Half-year Report

22 October 2020

Countrywide plc

Interim Results for the six months ended 30 June 2020

Countrywide plc (LSE: CWD) announces its results for the six months ended 30 June 2020

Countrywide today announces its results for the period ended 30 June 2020. It also announces a proposed recapitalisation of the business (the "Proposed Transaction") including an £90 million capital raise, which is being fully underwritten by Alchemy, a private equity investor and current shareholder in Countrywide (the "Capital Raise") and a new £75 million term loan facility (the "Term Loan") with existing lenders which is repayable at a point of four years from the first utilisation date. The Term Loan and a portion of the proceeds from the Capital Raise will be used to repay the Group's existing indebtedness. Full details are set out separately in our announcement RNS.

Resilient financial performance in context of COVID-19 outbreak on the UK economy and the housing market

During lockdown, the Group took swift and decisive action to manage its cost base and liquidity. 78% of colleagues were initially furloughed under the Government's Coronavirus Job Retention ("CJR") Scheme, the Chairman, the non-executive directors and the executive and leadership teams agreed to take reductions in salary ranging from 20% to 33%, and decisive action was taken on discretionary costs and capital expenditure.

On cash management, the Group curtailed all capital expenditure, including suspension of transformation of our IT estate; benefitting from the business rates relief of 100% (retail discount scheme, extended for estate agents); and agreeing with HMRC the deferral of VAT, PAYE and NI ("HMRC deferrals") of £44.6 million. In addition, in line with many others in the property services industry, we are moving mostly to monthly rent payments, and carefully balancing our payment obligations between smaller and larger suppliers to manage the working capital cycle. The majority of our landlords have been supportive of the change to monthly payments.

As a result, the Group traded positively at the adjusted EBITDA level and had strong liquidity through COVID-19.

HIGHLIGHTS

· Group income from continuing operations was £173.8 million (2019: £241.6 million); the Group continued to trade profitably with adjusted EBITDA(1) of £14.9 million (2019: £19.2 million(2)) in spite of loss of tenant fees of £8 million and COVID-19

· COVID-19 impacted the operational leverage of the business significantly during the period. Whilst employee costs during lockdown were mitigated in part through salary reductions and access to the Government's CJR Scheme, the Group continued to incur fixed costs of £4.6 million relating to unutilised premises and vehicles of employees in full during the period of lockdown, at a time when significantly reduced income was being generated

· Sales and Lettings delivered continued profitable growth with adjusted EBITDA of £10.8 million, up 23% year-on-year (2019: £8.8 million)

· Our income from complementary services (5) has increased from 49 pence in H1 2019 (FY 2019: 48p) to 50p in the £ during the first half of 2020

· Financial services adjusted EBITDA of £6.6 million (2019: £6.9 million) down 3%

· As at 30 June 2020, the Group's net debt(3) was £47.3 million (FY 2019: £82.9 million) against available liquidity of £135 million. The underlying net debt, after adjusting for HMRC deferrals, was £91.9 million. Net debt/adjusted EBITDA(3) was 2.1x (FY 2019: 3.4x)

· Operating profit of £7.9 million(4) (2019: £10.8 million(2)) before £51.8 million of exceptional costs - principally non-cash exceptional charges for goodwill, intangible and tangible asset impairments (2019: £42.8 million(2)) with resulting loss for the six months to June 2020 of £40.1 million (2019: £36.5 million)

OUTLOOK

Current trading remains buoyant, with positive performance indicators across the Group. The Government's stamp duty holiday for properties up to £500,000 provides further stimulus to our principal markets. However, it is still too early to assess the long-term impact of COVID-19 on the economy, and specifically housing transactions and, as a result the Group is unable to provide guidance for the full year ending 31 December 2020.

(1) Earnings before interest, tax, depreciation, amortisation, exceptional items, employment-linked contingent consideration, share-based payments and share of profits from joint venture, referred to hereafter as adjusted EBITDA (see note 8 for reconciliation)

(2) Restated from prior year following the amendment of the Group's opening IFRS 16 transition adjustment and H1 2019 results as described in the Countrywide plc consolidated financial statements for year ended 31 December 2019 (see note 4) and the reclassification of Lambert Smith Hampton as discontinued operations

(3) Net debt calculated before the effect of IFRS16 and leverage calculated on the basis of net debt to adjusted EBITDA (pre-IFRS 16) on a rolling 12 month basis

(4) Operating profit before exceptional items, amortisation of acquired intangibles, employment-linked contingent consideration, share-based payments and share of profits from joint venture

(5) Additional income arising from complementary services, comprising Financial Services and Conveyancing, expressed as an amount compared to each £ of income from estate agency income

Enquiries:

Analysts and investors

Himanshu Raja, Chief Financial Officer [email protected]

Media

Natalie Gunson [email protected] Tel: +44 (0)7721 439043

This document contains certain statements that are forward-looking statements. They appear in a number of places throughout this document and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the business we operate. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this document and, unless otherwise required by applicable law, the Company undertakes no obligation to update or revise these forward-looking statements. Nothing in this document should be construed as a profit forecast. The Company and its directors accept no liability to third parties in respect of this document save as would arise under English law.

Interim Results for the six months ended 30 June 2020

IMPACT OF COVID-19

The Group has delivered a resilient financial performance for the six months to June 2020, benefitting from the strong pipeline from the first 12 weeks of the year in sales, lettings, financial services and conveyancing. During lockdown, the Group took swift and decisive action to manage its cost base and liquidity. 78% of colleagues were initially furloughed under the Government's Coronavirus Job Retention ("CJR") Scheme, the Chairman, the non-executive directors and the executive and leadership teams agreed to take reductions in salary ranging from 20% to 33%, and decisive action was taken on discretionary costs and capital expenditure. As a result, the Group traded positively at the adjusted EBITDA level and had strong liquidity through COVID-19.

