Interim Report for the six mo
RNS Number : 2458Y
McInerney Holdings PLC
01 September 2009
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McInerney Holdings plc CHAIRMAN’S STATEMENT
Overview
McInerney Holdings plc (“The Group”) continued to experience very challenging trading conditions in its key home building markets of the UK and Ireland during the first half of 2009. A number of external factors continued to contribute to the adverse housing market conditions including fragile consumer confidence and poor mortgage availability. .
In the UK, while mortgage constraints continued to place downward pressure on house prices, there have been some positive indications of pricing stability and a steady pattern of sales at a low level has emerged. In Ireland, house prices continued to fall throughout the first half, with sales rates since May being particularly weak.
As a result of these difficult market conditions, the Group reports a loss before tax and exceptional items
Land/Impairment
In early 2009, the Group carried out a review of the carrying value of its assets in the light of market conditions
(-41%). This impairment charge does not constitute an immediate cash loss to the Group. As house prices
Credit Facilities
While the Group was in compliance with its trading covenants with its principal bankers at the 30th June 2009, the impairment charges as announced today would have caused the Group to breach tangible net worth covenants when next tested. Accordingly, the Group’s lenders continue to be supportive and have agreed to defer the testing of this tangible net worth covenant as part of ongoing banking negotiations.
As the Group is now trading at lower levels than had been anticipated at the start of the year, we are currently in constructive discussions with both our UK and Irish funders in relation to revised loan facility structures. The objective of these discussions is to provide a stable funding basis for the Group during current trading conditions. The Directors also anticipate an extension will be secured for the UK banking facility maturity date from March 2010 to early/mid 2011. The maturity date of the Irish banking syndicate remains June 2011.
The revised banking arrangements are expected to be completed and announced prior to the 2009 full year results. The Directors believe that there will be a positive outcome to these discussions.
The Group’s net debt increased from €219m at year end to €254m at the half year. Of the increase €17m is due to currency fluctuation and €12m is due to previously projected final land payments. The Group has limited forward land purchase commitments and has entered into no new land purchase agreements since 2007.
EGM
As a result of the further impairment charge the Group now has negative equity, i.e. net liabilities. As a consequence, it is necessary to convene an Extraordinary General Meeting of the Company pursuant to Section 40(1) of the Companies (Amendment) Act 1983. This Meeting will be held on the 28th September 2009. We will give an information update on progress at that meeting.
Conclusion
The autumn selling season this year will be particularly significant in providing an indication of the condition of our key housing markets. While the actions of the Irish and UK Governments to increase liquidity and stabilise the banking system are designed to free up mortgage availability, we await the impact feeding into the market. Financial institutions are requiring an increased level of equity deposit from potential home buyers which is also curtailing demand.
The timing and rate of recovery in the housing market will be dependent on a wider improvement in the economic conditions in Ireland and the UK together with a tangible increase in the supply of mortgages. In the UK there are signs of some market recovery albeit from a low base.
The Directors and the Senior Management Team remain singularly focussed on generating sales, managing cash effectively and reducing costs. Our product remains well positioned to benefit from any future market recovery, in its locations, design and pricing points. A full review of product mix and positioning has taken place and where possible the mix and design are being adjusted to improve affordability.
We realise that these are difficult times for our shareholders. The Board has taken strong action in the face of the difficult trading circumstances and is confident that the restructured operating cost base now achieved for the Group will leave it best placed to achieve growth potential when market conditions stabilise and improve, enabling shareholder value to be rebuilt.
Ned Sullivan
Chairman
ENDS
FOR INFORMATION:
Siobhan Molloy Tel: (01) 676 01 68
Weber Shandwick (086) 817 50 66
Interim Management Report
UK
The Group completed 274 housing units in the UK in the first half of 2009 compared to 281 in the same period of 2008. Of these 77 were social homes (2008: 52). The UK recorded an operating loss of €2,909k versus an operating loss of €7,584k in 2008. Lower selling prices resulted in continued losses despite the reduced cost base.
The Group’s average plot cost in UK is £27k. The average price per housing unit in the period was £109k compared to £135k for the first six months of 2008. McInerney owns or control 2,500 plots, 98% of which have planning. In addition, the Group control 150 plots for social housing. Land creditors total €2.8m. Sales on hand were 427 units.
Ireland
The Group completed 64 private housing units in Ireland in the first half of 2009 versus 142 in the first half of 2008 and reported an operating profit of €1,784k compared to a loss of €381k in 2008. This improvement was largely due to favourable final account settlements on our contracting business resulting in a profit of €4.2m. The home building business experienced lower volumes and lower prices and recorded a loss of €2.4m.
