustpilot February 2020 Highly Recommended All ﬁgures from February 2020 Safestyle UK currently have 19,599 independent customer reviews rating us excellent 14,537 of those gave us 5 stars with a further 1,878 giving us a 4 stars In 2019 alone we received 5,371 Trustpilot reviews with 4,141 of those giving us 5 stars Excellent service, 1st class windows and doors From initial contact through to completed installation I can't praise Safestyle enough. Each step was clear, well explained and expertly managed. The installation team was second to none and successfully completed the whole house in one day. The quality of the windows is evident, not all double glazed windows are the same. Fantastic job. Thanks! Paul Gill Middlesbrough From a total number of customers reviews, a huge 9,756 7,407 of those are 5 star reviews, meaning that 89.3% of our customers would highly recommend us Based on total reviews of 2,857 Safestyle UK has a customer experience and product rating of an excellent 4.6/5 «««« Excellent company Really happy with the salesman & ﬁtting! Great quality windows and doors. The guys who did the ﬁtting were polite, friendly and cleaned up brilliantly. An all- round excellent experience! Angela Pickering Liverpool Annual Report & Accounts 2019 03 Safestyle UK plc Strategic Report 06 20 22 24 30 36 What we do Chairman’s Statement CEO’s Statement Financial Review Risk Management Corporate Social Responsibility 38 Our People Safestyle UK plc Our Nationwide Branches & Depots We currently have 36 sales branches and 12 installation depots across the UK Operation Headlines 1 Head Ofﬁce 1 Manufacturing Facility 12 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. 12 Installation Depots Our 12 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 2019 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 12 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 2019 Annual Report & Accounts 2019 09 Safestyle UK plc Strategic Report Governance Financials Go Figure, Safestyle in numbers for 2019 Last year we made a lot of coloured windows 34,344 if you want to be exact White windows a whopping... 120,475 that’s a lot of windows! 2019 in total we recycled... 5,890 t nnes The equivalent weight of... double decker buses! of all post consumer waste 453 London to Greenland The distance from London to Greenland metres of PVCu extrusion used in 2019! is equivalent to the 3,441,000 81,025,549 2,398,796 users impressions on our website from PPC 5,584 hours or 232 days of operational & compliance training completed in 2019 Safestyle processed 206,335m² of glass... This is enough glass to re-glaze The Shard almost 4 times over! We sent a whopping number of emails last year... 1,065,490 ...and received a mind blowing number back 4,631,236 5 9 2 1 , online modules completed covering Health & Safety and Business Protection Awareness 10 Annual Report & Accounts 2019 644 colleagues across the company successfully completed GDPR refresher training 1,608 hours completed of Safestyle Advanced Technical Competency training 18 Blue wales tonnes Equivalent weight of the of general waste we recycled last year! 2,565 1,424 tonnes of wood 1,118 tonnes of glass l e b b u r f o s e n n o t 2 4 4 310 tonnes of PVCu off cut that’s a huge 78African elephants 30tonnes of metal equivalent of 2 million+ empty drinks cans 15 tankers of fuel saved that’s 167,437 litres of fuel thanks to our new, more efﬁcient ﬂeet of vans... Last year we made 1,090,025 journeys up and down the UK In 2019 we received 5,371 4,141 Trustpilot reviews gave us ﬁve stars Last year we produced a lot of composite doors with a huge range of options including styles, colours, glass designs, handles, knockers, letter boxes, the list goes on... 17,899 1,500+ workplace posts Workplace is Facebook for business, designed to keep team members connected and always in the know Over 1,500 colleagues helping to make Safestyle the UK’s No.1 for windows & doors Annual Report & Accounts 2019 11 Safestyle UK plc Strategic Report Governance Financials Safestyle 2019 timeline What a difference a year makes... 2019 June ‘Polaris’ our lead processing system celebrated it’s ﬁrst birthday, as did our ‘eContract’ management system. We also launched our ‘Swap Shop’ recycling promotion with great results SWAP SWAP SWAP SHOP SHOP SHOP 2019 May May saw the second Senior Managers Conference and the roll out of Ofﬁce 365 company wide. We also started realising savings from the glass toughening project 2019 April Add some colour without splashing out! We lowered coloured windows pricing resulting in an uplift in sales. Plus our ‘Safestyle Derby’ branch competition came to an end, the winners enjoying York Races from an all-expenses-paid private box 2019 March Following on from the success of our Senior Managers Conference we held the ﬁrst Senior Sales Agent Conference 2019 January Safestyle Advanced Technical Competency (SATC) programme commenced. Enhancing ﬁtter skills alongside refreshing best practice whilst keeping their technical & legislative knowledge up to date. We also introduced new ‘Monkey Tail’ & ‘Pear Drop’ furniture ranges available on our Eco Diamond™ windows 2019 February 6th February saw the ﬁrst ever Safestyle Senior Managers’ Conference take place in Leeds. We started our glass toughening project to reduce energy usage and also had our biggest Door Canvass sales week of the year 2019 November Late November saw the start of our ‘Illumination Street’ sponsorship. A competition celebrating festive decorations for the home & garden. Coverage included National press, TV news, online blogs and a host of social media... We also saw our biggest Media and Tele Canvass sales week of 2019 2019 July Full roll out and implementation of the Health & Safety ‘iAuditor’ system, allowing us to audit installation sites, depots and manufacturing in real time. This also reduced paper waste and allows us to be more dynamic and responsive 2019 December Our Fortnum & Mason Christmas hamper competition ended just in time for the festivities and all Senior Management came together once more 2019 August We changed our recruitment process and overhauled our sales training programme to improve the quality and retention of new Sales Representatives 2019 October The hard work on recruitment and training started to deliver results. Since August, Rep retention has improved by 38%! October also hosted the second Senior Sales Agent Conference in Nottingham and saw the launch of our 'free colour upgrade' promotion with a great response 2019 September Our Canvass operation leaders all came together for the ﬁrst Canvass growth meeting in Bradford. Towards the end of September our new and improved sales training programme started it’s roll out across the country and our 3 phase Turnaround Plan continued on track 12 Annual Report & Accounts 2019 Annual Report & Accounts 2019 13 Safestyle UK plc Strategic Report Governance Financials With so many window options no two are the same 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... Last year we made 151,366 casement windows available in 141 conﬁgurations in 10 different colours White Smooth 117,136 Anthracite 13,855 Rosewood 9,423 Golden Oak 3,810 Black 2,463 With 10 privacy glass options to pick from Clear 84% Stippolyte 5% Cotswold 3% Everglade 2% Arctic 1% Autumn 1% Last year we made 3,453 tilt & turn windows available in 10 beautiful colour ﬁnishes From 10 privacy glass options the most popular were White Smooth 2,545 Anthracite 414 Golden Oak 179 Rosewood 153 Black 60 Slate Grey 1,853 Cream 819 White Woodgrain 778 Chartwell 720 Irish Oak 509 Mayﬂower 1% Tafetta 1% Slate Grey 36 Chartwell 22 Cream 20 White Woodgrain 16 Irish Oak 8 Then 137,727 handles were chosen from 3 styles in 6 colours With 3,622 hero handles in 5 colours Florielle 1% Sycamore 1% 16,506 people chose fret Chrome 60% White 27% Gold 7% Brushed 5% Black 1% Chrome 33% Pewter 21% White 20% Chrome 57% White 28% Gold 8% Brushed 6% Black 1% 8,077 people chose lead And multiple fret options to choose from Black 60% Black 11% Chrome 9% Brushed 8% Gold 7% White 5% Brushed 14% Gold 7% Black 5% And a wide range of lead designs Then there’s the decorative & bevelled glass range to choose from, the number of openers, dummy sash options, toplights, trickle vents, ﬁre escape hinges, windows stays and more! 14 Annual Report & Accounts 2019 Annual Report & Accounts 2019 15 Clear 90% Stippolyte 3% Cotswold 2% Everglade 1% Arctic 1% Autumn 1% Safestyle UK plc Strategic Report Governance Financials With so many door options no two are the same 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... Last year we made 18,049 composite doors in 16 different styles 14,971 had letter boxes And 8,432 people chose a door knocker from 5 designs Windsor 4,367 Milano 3,134 Cheltenham 2,373 Gloucester 1,240 Florence 1,187 Stratford 784 Exeter 730 Oxford 721 And 4,916 had numerals Chrome 10,588 Brushed 3,146 Gold 1,237 Urn 3,391 Victorian Scroll 1,922 Scroll 1,786 Lion Head 785 Oval 548 All available in 5 colour ﬁnishes Verona 599 Richmond 579 Canterbury 518 Warwick 486 Turin 427 Venice 331 Siena 290 Roma 283 And 150 composite side panels in 5 complementary designs All in a choice of 12 different colours Chrome 3,052 Gold 406 Brushed 78 Chrome 469 Gold 73 Brushed 6 Chrome 1,661 Gold 103 Brushed 22 Chrome 3,773 Brushed 636 Gold 507 Chrome 2,925 Gold 443 Brushed 23 Chrome 1,735 Gold 163 Brushed 24 And 3,536 had spy holes Chrome 598 Gold 183 Brushed 4 And 6,511 people chose a safety chain 3,732 doors had contemporary handles Anthracite 5,686 Black 3,866 Blue 1,814 Chartwell 1,476 White 1,280 Red 928 Rosewood 852 Oak 632 Chrome 4,517 Brushed Chrome 1,326 Gold 668 Brushed Chrome 2,995 Brushed Chrome 737 Whilst 13,751 people went for a choice of 3 traditional handles in 5 colours Exeter 99 Canterbury 18 Oxford 18 Warwick 11 Stratford 4 Green 569 Duck Egg 387 Slate 348 Cream 211 Chrome 9,291 Gold 1,154 Black 319 White 152 Brushed 3 Chrome 2,338 Gold 328 Black 75 White 17 Brushed 37 Chrome 30 Black 3 Gold 2 Pewter 2 And then there’s the decorative & bevelled glass range to choose from, privacy glass styles, multiple lead & fret options, toplights, side ﬂags, thresholds, frame colours, the list goes on! 16 Annual Report & Accounts 2019 Annual Report & Accounts 2019 17 Safestyle UK plc Strategic Report Governance Financials The journey of an order Across the country 1 Interest registered Up and down the country, millions of people every year contact Safestyle UK through various channels to register their interest in energy efﬁcient windows & doors and request a free quote. Head Ofﬁce & Manufacturing Yorkshire 2 Arrange appointment Our appointment agents based at Head Ofﬁce in Bradford or in our Sales Branches speak to the customer, conﬁrm their interest and agree upon a convenient time and date for one of our representatives to visit. The appointment is then created within our lead management system 'Polaris'. Distribute to branch Through our lead management system, the appointment data is received by the local branch. At which time the appointment is then assigned to a speciﬁc representative for the visit. 3 Visit the property The representative will visit the property and go through all relevant product and service information with the potential customer. Next they will measure up, conﬁrm all the requirements and present a totally free quote. 4 Survey the property One of our expert surveyors will visit the property to double check all measurements and aspects of the job. All details are conﬁrmed with the customer including styles, designs etc. and make sure we are meeting the full requirements of the customer. 6 10 Ready for installation Once the products arrive at the depot, the assigned team will collect these bright and early on the morning of installation. They will check in with the depot, go through the work sheets and head off to the installation. 9 Happy customer At the agreed time and date our ﬁtting team will arrive ready for the transformation. All work will be carried out quickly, carefully and professionally, installing the customers new products to their exact speciﬁcations. We will take great care leaving the customers home as tidy and clean as we found it. Conﬁrm & book survey If the customer is happy and wants to go ahead then back in Bradford the order is received, conﬁrmed and all details are double checked. A survey will then be booked on our system and the customer will be notiﬁed. 5 7 8 Finalise survey to order Safestyle manufacturing Head Ofﬁce receive the detailed survey. It is then passed through Quality Control for ﬁnal checks before sending to the pricing team. Lastly, the installation date is conﬁrmed with the customer, the order is created and is electronically sent to our manufacturing facility for production to start. Under the watchful eyes of our highly skilled craftsmen, every single window and door is manufactured in our state- of-the-art facility in Barnsley to the customer’s exact speciﬁcations. Having passed through all quality control checks, the products are then transferred to our network of installation depots ready for installation. 18 Annual Report & Accounts 2019 Annual Report & Accounts 2019 19 Safestyle UK plc Strategic Report Governance Financials Chairman’s Statement Summary of performance I am pleased to report that the Group made strong progress in its Turnaround Plan in 2019. Proﬁtability was achieved in the second quarter of the year and this momentum continued into Q3. In Q4, sales order intake accelerated in November and December, causing additional lead generation costs; whilst this reduced 2019's proﬁts, it has strengthened the year end order book which increased by 24% above 2018's closing position. Revenue increased by 8.4% to £126.2m (2018: £116.4m). This, combined with a higher gross margin and reduced overheads, delivered a signiﬁcantly improved underlying (loss) before taxation¹ of £(1.5)m compared to £(8.7)m in 2018. Reported (loss) before taxation was a loss of £(3.8)m, an improvement of £12.4m when compared to the loss of £(16.3)m in 2018. Basic EPS for the period improved to (4.0)p from (16.1)p in 2018. months to October 2021, which will support the Group's working capital needs over the next few years. Non-underlying items² reduced signiﬁcantly to £2.3m (2018: £7.5m). The 2019 items include restructuring costs of £1.1m (2018: £1.2m) and impairment of right-of- use property leases of £0.7m as the Group simpliﬁed its organisation structure and reduced its overhead cost base. Encouragingly, the improving performance trajectory described above continued into the ﬁrst part of 2020 as the Group moved into phase three of its Turnaround Plan, which is the last, but also the longest phase of the plan. Balance sheet and dividend The Group has a £7.5m committed ﬁnance facility, the term of which was extended during the year by 12 The net cash³ position at the end of the year improved to £0.4m (2018: £0.3m). The Board does not propose a ﬁnal dividend for the year (2018: £nil) which will underpin the maintenance of suitable liquidity levels in the immediate future. The Board will revisit the dividend policy once further progress has been made in the Turnaround Plan. Outlook Our strategic plan for 2020 is now paused as the business faces into the unprecedented challenges caused by the COVID-19 pandemic. While huge uncertainties exist, our starting position as we go into this crisis is strengthened by recent strong trading performance and the 20 Annual Report & Accounts 2019 ¹ See the Financial Review for deﬁnition of underlying (loss) before taxation ² See the Financial Review for deﬁnition and detail of non-underlying items ³ See the Financial Review for deﬁnition of net cash capable Executive Team now in place. The situation is moving rapidly and our aims will be to protect our people, our customers and the business as we move through, and in due course out, of this crisis. The overall effect of the current uncertainty on the Group is, at the current time, difﬁcult to quantify. For this reason, the audit opinion will contain an emphasis of matter in respect of going concern as a result of COVID-19, although the audit opinion will remain unqualiﬁed. Notwithstanding these concerns, the Directors conﬁrm that, after due consideration, they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and have continued to adopt the going concern basis in preparing the ﬁnancial statements. The Board believes that our business is now much better equipped to deal with the probable short-term adverse impact because of the Group's improved net cash position, which is underpinned by a committed facility to October 2021 alongside a leaner cost base as a result of the actions taken as part of the Turnaround Plan. Inevitably, a number of our strategic investments are now on hold (totalling c.£3m in 2020). The Board believes that it is prudent to defer all possible ﬁnancial commitments possible until after the impact of COVID-19 is more fully understood and we can plan with a higher degree of certainty. With the above as context and acknowledging the material uncertainty that this creates, the Board still targets making progress in 2020 although remains cautious about the degree to which previously anticipated growth can be achieved. Finally, I must once again stress that the progress we have made would not have been at all possible without our skilled colleagues who all work with relentless dedication across the entire business. Right now that dedication is being demonstrated further as they address the challenges of COVID-19. I would once again like to thank them all for their continued commitment to Safestyle. Alan C Lovell Chairman 19 March 2020 Annual Report & Accounts 2019 21 Safestyle UK plc Strategic Report Governance Financials CEO’s Statement Summary During 2019 the business recovered strongly, delivering improvements in margin, costs and proﬁtability, while also growing ahead of the market (as measured by FENSA) in an uncertain domestic consumer context. Our growth was balanced, coming from both volume and price across all lead sources. In addition, the business transformation accelerated, improving further in customer service, safety, compliance, and internal management processes. Following the challenges of 2018, we started 2019 with an almost entirely new Executive Team and our progress gathered pace through the year as the team bedded into their roles. While the focus has been on business recovery, substantial changes have taken place internally as we embed our sales digitalisation process, which has been the biggest change within the business seen to date. The performance visibility resulting from this project will be a key enabler of 'levelling up' performance across sales, an initiative which will be at the heart of our strategy through 2020/21. Our industry has changed signiﬁcantly in recent years and this resulted in the business being impacted by regulatory issues in 2017 and 2018. The business has responded to the challenge robustly and 2019 saw compliance embedded across all parts of the business. As market leader it is essential that we operate to the highest ethical standards and we will continue to work closely with regulators to ensure best practice. The business is now heavily engaged in phase three of its Turnaround Plan, focused on building our value brand and embedding the transformation already underway. This will be a multiyear process that will deliver a branded business that is modern, compliant and a clear market leader. Phase two - Return to Proﬁtability The focus of phase two of our Turnaround Plan in 2019 was to return to monthly proﬁtability. Continuous progress was made through the year as actions taken by management positively impacted proﬁtability. The Group achieved an underlying (loss) before taxation¹ for the full year of £(1.5)m (2018: loss of £(8.7)m) with proﬁtability restored in Q2 and increased in Q3. Our Q4 exit rate proﬁtability was reduced by a decision to invest behind our strong year end sales momentum and this led to a stronger order book at the end of the year which was 24% higher than at the end of 2018. Improvements in proﬁtability were driven by revenue growth and higher gross margin percentage which increased by 240bps versus 2018, with the year on year improvement