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Redde PLC   -  REDD   

Final Results

Released 07:00 05-Sep-2019

RNS Number : 2790L
Redde PLC
05 September 2019
 

    • News Release

Redde plc

("Redde" or "Group")

 

Issue Date: 5 September 2019

 

Results for the year ended 30 June 2019

 

 Improved revenue and profits in a challenging year

 

 

Redde, a leading provider of mobility, incident management solutions and legal services to motorists, car dealerships, fleet owners and the insurance industry announces full year results:

 

Financial headlines

 

A summary of the key financial performance indicators is set out in the table below:

 

 

 

 

 

12 months ended

12 months ended

Change

 

30 June 2019

30 June 2018

 

Financial KPIs

 

 

 

Revenue (£'000)

589,724

526,981

11.9%

Profit before taxation (£'000)

41,654

38,812

7.3%

Adjusted profit before taxation*

49,288

46,021

7.1%

EBIT (£'000)

41,942

38,982

7.6%

Adjusted EBIT* (£'000)

49,576

46,191

7.3%

EBITDA ** (£'000)

54,919

55,435

(0.9)%

Debtor days ***

116

105

(11) days 

Net debt (£'000)

(34,685)

(8,459)

(26,226)

Adjusted* basic EPS

13.44p

13.27p

1.3%

Statutory basic EPS

11.28p

11.36p

(0.7)%

Total dividends for year****

11.65p

11.65p

unchanged 

 

* Adjusted measures exclude the impact of the amortisation of intangibles, share based payments and exceptional items ("adjustment items") described in Note 6.

** Calculation of EBITDA and operating cash flow is analysed in the consolidated statement of cash flows

*** Calculation of debtor days is as outlined in note 14.

**** subject to shareholder approval of the recommended final dividend of 6.15p per share

 

Operational headlines

 

·      9.4% growth in credit hire cases

·      Total number of hire days increased by 10.7%

·      5.2% increase in number of repair cases

·      Year end fleet up 10% to 10,711 (2018: 9,741) - reflecting increased demand

·      Revenue generating fleet utilisation maintained above 80.0% at 81.5%

 

Commenting on the Group's results and prospects, Martin Ward, Chief Executive Officer, said:

 

"The ongoing strategy of the Group is sustainable and profitable growth. This year we have seen record revenues and further underlying growth in adjusted profit before tax. We have broadened the reach of the Group and, through the continuing benefits of past acquisitions, diversified our income streams. We continue to seek further opportunities to build scale and diversify into related markets where the returns and investment case are attractive.

 

"The Board is pleased to be proposing a continued substantial dividend pay-out with an aggregate proposed amount of 11.65p in line with last year. Going forward, the Board intends to at least maintain the absolute dividend amount. The Group is well funded and has substantial unutilised funding lines to support its trading and future growth.

 

"We have already reported the loss of an insurer account ending in November and a renewal, on a long-term basis, with one of our large insurers. The Group has also won several new business contracts which will come on line in the current financial year. We have a great team of motivated people to support the Group's aims and believe there is ample opportunity to further develop the Group's services."

Enquiries

 

 

 

Redde plc

Tel: 01225 321134

 

Martin Ward - Chief Executive Officer

 

 

Steve Oakley - Chief Financial Officer

 

 

 

 

 

Cenkos Securities plc (Nominated Adviser and Joint Broker)

Tel: 0207 397 8900

 

Giles Balleny

Harry Hargreaves

 

 

 

 

 

N+1 Singer Capital Markets Limited (Joint Broker)

Tel: 0207 496 3000

 

Mark Taylor

 

 

 

Square1 Consulting

Tel: 0207 929 5599

 

David Bick

 

 

 

 

       

 

IFRS reconciliation

Management is required to exercise its judgment in the classification of certain items as exceptional and outside of the Group's underlying results. The determination of whether an item should be separately disclosed as an exceptional item or some other adjustment requires judgment on its nature and incidence, as well as whether it provides clarity on the Group's underlying trading performance.

Throughout this report reference is therefore made to adjusted results and measures. The directors believe that the selected adjusted measures allow management and other stakeholders to better compare the normalised performance of the Group between the current and prior year, without the effects of one-off or non-operational items and, given the Group's full distribution dividend policy, better reflects the normalised underlying cash earnings achieved in the year under review to which the directors have regard in determining the amount of any dividend. In exercising this judgment, the directors have taken appropriate regard of IAS 1 "Presentation of financial statements" as well as guidance issued by the European Securities and Markets Authority on the reporting of non-adjusted results.

As these Alternative performance measures ("APMs") are not defined by IFRS, they may not be directly comparable to other companies' APMs. They are not intended to be a substitute for, or superior to, IFRS measurements and the Directors recommend that the IFRS measures should also be used when readers of this document assess the performance of the Group.

Adjusted measures exclude the impact of the amortisation of intangibles, share based payments and exceptional items ("adjustment items") described in Note 6. A reconciliation of IFRS to non-IFRS underlying measures is also outlined in the Financial Review and is summarised in a column of the Condensed Consolidated Income Statement.

Notes for editors:

 

About Redde plc:

 

Founded in 1992 and working predominantly with insurance companies, insurance brokers, prestige motor dealerships, and large national fleet owners the Group provides a range of accident management, incident management and legal services.

 

The Group is one of the market leaders in its fields of business; it delivers accident management solutions to motorists ensuring that they remain mobile until their own vehicles are repaired or until they are put in a position to obtain a replacement and it provides legal services ensuring that they are properly compensated for their injuries and losses. Legal services also include wills and probate, family law, clinical negligence and employer and public liability law advice.

 

The name Redde is associated, in Latin, with the concept of restoration.

 

Chairman's statement

 

This is my first Chairman's statement since I was appointed to the role of interim chairman on 1 August 2019 and I am pleased to be able to report to shareholders that the Group achieved an adjusted profit before taxation of £49.3m compared to £46.0m last year, an increase of 7.1%.

 

Results

 

Revenues were £589.7m (2018: £527.0m), an increase of £62.7m (11.9%). Sales growth principally reflects a 9.4% growth in the number of credit hires together with a 5.2% increase in the total number of repairs undertaken and higher activity within the Group's fleet and incident management businesses.

 

The adjusted earnings before interest and taxation ("EBIT") for the year were £49.6m, an increase of 7.3% over the £46.2m achieved last year.

 

There was a net interest charge of £0.3m (2018: £0.2m) mostly reflecting non-utilisation fees incurred during the year on the Group's bank revolving working capital facility.

 

Adjusted profit before tax for the year was therefore £49.3m (2018: £46.0m), an increase of 7.1%.

 

A charge of £2.4m (2018: £2.4m) in respect of amortisation of intangible assets (acquired by virtue of the purchase of FMG) and a £1.1m cost (2018: £1.8m) recorded under IFRS2 in respect of the charge under share based payments on incentive share schemes were incurred in the year.

 

This year also saw a pre-tax exceptional charge of £4.2m (2018: £3.0m) in respect of restructuring charges arising from changes in the footprint of the Group's operations initiated last year involving the consolidation of some of the Group's operations from three main locations to two, including a lease on new larger premises to accommodate anticipated growth. In addition certain other parts of the Group underwent operational restructuring during the year giving rise to redundancy and termination costs and a charge for goodwill impairment. The net charge includes:

 

·      provisions of £2.8m relating to the Group's plans to mitigate against the holding costs between now and the end date for those leasehold premises that are no longer being occupied by the Group including plans to refurbish a major property for subletting (2018: £2.0m relating to properties vacated in prior years);

·      a profit of £0.2m on sale of a freehold property vacated during the year (2018: impairment charge of £0.4m);

·      reorganisation costs including associated redundancy and other staff associated costs of £0.7m (2018: £0.6m); and

·      as detailed in note 10, following the annual impairment review by the Directors it has been determined that an impairment in the value of goodwill in relation to NewLaw is appropriate and the resultant non cash impairment charge of £0.9m has been included above in exceptional items for the current year.

 

After the amortisation of intangible assets and the charge for share based payments together with the exceptional items above, statutory profit before tax was £41.6m (2018: £38.8m) an increase of 7.3%.

 

There was a net tax charge of £7.1m (2018: £4.3m) and therefore the statutory profit after tax was £34.5m (2018: £34.5m).

 

Earnings per share ("EPS")

 

Statutory basic EPS is 11.28p (2018: 11.36p). Statutory diluted EPS is 11.08p (2018: 11.19p).

 

The adjusted basic EPS is 13.44p (2018: 13.27p). The adjusted diluted EPS is 13.21p (2018: 13.07p).

 

The adjusted figures exclude the impact of amortisation of intangibles, share based payments and exceptional items ('adjustment items') described in Note 6.

 

Dividends

 

The Board is pleased to propose an unchanged final dividend of 6.15p per share, which if approved at the Annual General Meeting to be held on Wednesday 30 October 2019 will be paid on Thursday 7 November 2019 to those shareholders on the register at the close of business on Friday 4 October 2019. The shares will become ex-dividend on Thursday 3 October 2019.

 

An interim dividend of 5.50p per share was paid on 28 March 2019 and, including this, the total dividend for the year is 11.65p compared to a total of 11.65p for the interim and final dividends last year.

 

 

Outlook

 

As announced by the Company on 8 March 2019, following an extensive period of contract tendering, the Group was informed that, after 10 years of partnership and several prior successful renewals, it had not secured the renewal of a hire and repair contract with a large insurer.

 

The original contract was due to expire at the end of July 2019. However, following the announcement of 8 March an agreement was reached with the insurer concerned in respect of an orderly run-off of the services provided. This agreement involves the continuation of the higher-margin, non-fault hire and non-fault repair services through to November 2019. The lower margin work ceased on 31 July 2019. As a result, the positive effect on working capital is now expected to gain traction later in the 2020 financial year to accommodate this extension.

 

The Group is also pleased to report that a large insurer which had previously participated in a protocol agreement, which the Group terminated, has now agreed to take up a protocol agreement again after the Group was able to demonstrate the higher costs of not being in a protocol. The Group is pleased that the benefits delivered via protocols are valued by insurers who recognise the lower costs of settling claims under these agreements.

 

In addition, since the 8 March announcement we have won a number of new contracts in other areas of the Group as well as a contract renewal with a major insurer, all of which have contributed to the Board's confidence in its expectations for the financial year ended 30 June 2020.

 

Trading for the first two months since the year end has been in line with management expectations.

 

Directorate and our people

 

 

As previously announced on 1 May 2019, Avril Palmer-Baunack gave notice of her intention to step down as non-executive chairman and subsequently retired from the Board on 31 July 2019. I was appointed interim Chairman on 01 August 2019 and I look forward to working with the Board in the further development and delivery of the Group's strategic goals.

 

The Board would like to take this opportunity to thank Avril who was instrumental in reshaping the Group's business and has been a very supportive Chairman over the last 8 years. The Board has much admired and appreciated her determination at getting things done as well as the wise counsel and market experience that she brought to the Board. The Board wishes Avril all the best with her future plans.

 

Mark Chessman was appointed to the Board as an executive director of the Group on 27 November 2018. Mark joined FMG as Chief Operating Officer in December 2014, becoming first managing director in April 2015 and then, following FMG's acquisition by Redde, its Chief Executive Officer in October 2015. Mark is a member of the Chartered Institute of Management Accountants and, prior to his role at FMG, spent twelve years with Lex Autolease, initially in 2002 as Finance Director of Lloyds TSB Autolease and latterly as corporate sales director. In July 2018 Mark was appointed as Redde's Chief Operating Officer and he continues in this role.