Group income from continuing operations was £173.8 million (2019: £241.6 million) with the year-on-year decline reflecting the closure of all branches on 23 March 2020, in accordance with the Government's lockdown guidance until branches in England began to re-open from 18 May onwards, and in June for Wales and Scotland, following comprehensive risk assessments. The quarterly data below, and within the segmental results, illustrates the fall in volumes both in the run up to and, more pervasively, following the announcement of lockdown.

(1) Restated from prior year following the amendment of the Group's opening IFRS 16 transition adjustment and H1 2019 results as described in the Countrywide plc consolidated financial statements for year ended 31 December 2019 (see note 4) and the reclassification of Lambert Smith Hampton as discontinued operations

 (2) Earnings before interest, tax, depreciation, amortisation, exceptional items, employment-linked contingent consideration, share-based payments and share of profits from joint venture, referred to hereafter as adjusted EBITDA (see note 8 for reconciliation)

 (3) Additional income arising from complementary services, comprising Financial Services and Conveyancing, expressed as an amount compared to each £ of income from estate agency income

We have not sought to report any costs as exceptional in relation to COVID-19, as incremental costs incurred during H1 2020 such as, for example, personal protective equipment which were not material (£0.4 million). In addition, we have not amended the definition of our alternative performance measure, adjusted EBITDA, to isolate the impacts of the pandemic.

However, COVID-19 has impacted the operational leverage of the business significantly during the period. Whilst employee costs during lockdown have been mitigated in part through salary reductions and through access to the Government's CJR Scheme, the Group continued to incur fixed costs relating to unutilised premises and vehicles of employees in full during the period of lockdown, at a time when significantly reduced income was being generated. The costs of unutilised premises and vehicles leases during the period of initial lockdown, from 24 March 2020 to the announcement on 12 May 2020 of re-opening of markets, amounted to a net £4.6 million (£5.3 million in respect of our continuing operations, which was only mitigated in part by £0.7 million of rates grants in respect of estate agency branches).

SEGMENTAL RESULTS

Management has determined the operating segments based on the operating reports reviewed by the Board that are used to assess both performance and strategic decisions. Management has identified that the Board is the chief operating decision maker in accordance with the requirements of IFRS 8 'Operating segments'. The Board considers the business to be split into three main types of business generating income: Sales and Lettings, Financial Services and Business to Business (B2B); and 'all other segments' comprising central head office functions, with Lambert Smith Hampton classified as discontinued operations.

Lambert Smith Hampton was classified as held for sale following shareholder approval on 27 December 2019. These operations, which were reported within the B2B segment in the 2019 condensed consolidated interim financial report were classified as a disposal group held for sale and presented separately in the balance sheet as at 31 December 2019 as related assets and liabilities and disclosed as discontinued operations in the income statement and related notes in both 2019 and the comparative year. These operations are still expected to be sold within 12 months from the original classification and so continue to be classified as a disposal group held for sale and presented separately in the balance sheet as at 30 June 2020 and disclosed as discontinued operations in the income statement for the six months then ended.

OPERATING REVIEW

SALES AND LETTINGS

Summary

Our Sales & Lettings business has delivered adjusted EBITDA growth year-on-year despite Q2 2020 being the most challenging period ever, with the business closing its doors for two months.

The year began well with sales agreed building year-on-year on the back of positive consumer sentiment following the election result in December 2019. The COVID-19 pandemic resulted in non-essential businesses being closed from 24 March 2020, which resulted in closure of our branches and we placed 82% of our colleagues on furlough, supported by the CJR Scheme. While the housing market re-opened from 18 May, the hiatus of nine weeks through the traditionally strong spring market has resulted in weaker income in the first half.

While income declined materially, we delivered profitable growth as the result of optimising the Government support, close management of our staffing levels and diligent control over our operating costs.

Sales

Estate agency sales income was impacted most severely, declining by 33% year-on-year, with Q2 reducing by 54%. We commenced re-opening of our branches in May and by the end of June 2020 88% of our branches were trading compliantly with COVID-secure policies and procedures. As our colleagues re-entered the business we finished the half year strongly, dealing with the demand that built up during lockdown. We finished June with the pipeline 9% lower overall, but a strong recovery in our Hamptons and John D Wood brands resulted in the pipeline in those businesses being down only 1% year-on-year.

Lettings

Lettings income was impacted by the loss of £8 million of tenant fees earned prior to 1 June 2019 with an 11% decline year-on-year. Our actions to mitigate the loss of tenant fees resulted in managed fee income increasing by 2% year-on-year in our UK network.

The number of properties under management was down only 2% in Q1, but the decline increased to 5% by 30 June due to the restrictions during the COVID-19 lockdown. Equally, with the branches closed for two months, our ability to attract new landlords and let new properties was impacted and consequently the number of lets achieved was 29% down year-on-year.

Income from complementary services 

Our income from complementary services, comprising Financial Services and Conveyancing recognised in our Sales and Lettings business, has increased from 49p in H1 2019 (FY 2019: 48p) to 50p in the £ during the first half of 2020. This is the additional income driven from this activity expressed as an amount compared to each £ of income from sales exchanged income.

FINANCIAL SERVICES

Summary

Between January and June 2020, the overall UK market for new mortgage lending fell by approximately 14% year-on-year, with overall gross lending of £130 billion. In comparison, Countrywide's new mortgage lending fell by 11% to £8.7 billion.

Financial Services income at £29 million was down year-on-year, although cost measures, including the use of the CJR Scheme, have largely protected adjusted EBITDA.

Mortgage completions in the first three months of the year were down 1% year-on-year. The mortgage market was severely impacted by lockdown during Q2 resulting in completions ending the half year 10% down year-on-year. Within the £8.7 billion mortgage completions, our alternative channels business (operating outside the branch network) fared better with completions down only 4.5% year-on-year.

Since lockdown has been lifted our branch based business has begun to rebuild both the coverage of mortgage and protection consultants in the branch network, but also the volumes of mortgages written. Written mortgages volumes in the last four weeks of June were 48% of the levels experienced in the 12 weeks of 2020 pre-lockdown, despite only having 31% of the branch based workforce active.

