LSL Property Services Preliminary Announcement (8138R)

TIDMLSL

RNS Number : 8138R

LSL Property Services

05 March 2019

5(th) March 2019

LSL Property Services plc ("LSL" or "The Group")

PRELIMINARY ANNOUNCEMENT

LSL Property Services plc, a leading provider of residential property services incorporating estate agency, financial services and surveying and valuation businesses, announces preliminary results for the year ended 31(st) December 2018.

 
                                                  2018    2017   % change 
 Group Revenue - GBPm                            324.6   311.5         +4 
 Group Underlying Operating Profit(1) - GBPm      35.9    37.5         -4 
 Group Underlying Operating Margin - %            11.1    12.0 
----------------------------------------------  ------  ------  --------- 
 Group Adjusted EBITDA(2)                         41.6    42.7         -3 
 Group Operating Profit - GBPm                    25.4    42.1        -40 
 Profit before tax - GBPm                         23.1    40.1        -42 
 Net Exceptional (costs) / gain - GBPm           (3.0)     9.3 
 Basic Earnings Per Share - pence                 17.4    32.6        -47 
 Adjusted Basic Earnings Per Share - pence(3)     27.2    28.3         -4 
 Net Bank Debt(4) at 31(st) December - GBPm       32.1    30.0         +7 
 Final proposed dividend per Share - pence         6.9     7.3         -5 
 Full year dividend per Share - pence             10.9    11.3         -4 
----------------------------------------------  ------  ------  --------- 
 

-- Highly resilient Revenue and Underlying Operating Profit performance in the context of challenging residential market conditions. Group Revenue up 4%, Group Underlying Operating Profit(1) down 4% to GBP35.9m (2017: GBP37.5m) and Group Adjusted EBITDA down 3% to GBP41.6m (2017: GBP42.7m).

-- Proposed final dividend of 6.9p bringing full year dividend to 10.9p per share at the upper end of the range of our stated policy.

-- Leading market positions: market leader in Surveying, second largest combined networks in Financial Services, and market leading positions in Estate Agency.

-- Overall Estate Agency Division income up 3% year-on-year and operating profit down 24% reflecting the effect of operational gearing on lower Residential Sales exchange volumes which more than offset the benefits from Financial Services income and Lettings income growth.

-- Overall Surveying Division revenue up 9% year-on-year benefitting from the new Lloyds Bank plc contract with operating profit up 8%.

   --      Write-down of LSL investment in Yopa by GBP12.2m 

-- Net Bank Debt of GBP32.1m (2017: GBP30.0m) and low level of gearing(5) at 0.8x EBITDA (2017: 0.7x).

Commenting on today's announcement, Simon Embley, Chairman, said:

"The Group delivered a highly resilient revenue and Underlying Operating Profit performance in 2018 despite challenging residential property market conditions. We continue to deliver a range of proactive self-help initiatives demonstrating the breadth of opportunity across the Group.

Market conditions in 2019 have been notably softer than the equivalent period in 2018, whilst LSL's financial performance so far in 2019 has been marginally behind the Board's expectations. Nevertheless, at this early stage in the year, the Board's current expectation is that the Group will deliver a full year Underlying Operating Profit in line with its prior expectations, as the business is expected to continue to benefit from the range of LSL's ongoing self-help measures.

We continue to remain cautious on the residential property market outlook for 2019 given the current uncertainty over the UK and global political and economic environment and the potential impact on UK consumer confidence.

The Group has a robust balance sheet with relatively low levels of gearing and is highly cash generative at an operational level. The Board remain confident of the opportunities for further positive progress for the Group."

Estate Agency Financials

 
 P&L (GBPm)                    2018    2017    Change 
 Financial Services income     87.4    74.4     17% 
 Lettings income               76.6    73.9      4% 
 Residential Sales exchange 
  income                       69.9    76.6     -9% 
 Other Income                  20.9    22.5     -7% 
 Total Revenue                 254.8   247.4     3% 
 Operating Profit              20.6    26.9     -24% 
 Operating Margin              8.1%    10.9% 
 

-- Strong growth in Financial Services income of 17% year on year (organic growth 1%) reflecting the acquisition of two mortgage brokers: PTFS and RSC

-- Steady growth of recurring income with Lettings income increasing 4% year-on-year (organic growth: 3%)

-- Six lettings book acquisitions were made during 2018, in line with LSL's stated strategy, for a total consideration of GBP1.9m

-- Residential Sales exchange revenue down by 9% reflecting challenging residential property market conditions

-- Marsh & Parsons delivered a good revenue performance despite a challenging London market. Total revenue was down 2% year-on-year as Lettings income continued to perform positively with growth of 4% largely offsetting the 13% fall in Residential Sales exchange revenue. Full year operating profit fell to GBP2.3m (2017: GBP3.9m). Adjusted EBITDA was GBP3.4m (2017: GBP4.9m)

   --      Reshaping of the Your Move and Reeds Rains branch networks commenced in February 2019. 

-- LSL retains a strong position in its traditional Estate Agency business. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that Estate Agency branches will continue to remain core to providing the service our customers expect

-- LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of GBP20.0m for Yopa has been written down through reserves by GBP12.2m to GBP7.8m as at 31(st) December 2018 to reflect the Board's assessment of fair value

Surveying Financials

 
 P&L (GBPm)          2018    2017    Change 
 Total Revenue       69.8    64.1      9% 
 Operating Profit    20.4    18.9      8% 
 Operating Margin    29.3%   29.4% 
 

-- The Surveying Division delivered strong revenue and operating profit performance with revenue growth of 9%, operating profit growth of 8% and strong operating margins of 29.3% (2017: 29.4%). Revenues included a material contribution in the second half from the successful commencement of the Lloyds Bank plc surveying and valuation services relationship.

-- Continued positive progress in settling historic Professional Indemnity (PI) claims with an exceptional provision release of GBP2.2m in 2018 as claims were settled below previous expectations

Change to segment reporting

-- To reflect the growth and increased importance of LSL's Financial Services businesses, effective from 1(st) January 2019, LSL will report three segments: Estate Agency, Financial Services and Surveying

This announcement has been determined to contain inside information.

For further information, please contact:

 
 Ian Crabb, Group Chief Executive 
  Officer 
 Adam Castleton, Group Chief Financial 
  Officer 
 LSL Property Services plc                0207 382 0360 
 
 Helen Tarbet, Sophie Wills 
 Buchanan                                 0207 466 5000 
 

Notes:

1. Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4 to the Financial Statements)

2. Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 4 to the Financial Statements)

   3.     Refer to Note 6 to the Financial Statements for the calculation 
   4.     Refer to Note 10 to the Financial Statements for the calculation 
   5.     Operational gearing is defined as Net bank Debt divided by Group Adjusted EBITDA(2) 

Notes on LSL:

LSL is a leading provider of residential property services to its key customer groups. Services to consumers include: residential sales, lettings, surveying, conveyancing support, and mortgage, pure protection and general insurance brokerage services. Services to mortgage lenders include: valuations and panel management services, and asset management and property management services. For further information, please visit LSL's website: lslps.co.uk

Chairman's Statement

Introduction

The Group delivered a highly resilient revenue and operating profit performance in 2018 despite challenging residential property market conditions. Group Underlying Operating Profit(1) of GBP35.9m in 2018 was 4% below the prior year (2017: GBP37.5m) with Group Adjusted EBITDA(2) down 3%. Group Revenue in 2018 grew by 4% to GBP324.6m (2017: GBP311.5m) reflecting overall growth in both Divisions.

We continue to deliver a range of proactive self-help initiatives demonstrating the breadth of opportunity across the Group. These initiatives included the material contract win for the supply of surveying and valuation services to Lloyds Bank plc, the acquisitions in our Financial Services business of PTFS and RSC, the acquisition of a c.35% holding in Mortgage Gym, a digital mortgage marketplace business, and the recommencement of our lettings book acquisition programme with six lettings books acquired during the period.

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks and operations announced on 5(th) February 2019 demonstrate our commitment to evolve our business model to adapt to changes in the landscape and customer demands in order to drive value for our Shareholders.

The Your Move and Reed Rains future focus on 144 keystone branches is to create a platform that will benefit from their larger scale, enabling us to invest in people and technology with the aim of providing enhanced levels of service to our customers whilst ensuring operational performance is optimised by competing more effectively in local markets. Delivering the ways of working programme into Your Move and Reeds Rains is expected to deliver material improvement in Your Move and Reeds Rains operating profit, assuming no material change in market conditions.

LSL retains a strong position in its traditional Estate Agency business. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that Estate Agency branches will continue to remain core to providing the service our customers expect.

LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of GBP20.0m for Yopa has been written down through reserves by GBP12.2m to GBP7.8m as at 31(st) December 2018 to reflect the Board's assessment of fair value.

Dividend

The Board continues to support our previously communicated dividend policy, to apply a dividend pay-out ratio of between 30% to 40% of Group Underlying Operating Profit(1) after interest and tax. The Board has reviewed the policy while considering the risks and capital management decisions facing the Group.

Adjusted Basic Earnings Per Share for 2018 was 27.2 pence, a decrease of 4% on the prior year (2017: 28.3 pence). The Board has a positive view of the future prospects for the business whilst also being mindful of the uncertain economic and political landscape which has an impact on consumer sentiment. The proposed dividend payment is at the upper end of the range of our stated policy and a final dividend of 6.9 pence per share (2017: 7.3 pence per share) will be proposed to Shareholders at the forthcoming AGM, giving a total dividend for 2018 of 10.9 pence per share (2017: 11.3 pence per share). The ex-dividend date for the final dividend is 21(st) March 2019 with a record date of 22(nd) March 2019 and a payment date of 7(th) May 2019. The last date for election is 5(th) April 2019.

Corporate Governance and Board

The Board remains committed to high levels of corporate governance and during 2018, LSL has complied in all respects with the UK Corporate Governance Code (April 2016 edition). We note the publication of the revised UK Corporate Governance Code and Guidance on Board Effectiveness which was published in July 2018 and will apply to LSL from 1(st) January 2019. We have begun the implementation of actions to reflect the 2018 Code in our corporate governance arrangements, including the implementation of measures to support greater stakeholder engagement (including workforce engagement) and the development of LSL's culture, purpose and values. Further details on the steps we are taking are contained in our Corporate Governance Report.

In relation to 2018, as Chairman, I am responsible for leadership of the Board, and I have together with my fellow directors reviewed the effectiveness of the Board and its Committees. The 2018 annual evaluation exercise had regard to the requirements of both the 2016 and 2018 editions of the Code and its associated guidance. In particular, we reviewed the composition of the Board and its Committees and our succession arrangements. Following this review we concluded that we have the appropriate balance of skills, independence and knowledge of the Group together to enable the Board to discharge its duties and responsibilities effectively. The evaluation also considered other matters such as leadership, division of responsibilities, meeting arrangements, and included a review of the annual evaluation process itself.

Details of our corporate governance arrangements and the recommendations arising from the 2018 evaluation exercise are contained within the Corporate Governance Report of the Annual Report and Accounts 2018 together with details of how we have implemented recommendations which arose from the 2017 evaluation exercise.

I would like to take this opportunity to thank Kumsal Bayazit Besson who has been a Non Executive Director since September 2015 and who intends to resign from the Board and its Committees with effect from the 2019 AGM. Kumsal has made a significant contribution during her tenure as a Director and she is leaving LSL to focus on her new role as CEO of Elsevier.

I would also like to welcome Darrell Evans, who joined the Board and its Committees as a Non Executive Director on 28(th) February 2019. Darrell joins LSL with significant experience in Financial Services and he is currently the Chief Commercial Officer at the Co-Operative Bank plc.

The Nominations Committee will, on behalf of the Board, review the Board's composition during 2019. Details relating to all our Directors are included in The Board section of the Annual Report and Accounts 2018 and our website.

Outlook

Market conditions in 2019 have been notably softer than the equivalent period in 2018, whilst LSL's financial performance so far in 2019 has been marginally behind the Board's expectations. Nevertheless, at this early stage in the year, the Board's current expectation is that the Group will deliver a full year Underlying Operating Profit in line with its prior expectations, as the business is expected to continue to benefit from the range of LSL's ongoing self-help measures.

We continue to remain cautious on the residential property market outlook for 2019 given the current uncertainty over the UK and global political and economic environment and the potential impact on UK consumer confidence.

The Board currently expects to see a material reduction in the volume of house purchase transactions compared to the prior year. Mortgage costs continue to be low by historic standards and mortgage availability remains good. The medium to longer term fundamentals of the UK housing market remain solid.

The final arrangements for the planned exit from the European Union are uncertain. In the eventuality that the outcome leads to a changed impact on consumer confidence and our business, we will update our Shareholders.

Although Brexit and the current political environment continues to create uncertainty, the Group has a robust balance sheet with relatively low levels of gearing and is very cash generative at an operational level.

LSL continues to execute on its stated strategy and we are confident that LSL, with its market leading brands, broad portfolio of residential property services and the benefits from the proactive self-help measures, remains well positioned to perform well given a range of potential market conditions, in order to maximise Shareholder value. The Board remain confident of the opportunities for further positive progress for the Group.

Simon Embley

Chairman

5(th) March 2019

Note 1 Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4 to the Financial Statements).

Note 2 Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property plant and equipment (as defined in Note 4 to the Financial Statements).

Group Chief Executive's Review

2018 Overview

In the context of challenging market conditions, the Group delivered a highly resilient performance in 2018, underpinned by a continuing range of self-help measures delivered across the Group.

Group revenues for the year ended 31(st) December 2018 increased by 4% to GBP324.6m (2017: GBP311.5m) reflecting overall growth in both Divisions, with Estate Agency revenue up 3% and Surveying revenue up 9%. Group Underlying Operating Profit(1) was down 4% to GBP35.9m (2017: GBP37.5m), and Group Adjusted EBITDA(2) was down 3% to GBP41.6m (2017: GBP42.7m). Profit before tax of GBP23.1m was down 42% compared to the prior year (2017: GBP40.1m).

The Group has a strong balance sheet with closing Net Bank Debt at 31(st) December 2018 of GBP32.1m (2017: GBP30.0m) and low level of gearing(3) at 0.8 times Group Adjusted EBITDA (2017: 0.7 times). The modest increase in Net Debt in 2018 is after incurring total cash consideration of GBP11.8m for the funding of two Financial Services acquisitions (PTFS and RSC), one Financial Services investment (Mortgage Gym) and six lettings books acquisitions during the year. LSL also maintained the payment of dividends to Shareholders during the year.

The Group generated strong cash from operations of GBP36.9m (2017: GBP41.5m) converting 103% of Group Underlying Operating Profit to cash-flow from operations (pre PI and exceptionals) (2017: 117%).

In the Estate Agency Division, we continued to invest in the growing parts of our businesses and delivered strong year-on-year revenue growth in Lettings (+4%) and Financial Services (+17%). In the Surveying Division, we delivered strong operating profit growth (+9%) and strong margins (29.3%).