 

The enthusiasm, energy and commitment of our people has been instrumental in delivering high standards of service and customer satisfaction, as demonstrated by the customer feedback we receive. We would like to congratulate and thank all of our colleagues for their contribution to the business.

 

Annual General Meeting

 

The Group's Annual General Meeting will be held on Wednesday 30 October 2019.

 

John Davies

Chairman

4 September 2019
 

Operating and financial review

 

 

Operational review

 

Accident Management

 

The year again saw a continued increase in volumes in the Group's accident management business as a result of growth in market share both in the Group's own business and also in the businesses of those partners that the Group serves. This growth was also influenced in the early part of the year by the residual knock-on effect of the prolonged 2017/18 winter period (referred to in the media as "the Beast from the East"). This resulted in repairer capacity being squeezed and the availability of parts being affected by the higher levels of claims working their way through the repair supply chain, increasing demand for replacement vehicles. The relatively benign weather in the second half has however seen an easing in repairer workload and improved capacity with hire lengths returning to more normal levels as a result. 

 

It is noted that during the year members of the ABI commented that the cost of repairs has increased due to increased repair costs of bumper safety sensors and the cost of realigning them. At the same time the delay in availability of some spare parts sourced from overseas and the increasing complexity of repairs has also increased repair times and, as a consequence, average hire days.

 

On 8 March 2019 the Group announced that the Company was not successful in securing the renewal of a hire and repair contract with a large insurer.

 

The original contract was due to expire at the end of July 2019. However since making the original announcement an agreement was reached with the insurer concerned in respect of an orderly run off of the services provided. This agreement involves the continuation of the higher margin, non-fault hire and non-fault repair services through to November 2019. The lower margin work ceased on 31 July 2019. As a result of this the positive effect on working capital is now expected to gain traction later in the financial year 2020 to accommodate this extension.

 

The Group is pleased to report that a large insurer which had previously participated in a protocol agreement, which the Group terminated, has now agreed to take up a protocol agreement again after the Group was able to prove out to the insurer the higher costs of not being in a protocol. The Group is pleased that the benefits delivered via protocol agreements are valued by insurers who recognise the lower costs of settling claims under these agreements.   

 

In addition, since the 8 March announcement there have been a number of new contract wins in other parts of the Group as well as a contract renewal with a major insurer.

 

In connection with the above the Group's wide service offering has seen increased levels of interest from the market and during the year the Group participated in pilots with a number of insurers (including the provision of "fault" claims intervention services and "fault" repairs) which helped those insurers to manage and reduce their own indemnity spends and contracts have been secured for delivery in the new financial year with both new and existing partners. At the same time extensions in the coverage and scope of "not-at-fault" services have also been achieved with other existing partners. These developments support the Group's one-stop shop approach which provides the potential to further grow and develop more vehicle incident and accident management services for both business and insurance partners. This will in turn support the Group's position as a leading provider for vehicle mobility, rapid roadside recovery, repair, legal and other support services.

 

Protocols and Insurer Claims Portal

 

A main activity of the Group's operating model is to deliver credit hire and repair services on a B2C basis. This has a natural lag for receivables collections which under an insurance claim process can be lengthy. The Group has shortened this cycle considerably over the years through protocol arrangements with insurers. This generally involves discounting a claim in return for non-frictional and a more efficient, faster settlement process. It is within the Group's gift to operate this model and the Group always seeks to find a balance to the level of discount and the timing of cash. Where insurers don't make settlement in line with those timings the Group has the right to remove those discounts and operate to recover the full amount of a claim.

 

As a large stakeholder in the motor claims market the Group has good relationships with many insurers and makes efforts to maintain those relationships. However, going forwards, the Group intends to be more robust on collections to ensure the value of protocols is preserved for those that meet the terms and to remove non performing protocols so that fuller recoveries are made. Some insurers choose to take the discount under protocol but then defer payments at their leisure which is not equitable. If the Group has to sacrifice some debtor days to preserve value, then it will do so. The strength and quality of the Group's claims are unquestionable and the Group is very confident that its protocol offering provides the most cost effective and efficient settlement offering to insurers. This has been proven out with more than one insurer returning to protocols having experienced the costs outside these arrangements. Therefore, in order to improve debtor days beyond what has already been achieved, the Group will make tough decisions to create better, longer-term outcomes.

 

Rising accident costs for insurers has resulted in most insurers looking to reduce operational costs and in many instances this has manifested itself in the insurers providing less resource to the processing of claims leading to longer claims settlement times. During the year the Group launched a bespoke, digital, protocol portal link which enables further claim processing efficiencies for both protocol insurers and the Group and the provision of real-time claim settlement status. The year saw an increase in the number of protocol insurers linking-in directly to the Group's protocol portal which will over time reduce claims processing times for those insurers although the roll out of this is dependent upon the availability of insurer internal IT resources.

 

Fleet and Incident management

 

The Group's fleet and incident management business made further progress in growing its customer base, including the on-boarding of a number of insurer and large commercial broker clients for the provision of third party claims intervention services, reducing their cost of claims. The pipeline of potential business is encouraging with a number of new accounts being on-boarded for full implementation in the new financial year. In order to service the additional business and to provide the infrastructure for anticipated future growth, FMG's fleet and incident management operations were moved to larger premises in Huddersfield (comprising 43,000 square feet of operational space) from two existing premises in Huddersfield (comprising together 29,000 square feet) in September 2018 and the costs of this relocation are included in exceptional items.

 

Legal Services

 

The Group's latest ABS named 'Your Law' (which was launched last year by National Accident Helpline and supported by the Group's NewLaw legal firm) has showed encouraging progress and has continued to build its case load and consequently its levels of settlements to provide an increased contribution from this source which supplies a greater proportion of non-RTA cases under management. Whilst these cases together with the growth in NewLaw's employers' liability and medical negligence practice (supported by increased marketing) take longer to settle than road traffic accident claims and require greater cash investment as they progress, they are not affected by government announced reforms of RTA soft tissue injury compensation levels that are presently scheduled to come into effect in April 2020. The Group is investing in IT systems to provide a customer portal that will integrate with the proposed MoJ portals and provide efficiencies to deal with low-value claims after the reforms take effect.  During the year the consolidation of substantially all of NewLaw's operations into NewLaw's existing building in Cardiff was completed and the relocation and other costs of this restructuring are included in exceptional items.

 

Technology Initiatives

 

The year saw the continuation of the investment in technology that commenced last year, to support the Group's strategic objectives, including further integration of common Group services, productivity improvements within the Group's operational centres, and enhancements to existing supply chain integration.

 

The year saw mobile device optimisation and an upgrade of Auxillis's Digital Customer Portal being implemented, enabling a clearer and faster data transfer between customers and our operational systems.  In addition the Group delivered an upgrade to its Repair Tracker solution enabling network repairers to provide job status information in a more simplified and timely fashion via the portal, enabling automated updates to be provided to customers via our digital platforms.  Direct data integration with a leading bodyshop management system has also been implemented, targeting further efficiencies to the capture of repair status information, and reducing administrative overheads for repairers.

 

A major upgrade to Auxillis's core operational claims management system was successfully completed in October 2018, providing enhanced platform capability which will support further operating efficiencies and customer service improvements. Work also commenced on the development of a digital self-service claims-capturing platform which will further enhance efficiencies in claims management, with greater visual tracking of claims progress by claimants.

 

During the year the Group has further developed its use of Robotics Processing Automation in the processing of claims information and documentation including "back office" operational and finance systems. Applications live to date have proved cost effective and their use will be expanded across the Group where appropriate providing potential opportunities for future efficiencies.

 

The significant investment in the software and infrastructure services supporting the Group's legal businesses to meet anticipated changes in working practices, deliver process efficiencies, and support expanding demand for services has now come to fruition with the first phase of the project to replace one of NewLaw's core operating systems and associated reporting warehouse going live during the year. The second phase of this project is scheduled to go live shortly and the Group is actively involved in further system development to support its work processing cases as and when the planned government reforms to the conduct and outcomes of RTA soft tissue cases are implemented.

 

The Group has continued on its strategy of investing in core IT infrastructure, and is currently in the process of delivering enhanced network security controls across all operating sites. 

 

Relationships and customer service

 

Customer service delivery has continued to be a strong focus for the Group and this has translated into net promoter scores above industry norms for the appropriate service. Performance feedback on the Group's operational service delivery and customer satisfaction rates is of increasing importance with existing and potential new business partners who share the Group's vision for the customer journey.

 

Recognition of Auxillis for providing outstanding customer service was yet again evident at the prestigious North East Contact Centre Awards in February 2019 where Auxillis was honoured by being awarded the accolade of Contact Centre of the Year (in the over 250 seats category) having been runner up for this award in past years.

 

Vehicle fleet

 

The Group continues to operate highly effective fleet services through a hybrid solution of ownership, contract hire and, during peak periods, cross-hiring from daily rental companies. This combination gives the Group flexibility to dispose of excess fleet in the event of a downturn, balance the total number and the mix of the fleet in response to changes in mix of the insurer car parc and at the same time to maximise fleet, without incurring ownership costs, in both the short term and in peak periods.

 

The year saw a 10.7% increase in total number of hire days driven by a 9.4% increase in credit hire case volumes compared to last year. The average number of vehicles held during the year was increased by 20.0% from 9,312 to 11,173 as a result of the need to meet increases in demand seen during the year.

 

Fleet utilisation was maintained above our 80% target and was 81.6% compared to 82.9% last year with the fall being influenced by the implementation of an expanded contract for services being delayed by the insurer from 1 January to mid-March 2019. The average age of the fleet during the year was reduced to little over 10 months compared to 11 months last year.

 

The number of vehicles held at 30 June 2019 increased by 10.0% to 10,711 vehicles as a result of the increased demand during the year as well as providing more capacity to reduce the use of more expensive cross-hires and this compares to 9,741 at 30 June 2018.

 

Head Office Infrastructure

 

The Group has for the past 20 years occupied premises in Bath as a head office. Following a review of future requirements and options available the Group has advanced new plans to refurbish and sub-let such parts of these premises that are considered surplus to requirements as a head office. This work is expected to complete by the end of the new financial year at a capital cost of approximately £2 - £3 million.  

 

Financial Review

 

Management is required to exercise its judgment in the classification of certain items such as exceptional items and those other items considered to be outside of the Group's underlying results. The determination of whether an item should be separately disclosed as an exceptional item or other adjustment requires judgment on its nature and incidence, as well as whether it provides clarity on the Group's underlying trading performance.

 

Throughout this report reference is therefore made to adjusted results and measures. The directors believe that the selected adjusted measures allow management and other stakeholders to better compare the normalised performance of the Group between the current and prior year, without the effects of one-off or non-operational items and, given the Group's dividend policy, better reflects the normalised underlying cash earnings earned in the year under review to which the directors have regard in determining the amount of any dividend.

 

As these Alternative performance measures ("APMs") are not defined by IFRS, they may not be directly comparable to other companies' APMs. They are not intended to be a substitute for, or superior to, IFRS measurements and the Directors recommend that the IFRS measures should also be used when readers of this document assess the performance of the Group.