B2B

Summary

B2B continuing operations adjusted EBITDA saw an 80% decline year-on-year directly attributable to the restrictions on our ability to conduct physical valuations due to the COVID-19 lockdown. We responded to the restriction of physical valuations and the closure of non-essential businesses by placing 80% of our surveyors and 85% of our conveyancing teams on furlough supported by the CJR Scheme grant.

Surveying

In Q2, the COVID-19 lockdown prohibited physical valuations, but the business swiftly converted to the delivery of desktop valuations for lower loan to value offerings. The level of valuations undertaken during the lockdown period totalled 36% of volumes over the same period in 2019.

The easing of lockdown in England in May 2020, followed by Northern Ireland, Wales and Scotland in June, enabled the build back of both surveying instructions and valuations, including working through the backlog of physical valuations from lender pipelines. June 2020 instruction volumes reached 89% of June 2019 levels and overall valuations undertaken during the half year were 28% lower than 2019.

Conveyancing

Having entered the year with a strong pipeline, the conveyancing business ended the first three months with a pipeline that was 27% higher than 2019. The business was heavily impacted by the closure of the housing market but has seen a steady recovery since the end of May, with exchanges during June 2020 reflecting 66% of the volumes experienced in June 2019. The closing pipeline at the half year was 87% of the June 2019 level.

Discontinued operations - Lambert Smith Hampton

Summary

A positive start for the UK commercial property markets in early 2020, reflecting more certainty in the economy and confidence in the outlook post-election, meant that despite the COVID-19 pandemic hitting in the second half of March, Q1 income was only 4% down on the prior year. However, this has been impacted in the wake of measures to contain the COVID-19 pandemic as lockdown has reduced occupier demand significantly. Consequently, Lambert Smith Hampton saw a Q2 year-on-year income decrease of 24%, resulting in an overall year-on-year decrease in income of 14%.

While income declined materially, adjusted EBITDA improved in Q2 2020 as a result of optimising Government support, close management of staffing levels and diligent management of operating costs.

FINANCIAL SUMMARY

The Group's adjusted EBITDA for the six months ended 30 June 2020 was £14.9 million (2019: £19.2 million) reflecting in the period the impact of the COVID-19 lockdown. The resulting margin in H1 2020 was 8.5% (2019: 7.9%). Statutory results were impacted by impairment charges and strategic restructuring costs, resulting in a loss for the period of £44.3 million (2019: loss of £38.9 million).

A reconciliation of total adjusted EBITDA before exceptional items to statutory loss for the period is provided as follows:

(1) Restated from prior year following the amendment of the Group's opening IFRS 16 transition adjustment and H1 2019 results as described in the Countrywide plc consolidated financial statements for year ended 31 December 2019 (see note 4) and the reclassification of Lambert Smith Hampton as discontinued operations

The Group continued to make good operational progress in the execution of its turnaround plan and entered the year anticipating that the increase in activity in the UK property market following the decisive election victory in December 2019 would be sustained, and the Group saw the benefit of this in the first twelve weeks of 2020. However, following the COVID-19 pandemic and the resulting impact on GDP and unemployment, the Group revised its cashflow projections looking forward and this has resulted in further impairment charges since those taken at the full year.

Net exceptional costs incurred in the period amounting to £51.8 million (2019: £42.8 million) comprise items that have or will result in cash charges of £4.1 million and £47.7 million of non-cash charges as follows:

· Impairment charges of £46.3 million (2019: £36.4 million) in respect of:

o £39.0 million of goodwill associated with the Professional Services and Countrywide Residential Development Services cash generating units;

o £1.2 million of intangible assets (brands and customer contracts and relationships) associated with the Countrywide Residential Development services cash generating units;

o £6.1 million of intangible (computer software) and tangible fixed assets associated with both the UK and Countrywide Residential Development Services cash generating units and assets within the central functions used to support those businesses;

· People-related restructuring costs of £nil (2019: £1.3 million), additional consultancy costs of £1.0 million (2019: £2.2 million) arising from our three year IT transformation programme, and £nil (2019: £2.9 million) of property closure costs; 

· Fees in respect of aborted projects including in relation to the planned merger discussions with LSL Property Services plc amounting to £3.1 million (2019: £nil);

· Changes to committed loan facilities resulting in loan modification costs of £2.2 million arising from write-off of previously capitalised banking fees (2019: £nil); and

· Exceptional income of £0.7 million (2019: £nil) in relation to the motor vehicle fleet which will not recur in future years.

Amortisation of acquired intangibles has decreased to £1.0 million (2019: £1.1 million).

Contingent consideration is a net credit of £6.8 million (2019: credit of £0.1 million) to the income statement in respect of revisions to assessments of post-combination employment expenses, principally in relation to our Financial Services businesses.

Net finance costs have increased by £1.0 million during the period to £5.4 million.

Discontinued operations - Lambert Smith Hampton

In December 2019, the Group agreed the sale of our non-core commercial business, Lambert Smith Hampton (LSH). Following exchange of contracts and shareholder approval, the buyer, Mr John Bengt Moeller, failed to complete the transaction. The Group terminated the sale with Mr Moeller in March 2020, and is pursuing him for damages and costs. Meanwhile, the Group is continuing discussions with alternative buyers. These operations, which are expected to be sold within 12 months of the initial classification date, continue to be classified as a disposal group held for sale and presented separately in the balance sheet as related assets and liabilities and disclosed as discontinued operations in the income statement. At 30 June 2020, the anticipated proceeds less costs of disposal were lower than the year end estimate by £14 million and were less than the net book value of the assets and liabilities of the disposal group resulting in a fair value remeasurement of £3.2 million to write down the net assets to their fair value less costs of disposal.