During 2018, we continued to execute on our stated strategy and made positive progress across the Group as follows:

-- In May 2018, we were pleased to announce the material contract win for the supply of surveying and valuation services to Lloyds Bank plc. The initial performance of this contract is in line with expectations

-- During 2018, LSL continued its strategy to evaluate selective acquisitions and completed two Financial Services related acquisitions, PTFS and RSC which are both performing in line with expectations. These acquisitions support LSL's stated strategy of enhancing its position as a leading mortgage distributor and are an excellent fit with our existing Financial Services businesses. LSL also acquired a c.35% holding in Mortgage Gym, a digital mortgage marketplace business in July 2018

-- During 2018, LSL restarted its lettings book acquisition programme with six lettings books acquired during the period

Reshaping Your Move and Reeds Rains branch networks

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks and operations announced on 5(th) February 2019 are proceeding in line with expectations. The Your Move and Reeds Rains branch networks have been reduced from 308 to 144 keystone branches following the closure and merging of 81 neighbouring branches into the keystone branch network, the franchising of 39 branches and the closure of 44 branches.

Delivering the ways of working programme into Your Move and Reeds Rains is expected to deliver material improvement in Your Move and Reeds Rains operating profit, assuming no material change in residential property market conditions.

The Market in 2018

The UK residential property market was subdued in 2018. Approvals for house purchases(4) in 2018 were down by 1.9% with the decline in market transactions continuing to be more substantial in London and the South East(5) . Total mortgage approvals(4) increased by 0.6% in 2018, with the increase in remortgage approvals of 3.9% offsetting the fall in house purchase approvals. The increase in remortgage approvals included strong growth in the first half of 2018 (+7.9%) compared to the same period in 2017 reflecting an increase in remortgage activity due to the widely anticipated interest rate increase announced by the Bank of England in May 2018. Second half mortgage activity in 2018 was broadly flat against the same period in 2017.

Average house prices(6) in England and Wales grew by 0.1% (2017: 3.9%) to GBP305,284 with a decline in Greater London (-1.1%). Excluding Greater London and the South East, the average increase was 1.0%.

The proportion of residential housing stock available for sale with online and hybrid estate agents sector continued to grow modestly on a year-on-year basis, increasing from 7% in 2017 to 8% in 2018(7) .

Total gross mortgage lending in 2018 was GBP269bn(8) (2017: GBP261bn). The proportion of mortgage lending in the market placed through intermediaries increased to 71% in 2018 (2017: 68%)(9) .

Following market declines in the repossession market in the past few years, market repossessions volumes declined in 2018, reducing by 9.2% to 6,750(10) total repossessions as interest rates remained historically low and this was the lowest number since 1981.

Our market position

LSL continues to hold market leading positions in its core Estate Agency business comprising 12 Estate Agency subsidiaries: Your Move, Reeds Rains, LSLi group (9 companies) and Marsh & Parsons. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that our Estate Agency branches will continue to remain core to providing the service our customers expect.

In Your Move and Reeds Rains, the newly established keystone network of 144 branches are situated in core locations across the UK and generally have larger teams of dedicated experts in Residential Sales, Lettings and Financial Services roles than the average Your Move and Reeds Rains branches previously had in place.

The ambition for these keystone branches is to create a platform that will benefit from their larger scale, enabling us to invest in people and technology with the aim of providing enhanced levels of service to our customers whilst ensuring operational performance is optimised by competing more effectively in local markets. Our commitment to the new IT platform and investment in enhanced technology is intended to give these Your Move and Reeds Rains branches the opportunity to cover a wider geography and benefit from further scale.

Marsh & Parsons continues to implement its well established strategy of expanding its branch network with a focus on locations outside prime Central London. During 2018 we opened one new Marsh & Parsons branch in Chiswick, in outer prime Central London, which is performing in line with expectations.

The LSLi group of companies today operate 57 owned branches and they will continue with their existing strategy to develop the nine well established local companies in their existing markets in the South East of England. In addition, in 2019 the LSLi group of companies will continue to actively evaluate opportunities for lettings book acquisitions.

LSL has continued to monitor the progress of the Government's review of tenant fees which sets out to ban letting fees paid by tenants in the private rented sector and capping tenancy deposits in England and Wales. The Government has confirmed that the legislation will come into effect on 1(st) June 2019. In response to the change in legislation, LSL has made the necessary preparations to ensure these changes will be fully implemented across all of LSL's Estate Agency brands. We have also put in place a range of commercial measures in lettings across our Estate Agency brands to optimise future organic revenue growth.

In Financial Services, during 2018 the Group arranged total mortgage lending of GBP29.0bn (2017: GBP21.0bn). Measured by the number of appointed representatives, as at 31(st) December 2018, LSL's overall combined broker networks are the second largest in the UK(11) . Financial Services income represented 27% of total Group Revenue in 2018 (2017: 24%) demonstrating LSL's growing position as a leading financial services distributor.

Our Surveying Division became the clear market leader in 2018, maintaining strong relationships with many of the UK's largest lenders. During 2018 LSL was awarded a material contract to supply surveying and valuation services to Lloyds Bank plc. The five year contract included the transfer to e.surv of the existing Lloyds Bank plc surveyors and back-office employees. LSL's Surveying Division is the UK's largest provider of residential valuation services nationwide and is the largest employer of surveyors in the UK(5) with 503 qualified operational surveyors as at 31(st) December 2018.

Yopa

LSL retains a strong position in its traditional Estate Agency business. We continue to believe that traditional estate agents will represent the substantial majority of the Residential Sales and Lettings markets for the foreseeable future and that Estate Agency branches will continue to remain core to providing the service our customers expect.

LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of GBP20.0m for Yopa has been written down through reserves by GBP12.2m to GBP7.8m as at 31(st) December 2018 to reflect the Board's assessment of fair value.

Change to Segment reporting

LSL's Financial Services revenue has grown materially in recent years, through both organic growth and selective acquisitions. LSL's Financial Services Revenue CAGR over the 5-year period, 2014 to 2018, has been 19%, representing approximately 27% of total Group revenue in 2018, compared to 14% in 2013.

The Board has carried out a review of the structure of the financial information it requires in order to assess the performance of the Group, allocate resources and assist in investor understanding of the underlying performance trends and drivers of value.

To reflect the growth and increased importance of LSL's Financial Services businesses, the Board has decided to update the Group segmental reporting effective from 1(st) January 2019.

The Group currently reports two segments: Estate Agency and Related Services and Surveying and Valuation. Services. From 1(st) January 2019 LSL will report three segments: Estate Agency; Financial Services; and Surveying and Valuation Services. The Financial Services segment will incorporate all LSL's Financial Services businesses. The Estate Agency segment will primarily incorporate the results from the Estate Agency networks (Your Move, Reeds Rains, LSLi and Marsh & Parsons) and Asset Management. The Surveying and Valuation Services segment is unchanged.

The 2018 and 2017 financial results contained within this Preliminary announcement are on the previous segment reporting basis.

Strategy

LSL remains committed to delivering on our stated strategy which now includes the separate Financial Services segment:

Estate Agency

-- Ambition to achieve GBP80k-GBP100k profit per branch(12) in the medium term based on the expectation of a normalised level of market transactions

-- Ambition to expand the number of Marsh & Parsons branches to a total of 36 in the medium term, particularly outside prime Central London

   --      Grow recurring and where market conditions permit counter-cyclical income streams 
   --      Evaluate selective acquisitions of Residential Sales businesses and Lettings books 

Financial Services

-- Enhance LSL's position as a leading distributor of mortgage and non-investment insurance products

-- Consistent delivery of appropriate outcomes for consumers with a focus on "best practice" standards of regulatory compliance

-- Enhancement of technology solutions to improve the customer experience and operational efficiency

   --      Evaluate further selective Financial Services acquisitions 

Surveying and Valuation Services

   --      Optimise contract performance and revenue generation from business to business customers 
   --      Achieve further improvement in efficiency and capacity utilisation 
   --      Use technology to target further improvements in customer satisfaction and performance 
   --      Continue the graduate training programme 

LSL performance in 2018

Estate Agency Division

Total Estate Agency income of GBP254.8m (2017: GBP247.4m) increased by 3%. This increase resulted from the consistent execution of our strategies with strong growth in both Lettings income (+4%) and in Financial Services Income (total growth +17%, organic growth +1%). Operating profit being down 24% reflects the effect of operational gearing on lower residential exchange volumes which more than offset the benefits from Financial Services income and Lettings income growth

Residential Sales exchange income

Residential Sales exchange income decreased by 9% to GBP69.9m (2017: GBP76.6m) due primarily to the final quarter of 2017 residential property market conditions impacting opening 2018 pipelines and subdued activity during 2018. Residential Sales exchange income was also impacted by selective branch closures in the final quarter of 2017 (2% of wholly owned branch network).

LSL has remained extremely disciplined in its Residential Sales exchange fee strategy throughout 2018. Average LSL Estate Agency Residential Sales exchange fee (GBP) per unit increased by 1% to GBP3,071 (2017: GBP3,042).

Lettings income

In 2018 we delivered growth in Lettings income of 4% (organic growth: 3%). Lettings income represented 30% of total Estate Agency Division income in 2018 (2017: 30%).

In line with our stated strategy, we restarted our lettings book acquisition programme during 2018 and acquired six lettings books in 2018 for a total consideration of GBP1.9m. The lettings books are performing in line with expectations and have been successfully integrated into the Estate Agency network.

Financial Services

Total Financial Services income grew strongly again with 17% year-on-year growth in 2018. Adjusting for the acquisitions of Personal Touch Financial Services and RSC New Homes in the first quarter of 2018, we delivered organic growth of 1% which was slightly higher than the market as measured by Total Mortgage Approvals. Financial Services income increased as a proportion of the Estate Agency businesses and represented 34% of total Estate Agency Division income in 2018 (2017: 30%) reflecting our continuing strategy to enhance LSL's position as a leading distributor of mortgage and non-investment insurance products.

In 2018, LSL further strengthened its position as a leading distributor of mortgage and non-investment insurance products and LSL delivered strong overall growth in the value of mortgage completions which were up 38% to GBP29.0bn in 2018 (2017: GBP21.0bn). LSL's market share is estimated to be 8% of the total market value of mortgage completions(13) .

Marsh & Parsons

LSL estimates that Residential Sales volumes in the prime Central London market reduced by 15% to 20% in 2018 with Greater London house prices falling by 1.1%. Given the overall challenging prime Central London market, Marsh & Parsons delivered a resilient top line performance with revenue down by 2% in 2018 to GBP33.5m (2017: GBP34.3m).

Marsh & Parsons Residential Sales income fell by 13% in 2018 which represents a solid performance in light of the overall prime Central London market conditions. We are pleased with the Lettings performance with income growth of 4%. Lettings revenue now represents 63% of Marsh & Parson's total revenue (2017: 59%).

Expenditure at Marsh & Parsons was broadly flat year-on-year reflecting the increased staff costs of the Chiswick office opened in April 2018 and the full year impact of the two office openings in 2017, being largely offset by lower costs in a number of expenditure categories. Full year operating profit fell to GBP2.3m (2017: GBP3.9m). Adjusted EBITDA was GBP3.4m (2017: GBP4.9m). Profit in 2017 included a gain on sale of property of GBP0.7m (2018: GBPnil).

We continued with our branch expansion strategy in 2018, opening one new branch during the year in the outer prime Central London location of Chiswick. We are pleased with the performance of this new branch. This takes our total number of Marsh & Parsons branches to 28 as at 31(st) December 2018.

Our ambition remains to expand the number of Marsh & Parsons branches to a total of 36 in the medium term, particularly outside prime Central London. Outer prime Central London has not been as negatively impacted by subdued market conditions as prime Central London and Marsh & Parsons is looking to expand its branch footprint in outer prime Central London locations.

Estate Agency profit per branch (Your Move, Reeds Rains and LSLi)

Operating profit per owned branch in 2018 was GBP18,300 (2017: GBP32,000) due to the impact of the challenging residential sales market conditions on Residential Sales exchange income partly offset by growth in Financial Services income and Lettings income.

Surveying Division

The Surveying Division delivered strong revenue performance increasing by 9% to GBP69.8m (2017: GBP64.1m), which included a material contribution in the second half from the successful commencement of the Lloyds Bank plc surveying and valuation services relationship, up 25% year on year. The first half was down 6% year on year, impacted by market conditions and lender mix.

The Surveying Division delivered strong growth in operating profit of 8% to GBP20.4m (2017: GBP18.9m) and continued to deliver strong operating margins of 29.3% in 2018 (2017: 29.4%).

Total number of jobs performed during the year was 366k (2017: 309k) with income per job of GBP191 (2017: GBP207). The total number of qualified operational surveyors at 31(st) December 2018 was 503, an increase of 182 over 2017 due primarily to the transfer to e.surv of the existing Lloyds Bank plc surveyors as part of the contract awarded to e.surv during May 2018, to supply surveying and valuation services to Lloyds Bank plc. The initial performance of the contract for the supply of surveying and valuation services to Lloyds Bank plc is in line with expectations.

Our on-going graduate programme continues to be successful and assists in alleviating the impact of capacity constraints in the market.

In 2018 the Group continued to make positive progress in addressing historic claims and there has been a net GBP2.2m exceptional gain and reduced PI Costs payments of GBP1.7m during 2018 compared to the previous year (2017: GBP3.3m).

Our customers

Our continued focus on providing the best service to our customers has been recognised in 2018 with numerous industry awards including:

-- Marsh & Parsons: UK Property Awards 2018: Best Estate Agency Marketing, London - Gold Award, Best Real Estate Agency London - Gold Award, Best Lettings Agency, London - Gold Award. International Property Awards 2018: Best Estate Agency Marketing, UK - Gold Award, Best Estate Agency, UK - Gold Award, Best International Real Estate Agency, UK - Gold Award. London Magazine Club Awards 2018: Advertising Campaign of the Year - Silver Award. Creative Pool Awards 2018: Bronze for Photography.

-- Davis Tate: Best Estate Agent Guide 2018: (*) Abingdon, Burghfield, Shinfield and Wantage - Rated Highly (Sales) and Rated Excellent (Lettings), Henley and Pangbourne - Rated Highly (Sales) and Rated Exceptional (Lettings), Didcot and Reading - Rated Highly (Lettings), Goring - Rated Excellent (Lettings), Wallingford - Rated Excellent (Sales) and Rated Excellent (Lettings, Woodley - Rated Exceptional (Sales) Sonning Common and Twyford - Rated Exceptional (Sales) and Rated Exceptional (Lettings).

-- Frost's: The Negotiator Awards: Lettings Agency of the Year (2-5 branches) - Gold Award. The ESTAS - Estate Agency of the Year Awards: Letting Agent (rated by tenants), Hertfordshire and Middlesex - Silver Award, Letting Agent (rated by landlords), Hertfordshire and Middlesex - Silver Award.