 

In exercising this judgment, the directors have taken appropriate regard of IAS 1 "Presentation of financial statements" as well as guidance issued by the European Securities and Markets Authority on the reporting of non-adjusted results. For the reasons stated above, adjusted measures exclude the impact of the amortisation of intangibles, share based payments and exceptional items ("adjustment items") and are analysed on the face of the Consolidated Income Statement and in note 6 as well as in this report.

 

Results and performance

 

For the year, the Group recorded an adjusted EBIT of £49.6m (2018: £46.2m). The adjusted profit before tax was £49.3m (2018: £46.0m) and the statutory profit before tax was £41.6m (2018: £38.8m).

 

A summary of the key financial performance indicators is set out in the table below:

 

 

 

 

 

12 months ended

12 months ended

Change

 

30 June 2019

30 June 2018

 

Financial KPIs

 

 

 

Revenue (£'000)

589,724

526,981

11.9%

Gross profit (£'000)

137,690

127,782

7.8%

Gross margin

23.3%

24.2%

(0.9)pt

Profit before taxation (£'000)

41,654

38,812

7.3%

Adjusted profit before taxation*

49,288

46,021

7.1%

EBIT (£'000)

41,942

38,982

7.6%

Adjusted EBIT* (£'000)

49,576

46,191

7.3%

Adjusted EBIT margin*

8.4%

8.8%

(0.4)pt

EBITDA ** (£'000)

54,919

55,435

(0.9)%

EBITDA / Operating cash flow conversion %**

22%

72%

(50)pt

Debtor days ***

116

105

(11) days 

 

* Adjusted measures exclude the impact of the amortisation of intangibles, share based payments and exceptional items ("adjustment items") described in Note 6.

** Calculation of EBITDA and operating cash flow is analysed in the consolidated statement of cash flows

Calculation of debtor days is as outlined in note 14.

 

 

 

Revenue

 

Revenues were £589.7m (2018: £527.0m), an increase of £62.7m (11.9%):

 

2019

£'000

2018

£'000

Revenue - insurance claims (variable consideration under IFRS 15)

416,416

363,844

Revenue - invoiced for services (non-variable consideration under IFRS 15)

173,308

163,137

Total revenue

589,724

526,981

 

Sales growth principally reflects a 9.4% growth in the number of credit hire cases and an 11.4% increase in credit hire days. There was also a 5.2% increase in the total number of repairs undertaken against the corresponding period last year as well as continued momentum within the Group's fleet and incident management business. 

 

Gross profit and adjusted EBIT

 

Gross profit was £9.9m higher than the corresponding period last year and gross margin was 23.3% (2018: 24.2%).  The fall in gross margin was in line with the Board's expectations and for the year as a whole was influenced by an increased mix of lower margin activities and higher levels of commission payments to our referral partners. The Group expects gross margin percentage to improve following the termination of low margin business as a result of the exit from the large insurer contract mentioned in the operating review.

 

Adjusted administrative expenses were £93.4m (2018: £83.8m), an increase of 11.4% over last year reflecting increased investment in underlying infrastructure as well as increased marketing and operational costs supporting the increased volumes.  Adjusted administrative expenses as a percentage of sales was however reduced to 15.8% (2018: 15.9%).

 

Income from associates represents the Group's share of the profits in relation to NewLaw's membership of several Limited Liability Partnerships providing legal services in association with certain business partners (subject to regulation by the Solicitors Regulation Authority) and amounted to £5.3m (2018: £2.2m). The increase reflects growth in the number of cases processed in Your Law LLP (in which NAHL plc is the majority partner) which commenced as a start-up venture in July 2017.

 

The adjusted EBIT was £49.6m (2018: £46.2m) and adjusted EBIT margin was 8.4% (2018: 8.8%)

Adjusted EBIT is reconciled to the Income Statement as follows:

 

 

 

Audited

Audited

 

 

year ended

year ended

 

 

30 June 2019

30 June 2018

 

 

£m

£m

Adjusted EBIT - continuing operations

49.6

46.2

Adjustments:

 

 

 

Amortisation of acquired intangible assets

 

(2.4)

(2.4)

Share based payments

 

(1.1)

(1.8)

Leasehold property provisions

 

(2.8)

(2.0)

Freehold property profit on sale (2018:impairment)

 

0.2

(0.4)

Restructuring costs

 

(0.7)

(0.6)

Impairment of goodwill - NewLaw CGU

 

(0.9)

-

Statutory EBIT

 

41.9

39.0

 

Net finance income

 

There was a net interest charge of £0.3m (2018: £0.2m) mostly comprising non-utilisation fees on the Group's revolving working capital facilities with HSBC.

 

Adjusted profit before tax

 

Adjusted profit before tax of £49.3m (2018: £46.0m) is an increase of £3.3m (7.1%) over last year.

 

Amortisation of intangibles, share based payments and exceptional items

 

A charge of £2.4m (2018: £2.4m) in respect of amortisation of intangible assets (acquired by virtue of the purchase of FMG) and a £1.1m cost (2018: £1.8m) recorded under IFRS2 in respect of the charge under share based payments on incentive share schemes were incurred in the year.

 

This year also saw a pre-tax exceptional charge of £4.2m (2018: £3.0m) in respect of restructuring charges arising from changes in the footprint of the Group's operations initiated last year involving the consolidation of some of the Group's operations from three main locations to two, including a lease on new larger premises to accommodate anticipated growth and a charge for goodwill impairment. The net charge includes:

 

·      provisions of £2.8m relating to the Group's plans to mitigate against the holding costs between now and the end date for those leasehold premises that are no longer being occupied by the Group (2018: £2.0m relating to properties vacated in prior years);

·      a profit of £0.2m on sale of a freehold property vacated during the year (2018: impairment charge of £0.4m);

·      reorganisation costs including associated redundancy and other staff associated costs of £0.7m (2018: £0.6m); and

·      as detailed in note 10, following the annual impairment review by the Directors it has been determined that an impairment in the value of goodwill in relation to NewLaw is appropriate and the resultant non cash impairment charge of £0.9m (2018: £nil) has been included in exceptional items for the current year.

 

The tax effect of all of the above was a credit of £1.0m (2018: credit of £1.4m).

 

Statutory profit before and after taxation

 

After the amortisation of intangible assets, a charge for share based payments and the year's charge for exceptional items above, the statutory profit before tax was £41.6m (2018: £38.8m).

 

There was a net tax charge of £7.1m (2018: £4.3m) and therefore the statutory profit after tax is £34.5m (2018: £34.5m).

 

Earnings per share - basic and diluted

 

Statutory basic EPS is 11.28p (2018: 11.36p). Statutory diluted EPS is 11.08p (2018: 11.19p).

 

The adjusted basic EPS is 13.44p (2018: 13.27p). The adjusted diluted EPS is 13.21p (2018: 13.07p).

 

The adjusted figures exclude the effect of the amortisation of intangibles, share based payments and exceptional items ('adjustment items') described in note 6.

 

Dividends

 

An interim dividend of 5.50p per share was paid on 28 March 2019 (2018: 5.50p). 

 

A final dividend of 6.15p per share has been recommended by the Board (2018: 6.15p). This dividend, if approved at the Annual General Meeting to be held on Wednesday 30 October 2019, will be paid on Thursday 7 November 2019 to those shareholders on the Register at the close of business on Friday 4 October 2019 making a total dividend for the year of 11.65p compared to a total of 11.65p for the interim and final dividends last year.

Working Capital

 

The high demand for the Group's services continues and as a consequence the Group is investing in the appropriate working capital to support this demand including fleet. This follows an increase in the volume of work undertaken and investment in new IT digitisation projects and infrastructure to support this growth.

At the year end three (non-partner) insurers writing UK business from outside the UK were in administration/liquidation resulting in a hiatus on the settlement of claims whilst the relevant regulators oversee the responsibility of settling claims liabilities under their jurisdictional obligations. Whilst recoverability of these claims continues under the relevant legislation, it is clear that this is proving to be a slow process and accounts for approximately 3 debtor days.

 

More recently, collection of claims against one large (non-partner) Third Party Insurer has been challenging in the period as they reacted against the higher levels of claims seen in the market as a result of the "Beast from the East" and technology-led repair cost inflation by seeking to challenge some aspects of the claim. Based upon the run rate of past payments, the consequent reductions in payments amount to approximately £16m of the increase in working capital and account for approximately 9 debtor days. Such actions only serve to defer settlement of claims which are demonstrably proven and enforceable. The Group's track record shows that insurers who delay settling liabilities leads to an elongated outcome which adds unnecessary cost to the insurer by making recoveries through a litigated process. Consequently, and until the cost burden point is made, the Group expects a lag on an element of the normal cash collection recovery time with this insurer but with a higher margin return as a result.

 

The Group can also report that since the year end a previously announced terminated protocol agreement with a large insurer has been reinstated after the Group had proved out the higher costs of not being in a protocol. This demonstrates that the benefits delivered via protocol agreements are valued by insurers who recognise the lower costs of settling claims under these agreements and the Group will continue to work in supporting these aims.   

 

As a result of the extension of the run off period to November 2019 for the contract with the large insurer mentioned in the Operating Review the positive effect on working capital arising from the run off is now expected to gain traction in the second half of the financial year ending 30 June 2020 to accommodate this extension.

 

As a result of the above and the increase in sales volumes, debtor days at 30 June 2019 were 116 days and compare to 105 days at 30 June 2018. This measure is based upon net trade receivables, other receivables and accrued income as a proportion of the related underlying sales revenue for the past 12 months multiplied by 365 days.

 

Revenue generated debtors at 30 June 2019 were £187.0m and compare to £151.7m at 30 June 2018, an increase of £35.3m (23.3%). Trade creditors decreased to £87.8m compared to £89.3m at 30 June 2018 a decrease of 1.7%.

 

Net Assets

 

Net assets at 30 June 2019 were £161.1m (2018: £160.2m).

 

Cash flow

 

Cash generated from operating activities was £20.9m (2018: £46.5m). After other net outflows in respect of interest and taxation net cash flow from operating activities was £12.0m (2018: £39.7m).

 

Net debt, cash and financing

 

Cash balances were £11.9m at 30 June 2019 (2018: £30.7m). The decrease in cash balances is mostly the result of the increased investment in net working capital, and in particular receivables, funding the growth in sales including investment in an expanded fleet and an increasing amount of corporation tax paid following use of losses and allowances from previous years.

 

In order to fund the greater investment in working capital mentioned previously much of the increase was funded out of cash balances although shortly before the year end use was also made of the hitherto unutilised revolving facility in place with HSBC UK Bank plc with drawings of £9m being made. On 7 August 2019 the Group extended the maturity date of the HSBC revolving credit facility from December 2020 to August 2024 in the new amount of £50m and details of this are in Note 20 of this statement. The Group also has a £5m overdraft facility with the same bank. These facilities will provide support for future expansion of business by the Group.

 

As outlined in the operating review during the year the total average number of vehicles on the fleet during the year was increased by 20.0% over last year to service the increased volumes of hire days and also to reduce the levels of more expensive cross hire vehicles utilised in previous periods. A greater proportion of these new vehicles were funded by finance lease arrangements compared to last year. The number of vehicles funded by finance leases increased to 35.7% at 30 June 2019 compared with 32.2% at 30 June 2018. Despite this and an increase in the higher number of fleet vehicles to meet demand, fleet financing lease debt was reduced to £37.6m at 30 June 2019, a reduction of £1.6m compared to £39.2m at 30 June 2018 reflecting the funding of a greater mix of lower cost per unit small domestic vehicles.