The Group’s average plot cost in Ireland is €26k. The Group’s average sales price before VAT was €228k compared to €239k in the same period last year. McInerney owns or control 5,100 plots. Of these a total of 2,700 have planning permission and roughly 1,200 are long term strategic plots, mainly held in joint venture. Land creditors total €1m. Sales on hand were 230 units of which 180 were Part V social units where completions are expected in 2010 and beyond.
Other Businesses
The Commercial Division which operates in Ireland and the UK, delivered 632 sq. metres of sales in the first half of 2009 versus 344 sq. metres in the first half of 2008. It recorded an operating loss of €352k, as opposed to an operating loss of €684k for the same period last year. While sales demand for commercial units in both Ireland and the UK remains weak, the Division has successfully rented out 14 units. It is anticipated these will convert into sales when liquidity for the business sector recovers.
The Group’s current focus in Spain is to enhance our land value through the planning process. The Spanish Division recorded an operating loss of €369k versus an operating loss of €1,395k in 2008. Land creditors total €0.4m.
The Group has established a dedicated management team to assess opportunities in the United Arab Emirates. To date some project management work has been secured. A number of tender prospects are being reviewed.
Working Capital
Cash consumed in operations in the period was €13m compared to €60m in the first half of 2008. The Group’s inventory of built homes is higher than expected due to growth in cancellation rates together with an increased interval between exchange of contract and actual completion. This reflects increased stress testing by mortgage providers and also the overall weakness in consumer confidence.
Interest Charges
The interest charge for the first half was lower than for the first half of 2008. This is mainly due to lower European and British base rates.
Exchange Rate
The Group is primarily exposed to sterling foreign exchange risk. The average sterling exchange rate used for translation of the profit and loss account was 0.90 in the first half of 2009 compared to 0.77 in the first half of 2008. The Balance Sheet exchange rate was 0.85 as compared to 0.95 at end 2008.
Dividends
The Directors do not propose to pay an interim dividend in view of the current trading situation of the Group and the reserves position of the Company.
Debt
Debt at the half year was net €254m. This compares to €219m net debt at 31 December 2008. €17m of this increase is due to the impact of exchange rate movements on the Group’s sterling debt. A further €12m of the increase is due to the payment of final land commitments during the period. The balance of the increase in debt relates primarily to general trading.
Banking
While the Group was in compliance with its trading covenants with its principal bankers at 30 June 2009, the further impairment charge announced today would have caused a breach of tangible net worth covenants when next tested. The Group’s lenders are supportive and have agreed to defer the testing of this tangible net worth covenant as part of ongoing banking negotiations.
As the Group is now trading at lower levels than had been anticipated at the start of the year, we are currently in constructive discussions with both our UK and Irish funders in relation to revised loan facility structures. The objective of these discussions is to provide a stable funding basis for the Group during current trading conditions. The Directors also anticipate an extension will be secured for the UK banking facility maturity date to early/mid 2011. The maturity date of the Irish banking syndicate remains June 2011. The revised arrangements are expected to be completed and announced prior to the 2009 full year results. The directors believe that there will be a positive outcome to these discussions.
Principal Risks and Uncertainties
The Board assesses the principal risks and uncertainties faced by the Group on an ongoing basis and seeks to ensure that strategies to mitigate the effect of these risks are in place. As at the date of approval of the Interim Statement key risks facing the business in the next six months, in the opinion of the Board, include a range of factors that are similar to other development companies and specific to the nature of the housing supply industry. These include maintaining corporate funding facilities, housing market demand, availability of consumer/mortgage finance, consumer confidence, volatility in relation to financial and economic markets, and interest rates/foreign exchange rates. The carrying value of assets is reviewed at each Balance Sheet date.
Related Party Transactions
There were no related party transactions that would have materially affected the financial position or performance of the Group in the period. In addition there were no changes in related party transactions from the last Annual Report that could have had a material effect on the financial position or performance of the Group in the first six months.
Audited Review
The half year financial report has not been audited or reviewed by the Auditors of the Group pursuant to the Auditing Practices Board guidance on review of interim financial information. The Independent Auditors’ Report on the Group’s financial statements for the year ended 31 December 2008 contained an Emphasis of Matter relating to the Group’s ability to continue as a going concern and drawing shareholders attention to Note 1 to the financial statements. In Note 1 to these condensed financial statements the Directors again address the issue of going concern.
