Countrywide plc Bringing people and property together Annual Report 2016 Countrywide plc Annual Report 2016 Countrywide is the UK’s leading integrated property services group Customers are at the heart of our business. We are uniquely placed to support them at every stage of their property journey through a combination of national reach and local expertise – available online, on the phone and on the high street. This is supported by a diverse range of products and services: sales and lettings, mortgages and insurance, surveying, conveyancing, land and new homes, asset management and commercial. For more information, view our website: www.countrywide.co.uk Strategic report Corporate governance Financial statements 02 At a glance 38 Board of directors 70 Independent auditors’ report 04 Our chairman’s review 40 Chairman’s introduction to 76 Consolidated income statement 06 Our chief executive officer’s review corporate governance 77 Consolidated statement of 08 Our business model 41 Corporate governance statement comprehensive income 10 Our strategy 43 Report of the Nomination 78 Consolidated statement of changes 15 Our markets Committee in equity 17 Risk management 46 Report of the Audit and 79 Consolidated balance sheet Risk Committee 23 Segmental review 80 Consolidated cash flow statement 52 Directors’ remuneration report 23 Retail 81 Notes to the financial statements 67 Directors’ report 26 London 121 Independent auditors’ report 69 Directors’ responsibilities report 28 Financial Services 123 Company balance sheet 30 B2B 124 Company statement of changes in equity 33 Our chief financial officer’s review 125 Notes to the Company 36 Our people financial statements 129 Appendix (forming part of the financial statements) 135 Company information 136 Forward-looking statements Financial highlights • Maintained income through market share gains, benefit • Positive progress in Lettings, Financial Services of 2015 acquisitions and Surveying • Challenging residential market, investment to support • Key cost initiatives underway to underpin future growth impacts profitability and cash flow future profits Total income (£m) Operating profit(£m) Basic EPS (p) Adjusted EBITDA1 (£m) Adjusted EPS2 (p) 737.0 +0% 28.9 -46% 8.0 -58% 83.5 -26% 19.3 -40% 733.7 737.0 84.9 30.8 121.1 36.7 702.2 113.0 32.2 83.5 53.8 18.9 19.3 28.9 8.0 14 15 16 14 15 16 14 15 16 14 15 16 14 15 16 1 Earnings before interest, tax, depreciation, amortisation, exceptional items, contingent consideration, share-based payments and share of profits from joint venture, referred to hereafter as ‘EBITDA’. 2 Adjusted earnings per share is calculated on profit for the year before exceptional items, amortisation of acquired intangibles, contingent consideration and share-based payments (net of taxation). Operational highlights Volatile residential Focus on key organic Investment in foundations property market strategic initiatives for future success • Stamp duty changes • Record level of mortgage market share • Multichannel proposition • Additional 3% stamp duty land tax • Significant improvement in • Lettings customer service on buy to let/second homes remortgage activity • Underlying infrastructure • EU referendum creates uncertainty • Encouraging trend in landlord retention Annual Report 2016 Countrywide plc 01 Strategic report At a glance Our diverse offering Customers are at the heart of our business. We bring people and property together to help our customers at every step of their property journey. Our experienced leadership team Our chairman’s review Our chief executive officer’s review Our chief financial officer’s review page 4 page 6 page 33 Read about our Board page 38 Our focused strategy Our customers Our people Our portfolio Delivering a better, more personalised Creating an internal environment for Aligning our portfolio to where the customer experience great people to flourish growth is, thereby creating greater shareholder value Read more on our strategy page 10 02 Countrywide plc Annual Report 2016 Our diverse products and services Strategic report FOR SALE TO LET Sales Lettings Mortgages and insurance Surveying Conveyancing Land and New Homes Asset management Commercial Read more on our business model page 8 Read more on our segmental reviews page 23 Our national reach and local expertise... 66,000+ 9 91 properties exchanged* branches** 127,000+ properties under management* £15.7bn of mortgages completed* * For the year ended 31 December 2016. ** As at 28 February 2017. ...with a strong brand portfolio, including: Read more on our portfolio page 14 Annual Report 2016 Countrywide plc 03 Strategic report Our chairman’s review Building for the future In summary My first year as chairman coincided with a particularly challenging market backdrop. Overall the property market • Diversified portfolio helped contribute was destabilised by fiscal change and heightened economic to maintaining revenue against a very uncertainty, which inevitably had an impact on transactions. challenging backdrop Changes to the stamp duty regime, the UK’s decision to leave the European Union and proposed changes to tenants’ fees all • Tough market conditions are a catalyst for had an effect on the sector and the Group. Property will always be a part of the national conversation and how the industry reacts accelerating our transformation agenda to these conditions will remain a key focus for a wide variety of stakeholders going forward. • Executive team is committed to building a customer focused company, driving Tough market conditions can act as a catalyst for necessary change and true leaders show their strength by responding, and delivering efficiency and creating transforming their business model to build and ultimately to a sustainable and profitable business thrive. I have been impressed at how quickly Countrywide has faced into these challenges and how the executive team has responded, by accelerating our transformation agenda. 2016 results delivered a modest growth in income to £737.0 million (2015: £733.7 million), despite the unpredictable residential sales market. EBITDA decreased by 26% to £83.5 million (2015: £113.0 million), and statutory operating profit by 46%, as a result of a reduced sales transaction market and investment in key areas of our business, impacting underlying profitability. The Company is at a critical point in its evolution, and is determined to reinforce its leadership by developing a business that better reflects the needs of our customers. We accept that the market will continue to be constrained and that we need to transform our business, but we do so from a position of strength. We have genuine national reach, a broad service offering and a portfolio of high quality, well known brands. The Company is at a critical point in its evolution, and is determined to reinforce its leadership by developing a business that better reflects the needs of our customers. 04 Strategic report As we transform, the executive team is committed to building Our vision a customer focused company, driving and delivering efficiency and maintaining a sustainable and profitable business. Some of the decisions taken this year have put us ahead on this journey, not least: 1 Recommended • defining a new operating model which will include resizing more than any other company in the the retail estate, updating the technology platform and driving property sector. down our cost base • implementing a multichannel offering through a comprehensive digital, phone and high street presence 2 Recognised • seizing the growth opportunity represented in the financial as one of the best places to work services sector in the UK. • pausing all M&A activity after the first quarter of 2016 and focusing primarily on organic growth, delivering what we do 3 Transforming already, but better. the reputation of our industry. As previously stated, we commenced a strategic review of our commercial business, Lambert Smith Hampton, during 2016 to consider how best to maximise value in that sector over the 4 Celebrated coming years. That review continues and we anticipate it will for excellent sustainable conclude later this year. financial performance. Despite the uncertain market environment, we remain committed to reducing our leverage and at the same time enable the management team to future proof the business and exploit growth opportunities. To that end, and following consultations with our major shareholders, Our values the Board has decided to make a small placing of up to 9.99% of our share capital available via a cash box structure today. In addition, we have reviewed our dividend policy and have rebased that to Responsible between 30 and 35% of earnings going forward. No final dividend will be paid for 2016. We do the right thing. We listen, take time to understand and always I am confident that we are building a business for the long term, tell the truth. working towards a more resilient and efficient operating model that promotes organic growth through customer retention and by building on our unique strengths to be the best in the market at Personal what we do. We are a people business. We care about our customers and each other. We have fun. Peter Long Chairman Straightforward 9 March 2017 We keep it simple, dealing with the complicated things so our customers don’t have to. Passionate We love working with property and we work hard, knowing what we do really matters. Annual Report 2016 Countrywide plc 05 Strategic report Our chief executive officer’s review Geographic and service diversification underpins performance in uncertain markets In summary 2016 was a year of two halves for the property market in the UK. The first half of the year saw Countrywide benefit from a strong • A year of unprecedented change residential sales market and the actions we took to strengthen the core business in both Sales and Lettings. The changes to stamp • Focus on organic growth, execution and duty land tax on second homes provided a lift to first quarter acceleration of proposition improvements, volumes as our sales team capitalised on those buying second homes – most notably investor landlords who pulled forward and business transformation transactions to beat the April deadline for the additional 3% levy.