 

Net debt at 30 June 2019 was therefore £34.7m and compares to £8.5m at 30 June 2018. The net debt and cash position can be summarised as follows:

 

Audited

Unaudited

Audited

 

30 June 2019

31 December 2018

30 June 2018

 

£m

£m

£m

Fleet finance leases

(37.6)

(52.8)

(39.2)

Other leases and borrowings

-

-

-

Total fixed asset financing debt

(37.6)

(52.8)

(39.2)

Revolving working capital financing facilities drawn

(9.0)

-

-

 

(46.6)

(52.8)

(39.2)

 

 

 

 

Cash balances

11.9

11.6

30.7

Net debt

(34.7)

(41.2)

(8.5)

 

A graphical reconciliation of the movements in net debt can be viewed at:

 

 https://www.redde.com/wp-content/uploads/2019/09/ResultsGraphDLLink.html

 

The Group's ratio of net operating cash flow to EBITDA was therefore reduced as a result of the above factors and EBITDA/Operating Cash Flow conversion for the year to 30 June 2019 was 21.9% (2018: 71.6%).

 

Principal risks and uncertainties

 

The principal risks and uncertainties facing the Group are set out in note 22 to this announcement.

 

 

 

 

Martin Ward                                                                                         Stephen Oakley

Chief Executive Officer                                                                          Chief Financial Officer

4 September 2019                                                                                 4 September 2019

 

Consolidated income statement

For the year ended 30 June 2019

 

 

 

Year

ended

30 June

2019

Adjusted*

 

Year

ended

30 June

2019

Adjustment

items*

Year ended

30 June

2019

 

Year

 ended

30 June

2018

Adjusted *

 

Year

ended

30 June

2018

Adjustment items*

Year

ended

30 June

2018

 

 

 

Note 

£'000

£'000

£'000

£'000

£'000

£'000

 

 

 

 

 

 

 

 

Revenue

 

589,724

-

589,724

526,981

-

526,981

 

 

 

 

 

 

 

 

Cost of sales

 

(452,034)

-

(452,034)

(399,199)

-

(399,199)

 

 

 

 

 

 

 

 

Gross profit

 

137,690

-

137,690

127,782

-

127,782

 

 

 

 

 

 

 

 

Administrative expenses

6

(93,375)

(7,634)

(101,009)

(83,797)

(7,209)

(91,006)

 

 

 

 

 

 

 

 

Operating profit - continuing operations

 

44,315

(7,634)

36,681

43,985

(7,209)

36,776

 

 

 

 

 

 

 

 

Share of results of associates

12

5,261

-

5,261

2,206

-

2,206

 

 

 

 

 

 

 

 

EBIT

 

49,576

(7,634)

41,942

46,191

(7,209)

38,982

 

 

 

 

 

 

 

 

Net finance costs

7

(288)

-

(288)

(170)

-

(170)

Profit before taxation

 

49,288

(7,634)

41,654

46,021

(7,209)

38,812

 

 

 

 

 

 

 

 

Tax charge

8

(8,163)

1,015

(7,148)

(5,702)

1,418

(4,284)

Profit for the year

 

41,125

(6,619)

34,506

40,319

(5,791)

34,528

 

 

 

 

 

 

 

 

Profit for the year attributable to:

 

 

 

 

 

 

Equity holders of the Company

 

41,125

(6,619)

34,506

40,319

(5,791)

34,528

Profit for the year

 

41,125

(6,619)

34,506

40,319

(5,791)

34,528

 

 

 

 

 

 

 

 

Earnings per share (pence)

 

 

 

 

 

 

 

Basic

1

13.44

(2.16)

11.28

13.27

(1.91)

11.36

Diluted

1

13.21

(2.13)

11.08

13.07

(1.88)

11.19

 

 

 

* Adjusted measures exclude the impact of the amortisation of intangibles, share based payments and exceptional items ("adjustment items") described in Note 6.

 

 

 

 

 

 

 

 

 

 

 

 

Condensed consolidated statement of comprehensive income

For the year ended 30 June 2019

 

 

 

Year ended

30 June 2019

Year ended

 30 June 2018

Unaudited

 

£'000

£'000

 

 

 

 

 

Profit for the year

 

 

34,506

34,528

 

 

 

 

 

Other comprehensive income

 

 

-

-

Total comprehensive income for the year

 

 

34,506

34,528

 

 

 

 

 

Consolidated statement of changes in equity

For the year ended 30 June 2019

 

 

Share

capital

 

£'000

Shares

held in

Treasury

£'000

Share

premium

account

£'000

Retained

earnings

 

£'000

Total

 

 

£'000

Balance at 01 July 2017

304

-

73,780

84,870

158,954

 

 

 

 

 

 

Profit for the year

-

-

-

34,528

34,528

Total comprehensive income for the year

-

-

-

34,528

34,528

 

 

 

 

 

 

Issue of Ordinary Shares

-

-

8

-

8

 

 

 

 

 

 

Purchase of shares into treasury

-

(1)

-

(1,963)

(1,964)

 

 

 

 

 

 

Re-issue of shares from treasury for SAYE exercises

-

1

-

617

618

 

 

 

 

 

 

Dividends paid in the year

-

-

-

(33,740)

(33,740)

 

Share-Based Payments

 

-

 

-

 

-

 

1,791

 

1,791

 

 

 

 

 

 

Balance at 30 June 2018

304

-

73,788

86,103

160,195

 

 

 

 

 

 

Profit for the year

-

-

-

34,506

34,506

Total comprehensive income for the year

-

-

-

34,506

34,506

 

 

 

 

 

 

Issue of Ordinary Shares

3

-

980

-

983

 

 

 

 

 

 

Dividends paid in the year

-

-

-

(35,682)

(35,682)

 

 

 

 

 

 

Share-Based Payments

-

-

-

1,082

1,082

 

 

 

 

 

 

Balance at 30 June 2019

307

-

74,768

86,009

161,084

 

 

 

 

 

Consolidated statement of financial position

as at 30 June 2019

 

 

 

 

 

Note 

 2019

 

£'000

2018

 

£'000

Non-current assets

 

 

 

 

 

 

Goodwill

 

 

 

10

85,077

85,990

Intangible assets

 

11

14,137

16,527

Property, plant and equipment (including vehicles)

 

13

46,022

48,596

Interests in associates

 

12

4,401

2,559

Deferred tax asset

 

 

 

17

6,940

6,165

 

 

 

 

 

      156,577

      159,837

 

Current assets

 

 

 

 

 

 

Receivables and contract assets

 

 

 

14

219,645

181,414

Cash and cash equivalents

 

 

 

 

11,880

30,746

 

 

 

 

 

231,525

212,160

 

Total assets

 

 

 

 

388,102

371,997

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Trade and other payables

 

 

 

15

(171,301)

(164,030)

Obligations under finance leases

 

 

 

 

(15,535)

(23,723)

Short term borrowings

 

 

 

 

(9,000)

-

Provisions

 

 

16

(3,401)

(2,475)

 

 

 

 

 

(199,237)

(190,228)

 

Net current assets

 

 

 

 

32,288

21,932

 

Non-current liabilities

 

 

 

Obligations under finance leases

 

 

 

 

(22,030)

(15,482)

Deferred tax liability

 

 

 

17

(3,800)

(3,836)

Long-term provisions

 

 

 

16

(1,951)

(2,256)

 

(27,781)

(21,574)

Total liabilities

 

 

(227,018)

(211,802)

 

Net assets

 

 

161,084

160,195

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

Share capital

 

 

 

8

307

304

Share premium account

 

 

 

 

74,768

73,788

Retained earnings

 

 

 

 

86,009

86,103

Total Equity

 

 

 

 

161,084

160,195

 

 

 

 

 

          Consolidated statement of cash flows

          for the year ended 30 June 2019

 

 

Note

 

£'000 

2019

£'000

 

£'000

2018

£'000

Cash flows from operating activities

 

 

 

 

 

Profit for the year

 

 

34,506

 

34,528

 

Tax charge

 

 

7,148

 

4,284

 

 

 

 

41,654

 

38,812

 

Income from associates

 

12

(5,261)

 

(2,206)

 

Net finance costs

 

7

288

 

170

 

Fleet finance lease interest

 

7

1,222

 

1,203

 

Depreciation of tangible fixed assets

 

13

10,124

 

10,506

 

Impairment charge on freehold properties

 

13

-

 

379

 

Impairment of goodwill

 

10

913

 

-

 

Amortisation of intangible assets

 

6, 11

2,390

 

2,390

 

(Profits) / Losses on sale of property, plant and equipment

 

(557)

 

417

 

Property onerous lease provisions

 

6

3,064

 

1,973

 

Share-based payment charges

 

6

1,082

 

1,791

 

EBITDA

 

 

54,919

 

55,435

 

Increase in receivables and contract assets

 

 

(38,173)

 

(38,633)

 

Increase in payables

 

 

6,607

 

30,723

 

Decrease in provisions

 

 

(2,443)

 

(1,066)

 

Cash generated from
operating activities

 

 

 

20,910

 

46,459

 

 

 

 

 

 

 

Bank interest received

 

37

 

112

 

Bank interest paid

 

(61)

 

-

 

Fleet finance lease interest

 

(1,222)

 

(1,203)

 

Interest element of non-fleet finance lease rentals

 

(1)

 

(4)

 

 

 

 

 

(1,247)

 

(1,095)

 

 

 

 

 

 

 

Taxation paid

 

 

 

(7,616)

 

(5,652)

Net cash from operating activities

 

 

12,047

 

39,712

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Distributions from associates

 

 

3,419

 

1,007

 

Purchase of property, plant and equipment

 

 

(3,748)

 

(3,075)

 

Proceeds from sale of property, plant and equipment

 

29,985

 

29,340

 

Net cash inflow from investing activities

 

 

 

29,656

27,272

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from issue of share capital

 

16

983

 

8

 

Purchase of shares into treasury

 

 

-

 

(1,964)

 

Proceeds from re-issue of treasury shares

 

 

-

 

618

 

Dividends paid

 

9

(35,682)

 

(33,740)

 

Bank loans received

 

 

9,000

 

-

 

Finance lease principal repayments

 

18

(34,870)

 

(37,504)

 

Net cash used in financing activities

 

 

 

(60,569)

 

(72,582)

Net (decrease) / increase in cash and cash equivalents

 

(18,866)

 

(5,598)

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

 

30,746

 

36,344

Cash and cash equivalents at end of year

 

 

 

11,880

 

30,746

 

 

 

 

 

 

 

Cash and cash equivalents consist of:

 

 

 

 

 

 

Cash at bank and in hand

 

 

 

11,880

 

30,746

Total

 

 

11,880

 

30,746

 

Notes to the financial information

 

1          Earnings per share

 

The calculation of the basic and diluted earnings per ordinary share is based on the following share volume information:

 

 

 

 

2019

Number

2018

Number

Number of shares

 

 

 

 

 

Weighted average number of shares for the purposes of EPS

 

 

 

305,928,616

303,882,212

Effect of executive PSP share option scheme - 2016 grants

 

 

 

1,248,405

2,948,941

Effect of executive PSP share option scheme - 2017 grants

 

 

 

1,077,217

1,101,551

Effect of executive PSP share option scheme - 2018 grants

 

 

 

1,138,615

-

Effect of SAYE scheme - 2014 grants

 

 

 

-

102,375

Effect of SAYE scheme - 2015 grants 

 

 

 

357,731

206,617

Effect of SAYE scheme - 2016 grants

 

 

 

-

4,219

Effect of SAYE scheme - 2017 grants

 

 

 

37,079

173,726

Effect of SAYE scheme - 2018 grants

 

 

 

20,572

56,752

Effect of SAYE scheme - 2019 grants

 

 

 

1,625,766

-

Weighted average number of shares for the purposes of diluted EPS

 

311,434,001

308,476,393

 

There were 306,706,045 ordinary shares of 0.1p each in issue as at 30 June 2019.