-- Thomas Morris: Guild of Property Professionals 2018: Lettings (East Anglia) - Gold Award, Sales (East Anglia) - Gold Award. Fine & Country Awards 2018: Best Property Presentation and Best Overall Operator. The ESTAS - Estate Agency of the Year Awards: Best Local Agency in Central England, Letting Agent (rated by tenants), East of England - Silver Award. The 2018 all Agents Awards: Best Estate Agent in East of England - Gold Award. Relocation Agent Network: Best Agent in East Anglia and Essex, Customer Relocation Award - Winner. The Negotiator Awards 2018: Lettings Agency of the Year (6-9 branches) - Gold Award, Estate Agency of the Year (6-9 branches) - Gold Award, Community Champion of the Year - Silver Award, East of England Agency of the Year - Silver Award. Agents Giving Awards 2018: Best Team/Company Fundraiser. Best Estate Agent Guide 2018(*) : East of England (Lettings) - Gold Award, East of England (Sales) - Gold Award, Outstanding Contribution To Estate Agency - Simon Bradbury.

-- e.surv Chartered Surveyors: Money Age Awards 2018: Mortgage Surveyor of the Year. Mortgage Introducer Awards 2018: Best Survey/Valuation Business

-- LSL Financial Services: Precise Mortgage Awards: Best Distribution Group 2018. Lifetime Achievement Award - David Copland.

(*) As judged and announced in 2018

Post balance sheet events

On 5(th) February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5(th) February 2019, LSL expects to incur an exceptional P&L charge of approximately GBP14m in 2019 and GBP1m in 2020, with cash costs amounting to approximately GBP12m over the three years from 2019 to 2021 including approximately GBP9m cash costs in 2019.

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks announced on 5(th) February 2019 has reduced the total number of Your Move and Reeds Rains branches from 404 to 279 of which 144 are owned keystone branches and 135 are franchised.

Our people

The continued success of our business model is attributable to, and underpinned, by our strong brands and excellence in the delivery of high levels of customer services by our colleagues in our Estate Agency, Financial Services and Surveying businesses. I would like to take this opportunity to thank all my colleagues across our businesses for their professionalism and dedication during 2018. I look forward to working with my colleagues to deliver a successful year in 2019.

Outlook

Market conditions in 2019 have been notably softer than the equivalent period in 2018, whilst LSL's financial performance so far in 2019 has been marginally behind the Board's expectations. Nevertheless, at this early stage in the year, the Board's current expectation is that the Group will deliver a full year Underlying Operating Profit in line with its prior expectations, as the business is expected to continue to benefit from the range of LSL's ongoing self-help measures.

We continue to remain cautious on the residential property market outlook for 2019 given the current uncertainty over the UK and global political and economic environment and the potential impact on UK consumer confidence.

The Board currently expects to see a material reduction in the volume of house purchase transactions compared to the prior year. Mortgage costs continue to be low by historic standards and mortgage availability remains good. The medium to longer term fundamentals of the UK housing market remain solid.

The final arrangements for the planned exit from the European Union are uncertain. In the eventuality that the outcome leads to a changed impact on consumer confidence and our business, we will update our Shareholders.

Although Brexit and the current political environment continues to create uncertainty, the Group has a robust balance sheet with relatively low levels of gearing and is very cash generative at an operational level.

LSL continues to execute on its stated strategy and we are confident that LSL, with its market leading brands, broad portfolio of residential property services and the benefits from the proactive self-help measures, remains well positioned to perform well given a range of potential market conditions, in order to maximise Shareholder value. The Board remain confident of the opportunities for further positive progress for the Group.

Ian Crabb

Group Chief Executive Officer

5(th) March 2019

Note 1 - Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4 to the Financial Statements).

Note 2 - Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 4 to the Financial Statements)

Note 3 - Operational gearing is defined as Net Bank Debt divided by Group Adjusted EBITDA (Group Adjusted EBITDA is Group Underlying Operating Profit (Note 4 to the Financial Statements) plus depreciation on property plant and equipment).

Note 4 - Bank of England for "House Purchase Approvals" and "Total Mortgage Approvals" - January 2019.

Note 5 - LSL estimates and including Land Registry regional data - February 2019.

Note 6 - LSL Property Services/ACADATA HPI - February 2019.

Note 7 - LSL sources/data analysis.

Note 8 - UK Finance 'New mortgages by purpose of loan' - February 2019 (excluding product transfers).

Note 9 - UK Finance 'New mortgages sold by intermediaries' - February 2019.

Note 10 - UK Finance 'Possessions on mortgaged properties' - February 2019.

Note 11 - Which-Network - network performance figures - January 2019.

Note 12 - The profit per branch methodology has been consistently applied since the profit per branch ambition of GBP80k-GBP100k was first announced by LSL in March 2014. Profit per branch is calculated for Your Move, Reeds Rains and the LSLi owned branches and excludes Marsh & Parsons.

Note 13- LSL's market share is calculated using gross mortgage completions excluding product transfers

Business Review - Estate Agency Division

 
                                           2018     2017        % 
Financial                                  GBPm     GBPm   change 
-------------------------------------   -------  -------  ------- 
  Residential Sales exchange income        69.9     76.6       -9 
  Lettings income                          76.6     73.9       +4 
  Financial Services income                87.4     74.4      +17 
  Asset Management income                   5.5      6.3      -13 
  Other income(1)                          15.4     16.2       -5 
 
  Total income                            254.8    247.4       +3 
  Operating expenditure                 (234.2)  (220.5)       -6 
  Underlying Operating Profit(2)           20.6     26.9      -24 
--------------------------------------  -------  -------  ------- 
 
                                                                % 
KPIs                                       2018     2017   change 
-------------------------------------   -------  -------  ------- 
  Exchange units                         22,747   25,176      -10 
  Underlying Operating Margin (%)           8.1     10.9 
  Fees per unit GBP                       3,071    3,042       +1 
--------------------------------------  -------  -------  ------- 
 
Market data 
-------------------------------------   -------  -------  ------- 
  House purchase approvals (000s)(3)        781      797       -2 
  Total mortgage approvals (000s)(3)      1,535    1,526       +1 
  UK housing transactions (000s)(4)       1,195    1,220       -2 
  Repossessions(5)                        6,750    7,430       -9 
 

Notes:

1 'Other income' includes franchising income, conveyancing services, EPCs, Home Reports, utilities and other products and services to clients of the branch network.

   2     Refer to Note 4 to the Financial Statements for the calculation. 
   3     Bank of England for "House Purchase Approvals" and "Total Mortgage Approvals" - January 2019. 

4 HMRC Stats "Monthly property transactions completed in the UK with value of GBP40,000 or above" - January 2019.

   5     UK Finance 'Possessions on mortgaged properties' - February 2019. 

Estate Agency Division performance

Year-on-year income growth in the Estate Agency Division was 3%. Lettings income and Financial Services income showed positive growth with Residential Sales performance reflecting market conditions.

Residential Sales exchange income

Residential Sales exchange income decreased by 9% to GBP69.9m (2017: GBP76.6m), average fees per unit increased by 1% to GBP3,071 (2017: GBP3,042). Residential Sales exchange volumes fell by 10%.

Lettings income

As in 2017, Lettings income grew in each quarter of the year as LSL continued to focus on this recurring revenue stream. Lettings growth for the year was 4% (organic: 3%).

Financial Services income

Total Financial Services income is delivered through the Estate Agency Division's branches, Group First, RSC (acquired in March 2018), Personal Touch Financial Services (acquired in January 2018) and the intermediary networks trading as PRIMIS and grew strongly again with 17% year-on-year growth in 2018 (organic: 1%).

Other income

Other income fell by 5% year-on-year in large part due to a fall in conveyancing income due to lower Residential Sales transaction volumes.

Asset Management

Asset Management maintained its market position in a smaller repossessions market.

Estate Agency Division operating margin

The Estate Agency Division Underlying Operating Margin was 8.1% in 2018 (2017: 10.9%).

Branch numbers

Breakdown of LSL's Estate Agency branches as at 31(st) December 2018 and 31(st) December 2017:

 
                                      Total  Total 
                  Owned    Franchise   2018   2017 
----------------  -----  -----------  -----  ----- 
Your Move           194           58    252    260 
Reeds Rains         114           38    152    154 
Sub total           308           96    404    414 
LSLi                 57            2     59     64 
Marsh & Parsons      28            -     28     27 
Total               393           98    491    505 
 

The total number of Estate Agency branches reduced by fourteen in 2018, following the closure of six owned branches and six franchise branches and the opening of one new branch in Marsh & Parsons and the merging of three into existing local branches.

The changes to the structure of the Your Move and Reeds Rains estate agency branch networks announced on 5(th) February 2019 has at the 5(th) March 2019 reduced the total number of Your Move and Reeds Rains branches from 404 to 279 of which 144 are owned keystone branches and 135 are franchised.

Your Move and Reeds Rains branch summary:

 
                    Branch numbers   Branch 
                     (31(st) Dec      numbers 
                     18)              (5th Mar 
                                      19) 
-----------------  ---------------  ---------- 
 Total owned 
  branches          308              144 
 Total Franchise 
  branches          96               135 
 Total branches 
  (combined)        404              279 
 
 

Business Review -Surveying Division

 
                                                2018    2017        % 
Financial                                       GBPm    GBPm   change 
--------------------------------------------  ------  ------  ------- 
  Revenue                                       69.8    64.1       +9 
  Operating expenditure                       (49.4)  (45.2)       -9 
  Underlying Operating Profit(1)                20.4    18.9       +8 
--------------------------------------------  ------  ------  ------- 
 
                                                                    % 
KPIs                                            2018    2017   change 
--------------------------------------------  ------  ------  ------- 
  Underlying Operating Margin (%)               29.3    29.4 
  Jobs performed (000s)                          366     309      +18 
  Revenue from private surveys (GBPm)            2.1     2.4      -13 
  Income per job (GBP)                           191     207       -8 
  Historic PI Costs provision (balance 
   sheet) at 31(st) December (GBPm)             12.4    15.9      -22 
  Number of qualified operational surveyors 
   at 31(st) December (FTE)(2)                   503     321      +57 
 
  Total mortgage approvals ('000s)(3)          1,535   1,526       +1 

--------------------------------------------  ------  ------  ------- 
 

Notes:

   1          Refer to Note 4 to the Financial Statements for the calculation. 
   2          Full Time Equivalent (FTE). 

3 Bank of England for "House Purchase Approvals" and "Total Mortgage Approvals" - January 2019.

Surveying Division performance

Surveying Division revenue increased by 9% to GBP69.8m (2017: GBP64.1m), with total number of jobs performed during the year of 365,504 (2017: 309,499).

First half revenue was down by -6% year on year, impacted by market conditions and lender mix. In May 2018 the Surveying Division announced the successful negotiation of a material contract to supply surveying and valuation services to Lloyds Bank plc, with e.surv becoming the lead supplier for the Lloyds Bank plc group of companies with instructions commencing from September 2018. This led to an improved second half performance with revenue up 25% year-on-year.

The decrease in income per job to GBP191 (2017: GBP207), a reduction of 8% year-on-year, was offset by strong cost control leading to improved profit performance. As a result, the Surveying Division delivered an increase in Underlying Operating Profit(1) to GBP20.4m (2017: GBP18.9m), maintaining profit margin at 29.3% (2017: 29.4%).

The total number of qualified operational surveyors at 31(st) December 2018 was 503(2) , an increase of 182 against the 2017 position due to the transfer of Lloyds Bank plc surveyors into e.surv.

In 2019 the Surveying Division will continue to focus on its successful graduate training programme, which assists in alleviating the impact of capacity constraints in the market.

At 31(st) December 2018 the total provision for PI Costs was GBP12.4m (2017: GBP15.9m). In 2018 Surveying Division continued to make positive progress in addressing these historic claims. There was an exceptional gain of GBP2.2m during the year.

Financial Review

Income Statement

Group Revenue

Revenue increased by 4.2% to GBP324.6m in the year ended 31(st) December 2018 (2017: GBP311.5m).

Other operating income

Other income of GBP557k (2017: GBP555k) for the year ended 31(st) December 2018 was in line with previous year and comprised of rental income.

Gain on sale of property, plant and equipment

There was a small gain of GBP34k (2017: GBP668k) in the year ended 31(st) December 2018 resulting from the disposal of a commercial property.

Income from joint ventures and associates

Income from joint ventures and associates was GBP259k (2017: GBP1,583k) as challenging residential property market conditions impacted the financial performance of the joint ventures and LSL recognised its share of the early-stage costs of the newly acquired interest in Mortgage Gym.

Total operating expenses

Total operating expenses increased by 4.6% to GBP289.6m (2017: GBP276.8m). Increases in the Estate Agency Division were primarily a result of the acquisition of PTFS and RSC in the first quarter of 2018. Surveying operating expenses were ahead of prior year in the second half of 2018 due primarily to the transfer to e.surv of the existing Lloyds Bank plc surveyors and back-office employees as part of the contract awarded to e.surv during May 2018, to supply surveying and valuation services to the Lloyds Bank plc group.

Group Underlying Operating Profit

Group Underlying Operating Profit(1) decreased by 4.3% to GBP35.9m (2017: GBP37.5m) with an Underlying Operating Margin of 11.1% (2017: 12.0%).

On a statutory basis, the Group operating profit decreased to GBP25.4m (2017: GBP42.1m) largely reflecting the impact of exceptional items. In 2018 there were net exceptional cost of GBP3.0m compared to the 2017 financial results which included an exceptional gain on the disposal of LSL's share in GPEA (GBP5.6m) and a net exceptional gain on historic PI claims (GBP3.7m).

Group Adjusted EBITDA

Group Adjusted EBITDA(2) decreased by 2.7% to GBP41.6m (2016: GBP42.7m) with the decreased Group Underlying Operating Profit being slightly offset by an increased depreciation charge of GBP5.7m (2017: GBP5.2m).

Share-based payments

The share based payment charge of GBP349k (2017: GBP47k) in 2018 consists of a charge in the period of GBP1.3m offset by the lapse of the 2016 LTIP scheme as well as adjustments for leavers in the period.

Amortisation of intangible assets

The amortisation charge for 2018 was GBP5.3m (2017: GBP4.1m). The increase in 2018 is mainly a result of the amortisation of in-house software in both PTFS and e.surv.

Exceptional items

Total 2018 net exceptional cost of GBP3.0m including a GBP2.2m PI Costs exceptional provision release (H1: GBP1.2m, H2 GBP1.0m) as claims were settled below previous expectations and GBP5.2m of exceptional costs, the majority of which were in relation to initial one-off transition and integration costs for the contract to supply surveying and valuation services to Lloyds Bank plc (GBP3.2m) and also restructuring costs in the Estate Agency Division including planned restructuring costs incurred following the acquisition of PTFS (GBP2.0m).

The exceptional gain in 2017 consisted of a GBP5.6m gain on the sale of the Group's share in GPEA and a GBP3.7m gain relating to the historic PI Costs provision.