higher at 300bps for H2. In addition, measured restructuring and cost controls helped recover our cost base towards 2017 levels, with a £2.8m (excluding the impact of IFRS16 adoption) reduction in underlying operating expenses² year on year. While the trajectory of quarterly improvement matched our expectations, the absolute level of proﬁtability delivered was below our original plan due to marginally lower top line growth and the higher year end investment. The former was the outcome of structuring the Door Canvass department for the long term which has included utilising new technology and further embedding compliance. Despite this, the business grew revenues by 8.4% year on year, with the second half of the year's growth accelerating to 10.6%. In a broadly ﬂat market this performance delivered solid share gain (as measured by FENSA) to 8.5%. In addition, 2019 saw the business start to beneﬁt from the Digital Transformation programme launched in 2018. The breadth and detail of management information available is enabling a step change in how we can identify, analyse and drive performance in sales. Combined with our fast-paced culture this change will be critical for our strategy of 'levelling up' our sales performance nationally in 2020. The experiences of 2018 highlighted our need to adapt to the breadth of changes in our regulatory environment and 2019 saw us initiate fundamental changes to deliver this. Our collaboration with West Yorkshire Trading Standards has been hugely beneﬁcial and has accelerated our focus on treating consumers fairly. We also made signiﬁcant changes to adapt our processes to new Data Protection laws, including the introduction of new technology and internal audit processes. Together with sustained progress on Health and Safety, the business now aims to ensure that both our values and regulatory compliance are at the core of our business processes. Phase three – Accelerating Growth & Embedding Transformation In 2020 the business plan moved into Phase Three. The objectives of this phase included both accelerating growth and embedding the fundamental changes initiated during 2018. Clearly in the context of COVID-19 much of the strategic activity and investment will be deferred. However, as the economy comes out of the crisis we will aim to drives the following strategic priorities: Improving the National Sales and Depot Network. There are signiﬁcant variances across the UK in the performance of our sales branches and installation depots. Levelling up the performance of each location through implementing role model sites, supported by clear standard operating procedures and consistent training will deliver huge beneﬁts. This will be a two-year process and will leverage the excellent management information now available. Sustaining Momentum in Compliance and Customer Service. The business is determined to provide excellent customer service and has made signiﬁcant progress in 2019, cutting installation quality issues by c.30%. Concurrently, we aim to continue to embed our new compliance standards while working with the wider industry participants to establish these standards across the industry. Modernising our Value Brand. During 2020 we aim to update our value brand, setting a new and clear identity as we move beyond the 'Buy One, Get One Free' communication message. Having done this work, our plan includes a return to mass media brand investment in H2 2020. While the duration of the COVID-19 crisis is uncertain, these key strategies will focus our efforts for the next two years and support the continued development of our ﬁnancial delivery. Current trading The business has started strongly in 2020, but is now facing into the challenges posed by the COVID-19 pandemic. The Executive Team and Board has responded rapidly with the twin aims of protecting our people and customers, while providing the best service possible through the crisis. Our contingency planning was conducted early and our responses are being executed with excellent support from our staff and agents. Our immediate focus for the months ahead will be on managing our business through the pandemic crisis. Our long-term intent remains the same; to build the business for the long-term beneﬁt of shareholders with our trusted value brand whilst consolidating our position as the UK's No 1 choice for Windows and Doors. Mike Gallacher Chief Executive Ofﬁcer 19 March 2020 22 Annual Report & Accounts 2019 ¹See the Financial Review for deﬁnition of underlying (loss) before taxation ²See the Financial Review for deﬁnition of underlying operating expenses Annual Report & Accounts 2019 23 Safestyle UK plc Strategic Report Governance Financials Financial Review Financials Underlying £’000 126,237 (94,337) 31,900 (32,018) (118) 2 (1,402) (1,518) 4 Revenue Cost of sales Gross proﬁt³ Other operating expenses Operating (loss) Finance income Finance costs (Loss) before taxation Taxation (Loss) for the year 5 Basic EPS (pence per share) Diluted EPS (pence per share) Cash and cash equivalents Loan facility Net cash² 2019 Non- underlying items¹ £’000 Total Underlying £’000 £’000 2018 Non- underlying items¹ £’000 116,426 (89,748) 26,678 (35,287) (8,609) 7 (142) (8,744) (801) (801) (6,717) (7,518) (7,518) (2,314) (2,314) (2,314) 126,237 (94,337) 31,900 (34,332) (2,432) 2 (1,402) (3,832) 526 (3,306) (4.0)p (4.0)p 4,435 (3,991) 444 Change in underlying 8.4% (5.1%) 19.6% 9.3% 98.6% (71.4%) (887.3%) 82.6% Total £’000 116,426 (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 ¹See later section in this Financial Review ²Net cash is cash and cash equivalents less borrowings ³Underlying 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 4 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 5 Underlying (loss) before taxation is deﬁned in the 'Underlying performance measures' section below and the reconciliation between this measure and the GAAP measure is shown in the 'Financials' table at the front of this Financial Review 6 Underlying gross margin % is deﬁned as underlying gross proﬁt divided by revenue KPIs 2019 2018 Change % 6 Underlying gross margin % Average Order Value (£ inc VAT) Average Frame Price (£ ex VAT) Frames installed units Orders installed Frames per order 25.3% 3,337 678 190,252 46,412 4.10 22.9% 3,319 646 184,184 42,995 4.28 240bps 0.5% 5.0% 3.3% 7.9% (4.2%) Financial and KPI headlines Ÿ Revenue rose by 8.4% to £126.2m, which is attributable to a 3.3% increase in frames installed to 190,252 and a 5.0% improvement in the average frame price to £678 (2018: £646) as a result of price actions and a 0.2ppts increase in the mix of higher priced composite guard doors. These positive trends were partially offset by higher consumer ﬁnance subsidy costs. Ÿ Underlying gross proﬁt³ improved by 19.6% to £31.9m with the increase in revenue combining with reduced costs across commissions, access solutions and installation-related materials. Lead generation costs (predominantly in digital media) partially offset these reductions, in part due to higher costs per lead versus the prior year, coupled with investment in sales order intake in Q4 that increased the closing order book by 24% versus the prior year. Underlying gross proﬁt is the same as reported gross proﬁt in 2019. Ÿ Underlying other operating 4 expenses reduced by 9.3% to £32.0m with reductions in the overhead cost base achieved following restructuring and other cost-reduction initiatives. H2 underlying other operating expenses were £15.3m, a year on year reduction versus H2 2018 of £2.0m (11.7%). Ÿ Reported other operating expenses reduced by 18.3% to £34.3m with the decrease attributable to both the cost reduction actions described above, along with a reduction of £4.4m in non-underlying¹ items (further detail below). Ÿ Finance costs represented £0.9m of interest and fees payable on borrowings along with £0.5m of interest on lease liabilities following the adoption of IFRS 16 Leases. 5 Ÿ Underlying (loss) before taxation was £(1.5)m for the year (2018: loss of £(8.7)m). Non-underlying items were £2.3m in the year, a reduction of £5.2m versus 2018, leading to a reported (loss) before taxation of £(3.8)m (2018: loss of £(16.3)m). Ÿ Net cash² also improved to £0.4m versus the prior year position of £0.3m. 24 Annual Report & Accounts 2019 Annual Report & Accounts 2019 25 Safestyle UK plc Strategic Report Governance Financials Financial Review Underlying performance measures In the course of the last two years, the Group encountered a series of unprecedented and unusual challenges. These gave rise to a number of signiﬁcant non- underlying items in 2018. Addressing the impact of some of these events has continued into 2019, particularly as part of the Turnaround Plan. Consequently, adjusted measures of underlying gross proﬁt, underlying other operating expenses and underlying (loss) 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 Group's performance from year to year. These alternative measures are entirely consistent with how the Board monitors the ﬁnancial performance of the Group and the underlying proﬁt / (loss) before taxation measure is the 26 Annual Report & Accounts 2019 performance target for the annual incentive plan described in the Directors' Remuneration Report. 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 Group's primary performance measures as they would distort how the performance and progress of the Group is assessed and evaluated. Share-based payments are subject to volatility and ﬂuctuation and are excluded from the primary performance measures as such changes year to year would again potentially distort the evaluation of the Group's performance year to year. Finally, Commercial Agreement amortisation is also excluded from the primary performance measures because the Board believes that exclusion of this enables a better evaluation of the Group's underlying performance year to year. Revenue Revenue for the year was £126.2m compared to £116.4m in 2018, representing an improvement of 8.4%. Year on year revenue growth in H2 was 10.6%, representing the improving year on year performance as the year progressed. The key performance drivers were as follows: Ÿ A 7.9% improvement in the volume of orders installed from 42,995 to 46,412, as the business recovered from the decline in sales and installation workforce levels in 2018. Ÿ Alongside the increase in installations, the number of frames installed also increased by 3.3% to 190,252 from 184,184 which therefore represents a slight reduction in the number of frames installed per order of 4.2% to 4.10. This dilution was largely driven by an increased mix of installations of higher average priced composite doors in H1 which typically represent a lower unit count per job. This trend was reversed in H2, with the mix of composite doors declining, which in turn led to a commensurate increase in frames per order of 2.4% versus H2 2018. Ÿ Average order value including VAT increased by 0.5% to £3,337 which is despite the lower number of frames per order. The increased order value was largely the result of the annualisation effect of price increases made in late 2018 together with an increased mix of higher value composite doors and coloured frames. During 2019, the Group enacted minimal price increases to ensure it maintained its value- based proposition and lower price point relative to the competition. Ÿ Continuing the trend of recent years, favourable average price gains were partially offset by an increase in uptake of 0% interest-free consumer ﬁnance offering, which drives higher subsidy costs with the Group's consumer ﬁnance provider partners. Underlying gross proﬁt Underlying gross proﬁt improved by 19.6% to £31.9m while the underlying gross margin percentage increased by 240bps to 25.3% (2018: 22.9%). The improvement versus 2018 in both these measures is a result of the following: Ÿ The 3.3% increase in frames installed improved gross margin by £1.0m (3.8%) which, alongside the increase of 5.0% in the average price per frame, represented the largest components behind the improvement in both the gross proﬁt and gross margin %. Ÿ The Group achieved an improvement in many of the material cost ratios within cost of sales which includes commissions, access solutions and installation materials. The improvements in these areas were achieved through balancing the workforce with activity Ÿ levels, whilst improving processes and establishing additional controls on material ordering. Improvements in quality metrics and increased reliability of the product across the 10-year warranty period resulted in a reduction in the warranty provision required. Ÿ The above margin-enhancing factors were partially offset by the marginal costs of growing the number of leads to fuel the growth of the business. The volume-related element of the investment supported higher revenue in the year whilst also driving a 24% growth in the closing order book versus 2018. However, alongside this, 2019 continued the trend seen in recent years of higher costs per each lead across all channels, albeit most notably within the digital lead generation channel. As referred to in the Chairman's statement, the Group is targeting a recovery to a more balanced mix of digital and above the line investment in 2020 and beyond, to drive brand awareness and reverse the trend of increasing costs in the more expensive lead generation channels. Underlying other operating expenses Underlying other operating expenses decreased by £3.3m (9.3%) versus 2018, with the reduction increasing in H2 to 11.7% versus the 6.9% reduction of H1. The improving trend was largely a result of the impact of many of the cost reduction initiatives implemented as part of phase two of the Turnaround Plan. Expanding into more detail, the main changes were as follows: Ÿ A reduction of £0.7m in ﬁxed marketing investment, the largest component being TV advertising. All of the year on year reduction occurred in H1, predominantly as a result of a larger TV campaign run at the start of 2018 that was not repeated at the same activity level in 2019. Ÿ Salary and related costs decreased versus 2018 as the Group simpliﬁed its organisational structure and reduced its ﬁxed cost as part of the Turnaround Plan and efﬁciency drive. The beneﬁt of these reductions were larger in H2 as the actions took place across H1. Ÿ Recruitment costs reduced Ÿ versus 2018, which saw larger recruitment fees as part of the search for new senior management and executive directors. IT licensing and infrastructure costs increased versus 2018, which is a result of both the full year effect of the license fees for the Digital Transformation project and also the fees following the implementation of Ofﬁce365, which is an up to date and more resilient operating system for all users. Ÿ Adoption of IFRS 16 Leases reduced underlying other operating expenses by £0.5m with a corresponding increased interest charge of £0.5m as described in the Financial and KPI Headlines section above (see note 1 for more details). Underlying (loss) before taxation Underlying (loss) before taxation was £(1.5)m (2018: loss of £(8.7)m) although proﬁtability was achieved throughout the middle of the year. This loss is before the non- underlying items described below. Non-underlying items A total of £2.3m has been separately treated as non-underlying items for the year, which represents a marked reduction when compared to the £7.5m reported in 2018. This reﬂects the transition from the unusual events and associated costs incurred in 2018, to the costs predominantly incurred as part of phase two of the Turnaround Plan in 2019. The non-underlying items consisted of £1.8m (2018: £7.8m) of non- recurring costs, a £0.0m share- based payment charge (2018: credit of £0.4m) and £0.5m (2018: £0.1m) of Commercial Agreement (Intangible Asset) amortisation. Annual Report & Accounts 2019 27 Safestyle UK plc Strategic Report Governance Financials Financial Review Non-underlying items (continued) The following table provides the full breakdown: 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 Impairment of right-of-use assets Commercial Agreement costs Commercial Agreement service fee Non-recurring pay awards IT project Impairment Dilapidations provision Non-recurring costs charged to other operating expenses (note 7) Total non-recurring costs (note 7) Equity-settled share based payment charge / (credit) note 32) Commercial Agreement amortisation (note 14) 2019 £000 - - - 1,058 - - 692 - (13) - 113 - 1,850 1,850 12 452 2018 £000 801 801 1,912 1,167 1,079 294 - 311 1,000 635 - 618 7,016 7,817 (374) 75 Total non-underlying items 2,314 7,518 The largest non-recurring item in 2019 was £1.1m related to people restructuring costs which reduced the Group's aforementioned overhead levels. In addition, the Group recognised an impairment of right-of-use assets of £0.7m following closure of an installation branch and a sales ofﬁce in the period. Finally, project costs of £0.1m represented the impairment of a capital investment made in a new electronic survey system that was stopped following results of ﬁeld trials. Included within the 'Fines' category in 2018 was a ﬁne from the Health and Safety Executive (”HSE”) of £0.9m following prosecution for a working at height accident in March 2017. Last year the Group also reported there was another contingent liability linked to a second reportable incident which also occurred in 2017. The HSE conﬁrmed in 2019 that, following completion of its thorough investigation, it would not take any further action on this matter. The Commercial Agreement costs and service fees in 2018 arose as a result of an agreement entered into in 2018 with Mr M. Misra which encompassed a ﬁve year non- compete agreement and the provision of services by Mr Misra in support of the continued recovery of Safestyle. The Group agreed consideration with Mr Misra subject to the satisfaction of both clear performance conditions by him over 5 years and Safestyle's trading performance in 2019. Subject to satisfying the strict terms of the agreement, the consideration takes 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 would only be made in October 2020. The Commercial Agreement service fee of £1.0m in 2018 was the assessed fair value of the consideration payable under the terms of the Commercial Agreement that was attributed to services received in 2018. Following conclusion of the 2019 year, the value of the services received was re-assessed, based on the actual performance in 2019, and the provision for consideration to be paid has been reduced by £13k. 