 

2          Segmental information

The activities of the Group are managed by the Executive Board, "the Board", which is deemed to be the Chief Operating Decision Maker, as a single operating platform. The entities within the Group contribute as part of the whole operation of the Group to provide services for the core business. The Board of Redde plc considers the performance of the business by reference to contributions from all activities of the Group as a whole, and reviews requirements of the total Group when determining allocations of resources. IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board in order to allocate resources to the segment and to assess its performance. The Group has identified two operating segments.

 

The directors consider that these operating segments meet the aggregation criteria under IFRS 8 for aggregation into one reportable operating segment. The directors have considered a number of economic indicators in forming their assessment that the two operating segments share similar economic characteristics, including long-term average gross margins. A significant part of the business of both operating segments involves vehicle incident and accident management as well as associated rectification, and performance is influenced by the growth or reduction in the number of vehicles on UK roads, the associated accident and incident rates and the growth in vehicles insured or managed by the segments customers. Their activities carried out in generating revenue are not independent of each other, and their customer bases are similar in type.

 

3          Status of audit

The financial information set out above does not constitute the Company's statutory accounts for the years ended 30 June 2019 or 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

 

4          Basis of preparation

The financial statements have been prepared on the historical cost basis in accordance with International Financial Reporting Standards (IFRSs) adopted in compliance with Article 4 of the EU IAS Regulation. The presentational currency is sterling. All amounts in the financial statements have been rounded to the nearest £'000.

 

Two new accounting standards, IFRS 15 (Revenue from contracts with customers) and IFRS 9 (financial Instruments), have come into force for the current financial year and have now been adopted. The Group has assessed the impacts of these standards and they have not resulted in any material measurement differences. Consequently the two methods of adoption, being the fully retrospective method or the modified retrospective method, are not applicable to the Group.

 

 

 

The following standards have not been applied in preparing these consolidated Financial Statements:

 

·      IFRS 16 - Leases.

 

The Group will report its financial statements under IFRS 16 for the first time from the first half of 2019/20. The Group presently expects to adopt IFRS 16 on a modified retrospective basis in its 2019/20 financial statements. Accordingly prior year comparatives will not be restated for the effect of IFRS 16 but instead the Group's 1 July 2019 opening reserves will be restated for the full cumulative impact of adopting this standard.

 

The standard requires lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less, or the underlying asset is of low value. The following indicative impacts are anticipated:

 

·      there is expected to be an increase in total assets, as leased assets which are currently accounted for off balance sheet (i.e. classified as operating leases under IAS 17) will be recognised on balance sheet and valued in accordance with the principles of IFRS 16. The biggest asset categories impacted for the Group are expected to be land and buildings and motor vehicles currently supplied under contract hire arrangements.

 

·      there is expected to be an increase in debt, as liabilities relating to existing operating leases are recognised

 

·      operating lease expenditure will be reclassified and split between depreciation and finance costs. Therefore EBITDA will increase. Future depreciation and finance costs are also expected to increase as a result of increased assets and liabilities

 

·      there is an expected temporary but immaterial reduction in profit after tax. This is expected to be driven by an increase in finance costs as a result of the new leases. These finance costs will have an accelerated profile which will reduce over a lease term

 

·      there may be a corresponding effect on tax balances in relation to all of the above impacts.

 

This standard will require the Group to make key accounting judgments in particular around the likelihood of lease renewals. Details of the Group's existing operating lease commitments at 30 June 2019 are set out in note 19 of this statement.

 

On transition, the Group intends to apply the practical expedient allowing the exclusion of leases with a remaining life of less than 1 year. As a result, on 1 July 2019 right of use assets will increase by £18.6m, lease liabilities will increase by £19.1m, and there will be a one-off reduction to opening reserves of £0.5m. If applied for the financial year just ended then operating profit would have increased by 0.6m, interest charges would have increased by 0.3m and profit before taxation would have increased by £0.3m, EBITDA would have increased by £20.9m.

 

5          Going concern

The Group's business activities, analysis of its financial performance and position, and factors likely to affect its future development, are set out in the Operational and Financial Review above. The financial resources available to the Group are also discussed in detail in the Operational and Financial Review above. The forward risks faced by the Group are also discussed in the section on principal risks and uncertainties above.

 

The directors have assessed the future funding requirement of the Group and the Company, and have compared them to the sources and levels of working capital resources available including cash balances and the current committed £55m bank revolving credit and overdraft facilities as well as the numerous fleet financing lines provided by various parties. The assessment included a review of current financial projections to June 2021 and any applicable covenants under the bank facilities. Recognising the inherent uncertainty in making financial projections, in particular with regard to the demand for the Group's services and the cash collection profiles from insurers, the directors considered a number of scenarios and the mitigating actions the Group could take to limit any adverse consequences.

 

Having undertaken this work, the directors are of the opinion that the Group continues to have access to adequate resources to fund its operations for the foreseeable future and so determine that it is appropriate for the financial statements to be prepared on a going concern basis.

 

6          Amortisation of intangibles, share based payments and exceptional items

Management is required to exercise its judgment in the classification of certain items such as exceptional and those other items considered to be outside of the Group's underlying results. The determination of whether an item should be separately disclosed as an exceptional item or other adjustment requires judgment on its nature and incidence, as well as whether it provides clarity on the Group's underlying trading performance.

 

Throughout this report reference is therefore made to adjusted results and measures. The directors believe that the selected adjusted measures allow management and other stakeholders to better compare the performance of the Group between the current and prior year, without the effects of one-off or non-operational items and, given the Group's full distribution dividend policy, better reflects the normalised underlying cash earnings earned in the year under review to which the directors have regard in determining the amount of any dividend.

 

As these Alternative performance measures ("APMs") are not defined by IFRS, they may not be directly comparable to other companies' APMs. They are not intended to be a substitute for, or superior to, IFRS measurements and the Directors recommend that the IFRS measures should also be used when readers of this document assess the performance of the Group.

In exercising this judgment, the directors have taken appropriate regard of IAS 1 "Presentation of financial statements" as well as guidance issued by the European Securities and Markets Authority on the reporting of non-adjusted results. Adjusted measures exclude the impact of the amortisation of intangibles, share based payments and exceptional items ("adjustment items") as shown below. A reconciliation of IFRS to non-IFRS underlying measures is also outlined in the Financial Review and the Consolidated Income Statement.

 

 

 

 

 

2019

 

2018

 

 

 

£'000

£'000

Administration costs - Amortisation and share based payments:

 

 

 

 

a) Amortisation of acquired intangible assets

 

 

(2,390)

(2,390)

b) Share based payments

 

 

(1,082)

(1,791)

Total amortisation of acquired intangible assets and share based payments

(3,472)

(4,181)

 

 

 

 

 

Exceptional items comprise the following:

 

 

 

 

c) Leasehold property provisions

 

 

(2,812)

(1,973)

d) Freehold property profit on sale (2018: impairment)

 

 

246

(379)

e) Reorganisation and redundancy costs

 

 

(683)

(676)

f) Goodwill impairment

 

 

(913)

-

Impact of exceptional items on operating profit

 

 

(4,162)

(3,028)

Total exceptional items

 

 

(4,162)

(3,028)

 

 

 

 

 

Total adjustments to operating profits

 

 

(7,634)

(7,209)

Total adjustments to profit before taxation

 

 

(7,634)

(7,209)

Tax effect of the above

 

 

1,015

1,418

Impact on profit after tax for the year

 

 

(6,619)

(5,791)

 

a) Amortisation of acquired intangible assets

The Group recognised the value of customer relationships and acquired software amounting to £22.9m in total (Note 11) as a result of the acquisition of FMG in 2015 and these assets are being amortised over 10 and 5 years respectively. Such amortisation is included in adjustment items as it is related to the acquisitions of businesses and does not involve ongoing cash expenditure in the normal operations of the Group. The charge for the year amounts to £2.4m (2018: £2.4m) (Note 11), and the tax effect was a credit of £0.4m (2018: credit of £0.9m).

 

b) Share-based payments

The Group has a number of share incentive schemes. In accordance with IFRS 2 the calculated charge in respect of options issued and outstanding amounts to £1.1m for the year (2018: £1.8m). Such charges are included in adjustment items as they do not represent a cash cost of operations, have no effect on the net assets of the Group and given that unissued options are already included in the statutory diluted earnings per share calculations these costs are removed to avoid double counting in arriving at such diluted earnings per share.

 

c) Leasehold property provisions

The Group has restructured its operations by the moving of its operations from three existing locations to two locations one of which involving new premises with greater capacity to accommodate anticipated growth. Provisions made include provisions for the Group's plans to mitigate against the holding costs between now and the end date of any liabilities for the resultant empty properties for those premises that will be no longer occupied by the Group. In addition the Group presently is subject to a number of onerous long term leases of certain properties vacated in prior years and no longer occupied by the Group. Provisions made reflect the net holding cost of all of these empty properties between now and the end date of the relevant obligations for those properties taking into account the Group's plans for mitigation of these costs (which includes refurbishment and subletting) and a pre-tax exceptional charge of £2.8m (2018: £2.0m) has been made in this respect. The tax effect was a credit of £0.5m (2018: £0.4m).

 

d) Freehold property sale (2018: Impairment)

In connection with the restructuring its operations mentioned above the Group made the decision to vacate a freehold property and move its operations to new larger leasehold premises. As a consequence the empty property was sold at a profit of £0.2m. The impairment provision last year reflects an anticipated change in the valuation from an 'in use' basis to one that reflected vacant possession and amounted to £0.4m.

 

e) Reorganisation and redundancy costs

As stated above the Group has restructured its operations by moving its operations from three existing locations to two locations including one completely new premises. This restructuring has also, in the case of the closure of NewLaw's main Bristol office, given rise to redundancy costs in respect of those staff who were unable or unwilling to relocate to NewLaw's existing head office premises in Cardiff or whose roles would be duplicated as a result of the merger of operations. In addition certain of the Groups other operations were also restructured during the year giving rise to redundancy and termination payments. These restructurings did not represent the normal operations of the Group. The total costs of this and other costs associated with the restructuring total £0.7m (2018: £0.7m) for the year and the tax effect was a credit of £0.1m (2018: £0.1m).

 

f) Impairment of goodwill

As detailed in note 10, following the annual impairment review by the Directors it has been determined that an impairment in the value of goodwill in relation to NewLaw is appropriate and the resultant non cash impairment charge of £0.9m (2018: £nil) has been included above in exceptional items for the current year.