Cashflow

The Group took swift and decisive measures through COVID-19 to reduce operating costs and capital expenditure. The actions taken included: reducing the costs of the Board and leadership team; using Government support through the Coronavirus Job Retention Scheme; materially reducing our discretionary spend, including our marketing spend, to reflect the current environment; curtailing all capital expenditure, including suspension of transformation of our IT estate; benefitting from the business rates relief of 100%; and agreeing with HMRC the deferral of VAT, PAYE and NI of £44.6 million. In addition, in line with many others in the property services industry, we are moving mostly to monthly rent payments, and carefully balancing our payment obligations between smaller and larger suppliers to manage the working capital cycle. The majority of our landlords have been supportive of the change to monthly payments.

In the statutory cashflow, cash generated from operations increased by £44.9 million principally due to an inflow of £58.2 million for the period (2019: inflow of £13.3 million as restated).

The non-GAAP cashflow presented below (including discontinued operations) shows operating cashflow of £65.1 million (2019: £20.5 million) driven by HMRC Deferrals but also by the other actions on cost and working capital referred to above. After repayment of finance leases, tax, interest and the steady state capital expenditure to support the business, cash from operations was £45.7 million compared with an outflow of £5.1 million in the corresponding period in 2019. Total cash inflow was £33.6 million (2019: £19.7 million outflow) and was after the Group's investment in its IT transformation as part of the three year transformation programme of our IT estate which commenced in 2018; and exceptional consultancy costs.

(1) Restated from prior year following the amendment of the Group's opening IFRS 16 transition adjustment and H1 2019 results as described in the Countrywide plc consolidated financial statements for year ended 31 December 2019 (see note 4) and the reclassification of Lambert Smith Hampton as discontinued operations

Net debt, maturity and changes to committed bank facilities

The Group meets its working capital and funding requirements through a Revolving Credit Facility of£125 million which matures in September 2022. In April 2020, the Lenders agreed to provide an additional £20 million facility for an 18 month period, with £10 million available from 1 May 2020 and £10 million available from April 2021. The additional facility can only be accessed if liquidity headroom falls below pre-determined levels and therefore the availability of funds remains conditional. In view of the uncertainty arising as a result of COVID-19, the Lenders also agreed to waive the Group's debt covenants for the March 2020 covenant tests and to amend the covenants going forward in the short-term to be based on liquidity.

Since 30 June 2020, the composition of the Group's lending syndicate has changed and is majority owned by a specialist debt fund who have been part of the facility since September 2018, now controlling 79.5% of the Group's facilities.

As at 30 June 2020, the Group's net debt was £47.3 million. The underlying net debt, after adjusting for HMRC deferrals was £91.9 million.

In addition to Countrywide today announcing its results for the period ended 30 June 2020, it also announces a proposed recapitalisation of the business (the "Proposed Transaction") including an £90 million capital raise, which is being fully underwritten by Alchemy, a private equity investor and current shareholder in Countrywide (the "Capital Raise") and a new £75 million term loan facility (the "Term Loan") with existing lenders which is repayable at a point of four years from the first utilisation date. The Term Loan and a portion of the proceeds from the Capital Raise will be used to repay the Group's existing indebtedness. Full details are set out separately in our announcement RNS.

Going concern

The Board's assessment in relation to going concern is included in note 3 to the financial information.

PRINCIPAL RISKS AND UNCERTAINTIES

There are a number of risks and uncertainties facing the business. These risks and uncertainties and mitigating factors are described in more detail on pages 42 to 47 of the Countrywide plc Annual Report for the year ended 31 December 2019 (a copy of which is available on the Group's website).

Except for the risk in relation to financing and capital structure, reassessment of which is set out more fully in the directors' assessment of going concern in note 3, there has been no other significant change to the assessment of these risks, since disclosure in the annual report, which are summarised below:

● COVID-19 pandemic;

● financing and capital structure;

● exposure to UK housing market trends;

● professional indemnity exposure;

● potential loss of a major business partner or contract;

● resilience of IT infrastructure and arrangements for the protection of data;

● changing regulatory environment;

● increasing competition in the evolving markets; and

● securing and retaining excellent people.

Whilst it is not possible to predict the outcome of the COVID-19 pandemic, the directors have considered specific threats to the business and methods to mitigate those risks, as outlined in the Group's 2019 Annual Report principal risks disclosures. During the first half, the Group took a series of actions to mitigate the effects of COVID-19, which delivered savings in the Group's direct and indirect costs that under-pinned the first half performance.

The Group Audit and Risk Committee continues to reassess their risk appetite and evaluate the development of principal risks and effectiveness of the business response plans and mitigations.

FORWARD LOOKING STATEMENTS

This report may contain certain 'forward-looking statements' with respect to some of the Group's plans and its current goals and expectations relating to its future financial condition, performance, results, strategy and objectives. Statements that are not historical facts, including but not limited to statements about our beliefs and expectations, may be forward-looking statements. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. By their nature, all forward-looking statements involve risk and uncertainty. A number of important factors could cause the Group's actual future financial condition or performance or other indicated results to differ materially from those indicated in any forward-looking statement. We refer you to the Group's financial statements which can be downloaded from the Group's website: www.countrywide.co.uk/investor-relations. These documents contain and identify important factors that could cause the Group's actual results, performance or achievements to differ materially from those indicated in any forward-looking statement. The important factors in the Group's financial statements are not exhaustive and there may be other risks, including risks of which the Group is unaware, that could adversely affect the Group's results or the accuracy of the forward-looking statements in the report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors confirm that this condensed consolidated interim financial report has been prepared in accordance with International Accounting Standard 34 'Interim financial reporting', as adopted by the European Union and that the interim report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

· an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year;

· material related party transactions in the first six months and any material changes in the related party transactions described in the last annual report; and

· The directors are responsible for the maintenance and integrity of the Group's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

A list of the current directors is maintained on the Countrywide plc investor relations website:

 www.countrywide.co.uk/investor-relations/board-of-directors.