Net financial costs

Net financial costs amounted to GBP2.3m (2017: GBP2.0m). The finance costs related principally to interest and fees on the RCF. Additional costs relate to the unwinding of discounts on provisions and contingent consideration.

Taxation

The UK corporation tax rate reduced to 19% with effect from 1(st) April 2017. A future UK corporation tax of 17% has been enacted and is effective from 1(st) April 2020, and this is the rate at which deferred tax has been provided (2017: 17%). Corporation tax is recognised at the headline UK corporation tax rate of 19% (2017: 19.25%).

The effective rate of tax for the year was 22.5% (2017: 16.7%). The effective tax rate for 2018 is higher than the headline UK tax rate for a number of reasons, including non-deductible costs in relation to contingent consideration and the depreciation of assets which do not qualify for capital allowances.

Deferred tax credited directly to other comprehensive income is GBP0.0m (2017: GBP0.6m). Income tax credited directly to the share based payment reserve is GBP0.0m (2017: GBP0.0m).

In 2018 corporation tax payments of GBP6.9m (2017: GBP11.1m) were made which is greater than the current year corporation tax charge of GBP5.9m (2017: GBP7.5m). This is a result of two quarterly payments being made in the year in respect of the year ended 31(st) December 2017 liability - which is higher than the corporation tax charge for the year ended 31(st) December 2018.

Basic Earnings Per Share

The Basic Earnings Per Share was 17.4 pence (2017: 32.6 pence). The Adjusted Basic Earnings Per Share(3) is 27.2 pence (2017: 28.3 pence), a decrease of 3.9% which is in line with the decrease in Group Underlying Operating Profit(1) .

The Group seeks to present a measure of underlying performance which is not impacted by the unevenness in profile of exceptional gains and exceptional costs, contingent consideration, amortisation and share-based payments. The Directors consider that the adjustments made to exclude the after tax effect of exceptional items, contingent acquisition consideration and amortisation provides a better and more consistent indicator of the Group's underlying performance.

Balance sheet

Goodwill

In 2018 goodwill has increased by GBP7.8m to GBP159.7m (2017: GBP151.9m). The increase is due to the acquisitions of PTFS (GBP0.3m), RSC (GBP7.1m) and the lettings book acquisitions (GBP0.4m).

Other intangible assets and Property, plant and equipment

Total capital expenditure in the year amounted to GBP6.0m (2017: GBP5.6m) which includes expenditure of GBP1.1m (2017: GBP0.6m) for new software which has been treated as an intangible asset.

Financial Assets

LSL holds financial assets of GBP11.6m (2017: GBP25.3m); the decrease in the year is a result of the revaluation of LSL's shareholding in Yopa and the exercise and subsequent sale of the ZPG warrants in October 2018.

LSL has a 14.7% minority shareholding in Yopa. LSL's previous carrying value of GBP20m for Yopa has been written down by GBP12.2m to GBP7.8m as at 31(st) December 2018 to reflect the Board's accounting assessment of fair value. LSL has elected to recognise any changes to fair value through the Statement of Other Comprehensive Income (i.e. reserves) and not through the P&L account in accordance with IFRS 9.

Joint ventures, investments and associates

The Group has two joint ventures and one associate: a 33.3% (2017: 33.3%) interest in TM Group, whose principal activity is to provide property searches, a 50% (2017: 50%) interest in LMS whose principal activity is to provide conveyancing panel management services. LMS and TM Group are held in the balance sheet at GBP8.2m and GBP1.5m respectively (2017: GBP8.3m and GBP1.2m)

During the second half of 2018, LSL acquired a 34.69% interest in Mortgage Gym, a digital mortgage marketplace, for cash consideration of GBP4.1m. Mortgage Gym is held in the balance sheet at a value of GBP3.6m as at 31(st) December 2018 (2017: nil) reflecting the original investment of GBP4.1m and the post-tax loss of GBP0.5m in the period.

Financial Liabilities

Net Bank Debt

As at 31(st) December 2018 Net Bank Debt was GBP32.1m (2017: GBP30.0m) and Shareholders' funds amounted to GBP142.6m (2017: GBP148.6m) with a balance sheet gearing of 22.5% (2017: 20.2%). The increase in Net Bank Debt(4) incorporated acquisitions made in the year (PTFS, RSC and six Lettings Books) which totalled GBP7.7m along with the investment in Mortgage Gym of GBP4.1m. The 2018 gearing level was 0.8 times(5) Group Adjusted EBITDA (2017: 0.70 times).

Bank facilities

In January 2018, LSL extended its bank facility until May 2022. The facility includes a GBP100m RCF (2017: GBP100m). During the period under review, the Group complied with all of the financial covenants contained within the facility.

Deferred and contingent consideration

Within financial liabilities LSL has GBP2.1m of deferred consideration (2017: GBP0.1m) and GBP15.0m (2017: GBP9.1m) of contingent consideration. The deferred consideration relates primarily to the acquisition of PTFS and this has been settled since the balance sheet date. The contingent consideration relates primarily to Group First (GBP9.5m) and RSC (GBP4.8m).

Provisions for liabilities:

Professional indemnity (PI) claim provision

At 31(st) December 2018, the total provision for historic PI Costs was GBP12.4m (2017: GBP15.9m). In 2018 the Group continued to make positive progress in addressing historic claims and there has been a net GBP2.2m exceptional gain.

Onerous lease

As at 31(st) December 2018 LSL held onerous lease provisions of GBP130k (2017: GBP210k).

Net assets

The Group's net assets as at 31(st) December 2018 were GBP142.6m (2017: GBP148.6m).

Statement of cash-flows

The Group generated strong cash from operations of GBP36.9m (2017: GBP41.5m) converting 103% of Group Underlying Operating Profit to cash-flow from operations (pre PI and exceptionals) (2017: 117%). The decrease in conversion from 2017 is primarily related to the increase in trade receivables of GBP3.8m (2017: decrease of GBP1.7m) resulting from significant growth in the surveying business in quarter four. Provisions also decreased by GBP3.6m (2017: decrease of GBP5.4m) due to the positive progress in addressing historic PI claims.

Treasury and risk management

LSL has an active debt management policy. LSL does not hold or issue derivatives or other financial instruments for trading purposes. Further details on the Group's financial commitments as well as the Group's treasury and risk management policies are set out in this Report.

Post balance sheet events

On 5(th) February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5(th) February 2019, LSL expects to incur an exceptional P&L charge of approximately GBP14m in 2019 and GBP1m in 2020, with cash costs amounting to approximately GBP12m over the three years from 2019 to 2021 including approximately GBP9m cash costs in 2019.

International Financial Reporting Standards (IFRS)

The Financial Statements have been prepared under IFRS as adopted by the European Union.

Notes:

1. Group Underlying Operating Profit is before exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments (as defined in Note 4 to the Financial Statements).

2. Group Adjusted EBITDA is Group Underlying Operating Profit plus depreciation on property, plant and equipment (as defined in Note 4 to the Financial Statements)

   3.       Refer to Note 6 to the Financial Statements 
   4.       Refer to Note 10 to the Financial Statements for the calculation. 
   5.       Operational gearing is defined as Net bank Debt divided by Group Adjusted EBITDA(2) 

Principal Risks and Uncertainties

LSL has an overall framework for the management of risks and internal controls to mitigate the risks. Through this framework, the Board (which has overall accountability and responsibility for the management of risk and is supported by the Audit & Risk Committee) on a regular basis identifies, evaluates and manages the principal risks and uncertainties faced by the Group; as well as areas which could adversely affect its business, operating results and financial condition.

Management of risk appetite

During 2018, in line with the FRC's Guidance on 'Risk Management, Internal Control and Related Financial and Business Reporting', the Board continued to manage the Group's risk appetite through the risk appetite framework to ensure continued compliance with the 2016 Code and the related FRC guidance (published in 2014). The Board through its established processes expresses and reviews the types and level of risk which it is willing to take or accept to achieve LSL's strategy and business plans; and to support consistent, risk-informed decision making across the Group.

The risk appetite framework was developed following the approval by the Directors of a risk framework policy which included defining individual risk appetite statements for LSL's principal risks and uncertainties, and for key decisions made by the Board. These statements provide parameters within which the Board typically expects LSL's businesses to operate, facilitating structured consideration of the risk and reward trade-off for the decisions made around how the Group conducts business. This includes monitoring risk measures and the identification of actions needed to bring any specific outlying areas of risk within target levels.

During 2018, the Group has continued to take steps to enhance the existing risk framework within each of the Group's subsidiary businesses, including the maintenance of risk appetite measures by each subsidiary. Each year, each subsidiary business quantifies their highest ranked risk areas and routinely provide the Audit & Risk Committee with graphical management information to facilitate the tracking of risk status versus tolerance by the subsidiary boards and divisional governance committees. The framework continues to improve the visibility of action plans to address any core risk areas considered outside tolerance.

Risk management activities in 2018 included a 'deeper-dive' on information security risk and a business-wide questionnaire was issued to enable the Audit & Risk Committee to compare how well risk management practices are embedded at each subsidiary business, with a view to identifying any areas for improvement. These developments have in turn served to provide a more robust means for evaluating the capture and measurement of risk factors within the Group's established risk appetite framework.

The framework covers a wide range of risks, which reflect the nature of LSL's businesses and acknowledges that there is not a 'one size fits all' approach to establishing risk parameters. During 2019, LSL will continue to review the framework to ensure it remains in line with emerging best practice and continues to foster the maturity of risk appetite routines at both LSL and its subsidiary businesses.

The Board has established clear risk parameters, whilst at the same time fostering an environment within which innovation and entrepreneurial activities can thrive. Where there is any proposal to shift the Group significantly closer to or outside agreed risk parameters, this is discussed and is subject to Board approval before commencing any activities to ensure that appropriate mitigation controls are put into place.

On-going evolution of the risk management framework is carried out as part of an on-going cycle of continual improvement, and remains a key priority for the Audit & Risk Committee and the Board in 2019. Further, during 2018 the Audit & Risk Committee and Board commenced a review of the Group's risk management framework to ensure it reflects the requirements of the 2018 Code and the FRC's Guidance on Board Effectiveness (also published in 2018) and this work will continue during 2019.

Developing the financial viability statement

Assessment of prospects

The Group's business model and strategy are central to an understanding of its prospects, and details are included in Strategy and Business Model sections of the Annual Report and Accounts 2018.

Through organic growth, selective acquisitions and a delivery of high quality services to customers, the Group's key objective is to build market leading positions and ultimately deliver long-term Shareholder value.

Prospects of the Group are assessed by the Board throughout the year at its meetings, including a particular focus during the strategic planning process. This process includes an annual review of the on-going plan, led by the Group Chief Executive Officer and Group Chief Financial Officer in addition to the relevant business functions involved.

The Directors participate fully in the annual planning process by means of a Board meeting and part of the Board's role is to consider whether the plan continues to take appropriate account of the changing external environment including macroeconomic, political, regulatory and technical changes.

This process allows the Board to produce strategic objectives and detailed financial forecasts over a three year period. The latest updates to the on-going plan were finalised in December 2018. This considered the Group's current position and its prospect of operating over the three year period ending 31(st) December 2021, and reaffirmed the Group's stated strategy. Furthermore, the Group's future prospects have been further strengthened with the extension of the RCF which was renewed in January 2018 for a period up to May 2022.

Brexit

Since the 2016 EU referendum result, LSL has been monitoring Brexit developments to assess the impact on LSL. 'Brexit' is a subset entry within the Group's risk appetite framework and in addition during 2018 LSL has conducted a specific impact assessment in relation to Brexit which was completed in line with FRC guidance.

The impact assessment considered whether LSL will be impacted directly by the outcome of the negotiations between the UK and the EU, for example due to regulatory changes or due to changes that may impact our employees or whether the impact would be indirect, i.e. resulting from the broader economic uncertainties. The Group concluded that whilst LSL is not directly impacted by the Brexit negotiations due mainly to its UK based business model it is indirectly impacted by the impact that the continued economic uncertainty has on the housing market.

This approach has ensured that Brexit developments are being formally monitored, and the risk status regularly reassessed with reactive action plans identified to respond to the effects of on-going uncertainties and the outcomes of the UK and EU negotiations and any transitional period arrangements.

These practices will continue throughout 2019 as the UK progresses to the Brexit date of 29(th) March 2019, along with wider consideration of the likely impacts of other major economic and political events, and their influence on viability assessment modelling.

The Group's principal risks and uncertainties are set out below. The Board reviewed LSL's principal risks and uncertainties when assessing the Group's prospects, and noted that none of these individual risks would, in isolation, compromise the Group's prospects. See the Directors' Report in the Annual Report and Accounts 2018 for details of how Brexit was taken into account in the completing the going concern assessment.

Assessment of viability

Although the strategic plan reflects the Directors' best estimate of the prospects of the Group in accordance with provision C.2.2 of the 2016 Code (which is now contained in the 2018 Guidance on Board Effectiveness), the Directors have assessed the viability of the Company over a longer period than the 12 months required by the 'going concern' provision.

For the purposes of assessing the viability of the Group, it was determined that a three year period ending on 31(st) December 2021 should be used, as this corresponds with the Board's strategic planning cycle. This assessment has been made with reference to the Group's current position and prospects, the Board's risk appetite and the Group's principal risks and uncertainties.

A number of severe but plausible scenarios were considered and two of these were modelled in detail with input from a cross a functional group of senior managers, including representatives from the finance teams.

The following scenarios were modelled:

-- severe downturn in the UK housing market close to the level seen in 2008 during the last recession caused by Brexit and/or political uncertainties; and

-- a data breach causing a regulatory fine and reputational damage, with the potential loss of customers.

Detailed assumptions for each scenario were built up and modelled by month across the three year period. The models measured the downside impact on revenue and the management action which would be taken to retain cash reserves and maintain the operating capacity of the business as a result of the stress scenarios.

Assumptions were also made for the potential growth of LSL's recurring income and counter-cyclical businesses, notably Lettings and Asset Management, and the extent to which some activities, such as Lettings, tend to be less affected through the cycle. The modelling and assumptions took account of the broad range of services across a wide geography which allows some protection from the impact of stress scenarios.

The results from the stress testing indicated that the Group would be able to withstand the financial impact of each scenario and therefore continue to operate and meet its liabilities, as they fall due, over the three year period ending 31(st) December 2021.

Furthermore the Board also considered it appropriate to prepare the Financial Statements on the going concern basis, as explained in the Basis of Accounting paragraph in the Principal Accounting Policies section contained within the Annual Report and Accounts 2018.

The Audit & Risk Committee oversaw the process by which the Directors reviewed and discussed the assessment undertaken by the Management Team in proposing the viability statement.

The Directors' financial viability statement is contained in the Report of the Directors section of the Annual Report and Accounts 2018.