 

7          Finance income and finance costs

 

2019

£'000

2018

£'000

a) Finance income

 

 

Interest receivable

(37)

(112)

 

 

 

b) Finance costs

 

 

Interest on obligations under finance leases

1,223

1,207

Interest on obligations under working capital loan facility

61

-

Loan facility arrangement costs amortisation and non-utilisation fees

232

245

Unwind of discount on provisions

31

33

 

1,547

1,485

Reclassification of interest on finance leases and fleet facilities to cost of sales

(1,222)

(1,203)

Total finance costs payable

325

282

Total net finance costs

288

170

 

 

 

 

8          Tax

 

2019

£'000

2018

£'000

Current tax

 

 

UK corporation tax on profit for the year

7,917

7,401

Adjustments in respect of prior years

42

(33)

Total current tax charge

7,959

7,368

Deferred tax

 

 

Recognition of previously unrecognised fixed asset & other temporary differences

(1,170)

(2,029)

Origination and reversal of temporary differences

79

(359)

Adjustments in respect of prior years

51

-

Difference in tax rate on deferred tax movements

229

(696)

Total deferred tax credit

(811)

(3,084)

 

 

 

Total tax charge on profit on ordinary activities

7,148

4,284

 

The effective rate of the tax charge of 16.8% (2018: 11.0%) for the year is lower than the effective standard rate of UK corporation tax of 19.00% (2018: 19.00%) due to the increase in recognition of deferred tax assets consequent upon further assessment and recognition of the amount and anticipated timing of the future usage of potential tax allowances.

 

9          Dividends

 

Ordinary share dividends paid in the year to 30 June 2019 can be summarised as follows:

 

 

 

 

2019

£'000

2018

£'000

Final dividend for 2017 of 5.60p paid 02 November 2017

-

17,021

Interim dividend for 2018 of 5.50p paid on 29 March 2018

-

16,719

Final dividend for 2018 of 6.15p paid 08 November 2018

18,815

-

Interim dividend for 2019 of 5.50p paid on 28 March 2019

16,867

-

Total dividends paid in the year

 

 

35,682

33,740

 

The above does not include the recommended final dividend of 6.15p per share for 2019 which if approved at the AGM to be held on 30 October 2019 will be paid on 07 November 2019.

 

10         Goodwill

           

£'000

Cost

 

At 01 July 2017, 30 June 2018 and 30 June 2019

140,308

Accumulated impairment losses

 

At 01 July 2017, 30 June 2018

(54,318)‌‌

Impairment of goodwill - NewLaw CGU

(913)

Accumulated impairment losses 30 June 2019

(55,231)

Net book value at 30 June 2019

85,077

Net book value at 30 June 2018

85,990

 

 

 

Goodwill acquired in a business combination is allocated, at acquisition, to the cash generating units (CGUs) that are expected to benefit from that business acquisition. The Group tests goodwill annually for impairment or more frequently if there are indications that the goodwill might be impaired. The recoverable amounts of CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates and growth rates during the period. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the Group.

 

For the purposes of testing the value of goodwill of all CGUs for impairment the Group has prepared forecasts, for periods of 5 years which have looked at short to medium term factors relevant to the CGUs in the Group, including appropriate macro economic issues, anticipated industry growth forecasts, changes to selling prices and direct costs. Due to the economic and political factors affecting the industry in which the Group operates, the forecast has assumed a growth rate in cash from operating activities averaging 1.0% per annum over the forecast period.

 

The forecasts have been used as the basis for the value in use calculation since these forecasts are considered to be sufficiently detailed and represent the best available information. As required by IAS36, a terminal value has been added to the forecasts with a very conservative 0% growth assumed for the future years. The allocation of Goodwill to the Group's CGUs, pre-tax rates used to discount the forecasts, headroom values when compared to the carrying values of the CGUs (which exclude cash and borrowings) and headroom sensitivities to changes in discount rates, is shown in the table below:

 

2019

 

Auxillis

 

NewLaw

 

FMG

Allocation of Goodwill (£'000)

18,950

39,368

26,759

Pre-tax discount rate

11.4%

15.7%

11.1%

Headroom (£'m)

286.0

0.0

85.8

Headroom increase if discount rate 0.5% lower

16.4

1.5

5.6

Headroom decrease if discount rate 0.5% higher

(15.1)

(1.4)

(5.1)

 

2018

Auxillis

NewLaw

FMG

Allocation of Goodwill (£'000)

18,950

40,281

26,759

Pre-tax discount rate

10.5%

12.3%

10.0%

Headroom (£'m)

402.50

27.5

89.9

 

 

In undertaking the annual impairment review, the directors are required to perform certain calculations strictly in terms of the formulaic approach outlined in IAS36. In doing this they have considered both external and internal sources of information and any observable indications that may suggest that the carrying value of goodwill may be impaired.

 

In connection with the goodwill attributable to NewLaw it has been observed that there may be uncertainties, both positive and negative, with regard to the effects of the implementation of the Civil Liability Act (the "Act") which is presently scheduled to come into force on 1 April 2020. The main effects of the Act are to restrict the amount of damages payable for soft tissue injuries suffered by victims of (principally) road traffic accidents and the amount of fees recoverable from negligent third parties. As a consequence NewLaw, like the rest of the market, is in the process of adapting business models and processes in order to continue to handle such claims more efficiently so as to remain profitable albeit with lower levels of return than has been the case historically. At the same time as reducing cash generated from soft tissue injury cases these changes will require some investment in marketing and IT systems.

 

The recoverable amounts of NewLaw's goodwill has therefore, as required under IAS36, been determined based upon a value in use calculation. The value in use calculation is most sensitive to the key assumptions (prescribed in IAS36) in respect of cash flows, long term growth rate and discount rates. Discount rates are themselves the result of numerous judgemental inputs for which many differing views are held by separate independent experts.

 

These assumptions are subject to a considerable range of possible variations and judgments whilst being constrained by the requirement under IAS36 to have regard to general market comparators (rather than those specific to the Group) as well as certain stress scenarios in relation to the cash flows.

 

As a result of these changes and the resultant possible uncertainty over the levels of soft tissue injury claims that will be available in the market after 1 April 2020, IAS36 requires the Board to take a prudent view on the future cash flows and discount rates applicable to NewLaw (notwithstanding its confidence in the future prospects for the business following its restructure of operations during last year) and this has resulted in the Board's decision to recognise a non-cash impairment of NewLaw's goodwill in the amount of £0.9m as an exceptional item as disclosed in note 6).

 

After review of the results of these tests, the directors consider that there has been no impairment to any of the other CGUs during the year (2018: £nil). Any increase in the discount rate to 47.8% (Auxillis) and 46.5% (FMG) respectively would create a potential impairment indicator, however such levels are not deemed to be appropriate or reasonable by management.

 

The timing and amount of future cash flows are estimates which depend upon the outcome of future events, especially so where cash inflows and outflows arise in different reporting periods or where there is assumed growth in the business, and may need to be revised as circumstances change. Judgment is required in calculating an appropriate CGU specific discount rate.

 

11         Intangible assets

 

Customer relationships

£'000

 

Computer

software

£'000

Total

£'000

Cost

 

 

 

 

At 01 July 2017, 30 June 2018 and 30 June 2019

21,900

 

1,000

22,900

Amortisation

 

 

 

 

At 01 July 2018

(5,840)

 

(533)‌‌

(6,373)

Charge for year

(2,190)‌‌

 

(200)‌‌

(2,390)

At 30 June 2019

(8,030)

 

(733)‌‌

(8,763)

Net book value

 

 

 

 

At 30 June 2019

13,870

 

267

14,137

At 30 June 2018

16,060

 

467

16,527

 

 

12         Interests in associates

The Group's interest in associates comprises of minority participations in five (2018: five) Limited Liability Partnerships ("LLP'") registered and situated in the United Kingdom. All of the LLPs are engaged in the processing of legal claims and are regulated by the Solicitors Regulation Authority. The LLPs are businesses over which the Group is deemed to have significant influence but does not control.

                       

2019

£'000

2018

£'000

Carrying amount of interests in associates

4,401

2,559

 

Group's share of:

 

 

Profit from continuing operations

5,261

2,206

Other Comprehensive income

-

-

Total share of profits

5,261

2,206

 

The accounting period ends of the associated companies consolidated in these financial statements range from 30 November to 31 December. The accounting period end dates of the associates are different from the Group as they are more aligned to the accounting reference dates of the majority partners. The above Information has been obtained from the management accounts of the entities concerned as at 30 June 2019.
 

13         Property, plant and equipment (including vehicles)

 

 

 

 

 

 

Leasehold property

£'000

 

Vehicle hire

fleet

£'000

 

 

Fixtures and equipment

£'000

 

 

 

Total

£'000

 

Cost

 

At 01 July 2018

 

         2,725

820

49,646

11,910

65,101

 

Additions

 

-

  61

34,436

2,481

36,978

 

Disposals

 

(2,287)

                   -

(36,381)

            (439)

(39,107)

 

At 30 June 2019

 

          438

881

47,701

13,952

62,972

 

                     

 

 

 

Accumulated depreciation and impairment

At 01 July 2018

 

(616)

 (572)

(7,780)

(7,537)

(16,505)

Depreciation charge for the year

 

  (44)

(55)

(8,463)

(1,562)

(10,124)

Disposals

 

 (554)

              00

8,711

414

9,679

At 30 June 2019

 

  (106)

 (627)

(7,532)

(8,685)

(16,950)

 

 

Carrying amounts                                                         

At 30 June 2019

 

   332

254

40,169

5,267

46,022

At 30 June 2018

 

     2,109

248

41,866

4,373

48,596

 

 

Leased assets included above:

At 30 June 2019

 

-

-

39,542

-

39,542

At 30 June 2018

 

-

-

41,706

22

41,728

               

 

 

14         Receivables and contract assets

 

Net trade receivables and contract assets comprise claims due from insurance companies and self-insuring organisations as well as amounts invoiced for the provision of services to customers. The Group's debtor days at 30 June 2019 were 116 days (2018: 105 days). This measure is based on net trade receivables, other receivables and accrued income as a proportion of the related underlying revenue multiplied by 365 days.

 

 

 

 

2019

£'000

2018

£'000

Contract assets - claims due from insurance companies and self-insurers

164,732

132,249

Trade receivables - amounts invoiced for services

 

 

18,844

16,092

Net trade receivables and contract assets

 

 

183,576

148,341

Other receivables

 

 

430

175

Accrued income

 

 

3,026

3,208

Total receivables and contract assets for debtor day calculation purposes

 

 

187,032

151,724

Disbursements recoverable in Legal Businesses

 

 

14,383

13,687

Amounts due from associates

 

 

50

50

Taxation recoverable

 

 

120

63

Prepayments

 

 

18,060

15,890

 

 

 

219,645

181,414

 

 

 

 

15         Trade and other payables

 

 

 

 

2019

£'000

2018

£'000

Trade payables

 

 

87,777

89,272

Other taxation and social security

 

 

9,781

8,413

Accruals and deferred income

 

 

57,032

50,633

Disbursements payable in Legal Businesses

 

 

10,398

9,994

Other creditors

 

 

2,431

2,236

Corporation tax

 

 

3,882

3,482

 

 

 

171,301

164,030

 

Trade payables represent amounts payable for goods and services. The directors consider that the carrying amount of trade payables approximates to their fair value.