On behalf of the Board

Peter Long Himanshu Raja

Executive chairman Chief financial officer

22 October 2020 22 October 2020

Condensed consolidated interim income statement

For the six months ended 30 June 2020

1. Adjusted EBITDA is a non-GAAP measure of earnings before interest, tax, depreciation, amortisation, exceptional items, contingent consideration, share-based payments and share of profits/(losses) from joint venture.

2. Restated from prior year following the amendment of the Group's opening IFRS 16 transition adjustment and H1 2019 results as described in the Countrywide plc consolidated financial statements for year ended 31 December 2019 (see note 4) and the reclassification of Lambert Smith Hampton as a discontinued operation in December 2019

3. Loss per share for 2019 has been restated for the impact of the share consolidation undertaken on 30 December 2019 (see note 11).

The notes are an integral part of this condensed consolidated interim financial report.

Condensed consolidated interim statement of other comprehensive income

For the six months ended 30 June 2020

1. Restated from prior year following the amendment of the Group's opening IFRS 16 transition adjustment and H1 2019 results as described in the Countrywide plc consolidated financial statements for year ended 31 December 2019 (see note 4) and the reclassification of Lambert Smith Hampton as a discontinued operation in December 2019

The notes are an integral part of this condensed consolidated interim financial report.

Condensed consolidated interim statement of changes in equity

For the six months ended 30 June 2020

(1) Restated from prior year following the amendment of the Group's opening IFRS 16 transition adjustment and H1 2019 results as described in the Countrywide plc consolidated financial statements for year ended 31 December 2019 (see note 4)

The notes are an integral part of this condensed consolidated interim financial report.

Condensed consolidated interim balance sheet

As at 30 June 2020

The notes are an integral part of this condensed consolidated interim financial report.

Condensed consolidated interim cash flow statement

For the six months ended 30 June 2020

(1) Restated from prior year following the amendment of the Group's opening IFRS 16 transition adjustment and H1 2019 results as described in the Countrywide plc consolidated financial statements for year ended 31 December 2019 (see note 4)

(2) Net cash generated from operating activities includes £4.1 million (2019: £3.4 million) of net cash expended on exceptional items.

(3) Cash and cash equivalents includes £3.6 million within accounts that are subject to restrictions on withdrawal and are therefore not available for general use by the entities within the Group and £7.5 million of cash deposits held by HSBC who have charges over those accounts in respect of two letters of credit issued by the Group (see note 18).

The notes are an integral part of this condensed consolidated interim financial report.

Notes to the condensed consolidated interim financial report

1. General information

Countrywide plc (the "Company") and its subsidiaries (together, the "Group") is the leading integrated, full service residential estate agency and property services group in the UK, measured by both income and transaction volumes in 2019. It offers estate agency and lettings services, together with a range of complementary services, and has a significant presence in key areas and property types which are promoted through locally respected brands. The Company is a public limited company, which is listed on the London Stock Exchange and incorporated and domiciled in the UK (registered number: 08340090). The address of its registered office is Greenwood House, 1st Floor, 91-99 New London Road, Chelmsford, Essex, CM2 0PP.

This condensed consolidated interim financial report was approved for issue on 22 October 2020.

This condensed consolidated interim financial report does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Consolidated financial statements for Countrywide plc for the year ended 31 December 2019 were approved by the Board of directors on 21 May 2020 and delivered to the Registrar of Companies. The report of the auditor on those accounts was (i) unqualified, although included an emphasis of matter in respect of material uncertainty around going concern and (ii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

This condensed consolidated interim financial report has been reviewed, not audited by PricewaterhouseCoopers LLP.

2. Basis of preparation

This condensed consolidated interim financial report for the six months ended 30 June 2020 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 'Interim financial reporting', as adopted by the European Union. The condensed consolidated interim financial report should be read in conjunction with the annual financial statements of Countrywide plc for the year ended 31 December 2019, which have been prepared in accordance with IFRSs as adopted by the European Union.

During the period, the Group adopted the following new and amended IFRS for the first time for their reporting commencing 1 January 2020: IAS 1 and IAS 8. These standards do not have a material impact on the Group in the current or future reporting periods. There are no other standards that are not yet effective and that would be expected to have a material impact on the Group in the current or future reporting periods.

The areas of critical accounting judgements and key sources of estimation uncertainty remain consistent with those disclosed in the 2019 Annual Report and Accounts.

3. Going concern

This condensed consolidated interim financial report (the "interim financial statements") has been prepared on a going concern basis which assumes that the Group will be able to meet its liabilities as they fall due.

The Group currently meets its working capital and funding requirements through a Revolving Credit Facility ("RCF") of £125 million which matures in September 2022 and a £20 million super-senior debt facility which matures in October 2021. Both facilities are subject to a minimum liquidity headroom covenant which is currently in force, and leverage and interest coverage covenants which will be tested from September 2021.

In assessing the Group's ability to continue as a going concern, the Board reviewed its trading and cash flow forecasts against the available financing facilities and covenants and identified that, without action being taken to address the Group's capital structure, it is forecast that the leverage and interest coverage covenants would be breached in September 2021.

In response to the need to address the Group's capital structure, on 22 October 2020 the Board announced a proposed recapitalisation of the business (the "Proposed Transaction") including an £90 million capital raise, which is being fully underwritten by Alchemy, a private equity investor and current shareholder in Countrywide (the "Capital Raise") and a new £75 million term loan facility (the "Term Loan") with existing lenders which is repayable at a point of four years from the first utilisation date. The Term Loan and a portion of the proceeds from the Capital Raise will be used to repay the Group's existing RCF.

The Proposed Transaction is conditional on, among other things, shareholder and regulatory approvals.

On the assumption that the Proposed Transaction will be completed successfully, the Board reviewed its trading and cash flow forecasts against the post-transaction financing facilities and covenants. Covenants on the Term Loan require the Group to maintain minimum liquidity of £5 million to the second anniversary of the first utilisation date, then £10 million to the third anniversary of the first utilisation date and then £20 million thereafter.

The Board's assessment includes consideration of a base case and a severe but plausible downside case which includes the impact of mitigating actions that are within the control of the directors.