Risk management and internal controls framework

LSL's risk management and internal controls framework for 2018 included:

-- ownership of the risk management and internal controls framework by the Board, including a risk framework policy, supported by the Group Chief Financial Officer, the Company Secretary, the Head of Risk and Internal Audit and the Group Financial Controller;

-- a network of risk owners in each of LSL's businesses with specific responsibilities relating to risk management and internal controls, including maintenance of detailed risk analyses;

-- the documentation and monitoring of risks are recorded and managed through risk appetite measures which undergo regular reviews and scrutiny by subsidiary boards, divisional governance committees and the Head of Risk and Internal Audit;

-- the Board routinely identifies, reviews and evaluates the principal risks and uncertainties which may impact the Group as part of the planning and reporting cycle to ensure that such risks are identified, monitored and mitigated in addition to carrying out specific risk assessments as part of its decision-making processes;

-- the development and application of LSL's risk appetite statement and associated framework (for further details on steps taken during the year, see the Audit & Risk Committee Report included in the Annual Report and Accounts 2018); and

-- reporting by the Chairman of the Audit & Risk Committee to the Board on any matters which have arisen from the Audit & Risk Committee's review of the way in which LSL's risk management and internal control framework has been applied together with any breakdowns in, or exceptions to, these procedures.

The risk framework includes the following:

   --    a risk framework policy; 
   --    a boardroom culture which promotes risk assessment and management in decision-making; 

-- determination of risk appetite, with management and mitigation of risks in line with risk appetite tolerances;

   --    assessment of prospects and viability; 
   --    review of the effectiveness of the risk management and internal control systems; and 

-- going concern confirmation (for LSL's going concern disclosure see the Report of the Directors included in the Annual Report and Accounts 2018).

During 2019 the areas of focus will be to develop underlying subsidiary risk appetite metrics policies.

During 2018, the Directors carried out a robust assessment of the principal risks and uncertainties facing the Group, including those that threaten the Group's business model, future performance, solvency or liquidity. The Directors believe that the assessment which has been completed is appropriate to the complexity, size and circumstances of the Group, which is a matter of judgement of the Board and has been supported by the Management Team.

The Directors also carried out a risk appetite assessment exercise which involved the evaluation of continually evolving aspects of risk management. During 2018, this included further strategic responses to the threat of external technology-based business models, integration planning for newly acquired business activities, articulation of risk appetite tolerances with action plans to counter key aspects of information security risk, implementing responses to a fast changing regulatory environment (including new GDPR and tenant welfare requirements) and consideration of major scenarios of further external political and economic change on the UK housing market including the impact of Brexit.

The identified risks may change over time due to changes in business models, performance, strategy, operational processes and the stage of development of the Group in its business cycle as well as with changes in the external environment. This robust assessment is focused on the principal risks and uncertainties and it differs from the review of the effectiveness of the systems of risk management and internal controls.

In accordance with the requirements of the 2016 and 2018 Codes, this Report includes descriptions of principal risks and uncertainties together with a high level explanation of how they are being managed or mitigated. This includes clear descriptions of the risks together with an evaluation of the likelihood of a typical risk event crystallising and its possible impact. Mitigating steps and any significant changes to specific areas of risk are also referred to within the tabular summary.

As noted above, this robust analysis of principal risks and uncertainties has also contributed to the Group's viability statement which is included within the Report of the Directors. The Directors have also considered the impact if risks coincide, namely a combination of non-principal risks and uncertainties could potentially represent a single compound principal risk or uncertainty.

The Group also faces other risks which, although important and subject to regular review, have been assessed as less significant and are not listed in this Preliminary Results Announcement or the Annual Report and Accounts 2018. This may include some risks which are not currently known to the Group or that LSL currently deems as immaterial, or were included in previous Annual Report and Accounts and, through changes in external factors and careful management, are no longer deemed to be as material to the Group as a whole.

However, these risks may individually or cumulatively also have a material adverse effect together with other risk factors which are beyond the direct control of LSL, and may have a material adverse impact on LSL's business, results of operations and/or financial condition. The risk management framework and procedures in place can only provide reasonable but not absolute assurance that the principal risks and uncertainties are managed to an acceptable level.

Further information relating to how LSL managed these risks and uncertainties during 2018 is set out in the Audit & Risk Committee Report (Internal Controls) of the Annual Report and Accounts 2018.

Principal risks and uncertainties

 
     Risk                     Description                    Mitigation 
 Strategic: 
 1   UK housing               Group performance is 
      market                  intrinsically                     *    Daily, weekly and monthly monitoring of trading and 
                              linked to the overall                  market performance data. 
                              performance 
                              of the UK housing market 
                              (including subsets - e.g.         *    Market share, product mix and segmentation 
                              prime Central London).                 initiatives. 
 
                              The housing market is also 
                              impacted by changes in            *    Development of counter-cyclical and recurring revenue 
                              national                               income streams. 
                              and global political and 
                              economic environments (e.g. 
                              Brexit).                          *    Responsive investment and cost control measures 
                                                                     during the housing market cycle. 
                              The impact of this risk 
                              can be direct (such as 
                              changes                           *    Investment in teams to deliver strategic projects. 
                              in Government policy or 
                              legislation arising from 
                              a change in Government)           *    Balanced UK-wide geographical spread. 
                              or indirect (such as changes 
                              in consumer 
                              behaviour/sentiment               *    Monitoring of wider macroeconomic and political 
                              arising from changes in                developments (including domestic and international 
                              Government policy or                   developments). 
                              legislation). 
 
                                                                *    Enhanced impact analysis relating to Brexit completed 
                                                                     and considered as part of going concern analysis in 
                                                                     addition to budgeting and planning processes. 
    -----------------------  -----------------------------  --------------------------------------------------------------- 
 2   New UK housing           Traditional business models 
      market entrants         and pricing structures for        *    Competitor and industry benchmarking. 
                              residential property 
                              services 
                              are exposed to new business       *    Development of strategies in response to market 
                              models and technological               disrupters, including exploring options to capitalise 
                              advancements (e.g.                     on digital opportunities. 
                              online/hybrid 
                              estate agents, automated 
                              valuation models and              *    Infrastructure investment, including investment in 
                              automated                              innovation and technology, with upgrading, 
                              financial services operating           consolidating and replacing core or legacy operating 
                              models).                               systems to increase functionality, improve customer 
                                                                     experience, reduce costs and deliver efficiencies. 
 
 
                                                                *    Service delivery enhancements, product/services 
                                                                     differentiation and experimentation. 
 
 
                                                                *    Engagement of specialist external consultative 
                                                                     support as necessary. 
 
 
                                                                *    Monitoring of acquisition, investment, associate and 
                                                                     joint venture opportunities. 
 
 
                                                                *    Marketing initiatives. 
 
 
                                                                *    Operation of staff incentive schemes to mitigate 
                                                                     staff attrition. 
    -----------------------  -----------------------------  --------------------------------------------------------------- 
 3   Investment,              Realising appropriate 
      acquisitions            targets                           *    Monitoring of opportunities which support delivery of 
      and growth              for investment, acquisition            Group strategy. 
      initiatives             and major project 
                              initiatives, 
                              including delivery of             *    Engagement of strategy consultants to support 
                              appraisals,                            identification and evaluation of strategic investment 
                              due diligence and                      and acquisition opportunities. 
                              integration/implementation 
                              requirements, in line with 
                              LSL's strategy to complete        *    Defined pre and post-acquisition reporting to the 
                              selective acquisitions.                Board and Audit & Risk Committee. 
 
 
                                                                *    Establishment of structured authority levels. 
 
 
                                                                *    Responsive flexing of risk appetite during the 
                                                                     housing market cycle. 
 
 
                                                                *    Flexible resource pool to support and deliver 
                                                                     investments and acquisitions. 
 
 
                                                                *    Defined due diligence processes completed ahead of 
                                                                     all investments and acquisitions. 
 
 
                                                                *    Due diligence is undertaken by in house teams with 
                                                                     support from subject specialists as required (e.g. 
                                                                     the use of IT experts to carry out technology due 
                                                                     diligence or use of strategy consultants to advise on 
                                                                     business models). 
 
 
                                                                *    Completion of risk assessments including RCF leverage 
                                                                     stress testing ahead of all significant investments 
                                                                     and acquisitions. 
 
 
                                                                *    Flexible resource pool to deliver 
                                                                     integration/implementation activities following 
                                                                     completion of acquisitions. 
 
 
                                                                *    Engagement of specialist external consultative 
                                                                     support as necessary. 
 
 
                                                                *    Established integration/implementation planning 
                                                                     methodology. 
 
 
                                                                *    Promotion of Group-wide relationships in business 
                                                                     arrangements. 
 
 
                                                                *    Post-acquisition and post-integration/implementation 
                                                                     review programmes. 
 
 
                                                               -- Risk and Internal Audit 
                                                               engagements. 
    -----------------------  -----------------------------  --------------------------------------------------------------- 
 Sales/distribution: 
 4   Professional             Exposure to major PI claims     Surveying Division 
      services                arising from any lapses           *    Robust framework and monitoring routines to maintain 
                              in professional services,              valuation accuracy. 
                              including surveying and 
                              valuation practices, 
                              financial                         *    Dedicated surveying risk team. 
                              services advice, and estate 
                              agency services. 
                                                                *    Timely data capture of all claims and associated 
                                                                     trends with regular scenario modelling undertaken. 
 
 

                                                                *    Utilisation of technology to monitor valuation trends, 
                                                                     trigger alerts and 'real time' checks. 
 
 
                                                                *    Board-level authorities for PI claims settlement 
                                                                     payments and governance of underlying claims handling 
                                                                     and accounting processes. 
 
 
                                                                *    Integration of new business assets into the 
                                                                     established valuation controls framework. 
 
 
                                                                *    Development of lender on-boarding policy with Board 
                                                                     oversight to ensure instructions are within 
                                                                     risk-appetite. 
 
 
                                                               Estate Agency Division (including 
                                                               Financial Services) 
                                                                *    Defined responsibilities for claims management and 
                                                                     operation of PI insurance together with management of 
                                                                     underlying risk areas. 
 
 
                                                               Group-wide 
                                                                *    Risk and Internal Audit engagements. 
 
 
                                                                *    Experienced claims handling personnel supported by 
                                                                     legal and compliance experts. 
 
 
                                                                *    Culture promoting effective sales conduct and open 
                                                                     lines of communication with clients with a focus on 
                                                                     customer outcomes. 
    -----------------------  -----------------------------  --------------------------------------------------------------- 
 5   Client contracts         The performance of the 
                              Estate                              *    Customer outcomes focused forums and initiatives. 
                              Agency and Surveying 
                              businesses 
                              is dependent on entering            *    Designated senior members of staff with 
                              into appropriate and                     responsibility for relationship management at 
                              relevant                                 subsidiary and Group levels. 
                              agreements and retaining 
                              contracts with key clients 
                              (e.g. lenders, portfolio            *    On-going investment in resources, innovation, 
                              landlords and house                      technology and service standards to ensure LSL has 
                              builders).                               the capacity to meet service level demands. 
 
 
                                                                  *    Targeted marketing and training events for corporate 
                                                                       clients. 
 
 
                                                                  *    Monitoring of client dependency, service delivery, 
                                                                       risk and compliance with contractual requirements. 
 
 
                                                                  *    Robust control framework supporting the risk 
                                                                       profiling of prospective clients, contract renewals 
                                                                       (including contract terms) and the quality of 
                                                                       professional services. 
 
 
                                                                  *    In-house legal services and compliance teams, with 
                                                                       specialist external legal and compliance support 
                                                                       engagement when necessary, together with dedicated 
                                                                       claims/customer complaints management teams within 
                                                                       business areas. 
 
 
                                                                  *    Risk and Internal Audit reviews. 
    -----------------------  -----------------------------  --------------------------------------------------------------- 
 Operations: 
 6   Business                 The Group has varied 
     Infrastructure           operations                      *    Group-wide internal controls processes and policies 
     (including               which require robust                 which are subject to regular review to ensure they 
     IT)                      internal                             are in line with best practice. 
                              controls, infrastructures 
                              and business continuity 
                              arrangements (including         *    Group IT governance, policies, base standards and 
                              in relation to IT).                  initiatives supported by the Group IT Director and 
                                                                   with oversight from the Information Security and 
                              The controls environment             Governance Committee. 
                              needs to remain adaptable 
                              to support growth 
                              initiatives,                    *    Focus on investment and development of innovation and 
                              harness technological                systems development within the Group's strategies. 
                              advancements 
                              and counter business 
                              continuity                      *    Combination of dedicated in-house IT teams and 
                              threats, including in                engagement with external IT specialist suppliers to 
                              relation                             deliver efficiencies and market leading service. 
                              to IT systems, malicious 
                              and cyber-related attacks. 
                                                              *    Maintenance of business infrastructure to ensure 
                              LSL's strategy recognises            effective service delivery with appropriate controls. 
                              the importance of 
                              investing 
                              in the Group's                  *    On-going infrastructure investment and development 
                              infrastructure                       programmes. 
                              (including IT) to maintain 
                              both competitive 
                              advantages                      *    Identifying and securing innovation and technology 
                              and deliver controls and             opportunities through the Group's investment and 
                              system security - all                acquisition strategies. 
                              within 
                              the context of changing 
                              business models within          *    Implementing business continuity and disaster 
                              the residential property             recovery solutions (encompassing IT premises, 
                              services markets.                    transportation and employees). 
 
 
                                                              *    Monitoring of compliance with relevant contractual 
                                                                   and regulatory requirements. 
 
 
                                                              *    Inter-Group IT governance forums. 
 
 
                                                              *    External consultative support as necessary. 
 
 
                                                              *    Risk and Internal Audit engagements. 
 
 
                                                              *    Oversight by the Information Security and Governance 
                                                                   Committee, the Audit & Risk Committee and the LSL 
                                                                   Board. 
    -----------------------  ---------------------------  ----------------------------------------------------------------- 
 7   Information              Group operations involve 
      security (including     the processing of high          *    LSL Information Security and Governance Committee and 
      data protection)        volumes of personal data,            IT Teams with policy implementation and oversight 
                              with potential for                   responsibilities. 
                              unintended 
                              data loss and exposure 
                              to increasing levels of         *    Defined Group-wide base policy standards. 

                              external cybercrime. 
 
                                                              *    Dedicated information security and data protection 
                                                                   personnel (including DPOs). 
 
 
                                                              *    Group cyber insurance cover in place and reviewed 
                                                                   annually to ensure the cover remains appropriate. 
 
 
                                                             Data protection 
                                                              *    Group data protection policies and training in place 
                                                                   supported by in-house legal and compliance teams. 
 
 
                                                              *    Tracking of data assets/data sharing and any breach 
                                                                   incidents, in line with authority levels. 
 
 
                                                              *    Implementation of regulatory changes - (e.g. General 
                                                                   Data Protection Regulation) via defined project teams 
                                                                   with support from in-house legal and compliance 
                                                                   teams. 
 
 
                                                             Systems security 
                                                              *    Penetration testing and intrusion scanning 
                                                                   programmes. 
 
 
                                                              *    Benchmarking against and accreditation by best 
                                                                   practice standards - e.g. ISO27001 accreditation for 
                                                                   e.surv. 
 
