Safestyle has now released their interim results for the year ending 2018.
Revenues collapsed by £21.9M when compared to the first half of last year. Cost of sales also declined but obviously less than revenues and gross profit was down £13M. Share based payments saw a £756K reverse but there was £1.1M of litigation costs, £233K of restructuring costs, £184K operational costs, an £859K HSE fine, £468K of onerous lease provisions and a £163K growth in depreciation and amortisation. Other operating expenses were down £731K but the group saw a £14.5M detrimental swing to an operating loss. Tax costs reduced by £2.9M to give a loss for the period of £4.7M, a detrimental movement of £11.6M year on year.
When compared to the end point of last year, total assets declined by £3.7M, driven by a £6.4M decline in cash levels, partially offset by a £933K increase in current tax assets and an £816K growth in inventories. Total liabilities increased during the period as a £776K decline in tax liabilities was more than offset by a £2.5M growth in payables. The end result was a net tangible asset level of £13.2M, a decline of £5.6M over the past six months.
Before movements in working capital the group had a £14.8M swing to a cash loss of £5.3M. There was a modest cash inflow from working capital and after tax payments reduced by £304K the net cash outflow from operations was £5M. The group spent a net £1.4M on capex, mainly relating to the investment in the digital transformation project, to give a cash outflow of £6.4M before financing. This was also the total cash outflow for the period to leave the group with a cash level of £4.6M at the period-end.
Going forward there has been a steady improvement in the daily order intake which is almost 12% higher for September to date than it was at the start of July. This improvement in order intake has now flowed into revenue in the quarter, however, as the improvement came too late to affect the installation volumes which resulted in a weaker Q3 performance.
Overall the rate of market decline in the first half was 6% and the group’s market share has declined from 10.8% to 8.5%. The number of employees and agents working with the group declined sharply in Q1 which created a huge disruption in their operations and resulted in a material reduction in leads, sales and installation capacity.
Leads generated from direct response media represented a slight decline from 42,680 to 41,306 but leads from other sources, particularly canvass which was disrupted by the actions of Safeglaze, declined by 65%. Conversion of leads to orders improved by 18%, partially offsetting the reduction in leads. There was a 31% decline in the volume of orders to 21,724, a 29% decline in the volume of frames installed to 99,491 but a 3% growth in the average unit price to £616.
A price increase was implemented at the start of the year to negate cost increases as a result of Sterling weakness and commodity and silicone inflation. In addition there was a significant year on year increase in Pay Per Click rates driven by increased online competition; there has been an increased usage of scaffolding to ensure teams are safely working at height; and agent commission costs as a percentage of sales increased as the business responded to the more competitive environment, all of which helped to increase costs.
During the period there was a fine from the HSE of £900K following prosecution for a working at height accident in March 2017. Steps have been taken to avoid a recurrence. These measures include an increased use of scaffolding, investment in other solutions for working safely at height, establishing a new group health and safety function and significantly increased safety audits.
A turnaround plan has been developed. The first phase aimed to stabilise the business through the establishment of a new board, to resolve the litigation and to ensure they have sufficient liquidity in place whilst developing the next phase of the plan. With the group having now stabilised this phase is largely complete. The second phase which will run through 2019 is designed to return the group to profitability by recovering the momentum lost in their lead generation, sales, surveying and installation teams whilst also improving margins and making the business more efficient. The third phase of the plan aims to accelerate growth through a combination of brand investment, the establishment of a national training academy and leveraging their digital platform.
In May the group issued a claim seeking injunctive relief and damages against Safe Glaze UK. The claim asked the court to determine whether the group was entitled to injunctive relief and damages from what the group considers to be passing off, the misuse of confidential information, unlawful means conspiracy and malicious falsehood. They also applied for urgent interim relief pending the trial. A series of injunctions were put in place and in early September the group settled the claim. In the settlement, Safe Glaze agreed that the existing court injunctions will be replaced by appropriate undertakings to the court. The settlement should prevent the possibility of any acts of intimidation of Safestyle reps and Safe Glaze have agreed to change their name.
There have been a number of changes to the board. CEO Steve Birmingham and executive director Mike Robinson have left the group along with Chairman Steve Halbert and non-executive director Peter Richardson. Mike Gallacher was appointed CEO in May having most recently been CEO of First Milk Ltd, a dairy company owned by British family farms. Alan Lovell was appointed Chairman in July and has been chairman of Flowgroup. Rob Neale replaced Mike Robinson as CFO having most recently been head of leisure travel finance at Jet2.com
As they exit Q3, the opening order book will be higher than originally forecast and as that converts into revenue, the board still expects that the group will be generating modest operating profits in Q4. As a result they expect to report an underlying pre-tax loss for the full year in the region of £6.5M.
They are implementing their turnaround plans and are making progress in recruitment, process improvement, efficiencies and various other margin-enhancing initiatives. Notwithstanding an uncertain consumer environment and while they do not anticipate an immediate recovery back to 2016 and 2017 levels of financial performance, the board’s expectations of a return to profitability in 2019 remain unchanged.
As can be seen there were a number of non-recurring costs in the period. Litigation costs of £1.1M were incurred as a result of the Safe Glaze legal action and mostly refer to legal advisor fees. Fines of £859K relate to the HSE fine. Onerous leases of £468K represent an accrual for all rental costs up until the first lease break date for properties that were closed and restructuring and operational costs of £417K are expenses incurred as a result of changes being made to reduce the cost base of the business.
The board are not declaring an interim dividend for this year unsurprisingly.
Overall then this has been a disastrous period for the group. They have swung to a heavy loss and operating cash outflow and the net assets deteriorated. This is being blamed by the activities of a new competitor but it almost seems to have gone un-noticed that they have also received a hefty fine for unsafe working conditions. They have made wholesale changes to the board and expect Q4 to show a modest profit but this until this starts to show I feel it sensible to steer clear here.
On the 7th November the group announced that Chairman Alan Lovell purchased 30,000 shares at a value of £29K. He now owns 130,000 shares in the company.
On the 10th December the group announced that non-executive director Fiona Goldsmith purchased 20,000 shares at a value of £16.6K. This is her maiden purchase.
On the 17th December the group released a trading update. Since the commercial agreement, they have experienced a significant increase in their contracted workforce across their canvass, sales, surveying and installations operations which has resulted in an improved sales order intake that was in line with the same six week period last year.
Linked to this growth in workforce the group has invested more than budgeted in lead generation, commissions and overheads. Whilst management expects that turnover for the last month of the year will be head of previously forecast, the majority of the benefit will only occur in 2019.
As a result of the timing difference between incurring these higher costs and the installations taking place, the board now expects that they will deliver an underlying loss of between £8.2M and £8.6M this year. As a result of this, however, the board is confident that the recovering in performance in 2019 will be head of current market expectations.