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 was measured based on the fair value of the consideration that the Group expects to issue under the terms of the agreement and is being amortised over 5 years which matches the term of the non- compete arrangement. Further detail of all non-recurring costs is contained in note 7. Finally, in addition to the items classiﬁed as non-recurring costs on the Consolidated Income Statement, the share based payment charge / (credit) and the amortisation of the intangible asset created as a result of the Commercial Agreement reached in 2018 have been excluded from the underlying (loss) before taxation performance measure to enable a meaningful evaluation of the performance of the Group from year to year. IFRS 16 IFRS 16 is effective for this year and requires the total commitments of all leases (both ﬁnance and operating leases) to be recognised on the balance sheet. The impact of adopting the standard is: Ÿ on the balance sheet, an additional lease liability of £6.4m and right-of-use assets of £6.0m have been recognised; in the income statement, the impact on the operating (loss) is a £0.5m beneﬁt as rental payments are now replaced with depreciation on the right-of-use assets. However, higher ﬁnance costs of £0.5m relating to the lease liability offsets the above beneﬁt which combined results in a reduction of £0.0m in the overall reported or underlying (loss) before taxation compared with the previous basis of accounting for leases; and ﬁnally, there is no cash ﬂow impact. Ÿ Ÿ Earnings per share Basic earnings per share for the period were a loss of (4.0)p compared to a loss of (16.1)p for the prior year. The basis for these calculations is detailed in note 9. Net cash and cashﬂow As reported last year, the Group secured a £7.5m committed ﬁnance facility in October 2018, which consisted of a £4.5m term loan that was drawn on completion of the deal and a £3.0m revolving credit facility that can be utilised as required over the term of the arrangement. I am pleased to report that this facility was extended for a further year to end in October 2021. This facility will continue to underpin the working capital needs of the business and provide considerable liquidity for the next two years. At 31 December 2019, the revolving credit facility was undrawn in its entirety and cash and cash equivalents were £4.4m (2018: £4.2m). After deducting borrowings of £3.9m (2018: £4.0m), which are stated net of arrangement fees, net cash of the Group was £0.4m at year end (31 December 2018: £0.3m). Net cash inﬂow / (outﬂow) from operating activities, including the cashﬂow impact of non-underlying items, was an inﬂow of £4.8m (2018: outﬂow of £(8.8)m). Capital expenditure in the year on property, plant and equipment and software was £0.4m, (2018: £1.9m) which represents a considerable reduction on the spend compared to the prior year which included the investment in the Digital Transformation project. The focus in 2019 was on embedding the systems and processes related to the Digital Transformation project implemented in 2018. Looking ahead, the Group plans to continue to invest in improving and modernising its IT infrastructure and systems to ensure security, stability and resilience whilst also facilitating improved processes and efﬁciency. Receipt of a £2.5m tax refund from HMRC follows a tax reclaim against the reported losses in 2018. No dividends were paid in the year (2018: £nil) which, combined with the movements above, resulted in a net cash inﬂow in the year of £0.3m (2018: outﬂow of £(6.8)m). Dividends As the Group moves into phase three of its Turnaround Plan, the Board will focus on continuing to increase the Group's net cash position and consequently does not propose a ﬁnal dividend for this year (2018: £nil per share). Net cash update post balance sheet date As at 19 March 2020, £2.0m of the revolving credit facility has been drawn down, leaving £1.0m of the facility undrawn. The Group had net cash at the end of February 2020 of £0.1m (Feb 2019: net debt of £(2.5)m). Rob Neale Chief Financial Ofﬁcer 19 March 2020 28 Annual Report & Accounts 2019 Annual Report & Accounts 2019 29 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, for the Group's internal control systems 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 key features of the Group's systems of internal control are: Ÿ 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. Ÿ An ongoing process is in place to assess key risks which is performed by senior management and presented to the Board at least annually. A risk register is maintained and regularly reviewed by the Executive 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, ownership and mitigation measures, as well as any proposed further actions (and timescale for completion) for each signiﬁcant risk. Ÿ The Group has a Compliance Committee which is chaired by Julia Porter, non-executive director. This committee meets on a regular basis (generally monthly). The status of the risks and mitigations are reviewed at each meeting, with the minutes being reported and discussed at each Board meeting. Ÿ Risks faced by the Group are identiﬁed during the formulation of the annual business plan and budget process, which sets objectives and agrees initiatives to achieve the Group's goals, taking account of the risk appetite set by the Board. Ÿ The Group has begun an Internal Audit programme in late 2019, which will provide independent assurance on key processes and controls. Principal risks and uncertainties Risk Description Mitigation Health & safety The Group's operations take place in a diverse range of domestic operating environments. In 2019, there were 46k 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. 30 Annual Report & Accounts 2019 The Group has continued it’s focused priority of improving its safety performance for its employees and stakeholders, using a proactive strategy of focusing on risks in the process and ensuring mitigation is in place across all our activities, speciﬁcally working at height and glass handling to reduce accidents and risk. The approach is aligned across all aspects of the Group with a structure that supports positive engagement from suppliers to end customers. The Group has been engaging with suppliers, speciﬁcally of working at height equipment to ensure that standardised solutions are delivered to meet operational needs for the activities that are required to work safely. In addition to this, best practice exercises have taken place with our main glass supplier to review methods of working with glass and equipment used for Personal Protective Equipment (“PPE”) to ensure the Group is operating at the highest level. This strategy is supported by a team of health and safety professionals embedded and working within the operational teams. This ensures continual improvement, positive conversations supported by a programme of training and investment in people and facilities. This is supported by proactive audit and data collection, allowing live conﬁrmation of compliance direction for continued improvement. Risk Description Mitigation Health & safety (continued) This approach is fully supported by the Board and Executive Teams who review performance regularly and ensure that safety is the priority within the business, challenging results and driving improvements. This is also supported by the decision for the Group to implement systems and develop the culture to attain the accreditations for Occupational Health and Safety Management, ISO 45001:2018. This is expected to be delivered in 2020 and is a further indicator of the Group's desire to focus on the safety of our people. 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. The Group has a wide-ranging set of programmes of appropriate training to ensure legal compliance and minimise mistakes. This training is for both new joiners and also in the form of refresher training. 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. A Compliance Committee, chaired by one of the Group's non-executive directors, also meets on a monthly basis to ensure all regulatory requirements are being met. 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 recognises the importance of providing excellent customer service and continues to invest in improving its systems and processes in this regard. As part of the Turnaround Plan, a speciﬁc set of projects to improve the customer experience have been ongoing which have resulted in a positive trend in terms of the numbers of post-installation complaints. The close working relationship with West Yorkshire Trading Standards since late 2018 has also resulted in a far more pro-active response should there be complaints that are escalated to third parties. 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. Online reviews and social media comments are also reviewed and responses made promptly to maintain the Group's reputation. 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. 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. Annual Report & Accounts 2019 31 Safestyle UK plc Strategic Report Governance Financials Risk Management Risk Description Mitigation 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 negotiations on the ﬁnal terms of the Brexit deal progress, there is a risk that Sterling could weaken further with a potential negative impact on performance. IT system dependency and information security The Group is reliant on a number of key IT systems and proceses. 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. 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. 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. The Group continues to invest in improvements to IT systems and people, with security, compliance and capacity planning at the forefront of the plans for 2020. This follows investment made in the last 2 years into new Anti-Virus, Web Filtering and Firewall technologies, in addition to the retirement of on-site email servers to make way for the introduction of Ofﬁce365 and associated Advanced Threat Protection. A concerted effort toward Cyber Essentials accreditation will form the basis of the security focus, with an overhaul of The Group's foundation IT infrastructure offering signiﬁcantly improved capacity and resilience. Both of the above will be complimented by the implementation the 'Information Technology Infrastructure Library' (ITIL) operating framework, aimed at ensuring compliance in IT operations. As we highlighted last year, awareness is pivotal to data security and our GDPR training programme has matured well, with a good rhythm built into refresher training across the organisation and new people trained as they are inducted into the business. As described above, we have formed a compliance committee, chaired by one of the Group's non-executive directors, which meets on a monthly basis to review the activity of the business in terms of matters such as data subject rights requests and responsiveness thereto, training statistics, data incident monitoring and the like. A data compliance ofﬁcer is being recruited to aid our privacy programme objectives and to assist in its continual development. This person will assist the Data Protection Ofﬁce ('DPO') who was appointed in 2018. Risks are identiﬁed and captured within our risk register, with mitigating actions implemented as appropriate. Risk Description Mitigation 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. 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 that it continues to develop. Plans capture natural events, critical infrastructure outage and malicious acts. Mitigation measures include a robust physical and technical security plan. 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. 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. 32 Annual Report & Accounts 2019 Annual Report & Accounts 2019 33 Safestyle UK plc Strategic Report Governance Financials Risk Management Risk Description Mitigation 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. Self-employed status The Group uses the services of a large number of self-employed individuals for marketing, sales, surveying and installation purposes. These individuals are engaged as self- employed agreements and payments are accordingly paid on this basis. The Group is currently involved in a compliance review by HMRC that has been ongoing for over 2 years. There is a risk if HMRC determine that the incorrect employment status has been applied for some or all of its agents that the Group could be required to pay employment taxes not collected on this basis. 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 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 has had 2 status audits performed by professional tax ﬁrms which concluded that the status being applied was appropriate. The Group continues to monitor developments in legislation and case law and has sought professional advice to ensure the rules are being applied correctly. The Group's approach in this area is comparable with many other companies operating in this industry and wider sector where the use of self-employed agents and contractors is the primary source of specialised resource. The Group is aware that HMRC has previously agreed to its assessment of some of its self-employed agents and has recovered unpaid taxes from these individuals on that basis. The Group will continue to work with HMRC to respond to any further queries and believes that it has followed professional advice and applied the requirements diligently. The Group mitigates its exposure to credit risk through close monitoring of the trade debtors ledger through a dedicated collections team. Performance of this collections team is regularly reviewed and monitored by members of the ﬁnance team, including the Chief Financial Ofﬁcer. 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. Risk Description Mitigation Liquidity risk Liquidity risk is the risk that the Group will have insufﬁcient funds to meet its ﬁnancial obligations as they fall due. 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 until October 2021. Regular forecasts and assessments of the facility's covenant compliance are 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. Post-Brexit risk Now that the UK has exited the EU, Brexit risk reﬂects the potential impact on the Group's operations and ﬁnancial position of the UK future trade deal and relationship with the EU. Now that the UK has ofﬁcially left the EU, the post-Brexit trade deal is the subject of continued negotiation between the UK Government and the EU and the full implications of this 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 PVCu proﬁles the Group uses to manufacture its window frames and the composite door slabs that are imported from South Korea. 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. COVID-19 (Coronavirus) risk The COVID-19 (Coronavirus) pandemic represents a material risk to the business and is driving signiﬁcant uncertainty. The impact on consumer spending and our operations is difﬁcult to assess at this stage. The Board and Management are closely monitoring the rapidly evolving situation of Coronavirus and has already responded with the following measures : Ÿ Ÿ Implemented a number of measures which follow government guidance focussed on cleaning and preventing the spread of the virus. Implemented bans for any unnecessary travel within the UK whilst also enacting a ban on international travel for all members of the senior management team. Ÿ Department and site by site plans have been developed to respond to any disruption caused to maintain business as usual wherever possible. Ÿ Audited key suppliers to understand the measures they have in place to maintain continuity of supply. Ÿ The Group has modelled a number of scenarios and measured the impact to its balance sheet and liquidity using a detailed weekly cashﬂow forecasting model. This proactive approach enables the Group to identify quickly emerging risks to liquidity. 34 Annual Report & Accounts 2019 Annual Report & Accounts 2019 35 Safestyle UK plc Strategic Report Governance Financials Corporate Social Responsibility 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 strive to lead the way in our industry in looking after it. Going even greener, new energy saving initiatives in 2019 Cool Temper furnace energy saving project At our manufacturing facility in Barnsley, the Cool Temper furnace is used for the glass toughening process. What this means is, once glass is toughened if it’s broken, the glass will fragment into lots of much smaller and safer pieces of glass - here’s how it works... 01 OUT WITH THE OLD, OUT WITH THE OLD, OUT WITH THE OLD, IN WITH THE NEW IN WITH THE NEW IN WITH THE NEW Our team of expert ﬁtters install a beautiful new set of windows for the happy customer. 02 OLD WINDOWS OLD WINDOWS OLD WINDOWS TAKEN AWAY TAKEN AWAY TAKEN AWAY 03 MATERIALS MATERIALS MATERIALS SORTED OUT SORTED OUT SORTED OUT All the old windows (and any other waste) are loaded onto the van and brought back to the depot. We sort and separate all the different materials ready to go back to our factory in Yorkshire. 01 The individual panes of glass are loaded onto the in-feed bed of the Cool Temper furnace. 02 The glass is then taken into the furnace on rollers ready for the transformation to take place. 03 Super heating the glass to approximately 700°C before being rapidly cooled. 04 The toughened glass is now ready for the next stage of its manufacturing process. 06 BESPOKE WINDOWS ARE NOW BORN Highly-skilled craftsmen and state-of- the-art machinery precisely manufacture new windows to your exact order. 05 THE NEW GLASS IS MADE Old glass, (called 'cullet') is crushed and recycled. Every month 80 tonnes of it is made into brand new, energy saving glass. 04 EXPERTLY RECYCLED The separate materials arrive back at our dedicated recycling centre. Whatever we can't use, we send to a recycler who can. Energy saving project After toughening a fragmentation test is performed, the glass is smashed and we count the fragments within a small area. To pass the BSI test we must have 40 fragments or more. Before our project, we had up to 140 meaning we were massively over-processing. Due to the furnace using a lot of energy, the equivalent of 600 homes, we began testing and found that by marginally lowering the heating and cooling time, this greatly reduced the amount of energy we use. With approximately 80 fragments we also still pass the BSI test with ﬂying colours. This has resulted in huge amounts of energy being saved, the equivalent of around 150 homes per year! Before: 127 fragments After: 74 fragments VIRGIN PVCu OFF CUTS 8 tonnes each month go back into making new frames WHAT WE CAN’T USE OURSELVES WE SEND TO A RECYCLER WHO CAN, IN 2019... WHAT WE CAN’T USE OURSELVES WE SEND TO A RECYCLER WHO CAN, IN 2019... WHAT WE CAN’T USE OURSELVES WE SEND TO A RECYCLER WHO CAN, IN 2019... Electric charging points As more of our vehicle ﬂeet become hybrid and full electric we have installed various charging points at our factory. Single use plastics Even the little things add up to make a big difference. We’ve been consciously replacing any single use plastics across the business with greener alternatives, such as paper cups for our drinking water machines. Designated cycle parking To encourage local workers to use leg power rather than petrol power, we have installed a designated cycle parking area. Compressed air energy saving project At our manufacturing facility many of our machines and tools are powered by compressed air. Making this process as efﬁcient as possible has also saved huge amounts of energy. GLASS 1,118 tonnes of old glass (called cullet) went into making new windows. PLASTIC Each month 500 tonnes of post consumer plastic is recycled into drainpipes & plastic decking etc. WOOD 1,424 tonnes of wood got recycled into pellet fuels for Biomass heating systems. METAL 30 tonnes of metal in 2019 was melted down and reused. OUR LORRIES COME BACK FULL 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. WE CERTAINLY PACK 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. 36 Annual Report & Accounts 2019 Annual Report & Accounts 2019 37 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. 2019 People Review After the unique challenges of 2018, we commenced 2019 with a refreshing sense of normality as we went to work to reignite our People Agenda. 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 this, effective communication, engagement, training and development are of paramount importance as is a ﬁt for purpose organisation design. Organisation Design During the year we completed two signiﬁcant restructure projects that supported the re-alignment of our 38 Annual Report & Accounts 2019 cost base whilst importantly delivering ﬁt for purpose organisation structures. We set to work to simplify reporting lines to enable more efﬁcient decision- making processes and to bring our managers closer to our people and to our front-line activities. Accompanying these projects, the work continues to review role proﬁles and key accountabilities and to embed these within a suitable performance review process starting with our senior management population and ultimately cascading this throughout the organisation through 2020. In the ﬁeld, a new approach to Sales Agent recruitment was adopted in July and has delivered a more cost- effective service for the business and a much-improved experience for the Rookie Reps. To complement this, we have restructured our Sales Training team and re-designed our introductory training. These activities have translated into better performance results for our Sales Agents and the business. Equality & Diversity We are working to encourage a more diverse workforce throughout the business. We are committed to recruiting and promoting our colleagues based on their skills, competencies and abilities, and in ensuring that our decisions encourage equality and diversity. To this end, 2020 will see a focus on training in this area for our managers and colleagues alike. We continue to address our Gender Pay Gap having always recognised that this will take time to improve. As we get ready to publish our 2019 Gender Pay Gap Report we are pleased to conﬁrm that the median Gender Pay Gap decreased from 23% to 15% to 12% from 2017 to 2019, whilst the proportion of females receiving a bonus rose from 18% to 30% to 33% in the same period. 