 
                                                              *    Second and third-line risk-based thematic reviews. 
    -----------------------  ---------------------------  ----------------------------------------------------------------- 
 8   Regulatory               Compliance with legal and 
      and compliance          regulatory requirements,       *    Top-down management culture focused on fairness, 
                              including relationship              transparency and delivery of good customer outcomes. 
                              with regulators. 
 
                              Regulations govern roles       *    Open dialogue with regulators and monitoring of 
                              as an employer and as               emerging developments and regulatory reforms. 
                              providers 
                              of services. 
                                                             *    Group risk framework policy incorporating a 'three 
                              Any compliance breaches             lines of defence' model to track compliance with 
                              could result in sanctions           regulations. 
                              and reputational damage 
                              (e.g. prosecutions or 
                              fines).                        *    Group policies including ethics (i.e. whistleblowing 
                              This includes compliance            structures, anti-fraud and anti-bribery policies) and 
                              with existing regulations           employee welfare. 
                              and implementing new 
                              regulations 
                              (e.g. Senior Managers          *    Subsidiary businesses have in place health and safety 
                              Certification                       arrangements with an associated Group reporting 
                              Regime).                            framework which ensures that the welfare of employees 
                                                                  and visitors to Group premises. 
                              Regulatory and compliance 
                              risk extends to oversight 
                              of standards adopted by        *    Group-wide forums with regulatory focus and oversight 
                              business partners (e.g.             (e.g. Financial Services Management Committee, 
                              franchises, appointed               Financial Services Risk Committee and Information 
                              representatives,                    Security and Governance Committee). 
                              joint ventures, minority 
                              investments, associates 
                              and suppliers).                *    Dedicated second line compliance teams in higher 
                                                                  risk/regulated functions. 
                              The market and business 
                              operations are also 
                              impacted                       *    Investment in recruitment of expertise within the 
                              by regulatory reforms               compliance teams to ensure the Group is able to 
                              (e.g.                               maintain appropriate procedures and risk measures for 
                              Government reviews                  regulatory compliance. 
                              relating 
                              to the housing market, 
                              including reforms relating     *    Harmonisation of best practice compliance standards 
                              to the tenants fees and             following acquisitions. 
                              conveyancing referral 
                              fees) 
                              which may have an impact       *    Evolution and development of IT systems to strengthen 
                              on Group revenue and                oversight routines. 
                              expenditures. 
 
                              Regulatory costs, fees         *    Responsive complaints tracking of any emerging 
                              and charges continue to             themes. 
                              grow due to the growth 
                              of LSL's Financial 
                              Services                       *    In-house legal and compliance teams, with access to 
                              businesses and the funding          specialist external legal and compliance support when 
                              requirements of the                 necessary. 
                              Financial 
                              Services Compensation 
                              Scheme                         *    Group Risk and Internal Audit engagements. 
                              (FSCS). 
 
                                                             *    Membership of industry trade bodies and participation 
                                                                  in Government and regulatory consultations. 
 
 
                                                             *    Responsive business model changes to mitigate and 
                                                                  address the impact of any regulatory changes. 
    -----------------------  ---------------------------  ----------------------------------------------------------------- 
 People: 
 9   Employees                Securing and retaining key 
                              strategic populations and         *    Oversight by LSL Remuneration and Nominations 
                              controlling attrition in               Committees supported by the Company Secretary and 
                              key business critical areas            Group HR Director. 
                              (e.g. through e.surv's 
                              graduate 
                              training program), as well        *    Group remuneration policies and incentive schemes to 
                              as ensuring the effective              retain key strategic populations. 
                              management of personnel 
                              standards and policy 
                              frameworks                        *    Regular benchmarking and appraisals of Executive 
                              across varied Group                    Directors and Senior Management. 
                              businesses. 
 
                                                                *    Succession planning reviews and targeted development 
                                                                     programmes for high achievers. 
 
 
                                                                *    Dedicated in-house talent acquisition teams within 
                                                                     Group HR. 
 
 
                                                                *    Targeted retention and recruitment initiatives. 
 
 
                                                                *    Employee surveys and Group HR initiatives to monitor 
                                                                     culture, attrition, morale, and any areas of 
                                                                     pressure. 
 
 
                                                                *    Group-wide HR IT systems. 
 
 
                                                                *    Monitoring of statutory reporting requirements and 
                                                                     developments (e.g. gender and ethnic pay reporting). 
 
 

                                                                *    Employee policies and monitoring frameworks in place 
                                                                     (e.g. health and safety and lone working arrangements 
                                                                     to ensure employee welfare). 
 
 
                                                                *    Monitoring subsidiary culture, values and ethics and 
                                                                     the development of LSL's culture, values and ethics. 
 
 
                                                                *    Implementation of workforce engagement measures to 
                                                                     ensure employee considerations are including in 
                                                                     decision-making. 
 
 
                                                                *    Adoption of reporting arrangements to demonstrate 
                                                                     consideration of key stakeholders, including 
                                                                     employees in decision-making. 
 
 
                                                                *    Clear Group policies and whistleblowing procedures to 
                                                                     enable employees to confidentially raise or report 
                                                                     concerns. 
    -----------------------  -----------------------------  --------------------------------------------------------------- 
 
 

Group Income Statement

for the year ended 31(st) December 2018

 
                                              Note        2018        2017 
                                                       GBP'000     GBP'000 
                                                    ----------  ---------- 
 
 Group Revenue                                         324,640     311,540 
 
 
 Employee and subcontractor costs                    (203,095)   (186,307) 
 Establishment costs                                  (20,614)    (19,057) 
 Depreciation on property, plant and 
  equipment                                            (5,674)     (5,216) 
 Other operating costs                                (60,211)    (66,269) 
                                                    ----------  ---------- 
 Total operating expenses                            (289,594)   (276,849) 
 
 Other operating income                                    557         555 
 Gain on sale of property, plant and 
  equipment                                                 34         668 
 Income from joint ventures and associates                 259       1,583 
 
 
 Group Underlying Operating Profit             4        35,896      37,497 
 
 Share-based payments                                    (349)        (47) 
 Amortisation of intangible assets                     (5,301)     (4,083) 
 Exceptional gains                             5         2,188       9,337 
 Exceptional costs                             5       (5,234)           - 
 Contingent consideration                              (1,783)       (654) 
 Group operating profit                                 25,417      42,050 
                                                    ----------  ---------- 
 
 Finance costs                                         (2,333)     (1,952) 
 Net financial costs                                   (2,333)     (1,952) 
 
 Profit before tax                                      23,084      40,098 
 
 Taxation charge                               8       (5,201)     (6,686) 
 
 Profit for the year                                    17,883      33,412 
                                                    ----------  ---------- 
 Attributable to 
 - Owners of the parent                                 17,883      33,414 
 - Non-controlling interest                                  -         (2) 
 
 
 
 Earnings per share expressed in pence 
  per share: 
 Basic                                         6          17.4        32.6 
 Diluted                                       6          17.3        32.4 
 

Group Statement of Comprehensive Income

for the year ended 31(st) December 2018

 
                                                           2018        2017 
                                              Note      GBP'000     GBP'000 
                                                    -----------  ---------- 
 
 Profit for the year                                     17,883      33,412 
                                                    -----------  ---------- 
 
 Items not to be reclassified to profit 
  and loss in subsequent periods: 
 Revaluation of financial assets not                   (12,200)           - 
  recycled through income statement 
                                                    -----------  ---------- 
                                                       (12,200)           - 
 Items to be reclassified to profit 
  and loss in subsequent periods: 
 Reclassification adjustments for disposal 
  of financial assets                                         -     (5,593) 
 Income tax effect                              8             -         951 
 Revaluation of financial assets recycled 
  through income statement                                    -       1,885 
 Income tax effect                              8             -       (320) 
                                                    -----------  ---------- 
                                                              -     (3,077) 
 Net other comprehensive (loss)                        (12,200)     (3,077) 
 
 Total other comprehensive (loss) for 
  the year, net of tax                                 (12,200)     (3,077) 
                                                    -----------  ---------- 
 
 Total comprehensive income for the 
  year, net of tax                                        5,683      30,335 
                                                    -----------  ---------- 
 
 Attributable to 
    - Owners of the parent                                5,683      30,337 
    - Non-controlling interest                                -         (2) 
 
 

Group balance sheet Company No. 05114014

as at 31(st) December 2018

 
                                        2018        2017 
                                     GBP'000     GBP'000 
                                  ----------  ---------- 
 
 Non-current assets 
 Goodwill                            159,723     151,901 
 Other intangible assets              31,960      29,729 
 Property, plant and equipment        16,866      17,763 
 Financial assets                     11,566      25,282 
 Investments in joint ventures 
  and associates                      13,230       9,556 
 Contract assets                         959           - 
 Total non-current assets            234,304     234,231 
                                  ---------- 
 
 Current assets 
 Trade and other receivables          38,650      31,357 
 Contract assets                         262           - 
 Cash and cash equivalents             2,405           - 
 
 Total current assets                 41,317      31,357 
                                  ----------  ---------- 
 
 Total assets                        275,621     265,588 
                                  ----------  ---------- 
 
 Current liabilities 
 Financial liabilities              (10,455)     (6,454) 
 Trade and other payables           (63,980)    (53,418) 
 Current tax liabilities             (2,688)     (3,662) 
 Provisions for liabilities          (6,616)     (2,850) 
                                  ----------  ---------- 
 Total current liabilities          (83,739)    (66,384) 
                                  ----------  ---------- 
 
 Non-current liabilities 
 Financial liabilities              (41,156)    (34,654) 
 Deferred tax liability              (2,189)     (2,698) 
 Provisions for liabilities          (5,944)    (13,276) 
                                  ----------  ---------- 
 Total non-current liabilities      (49,289)    (50,628) 
                                  ----------  ---------- 
 
 Total Liabilities                 (133,028)   (117,012) 
 
 Net assets                          142,593     148,576 
                                  ----------  ---------- 
 
 Equity 
 Share capital                           208         208 
 Share premium account                 5,629       5,629 
 Share-based payment reserve           4,129       3,802 
 Shares held by EBT                  (5,261)     (5,317) 
 Fair value reserve                 (11,727)         494 
 Retained earnings                   149,615     143,578 
                                  ----------  ---------- 
 Equity attributable to 
  owners of parent                   142,593     148,394 
 Non-controlling interests                 -         182 
 
 Total equity                        142,593     148,576 
                                  ----------  ---------- 
 

The Financial Statements were approved by and signed on behalf of the Board by:

Ian Crabb Adam Castleton

Group Chief Executive Officer Group Chief Financial Officer

5(th) March 2019 5(th) March 2019

Group Statement of Cash-Flows

for the year ended 31(st) December 2018

 
                                                                   2018          2017 
  Note                                                          GBP'000       GBP'000 
                                                              ---------  ------------ 
 Profit before tax                                               23,084        40,098 
 Adjustments for: 
 Exceptional operating items and contingent 
  consideration                                                   4,829       (7,640) 
 Depreciation of tangible assets                                  5,674         5,216 
 Amortisation of intangible assets                                5,301         4,083 
 Share-based payments                                               349            47 
 (Profit) on disposal of fixed assets                              (34)         (668) 
 (Profit) from joint ventures                                     (259)       (1,583) 
 Finance costs                                                    2,333         1,952 
 Dividend income/rebates received via 
  non-cash consideration                                              -       (1,503) 
 Proceeds received via cash consideration                         1,529             - 
 Operating cash-flows before movements 
  in working capital                                             42,806        40,002 
-----------------------------------------------  ---  -----------------  ------------ 
 
 Movements in working capital 
 (Increase)/decrease in trade and other 
  receivables                                                   (3,815)         1,695 
 (Decrease)/increase in trade and other 
  payables                                                        (111)         5,261 
 Decrease in provisions                                         (3,608)       (5,440) 
                                                                (7,534)         1,516 
-----------------------------------------------  ---  -----------------  ------------ 
 
 Cash generated from operations                                  35,272        41,518 
-----------------------------------------------  ---  -----------------  ------------ 
 Interest paid                                                  (1,359)       (1,268) 
 Income taxes paid                                              (6,875)      (11,113) 
  Exceptional costs paid                                        (3,310)             - 
 Net cash generated from operating activities                    23,728        29,137 
-----------------------------------------------  ---  -----------------  ------------ 
 
 Cash-flows used in investing activities 
 Cash acquired on purchase of subsidiary 
  undertaking                                                     6,944             - 
 Acquisitions of subsidiaries and other 
  businesses                                                    (7,732)             - 
 Payment of contingent consideration                            (1,392)       (2,175) 
 Investment in joint ventures and associates                    (4,100) 
 Investment in financial assets                                    (13)      (20,315) 
 Cash received on sale of financial assets                            -         3,024 
 Purchase of property, plant and equipment 
  and intangible assets                                         (5,877)       (5,489) 
 Proceeds from sale of property, plant 
  and equipment                                                     156         1,457 
 Net cash (expended) on investing activities                   (12,014)      (23,498) 
-----------------------------------------------  ---  -----------------  ------------ 
 
 Cash-flows used in financing activities 
 Drawdown of loans                                                4,521         9,723 
 Refinance costs                                                  (250)             - 
 Repayment of loan notes                                        (2,000)             - 
 Payment of deferred consideration                                    -       (4,790) 
 Proceeds from exercise of share options                             20             - 
 Dividends paid                                                (11,600)      (10,572) 
 Net cash expended in financing activities                      (9,309)       (5,639) 
-----------------------------------------------  ---  -----------------  ------------ 
 Net increase in cash and cash equivalents                        2,405             - 
-----------------------------------------------  ---  -----------------  ------------ 
 Cash and cash equivalents at the end 
  of the year                                                     2,405             - 
-----------------------------------------------  ---  -----------------  ------------ 
 
 

Group Statement of Changes in Equity

Year Ended 31(st) December 2018

 
 
                                             Share- 
                                    Share     based       Shares       Fair 
                         Share    premium   payment      held by      value    Retained      Total    Non-controlling 
                       capital    account   reserve       EBT(1)    Reserve    earnings     equity           interest      Total 
                       GBP'000    GBP'000   GBP'000      GBP'000    GBP'000     GBP'000    GBP'000            GBP'000    GBP'000 
     At 1(st) 
      January 2018         208      5,629     3,802      (5,317)        494     143,578    148,394                182    148,576 
                     ---------  ---------  --------  -----------  ---------  ----------  ---------  -----------------  --------- 
     Adjustment on 
      initial 
      application 
      of IFRS 15         -          -          -            -         -           (434)      (434)                  -      (434) 
     Adjustment on 
      initial 
      application 
      of IFRS 9          -          -          -            -        (21)            21          -                  -          - 
     Revised 
      opening 
      balance           208       5,629      3,802       (5,317)     473        143,165    147,960                182    148,142 
     Other 
     comprehensive 
     income for the 
     period 
     Revaluation of 
      financial 
      assets                 -          -         -            -   (12,200)           -   (12,200)                  -   (12,200) 
     Profit for the 
      period                 -          -         -            -          -      17,883     17,883                  -     17,883 
     Total 
      comprehensive 
      (loss) / 
      income for 
      the period         -          -          -          -        (12,200)      17,883      5,683                  -      5,683 
     Exercise of 
      options            -          -        (22)             56          -        (15)         19                  -         19 
     Share-based 
      payments           -          -         349         -               -           -        349                  -        349 
     Acquisition of 
      minority 
      interest           -          -          -          -               -         182        182              (182)          - 
     Dividend 
      payment            -          -          -          -               -    (11,600)   (11,600)                  -   (11,600) 
     At 31(st) 
      December 2018     208       5,629      4,129     (5,261)     (11,727)     149,615    142,593                  -    142,593 
                     ---------  ---------  --------  -----------  ---------  ----------  ---------  -----------------  --------- 
 