Forward Looking Statements
Certain comments made in these interim results are forward looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from the expected future events or results referred to in these forward looking statements.
Responsibility Statement
The Directors are responsible for preparing the Interim Report in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the related Transparency Rules of the Irish Financial Services Regulatory Authority and with IAS 34, Interim Financial Reporting as adopted by the European Union.
The Directors confirm that, to the best of their knowledge:
a. the Group Condensed Financial Statements for the half year ended 30 June 2009 have been prepared in accordance with the International Accounting Standard applicable to interim financial reporting (IAS 34 Interim Financial Reporting) adopted pursuant to the procedure provided for under Article 6 of the Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002;
b. the Interim Management Report includes a fair review of the important events that have occurred during the first six months of the financial year, and their impact on the Group Condensed Financial Statements for the half year ended 30 June 2009, and a description of the principal risks and uncertainties for the remaining six months;
c. the Interim Management Report includes a fair review of related parties’ transactions that have occurred during the first six months of the current financial year and that have materially affected the financial position or the performance of the Group during that period, and any changes in the related parties’ transactions described in the last Annual Report that could have a material effect on the financial position or performance of the Group in the first six months of the current financial year.
Barry O’Connor
Managing Director
On behalf of the Board
28 August 2009
Condensed Consolidated Income Statement (unaudited)
for the period ended 30 June 2009
Condensed Consolidated Statement of Comprehensive Income (unaudited)
for the period ended 30 June 2009
Condensed Consolidated Statement of Changes in Equity (unaudited)
for the period ended 30 June 2009
Condensed Consolidated Balance Sheet (unaudited)
as at 30 June 2009
Condensed Consolidated Cash Flow Statement (unaudited)
for the period ended 30 June 2009
Notes to the Interim Report (unaudited)
for the period ended 30 June 2009
1. Going Concern
The condensed financial statements have been prepared on a going concern basis.
The Chairman’s Statement and the Interim Management Report refer to the challenging business environment currently being experienced by the Group. The housing markets and general economic conditions in the UK and Ireland deteriorated progressively during 2008 and 2009. Trading conditions in our key markets of Ireland and the UK continue to be challenging as consumer confidence is low, access to mortgage funds remains restricted and the international financial climate is uncertain. As a result, the Group incurred trading losses before exceptional items of €12.8m for the period ended 30 June 2009.
The Group reviewed the carrying value of its land and work in progress as at 30 June 2009 in the context of the continued deterioration in trading conditions. This review resulted in a further exceptional write down of €156m in the value of land and work in progress based on the continuation of current market conditions for the duration of the development of our landbank. Consequently the Group’s balance sheet at 30 June 2009 reports net liabilities of €81m. As the loss of capital is due to a non-cash impairment charge against the carrying value of land and work in progress at a point in time, the Directors believe that the resulting net liability position does not prevent the adoption of the going concern basis in the preparation of these financial statements.
The further impairment charge of €156m would have resulted in a breach of tangible net worth banking covenants when next tested. However, the Group’s UK and Irish lenders have agreed to defer measurement of these covenants in the context of ongoing banking negotiations. At 30 June 2009, the Group was in compliance with its other banking covenants. The Group is trading in an environment of considerable uncertainty. Based on current market conditions, and current forecasts, the Group’s subsidiaries are likely to be non-compliant with certain banking covenants on certain measurement dates during 2009 and 2010. If any such covenant breaches were to occur then the lenders may be able to request early repayment of all outstanding borrowings. To date the Group has successfully renegotiated covenants with its lenders whenever breaches have been forecast or have occurred and has successfully renegotiated extensions of facilities.
On 10 March 2009, the Group concluded an agreement with its UK lenders to extend the maturity dates of the UK facilities to 31 March 2010. The Group’s UK division continues to generate positive cashflow. The Directors expect further maturity extension negotiations to be successfully concluded early in 2010. The Irish facilities continue to have maturity dates in 2011.
The Group is in ongoing constructive discussions with both its UK and Irish funders in relation to revised covenants and facility structures. The outcome of these discussions and the possibility of a further or prolonged significant deterioration in our key housing markets of Ireland and the UK beyond that assumed in our forecasts, represent material uncertainties that may cast doubt on the Group's ability to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business. The condensed financial statements do not include any adjustments that would be necessary if the Group were unable to continue as a going concern.
Based on the progress of discussions to date with the Group’s principal lenders, the Directors are satisfied that the required covenant, facility structure and maturity revisions will be agreed, enabling the Group to continue as a going concern. Therefore the Directors consider it appropriate to prepare the condensed financial statements on a going concern basis.