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 will continue to develop and promote equality and diversity within the organisation. Communication & Engagement 2019 saw the enhancement of strong foundation work that had commenced in 2018. A new communication committee was established at our Barnsley site to complement the constructive relationship with our Trade Union colleagues and the 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. To more easily reach our ﬁeld-based colleagues, and to provide an improved two-way communication mechanism we have further developed our use of the Workplace Digital Platform and are increasingly using video messaging to bring key updates alive. Our Senior Managers' Christmas video messaging was particularly light-hearted and well received. At the beginning of February we held our very ﬁrst Senior Managers' Conference which has been since followed by 3 more successful events, the second of which took the theme of our People Vision “To make Safestyle UK plc a successful business that our colleagues are proud to be part of and that others want to join.” The positivity from showcasing the achievements that our teams were most proud of was something that created a lasting memory. Building on the success of our Senior Management Conferences, 2019 saw the introduction of Sales Management Conferences designed to share information and best practice across the business. Annual Report & Accounts 2019 39 Safestyle UK plc Strategic Report Governance Financials Safestyle People Learning & development The development of our people continues to be a crucial factor in our continued growth. Our business will only ever be as successful as the people within it. Ensuring that our colleagues have the right skills to perform their roles effectively and efﬁciently in an increasingly regulated industry will only serve to drive a positive and proﬁtable business as we move forward. The Safestyle Advanced Technical Competency programme (SATC) commenced in earnest at the start of 2019 and by year end we were in the position of enrolling all new lead installers automatically to the programme. With approximately two thirds of lead installers now on the programme and a closer working relationship with FENSA, the programme is starting to gain traction and the installer feedback remains extremely positive. Throughout 2019 our surveyors have been enrolled onto either a full NVQ Level 3 qualiﬁcation in Surveying or onto a suitable Continued Competency Update (CCU) programme and at the end of 2019 the business had all surveyors on programme with 49% fully re- qualiﬁed. With a good working relationship with the provider GFTS, communication channels remain clear and effective ensuring genuine improvements in the knowledge and skills of our surveyors. In continued support of our Customer Service value – “We treat our Customers as we want to be treated. We put our Customers ﬁrst” – 2019 saw the training programme entitled “Customer First” embedded into operational inductions as well as the PAYE induction and sales agent inductions. Utilising our Apprenticeship Levy in 2019 we funded 25 individuals across the business from various departments on programmes ranging from Level 2 to Level 6. The ﬁrst fully “levy funded” individuals successfully achieved their Customer Service Practitioner level 2, with distinction in January 2020. In addition to the above, our E Learning facility has added a huge amount of value in 2019 to our colleagues. During the year 1340 modules were completed across both business protection and health and safety subject areas. This training intervention reached over 600 individuals, some of whom had not received any form of training for extended periods leading up to this. For the business this has achieved a baseline competence in compliance areas and has sent a clear message of change to colleagues and contractors alike that right ﬁrst time is our way of working. E-learning will continue to complement the training and development our colleagues receive throughout 2020. Looking forward 2019 was yet another to be proud of the passion, enthusiasm, commitment and resilience of our colleagues. The work carried out resulted in increased collaboration, better team-working and more openness and positivity – all rewarding steps in our cultural development. We will continue this journey in 2020 when our People Agenda will focus on the development of leadership and management skills, building high performing sales and installation functions, increasing engagement, and developing reward strategies to support delivery in line with our cultural values. 40 Annual Report & Accounts 2019 Annual Report & Accounts 2019 41 Safestyle UK plc Strategic Report Governance Financials A day in the life of... With a huge diversity of roles across the business, here’s a glimpse into a typical day in the life of some of our unsung heroes working tirelessly behind the scenes. What is your typical day? I generally spend the ﬁrst few hours reviewing the prior day sales data, looking at performance versus target on our commercial KPIs, such as cost of lead generation, rep conversion etc. These KPIs are tracked in our sales dashboards and reviewed at the daily sales meeting. I spend a lot of time working with the commercial teams to drive performance and investigate issues, using data analysis tools such as Tableau to take complex data and turn it into usable information. What challenges do you face? Engaging a broad range of people to use and understand often quite complex data to drive the right actions. Most important aspect of your role or project worked on? Creating the revenue dashboard that underpins our daily sales meeting and enables us to quickly see how we are performing against our KPIs, and launching Tableau data analytics into our sales branches to give branch managers a data-driven view of performance. How do you measure success? When the analysis I provide is used to make decisions that beneﬁt the business. Most proud moment? Seeing people who were previously cautious around data using data analytics to drive performance. What is your typical day? A typical start to the day is making sure that all critical IT systems are running as expected, before moving on to my planned work for the week. This includes designing, writing, testing and implementing new software or changes to existing systems to ensure the business processes are as efﬁcient and effective as possible. This is combined with resolving any issues that may arise and providing a quick, but safe ﬁx that will get the business back up to full speed as quickly as possible. Most important aspect of your role or project worked on? Helping with the creation and implementation of Polaris was the biggest project worked on to date. Out-of-hours support, when required, is important to help ensure colleagues across the business can keep the business running successfully. How do you measure success? The size of the helpdesk queue and hitting deadlines, whilst retaining customer satisfaction when colleagues come to us with questions or issues. What challenges do you face? Balancing the resolution of issues with planned work on tight deadlines. Most proud moment? Finishing my apprenticeship at Safestyle and getting recognition from the company for my efforts. What is your typical day? First I deal with urgent queries from ﬁtters and create the daily scaffold plan of how many to order. I deal with invoice queries, specials, urgent requests, creating reports and much more. I also negotiate scaffold prices and as a Yorkshire lass I drive a hard bargain! I live up to my name being a busy Bee, which I couldn't do without my colleagues help! What challenges do you face? I face many challenges, site access issues, scheduling problems, Access Solutions to name a few but we always try our best to ﬁnd a solution! Most important aspect of your role or project worked on? Most important is enjoying work, smiling and laughing with good people whilst working hard to achieve the best results. Access Solutions has developed recently with the ongoing projects and it's great being a part of this! How do you measure success? Leaving my ofﬁce daily knowing everything is sorted. If you always work to the best of your ability then the day's a success! A bit of positive feedback is also nice. Most proud moment? Can I have more than one please? Working my way up to where I am, receiving kind words & recognition from those in higher roles than me, being asked to answer these questions and of course getting my photo on as many Marketing projects as I can. What is your typical day? I start work at 7:30am, review my workload and prepare for a project meeting which I lead. In the meantime, I focus on actions assigned to me from the project meetings. Trying to close as many actions as I possibly can, and in some cases, it requires performing engineering trial on relevant process. As a project leader I challenge other project team members on their actions. What challenges do you face? Breaking old-fashioned thinking and convincing people to think out of the box. Most important aspect of your role or project worked on? The two big projects of 2019 were ‘Cool Temper’ and ‘Compressed Air Optimisation’ which combined resulted in huge savings both monetary and in energy usage. Currently I'm leading three parallel projects which are focused on improving Safety, Quality and Service through application of lean tools. Nine more projects are on the way in 2020! How do you measure success? Electricity usage data shows we are using much less energy now compared to before the two big projects of 2019. We measure cell performance and perform audits in improved areas. Most proud moment? Recognition for the project achievements. Tom Morley Commercial Finance Manager Based at Head Ofﬁce 4 years with Safestyle UK Adam Jacobs IT Developer Based at Manufacturing Facility 4 years with Safestyle UK Bee Calam Access Solutions Team Leader Based at Head Ofﬁce 5 years at Safestyle UK Karolina Plonka Manufacturing Engineer Based at Manufacturing Facility 1 year at Safestyle UK What is your typical day? My role includes visiting all installation depots to aid in the daily running and the overall management of depot performance. Implementing Standard Operating Procedures with a clear goal of getting each depot to run in line with company policies. What challenges do you face? On a daily basis my challenges are organising depots and ensuring they are providing a good customers service, this in turn ensures depots are running smoothly and few issues arise. Most important aspect of your role or project worked on? Support the teams around me and be available for anybody when they need assistance or advice. My most important project was taking the Manager position at Warrington depot and turning the depot into one of the best performing depots. How do you measure success? I measure success by giving myself clear goals; if I then achieve these goals I would consider myself successful. Most proud moment? My most proud moment was turning the Warrington depot around and getting it to perform to it’s maximum in all aspects. This achievement is shared with everyone involved. The ﬁtters and the depot staff who without their support and hard work would have made it impossible. What is your typical day? My day consists of contacting customers that have any issues with their orders. This could be that extra money is required, orders that are unable to be installed due to technical issues and customers that have requested to cancel their orders. What challenges do you face? The main challenge is when asking for any extras that are required, mainly things like scaffolding or building work that has been requested by the surveyor. This is made more difﬁcult as the customers are unaware of these extras at this stage, so the ﬁrst time the customer is notiﬁed of this is when we call them from head ofﬁce to explain. Most important aspect of your role or project worked on? Speaking to customers that have requested to cancel their order to see how we can help to keep their business. Discuss extra amounts that are required with customers without losing their business. How do you measure success? Success is measured by Managers running reports which show how many ﬁles have been booked on for an installation date. Most proud moment? I’m most proud at the end of each day, when I have worked through all my calls knowing that I have helped our customers and resolved any issues to the best of my abilities. What is your typical day? When working in HR, no day is ever the same. Since taking on the recruitment role alongside my general HR role I have to be more structured, producing reports for the exec team. I have regular meetings with my business partners to support them with any projects and HR needs. What challenges do you face? Ensuring that I give the best service to the business and the areas I work with. The business is going through lots of change, so I need to manage managers expectations, understand their thoughts whilst guiding them in the right direction. Most important aspect of your role or project worked on? The most important project has to be the Sales Rep recruitment process, this was a new way of recruiting for me but with the rest of the team, I managed to build a process successfully bringing in new reps every week. How do you measure success? I believe within HR, people relationships are top priority, if I build one new relationship and employees feel they can approach me, I’ve been successful. Most proud moment? Smashing the record for number of reps booked on one week’s course. We worked so hard to build the process and improve the candidate experience. The positive comments from around the business makes me feel proud. What is your typical day? 7:30am start my prep for the 9:00am production meeting. Check the number of reported missed ﬁts/deliveries and stock issues, minimising any negative impact. Oversee recycling's productivity making sure targets and standards are being met. Next, it's onto checking in with purchasing and the stores team that everything is running smooth. Reviewing depot queries and making sure the depots are receiving feedback. Finally later in the day I debrief our drivers, checking the condition of our wagons, number of hours worked and time sheets are completed. wrong and how to prevent a reoccurrence. Keeping fork lift trucks running as they a critical in the plants efﬁciency Most important aspect of your role or project worked on? Making sure the manufacturing plant has the stock required to make the frames on time to hit delivery dates. Maintaining the legality and service schedules of our HGV ﬂeet to minimise any potential down time. How do you measure success? We use OTIF reports to monitor our progress and as a driver for constant improvement. What challenges do you face? Understanding unknown stock outs, investigating what went Most proud moment? Watching promoted staff members grow and surprise me. Paul Willett Branch Support Manager Based Nationwide 9 years with Safestyle UK Stacey Power Contract Manager Based at Head Ofﬁce 3 years with Safestyle UK Natalie Hellowell Human Resources Based at Head Ofﬁce 2.5 years with Safestyle UK 42 Annual Report & Accounts 2019 Dale Mallison PCW, Stocks & Transport Manager Based at Manufacturing Facility 22 years at Safestyle UK Annual Report & Accounts 2019 43 Safestyle UK plc Our new, more fuel efﬁcient ﬂeet of vans will save 167,437 litres of fuel this year Governance 46 48 50 58 61 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 From left to right: Mike Gallacher, Rob Neale, Alan Lovell, Fiona Goldsmith and Julia Porter 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 Chairman of Interserve Group Limited since July 2019, and Senior Independent Director at SIG plc since July 2018. He was National Chairman of the Consumer Council for Water from 2015 to 2019 and a Non-Executive Council Member of Lloyd's of London from 2007 to 2016. During the last two years, Alan has been a Non-Executive Director and Chairman of the Restructuring Committee of Carillion plc for its ﬁnal 10 weeks of trading and a Non- Executive Director of Amey UK as it extracted itself from an onerous contract and established a solid base for the future. Alan has a huge breadth of experience, including both strategic and complex situations, with a particular focus on companies undergoing turnaround or business improvement initiatives. 46 Annual Report & Accounts 2019 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. His other Chief Executive Ofﬁcer appointments were in the consumer goods group Dunlop Slazenger and in three businesses in the construction sector, Jarvis plc, Costain Group plc and Conder Group plc. In the not-for-proﬁt world, Alan is Chair of the Governors of the University of Winchester, Chair of the Mary Rose Trust and the Hampshire Cultural Trust and a Trustee of Winchester Cathedral Trust. 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 Fiona Goldsmith Non-Executive Director Julia Porter Non-Executive Director Fiona joined the Safestyle Board in September 2018 and she is Senior Independent Director and Chair of the Audit Committee. She is also a Non-Executive Director and the Audit Chair designate at the listed housebuilder MJ Gleeson plc. She was previously Chair of the Audit Committee, at Walker Greenbank PLC (2008 to 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. Prior to embarking on a portfolio career, Fiona was CFO of Land Securities Trillium, the outsourcing division of Land Securities Group PLC. Julia joined the Safestyle Board in November 2018 and she is Chair of the Remuneration Committee. Julia 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). Julia’s 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 also holds an MBA from London Business School. 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 fellow of the Institute or Chartered Accountants of England and Wales and started his career at Arthur Andersen. Annual Report & Accounts 2019 47 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. Committee does not believe that the size of the company 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. This report provides details of the role of the Audit Committee and the work it has undertaken during the year and at its meeting in March 2020 when this annual report and ﬁnancial statements were approved. The Committee undertook the following activities during the year: Financial reporting Principal duties The principal duties of the Committee are to: The Committee reviews the half year and annual ﬁnancial statements and matters raised by management and the auditors. Ÿ Oversee the integrity of the Group's ﬁnancial statements Ÿ The accounting policies used are consistent both year on and public announcements relating to ﬁnancial performance. Ÿ Review signiﬁcant accounting and reporting judgements. 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 are in place for individuals to raise concerns regarding breach of conduct and legal and regulatory compliance. Committee membership The Committee comprises two independent Non-Executive Directors: Julia Porter and me. The Committee met three times during the year and had 100% attendance. The Company Secretary acts as secretary to the Committee. 