 

16         Provisions

 

 

Onerous lease

provisions

 

Restructuring provisions

 

 

Total

 

£'000

£'000

£'000

At 30 June 2017

3,824

-

3,824

Provisions made in the year

1,973

218

2,191

Utilised during the year

(1,284)

-

(1,284)

At 30 June 2018

4,513

218

4,731

Provisions made in the year

3,064

-

3,064

Utilised during the year

(2,225)

(218)

(2,443)

At 30 June 2019

5,352

-

5,352

 

Included in current liabilities

 

3,401

 

-

 

3,401

Included in long term liabilities

1,951

-

1,951

 

5,352

-

5,352

 

The Group presently is subject to a number of onerous long term leases of certain properties no longer occupied by the Group. The above provision reflects the directors' estimate of the net holding cost of these leases between now and the end date of those leases discounted to their present value at an appropriate risk free interest rate for the period, taking into account the group's present intended plans for mitigation of these lease costs, including refurbishment plans. Last year the Group has also restructured its operations by moving its operations from three existing locations to alternative locations including one completely new premises. A further restructuring in certain parts of the Groups other operations took place in the year. These restructurings also gave rise to redundancy and termination costs.

 

 17        Deferred tax

 

Deferred tax charge is calculated in full on temporary differences under the liability method as at 31 December 2018, 30 June 2018 and 31 December 2017 using the tax rates enacted at the balance sheet date.

 

(Liability)

 

 

Asset

£'000

£'000

At 30 June 2017

(4,991)

4,236

Credit to income

1,155

1,929

At 30 June 2018

(3,836)

6,165

Credit to income

36

775

At 30 June 2019

(3,800)

6,940

 

At the balance sheet date the Group has temporary differences, principally arising from capital allowances on fleet vehicles of £39.2m (2018: £41.9m) which will be available for offset against future trading profits. A deferred tax asset has been recognised in respect of £38.2m (2018: £32.6m) of this amount to reflect the forecast utilisation of capital allowances carried forward. No deferred tax was recognised on the remaining £1.0m (2018: £9.3m).

 

Deferred tax asset/(liability) not provided in full on temporary differences under the liability method using a tax rate of 17% (2018: 19%):

 

Asset

Tax losses

Carried forward

£'000

Share incentives

 

£'000

Asset

Accelerated tax

depreciation

£'000

Asset

Other timing differences

£'000

At 30 June 2019

-

161

17

(3)

At 30 June 2018

270

957

1,400

89

 

18         Share capital and share premium account

 

Changes in the share capital or share premium account during the year are summarised in the Consolidated Statement of Changes in net Equity and reflect:

 

 

Ordinary shares of 0.1p each

 

Number

£'000

In issue at 30 June 2018

303,986,757

304

Exercise of PSP Options

771,481

1

Exercise of SAYE share options

1,947,807

2

In issue at 30 June 2019 fully paid

306,706,045

 307

 

 

Date

 

Reason

 

Number

 

Average

price

 

Total

£'000

Share

Capital

£'000

Share

Premium

£'000

 

 

 

 

 

 

16 August 2018

Exercise of SAYE Options

3,597

139.00p

5

-

5

28 September 2018

Exercise of SAYE Options

8,035

126.94p

10

-

10

22 October 2018

Exercise of SAYE Options

22,962

126.94p

29

-

29

08 November 2018

Exercise of SAYE Options

6,946

138.17p

10

-

10

03 December 2018

Exercise of SAYE Options

386,300

126.94p

491

1

490

13 December 2018

Exercise of SAYE Options

159,117

126.94p

202

-

202

03 January 2019

Exercise of SAYE Options

38,132

126.94p

48

-

48

24 January 2019

Exercise of SAYE Options

67,196

126.94p

86

-

86

14 February 2019

Exercise of SAYE Options

37,314

126.94p

47

-

47

22 February 2019

Exercise of SAYE Options

1,049

126.94p

1

-

1

06 March 2019

Exercise of SAYE Options

40,833

126.94p

52

-

52

 

Total exercise of SAYE options

771,481

 

 981

   1

 980

               

 

 

Date

 

Reason

 

Number

 

Average

price

 

Total

£'000

Share

Capital

£'000

Share

Premium

£'000

 

 

 

 

 

 

13 September 2018

Exercise of Executive PSP Options

1,285,722

0.1p

1

1

-

19 September 2018

Exercise of Executive PSP Options

207,134

0.1p

-

-

-

24 September 2018

Exercise of Executive PSP Options

410,699

0.1p

1

1

-

27 September 2018

Exercise of Executive PSP Options

25,739

0.1p

-

-

-

28 February 2019

Exercise of Executive PSP Options

18,513

0.1p

-

-

-

 

Total exercise of PSP options

1,947,807

 

2

2

-

 

 

 

 

 

 

 

 

Total shares issued

2,719,288

 

983

3

980

               
 

 

19         Operating lease arrangements

At the balance sheet date the Group had outstanding commitments for future minimum lease payments under non- cancellable operating leases, which fall due as follows:

 

 

2019

2019

2019

2018

2018

2018

Vehicles

Properties

Total

Vehicles

Properties

Total

£'000

£'000

£'000

£'000

£'000

£'000

Within one year

13,482

2,453

15,935

13,020

1,845

14,865

In the second to fifth years inclusive

2,650

16,059

18,709

4,162

7,828

11,990

After five years

-

1,236

1,236

-

2,996

2,996

 

16,132

19,748

35,880

17,182

12,669

29,851

 

Operating lease payments represent rentals payable by the Group for certain of its motor vehicles, plant and equipment and properties. Leases have a weighted average term of 2.55 years (2018: 2.92 years). The lease payments subject to the onerous lease provision of £5.4m (2018: £4.5m) (note 16) have been included within the above amounts.

 

20         Cash flow information

 

a) Analysis and reconciliation of net debt

 

 

01 July

2018

£'000

Cash

flow

£'000

Non cash

changes

£'000

30 June

2019

£'000

 

Cash and cash equivalents

 

30,746

(18,866)

-

11,880

 

Debt due within one year

 

-

(9,000)

-

(9,000)

 

Debt due after more than one year

 

-

-

-

-

 

 

 

-

(9,000)

-

(9,000)

 

Finance leases

 

(39,205)

34,870

(33,230)

(37,565)

 

 

 

(39,205)

25,870

(33,230)

(46,565)

 

Net debt

 

(8,459)

7,004

(33,230)

(34,685)

 

 

 

 

 

 

2019

£'000

2018

£'000

(Decrease) / increase in cash and cash equivalents in the year

(18,866)

(5,598)

Net drawdowns under bank working capital revolving credit facility

(9,000)

-

Finance lease principal payments

34,870

37,504

Change in net debt resulting from cash flows

7,004

31,906

New finance leases

(33,230)

(30,649)

Movement in net debt in the year

(26,226)

1,257

Net debt at start of the year

(8,459)

(9,716)

Net debt at end of the year

(34,685)

(8,459)

 

 

 

A more detailed (non IFRS) reconciliation of the movement in net debt is as follows:

 

 

2019

Cash flow

£'000

2019

Other

adjs

£'000.

2019

Total

 

£'000

 

2018

Cash flow

£'000

2018

Other

adjs

£'000.

2018

Total

 

£'000

 

 

 

 

 

 

 

 

 

EBITDA

 

54,919

 

54,919

 

55,435

 

55,435

Working capital investment

 

(34,009)

 

(34,009)

 

(8,976)

 

(8,976)

Interest paid

 

(1,247)

 

(1,247)

 

(1,095)

 

(1,095)

Tax paid

 

(7,616)

 

(7,616)

 

(5,652)

 

(5,652)

Net cash flows on operating activities

 

12,047

 

12,047

 

39,712

 

39,712

 

 

 

 

 

 

 

 

 

Distributions from associates

 

3,419

 

3,419

 

1,007

 

1,007

Purchase of property, plant & equipment

 

(3,748)

 

(3,748)

 

(3,075)

 

(3,075)

Leases on purchase of motor vehicles

 

-

(33,230)

(33,230)

 

-

(30,649)

(30,649)

Proceeds from sale of plant & equipment

 

29,985

 

29,985

 

29,340

 

29,340

Total investing activities

 

29,656

(33,230)

(3,574)

 

27,272

(30,649)

(3,377)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issue of share capital

 

983

 

983

 

8

 

8

Purchase of shares into treasury

 

-

 

-

 

(1,964)

 

(1,964)

Re-issue of treasury shares

 

-

 

-

 

618

 

618

Dividends paid

 

(35,682)

 

(35,682)

 

(33,740)

 

(33,740)

Net bank loans received / (repaid)

 

9,000

(9,000)

-

 

-

 

-

Finance lease principal repayments

 

(34,870)

34,870

-

 

(37,504)

37,504

-

Net cash used in financing activities

 

(60,569)

25,870

(34,699)

 

(72,582)

37,504

(35,078)

 

 

 

 

 

 

 

 

 

Net (increase) / decrease in net debt

 

(18,866)

(7,360)

(26,226)

 

(5,598)

6,855

1,257

 

 

 

 

 

 

 

 

 

Opening net debt

 

 

 

(8,459)

 

 

 

(9,716)

 

 

 

 

 

 

 

 

 

Closing net debt

 

 

 

(34,685)

 

 

 

(8,459)

 

 

 

 

 

 

 

 

 

Net debt consist of:

 

 

 

 

 

 

 

 

Fleet finance leases

 

 

 

(37,565)

 

 

 

(39,205)

Bank loans

 

 

 

(9,000)

 

 

 

-

Cash at bank and in hand

 

 

 

11,880

 

 

 

30,746

 

 

 

 

(34,685)

 

 

 

(8,459)

 

 

 

21.        Borrowings

 

On 07 August 2019 the Group extended and amended its existing 5 year £35m unsecured revolving credit facility with HSBC expiring in December 2020 to a 5 year £50m facility maturing in August 2024. The Group also has an annual unsecured overdraft facility of £5m with the same bank.

 

The related covenants for the previous £35m facility surround a net debt to EBITDA ratio (< 3:1) and the ratio of qualifying trade and other receivables (including contract assets) to amounts drawn under the HSBC facility (> 1.5:1). Under the extended £50m facility the receivables cover covenant has been replaced by an adjusted EBITDA/to net finance charges ratio (>4:1).

 

The margin charged on the £35m revolving credit facility was dependent upon the Group's net debt to EBITDA ratio, ranging from a minimum of 1.25% over LIBOR to a maximum of 2.25% over LIBOR. Under the £50m facility rates range from a minimum of 1.20% over LIBOR to a maximum of 2.20% over LIBOR The margin on the overdraft is 1.25% over Bank of England Base Rate.

 

 

 

 

22.        Principal risks and uncertainties

 

The Group faces a range of risks and uncertainties. The processes that the Board has established to safeguard both shareholder value and the assets of the Group are described in the Corporate Governance report in the Annual Report and Accounts. Set out here are the Brexit risks and those other specific risks and uncertainties arising in the ordinary course of business that the directors believe could have the most significant adverse impact on the Group's business together with the steps that the Board undertakes in order to mitigate these risks. The risks and uncertainties described below are not intended to be an exhaustive list.

 

Brexit

There has been much speculation but no certainty on the effect of Brexit on the timeliness, quantity and cost of the supply of goods or services into the United Kingdom post Brexit which is presently re-scheduled for 31 October 2019.

 

The Group does not employ a significant number of Non UK EU nationals and does not directly purchase or sell goods or services from or to the EU.

 

The services that the Group supplies are contained within the UK and principally involve the arrangement of accident and incident management on behalf of customers. In such cases the Group will instruct third parties to supply replacement parts and/or make repairs to customer's vehicles whilst also supplying replacement cars to the customer from the Group's own fleet of vehicles whilst repairs are being carried out. The costs of these services are then collected from the relevant insurance company or fleet owner as appropriate under the law of tort or relevant services agreement.