 
 

During the year ended 31(st) December 2018, the Trust acquired nil LSL Shares. During the period 15,966 share options were exercised relating to LSL's various share option schemes resulting in the Shares being sold by the Trust. LSL received GBP20,000 on exercise of these options

Group Statement of Changes in Equity

Year Ended 31(st) December 2017

 
                            Share     Share    Share-   Treasury      Fair   Retained      Total   Non-controlling      Total 
                          capital   premium     based     shares     value   earnings     equity         interests 
                                    account   payment              Reserve 
                                              reserve 
                          GBP'000   GBP'000   GBP'000    GBP'000   GBP'000    GBP'000    GBP'000           GBP'000    GBP'000 
 At 1(st) January 
  2017                        208     5,629     4,303    (5,368)     3,571    120,239    128,582               184    128,766 
 Disposal of financial 
  assets (net of 
  tax)                          -         -         -          -   (4,642)          -    (4,642)                 -    (4,642) 
 Revaluation of 
  financial assets 
  (net of tax)                  -         -         -          -     1,565          -      1,565                 -      1,565 
                         --------  --------  --------  ---------  --------  ---------  ---------  ----------------  --------- 
 Other comprehensive 
  income for the 
  year                          -         -         -          -   (3,077)          -    (3,077)                 -    (3,077) 
 Profit for the 
  year                          -         -         -          -         -     33,414     33,414               (2)     33,412 
 Total comprehensive 
  income for the 
  year                          -         -         -          -   (3,077)     33,414     30,337               (2)     30,335 
 Exercise of options            -         -      (46)         51         -        (5)          -                 -          - 
 Share-based payments           -         -     (455)          -         -        502         47                 -         47 
 Dividend payment               -         -         -          -         -   (10,572)   (10,572)                 -   (10,572) 
 At 31(st) December 
  2017                        208     5,629     3,802    (5,317)       494    143,578    148,394               182    148,576 

                         --------  --------  --------  ---------  --------  ---------  ---------  ----------------  --------- 
 

During the year ended 31(st) December 2017, the Trust acquired nil LSL Shares. During the period 14,661 share options were exercised relating to LSL's various share option schemes resulting in the Shares being sold by the Trust. LSL received nil on exercise of these options.

Notes to the Preliminary Results Announcement

The financial information in this Preliminary Results Announcement does not constitute LSL's statutory financial statements for the year ended 31(st) December 2018 but has been extracted from the Financial Statements included in LSL's Annual Report and Accounts 2018 and as such, does not contain all information required to be disclosed in the financial statements prepared in accordance with IFRS.

Statutory financial statements for this year will be filed following the 2019 AGM. The auditors have reported on these financial statements. Their report was unqualified and did not contain a statement under section 498 (2), (3) or (4) of the Companies Act 2006.

   1.      Directors responsibility statement 

Each of the current Directors confirms that, to the best of their knowledge, the financial statements, prepared in accordance with IFRS as adopted by EU standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the issuer and the undertakings included in the consolidation taken as a whole; and the Directors' Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

   2.      Basis of preparation of  financial information 

The Group Financial Statements have been prepared on a going concern basis and on a historical cost basis, except for certain debt and equity financial assets that have been measured at fair value.

The accounting policies which follow set out those significant policies which apply in preparing the Financial Statements for the year ended 31(st) December 2018. The Group's Financial Statements are presented in pound sterling and all values are rounded to the nearest thousand pounds (GBP'000) except when otherwise indicated.

   3.      Segment analysis of revenue and operating profit 

For management purposes, the Group was in 2018 organised into business units based on their products and services and had two reportable segments as follows:

Ø The Estate Agency and Related Services segment provides services related to the sale and letting of residential properties. It operates a network of high street branches. As part of this process, the Estate Agency Division also provides marketing and arranges conveyancing services. In addition, it provides repossession asset management services to a range of lenders. It also arranges mortgages for a number of lenders and arranges pure protection and general insurance policies for a panel of insurance companies via the estate agency branches, PRIMIS, Embrace Financial Services, First2Protect, Mortgages First, Insurance First and Linear Financial Services, Personal Touch Financial Services and RSC New Homes. The Financial Services revenue included within the Estate Agency Division includes three mortgage and insurance distribution networks providing products and services for sale via financial intermediaries. A significant proportion of the results of the Financial Services were inextricably linked to the Estate Agency business. They have therefore been aggregated with those of Estate Agency and Related Service segment for 2018.

Ø The Surveying and Valuation Services segment provides a valuations and professional survey service of residential properties to various lenders and individual customers.

Each reportable segment has various products and services and the revenue from these products and services are disclosed in the Business Review sections of the Strategic Report of the Annual Report and Accounts 2018.

The Management Team monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects, as explained in the table below, is measured differently from operating profit or loss in the Group Financial Statements. Head office costs, Group financing (including finance costs and finance incomes) and income taxes are managed on a Group basis and are not allocated to operating segments.

Reportable segments

The following table presents revenue and profit information regarding the Group's reportable segments for the financial year ended 31(st) December 2018 and financial year ended 31(st) December 2017 respectively.

To reflect the increased importance of LSL's Financial Services businesses, the LSL Board has decided to update the Group segmental reporting effective from 1(st) January 2019. From 1(st) January 2019 LSL will report three segments: Estate Agency; Financial Services; and Surveying and Valuation Services. The Financial Services segment will incorporate all LSL's Financial Services businesses. The Estate Agency segment will primarily incorporate the results from the Estate Agency branch networks (Your Move, Reeds Rains, LSLi and Marsh & Parsons) and Asset Management. The Surveying and Valuation Services segment is unchanged.

   3.   Segment analysis of revenue and operating profit (continued) 

Year ended 31(st) December 2018

 
                                     Estate Agency        Surveying 
                                       and Related    and Valuation 
                                          Services         Services   Unallocated       Total 
  Income Statement information             GBP'000          GBP'000       GBP'000     GBP'000 
                                                                                   ---------- 
 
 Segmental revenue                         254,842           69,798             -     324,640 
                                  ----------------  ---------------  ------------  ---------- 
 Segmental result: 
  - before exceptional costs, 
   contingent consideration, 
   amortisation and share-based 
   payments                                 20,568           20,426       (5,098)      35,896 
  - after exceptional costs, 
   contingent                               11,601           19,022       (5,206)      25,417 
  consideration, amortisation 
   and share-based payments 
                                  ----------------  ---------------  ------------  ---------- 
 
 
 Finance costs                                                                        (2,333) 
 Profit before tax                                                                     23,084 
 Taxation                                                                             (5,201) 
 Profit for the year                                                                   17,883 
                                                                                   ---------- 
 
                                     Estate Agency        Surveying 
                                       and Related    and Valuation 
                                          Services         Services   Unallocated       Total 
 Balance sheet information                 GBP'000          GBP'000       GBP'000     GBP'000 
                                  ----------------  ---------------  ------------  ---------- 
 
 Segment assets - intangible               179,512           12,171             -     191,683 
 Segment assets - other                     68,443           11,659         3,836      83,938 
 Total Segment assets                      247,955           23,830         3,836     275,621 
 Total Segment liabilities                (64,889)         (27,828)      (40,311)   (133,028) 
                                                                                   ---------- 
 
 Net assets/(liabilities)                  183,066          (3,998)      (36,475)     142,593 
                                  ----------------  ---------------  ------------  ---------- 
 
 Other segment items 
 Capital expenditure including 
  intangible assets                          4,738            1,282             -       6,020 
 Depreciation                              (5,420)            (254)             -     (5,674) 
 Amortisation of intangible 
  assets                                   (4,897)            (404)             -     (5,301) 
 Share of results of joint 
  venture                                      259                -             -         259 
 PI Costs provision                              -         (12,430)             -    (12,430) 
 Exceptional costs                         (1,994)          (3,240)                   (5,234) 
 Exceptional gains                                            2,188                     2,188 
 Onerous leases provision                    (130)                -             -       (130) 
 Share-based payment                         (294)               53         (108)       (349) 
                                  ----------------  ---------------  ------------  ---------- 
 

Unallocated net liabilities comprise plant and equipment (GBP15,000), other assets (GBP3,822,000), accruals (GBP922,000), deferred and current tax liabilities (GBP4,890,000), RCF (GBP34,500,000)

Year ended 31(st) December 2017

 
                                           Estate 
                                           Agency        Surveying 
                                      and Related    and Valuation 
                                         Services         Services   Unallocated       Total 
  Income Statement information            GBP'000          GBP'000       GBP'000     GBP'000 
                                                                                  ---------- 
 
 Segmental revenue                        247,410           64,130                   311,540 
                                  ---------------  ---------------  ------------  ---------- 
 Segmental result: 
  - before exceptional costs, 
   contingent consideration, 
   amortisation and share-based 
   payments                                26,942           18,877       (8,322)      37,497 
  - after exceptional costs, 
   contingent 
  consideration, amortisation 
   and share-based payments                22,124           22,466       (2,540)      42,050 
                                  ---------------  ---------------  ------------  ---------- 
 
 Finance costs                                                                       (1,952) 
 Profit before tax                                                                    40,098 
 
 Taxation                                                                            (6,686) 
 Profit for the year                                                                  33,412 
                                                                                  ---------- 
 
                                           Estate 
                                           Agency        Surveying 
                                      and Related    and Valuation 
                                         Services         Services   Unallocated       Total 
 Balance sheet information                GBP'000          GBP'000       GBP'000     GBP'000 
                                  ---------------  ---------------  ------------  ---------- 
 
 Segment assets - intangible              169,113           12,517             -     181,630 
 Segment assets - other                    75,453            7,306         1,200      83,958 
 Total Segment assets                     244,566           19,823         1,200     265,588 
 Total Segment liabilities               (49,851)         (25,794)      (41,367)   (117,012) 
                                                                                  ---------- 
 
 Net assets/(liabilities)                 194,715          (5,970)      (40,167)     148,576 
                                  ---------------  ---------------  ------------  ---------- 
 
 Other segment items 
 Capital expenditure including 
  intangible assets                         5,177              312             -       5,489 
 Depreciation                             (5,036)            (180)             -     (5,216) 
 Amortisation of intangible 
  assets                                  (4,013)             (70)             -     (4,083) 
 Share of results of joint 
  venture                                   1,583                -             -       1,583 
 PI Costs provision                             -         (15,916)             -    (15,916) 
 Onerous leases provision                   (210)                -             -       (210) 
 Share-based payment                        (152)             (85)           190        (47) 
                                  ---------------  ---------------  ------------  ---------- 
 

Unallocated net liabilities comprise plant and equipment (GBP9,000), other assets (GBP1,191,000), accruals (GBP3,028,000), financial liabilities (GBP4,979,000), deferred and current tax liabilities (GBP6,360,000), RCF (GBP27,000,000).

   4.   APMs (adjusted performance measures) 

In addition to the various performance measures defined under IFRS, the Group reports a number of alternative performance measures that are designed to assist with the understanding of the underlying performance of the Group. The Group seeks to present a measure of underlying performance which is not impacted by the inconsistency in profile of exceptional gains and exceptional costs, contingent consideration, amortisation of intangible assets and share-based payments. Share-based payments are excluded from the underlying performance due to the fluctuations that can impact the charge, such as lapses and the level of annual grants. The four adjusted measures reported by the Group are:

   --      Group Underlying Operating Profit 
   --      Adjusted Basic EPS 
   --      Adjusted diluted EPS 
   --      Group Adjusted EBITDA 

The amortisation of intangibles assets is not representative of the underlying costs of the business, and is therefore excluded from adjusted earnings.

The Directors consider that these adjusted measures shown above give a better and more consistent indication of the Group's underlying performance. These measures form part of management's internal financial review and are contained within the monthly management information reports reviewed by the Board.

The calculations of adjusted basic and adjusted diluted EPS are given in Note 10 to these interim condensed consolidated Group Financial Statements and a reconciliation of Group Underlying Operating Profit is shown below:

 
                                                           2018      2017 
                                                        GBP'000   GBP'000 
                                                       --------  -------- 
 Group operating profit                                  25,417    42,050 
 Share-based payments                                       349        47 
 Amortisation of intangible assets                        5,301     4,083 
 Exceptional gains                                      (2,188)   (9,337) 
 Exceptional costs                                        5,234         - 
 Contingent consideration charge                          1,783       654 
                                                       --------  -------- 
 Group Underlying Operating Profit                       35,896    37,497 
                                                       --------  -------- 
 Depreciation on property, plant and equipment            5,674     5,216 
                                                       --------  -------- 
 Group Adjusted EBITDA                                   41,570    42,713 
                                                       --------  -------- 
 
 
   5.   Exceptional items 
 
                                                          2018        2017 
                                                       GBP'000     GBP'000 
                                                    ----------  ---------- 
 Exceptional costs: 
 Transition costs relating to surveying contracts        3,241           - 
 Branch/centre closures and restructuring costs          1,993           - 
  including redundancy costs 
                                                    ----------  ---------- 
                                                         5,234           - 
                                                    ----------  ---------- 
 
 Exceptional gains: 
 Gain on disposal of Financial Assets                        -     (5,593) 
 Exceptional gain in relation to historic PI 
  Costs                                                (2,188)     (3,744) 
                                                    ----------  ---------- 
                                                       (2,188)     (9,337) 
                                                    ----------  ---------- 
 
 

Exceptional costs

There were GBP5.2m of exceptional costs in the year (2017: nil), the majority of which were in relation to initial non-recurring transition and integration costs for the contract to supply surveying and valuation services to Lloyds Bank plc (GBP3.2m).

In the Estate Agency Division there were GBP2.0m (2017: nil) of non-recurring and material exceptional costs relating to the planned restructuring costs incurred following the acquisition of Personal Touch Financial Services as well as branch / centre closures.

Provision for professional indemnity (PI) claims and insurance claim notification

In 2018 the Group continued to make positive progress in addressing the historic PI claims and there has been a release of GBP2.2m.

   6.   Earnings per share (EPS) 

Basic EPS amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the Parent Company by the weighted average number of Ordinary Shares outstanding during the year.