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. Terms of reference These were adopted by the Board on 11th December 2013 and are available on the company 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 Company'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 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, considering the views of the external auditor. Ÿ The appropriate accounting standards have been applied. External audit 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. Audit tender KPMG conﬁrmed they will retire as the Group's external auditors following completion of the 2019 Annual Report. After a comprehensive tender process, Grant Thornton will be recommended for appointment as the Group's external auditors at the AGM in May 2020. The Committee also considered a paper prepared by the external auditor, which included signiﬁcant reporting and accounting matters. The Committee considered the appropriateness of the following areas of signiﬁcant judgement, complexity or estimation in the ﬁnancial statements. Risk management Going concern During the year the Group's risk register was refreshed following a detailed bottom up review. The risks identiﬁed and the mitigating actions were reviewed by the Executive Committee and then the Audit Committee. In managing risk, the Committee analyses the nature and extent of risks and considers their likelihood and impact, both on an inherent and a residual basis, after taking account appropriate mitigation and the Group's appetite. The Risk Management section on pages 30 to 35 sets out the key risks that the business may face and how it mitigates them. During the year a Compliance Committee was established this is made up of managers from across the business and is Chaired by an independent director. This Committee meets monthly and is focussed on managing Data Compliance risks. The Group has commenced the process to gain 'Cyber Essentials' certiﬁcation. The Audit Committee will be kept updated on the progress. Internal controls The Committee is responsible for reviewing and monitoring the effectiveness of internal controls and risk management systems on behalf of the Board. The Group's system of internal control includes the following processes: Ÿ Each department has deﬁned procedures and controls to identify and minimise operational and ﬁnancial risks. These procedures include segregation of duties and the regular monitoring of KPI's. Ÿ The Board and management meet regularly to monitor the performance of the business against the KPI's. The Audit Committee monitors the requirement for an Internal Audit function. During the year the committee appointed an external ﬁrm to perform internal audit reviews on certain key controls. There is a detailed Internal Audit programme for the coming year, initially this will be carried out by external resource, but we continue to monitor the requirement for internal audit resource within the business. In addition, our external auditors, KPMG, report annually to the Audit committee on their review of the control environment. Whistleblowing The Group's whistleblowing policy was reviewed during the year. All cases of whistleblowing are appropriately investigated, however following the review it was decided that it was appropriate to update awareness across the business. Consequently, an online training programme is now being rolled out across the business. 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 2019 and March 2020 the Committee reviewed the Group's results and other information provided by the Chief Financial Ofﬁcer to support the Directors' going concern statements. 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 period to December 2021. These forecasts were then sensitised to reﬂect reasonable possible adverse effects which could arise. 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. During the period leading up to the date of this report the global impact of COVID-19 escalated. The Board and the Audit Committee have considered possible impacts of the COVID-19 outbreak on the Group's trading and cashﬂow forecasts. In preparing this analysis a number of scenarios were modelled based on management's current understanding of potential income. In each scenario, mitigating actions within the control of management, including reductions in discretionary spend, have been modelled, but no ﬁxed cost reductions have been assumed. In these uncertain times, it is difﬁcult to predict the overall outcome and impact of COVID-19 as the extent of the duration and impact on the business. More detail of the scenarios considered is set out in note 1 to the ﬁnancial statements. Under some scenarios modelled there is a risk of breaching the Group's ﬁnancial covenants and in a scenario where a loss of written and ﬁtted sales extends beyond the end of April 2020 there is a risk of the liquidity requirements of the business exceeding the total quantum of facilities available. The Board welcomes the ﬁnancial support commitment announced by the UK Government on 17th March 2020. Whilst detailed information on the qualifying criteria is yet to be provided, based on the initial announcement the directors would anticipate that the Group would qualify for a level of ﬁnancial support should it be required. The Audit Committee considered the basis of preparation of the accounts against the background of the material uncertainty posed by COVID-19 and concluded that it is appropriate to prepare the accounts on a going concern basis subject to the detail set out in note 1. In a continually evolving situation, the Audit Committee are satisﬁed that the Annual Report as a whole reﬂects our expectations and actions at the date of signing. Impact of uncertainties due to the UK exiting the European Union The Audit Committee reviewed the Group's preparation for Brexit. Whilst there remains uncertainty as to the eventual terms under which the UK will exit the European Union, the Board and the Audit Committee are satisﬁed that the Group is appropriately positioned to address any impact. Fiona Goldsmith Chair of the Audit Committee 19 March 2020 48 Annual Report & Accounts 2019 Annual Report & Accounts 2019 49 Safestyle UK plc Strategic Report Governance Financials Directors’ Remuneration Report Statement from the Chairman of the Remuneration Committee Dear Shareholder I am pleased to present the Directors' Remuneration Report for the year ended 31 December 2019, my ﬁrst report as Chair of the Remuneration Committee, which comprises two sections: Ÿ This annual statement. Ÿ The Annual Report on Remuneration, which provides details of the amounts earned in respect of the year ended 31 December 2019 and remuneration for the year ending 31 December 2020. Our Directors' Remuneration Policy was approved as part of an advisory vote on the 2017 Directors' Remuneration Report at the May 2018 AGM. The Policy has not been reproduced here but is available in our 2017 Directors' Remuneration Report. Similar to previous years, the Directors' Remuneration Report is subject to an advisory vote at the May 2020 AGM. The Committee believes the advisory vote provides a greater degree of accountability and provides shareholders with a say on executive pay. We recognise that this is an important area of corporate governance attracting increasing media and societal focus. Review of the 2019 ﬁnancial year As detailed in the CEO's statement and Financial Review, the underlying 50 Annual Report & Accounts 2019 loss before taxation for 2019 (which is stated before all non-underlying items which include share based payments) was £(1.5)m. This underlying performance represents a material improvement on the £(8.7)m underlying loss in 2018, which was an exceptionally challenging year for all the factors covered in the Annual Report & Accounts 2018. Notwithstanding the improving trend and the recovery to proﬁtability achieved for part of 2019, the full year loss is below the bonus performance targets set for 2019. Despite personal objectives for the Executive Directors being achieved within the challenging recovery context, the Committee concluded that there would be no bonus payments to Executive Directors in 2019 for either the PBT or personal objectives elements of the annual incentive plan. In reaching this decision, the Committee considered the underlying performance of the Group during the performance period, taking into account ﬁnancial and strategic performance including affordability as well as the experience of stakeholders. See page 53 for further details. With this performance context for 2019, the Committee is aware that the performance thresholds in relation to the 2018 LTIP awards, are considerably in excess of current market expectations and look extremely unlikely to be achieved at any level. The Committee is currently reviewing this matter and will consult with major shareholders on this point in the coming weeks. Share awards Under our Policy, our usual award for the LTIP is up to 100% of base salary. In 2019, awards were granted under the LTIP to the CEO and CFO at 47% of salary which is less than half of the usual maximum level. The lower percentage was set to ensure a balance between a satisfactory award level for performance attainment whilst managing the potential dilution of shareholders. These awards are linked to absolute EPS targets for the year ended 31 December 2021, which have been set at a threshold performance (at which 25% of the LTIP award vests) of 3.45p and for maximum performance at 5.03p, with straight line vesting in between. The Committee considers these targets to be very stretching, particularly in light of the ﬁnancial losses in the last 2 years and the current market uncertainty as we rebuild and modernise the business. Once again, malus and clawback triggers apply to the awards. On 10 April 2017, nil cost options equivalent to 80% of salary were granted to Giles Richell and to former Executive Directors Steve Birmingham and Mike Robinson under the 2017 Performance Share Plan. As disclosed in the 2018 Directors' Remuneration Report, Steve Birmingham and Mike Robinson were treated as good leavers under the 2017 Performance Share Plan. Giles Richell was also treated as a good leaver under the 2017 Performance Share Plan (see below). All three individuals therefore retained interests in the unvested awards. Vesting of the awards were subject to EPS growth targets over the three-year performance period to 31 December 2019. The threshold EPS growth target was not met and the awards lapsed in full. See page 53 for further details. Changes to the Board Giles Richell stepped down from the Board on 5 March 2019 and left the Group on 31 August 2019 as part of a redundancy process. The terms of Giles' exit were set in line with the Group's redundancy policy. Giles received his salary, pension and beneﬁts until the date he left the Group and following his departure date, he also received payments in lieu of his unexpired noticed period. No 2019 bonus was awarded and his 2018 LTIP award was pro-rated to 6 February 2019. See page 52 for further details. Outlook for the 2020 ﬁnancial year Rob Neale received an exceptional increase in his base salary, from £175,000 to £190,000 (9%) which is effective from 1 January 2020. This was the result of consideration of wider market benchmarks, his signiﬁcant development in role, additional management responsibilities assumed in early 2019 and his overall contribution to the business since he joined. Fiona Goldsmith's fees have increased to £55,000 (17%), effective from 1 January 2020, reﬂecting her additional duties as Senior Independent Director alongside those of Audit Committee chair. Julia Porter's fees have also increased to £55,000 (17%), also effective from 1 January 2020 reﬂecting her additional duties as chair of the Compliance Committee. This is in addition to an increase to £47,000 (12%) effective from 1 August 2019 on account of her additional duties as chair of the Remuneration Committee following Chris Davies' retirement in May 2019. Mike Gallacher, Executive Director and Alan Lovell, Chairman waived a general cost of living increase to their base salary and fees respectively for 2020. See page 52 for further details. The annual bonus structure will remain the same as in 2019. Executive Directors will be awarded an annual bonus opportunity of up to 100% of salary, based on delivering against stretching PBT targets (as regards 70% of the award) and a range of strategic and personal objectives (as regards the remaining 30% of the award). See page 56 for further details. Awards under the Performance Share Plan in 2020 are expected to reﬂect the usual Policy at 80% to 100% of salary for Executive Directors. We are currently reviewing the associated performance criteria and targets and these will be disclosed in full in the 2020 Remuneration Report. I anticipate that these will continue to be based on EPS targets. Summary The Committee aims to provide clear and transparent reporting on executive pay and performance at Safestyle, taking into account best practice amongst larger AIM listed companies. I look forward to receiving your support at our May 2020 AGM, where I will be available to respond to any questions shareholders may have on this Directors' Remuneration Report or in relation to any of the Committee activities. Julia Porter Chairman of the Remuneration Committee 19 March 2020 Annual Report & Accounts 2019 51 Safestyle UK plc Strategic Report Governance Financials Directors’ Remuneration Report Annual Report on Remuneration 2019 Remuneration (Audited) The table below details the elements of remuneration received by each Director for the ﬁnancial year ended 31 December 2019, and the total remuneration received by each Director for that ﬁnancial year and also for the ﬁnancial year ended 31 December 2018. 2019 Salary and fees £’000 8 Beneﬁts¹ Annual bonus Long term incentives Pension £’000 £’000 £’000 £’000 Supplemental salary and fees £’000 Total remuneration 2019 £’000 Total remuneration 2018 £’000 Executive Directors M Gallacher¹ R Neale² G Richell³ Total Non-Executive Directors A C Lovell 4 5 F Goldsmith J Porter 6 C J Davies 7 Total 275 175 146 596 120 47 44 20 231 21 14 10 45 - - - - - - - - - - - - - - - - - - - - - - - 22 14 9 45 - - - - - - - - - - - - - - 318 203 165 686 120 47 44 20 231 544 193 367 1,104 55 16 7 72 150 Remuneration in 2019 for G Richell (and remuneration in 2018 for other Directors) reﬂects a part year as follows: 1 2 3 4 5 6 7 8 Mike Gallacher was appointed to the Board on 1 May 2018. Rob Neale was appointed to the Board on 16 July 2018. Giles Richell resigned and stepped down from the Board on 5 March 2019. Giles Richell remained as an employee of the Company until 31 August 2019 to focus on handing over his executive responsibilities. Alan Lovell was appointed to the Board as Chairman on 16 July 2018. Fiona Goldsmith was appointed to the Board on 17 September 2018. Julia Porter was appointed to the Board on 5 November 2018. Chris Davies retired from the Board on 16 May 2019. Beneﬁts include car allowance, private fuel and private medical insurance. Individual elements of remuneration Base salary The annualised salaries for 2019 and 2018 are as set out below. Executive Directors did not receive a salary increase in 2019. 2019 base salary £,000 2018 base salary £,000 % increase M Gallacher R Neale G Richell 275 175 175 275 175 175 0% 0% 0% Annual incentive plan Bonus opportunities equal to 100% of salary were awarded to Mike Gallacher, Rob Neale and Giles Richell. 70% of the opportunity was dependent on Proﬁt Before Tax (PBT) performance, with the remaining 30% of the opportunity dependent on strategic and personal objectives. Giles Richell's annual bonus award lapsed in full following his cessation of employment. As illustrated in the table below, PBT performance fell short of the threshold target and the proportion of the annual bonus subject to PBT lapsed in full. Whilst good progress was made by Mike Gallacher and Rob Neale against strategic and personal objectives, the Committee determined that no payment should be made under this element of the annual bonus, taking into account underlying ﬁnancial performance. PBT¹ Performance target (50% proﬁt element / 35% of salary) Performance target (100% proﬁt element / 70% of salary) Bonus earned by each Executive Director (% of salary) PBT of £2.5m PBT of £3.0m 0% ¹For the purposes of the annual incentive plan, PBT is stated before all non-underlying items as deﬁned in the Financial Review. Strategic and personal objectives The strategic and personal objectives were tailored to each Executive Director and focused on key performance metrics in the 2019 plan to deliver our strategy and deliver the Group to proﬁtability. Director Performance metrics Bonus opportunity (% of annual salary) Performance achieved M Gallacher Performance metrics relating to delivery of operating plan, improving operational metrics, establishing appropriate business processes, improving cost base, embedding regulatory compliance, improving quality and establishing an effective new Exec Team. 30% R Neale Performance metrics relating to delivery of operating plan, driving ﬁnancial awareness and accountability across the Executive Team, implementing data analytics and insights reporting on commercial performance, and managing cash, liquidity and borrowing facilities. 100% 100% Long term incentives Awards vested during the ﬁnancial year On 10 April 2017, nil cost options equivalent to 80% of salary were granted to Giles Richell and to former Executive Directors Steve Birmingham and Mike Robinson under the 2017 Performance Share Plan. As disclosed in the 2018 Directors' Remuneration Report, Steve Birmingham and Mike Robinson were treated as good leavers under the 2017 Performance Share Plan. Giles Richell was also treated as a good leaver under the 2017 Performance Share Plan. All three individuals therefore retained interests in the unvested awards. Vesting of the awards were subject to EPS growth targets over the three-year performance period to 31 December 2019. These targets were 6% average annual growth for threshold performance (at which level 25% of the awards vest) and 12% average annual growth for maximum performance. The threshold EPS growth target was not met and the awards lapsed in full. 52 Annual Report & Accounts 2019 Annual Report & Accounts 2019 53 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 2017 Performance Share Plan 2018 M Gallacher R Neale Type of award Nil cost option Date of grant Percentage of salary Number of shares Exercise price Performance period 27 June 2019 27 June 2019 47% 47% 200,000 127,273 £nil 1 January 2021 - 31 December 2021 Vesting of the awards is subject to achievement of an EPS targets for the year ending to 31 December 2021. The targets are as follows. EPS for the year ending 31 December 2021 (%) Percentage of PSP award vesting¹ 5.03p 3.45p 100% 25% ¹For EPS below 3.45p no amount vests. Straight line vesting between threshold and maximum. Payments made to former Directors during the year and payments for loss of ofﬁce during the year As mentioned above, Giles Richell stepped down from the Board in the year. He received his salary, pension and beneﬁts until the date he left the Group on 31 August 2019 and following his departure date, he also received 3 payments of £16,596 in lieu of his unexpired noticed period. No 2019 bonus was awarded and his 2018 LTIP award was pro-rated to 6 February 2019. As disclosed in the 2018 Directors' Remuneration Report, under the terms of his exit agreement, Steve Birmingham received £10,000 equal monthly payments during January 2019 to August 2019 for pay (covering salary and beneﬁt) in lieu of his unexpired notice period. Statement of Directors' shareholding and share interests (Audited) The Directors who held ofﬁce at either 31 December 2019 or 31 December 2018 had the following interests in the ordinary shares of Safestyle UK plc at that date: Executive Directors M Gallacher R Neale G Richell Non-Executive Directors A C Lovell F Goldsmith J Porter C J Davies 31 December 2019 Number 31 December 2018 Number 50,000 50,000 n/a 130,000 20,000 9,671 n/a 50,000 - - 130,000 20,000 - 160,000 The interests of each individual, who served as a Director of the Group during the year, as at 31 December 2019 in the Group's share schemes were as follows: Director Plan Date of grant Exercise price Options held at 31 December 2018 Options granted in the period Options exercised in the period² Options lapsed in the period Options held at 31 December 2019 and status M Gallacher Safestyle UK 2017 PSP Safestyle UK 2017 PSP 18 June 2018 27 June 2019 £nil 733,333 - £nil - 200,000 Safestyle UK 2017 PSP 13 August 2018 £nil 350,000 - R Neale G Richell Safestyle UK 2017 PSP Safestyle UK 2017 PSP Safestyle UK 2017 PSP 27 June 2019 10 April 2017 18 June 2018 £nil - 127,273 £nil 41,913 £nil 350,000 - - - A C Lovell Individual share agreement 20 December 2018 £nil 250,000 - - - - - - - - - - 733,333¹ 200,000¹ 350,000¹ 127,273¹ 41,913¹ - (275,845)³ 74,155¹ - - 250,000² 54 Annual Report & Accounts 2019 ¹Unvested subject to performance conditions linked to EPS. ²Unvested subject to time and an overall business performance underpin. ³Pro-rated share options to 6 February 2019. Annual Report & Accounts 2019 55 Safestyle UK plc Strategic Report Governance Financials 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. Directors' Remuneration Report voting at the 2019 AGM The table below sets out the voting outcome at the Group's AGM held on 16 May 2019 in respect of the resolution to approve the Directors' Remuneration Report contained in the Group's 2018 Annual Report and Accounts. Votes for % for Votes against % against Total votes cast Votes withheld (abstentions) Approval of Directors' Remuneration report 50,529,483 80.11% 12,545,636 19.89% 60,075,119 637 Approval This Report was approved by the Board on 19 March 2020 and signed on its behalf by: Julia Porter Chairman of the Remuneration Committee 19 March 2020 Directors’ Remuneration Report Annual Report on Remuneration Implementation of Directors' Remuneration Policy for the ﬁnancial year commencing 1 January 2020 Information on how the Group intends to implement the Directors' Remuneration Policy for the ﬁnancial year commencing on 1 January 2020 is set out below. Salary / fees Rob Neale received an exceptional increase in his base salary, from £175,000 to £190,000 (9%) which is effective from 1 January 2020. This was the result of consideration of wider market benchmarks, his signiﬁcant development in role, additional management responsibilities assumed in early 2019 and his overall contribution to the business since he joined. The Board is satisﬁed that this award is entirely appropriate. Fiona Goldsmith's fees have increased to £55,000 (17%), effective from 1 January 2020, reﬂecting her additional duties as Senior Independent Director alongside those of Audit Committee chair. Julia Porter's fees have also increased to £55,000 (17%), also effective from 1 January 2020 reﬂecting her additional duties as chair of the Compliance Committee. This is in addition to an increase to £47,000 (12%) effective from 1 August 2019 on account of her additional duties as chair of the Remuneration Committee following Chris Davies' retirement in May 2019. Mike Gallacher, Executive Director and Alan Lovell, Chairman waived a general cost of living increase to their base salary and fees respectively for 2020. Annual incentive plan The Executive Directors' annual bonus structure will remain the same as in 2019. Executive Directors will be awarded an annual bonus opportunity of up to 100% of salary, based on delivering against stretching PBT targets (as regards 70% of the award) and a range of strategic and personal objectives (as regards the remaining 30% of the award). This provides a balanced scorecard approach to measuring and rewarding management performance during the year. As with the 2019 annual incentive plan, PBT will be measured before share based payments and non-underlying items. The strategic and personal objectives will be tailored to each individual and will focus around key performance metrics to deliver the 2020 plan. The PBT targets and strategic and personal objectives will be disclosed retrospectively in the 2020 Annual Report on Remuneration, where further detail of performance against the targets and objectives will also be provided. LTIP With the performance context for 2019, the Committee is aware that the performance thresholds in relation to the 2018 LTIP awards, which are based on performance levels that are considerably in excess of current market expectations, look extremely unlikely to be achieved at any level. The Committee is currently reviewing this matter and will consult with major shareholders on this point in the coming weeks. Awards under the Performance Share Plan in 2020 are expected to reﬂect the usual Policy at 80% to 100% of salary for Executive Directors. We are currently reviewing the associated performance criteria and targets and these will be disclosed in full in the 2020 Remuneration Report. Consideration by the Directors of matters relating to Directors' remuneration The Committee is composed of the Group's independent Non-Executive Directors, Julia Porter (Chair), Alan Lovell and Fiona Goldsmith. 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. 56 Annual Report & Accounts 2019 Annual Report & Accounts 2019 57 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 2019 Registered ofﬁce The registered ofﬁce of Safestyle UK plc is 47 Esplanade, St Helier, Jersey, JE1 0BD. Principal activities Promoting the success of the Group The Board consider, both individually and collectively, that they have acted in a way they consider, in good faith, to promote the success of the company for the longer term. The Board fully appreciates that the business can only grow and prosper through having regard for the views and needs of our customers, colleagues and the communities in which we operate, as well as our suppliers, the environment and the shareholders to whom we are accountable. The Board ensures that these requirements are met and the interests of our stakeholder groups are considered through a combination of the following: Ÿ Standing agenda points and papers presented at each Board meeting. Ÿ A rolling agenda of matters to be considered by the Board throughout the year, which includes strategy review days that consider the Group strategy for the longer-term. Ÿ Board presentations and reports which include monthly updates on Health & Safety along with operational, performance and people matters. Ÿ Regular engagement with our stakeholders, including, but not limited to, suppliers, customers and employees. Ÿ Consideration of the impact of the Company's operations on the community and the environment, and how this 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. can be improved. Shareholder communication Business review The Chairman's statement, the Chief Executive's statement and the Financial Review on pages xx to xx report on the Group's performance during the year and future developments. Dividends The directors do not propose a ﬁnal dividend for the year (2018: £nil). 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 2019 comprised a non-executive chairman, two executive directors and two 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 48 to 49 provides details regarding the Audit Committee members and its responsibilities. Remuneration Committee The Chairman of the Remuneration Committee is Julia Porter with Alan Lovell and Fiona Goldsmith 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 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. 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. Directors' indemnities and insurance 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. 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. 58 Annual Report & Accounts 2019 Annual Report & Accounts 2019 59 Safestyle UK plc Strategic Report Governance Financials Directors’ Report Substantial shareholdings As at 17 March 2020 the Group has been advised of the following interests in more than 3% of its ordinary share capital. Signiﬁcant Shareholders Shares Held % Alantra Asset Management Janus Henderson Investors Cambridge Global Asset Mgt Standard Life Invesco Advisors Inc Jupiter Asset Management Invesco Asset Mgt Ruffer 15,796,480 10,016,122 8,446,452 6,650,259 4,775,000 4,175,000 3,697,816 2,628,923 19.08% 12.10% 10.20% 8.03% 5.77% 5.04% 4.47% 3.17% 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 2021, 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, excluding the potential impact of COVID-19 which is considered below, the directors have a reasonable expectation that the Group has adequate resources to continue to trade for the foreseeable future. The uncertainty as to the future impact on the Group of the recent COVID-19 outbreak has been separately considered as part of the directors' consideration of the going concern basis of preparation. A number of potential downside scenarios have been modelled and in a scenario where a total loss of written and ﬁtted sales extends beyond the end of April 2020 there is a risk of the liquidity requirements of the business exceeding the total quantum of facilities available. Based on the above indications, the directors believe that it remains appropriate to prepare the ﬁnancial statements on a going concern basis. However, the speciﬁc downside scenario detailed above would indicate the existence of a material uncertainty which may cast signiﬁcant doubt on the Group's ability to continue as a going concern and that the Group may, as a consequence, be unable to realise its assets and discharge its liabilities in the normal course of business. Auditors KPMG LLP will sign the 2019 annual report and will then retire as external auditors. Following a comprehensive tender process, Grant Thornton UK LLP will be recommended for appointment as the Company's external auditors at the AGM in May 2020. 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 19 March 2020 Rob Neale Chief Financial Ofﬁcer 19 March 2020 60 Annual Report & Accounts 2019 Annual Report & Accounts 2019 61 Safestyle UK plc Strategic Report Governance Financials 62 Annual Report & Accounts 2019 Annual Report & Accounts 2019 63 Safestyle UK plc Strategic Report Governance Financials 64 Annual Report & Accounts 2019 Annual Report & Accounts 2019 65 Safestyle UK plc Financials 68 69 70 71 72 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 2019 Revenue Cost of sales Gross profit¹ Note 2019 £000 2018 £000 2,5 126,237 116,426 (94,337) (90,549) 31,900 25,877 at 31 December 2019 Assets Intangible assets - Trademarks Intangible assets - Goodwill Intangible assets - Software Intangible assets - Other Property, plant and equipment Right-of-use assets Deferred taxation asset Other operating expenses² (34,332) (42,004) Non-current assets Consolidated Statement of Financial Position Operating (loss) Finance income Finance costs³ Net finance costs (Loss) before taxation Underlying (loss) before taxation before non-recurring costs, Commercial Agreement amortisation and share based payments Non-recurring costs Commercial Agreement amortisation Share based payments (Loss) before taxation Taxation (Loss) for the year Basic EPS (pence per share) Diluted EPS (pence per share) 6 12 7 14 32 13 9 9 (2,432) (16,127) 2 (1,402) (1,400) 7 (142) (135) (3,832) (16,262) (1,518) (1,850) (452) (12) (8,744) (7,817) (75) 374 (3,832) (16,262) 526 2,964 (3,306) (13,298) (4.0p) (4.0p) (16.1)p (16.1)p ¹Prior year gross proﬁt includes £801k of non-recurring items. Adjusting for this gives underlying gross proﬁt of £26,678k in 2018. See Financial Review for details. ²Other operating expenses includes £1,850k of non-recurring items, £452k of Commercial Agreement amortisation and £12k of share based payments. Adjusting for these gives underlying other operating expenses of £32,018k. See Financial Review for details. ³Finance costs includes £526k of IFRS 16 related interest costs (see IFRS 16 note). 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. 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 Lease liabilities Deferred taxation liability Provision for liabilities and charges Current liabilities Provision for liabilities and charges Lease Liabilities Borrowings Non-current liabilities Total liabilities Total equity and liabilities 68 Annual Report & Accounts 2019 Annual Report & Accounts 2019 69 The accompanying notes form part of the ﬁnancial statements. The ﬁnancial statements were approved by the Board of Directors and authorised for issue on 19 March 2020 and were signed on their behalf by: R Neale Chief Financial Ofﬁcer Note 14 14 14 14 15 26 16 17 18 19 20 21 26 22 23 23 26 24 2019 £000 504 20,758 1,122 1,736 12,633 6,012 886 2018 £000 504 20,758 1,346 2,188 14,213 - 693 43,651 39,702 2,725 - 3,999 4,435 2,416 2,287 4,478 4,163 11,159 13,344 54,810 53,046 828 81,845 10,009 (66,527) 828 81,845 13,347 (66,527) 26,155 29,493 15,384 2,482 17 990 15,286 - 53 1,123 18,873 16,462 1,891 3,900 3,991 9,782 3,188 - 3,903 7,091 28,655 23,553 54,810 53,046 Safestyle UK plc Strategic Report Governance Financials Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows for the year ended 31 December 2019 for the year ended 31 December 2019 Share capital Share premium Proﬁt and loss account £000 £000 £000 Common control transaction reserve £000 Total equity £000 Balance at 1 January 2018 Total comprehensive (loss) for the year Transactions with owners recorded directly in equity: Equity settled share based payment transactions (see note 32) Deferred taxation asset taken to reserves (note 16) Equity settled Commercial Agreement (see note 14) Balance at 31 December 2018 Total comprehensive (loss) for the year Transactions with owners recorded directly in equity: Deferred taxation asset taken to reserves (see note 16) Equity settled share based payment transactions (see note 32) 828 - 81,845 - 24,712 (13,298) (66,527) - 40,858 (13,298) - - - - - - (374) 44 2,263 - - - (374) 44 2,263 828 - 81,845 - 13,347 (3,306) (66,527) - 29,493 (3,306) - - - - (44) 12 - - (44) 12 Balance at 31 December 2019 828 81,845 10,009 (66,527) 26,155 The accompanying notes form part of the ﬁnancial statements. Note 15 26 14 12 14 6 32 13 1 1 15 14 24 26 Cash flows from operating activities (Loss) for the year Adjustments for: Depreciation of plant, property and equipment Depreciation and impairment of right-of-use assets Amortisation of intangible fixed assets Finance income Finance expense IT project impairment Loss on sale of plant, property and equipment Equity settled share based payments charge / (credit) Taxation (credit) (Increase) in inventories Decrease in trade and other receivables Increase in trade and other payables (Decrease) / increase in provisions IFRS 16 prepaid lease costs IFRS 16 onerous leases Other interest (paid) Taxation received / (paid) Net cash inflow / (outflow) 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 Net cash outflow from investing activities Cash flows from financing activities Proceeds from loans and borrowings Transaction costs relating to loans and borrowings Payment of lease liabilities Net cash (outflow) / inflow from financing activities Net inflow / (outflow) in cash and cash equivalents Cash and cash equivalents at start of year Cash and cash equivalents at end of year The accompanying notes form part of the ﬁnancial statements. 2019 £000 (3,306) 1,666 4,322 904 (2) 1,402 113 - 12 (526) 4,585 (309) 479 98 (1,430) (413) 67 (1,508) (1,079) 2,540 4,538 (86) - 2 - (341) (425) - (235) (3,606) (3,841) 272 4,163 4,435 2018 £000 (13,298) 1,715 - 400 (7) 142 - 42 (374) (2,964) (14,344) (384) 81 4,422 2,282 - - 6,401 (142) (757) (8,842) (1,028) (30) 7 33 (855) (1,873) 3,903 - - 3,903 (6,812) 10,975 4,163 70 Annual Report & Accounts 2019 Annual Report & Accounts 2019 71 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 2019. 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 2019 (“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 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) (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 Amendments to References to the Conceptual Framework in IFRS Standards (effective 1 January 2020) Ÿ Amendments to IAS 1 and IAS 8 (effective 1 January 2020) Ÿ Amendments to IFRS 7, IFRS 9 and IAS 39 (effective 1 January 2020) Changes in signiﬁcant accounting policies IFRS 16 Leases transition The Group has applied IFRS 16 using the modiﬁed retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17. Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4 Determining Whether an Arrangement contains a Lease. The Group now assesses whether a contract is or contains a lease based on the new deﬁnition of a lease. Under IFRS 16, a contract is, or contains a lease, if the contract conveys a right to control the use of an identiﬁed asset for a period of time in exchange for consideration. On transition to IFRS 16, the Group elected to apply the practical expedient to continue to apply the outcome of the assessments made under IAS17 of which transactions are leases. It applied IFRS 16 only to contracts that were previously identiﬁed as leases. Contracts that were not identiﬁed as leases under IAS 17 and IFRIC 4 were not reassessed. The deﬁnition of a lease under IFRS 16 has been applied only to contracts entered into or changed on or after 1 January 2019. On transition, for leases classiﬁed as operating leases under IAS 17, lease liabilities were measured at the present value of the remaining lease payment, discounted at the Group's incremental borrowing rate as at 1 January 2019. Right-of-use assets are measured at an amount equal to the lease liability and adjusted for any prepayment in place. On transition, the Group used the following practical expedients when applying IFRS 16 to leases previously classiﬁed as operating leases under IAS 17. Ÿ Applied the exemption not to recognise right-of-use assets and liabilities for leases with less than 12 months of lease term. Ÿ Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease. Ÿ Safestyle has decided to rely on its view of whether leases are onerous applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application as an alternative to performing an impairment review. Ÿ Applied the low value exemption when deﬁning right-of-use assets and liabilities. Impact on ﬁnancial statements On transition to IFRS 16, the Group recognised additional right-of-use assets and additional lease liabilities. The impact on transition is summarised below. Right-of-use assets Property, plant and equipment Motor Vehicles Plant & Equipment Right-of-use assets Lease liabilities Property, plant and equipment Motor Vehicles Plant & Equipment Lease liabilities Reconciliation between assets and liabilities at transition: Lease liabilities Prepayments relating to IFRS 16 Leases at 31 December 2018 Onerous leases Right-of-use-assets When measuring lease liabilities for leases that were classified as operating leases, the Group discounted lease payments using its incremental borrowing rate at 1 January 2019. The rate applied is 7%. Operating lease commitment at 31 December 2018 as disclosed in the Group's consolidated financial statements Discounted using the incremental borrowing rate at 1 January 2019 Finance lease liabilities recognised as at 31 December 2018 Recognition exemption for leases with less than 12 months lease term at transition Lease liabilities recognised at 1 January 2019 1 Jan 2019 £000 6,088 3,360 293 9,741 £000 5,831 3,271 293 9,395 £000 9,395 413 (67) 9,741 £000 12,470 9,409 - (14) 9,395 Impact for the period As a result of initially applying IFRS 16, in relation to the leases that were previously classiﬁed as operating leases, the Group recognised £9,741k right-of-use assets and £9,395k of liabilities as at 1 January 2019. Also in relation to those leases under IFRS 16, the Group has recognised depreciation and interest costs, instead of operating lease expense. In relation to leases under IFRS 16, during the year, the Group recognised £3,835k of depreciation charges and £526k of interest costs from these leases. The P&L impact of adopting IFRS 16 versus accounting under IAS 17 is a cost of £42k in 2019. 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 2019. The actual trading cut-off date for the year end ﬂuctuates year on year and is based on the nearest Sunday to the end of December. 