 

Depending on the outcome of Brexit, there are scenarios which could result in delays in the sourcing of required replacement parts for repairs or new vehicles into the United Kingdom and it is possible that such delays might, in the absence of any mitigating actions by vehicle manufacturers or stockholders in the repairer supply chain, lead to delays in the supply of new vehicles or delays in the repairing of vehicles causing an increase in off-road time for those vehicles that are classed as un-driveable (with a corresponding increase in required replacement vehicle hire days). This is turn would have an adverse impact on costs which are passed through the supply chain. In the case of delays in the supply of new motor vehicles the Group would manage its fleet rotation by similarly delaying corresponding disposals of its fleet.

 

To the extent that Brexit generally adversely affects the economic conditions in the United Kingdom then the risks to the Group are as outlined in the principal risks and uncertainties as detailed below.

 

 

Economic conditions

The Group's operating and financial performance is affected by the economic conditions in the United Kingdom. Adverse changes in economic conditions in the United Kingdom and globally and the volatility of international markets could result in continued or further changes to driving patterns, car usage and ownership and this may result in fewer miles driven and lower numbers of accidents and therefore reduced business volumes. Any such adverse effects on the Group's business might affect its relationships and/or terms of business with, and ultimately even the loss of, some key business partners. Economic uncertainty might also affect its key business partners and referrers and/or generally have an adverse impact on the insurance or other industries in which the Group's key trading partners operate. This in turn could lead to more onerous terms of business or the inability of the Group's debtors to pay monies due. Economic uncertainty may also have an adverse effect on the banking industry generally which may affect the Group's ability to obtain or maintain finance on suitable terms when needed.

 

The Group continually monitors government statistics as well as other external data as part of its ongoing financial and operational budgeting and forecasting processes. In addition regular communications take place with the Group's major insurance partners in order to monitor consumer insurance trends so that the Group may plan its response to any potential changes. The Group also communicates with its existing and potential lenders regularly in order to maintain close relationships.

 

Competition

Barriers to entry into the general credit hire and credit repair markets at a local level are low. Although barriers to establishing a national or specialist business in this sector are higher, there is no certainty that these barriers will remain or will deter new entrants or existing competitors. In addition, there is the potential for local operators to overcome these barriers and establish national networks by forming alliances. Furthermore, competition could be intensified due to the activity of the Group's competitors or if insurance companies, brokers and/or providers of services to motorists or other consumer groups entered the market, either alone or in collaboration with existing providers.

 

Increased competitive pressures such as these could result in a fall in the Group's revenues, margins and/or market share which could cause an adverse impact on its business, financial condition and operating results.

 

The Group monitors its competitive position closely with a view to ensuring that it is able to provide its customers with the best overall solution to their requirements taking into account commercial considerations. This is underpinned by a commitment to high quality service of its customers' needs together with regular monitoring and feedback of actual performance against customers' expectations. The monitoring includes performance against agreed service levels with customers and regular meetings are held with referrer partners to discuss performance and requirements.

 

Customer and referrer relationships

Business is referred to the Group from a number of sources including insurance companies, insurance brokers, dealerships, body shops, leasing companies and owners of large fleets. The Group has agreements in place with many of these referrers which govern the flow of hire and repair cases and the terms and commissions on which such cases are introduced. These agreements are subject to periodic review, and once out of initial term can be terminated with short notice periods of typically 3 to 6 months. In the past, commission rates for new business have risen sharply, increasing the costs of acquiring such new business. Commission increases could adversely affect the Group's business and operating results.

 

A significant proportion of the Group's business is referred from insurance companies. If insurance companies were to withhold business from the Group or accident management providers generally or increase their referral commissions, whether alone or on a concerted basis, the operating results, business and prospects of the Group could be adversely impacted. Based upon profit contribution analysis, the Group may decide that renewal terms for certain existing contracts are uneconomic for the Group and consequently gross revenues may decline.

 

The Group seeks and develops long term relationships with partners and secures these relationships with appropriate, long-term formal contracts. Where possible contracts are structured in such a way as to match income with corresponding costs and regular reviews take place of contribution from contracts in order to ensure that where such contributions become uneconomic a dialogue is opened with the counterparty in an attempt to resolve this.

 

Insurance industry protocols

The Group was a subscriber to the voluntary agreement developed by accident management companies and the ABI known as the General Terms of Agreement (GTA) but withdrew from this agreement with effect from 15 August 2015. This decision was taken due to the considerable amount of business conducted by the Group under protocol arrangements that the Group has with insurers and the residual element of business still conducted under the GTA was considered to be less significant. There is no guarantee that non-protocol insurers will continue to conduct their business with the Group on terms (including payment terms) similar to those previously pertaining to the GTA and they may also seek alternative strategies to dealing with claims submitted. The Group takes an active part in discussions within the industry and since the Group's withdrawal from the GTA the Group has continued to undertake a significant amount of its business under protocol arrangements with insurers.

 

Regulation

Certain of the Group's activities and arrangements are subject to regulation. Whilst the Group seeks to conduct its business in compliance with all applicable regulations, there remains a residual risk that regulators will find that the Group has not complied fully with all such regulations. Failure by the Group to comply with regulations may adversely affect its reputation (which could in turn lead to fewer referrals), may result in the imposition of fines or an obligation to pay compensation, or may prevent the Group from carrying on a part of its business and could have a materially adverse effect on the Group's business, financial condition and operating results.

 

The Group maintains a legal function and a regulatory risk and compliance function to monitor the management of these risks and compliance with relevant laws and regulations. Reputable external advisors are retained where necessary. Internal policies and practices are reviewed regularly to take account of any changes in obligations. Training and induction programmes ensure that staff receive appropriate training and briefings on the relevant policies and laws.

 

Legal

In the past, legal challenges have been brought on various grounds (mainly by insurance companies) seeking weaknesses in the legality of credit hire agreements and the hire rates and the periods of hire that can be recovered by credit hire companies. A number of historical legal cases relating to the provision of credit hire and related services have provided a precedent framework which has remained broadly stable for several years. The majority of the Group's claims are now initially pursued under the terms of protocols with individual insurers and the Group believes that it operates its business within the parameters laid down by the reported decisions of the courts such that its credit hire and repair arrangements are enforceable. However fresh challenges may be brought from time to time.

 

The government continues to look at the overall costs of litigation. It may bring in legislation or amend or create new rules of court, which further reduce the costs recoverable in certain types of actions and/or changing the criteria for litigation to fall within the small claims track (where legal costs (except the most basic) are not generally recoverable) which might have an impact on the profit costs of the Group's legal businesses and/or increase the cost of recovering credit charges.

 

The Group maintains a legal function and also monitors relevant legal developments and the development and outcome of test cases through its membership of the Credit Hire Organisation. The Group's contracts and documentation are reviewed and amended where appropriate to take into account legal developments and case law.

 

The Group's legal department and the Group's legal businesses monitor such matters and the Group will endeavour to adapt its business model to deal with such changes if and when they are introduced.  The legal businesses have been diversifying and undertaking a greater volume of significant injury cases which would not be affected to the same extent by these reforms.

 

Recovery of contract assets (claims due from insurers and self-insuring organisations)

The business of credit hire and repair involves the provision of goods and services on credit. The Group generally receives payment for the goods and services it has provided after a claim has been pursued against the party at fault (and the relevant third party insurer). This can mean that the Group can endure a long period before payment is received. Whilst currently a significant level of the Group's claims are subject to protocol arrangements resulting in prompt settlement of claims there is a risk that the Group will not be able to improve or maintain the pace of settlement of claims. In addition, third party insurers may seek to delay payments further in an attempt to achieve more favourable settlement terms for outstanding claims or, ultimately, to force the Group and other credit hire providers out of the market. If the Group is unable to maintain existing settlement periods, if there are further delays in the receipt of payments or if settlement terms with insurers worsen, its business, financial condition and operating results could be adversely impacted.

 

The Group manages this risk by ensuring that services are only provided to customers after a full risk assessment process and agreement to an appropriate contract.

 

Fleet costs and residual values

The cost to the Group of holding vehicles for hire is dependent upon a number of factors, including the availability of vehicle finance, the purchase price of those vehicles, the level of discounts available from dealers and manufacturers, financing costs (represented by LIBOR and applicable margins) and the expected residual value at the date of disposal. There is a risk that changes in any of these factors could mean that the Group's fleet costs are increased.

 

Tax Writing Down Allowances (WDAs) influence the net holding costs of vehicles whether purchased or contract hired. Government strategy and policies on vehicle emissions are often implemented by changes in the rates and deductibility of tax allowances applicable to vehicles generally and their related emissions. There is a risk that changes in government policy and related tax WDAs could mean that the fleet holding costs (net of taxation) and the effective Group tax charge percentage are increased as a result.

 

The Group's fleet management system enables the business to manage the fleet effectively and maximise the utilisation of its vehicles in order to minimise the cost to the business of holding vehicles. Risk is further mitigated by managing vehicle holding periods and managing interest rate risk via fixed interest rate arrangements including interest hedging arrangements where appropriate.

 

Operational risks and systems

Operational risks are present in all of the Group's businesses, including the risk of direct and/or indirect loss resulting from inadequate or failed internal and external processes, systems, or infrastructure from fraud or human error or from external events. The Group's business is dependent on processing a large number of incidents for management, claims, and vehicle hires and repairs. There could be a failure, weakness in, or security breach of, the Group's systems, processes or business continuity arrangements.

 

The Group's systems and processes are designed to ensure that the operational risks associated with its activities are appropriately controlled. Preventative controls and back-up and recovery procedures are in place for key systems and all buildings. Changes to Group systems are considered as part of a wider group business change management process and implemented in phases where possible. The Group has business recovery and business continuity plans in all of its operations.

 

Liquidity and financial

The Group manages its existing cash balances and operational cash flow surpluses to provide day to day working capital headroom. In addition the Group has available to it a £50m 5 year committed revolving capital facility with HSBC and also has a £5m overdraft facility with the same bank. The Group also has both committed and uncommitted fleet finance facilities to finance replacement vehicle purchases. In addition the principal financial risks and uncertainties therefore include capital risk, interest rate risk and credit risk.

 

Going concern

The Group's business activities, analysis of its financial performance and position, and factors likely to affect its future development, are set out in the Operational and Financial Review above. The financial resources available to the Group are also discussed in detail in the Operational and Financial Review above. The forward risks faced by the Group are also discussed in the section on principal risks and uncertainties above.

 

The directors have assessed the future funding requirement of the Group and the Company, and have compared them to the sources and levels of working capital resources available including cash balances and the current committed £55m bank revolving credit and overdraft facilities as well as the numerous fleet financing lines provided by various parties. The assessment included a review of current financial projections to June 2021 and any applicable covenants under the bank facilities. Recognising the inherent uncertainty in making financial projections, in particular with regard to the demand for the Group's services and the cash collection profiles from insurers, the directors considered a number of scenarios and the mitigating actions the Group could take to limit any adverse consequences.

 

Having undertaken this work, the directors are of the opinion that the Group continues to have access to adequate resources to fund its operations for the foreseeable future and so determine that it is appropriate for the financial statements to be prepared on a going concern basis.

 

23. Full financial statements

 

The Group's full financial statements for the year ended 30 June 2019 will be posted to shareholders shortly and will be delivered to the Registrar of Companies in due course. A copy will be available shortly on the Group's website:  http://www.redde.com/investors/reports-and-presentations.aspx


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