Diluted EPS amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Parent Company by the weighted average number of Ordinary Shares outstanding during the year plus the weighted average number of Ordinary Shares that would be issued on the conversion of all the dilutive potential Ordinary Shares into Ordinary Shares.

 
                         Profit       Weighted         2018     Profit       Weighted           2017 
                          after        average    Per share      after        average      Per share 
                            tax         number       amount        tax         number         amount 
                                     of shares        Pence                 of shares          Pence 
                        GBP'000                                GBP'000 
 Basic EPS              17,883     102,653,447      17.4       33,414     102,640,363       32.6 
 Effect of dilutive 
  share options                        839,935                                635,058 
 Diluted EPS             17,883    103,493,382         17.3     33,414    103,275,421         32.4 
                      ---------  -------------               ---------  ------------- 
 
 

There have been no other transactions involving Ordinary Shares or potential Ordinary Shares between the reporting date and the date of completion of these Financial Statements.

The Directors consider that the adjusted earnings shown below give a better and more consistent indication of the Group's underlying performance:

 
                                                                  2018       2017 
                                                               GBP'000    GBP'000 
 
 Group operating profit before contingent consideration, 
  exceptional items, share-based payments and amortisation 
  (excluding non-controlling interest):                         35,896     37,497 
 
  Net finance costs (excluding exceptional and contingent 
   consideration items)                                        (1,401)    (1,468) 
  Normalised taxation                                          (6,554)    (6,936) 
                                                             ---------  --------- 
 Adjusted profit after tax(1) before exceptional items, 
  share-based payments and amortisation                         27,941     29,093 
                                                             ---------  --------- 
 

Adjusted basic and diluted EPS

 
                       Adjusted       Weighted         2018   Adjusted      Weighted         2017 
                         profit        average    Per share     profit       average    Per share 
                          after         number       amount      after        number       amount 
                         tax(1)      of shares        Pence     tax(1)     of shares        Pence 
                        GBP'000                                GBP'000 
 
 Adjusted Basic EPS      27,941    102,653,447         27.2     29,093   102,640,363         28.3 
 Effect of dilutive 
  share options                        839,935                               635,058 
                      ---------  -------------               ---------  ------------ 
 Adjusted Diluted 
  EPS                    27,941    103,493,382         27.0     29,093   103,275,421         28.2 
                      ---------  -------------               ---------  ------------ 
 

Note

(1) This represents adjusted profit after tax attributable to equity holders of the parent. The normalised tax rate in 2018 is 19% (2017: 19.25%).

   7.   Dividends paid and proposed 
 
                                                        2018       2017 
                                                     GBP'000    GBP'000 
 Declared and paid during the year: 
 Equity dividends on Ordinary Shares: 
 2016 Final: 6.3 pence per share                                  6,466 
  2017 Interim: 4.0 pence per share                               4,106 
 2017 Final: 7.3 pence per share                       7,493 
 2018 Interim: 4.0 pence per share                     4,107 
                                                      11,600     10,572 
                                                    --------  --------- 
 
 
   Dividends on Ordinary Shares proposed (not 
   recognised as a liability as at 31(st) 
   December): 
 Equity dividends on Ordinary Shares: 
  Dividend: 6.9 pence per share (2017: 7.3 pence 
   per share)                                          7,083    7,493 
                                                    --------  ------- 
 
 
   8.   Taxation 
   (a)        Tax on profit on ordinary activities 

The major components of income tax charge in the Group Income Statements are:

 
                                                                                  2018        2017 
                                                                               GBP'000     GBP'000 
                                                                            ----------  ---------- 
 
 UK corporation tax - current year                                               5,931       7,537 
                                   - adjustment in respect of prior years        (205)       (345) 
                                                                                        ---------- 
                                                                                 5,726       7,192 
 Deferred tax: 
 Origination and reversal of temporary differences                               (322)       (442) 
 Adjustment in respect of prior year                                             (203)        (64) 
                                                                            ----------  ---------- 
 Total deferred tax (credit)                                                     (525)       (506) 
                                                                            ----------  ---------- 
 Total tax charge in the Income Statement                                        5,201       6,686 
                                                                            ----------  ---------- 
 

The UK corporation tax rate reduced to 20% with effect from 1(st) April 2015 and 19% with effect from 1(st) April 2017. A future UK corporation tax of 17% has been enacted and is effective from 1 April 2020, and this is the rate at which deferred tax has been provided (2017: 17%). Corporation tax is recognised at the headline UK corporation tax rate of 19% (2017: 19.25%).

The effective rate of tax for the year was 22.5% (2017: 16.7%). The effective tax rate for 2018 is higher than the headline UK tax rate for a number of reasons, but the most significant are non-deductible costs in relation to contingent consideration and the depreciation of assets which do not qualify for capital allowances.

Deferred tax credited directly to other comprehensive income is GBP0.0m (2017: GBP0.6m). Income tax credited directly to the share based payment reserve is GBP0.0m (2017: GBP0.0m).

   (b)        Factors affecting tax charge for the year 

The tax assessed in the profit and loss account is higher (2017: lower) than the standard UK corporation tax rate, because of the following factors:

 
                                                            2018       2017 
                                                         GBP'000    GBP'000 
                                                      ----------  --------- 
 
 Profit on ordinary activities before tax                 23,084     40,098 
                                                      ----------  --------- 
 
 Tax calculated at UK standard rate of corporation 
  tax rate of 19% (2017 - 19.25%)                          4,386      7,719 
 Non-deductible expenditure / (non-taxable income) 
  from joint ventures and associates                          56      (153) 
 Other income not taxable                                      -      (369) 
 Other disallowable expenses                                 550        627 
 Impact of movement in contingent consideration 
  charged/( credited) to the Income Statement                494        251 
 Capital gains (lower than)/in excess of accounting 
  profit                                                       -    (1,053) 
 Share-based payment relief                                   73         15 
 Impact of rate change on deferred tax                        50         58 
 Prior period adjustments - current tax                    (205)      (345) 
 Prior period adjustment - deferred tax                    (203)       (64) 
                                                      ----------  --------- 
 Total taxation charge                                     5,201      6,686 
                                                      ----------  --------- 
 

The major component of the disallowable expenditure is a permanent disallowance of depreciation on assets which do not qualify for capital allowances. This is a recurring adjustment and the tax impact in the year is GBP421,000. Another significant adjustment is the impact of deferred and contingent consideration, which is a non-deductible expense within the income statement. The tax impact of this movement in deferred and contingent consideration is GBP494,000.

   9.   Acquisitions during the year 

Year ended 31(st) December 2018

The Group acquired the following businesses during the period to 30(th) June 2018:

   --      Lettings books 

During the period the Group acquired six Lettings books for a total consideration of GBP1,853,000. The fair value of the identifiable assets and liabilities of these businesses as at the date of acquisition have been provisionally determined as below:

 
                                                             Fair value recognised 
                                                                    on acquisition 
                                                                           GBP'000 
                                                            ---------------------- 
 Intangible Assets                                                           1,817 
 Deferred tax liabilities                                                    (309) 
                                                            ---------------------- 
 Total identifiable net liabilities acquired                                 1,508 
 Purchase consideration                                                      1,853 
 Goodwill                                                                      345 
 
 Purchase consideration discharged by:                                     GBP'000 
                                                            ---------------------- 
 Cash                                                                        1,670 
                                                            ---------------------- 
 Contingent consideration                                                      183 
                                                            ---------------------- 
                                                                             1,853 
                                                            ---------------------- 
 

 Analysis of cash-flow on acquisition                                      GBP'000 
                                                            ---------------------- 
 Transaction costs (included in cash-flows from operating 
  activities)                                                                    - 
                                                            ---------------------- 
 Net cash acquired with the subsidiaries and other 
  businesses                                                                     - 
                                                            ---------------------- 
 Purchase consideration discharged in cash (included 
  in cash-flows from investing activities)                                     345 
                                                            ---------------------- 
 Net cash outflow on acquisition                                               345 
                                                            ====================== 
 
   --      Personal Touch Financial Services 

In January 2018, the Group acquired the entire issued share capital of Personal Touch Financial Services and its subsidiary company, Personal Touch Administration Services Limited (PTAS) from Personal Touch Holdings Limited. Personal Touch Financial Services is a financial services business specialising in the provision of mortgage and other financial services products via its network of intermediaries. Personal Touch Financial Services is authorised by the FCA with 200 appointed representative firms and 474 advisers as at 31(st) December 2108.

The consideration for the initial investment was GBP5.4 million with GBP3.6 million paid on completion and a present value deferred consideration of GBP1.8 million in January 2019. The purchase price allocations for the acquisition made has now been finalised, with no changes made to the provisional purchase price allocations as disclosed below:

 
                                                             Fair value recognised 
                                                                    on acquisition 
                                                                           GBP'000 
                                                            ---------------------- 
 Intangible assets                                                           4,305 
 Property, plant and equipment                                                 121 
 Trade and other receivables                                                 3,617 
 Cash and cash equivalents                                                   6,795 
 Deferred tax asset                                                            921 
 Trade and other payables                                                  (7,974) 
 Provision for liabilities                                                 (2,034) 
 Deferred tax liability                                                      (657) 
                                                            ---------------------- 
 Total identifiable net assets acquired                                      5,094 
 Purchase consideration                                                      5,440 
 Goodwill                                                                      346 
 
 Purchase consideration discharged by:                                     GBP'000 
                                                            ---------------------- 
 Cash                                                                        3,562 
                                                            ---------------------- 
 Present value deferred consideration                                        1,878 
                                                            ---------------------- 
                                                                             5,440 
                                                            ---------------------- 
 
 Analysis of cash-flow on acquisition                                      GBP'000 
                                                            ---------------------- 
 Transaction costs (included in cash-flows from operating 
  activities)                                                                  518 
                                                            ---------------------- 
 Net cash acquired with the subsidiaries and other 
  businesses                                                               (6,795) 
                                                            ---------------------- 
 Purchase consideration discharged in cash (included 
  in cash-flows from investing activities)                                   3,562 
                                                            ---------------------- 
 Net cash outflow on acquisition                                           (2,716) 
                                                            ====================== 
 

As defined in IFRS 3 the Group has recognised, separately from goodwill, the identifiable intangible assets acquired in the business combination. The assets identified include the in-house developed software Toolbox.

From the date of acquisition, Personal Touch Financial Services has contributed GBP8.7 million of revenue and GBP1.0 million to the profit before tax from the continuing operations of the Group. If the acquisition had taken place at the beginning of the year, revenue from continuing operations would have been GBP9.5 million and the profit from continuing operations for the period would have been GBP0.2 million.

   --      RSC New Homes 

In March 2018, the Group, through wholly owned subsidiary, acquired 60% interest in RSC New Homes, who provide mortgage and protection brokerage services to the purchases of new homes. The consideration for the initial investment was GBP5.3 million cash, with GBP2.5 million paid on completion and the remaining subject to put and call options which are exercisable between 2022 and 2023. The contingent consideration is Management Team's best estimation of the probable discounted pay-out (using a rate of 6.5%), based upon current forecasts over the earn out period. Due to the nature of the payment terms, the contingent consideration is considered to be a capital payment for accounting purposes.

The purchase price allocations for the acquisition made has now been finalised, with goodwill increasing by GBP0.2m.

 
                                                             Fair value recognised 
                                                                    on acquisition 
                                                                           GBP'000 
                                                            ---------------------- 
 Intangible assets                                                             271 
 Property, plant and equipment                                                  40 
 Trade and other receivables                                                   403 
 Cash and cash equivalents                                                     149 
 Trade and other payables                                                    (340) 
 Provision for liabilities                                                   (277) 
 Current tax liability                                                       (200) 
 Deferred tax liability                                                       (46) 
                                                            ---------------------- 
 Total identifiable net assets acquired                                        (2) 
 Purchase consideration                                                      7,126 
 Goodwill                                                                    7,128 
 
 Purchase consideration discharged by:                                     GBP'000 
                                                            ---------------------- 
 Cash                                                                        2,500 
                                                            ---------------------- 
 Present value deferred consideration                                            9 
                                                            ---------------------- 
 Contingent consideration                                                    4,617 
                                                            ---------------------- 
                                                                             7,126 
                                                            ---------------------- 
 
 Analysis of cash-flow on acquisition                                      GBP'000 
                                                            ---------------------- 
 Transaction costs (included in cash-flows from operating 
  activities)                                                                   29 
                                                            ---------------------- 
 Net cash acquired with the subsidiaries and other 
  businesses                                                                 (149) 
                                                            ---------------------- 
 Purchase consideration discharged in cash (included 
  in cash-flows from investing activities)                                   2,500 
                                                            ---------------------- 
 Net cash outflow on acquisition                                             2,380 
                                                            ====================== 
 

As defined in IFRS 3 the Group has recognised, separately from goodwill, the identifiable intangible assets acquired in the business combination. The assets identified include the RSC New Homes brand and the pipeline of work acquired. As disclosed to the market on acquisition, there are strong customer relationships between RSC New Homes and key house builders, however, these relationships do not qualify as an intangible asset given they do not fulfil either the separability criterion or the contractual-legal criterion. This has been fully explored by the Management Team who are confident that given that no economic benefit passes between the two parties in this relationship (the housebuilder and RSC New Homes) there is no asset that can be "separated or divided" and "sold, transferred, licensed, rented or exchanged".

From the date of acquisition, RSC New Homes has contributed GBP3.4 million of revenue and GBP0.6 million to the net profit before tax from the continuing operations of the Group. If the acquisition had taken place at the beginning of the year, revenue from continuing operations would have been GBP4.3 million and the profit from continuing operations for the period would have been GBP0.5 million.

The goodwill represents expected synergies and intangible assets that do not qualify for separate recognition. The maximum undiscounted contingent consideration sum payable is capped at GBP7.5m.

Year ended 31(st) December 2017

The Group made no acquisitions during 2017.

10. Analysis of Net Bank Debt (excluding loan notes)

 
                                                     2018       2017 
                                                  GBP'000    GBP'000 
                                               ----------  --------- 
 
 Interest-bearing loans and borrowings 
 
   *    Current                                    10,456      6,454 
 
   *    Non-current                                41,156     34,654 
                                               ----------  --------- 
                                                   51,612     41,108 
 Less: Unsecured loan notes                             -    (2,000) 
 Less: cash and short term deposits               (2,405)          - 
                                               ----------  --------- 
 Less: deferred and contingent consideration     (17,112)    (9,129) 
                                               ----------  --------- 
 Net Bank Debt at the end of the year              32,095     29,979 
                                               ----------  --------- 
 

11. Post Balance Sheet Events

On 5(th) February 2019 LSL announced an Estate Agency Strategy: ways of working programme update and work has now commenced on the reshaping of the Your Move and Reeds Rains branch networks. As disclosed on 5(th) February 2019, LSL expects to incur an exceptional P&L charge of approximately GBP14m in 2019 and GBP1m in 2020, with cash costs amounting to approximately GBP12m over the three years from 2019 to 2021 including approximately GBP9m cash costs in 2019.

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March 05, 2019 02:01 ET (07:01 GMT)