2. Basis of Preparation
The Interim Report has been prepared in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the Transparency Rules of the Irish Financial Services Regulatory Authority and IAS 34, Interim Financial Reporting, as adopted by the European Union.
The condensed financial statements are unaudited and do not constitute statutory accounts within the meaning of Section 19 of the Companies (Amendment) Act 1986. The condensed financial information included for the year ended 31 December 2008 represents extracts from the audited financial statements for the year ended 31 December 2008. The auditors’ report on those financial statements was not qualified but did contain an emphasis of matter paragraph concerning Note 1 – Going Concern. These financial statements are being filed with the Registrar of Companies.
3. Significant Accounting Policies
The accounting policies and methods of computation adopted in the Interim Report are consistent with those used in the Annual Report for the year ended 31 December 2008.
The following new relevant standards, amendments to standards or interpretations are mandatory for the first time for accounting periods ending on or after 1 January 2009 but have no material impact on the Group’s financial statements:
IAS 1(2007) – Presentation of financial statements
IFRS 8 – Operating Segments
IAS 23 – (Amended) Borrowing Costs
4. Segment Information
The Group operates in Ireland, the UK and Spain. These divisions are the basis on which the Group reports its segmental information. The principal activities of the Group are Housing, Contracting, Commercial Development and Leisure. Land sales are also part of the activity of each business.
5. Operations in Interim Period
Past experience shows that the majority of trading activity occurs in the second half of the year. However with the current fragile housing market it is difficult to predict whether this trend will continue to apply in 2009.
6. Exceptional Costs
Land and inventory impairments represent a write down in the value of the land and inventory controlled by the Group to reflect current market conditions. This includes €19.5m for Group’s share of joint venture land impairment and a provision of €19.4m for impaired licence land commitments. A full review of inventories has been performed and write downs have been made where cost exceeds net realisable value. Estimated sales rates and prices have been reviewed on a site by site basis and reflect local management and the Board’s assessment of current market conditions.
The restructuring charge is made up of redundancy payments, office closure costs, costs associated with site closures and professional fees associated with refinancing the Group’s UK revolving credit facility.
7. Changes in Estimates and Judgements
In the process of applying the Group's accounting policies management are required to make certain judgements that have an effect on the amounts recognised in the financial statements.
These include but are not limited to the following:
Valuation of work in progress and land
Inventories are carried at the lower of cost and net realisable value. Net realisable value for each site in the Group’s land bank represents the excess of estimated future revenue in the ordinary course of business over all estimated costs to completion including unavoidable overheads.
Valuations of site work in progress are carried out at regular intervals by the Group’s quantity surveying and marketing departments. This process involves estimating costs to complete and anticipated revenues and therefore involves considerable judgement. The revenue estimates are based on current market conditions. Should there be a further significant deterioration in the Group’s main markets then additional write downs of land and work in progress may be required.
Revenue recognition
In making its judgement, management considered the detailed criteria for the recognition of revenue from the sale of goods set out in IAS 18 Revenue and, in particular, whether the Group had transferred to the buyer the significant risks and rewards of ownership of the goods. The Directors are satisfied that the significant risks and rewards of ownership have been transferred in all cases and that recognition of the revenue in the current year is appropriate.
Margin recognition
In calculating the cost of sale for completed units, it is usually necessary to include in such calculations the cost to complete the whole project. The margin, therefore, recognised on a project that is not yet complete is dependent on the accuracy of the calculation of the cost to complete the project in total. The Directors are satisfied that all such calculations have been carried out on a reasonable and accurate basis, and that the margins recognised are reasonable.
Key Sources of Estimation Uncertainty
The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.
Net Realisable Value of Land and Inventory
For the period ended 30 June 2009 a full review of inventories has been performed and write downs have been made where cost exceeds net realisable value. As noted above, estimated selling prices have been reviewed on a site by site basis and reflect local management and the Board’s assessment of current market conditions. These site reviews have resulted in write downs totalling €156m. Should there be a further significant reduction in demand for housing in Ireland, the UK or Spain then further write downs of land and work in progress may be required.
Maintenance Provisions
The maintenance provision represents management's best estimate of the Group's liability under 12 month guarantees given to purchasers for repair and maintenance work on housing units. The provision also encompasses the Group’s liability for maintenance work required on communal site facilities prior to handover to local authorities. The provision is estimated based on past experience. The Directors are satisfied that, based on this experience, the maintenance provision is sufficient to cover all foreseeable costs of any maintenance work required.