The base case scenario reflects the latest forecasts and three year plan that was approved by the Board in October 2020 which reflects the Board's current view on the likely impact of COVID-19 and Brexit. The key assumptions used in the base case include estimates of the volume of UK housing market transactions and the Group's market share; house prices; and costs associated with the Group's ongoing IT transformation programme and the customer excellence programme; as well as the impact of the closure of a number of loss making branches.

The severe but plausible downside scenario assumes a series of stricter COVID-19 disease containment measures will be re-introduced on a regional basis over the winter months, resulting in lower housing market transactions and house prices and other consequential impacts. The severe but plausible downside scenario also reflects the impact of various mitigating actions that would be available to the Board.

In both the base case and the severe but plausible downside scenario, on the basis that the Proposed Transaction completes successfully, the Board's assessment shows that the Group will be able to operate in compliance with the new Term Loan covenant requirements for at least 12 months from the approval date of these interim financial statements.

Material uncertainty

The successful completion of the Proposed Transaction is subject to shareholder and regulatory approvals and subsequent receipt of the £90 million proceeds from the Capital Raise. Failure to successfully complete the Proposed Transaction would result in the Group having to explore other options to address the forecast breach of covenants in the existing RCF in September 2021.

Without the additional liquidity that will be provided by the Proposed Transaction, it is forecast that the Group would breach its existing leverage and interest coverage covenants in September 2021. Due to both shareholder and regulatory approvals and subsequent successful receipt of the £90 million proceeds being outside of the control of the directors, the directors have drawn attention to this matter as a material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern. Therefore, the interim financial statements do not include any adjustments that would result if the going concern basis of preparation was inappropriate.

Despite this material uncertainty, the directors are of the view that it is probable that shareholders and the regulator will approve the transaction and that the £90 million proceeds will be received such that they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and that they can adopt the going concern basis in preparing the interim financial statements.

4. Accounting policies

The accounting policies adopted in the preparation of this condensed consolidated interim financial report are consistent with those of the previous financial year and corresponding interim reporting period, except for items stated below:

· Taxes on income in the interim periods are accrued using the forecast tax rate that would be applicable to expected total annual profit or loss.

· Grants from the Government are recognised at their fair value where there is reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are recognised in profit or loss over the period necessary to match them with the costs that they are intended to compensate. Grant income has been recognised in 2020 as follows:

o £30.2 million from reimbursement of employment costs under the Coronavirus Job Retentions Scheme are included in employee benefit costs; and

o £0.7 million relating to funds received under the rates grant scheme are included in other income.

There are no unfulfilled conditions or other contingencies associated with these grants. The Group did not benefit directly from any other forms of Government assistance.

· Discontinued operations: On 29 November 2019, the Board announced the proposed sale of Lambert Smith Hampton and the business was classified as held for sale following shareholder approval on 27 December 2019. These operations, which are expected to be sold within 12 months of the classification date, continue to be classified as a disposal group held for sale and presented separately in the balance sheet as related assets and liabilities and disclosed as discontinued operations in the income statement. At 30 June 2020, the anticipated proceeds less costs of disposal were lower than the year end estimate by £14 million and were less than the net book value of the assets and liabilities of the disposal group resulting in a fair value remeasurement of £3.2 million to write down the net assets to their fair value less costs of disposal.

4.1 Prior year restatement in respect of IFRS 16 'Leases'

The Group adopted IFRS 16 'Leases' on 1 January 2019 and elected not to restate comparative information from prior periods. The Countrywide plc consolidated financial statements for the year ended 31 December 2019 noted that, subsequent to the Group's 2019 Interim Results for the period ended 30 June 2019, the Group's initial application of IFRS 16 at 1 January 2019 was revised as a result of the identification of missing leases, the change in assumptions around held over leases and further information in respect of certain leases and judgements made regarding extension options. This resulted in an amendment of the Group's opening transition adjustment within the consolidated financial statements for the year ended 31 December 2019. The impact on the balance sheet as at 30 June 2019 and the income statement for the six month period ended 30 June 2019 is set out in the tables below.

Consolidated balance sheet (extract)

New standards and interpretations not yet adopted

Certain new accounting interpretations have been published that are not mandatory for 31 December 2020 reporting periods and have not been early adopted by the Group. None of these new standards or interpretations is expected to have a material impact on the consolidated financial statements of the Group.

5. Critical accounting judgements and estimates

The preparation of the condensed consolidated interim financial report requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing this condensed consolidated interim financial report, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those applied to the consolidated financial statements for the year ended 31 December 2019 with the exception of the update in relation to the going concern judgement (detailed in note 3).

6. Financial risk management and financial instruments

Financial risk factors

The Group's activities expose it to a variety of financial risks: cash flow and fair value interest rate risk; liquidity risk; counterparty credit risk; and price risk.

The condensed consolidated interim financial report does not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group's annual financial statements as at 31 December 2019.

There have been no changes in the operation of risk management and risk management policies since those detailed in the 2019 Annual Report issued in May 2020, in response to COVID-19.

Liquidity risk

Compared to the year end, there has been a material change in the contractual financial liabilities (see note 18) following the additional draw down against the revolving credit facility. There has been a change in the covenants levels applicable in respect of the revolving credit facility since the year end, as disclosed in the financial summary, as the lenders agreed to waive the Group's debt covenants for the March 2020 covenant tests and to amend the covenants going forward until September 2021 to be based on liquidity.

On 22 October 2020, the Group announced a proposed recapitalisation of the business (the "Proposed Transaction") including an £90 million capital raise, which is being fully underwritten by Alchemy, a private equity investor and current shareholder in Countrywide (the "Capital Raise") and a new £75 million term loan facility (the "Term Loan") with existing lenders which is repayable at a point of four years from the first utilisation date. The Term Loan and a portion of the proceeds from the Capital Raise will be used to repay the Group's existing indebtedness. Full details are set out separately in our announcement RNS.