72 Annual Report & Accounts 2019 Annual Report & Accounts 2019 73 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 1 Basis of preparation (continued) 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 £(3.3)m in the year to 31 December 2019 (2018: (loss) of £(13.3)m) and had net current liabilities of £7.7m at 31 December 2019 (2018: net current liabilities of £3.1m). The Group is ﬁnanced by a £4.5m term loan and a £3.0m revolving credit facility, which matures in October 2021, after being extended by one year during 2019. The ﬁnance agreement contains certain covenants, including a minimum EBITDA to be tested on a cumulative monthly basis, which has been revised during 2019 such that the minimum EBITDA for covenant compliance has been reduced in 2019 and 2020. As at 31 December 2019, the £4.5m term loan was fully drawn on the facility, while the revolving credit facility was unutilised. At the end of February 2020, £2.0m of the revolving credit facility has been drawn down and the Group's net cash position was £0.1m (February 2019: net debt of £2.5m). The Directors have prepared forecasts covering the period to December 2021, built from the detailed Board approved budget for 2020. The forecasts include a number of assumptions in relation to sales volume and pricing growth, and margin improvements. Whilst the Group's trading and cash ﬂow forecasts have been prepared using current trading assumptions, the operating environment presents a number of challenges which could negatively impact the actual performance achieved. Excluding the potential impact of COVID-19 which is considered below, these risks include, but are not limited to, achieving forecast levels of order intake, the impact on customer conﬁdence as a result of general economic conditions and Brexit, achieving forecast margin improvements and the director's ability to implement cost saving initiatives in areas of discretionary spend where required. If future trading performance signiﬁcantly underperforms the Group's forecasts, this could impact the ability of the Group to comply with its covenant tests over the period of the forecasts. The Group's cash ﬂow forecasts and projections, taking account of reasonably possible changes in trading performance excluding the potential impact of COVID-19 (which is considered below), offset by mitigating actions within the control of management including reductions in areas of discretionary spend, show that the Group will be able to operate within the level of its facilities and associated covenants for a period of at least the duration of the facility agreement. The Group has started the year well, with proﬁt and order intake ahead of prior year which the directors believe further supports this basis of preparation. The uncertainty as to the future impact on the Group of the recent COVID-19 outbreak has been separately considered as part of the directors' consideration of the going concern basis of preparation. Thus far, the Group has not observed any material impact in trading performance due to COVID-19. In the downside scenario analysis performed, the directors have considered the reasonably plausible impact of the COVID-19 outbreak on the Group's trading and cash ﬂow forecasts. In preparing this analysis, a number of scenarios were modelled ranging from a 30% drop in written and ﬁtted sales both in April and May 2020, followed by a recovery through June, to a total loss of written and ﬁtted sales for April 2020 followed by a recovery through the ﬁrst half of May 2020. In each scenario, mitigating actions within the control of management, including reductions in areas of discretionary spend, have been modelled, but no ﬁxed cost reductions have been assumed. It is difﬁcult to predict the overall outcome and impact of COVID-19 at this stage and the duration of disruption to written and ﬁtted sales activity could be longer than anticipated. However, under the scenarios modelled, there is a risk of breaching the Group's ﬁnancial covenants and in a scenario where a total loss of written and ﬁtted sales extends beyond the end of April 2020 there is a risk of the liquidity requirements of the business exceeding the total quantum of facilities available. The directors note the ﬁnancial support commitment made by the UK Government as part of a £330bn funding package to support businesses on 17 March 2020. Whilst there is still uncertainty around this, the directors believe, based on the initial details circulated as part of the announcement, that the Group would qualify for ﬁnancial support. Based on the above indications the directors believe that it remains appropriate to prepare the ﬁnancial statements on a going concern basis. However, the speciﬁc downside scenario detailed above would indicate the existence of a material uncertainty which may cast signiﬁcant doubt on the Group's ability to continue as a going concern and that the Group may, as a consequence, be unable to realise its assets and discharge its liabilities in the normal course of business. The ﬁnancial statements do not include any adjustments that would result from the basis of preparation being inappropriate. 2 Summary of signiﬁcant accounting policies Revenue recognition The Group earns revenues from the sale, design, manufacture and installation of domestic double-glazed replacement windows and doors. There is no signiﬁcant judgement involved in the estimation of revenues and no material contract assets or liabilities are recognised. IFRS 15 requires revenue earned from contracts to be recognised in line with performance obligations based on a ﬁve-step model. Safestyle recognises revenue based on the stand-alone selling price of each performance obligation. The selling price is determined based on the contract agreed with the customer. Subsidies payable by Safestyle to third party ﬁnance providers where the customer takes out a ﬁnance product are recognised as a reduction to revenue. On inception of the contract the performance obligation is identiﬁed for each of the distinct goods or services to be provided to the customer. The following summarises the performance obligations identiﬁed and provides information on the time of when they are satisﬁed and the related revenue recognition policy. Revenue on sale of windows and doors The performance obligation in this case is the manufacture and ﬁnal installation of products. This doesn't meet the criteria for over-time recognition as control transfers to the customer on the completion of the installation and subsequent customer approval. Revenue is recognised at this point and payment is due on installation. Survey fees The survey fee is payable in advance of the survey being carried out. For customers that proceed with the contract to purchase, the amount received is treated as an advance payment and is recognised as revenue when the installation services are provided. For customers that do not proceed to purchase, the amount received for survey fees is recognised at the point at which the survey fee becomes non-refundable, which is after a period of time deﬁned in the contract. Non-recurring items Items that are either material because of their nature, non-recurring or whose signiﬁcance is sufﬁcient to warrant separate disclosure and identiﬁcation within the consolidated ﬁnancial statements are referred to as non-recurring items. The separate reporting of non-recurring items is important to provide an understanding of the Group's underlying performance. 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. Cost of sales Cost of sales principally comprises the costs of materials, direct labour, commissions and lead generation. Employee beneﬁts Obligations for contributions to deﬁned contribution pension plans are recognised as an expense in the income statement when they are due. Goodwill Goodwill is stated at cost less any accumulated impairment losses. Goodwill is not amortised but is tested annually for impairment. Intangible ﬁxed assets 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 Commerical 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. 74 Annual Report & Accounts 2019 Annual Report & Accounts 2019 75 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 2 Summary of signiﬁcant accounting policies (continued) Impairment 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 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. 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. 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. Taxation 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. 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. 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. 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 borrowings 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. 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 (policy applicable from 1 January 2019) The Group has applied IFRS 16 using the modiﬁed retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17. At the inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identiﬁed asset for a period of time in exchange for consideration. Provisions As a lessee 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-taxation 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 Annual Report and Accounts 2018. 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 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. 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 income statement 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). The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term, unless the lease transfers ownership of the underlying asset to the Group by the end of the lease term or the cost of the right-of-use asset reﬂects that the Group will exercise a purchase option. In that case the right-of-use asset will be depreciated over the useful life of the underlying asset, which is determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise the following: Ÿ Ÿ Ÿ Ÿ Ÿ Ÿ ﬁxed payments, including in-substance ﬁxed payments; variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date amounts expected to be payable under a residual value guarantee; and the exercise price under a purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Group is reasonably certain not to terminate early. The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, there is a change in the Group's estimate of the amount expected to be payable under a residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance ﬁxed lease payment. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, to the extent that the right-of-use asset is reduced to nil, with any further adjustment required from the remeasurement being recorded in proﬁt or loss. 76 Annual Report & Accounts 2019 Annual Report & Accounts 2019 77 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 2 Summary of signiﬁcant accounting policies (continued) Short-term leases and leases of low-value assets The Group has elected not to recognise right-of-use assets and lease liabilities for lease of low-value assets and short-term leases. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. Share based payments The grant date fair value of share-based payments awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the awards. The fair value of the awards granted is measured using an option valuation model, taking into account the terms and conditions upon which the awards were granted. The amount recognised as an expense is adjusted to reﬂect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions 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. 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. Assumptions and estimation uncertainties The assessment of whether trade receivables are recoverable is subject to management judgement. 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 provisions The Group has a number of 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. Recoverability of deferred taxation asset The deferred taxation asset of £886k has been recognised on the basis that the Group is forecasting to make sufﬁcient levels of proﬁts in future periods in line with the Turnaround Plan. Further details can be found in note 16. Where the fair value of the goods or services received cannot be reliably estimated, the entity measures the goods or services received, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders service. 5 Segmental information Dividends Dividends are only recognised as a liability to the extent that they are declared prior to the year end. 3 Financial risk management Financial risk factors 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. 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. The Group 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. Risk management is carried out by the Board of Directors. They identify and evaluate ﬁnancial risks in close co-operation with key employees. 6 Expenses and auditor's remuneration 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. Operating (loss) is stated after charging: Depreciation of plant, property and equipment: Owned assets Amortisation of intangibles assets Depreciation and impairment on right-of-use 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 2019 £000 2018 £000 1,666 1,017 4,322 - - - 91 39 24 1,715 400 - 42 3,396 1,488 70 30 12 78 Annual Report & Accounts 2019 Annual Report & Accounts 2019 79 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 7 Non-recurring costs Product guarantees provision Non-recurring costs charged to cost of sales Litigation Costs Restructuring and operational costs Fines Onerous Leases Impairment of right-of-use assets Commercial Agreement costs Commercial Agreement service fee Non-recurring pay awards IT project impairment Dilapidations provision Non-recurring items charged / (credited) to other operating expenses Total non-recurring costs Note a b c d e f g h i j k 2019 £000 - - - 1,058 - - 692 - (13) - 113 - 1,850 1,850 2018 £000 801 801 1,912 1,167 1,079 294 - 311 1,000 635 - 618 7,016 7,817 a) b) c) d) e) f) g) h) i) j) k) As part of a review by management of provisions made for the Group's future obligations in 2018, a revision to the estimates used for future product guarantee claims was made which management considered more accurately reﬂected the Group's obligations. £801k represented the impact on 2017 had this change in estimate been retrospectively applied. Litigation costs are expenses incurred as a result of the NIAMAC litigation in 2018. These costs were predominantly legal advisor's fees. Restructuring costs are expenses incurred, including redundancy payments, as a result of changes being made to reduce the cost structure of the business as part of the Turnaround Plan described in the CEO’s Statement. Fines relate to the HSE and WYTS ﬁnes incurred in 2018. Onerous leases represent an accrual for all rental costs up until the ﬁrst lease break date for properties that were closed in the prior year. Impairment costs relate to vacating properties recognised as assets under IFRS 16 where the lease commitment extends beyond 2019. Commercial Agreement costs are expenses incurred in securing the Commercial Agreement in 2018. These costs consisted 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. The provision was adjusted based on the actual performance in 2019 and a £13k reduction in the 2018 provision has been made. Non-recurring pay awards relate to the bonus payments made to executives in 2018. These were 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. This charge represents the impairment of a capital investment made in a new electronic survey system that was stopped following results of ﬁeld trials. The accounting policy for providing for exit obligations on leased property, principally dilapidations, was also assessed in 2018. In previous years, no provision has been made for these. Management concluded that a provision was appropriate based on new circumstances during the prior 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 No ﬁnal dividend in relation to 2019 was declared and no dividends were paid or declared in 2018. 9 Earnings per share a) Basic earnings per share The calculation of basic earnings per share has been based on the following (loss) attributable to ordinary shareholders and weighted- average number of shares outstanding. i) (Loss) attributable to ordinary shareholders (basic) 2019 £000 2018 £000 (Loss) attributable to ordinary shareholders (3,306) (13,298) ii) Weighted-average number of ordinary shares (basic) In issue during the year b) Diluted earnings per share No. of shares ‘000 82,809 No. of shares ‘000 82,809 *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 loss 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) attributable to ordinary shareholders (diluted) 2019 £000 2018 £000 (Loss) attributable to ordinary shareholders (3,306) (13,298) ii) Weighted-average number of ordinary shares (diluted) Weighted-average number of ordinary shares (basic) Effect of conversion of share options and share consideration No. of shares ‘000 82,809 7,166 No. of shares ‘000 82,809 2,270 89,975 85,079 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: Basic earnings per ordinary share (pence) Diluted earnings per ordinary share (pence)* 80 Annual Report & Accounts 2019 2019 (4.0) (4.0) 2018 (16.1) (16.1) Details of long term incentive plans can be found in note 32. Salary, bonus and other beneﬁts Pensions Share based payments and associated costs Compensation on loss of ofﬁce Total remuneration 2019 £000 1,823 78 161 135 2,197 2018 £000 2,356 64 201 19 2,640 Annual Report & Accounts 2019 81 Safestyle UK plc Strategic Report Governance Financials 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 were as follows: Wages and salaries Social security costs Other pension costs (see note 27) Share based payments (credit) / expenses (see note 32) The analysis of Directors' remuneration is shown in the Directors Remuneration Report. 12 Finance costs On borrowing facility On lease liabilities 2019 Number 2018 Number 276 90 291 657 2019 £000 18,927 1,920 789 12 21,648 2019 £000 876 526 1,402 316 96 312 724 2018 £000 19,409 1,886 777 (374) 21,698 2018 £000 142 - 142 Notes to the Consolidated Financial Statements 10 Key management remuneration (continued) Detailed disclosures of individual remuneration, pension entitlements and share options, for the Directors who served during the year are as follows: 2019 Executive directors M Gallacher R Neale G Richell Non-executive A C Lovell C J Davies F Goldsmith J Porter 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 Salary and fees £000 Beneﬁts £000 Annual bonus £000 LTIP Pension £000 £000 275 175 146 120 20 47 44 827 183 81 175 121 66 55 48 16 7 19 46 817 21 14 10 - - - - 45 11 6 13 15 4 - - - - - - 49 - - - - - - - - 350 100 164 - - - 24 - - - - 638 15 9 - 111 - - - 135 - - - - - - - - - - - - 22 14 9 - - - - 45 - 6 15 10 5 - - - - - - 36 Total £000 333 212 165 231 20 47 44 1,052 544 193 367 146 75 55 72 16 7 19 46 1,540 G Richell resigned from the Board on the 5th March 2019 and his fees therefore reﬂect a part year. C Davies resigned from the Board on the 16th May 2019 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 2019 in the Group's share schemes were as follows: G Richell M Gallacher R Neale G Richell A C Lovell M Gallacher R Neale Plan LTIP 2017 LTIP 2018 LTIP 2018 LTIP 2018 Individual LTIP 2019 LTIP 2019 Options held at start of period Options granted in period Options exercised in period Options lapsed in period Options held at end of period 41,913 733,333 350,000 350,000 250,000 - - 1,725,246 - - - - - 200,000 127,273 327,273 - - - - - - - - - - - (275,845) - - - - 41,913 733,333 350,000 74,155 250,000 200,000 127,273 2,052,519 82 Annual Report & Accounts 2019 Annual Report & Accounts 2019 83 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 13 Taxation Recognised in the statement of comprehensive income 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) Total taxation (credit) The current year taxation (credit) is split into the following: Taxation (credit) Total taxation (credit) Reconciliation of effective taxation rate Current taxation reconciliation (Loss) for the year Total taxation (credit) (Loss) excluding taxation Expected taxation (credit) based on the standard rate of corporation taxation in the UK of 19.00% (2018: 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) 2019 £000 2018 £000 - (253) (253) (489) 45 171 (273) (526) (526) (526) 2019 £000 (3,306) (526) (3,832) (2,461) 155 (2,306) (658) - - (658) (2,964) (2,964) (2,964) 2018 £000 (13,298) (2,964) (16,262) (728) (3,090) 229 10 (82) 45 143 (127) 155 (45) (526) (2,964) A reduction in the UK corporation tax rate from 19% to 17% (effective from 1 April 2020) was substantively enacted on 6 September 2016, and the UK deferred taxation asset/(liability) as at 31 December 2019 has been calculated based on this rate. In the 11 March 2020 Budget it was announced that the UK taxation rate will remain at the current 19% and not reduce to 17% from 1 April 2020. This will have a consequential effect on the group’s future tax charge. If this rate change had been substantively enacted at the current balance sheet date the deferred taxation asset would have increased by £104k. 14 Intangible assets Cost At 1 January 2018 Additions Transfer At 31 December 2018 Additions Transfer At 31 December 2019 Accumulated amortisation and impairment At 1 January 2018 Charge for the year At 1 January 2019 Charge for the year Impairment charge At 31 December 2019 Goodwill Trademark Software £000 £000 £000 Assets under the course of construction £000 Commercial Agreement £000 Total £000 20,758 30 - 20,788 - - 20,788 - 30 30 - - 30 504 - - 504 - - 504 - - - - - - 1,717 - 579 2,296 - 606 2,902 1,094 295 1,389 452 - 1,841 907 1,061 163 855 (579) 439 341 (606) 174 - - - - 113 (113) 439 61 - 2,263 - 2,263 - - 2,263 - 75 75 452 - 527 23,142 3,148 - 26,290 341 - 26,631 1,094 400 1,494 904 113 2,511 2,188 1,736 24,796 24,120 NBV at 31 December 2018 NBV at 31 December 2019 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 2019. For the review at 31 December 2019, the recoverable amount of the CGU has been determined from value in use calculations based on cash ﬂow projections covering a three year period to 31 December 2022. After the third year a sales growth of 2% has been applied into perpetuity based on the expected inﬂation rate. The assessment was performed on a value in use basis using a 9% discount rate (2018: 7%) and the following year's budget as approved by the Board, followed by a forecast for 2022. Sales growth assumptions are 7% in 2020, 7% in 2021 and 8% in 2022. There are no reasonably possible changes 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 share consideration that the Group expects to issue under the terms of the Commercial Agreement as described in the Financial Review 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. Under the terms of the agreement, 4,000,000 shares will be issued in October 2020. 15 Plant, property and equipment Freehold property Leasehold improvement Plant and machinery £000 £000 £000 Ofﬁce and computer equipment £000 Motor vehicles £000 Assets under the course of construction £000 Cost At 1 January 2018 Additions Transfers Disposals At 31 December 2018 Additions Transfers At 31 December 2019 Depreciation At 1 January 2018 Charge for the year Disposals At 31 December 2018 Charge for the year At 31 December 2019 NBV at 31 December 2018 NBV at 31 December 2019 9,281 - 219 - 9,500 - 7 9,507 413 185 - 598 185 783 8,902 8,724 337 - 88 - 425 - - 425 58 101 - 159 124 283 266 142 10,147 - 546 (708) 9,985 - 68 10,053 4,963 1,167 (635) 5,495 1,106 6,601 4,490 3,452 1,440 - 217 (2) 1,655 - 34 1,689 863 262 - 1,125 251 1,376 530 313 8 - - - 8 - - 8 6 - - 6 - 6 2 2 Total £000 21,278 1,028 - (710) 21,596 86 - 21,682 6,303 1,715 (635) 7,383 1,666 9,049 65 1,028 (1,070) - 23 86 (109) - - - - - - - 23 - 14,213 12,633 84 Annual Report & Accounts 2019 Annual Report & Accounts 2019 85 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 16 Deferred taxation asset Balance at beginning of period Movement in deferred taxation asset on losses recognised in income Movement in deferred taxation asset on share based payments recognised in income Share based payments (charge) / credit recognised in equity Balance at end of period The deferred taxation asset provided in the ﬁnancial statements at 17% (2018: 17%) is as follows: Losses Share based payments 2019 £000 693 244 (7) (44) 886 2019 £000 853 33 886 2018 £000 28 609 12 44 693 2018 £000 609 84 693 Opening provision against trade receivables Provision utilised in year Expensed in year Closing provision for trade receivables 19 Cash and cash equivalents Cash and cash equivalents Balance at end of period 2019 £000 1,206 (611) 477 1,072 2019 £000 4,435 4,435 2018 £000 1,045 (573) 734 1,206 2018 £000 4,163 4,163 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 £470k (2018: £1,575k) 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 There are no unrecognised taxation losses (2018: £nil). Authorised The deferred taxation asset of £886k has been recognised on the basis that the Group is forecasting to make sufﬁcient levels of proﬁts in future periods in line with the turnaround plan. 17 Inventories Raw materials and consumables Work in progress Finished goods Stock recognised in cost of sales during the period was £21,434k (2018: £21,264k). 18 Trade and other receivables Trade receivables (net of provisions) Other receivables Prepayments and accrued income 2019 £000 2,149 42 534 2,725 2019 £000 1,702 16 2,281 3,999 2018 £000 1,702 53 661 2,416 2018 £000 2,184 22 2,272 4,478 Contractual payment terms with the Group's customers are typically zero days. Payment is due upon installation. The above receivables are shown net of the following provisions for doubtful debts. 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 2019 £000 2018 £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 86 Annual Report & Accounts 2019 Annual Report & Accounts 2019 87 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) to The Consolidated Income Statement for the period Balance at end of period The deferred taxation asset provided in the financial statements at 17% (2018: 17%) is as follows: Capital allowances in excess of depreciation 23 Provisions for liabilities and charges 2019 £000 6,675 2,167 3,197 3,345 2018 £000 5,921 2,905 2,305 4,155 15,384 15,286 2019 £000 53 (36) 17 17 17 2018 £000 90 (37) 53 53 53 Dilapidations Product guarantees Commercial Agreement Total 2019 £000 767 (182) 203 - - 788 201 587 788 2018 £000 2019 £000 2018 £000 - - 767 - - 767 279 488 767 2,544 (1,187) 736 - - 2,093 789 1,304 2,093 2,029 (1,197) 1,712 - - 2,544 844 1,700 2,544 2019 £000 1,000 - - (13) (987) - - - - 2018 £000 - - 1,000 - - 1,000 - 1,000 1,000 2019 £000 2018 £000 4,311 (1,369) 939 (13) (987) 2,881 990 1,891 2,881 2,029 (1,197) 3,479 - - 4,311 1,123 3,188 4,311 Balance at beginning of year Utilised in year Provided in year Released in year Reclassified in year to accruals Balance at end of year Current Non current Balance at end of year 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 warranty provision is made for the expected future costs of rectifying faults arising within the guarantee period and then discounted at 9% 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 Financial Review. The cash consideration is conﬁrmed at £987k and is payable in October 2020. As there is no estimation involved the £987k is recognised as an accrual at 31 December 2019. 24 Borrowing facilities The total borrowing facilities available at 31 December 2019 were as follows: Amounts drawn down Facilities available Nominal interest rate Maturity date 2019 £000 2018 £000 2019 £000 2018 £000 Term bank loan Revolving credit facility Less: Prepaid arrangement fees² LIBOR + 7.0% LIBOR + 7.0%¹ October 2021 October 2021 4,500 - (509) 3,991 4,500 - (597) 3,903 4,500 3,000 - 7,500 4,500 3,000 - 7,500 ¹Interest is payable monthly and is charged at the 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 term of the facility which expires in October 2021. Changes in loans and borrowings from ﬁnancing activities At 1 January 2019 Changes from financing cash flows Proceeds from loans and borrowings Repayment of borrowings 2019 £000 3,903 2,500 (2,500) 2018 £000 - 4,500 - Total changes from financing activities - 4,500 Other changes Transaction costs capitalised Interest expense Interest paid Total liability-related other changes At 31 December 2019 25 Financial instruments (235) 876 (553) 88 3,991 (651) 142 (88) (597) 3,903 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 2019, £4,500k of loans were outstanding (2018: £4,500k). 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. Principal ﬁnancial instruments 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. 88 Annual Report & Accounts 2019 Annual Report & Accounts 2019 89 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 25 Financial instruments (continued) Financial assets At the reporting date, the Group held the following ﬁnancial assets: Trade receivables Other receivables Cash and cash equivalents Financial liabilities 2019 £000 1,702 16 4,435 6,153 2018 £000 2,184 22 4,163 6,369 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 Market risk 2019 £000 6,675 3,197 3,991 13,863 2018 £000 5,921 2,305 3,903 12,129 The Group is not materially exposed to changes in foreign currency exchange rates or interest rate movements. Trade receivables totalling £519k (2018: £531k) are secured by charges against the debtors' properties. 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. The nature of the Group's business and current stage of its development are such that customers 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. At 31 December 2019, the Group's trade receivables balance was £1,702k (2018: £2,184k). 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). Debt over 1 yr old Speciﬁc Debtors to be written off Standing Orders Debt less than 1 yr old Debt with charges over property Weighted average loss rate 100.0% 100.0% 33.0% 26.0% 0.0% In 2018, debt over 1 year old with charges over property were provided at 100%. Due to recent recovery rates observed when assessing the ECL, no provision has been made in 2019. The following table provides information about the exposure to ECLs for trade receivables at 31 December 2019. < 1 month overdue 1-2 months overdue 2-3 months overdue 3-12 months overdue > 1 Year Total receivables Gross 2019 £000 454 259 121 674 1,266 2,774 Loss allowance 2019 £000 (12) (11) (9) (361) (679) (1,072) Net 2019 £000 442 248 112 313 587 1,702 Gross 2018 £000 624 416 327 1,015 1,008 3,390 Loss allowance 2018 £000 (19) (18) (5) (156) (1,008) (1,206) Net 2018 £000 605 398 322 859 - 2,184 All debtors are categorised the same and are not credit impaired. The range of reasonably possible outcomes within the next ﬁnancial year is that debtors provided for of £1,072k may be recovered in full or some of the unprovided debtors may become irrecoverable. £519k of trade receivables over one year overdue (2018: £531k) and are secured by ﬁxed charges over properties and therefore no provision is made for these balances. £68k of the balance relates to customers setup on standing order (2018: £40k). 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 2019, the Group had £4,435k (31 December 2018: £4,163k) of cash reserves. After deducting borrowings of £3,991k, which are stated net of arrangement fees, net cash of the Group was £444k at the end of the year (2018: £260k). The £3,000k revolving credit facility was undrawn at the end of the year. The Group had net cash of £0.1m at the end of February 2020 (Feb 2019: net debt of £(2.5)m. 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. The Group's borrowing facility was extended by one year during 2019 and matures in October 2021. 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. 90 Annual Report & Accounts 2019 Annual Report & Accounts 2019 91 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 26 IFRS 16 Assets Balance at 1 January 2019 Additions Depreciation Impairment 31 December 2019 Liabilities Balance at 1 January 2019 Payment Additions Interest 31 December 2019 Properties Motor vehicles Equipment Total 6,088 219 (1,140) (487) 4,680 5,831 (1,371) 219 367 5,046 3,360 374 (2,540) - 1,194 3,271 (2,597) 374 145 1,193 3,271 (2,452) (2,452) 374 145 (145) 374 1,193 293 - (155) - 138 293 (164) - 14 143 9,741 593 (3,835) (487) 6,012 9,395 (4,132) 593 526 6,382 293 9,395 (150) (150) (3,606) (3,606) - 14 (14) - 143 593 526 (526) 593 6,382 Reconciliation of movements of liabilities to cash flows arising from financing activities Balance at 1 January 2019 Changes from financing cash flows Payment of lease liabilities Total changes from financing cash flows Other changes New leases Interest expense Interest paid Total liability-related other changes Balance at 31 December 2019 5,831 (1,004) (1,004) 219 367 (367) 219 5,046 The interest expense recognised in the proﬁt and loss statement is in the table above. No expenses relating to short-term leases and low- value leases has been recognised. The total cash outﬂow for leases is £4,132k. This comprises the payment of lease liabilities of £3,606k and the interest paid £526k. Liabilities - classification The following table sets out a maturity analysis of lease liabilities: Current (<1 year) Long term (>1 year) 27 Pension costs Properties Motor vehicles Equipment 1,404 3,642 5,046 976 217 1,193 102 41 143 Total 2,482 3,900 6,382 The charge for the period amounts to £789k (2018: £777k) and relates to contributions paid into a money purchase scheme in the period. 28 Commitments At 31 December, the future minimum lease payments under non-cancellable leases were payable as follows: 29 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 Style Group Holdings Limited Style Group Limited* HPAS Limited* Windowstyle UK Limited* Safestyle UK Limited* Style Group Europe Limited* Safeglaze (Milnrow) Ltd* / ** 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 *Owned Indirectly ** Safeglaze (Milnrow) Ltd was dissolved on 4th February 2020. The registered address of all companies is Style House, 14 Eldon Place, Bradford, BD1 3AZ. 30 Related party transactions During the year ended 31 December 2019 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 (2018: £3.2m) and received no dividends (2018: £nil). At the year end, total amounts receivable from subsidiaries were £9.7m (2018: £9.6m). Transactions with key management personnel are shown in note 10. 31 Ultimate controlling party Safestyle UK plc is quoted on the stock exchange (AIM) and ultimate control is exercised by the shareholders. 32 Share based payments At 31 December 2019 the Group had the following share based payment arrangements: LTIP The Group operates an equity-settled LTIP remuneration scheme for Directors and certain management ("LTIP 2017", "LTIP 2018" & "LTIP 2019"). On 27th June 327,273 options were granted, in addition to 820,375 options granted on 25th June ("LTIP 2019"). 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: 2019 2018 Number of share options Weighted average exercise price Number of share options Weighted average exercise price 3,223,600 1,147,648 - - (1,146,423) 3,224,825 - £0.17 £nil - - £0.47 £nil - 907,359 2,788,163 - - (471,922) 3,223,600 - £1.51 £nil - - £0.37 £0.17 - 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 2019 £000 - - - - - - - - 2018 £000 2,907 1,136 198 146 1,431 4,428 2,224 12,470 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 Lease costs are accounted for under IFRS 16 in 2019 and under IAS 17 in 2018. In 2018, £4,884k was recognised in the consolidated statement of comprehensive income. There were no capital commitments at 31st December 2019 (2018: £nil) 92 Annual Report & Accounts 2019 Annual Report & Accounts 2019 93 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements 32 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 period. LTIP 2019 LTIP 2019 LTIP 2018 LTIP 2018 LTIP 2018 LTIP 2017 Grant date Vesting date Lapsing date Risk free interest rate Expected volatility Expected option life (in years) Weighted average exercise price Weighted average fair value of options granted Dividend yield Remaining contractual life 25/06/2019 25/06/2022 25/06/2029 0.52% 61.22% 3.00 £0.00 27/06/2019 27/06/2022 27/06/2029 0.56% 60.79% 3.00 £0.00 19/10/2018 18/06/2021 19/10/2028 0.85% 60.90% 2.67 £0.00 15/08/2018 18/06/2021 15/08/2028 0.75% 51.90% 2.84 £0.00 18/06/2018 18/06/2021 18/06/2028 0.78% 47.10% 3.00 £0.00 10/04/2017 10/04/2020 10/04/2027 0.15% 33.60% 3.00 £0.00 64.70p 0.00% 9.50 65.20p 0.00% 9.49 56.60p 0.00% 8.81 33.00p 0.00% 8.63 55.90p 0.00% 8.47 256.00p 5.71% 7.28 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. Prior to 2019, 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. For 2019 options, there is a sufﬁciently long share price dataset over which to measure volatility for the LTIP Awards. SAYE On 7 June 2019 the company launched a new equity settled share save (SAYE) scheme ("SAYE 2019") in addition to the existing schemes ("SAYE 2017" and "SAYE 2018") 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. All schemes require employees to remain an employee at the vesting date. 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 2019 2018 Number of share options Weighted average exercise price Number of share options Weighted average exercise price 803,292 449,800 - (319,275) 933,817 - £0.57 £0.72 - £0.71 £0.66 - 204,125 794,139 - (194,972) 803,292 - £2.10 £0.49 - £1.92 £0.57 - 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 exercise price Weighted average fair value of options granted Dividend yield Remaining contractual life SAYE 2019 SAYE 2018 SAYE 2017 07/06/2019 01/07/2022 31/12/2022 0.49% 59.24% 3.32 £0.72 43.30p 0.00% 3.00 08/05/2018 08/05/2021 08/05/2021 0.92% 48.50% 3.35 £0.49 24.70p 0.00% 1.92 25/04/2017 01/06/2020 01/12/2020 0.21% 34.17% 3.35 £2.51 68.60p 5.53% 0.92 Prior to 2019, 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. For 2019 options, there is a sufﬁciently long share price dataset over which to measure volatility for the LTIP Awards. Alan Lovell Options On 20 December 2018, the Group issued 250,000 equity settled options to its Non-Executive Chairman, Alan Lovell. In order to vest, Alan Lovell must be the Chairman at the vesting date. There are no ﬁnancial targets, but there is a general business performance underpin. The number 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 2019 2018 Number of share options Weighted average exercise price Number of share options Weighted average exercise price 250,000 - - - 250,000 - - - - - - - - 250,000 - - 250,000 - - - - - - - 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% 8.98 20/12/2018 16/07/2020 20/12/2028 0.71% 76.50% 1.57 £0.86 £0.00 86.30p 0.00% 8.98 94 Annual Report & Accounts 2019 Annual Report & Accounts 2019 95 Safestyle UK plc Strategic Report Governance Financials Notes to the Consolidated Financial Statements Notes 32 Share based payments (continued) Prior to 2019, 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. For 2019 options, there is a sufﬁciently long share price dataset over which to measure volatility for the LTIP Awards. The total share-based payment expense / (credit) comprises: Equity settled - LTIP Equity settled - SAYE Equity settled - Alan Lovell Options 33 Contingent liability 2019 £000 (125) 26 111 12 2018 £000 (2) (375) 3 (374) The Group uses the services of a large number of self-employed individuals for marketing, sales, surveying and installation purposes. The Group is currently involved in a compliance review by HMRC in respect of the employment status of these individuals. This review has been ongoing for over two years. The Group has operated this self-employed model consistently for a number of years and there has been no material change to the underlying business model during this time. The Group continues to monitor developments in legislation and case law and has sought professional advice to ensure the rules are being applied correctly. The Group believes that its approach in this area is comparable with many other companies operating in this industry and wider sector where the use of self-employed agents and contractors is the primary source of specialised resource. Furthermore, the Group is aware that HMRC has previously assessed some of its self-employed agents and has recovered unpaid taxes from these individuals on that basis. The Group will continue to work with HMRC to respond to any further queries and believes that it has followed professional advice and applied the requirements diligently. While the compliance review is ongoing, the Group acknowledges that there is a potential risk of employee status ﬁndings by HMRC in respect of one or more groups of self-employed workers, however at this time the Group believes that the chance of this is unlikely based on the facts and circumstances set out above. It would not be practicable to indicate any potential ﬁnancial impacts of any status rulings at this time. 96 Annual Report & Accounts 2019 Annual Report & Accounts 2019 97

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