8. Tax
9. Dividends
10. Loss Per Share
From continuing operations
The calculation of basic and diluted loss per share is based on the following data:
21
11. Inventories
The Directors consider all inventory to be current in nature. The operational cycle is such that the majority of inventory may not be realised within 12 months. It is not possible to determine with accuracy when specific inventory will be realised, as this is subject to a number of issues such as consumer demand and planning permission processes.
For the period ended 30 June 2009 a full review of inventories has been performed and write downs have been made where cost exceeds net realisable value. Estimated selling prices have been reviewed on a site by site basis and reflect local management and the Board’s assessment of current market conditions. These site reviews have resulted in write downs totaling €127.9m (2008: €100.9m) from inventories.
All inventories have been pledged as security for certain of the Group's bank borrowings.
12. Provisions
Maintenance provision
This represents management's best estimate of the Group's liability under 12 month guarantees given to purchasers for repair and maintenance work on housing units. The provision also encompasses the Group's liability for maintenance work required on communal site facilities prior to handover to local authorities. Whilst the timing and amount of payments are uncertain, the provision is estimated based on past experience and the Directors expect it to be utilised within 5 years.
Other provisions
These relate to provisions for impaired licence land commitments, restructuring costs and to costs arising from a legal case taken against one of the Group’s divisions following a dispute with a neighbouring developer concerning an alleged boundary infringement.
13. Bank Overdrafts and Loans
While the Group was in compliance with its trading covenants with its principal bankers at 30 June 2009, the further impairment charge (see note 6) would have caused a breach of tangible net worth covenants when next tested. The Group’s lenders are supportive and have agreed to defer the testing of this tangible net worth covenant as part of ongoing banking negotiations.
As the Group is now trading at lower levels than had been anticipated at the start of the year, we are currently in constructive discussions with both our UK and Irish funders in relation to revised loan facility structures. The objective of these discussions is to provide a stable funding basis for the Group during current trading conditions. The Directors also anticipate a further extension will be secured for the UK banking facility maturity date to early/mid 2011. The maturity date of the Irish banking syndicate remains June 2011. The revised arrangements are expected to be completed and announced prior to the 2009 full year results. The directors believe that there will be a positive outcome to these discussions.
14. Share Capital
15. Hedging & Translation Reserves
The fair value of interest rate swaps is taken to the hedging reserve. There are no other amounts included in this balance. Foreign exchange differences on translation of the Group's net investment in its UK subsidiaries are taken to the translation reserve.
16. Retained Earnings
17. Contingent Liabilities
There are no contingencies or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) against the Company or any of its subsidiaries which may have, or have had during the financial period, a significant effect on the financial position of the Group.
18. Related Party Transactions
There are no related party transactions between the Company and its subsidiaries other than inter-company dividends. Details of transactions between the Group and other related parties are disclosed below.
Transactions between the Group and its joint ventures:
The movements on the above balances arise from loan repayments, impairment provisions and trading transactions.
The amounts outstanding are unsecured and will be settled in cash. Two Group companies have provided separate joint and several guarantees to two joint venture companies for €8.9 million. Interest only guarantees are provided on joint venture borrowings.
Transactions with staff:
During the period 2 residential units were purchased by members of staff at a gross consideration of €262,144. There were no outstanding balances in respect of these transactions at the period end.
Other related party transactions:
In 1999, a loan of €749,000 was advanced by the Group to Alanda Club, Marbella (‘the Club’). During the period €129,914 has been repaid, leaving an outstanding balance at the period end of €619,086. The Group owns a stock of membership weeks at the Club, and also manages the resort on behalf of the Club. In addition, the Group owns 100 redeemable preference shares in the Club.
19. Land Commitments
In addition to amounts included in trade payables, the Group is committed to the following land payments:
Land contracted for
These commitments are in respect of land for which purchase contracts have been signed but not all contractual preconditions have been satisfied. Therefore, title has not yet passed and as a result there are payments outstanding to which the Group may be committed.
Licence agreements
The Group has entered into licence agreements with third parties in the normal course of business to build private housing developments. The Group has exclusive building licences on such sites. The estimated total amount payable over time under such agreements at the balance sheet date was €73.1m (December 2008: €73.7m). In certain circumstances the Group could be required to prepay these amounts. An impairment provision has been made to the extent that any licence commitments are considered onerous (see note 12).
20. Events After the Balance Sheet Date
There have been no significant events since the balance sheet date.
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