Fair value estimation

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined, in accordance with IFRS 13 'Fair value measurement', as follows: inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

The following table presents the Group's assets and liabilities that are measured at fair value at 30 June 2020:

The following table presents the Group's assets and liabilities that are measured at fair value at 31 December 2019:

The contingent consideration relates to amounts payable in the future on three (2019: three) acquisitions undertaken in prior years, requiring the Group to pay in cash a potential undiscounted maximum aggregate amount of £14.7 million (2019: £14.7 million). The amounts payable are based on the amounts agreed in the contracts and based on the future profitability of each entity acquired. In valuing each liability, estimates have been made as to the future profitability of each entity based on management's expectation of performance, consistent with operating plans approved.

Each of these contingent consideration arrangements require the vendors to remain in employment and as such have been treated as a post-combination employment expense and are being accrued over the relevant periods of up to two years (2019: one to three) specific to each of the agreements, with remaining periods of up to two years (2019: three years). Each contingent consideration arrangement is also subject to performance conditions being satisfied. There are target adjusted EBITDA levels which must be achieved in order to realise the full payment, with a reduced payment made if targets are not fully met. Accruals for contingent consideration are reviewed at each period end as future earn-out assumptions are revisited and any credits to the income statement in respect of downward revisions to estimates will be treated in the same way. £0.8 million (2019: £0.9 million) of this potential contingent consideration is payable in less than one year and there is no material difference in out-turn anticipated. £13.8 million (2019: £13.8 million) of the potential contingent consideration is payable on a material acquisition six years after the acquisition dates (with a residual period of less than two years remaining), depending on the profitability of those subsidiaries in the relevant years and the former owners being continuously employed over the earn-out period. The fair value of the related contingent consideration liability, estimated by applying the income approach, was revisited at the period end and accrued at £2.8 million (2019: £8.2 million), based on assumed profitability. If the future profitability of the entity with less than a two year out-turn was to increase, with:

- a 10% increase in adjusted EBITDA, the size of the total contingent consideration would increase by approximately £0.9 million;

- An increase of 1 in the earning multiple applied, the size of the total contingent consideration would increase by approximately £1.3 million; and

- Both sensitivities disclosed above applying concurrently, the size of the total contingent consideration would increase by approximately £2.4 million.

Fair value measurements using significant unobservable inputs (Level 3) and valuation processes

Contingent consideration relates to amounts payable in the future on acquisitions undertaken in prior years. The amounts payable are based on the amounts agreed in the contracts and based on the future profitability of each business acquired. In valuing each provision, estimates have been made as to the future profitability of each business at this date.

The Group's finance department performs the valuations of financial assets required for financial reporting purposes, including Level 3 fair values where appropriate. This team reports directly to the Chief Financial Officer and the Group Audit and Risk Committee. Discussions of valuation processes and results are held between the Chief Financial Officer, Group Audit and Risk Committee and the valuation team in line with the Group's half-yearly reporting dates.

The fair value of all other financial assets and liabilities approximate to their carrying amount.

7. Seasonality of operations

The UK housing market is seasonal, with peaks in the summer months. Typically, more income is recognised in the second half of the year. In 2019 income was split 49% in the first half and 51% in the second half. This trend is expected to be further exacerbated in the current year by the impact of lockdown in H1 2020. The Group's operating profits are typically higher in the second half than in the first half of the year because, while fixed costs (such as wages, salaries and finance costs, which are not seasonal) tend to be consistent throughout the year, volumes of transactions in the second half are typically higher and therefore there is a higher marginal contribution over such fixed costs.

8. Operating segment information

Management has determined the operating segments based on the operating reports reviewed by the Board that are used to assess both performance and strategic decisions. Management has identified that the Board is the chief operating decision maker in accordance with the requirements of IFRS 8 'Operating segments'.

The Board considers the business to be split into three main types of business generating income: Sales and Lettings, Financial Services and Business to Business (B2B); and 'all other segments' comprising central head office functions, with Lambert Smith Hampton classified as discontinued operations.

Lambert Smith Hampton was classified as held for sale following shareholder approval on 27 December 2019. These operations, which were reported within the B2B segment in the 2019 condensed consolidated interim financial report were classified as a disposal group held for sale and presented separately in the balance sheet as at 31 December 2019 as related assets and liabilities and disclosed as discontinued operations in the income statement and related notes in both 2019 and the comparative year. These operations are still expected to be sold within 12 months from the original classification and so continue to be classified as a disposal group held for sale and presented separately in the balance sheet as at 30 June 2020 and disclosed as discontinued operations in the income statement for the six months then ended (see note 24).

The Sales and Lettings network combines estate agency and lettings operations. Estate agency generates commission earned on sales of residential property and Lettings earns fees from the letting and management of residential properties and fees for the management of leasehold properties. The Financial Services division receives commission from the sale of insurance policies, mortgages and related products under contracts with financial service providers. Business to Business (B2B) services comprise all lines of business which are delivered to corporate clients, including Surveying Services and Conveyancing Services. Surveying Services generates surveying and valuation fees which are received primarily under contracts with financial institutions with some survey fees being earned from home buyers. Conveyancing Services generates income from conveyancing work undertaken from customers buying or selling houses through our network. Other income generated by head office functions relates primarily to sub-let rental income or other sundry fees.

The Board assesses the performance of the operating segments based on a measure of adjusted EBITDA. This measurement basis excludes the effects of exceptional items, share-based payments charges, employment-linked contingent consideration and income from joint ventures. Finance income and costs are not allocated to segments as this type of activity is driven by the central treasury function which manages the cash and debt position of the Group.

The income from external parties reported to the Board is measured in a manner consistent with that in the income statement.

The following table presents income and profit information regarding the Group's operating segments for the six months ended 30 June 2020 and 2019 respectively.

Total income

(1) Restated from prior year following the reclassification of Lambert Smith Hampton as discontinued operations

Disaggregation of segment revenue

(1) Restated from prior year following the reclassification of Lambert Smith Hampton as discontinued operations

Adjusted EBITDA before exceptional items

1. Restated from prior year following the amendment of the Group's opening IFRS 16 transition adjustment and H1 2019 results as described in the Countrywide plc consolidated financial statements for year ended 31 December 2019 (see note 4)

2. Restated from prior year following the reclassification of Lambert Smith Hampton as a discontinued operation in December 2019

Reconciliation of adjusted EBITDA to statutory operating loss and loss before income tax

A reconciliation of total adjusted EBITDA before exceptional items to statutory operating loss and loss before income tax is provided as follows:

(1) Restated from prior year following the amendment of the Group's opening IFRS 16 transition adjustment and H1 2019 results as described in the Countrywide plc consolidated financial statements for year ended 31 December 2019 (see note 4)

(2) Restated from prior year following the reclassification of Lambert Smith Hampton as discontinued operations

There has been a material change in segment total assets or liabilities from the amount disclosed in the last annual financial statements principally due to the impairments arising in Professional Services (see note 9) and retention of cash within all other segments as a result of HMRC payment deferrals agreed.

Adjusted items

As permitted by IAS 1 'Presentation and disclosure' certain items are presented separately in the income statement as exceptional where, in the judgement of the directors, they need to be disclosed separately by virtue of their nature, size or incidence in order to obtain a clear and consistent presentation of the Group's underlying business performance. Examples of material and non-recurring items which may give rise to disclosure as exceptional items include costs of restructuring existing businesses, integration of newly acquired businesses, asset impairments, costs associated with acquiring new businesses and profit on sale of financial assets.

The columnar presentation of our income statement separates exceptional items as well as adjusting items, specifically amortisation of intangibles arising on business acquisitions, contingent consideration and share-based payments, to illustrate consistently the Group's underlying business performance.

The Board believes that excluding each of the adjusted items, considered to be exceptional or non-operational in nature, in arriving at adjusted EBITDA is necessary to provide a more consistent indication of the trading performance of the Group. This alternative performance measure provides additional useful information to shareholders on the underlying trends and comparable performance of the Group over time. We seek to present a consistent measure of trading performance which is not impacted by the volatility in profile of:

· exceptional items (costs or income): these are specific items which are material by their nature, size or incidence and are highlighted, with further descriptions, in note 9 to the condensed consolidated interim financial report;

· amortisation of intangibles arising on acquisitions (excluding software): charges can vary significantly dependent on the level and size of acquisitions undertaken in each period, and the related brand names, customer relationships and contracts recognised. In addition, we do not believe the amortisation charge provides insight into the costs of running our business as these assets are supported and maintained by marketing costs which are reflected within our operating costs. The directors note that the intangibles acquired in business combinations are used in the business to generate revenue, but that there is no equivalent adjustment made to eliminate this revenue;

· contingent consideration: charges can vary significantly depending on the level and size of acquisitions undertaken and the associated performance criteria linked to the ongoing service requirement. We reassess the fair value of the resulting liabilities across these arrangements at each reporting period end, reflecting our best estimates of future performance. However, these estimates are inherently judgemental as we are required to look beyond our normal three year budgeting and planning cycle for the five year agreements in place. Remeasurement could cause material volatility in our reported results over the earn out periods which would not be reflective of the business' performance in the period; and

· share-based payments: as the Group is now in a turnaround situation, it is anticipated that the incentivisation of performance will be driven by award of future LTIPs which, provided Group performance meets these LTIP targets, will see the share-based payment charge continue to increase and re-introduce material volatility into the income statement.

The use of an adjusted EBITDA profit measure, as a consistent measure of underlying performance, is also aligned with management's internal financial reporting (including monthly management information reports reviewed by the Board as the chief operating decision maker) and executive director remuneration (being a factor of both the LTIP scheme and annual bonus disclosed in the Remuneration Committee report within the 2019 Annual Report and Accounts) and senior management incentive targets.

9. Exceptional items

The following items have been included in arriving at loss before taxation:

1. Restated from prior year following the amendment of the Group's opening IFRS 16 transition adjustment and H1 2019 results as described in the Countrywide plc consolidated financial statements for year ended 31 December 2019 (see note 4)

2. Restated from prior year following the reclassification of Lambert Smith Hampton as a discontinued operation in December 2019

2020

Net exceptional costs comprise items that have or will result in cash charges of £4.1 million and £47.7 million of non-cash charges as follows:

Exceptional income

Exceptional income comprises one-off income of £0.7 million (2019: £nil) in relation to the motor vehicle fleet which will not recur in future years.

Exceptional costs

Strategic and restructuring costs

During the first half of 2020 the Group progressed a strategic transformation agenda for the fundamental turnaround of the business, which is expected to take place over a period of around three years, resulting in exceptional costs in relation to various projects. The principal elements are:

· £1.0 million (2019: £2.2 million) in respect of restructuring costs, comprising third party consultancy costs in the main arising from our IT transformation projects (commenced in 2018 and running over a three year period, with costs being capitalised where applicable in notes 12 and 13) and related strategic initiatives which are being project managed centrally and routinely reporting progress to the Group Executive Committee;

· Changes to committed loan facilities resulting in loan modification costs of £2.2 million (2019: £nil) arising from write-off of previously capitalised banking fees (see note 18); and

· £3.1 million (2019: £nil) fees including in respect of aborted projects in relation to the planned merger discussions with LSL Property Services plc.

Impairment charges

Progress was made with the turnaround plan during the period. However, the continued subdued external environment as a result of COVID-19 and the deterioration in trading, which became apparent after conclusion of the 2020 business planning process that underpinned the 2019 impairment review, resulted in further impairment charges since those taken at the full year.

The Group incurred the following impairment charges, deemed to be exceptional given their size, arising from the impairment review of goodwill and indefinite-life intangible assets undertaken outside of the annual cycle as a result of continuing triggers for impairment (including the market capitalisation level of the Group), and the associated review of other intangible and tangible fixed assets impacted by the impairment review: