Annual Financial Report
Bovis Homes Group PLC - Annual Report and Accounts 2008
Annual Report and Accounts 2008, Notice of Annual General Meeting, Proxy Card
Copies of the above documents will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at:
Financial Services Authority
25 The North Colonnade
Canary Wharf
London E14 5HS
Tel No: 020 7066 1000
The documents are being mailed to shareholders and are available on the Company's website at www.bovishomes.co.uk/plc/annualreport2008
Amendments to Articles of Association
The Company further announces that, in accordance with DTR 6.1.2, it's Articles of Association, showing amendments to be proposed at the Company's forthcoming Annual General Meeting on 7 May 2009, have been lodged with the UK Listing Authority for publication through the Document Viewing Facility. An explanation of the proposed changes is set out in the Notice of Annual General Meeting and they are as follows:
Authorised Share Capital - The 2006 Act abolishes the requirement for a company to have an authorised share capital and the new Articles of Association reflect this. The Company will still be limited as to the number of shares which it can at any time allot because allotment authority continues to be required under the 2006 Act, save in respect of employee share schemes.
Notice of General Meetings - Certain provisions in the current Articles of Association dealing with the convening of general meetings and the length of notice required to convene general meetings are being removed in the new Articles of Association because the relevant matters are provided for in the 2006 Act. In particular, a general meeting to consider a special resolution can be convened on 14 days' notice whereas previously 21 days' notice was required.
It is also proposed that the Company's Articles of Association be amended with effect from 00.01 a.m. on 1 October 2009 by deleting all the provisions in the Company's Memorandum of Association which, by virtue of section 28 of the Companies Act 2006, are to be treated as provisions of the Company's Articles of Association.
Annual Report and Accounts 2008 - publication required by DTR 6.3.5
The Company published its Preliminary Results for the year ended 31 December 2008 on 9 March 2009. In order to comply with DTR 6.3.5 it is now publishing in unedited full text information contained in the annual financial report of a type required to be disseminated in a half-yearly financial report. For coherence, this repeats some of the information contained in the Preliminary Results announcement.
The full annual financial report is available on the Company's website at www.bovishomes.co.uk/plc/annualreport2008
Annual report and accounts 2008
Bovis Homes Group PLC
Chairman's statement
2008 was a challenging year for the housebuilding industry. The poor economic conditions encountered, including the lack of mortgage availability, had a negative impact on volumes with first time purchasers in particular being adversely affected by an increased requirement for deposits. This culminated in total mortgage lending for new home purchase falling by 70% towards the end of the year.
Faced with this deteriorating economic background, Bovis Homes acted decisively in substantially reducing its overhead, controlling work in progress and negotiating new banking arrangements. The Group has reviewed the carrying value of its assets and liabilities and has taken a provision against carrying values of inventory as well as fully writing off goodwill arising on acquisition.
Whilst the Group's net assets have fallen during 2008, gearing remains low, at 17%. The business is now well positioned to manage its balance sheet in an effective manner and to be able to take advantage of future investment opportunities.
Results
For the year ended 31 December 2008, the Group achieved a pre-exceptional pre-tax profit of £14.4 million, as against £123.6 million in 2007. Pre-exceptional basic earnings per share was 9.2p in 2008 as compared to 72.4p per share in 2007. After taking into account £93.1 million of exceptional charges, the Group made a pre-tax loss of £78.7 million and basic loss per share of 49.1p in 2008.
Total revenue generated was £282.3 million (2007: £555.7 million), and the Group legally completed 1,817 homes (2007: 2,930 homes).
On a pre-exceptional basis, the Group's operating margin reduced to 7.5% (2007: 22.4%). This reduction reflected a fall in private home sales prices, a shift in the selling mix towards social homes and away from private homes and the de-leveraging impact on cost recovery from the sharp fall in revenues.
Group net assets reduced by £91.4 million, from £723.7 million to £632.3 million, equivalent to £5.23 per share at the year end. This reduction in net assets was driven primarily by the Group's retained loss in the year, inclusive of exceptional items, and an adverse movement in value of the pension scheme of £7.8 million.
Net debt before issue costs was £108 million at the year end, and year end gearing was a modest 17%, with net borrowing utilisation less than half of the Group's committed loan facility.
Dividend
During 2008, the Group paid the 2007 final dividend of 17.5p per share, and the 2008 interim dividend of 5.0p per share. Given the challenging trading conditions and the importance of conserving cash the Group is not recommending payment of a final dividend for 2008.
The Board
Whilst the Group has seen major changes during the year, changes also related to the Boardroom, where I became non-executive Chairman in July 2008 following my retirement as Chief Executive, to be replaced by Mr David Ritchie, who was previously Group Managing Director, this role not being retained.
The Board would like to thank Mr Tim Melville-Ross, my immediate predecessor, for his significant contribution to the Group's development since 1997, first as a non-executive director and then as Chairman of the Group. The Board would also like to welcome Mr Alastair Lyons who joined the Group as Deputy Chairman and Senior Independent Director in October 2008.
Employees
2008 has been a difficult year for the employees, suppliers and sub-contractors of the Group. The Group has seen two restructuring events leading to more than half its employees leaving the business during the year. The Board took these necessary and essential decisions after consideration of alternative courses of action, and recognises the significant impact its decisions have had on many individuals, which is regrettable. The Board would also like to recognise the commitments and contribution of those colleagues who have been made redundant during the year and would like to wish them every success in their future employment.
Whilst distressing for those individuals leaving, it is often also difficult for those employees remaining, who may have to take on additional tasks in a more uncertain environment. In reducing production activity and seeking savings throughout the business, the Group also recognises that this has been very challenging for the many suppliers and sub-contractors who provide services to the business.
The Board would like to thank its employees, suppliers and sub-contractors for their continued hard work and commitment during a year that has been very challenging for a great many individuals connected to the Group in many respects.
The Board would also like to thank Mr Geoff Coleman, the regional Managing Director of South East region, who retired during the year after more than 20 years service.
Market conditions and prospects
As has been well reported, the current market for housebuilders is exceedingly weak, and accordingly, the Group's priorities are to manage through the current downturn in an orderly way. The Group commenced 2009 with a healthy number of unsold finished stock homes which it can sell to generate a strong cash margin, preserving the value in the balance sheet whilst continuing to maintain a relatively low level of indebtedness. Through its efforts to date, as at 6 March 2009, the Group has secured 772 net reservations for legal completion in 2009, as compared to 1,262 net reservations at the same point in 2008. Whilst this represents a decrease year over year of 39%, the 330 private net reservations achieved in the first nine weeks of the year represents a 22% increase on the prior year's comparative of 271 net reservations.
Looking ahead, the Group expects that transaction volumes will begin to improve as lower house prices and lower mortgage interest rates feed through into the marketplace. This pick up in activity does, however, depend on the credit market being capable of funding increased transactional growth.
With improved volume, market pricing will begin to stabilise. However, visibility on the timing of these likely market developments is not good and for the present, the Group is positioning itself assuming a continuation in 2009 of current market conditions.
With low levels of debt and a largely strategically sourced and long consented land bank the Group anticipates being well placed in terms of balance sheet capability for this eventuality.
Malcolm Harris
Chairman
Report of the directors - Business review
The marketplace and Group performance
Bovis Homes Group PLC's (Bovis Homes) business remains designing, building and selling homes for both private and public sector, operating in England and Wales. Mixed use schemes involving retail, commercial and office, in addition to residential, are also undertaken by the Group. The key steps in the value delivery chain for the Group remain the sourcing of land, achievement of an appropriate planning consent, physical construction of property and its subsequent sale.
Marketplace demand during 2008
Longer term demand drivers in the UK housebuilding market include household formation, population growth and societal changes such as increased longevity and higher divorce rates: all of which drive an increased requirement for housing. Based on Government forecasts which allow for the impact of these, the industry should be building 240,000 homes each year to meet the country's housing needs. This said, in the shorter term, it is self evident that demand can be strongly influenced by consumer sentiment, affordability and availability of mortgage financing.
During 2008, marketplace demand has been badly affected by two developments. Firstly, the availability of mortgage finance has reduced following the liquidity crisis affecting the banking sector in late 2007 and into 2008. As well as a sharp reduction in the number of mortgage products available from 15,599 in July 2007 to 1,542 in January 2009, the absolute number of mortgages being approved has fallen, with year over year mortgage approvals falling by 43% in Q1, 61% in Q2, 70% in Q3 and 63% in Q4: 59% overall across the year. Secondly, the onset of the recession together with bleak economic news, a sharp retrenchment in corporate lending and further crises in banking requiring Government bailouts has impacted consumer confidence, such that in the latest consumer confidence survey by the Nationwide, 82% of respondents feel the current economic situation is bad.
The combination of these factors has led to a significant decrease in residential transaction volumes, down 44% in 2008 against the prior year according to the HMRC. Further, the lower number of buyers able to obtain mortgage finance has led to lower levels of demand and a sharp fall in achieved house pricing across the marketplace over the year, with the Nationwide reporting a 15.9% fall during 2008 and the Halifax a 16.2% fall over the same period. This scale of fall over a one year period is unprecedented, and has further dented confidence. The lower activity trend is likely to worsen in the short term as mortgage approval data runs ahead of transactions, and the absolute level of mortgage approvals indicates a further step down in transaction volumes.
The two developments over the year that bear within them the potential for recovery are the movements downwards in base interest rates, currently at 0.5%, and the general improvement in affordability metrics as house prices fall. The timing of this recovery is largely dependent on mortgage availability, which is extremely difficult to forecast.
Marketplace supply in 2008
As sale volumes across the housebuilding sector have fallen, construction volumes have reduced as individual companies seek to conserve cash. Bovis Homes has not differed in this respect: the Group has limited construction to 1,782 units of production in 2008, a decrease of 39% compared to 2007's 2,923 units of production. New starts have been limited to 1,179 homes compared to 3,406 homes in 2007, a 65% decrease. In the marketplace as a whole, data for England for the year to the end of quarter 3 2008 would suggest a fall in new starts against the prior comparable of some 31% for the year, with quarter 3 in isolation down 48% against the prior comparable and down 33% against the previous quarter. Whilst this is a logical response by individual housebuilders, it is at odds with Government objectives for construction of new homes, and is therefore indicative of a continuation of a longer term supply and demand imbalance. Such an imbalance continues to suggest that demand for new housing will remain robust over the long term.
Competition
In normal markets, the main competitor for Bovis Homes is the second hand market, with over 90% of residential transactions being second hand, and with pricing in the new build sector being set by reference to that market. During 2008, however, the pricing dynamic has changed somewhat, and with thin second hand volumes, the impact of new-build competitors discounting has been to place downwards pressure on achievable pricing for Bovis Homes where the Group trades in close proximity: both directly as customers shop around and indirectly via comparative mortgage valuations.
Group performance in 2008
The Group legally completed 1,817 homes in 2008 compared to 2,930 legal completions in 2007. Of these, 594 were social homes ( 2007: 637) and 1,223 were private homes (2007: 2,293), a social mix of 33% as compared to 22% in 2007.
The average sales price of legal completions fell over the year, from £179,500 in 2007 to £150,800 in 2008. This fall was driven by a combination of factors. Firstly, the average sales price of private homes fell by 12%, from £206,200 to £181,000 as the Group responded to a weaker market to deliver the Group's volume aspirations and as the average size of private homes legally completed reduced.
Secondly, there was a shift in selling mix towards social housing, from 22% in 2007 to 33% of legal completions in 2008. With an average sales price of £88,500 in 2008 (2007: £83,400), the increase in the mix of this category diluted the overall average sales price achieved.
The average size of the Group's private homes fell by 5% in 2008, to 972 square feet as compared to 1,023 square feet in 2007. Taking this into account, the Group's private sales price per square foot fell by less than the average sales price, an 8% fall from £202 per square foot to £186 per square foot. Overall, the Group's homes legally completed reduced in size from 969 square feet in 2007 to 909 square feet, a fall of 6%.
Strategy and objectives
The Group's long-held strategic objectives are as follows:
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The Group seeks to achieve a minimum return on capital employed (ROCE) of 20% over the cycle, and seeks to maximise operating margin whilst doing so
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The Group seeks to ensure growth in profits and in earnings per share
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The Group seeks to maintain the highest levels of awareness and practical implementation of health, safety and environmental standards
Largely arising as a result of the marketplace conditions during 2008, progress against a number of these strategic objectives has been disappointing during the year.
The Group remains committed to its ROCE target of 20% over the business cycle, although the impact of current market conditions is likely to mean that the Group will perform well below the target in the short term. During 2008 operational margins suffered from the impact of an increased social mix and a reduction in average sales price for private sales with input costs remaining relatively fixed. Given falling sales, there was also a reduction in overhead recovery as a result of loss of scale.
Pre-exceptional profits have fallen sharply against prior year, as sales revenue has reduced by 49%. This has also impacted earnings per share. Following the completion of carrying value reviews on inventory valuations, the Group has also charged write-downs in carrying values of assets, leading to an overall retained loss for the Group during 2008.
Performance against the Group's non-financial objectives will be covered in more detail throughout the operating performance section of this review.
Operating performance
During what has been an untypical year requiring a number of difficult actions, the Group has ensured that its operations continue to be managed and measured in a timely and consistent manner; that key activities occur as planned and that the Group is performing well having regard to the constraints imposed by the economic backdrop. The Group also seeks to manage its operations such that it can assure itself that its activities are ethically based, environmentally sustainable and that it is ensuring the highest practical standards of health and safety for its employees, subcontractors and all visitors.
Further details of the Group's efforts and achievements during 2008 in regards to Corporate Social Responsibility are published in a separate report, available from the Company's website (www.bovishomes.co.uk/plc), but the following brief review highlights the key operational performance matters together with objective data assessing progress achieved.
Employees
Construction is by its nature an activity that carries with it some physical risk, and accordingly, the Group regards the health and safety of its employees, subcontractors and all visitors to its sites of paramount importance. Comprehensive staff training, management processes and regular and comprehensive accident and incident reporting ensure that the Group is aware of all material matters pertaining to health and safety, and it seeks to ensure that this reporting is at the cornerstone of a system which uses high quality information to address risk, preventing injury or recurrence. The Group also seeks to ensure that its site workforce is fully CSCS carded, a goal achieved during 2008.
As well as being a key item on the agenda of all regular senior management meetings, the Group seeks to ensure that its health and safety regime is independently monitored via external advisors, and uses the services of the National House Building Council to effect this.
In absolute terms, the performance of the Group has improved in 2008, with reportable accidents under the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations (RIDDOR) falling by 13% in the year to 27 (2007: 31). Minor injuries have also fallen by 41%, from 246 occurrences in 2007 to 144 in 2008. The outcome from external monitoring and inspection also confirms this trend, with NHBC priority A scores showing a fall of 79%, and priority B scores a fall of 41%. Despite this absolute fall, the reduction in activity on site means that the Group's accident incidence rate has increased, from 945 in 2007 to 1,024 in 2008. This rate is ahead of the HSE Construction accident incidence rate of 906, and is indicative of the fact that the Group cannot be complacent about the positive trend of falling absolute scores.
Notwithstanding changes in overhead structure and staffing levels during the year, the Group has continued to ensure that staff are being trained and that they are capable of doing their jobs well and in a safe way. Absolute levels of training have remained high as has the proportion of staff being trained.
Customers
The Group's objective is to provide customers with a high quality product and service, something outlined in its customer charter. The Group has focused on this area intensively in 2008, building on work done in 2007 to improve process around its customer satisfaction surveys. Internal scoring demonstrates the success of this with improvements in both 'recommend to a friend' and 'purchase another Bovis Home' responses.
Customer communication has continued to be supported via the web, with ongoing developments to ensure that the Group website is a key selling tool. For instance, floor plans are now available on the Group website to allow potential consumers to better visualise their Bovis home. The Group is also using the power of the internet to directly market its products to consumers, utilising internally generated mailing lists as well as via intermediaries such as 'smart new homes.com' or 'right move.com'.
Given the present level of price competition, the Group remains focused on designing sales packages which provide customers with a strong motivation to transact with Bovis Homes.
'Jumpstart' remains a strong sales aid, allowing the Group to overcome the issue that many first time buyers are now finding, namely that mortgages for those without substantial deposits are difficult to obtain. 'Home-exchange' also remains an important tool in the context of a second hand market in which transaction levels are very low.
Shareholders
The value chain for Bovis Homes over the long term business cycle remains the sourcing of land, achievement of an appropriate planning consent, physical construction of property and its subsequent sale.
This said, the nature of the current downturn has forced Bovis Homes to take a number of shorter term steps to mitigate the impact the sharp downturn has had on mortgage finance, consumer sentiment and ultimately Group sales revenue. These mitigating actions have been taken to protect the shareholder value represented by the Group's balance sheet.
Actions have been taken to ensure that the Group is able to pass through the current low ebb of the cycle in a controlled and orderly way from a cashflow perspective, as well as ensuring that the impact of current marketplace conditions on its financing arrangements are addressed.
Firstly, and regrettably as regards the impact on its employees, the Group has taken action to reduce its overhead cost base during 2008, as falling volume and prices have reduced the sales revenue generated by the Group. In June 2008, the Group reviewed its structure and closed its Eastern regional office, one of its five regional offices at that time, as well as seeking to make savings in headcount across the Group. In December 2008 the Group acted again, closing its Northern regional office. The Group now trades from three regional office bases - South West based in Cheltenham; South East based in New Ash Green, Kent and Central based in Coleshill, near Birmingham. Northern activity is being managed by the Central region, and Eastern largely by the South East region. This structure replicates the organisation of the Group after flotation and the Group is confident that it will be a suitable regional structure to support volume growth in the short term. Effected through the restructuring, around 60% of the Group's work force in place at the start of the year have left the business.
As a result, the Group expects that overhead costs in 2009 will be between 40-50% below peak levels in late 2007.
Secondly, as outlined earlier in this review, production levels have been reduced significantly, reflective of the need to conserve cash and the Group's generally high stock levels.
Thirdly, the Group has cut back its land expenditure, seeking to cancel or delay previous commitments. The impact of this is not immediately evident from the Group's consented land bank position which has benefited from a strong year of pull-through from its strategic land bank. The Group's consented land bank grew from 11,413 plots at 31 December 2007 to 13,545 plots at 31 December 2008. Of the 4,026 plots added, 96% or 3,853 plots were pulled through from the strategic land bank, and 173 plots were added through acquisition of land in the consented market. At current activity levels, this consented land bank represents 7.5 years of supply. Prior to the inventory write-downs taken in 2008, the average consented land plot cost was £40,200 with the equivalent figure for 2007 being £43,400. Adjusting for the carrying value provisions, the average balance sheet plot cost was £35,000.
The strategic land bank reduced over the year primarily because of the transfer of plots into the consented land bank. The potential plots at 31 December 2008 were 18,972 as compared to 24,868 potential plots at 31 December 2007.
The 2008 year end potential plots include 2,200 plots at Wellingborough, controlled via an option, which have the benefit of outline planning consent but which have not yet been called down by the Group. The Group added 966 net potential plots to the strategic land bank during 2008 and adjusted 3,032 potential plots out of the strategic land bank reflecting updated views on the likelihood of or quantum of viable residential planning consents achievable given current conditions in the housing market.
Finally, the Group was successful in refinancing its banking arrangements during the second half of 2008, extending its committed facility through to 2011. Whilst the bank pricing margin has increased, underlying LIBOR has reduced, and so the effective interest rate prior to amortisation of the one-off fees and commitment fees, is not anticipated to be materially greater than that paid in 2008.
Environment and sustainability
The Group continues to regard sustainable development as critical to the long term creation of value for its shareholders.
Given the continuing focus on climate change, the role of the housebuilding industry is highly important in terms of both the mitigation of the impact of its near term building developments on the local environment, and in playing its part in the evolution of building techniques and advances which reduce the carbon arising from new housebuilding developments.
Ensuring that its developments take place in a manner which mitigates the impact of its operations on its local environment, balancing the needs of local communities for new housing with the requirement to avoid environmental damage, the Group works with a range of external stakeholders to agree and carry out development in a mutually acceptable manner.
Looking forward, the Group is keen to ensure that its products conform to good environmental standards, including both to Ecohomes standards and to emerging standards under the Code for Sustainable Homes.
Reflecting the existing contribution that the Group makes to the communities and environments in which it operates, the Group is proud to say that it is a member of the FTSE4Good index.
The Group's Corporate Social Responsibility report outlines this key area for the Group in more detail, and is available on the Group's website (www.bovishomes.co.uk/plc).
Main Trends and factors looking forward
The outlook for the housing market, combined with that of the wider economy appears to be challenging at present.
The Government and the Bank of England together have taken a number of actions including a reduction in bank lending base rates to historical lows, money market innovations designed to increase liquidity, recapitalisation of clearing banks, and the nationalisation of a number of former building societies: all actions which it is hoped will begin to reverse the impact of the 'credit crisis'.
Notwithstanding these actions, the Group expects that de-leveraging from corporate and personal balance sheets will continue during 2009, leading to a generally low level of personal confidence as weak economic news prevails in the short term. The key financial trend remains the quantum of mortgage availability. As prices fall, so affordability improves, making the market more attractive to new entrants, but this can only improve if mortgage finance increases in availability.
Accordingly, visibility remains poor, and the Group will remain focused during 2009 on managing in a manner which prioritises cashflow and in preserving the value inherent within the Group's balance sheet.
David Ritchie
Chief Executive
Financial performance during the year
Revenue
Total revenue for the Group in 2008 was £282.3 million as compared to £555.7 million in 2007.
The main component of revenue for the Group is housing revenue which, at £274.0 million, was well below the prior year (2007: £525.9 million) arising from a combination of a fall in average sales price and a reduction in the volume of homes legally completed. Given the dearth of activity in the consented land market and uncertainty over achievable values, the Group limited disposals of land during 2008 to £4.9 million, as compared to £25.1 million in 2007. Other income at £3.4 million for 2008 was slightly behind that of the prior year.
Pre-exceptional operating profit
The Group achieved £21.3 million of operating profit, before exceptional items, for the year ended 31 December 2008, at an operating margin of 7.5%. This was a sharp reduction on the previous year's operating profit of £124.4 million and operating margin of 22.4%. Gross margins have fallen by around 9 ppts, reflective primarily of an underlying reduction in private home profit margins as prices fell, but also of an increase in the social mix and a loss of scale-benefits on strategic planning fees and other costs charged as incurred against gross profit. Despite a 14% absolute reduction in overhead, from £48.7 million in 2007 to £42.0 million in 2008, excluding exceptional items, the operating margin was further impacted by the lower recovery of overhead as the ratio to revenue grew from 8.7% in 2007 to 14.9% in 2008.
Profit from land sales, less option costs, was £1.3 million in 2008, as compared with £10.0 million in 2007.
Exceptional and non-recurring costs
The Group discloses items as exceptional when the Board deems them material by size or nature, non-recurring and of such significance that they require separate disclosure.
The Group has reviewed the carrying value of its assets and liabilities as at 31 December 2008. Following this review, the Group has charged an exceptional provision against the carrying value of inventory and an impairment charge for available-for-sale financial assets and fixed assets. The Group has also written off the goodwill arising from the acquisition of Elite Homes in 2007.
The Group has reviewed its inventory carrying values on a site by site basis, taking into account local management and the Board's estimates of current achievable pricing in local markets. Where this gave rise to a situation where the current carrying costs of the asset were higher than the estimated net realisable value, a provision has been recognised for the difference. This provision includes allowance for both land and part-exchange assets. In total, £75.2 million has been provided.
Prior to the expiry of the 12 month review period for fair value adjustments relating to the acquisition of Elite Homes in October 2007, the Group revised its fair value estimates downwards by £0.8 million, reflecting finalisation of estimates for liabilities existing at the point of acquisition. This adjustment increased the cost of acquired goodwill by £0.8 million, to £10.0 million in total.
Subsequently at the year end, the Group has reviewed the goodwill it is carrying and, given the fact that provisions have been recognised relating to the carrying value of land acquired by the Group as part of the Elite acquisition and given that the Group has restructured its Northern regional business, the Group has fully impaired this goodwill reflecting the Board's current view of the value of this intangible asset.
The Group has reviewed the carrying values of its available-for-sale financial assets, revisiting the long term growth assumptions built into its valuation model, and in particular the likelihood of a short-term decline in pricing, with a longer term return to trend. This has given rise to an impairment charge of £1.2 million. An impairment charge of £1.0 million has also been made relating to the Group's freehold offices, given the fall in commercial property values during 2008.
The Group has also charged restructuring costs of £5.7 million reflecting the one-off costs of two restructuring events that took place during the year. These costs include redundancies as well as costs relating to office closures.
Pre tax loss and loss per share
Together with £21.3 million of pre-exceptional operating profit (2007: £124.4 million), the Group incurred £6.9 million of net financing charges (2007: £0.8 million) and £93.1 million of exceptional items (2007: £nil), resulting in a pre-tax loss of £78.7 million (2007: pre-tax profit of £123.6 million).
Before exceptional items, the Group delivered basic earnings per share of 9.2p. However, after exceptional items, basic loss per share was 49.1p. This is as compared to basic earnings per share of 72.4p in 2007.
Financing
Net financing charges were £6.9 million in 2008 (2007: £0.8 million). Net bank interest charges for 2008 were £5.6 million, which included the amortisation of arrangement fees and commitment fee charges. This was as compared to £2.4 million of net income in 2007. On average during 2008, the Group had £97 million of net debt, as compared to an average net cash in hand of £49 million in 2007. The Group incurred a £2.5 million finance charge (2007: £4.1 million), reflecting the difference between the cost and nominal price of land bought on deferred terms and which is charged to the income statement over the life of the deferral of the consideration payable.
This year over year reduction was largely driven by a corresponding fall in land creditors.
The Group benefited from a £1.1 million net pension financing credit during 2008. This credit arose as a result of the expected return on scheme assets being in excess of the interest on the scheme obligations. The equivalent credit in 2007 was £0.9 million. The Group also benefited from a finance credit of £0.1 million arising from the unwinding of the discount on its available-for-sale financial assets during 2008.
Taxation
The Group has accounted for a tax credit of £19.7 million in 2008 (2007: tax charge of £36.7 million). Of this, a £3.3 million charge has arisen on pre-exceptional pre-tax profits of £14.4 million, and a £23.0 million tax credit has arisen on pre tax exceptional items of £93.1 million. This equates to an effective tax rate of 25.1% (2007: 29.7%). The major contributor to this lowered effective rate has been the £10.0 million impairment of goodwill arising on acquisition which is a non-deductible charge. The Group has also benefited from a £1.0 million overprovision of tax charge relating to prior years.
As a result of the tax credit arising from the exceptional items taken in 2008, the Group has recognised a tax asset of £23.6 million on its closing balance sheet as at 31 December 2008.
Dividends
During 2008, the Group paid the 2007 final dividend of 17.5p per share and the 2008 interim dividend of 5.0p per share. In total, this equated to £27.0 million (2007: £45.0 million). As previously announced, the Board has decided not to recommend payment of a final dividend for 2008, having regard to trading conditions.
Net assets
The Group's net assets at 31 December 2008 were £632.3 million, £91.4 million lower than the net asset position as at 31 December 2007. This was primarily as a result of an £86.0 million retained loss, together with a movement in the value of the pension scheme reserve by £6.4 million.
Net assets per share as at 31 December 2008 was £5.23 as compared to £5.99 at 31 December 2007.
Pensions
At the start of 2008, the Group enjoyed a surplus on its pension scheme of £1.0 million, but following a roll-forward of the valuation, with latest estimates provided by the Group's actuarial advisors, the Group's pension scheme had a deficit of £6.8 million at 31 December 2008. This adverse movement has arisen from a combination of a reduction in value of the scheme's assets, partially offset by a favourable movement in the discount rate applicable to the scheme's liabilities.
Cash flow
Over the year, the Group managed to limit the net cash outflow from operations to only £4 million, reflecting positively on the actions of the Group in reducing cash outflows, despite sharply falling revenues. The Group's net debt before issue costs increased by £64 million, from £44 million to £108 million, the bulk of this increase arising during the first half of 2008. In addition to the modest cash outflow from operations, the Group paid £17 million of tax largely relating to 2007's profits, £27 million of dividends and £17 million of interest and related charges, including £8.3 million of arrangement fees and related costs linked to its successful bank facility refinancing.
Borrowings
As at 31 December 2008, the Group had £11.6 million of cash in hand, and borrowings of £120 million. The Group has in place a £220 million committed syndicated banking facility, which steps down to £180 million in February 2010 and to £160 million in September 2010 and which matures in March 2011. Looking ahead, the Group anticipates around £50 million of net debt by the end of 2009.
On average the Group had net borrowings of £97 million in 2008 (2007: Net cash in hand £49 million). Average gearing was 14% and year end gearing 17%.
The difference between the average and the year end gearing is largely due to an asset provision made in December 2008 relating to the carrying value of inventories.
Financial risk and liquidity
The Group largely sees three categories of financial risk: interest rate risk, credit risk and liquidity risk. Currency risk is not a consideration as the Group trades exclusively in England and Wales.
In regards to interest rate risk, the Group from time to time will enter into hedge instruments to ensure that the Group's exposure to excessive fluctuations in floating rate borrowings is adequately hedged. The Group allowed its existing hedges to expire in 2007, but with the commencement of a new banking arrangement, the Group has in February 2009 entered into a £50 million collar and floor hedge arrangement, ensuring that variable rates on £50 million of the Group's floating rate debt are held within a pre-determined range. This prevents the Group from suffering material adverse floating rate increases beyond the agreed cap level.
In regard to credit risk, this is largely mitigated by the nature of the Group's business in which the majority of its sales are made on completion of a legal contract at which point completion monies are received in return for transfer of title.
During 2008, the Group successfully refinanced its banking arrangements, putting in place a £220 million syndicated facility which is committed to 2011, and which features covenants more appropriate to the current trading environment. This ensures that the Group has adequate cash facilities in terms of both flexibility and liquidity to cover its medium term cash flow needs.
Financial reporting
There have been no changes to the Group's accounting policies during 2008.
Principal risks and uncertainties
The Group formally considers risk on a regular basis with the Board annually reviewing the dimensions of risk that exist for the Group as well as the mitigation plans and processes that the Group may have in place to reduce the likelihood of the risk emerging and or to lessen the impact of the risk on the business. The Board has also focused on individual risk areas during 2008, with specific areas being discussed at each meeting.
The risks that the Group face generally fall into a number of categories: these include commercial risks (market, liquidity etc), social risks, environmental risk and ethical risks.
With regard to commercial risk, the trading environment has markedly worsened during 2008, and the Group has formally re-assessed the likelihood and impact of risk occurring in this changed business environment. For example, perhaps not surprisingly, risks that the Group assessed as more remote in earlier years such as the risk of inadequate working capital resources being available have increased greatly both in likelihood and impact. An environment of falling sales prices also has wider ramifications looking forwards, for example in terms of the affordability both of planning gain packages and of the affordability of cost changes driven by primary legislation as well as in terms of the viability of purchased land.
Currently, the Group assesses the following to be the principal commercial risks:
-
Market driven risks, such as a risk to revenue levels from an ongoing downturn in trade or falling house prices impacting the commercial assumptions on which key assets are acquired
-
Legislative risks, such as the risk of planning/legislative changes driving costs ahead of sales prices and reducing shareholder returns
-
Liquidity risks, both in terms of financing availability and in terms of the Group's ability to sell stock at acceptable prices in a tough market
-
Organisational risk, with additional stresses placed on key individuals or teams as a result of downsizing
Risks are not limited to these and the Group remains intent on continuing to manage risks across all risk dimensions, notwithstanding a worsening commercial risk environment. The principal social, environmental and ethical risks and uncertainties remain the following:
-
Existing land contamination is not identified pre-acquisition
-
Wildlife habitats are not identified resulting in planning difficulties
-
Sustainable development requirements are not addressed, leading to planning delays and the loss of potential efficiencies
-
Failure to design for social inclusion, and for use of appropriate materials
-
Environmental pollution occurs on a construction site and is not swiftly controlled
-
Health and safety standards are breached, leading to injury
-
A significant environmental, health and safety, social or ethical event impacts on the Group's reputation or Brand
The importance of risk assessment is that it allows the Group to reflect on what might happen, and how the adverse impact of events can be mitigated. In all the areas that the Group regards as potential risks, the Group has reviewed the likelihood and impact of a problem occurring and has identified suitable controls and processes to manage, monitor and mitigate these risks. Now, more than ever, it is important to recognise that the trading environment remains highly uncertain, with unprecedented developments in financial markets having a profound impact on the risks that the Group faces.
Neil Cooper
Group Finance Director
Statement of directors' responsibilities
We confirm that to the best of our knowledge:
-
the Group and Parent Company financial statements in this report and in the full Annual Report and Accounts, which have been prepared in accordance with IFRS as adopted by the EU, IFRIC interpretation and those parts of the Companies Act 1985 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and of the Group taken as a whole; and
-
the management report contained in this report includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties they face.
For and on behalf of the Board
David Ritchie
Chief Executive
Neil Cooper
Finance Director
Bovis Homes Group PLC
Group income statement
|
For the year ended 31 December 2008 |
Before exceptional items |
|
Exceptional items |
|
Continuing operations |
|
|
|
|
|
2008 |
|
2008 |
|
2008 |
|
2007 |
|
|
|
£000 |
|
£000 |
|
£000 |
|
£000 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue - continuing operations |
282,326 |
|
- |
|
282,326 |
|
555,702 |
|
|
Cost of sales |
(219,011 |
) |
(76,487 |
) |
(295,498 |
) |
(382,659 |
) |
|
Gross profit / (loss) |
63,315 |
|
(76,487 |
) |
(13,172 |
) |
173,043 |
|
|
Administrative expenses |
(42,018 |
) |
(16,641 |
) |
(58,659 |
) |
(48,653 |
) |
|
Operating profit / (loss) before financing costs |
21,297 |
|
(93,128 |
) |
(71,831 |
) |
124,390 |
|
|
Financial income |
1,389 |
|
- |
|
1,389 |
|
6,158 |
|
|
Financial expenses |
(8,292 |
) |
- |
|
(8,292 |
) |
(6,962 |
) |
|
Net financing costs |
(6,903 |
) |
- |
|
(6,903 |
) |
(804 |
) |
|
Profit / (loss) before tax |
14,394 |
|
(93,128 |
) |
(78,734 |
) |
123,586 |
|
|
Income tax |
(3,319 |
) |
23,058 |
|
19,739 |
|
(36,727 |
) |
|
Profit / (loss) for the period attributable to equity holders of the parent |
11,075 |
|
(70,070 |
) |
(58,995 |
) |
86,859 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings/(loss) per ordinary share |
9.2p |
|
(58.3p |
) |
(49.1p |
) |
72.4p |
|
|
Diluted earnings/(loss) per ordinary share |
9.2p |
|
(58.3p |
) |
(49.1p |
) |
72.2p |
|
Bovis Homes Group PLC
Group balance sheet
|
At 31 December 2008 |
|
|
2008 |
|
2007 |
|
|
|
|
|
£000 |
|
£000 |
|
|
|
|
|
|
|
Restated |
|
|
Assets |
|
|
|
|
|
|
|
Goodwill |
|
|
- |
|
10,036 |
|
|
Property, plant and equipment |
|
|
12,347 |
|
14,451 |
|
|
Available for sale financial assets |
|
|
6,030 |
|
1,085 |
|
|
Investments |
|
|
22 |
|
22 |
|
|
Deferred tax assets |
|
|
5,548 |
|
3,568 |
|
|
Trade and other receivables |
|
|
2,418 |
|
2,589 |
|
|
Retirement benefit asset |
|
|
- |
|
1,010 |
|
|
Total non-current assets |
|
|
26,365 |
|
32,761 |
|
|
Inventories |
|
|
780,808 |
|
869,355 |
|
|
Trade and other receivables |
|
|
37,947 |
|
52,725 |
|
|
Cash |
|
|
11,634 |
|
346 |
|
|
Current tax assets |
|
|
23,550 |
|
- |
|
|
Total current assets |
|
|
853,939 |
|
922,426 |
|
|
Total assets |
|
|
880,304 |
|
955,187 |
|
|
Equity |
|
|
|
|
|
|
|
Issued capital |
|
|
60,497 |
|
60,415 |
|
|
Share premium |
|
|
157,127 |
|
156,734 |
|
|
Retained earnings |
|
|
414,654 |
|
506,594 |
|
|
Total equity attributable to equity holders of the parent |
|
|
632,278 |
|
723,743 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Bank loans |
|
|
111,730 |
|
25,000 |
|
|
Trade and other payables |
|
|
24,907 |
|
28,816 |
|
|
Retirement benefit obligations |
|
|
6,790 |
|
- |
|
|
Provisions |
|
|
1,623 |
|
1,463 |
|
|
Total non-current liabilities |
|
|
145,050 |
|
55,279 |
|
|
Bank overdraft |
|
|
- |
|
3,588 |
|
|
Bank loans |
|
|
- |
|
16,000 |
|
|
Trade and other payables |
|
|
101,964 |
|
142,291 |
|
|
Provisions |
|
|
1,012 |
|
500 |
|
|
Current tax liabilities |
|
|
- |
|
13,786 |
|
|
Total current liabilities |
|
|
102,976 |
|
176,165 |
|
|
Total liabilities |
|
|
248,026 |
|
231,444 |
|
|
|
|
|
|
|
|
|
|
Total equity and liabilities |
|
|
880,304 |
|
955,187 |
|
These accounts were approved by the board of Directors on 6 March 2009 and were signed on its behalf: D Ritchie and N Cooper, Directors.
Bovis Homes Group PLC
Group statement of cash flows
|
For the year ended 31 December 2008 |
|
|
2008 |
|
2007 |
|
|
|
|
|
£000 |
|
£000 |
|
|
|
|
|
|
|
Restated |
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
(Loss) / profit for the year |
|
|
(58,995 |
) |
86,859 |
|
|
Depreciation |
|
|
1,168 |
|
1,421 |
|
|
Impairment of goodwill |
|
|
10,036 |
|
- |
|
|
Impairment of assets |
|
|
2,241 |
|
- |
|
|
Financial income |
|
|
(1,389 |
) |
(6,158 |
) |
|
Financial expense |
|
|
8,292 |
|
6,962 |
|
|
Profit on sale of property, plant and equipment |
|
|
(146 |
) |
(43 |
) |
|
Equity-settled share-based payment (credit) / expense |
|
|
(22 |
) |
133 |
|
|
Income tax (credit) / expense |
|
|
(19,739 |
) |
36,727 |
|
|
Write-down of inventories |
|
|
75,202 |
|
- |
|
|
Other non-cash items |
|
|
- |
|
996 |
|
|
Operating profit before changes in working capital and provisions |
|
|
16,648 |
|
126,897 |
|
|
|
|
|
|
|
|
|
|
Decrease / (increase) in trade and other receivables |
|
|
8,924 |
|
(29,821 |
) |
|
Decrease / (increase) in inventories |
|
|
13,345 |
|
(42,195 |
) |
|
Decrease in trade and other payables |
|
|
(43,444 |
) |
(44,149 |
) |
|
Increase / (decrease) in provisions and employee benefits |
|
|
702 |
|
(1,671 |
) |
|
Cash generated from operations |
|
|
(3,825 |
) |
9,061 |
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
|
(8,769 |
) |
(4,812 |
) |
|
Income taxes paid |
|
|
(16,924 |
) |
(39,052 |
) |
|
Net cash from operating activities |
|
|
(29,518 |
) |
(34,803 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
Interest received |
|
|
187 |
|
5,420 |
|
|
Acquisition of property, plant and equipment |
|
|
(143 |
) |
(879 |
) |
|
Proceeds from sale of plant and equipment |
|
|
214 |
|
106 |
|
|
Acquisition of subsidiary net of cash acquired |
|
|
- |
|
(73,304 |
) |
|
Net cash from investing activities |
|
|
258 |
|
(68,657 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
Dividends paid |
|
|
(27,049 |
) |
(44,990 |
) |
|
Proceeds from the issue of share capital |
|
|
475 |
|
1,367 |
|
|
Drawdown of borrowings |
|
|
79,000 |
|
1,000 |
|
|
Costs associated with refinancing |
|
|
(8,290 |
) |
- |
|
|
Net cash from financing activities |
|
|
44,136 |
|
(42,623 |
) |
|
|
|
|
|
|
|
|
|
Net increase / (decrease) in cash and cash equivalents |
|
|
14,876 |
|
(146,083 |
) |
|
Cash and cash equivalents at 1 January |
|
|
(3,242 |
) |
142,841 |
|
|
Cash and cash equivalents at 31 December |
|
|
11,634 |
|
(3,242 |
) |
Bovis Homes Group PLC
Group statement of recognised income and expense
|
For the year ended 31 December 2008 |
|
|
2008 |
|
2007 |
|
|
|
|
|
£000 |
|
£000 |
|
|
|
|
|
|
|
|
|
|
Effective portion of changes in fair value of interest rate cash flow hedges |
- |
|
160 |
|
||
|
Deferred tax on changes in fair value of interest rate cash flow hedges |
- |
|
(48 |
) |
||
|
Actuarial (loss) / gain on defined benefits pension scheme |
(8,820 |
) |
3,750 |
|
||
|
Deferred tax on actuarial movements on defined benefits pension scheme |
2,470 |
|
(1,325 |
) |
||
|
Current tax on share-based payments recognised directly in equity |
498 |
|
- |
|
||
|
Deferred tax on other employee benefits |
(22 |
) |
(790 |
) |
||
|
Net (expense) / income recognised directly in equity |
(5,874 |
) |
1,747 |
|
||
|
(Loss) / profit for the period |
(58,995 |
) |
86,859 |
|
||
|
Total recognised income and expense for the period attributable to equity holders of the parent |
(64,869 |
) |
88,606 |
|
||
Notes to the financial statements
Bovis Homes Group PLC (the 'Company') is a company domiciled in the United Kingdom. The consolidated financial statements of the Company for the year ended 31 December 2008 comprise the Company and its subsidiaries (together referred to as the 'Group') and the Group's interest in associates.
The financial statements were authorised for issue by the directors on 6 March 2009. The accounts were audited by KPMG Audit Plc.
The financial information included within this statement does not constitute the Company's statutory accounts for the year ended 31 December 2007 or 2008. The information contained in this statement has been extracted from the statutory accounts of Bovis Homes Group PLC for the year ended 31 December 2008, which have not yet been filed with the Registrar of Companies, on which the auditors have given an unqualified audit report, not containing statements under section 237(2) or (3) of the Companies Act 1985.
1. Statement of compliance
The consolidated financial statements of the Company and the Group have been prepared in accordance with International Financial Reporting Standards as adopted by the EU (adopted IFRS) and its interpretations as adopted by the International Accounting Standards Board (IASB). On publishing the Company financial statements in the Group's full Report and Accounts together with the Group financial statements, the Company is taking advantage of the exemption in s230 of the Companies Act 1985 not to present its individual income statement and related notes that form a part of these approved financial statements.
2. Basis of preparation
The financial statements are prepared on the historical cost basis except for derivative financial instruments, available for sale assets and certain items of inventory which are stated at their fair value.
The preparation of financial statements in conformity with adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
Judgements made by management in the application of adopted IFRSs that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 31 of the full Annual Report and Accounts, available from the Group's website.
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. The accounting policies have been applied consistently to the Company and the Group where relevant.
3. Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group's share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence commences until the date that significant influence ceases.
4. Accounting policies
Business combinations
The purchase method of accounting is used to account for the acquisition of subsidiary undertakings by the Group. The cost of or consideration for an acquisition is measured as the fair value of the assets given and liabilities taken on or assumed in return for the acquisition plus costs directly attributable to the acquisition. On acquisition, identifiable assets and liabilities are measured initially at fair value, with any excess of consideration being recognised as goodwill. Accounting policies of subsidiary undertakings have been changed where necessary to ensure consistency with those adopted by the Group.
Revenue
Revenue is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the purchaser. Revenue comprises the fair value of the consideration received or receivable, net of value-added tax, rebates and discounts. Revenue in respect of the sale of residential properties and land is recognised at the fair value of the consideration received or receivable on legal completion of the sale transaction. Revenue does not include the value of the onward legal completion of properties accepted in part exchange against a new property. The net gain or loss arising from the legal completion of these part exchange properties is recognised in cost of sales.
Rental income is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.
Operating leases
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Lease incentives received are recognised as an integral part of the total lease expenditure.
Net financing costs
Net finance costs comprise:
-
interest payable on borrowings, including any premiums payable on settlement or redemption and direct issue costs, accounted for on an accrual basis to the income statement using the effective interest method;
-
interest receivable on funds invested accounted for on an accrual basis to the income statement using the effective interest method;
-
dividend income recognised on the date the right to receive payments is established;
-
imputed interest on available-for-sale financial assets and on deferred terms land payables;
-
pension finance costs or benefits being the net of interest costs on liabilities and expected return on assets linked to the Defined Benefit Scheme; and
-
gains and losses on hedging instruments that are recognised in the income statement.
Finance costs are included in the measurement of borrowings at their amortised cost to the extent that they are not settled in the period in which they arise.
Taxation
Income tax comprises the sum of the tax currently payable or receivable and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
The tax currently payable or receivable is based on taxable profit or loss for the year and any adjustment to tax payable or receivable in respect of previous years. Taxable profit or loss differs from net profit or loss as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability or asset for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from non-tax deductible goodwill, from the initial recognition of assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit, and from differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to reserves, in which case the deferred tax is also dealt with in reserves.
Derivative financial instruments and hedge accounting
The Group's activities expose it primarily to the financial risks of changes in interest rates. The Group uses interest rate swap contracts where deemed appropriate to hedge these exposures. The Group does not use derivative financial instruments for speculative purposes. The use of financial derivatives is governed by the Group's policies approved by the Board of directors, which provide written principles on the use of financial derivatives.
Derivative financial instruments are recognised at fair value. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account interest rates and the current creditworthiness of the swap counterparties.
Where the derivative instrument, typically an interest rate swap, is deemed an effective hedge over the exposure being hedged, the derivative instrument is treated as a cash flow hedge and hedge accounting applied. Under a cash flow hedge, gains and losses on the effective portion of the change in the fair value of the derivative instrument are recognised directly in equity.
Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting and any ineffectiveness in the hedge relationship are recognised in the income statement as they arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in reserves is retained in reserves until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in reserves is transferred to net profit or loss for the period.
Goodwill
Where the fair value of consideration paid for an acquisition exceeds the fair value of the net assets acquired, the excess is recognised as goodwill arising on consolidation and is capitalised as an asset. Once capitalised, this asset is reviewed for impairment on an annual basis with any impairment arising requiring immediate recognition in the income statement.
For the purpose of impairment testing, goodwill is allocated to each of the cash-generating units of the Group at acquisition. Cash-generating units to which goodwill has been allocated are tested for impairment at least annually. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then, where appropriate, to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. Any impairment is recognised immediately in the income statement and is not subsequently reversed.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Certain property that had been revalued to fair value on or prior to 1 January 2004, the date of transition to adopted IFRS, are measured on the basis of deemed cost, this being the revalued amount at the date of that revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Regular reviews of the carrying values of property are completed to assess any impairment in value. When impairment is identified, the asset's recoverable amount is assessed and any shortfall is written off through the income statement.
Depreciation is charged so as to write off the cost less residual value (which is reassessed annually) of assets over their estimated useful lives. Depreciation is charged on property in respect of the value of the building. Land is not depreciated. The basis of depreciation for each class of asset is as follows:
|
• |
Buildings |
straight line over 50 years |
|
• |
Plant and machinery |
33.3% reducing balance |
|
• |
Computer equipment |
straight line over 3 years |
|
• |
Office equipment |
25% reducing balance |
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.
Fixed asset investments
Investments in subsidiaries are carried at cost less impairment. Following the issue of IFRIC11 in 2007, the Parent Company accounts for the share-based payments granted to subsidiary employees as an increase in the cost of its investment in subsidiaries.
Trade receivables
Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads, not including any general administrative overheads, that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated net selling price less estimated total costs of completion of the finished goods.
Land held for development, including land in the course of development until legal completion of the sale of the asset, is initially recorded at cost. Where, through deferred purchase credit terms, cost differs from the nominal amount which will actually be paid in settling the deferred purchase terms liability, no adjustment is made to the cost of the land, the difference being charged as a finance cost.
Options purchased in respect of land are capitalised initially at cost. Regular reviews are completed for impairment in the value of these options, and provisions made accordingly to reflect loss of value. The impairment reviews consider the period elapsed since the date of purchase of the option given that the option contract has not been exercised at the review date. Further, the impairment reviews consider the remaining life of the option, taking account of any concerns over whether the remaining time available will allow successful exercise of the option. The carrying cost of the option at the date of exercise is included within the cost of land purchased as a result of the option exercise.
Investments in land without the benefit of planning consent, either through purchase of freehold land or non refundable deposits paid on land purchase contracts subject to residential planning consent, are capitalised initially at cost. Regular reviews are completed for impairment in the value of these investments, and provision made to reflect any irrecoverable element. The impairment reviews consider the existing use value of the land and assesses the likelihood of achieving residential planning consent and the value thereof.
Ground rents are held at an estimate of cost based on a multiple of ground rent income, with a corresponding credit created against cost of sales, in the year in which the ground rent first becomes payable by the leasehold purchaser.
Cash and cash equivalents
Cash and cash equivalents comprises cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group's cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
Bank borrowings
Interest-bearing bank loans and overdrafts are initially recorded at fair value, net of direct issue costs, and subsequently at amortised cost. Finance charges are accounted for on an accrual basis to the income statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.
Trade payables
Trade payables on normal terms are not interest bearing and are stated at their nominal value.
Trade payables on extended terms, particularly in respect of land, are recorded at their fair value at the date of acquisition of the asset to which they relate. The discount to nominal value which will be paid in settling the deferred purchase terms liability is amortised over the period of the credit term and charged to finance costs using the effective interest rate method.
Available for sale financial assets
Gains and losses arising from changes in fair value are recognised directly in equity in retained earnings, with the exceptions of impairment losses and interest calculated using the 'effective interest rate' method, which are recognised directly in the income statement. Where the investment is disposed of, or is determined to be impaired, the cumulative gain or loss previously recognised in equity is included in the income statement for the period.
Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Own shares held by ESOP trust
Transactions of the Group-sponsored ESOP trust are included in the Group financial statements. In particular, the trust's purchases of shares in the Company are debited directly to equity through an own shares held reserve.
Employee benefits
The Group accounts for pensions and similar benefits under IAS 19 (Revised): 'Employee benefits'. In respect of defined benefit schemes, the net obligation is calculated by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods, such benefits measured at discounted present value, less the fair value of the scheme assets. The discount rate used to discount the benefits accrued is the yield at the balance sheet date on AA credit rated bonds that have maturity dates approximating to the terms of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit method. The operating and financing costs of such plans are recognised separately in the income statement; service costs are spread systematically over the lives of employees and financing costs are recognised in the periods in which they arise. All actuarial gains and losses are recognised immediately in the statement of recognised income and expense.
Payments to defined contribution schemes are charged as an expense as they fall due.
Share-based payments
The Group has applied the requirements of IFRS2: 'Share-based payments'. In accordance with the transitional provisions of IFRS1, IFRS2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005.
The Group issues equity-settled share-based payments to certain employees in the form of share options over shares in the Parent Company. Equity-settled share-based payments are measured at fair value at the date of grant calculated using an independent option valuation model, taking into account the terms and conditions upon which the options were granted. The fair value is expensed on a straight line basis over the vesting period, based on the Group's estimate of shares that will eventually vest, with a corresponding credit to equity.
Segment reporting
A segment is a distinguishable component of the Group that is engaged either in providing products and services (business segment), or in providing products and services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.
As the Group's main operation is that of a housebuilder and it operates entirely within the United Kingdom, there are no separate segments, either business or geographic, to disclose.
Exceptional items
Items that are both material in size and unusual or infrequent in nature are presented as exceptional items in the income statement. The Directors are of the opinion that the separate recording of exceptional items provides helpful information about the Group's underlying business performance. Examples of events that, inter alia, may give rise to the classification of items as exceptional are the restructuring of existing and newly-acquired businesses, gains or losses on the disposal of businesses or individual assets and asset impairments, including currently developable land, work in progress and goodwill.
Restructuring costs
Restructuring costs are recognised in the income statement when the Group has a detailed plan that has been communicated to the affected parties. A liability is accrued for unpaid restructuring costs.
Impact of standards and interpretations in issue but not yet effective
At the date of authorisation of these financial statements there are a number of standards, amendments and interpretations that have been published. All of these have been endorsed by the EU with the exception of the revisions to IAS27, IAS39 and IFRS3, IFRIC12, IFRIC15 and IFRIC16, and are therefore mandatory for the Group's accounting periods beginning on or after 1 January 2009. The Group has not early-adopted any standard, amendment or interpretation.
The standards, amendments and interpretations that are expected to impact upon the Group are:
-
IFRS8 'Operating Segments'. IFRS8 amends the current segmental reporting requirements of IAS14 and requires a 'management approach' to be adopted so that segment information is presented on the same basis as that used for internal reporting purposes. This standard will apply to the Group from the accounting period commencing 1 January 2009 and is not expected to impact upon the Group's current segmental reporting approach.
-
Amendment to IAS23 'Borrowing Costs'. This amendment requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of the asset. The option of immediately expensing these borrowing costs is removed. This amendment will apply to the Group from the accounting period commencing 1 January 2009 and the Group is assessing whether the amendment is applicable to the Group, and if so, its likely effect.
-
IFRIC14 - IAS19 - 'The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their interaction'. IFRIC14 states when refunds or reductions in future contributions can be treated as available under IAS19 and how a minimum funding requirement affects future contributions or may give rise to a liability. This interpretation applies to the Group from the accounting period commencing on 1 January 2009, however the Group anticipates that no additional liabilities will be recognised upon the adoption of IFRIC14.
-
IFRS2 'Share-based Payments (amendment)'. Non-vesting conditions are to be taken into account in the estimate of the fair value of the equity instruments; vesting conditions that are not market conditions are not taken into account. This amendment will apply to the Group from 1 January 2009; its impact is currently being assessed.
-
Revision of IAS1 'presentation of financial statements'. This revision to IAS1 is applicable from 1 January 2009, and is expected to affect the presentation and classification of certain items within the Group's financial statements.
-
Revision of IFRS3 'Business Combinations'. Following this revision, transaction costs must be expensed, rather than included as costs of acquisition, and contingent consideration will require to be fair valued. In addition, there will be a choice of two goodwill measurement methods where less than 100% of the entity is acquired. This revision will apply to the Group from 1 January 2010, and although it will have no impact on implementation, it will have an impact on any future acquisitions.
-
An amendment to IAS39 'Eligible hedged items'. The amendment makes two significant changes. It prohibits designating inflation as a hedgeable component of a fixed rate debt. It also prohibits including time value in the one-sided hedged risk when designating options as hedges. The amendment will apply to the Group from 1 January 2010, and its impact is expected to be minimal until the Group enters into any cash flow hedges.
-
Part 1 of the improvements to IFRS project has a number of smaller amendments to existing IAS and IFRS, which have implementation dates at various points during 2009. The impact of these amendments is currently being assessed.
-
IFRIC15 'Agreements for the construction of real estate'. IFRIC15 provides guidance on whether the construction of real estate should be accounted for under IAS11 or IAS18. The Group already accounts for the construction of real estate in accordance with IFRIC15 and accordingly this interpretation, which is effective from 1 January 2009, will have no impact upon the Group.
The adoption of the following standards, amendments and interpretations are not expected to have any material impact on the financial statements of the Group:
-
lFRIC13 'Customer Loyalty Programmes'. IFRIC13 requires the credits given as part of customer loyalty schemes to be recognised at their fair value as a separate component of revenue. The revenue related to these schemes should only be recognised when the entity's obligations are fulfilled. This interpretation applies to the Group from 1 January 2009.
-
IFRIC16 'Hedges of a net investment in a foreign operation'. IFRIC 16 guides an investing company on the designation of, and accounting for, hedges in foreign operations. This interpretation will apply to the Group from 1 January 2009.
-
Amendments to IAS32 'Financial Instruments: Presentation' and IAS1 'Presentation of financial statements for certain puttable financial instruments and obligations arising on liquidation' require some financial instruments that meet the definition of a financial liability to be classified as equity, where certain strict criteria are met. These amendments will apply to the Group from 1 January 2009.
-
IAS27 (revised) 'Consolidated and separate financial statements'. The amendments relate, primarily, to accounting for non-controlling interests and the loss of control of a subsidiary, and will apply to the Group from 1 January 2010.
5. Prior year restatement
In 2007, the cashflow statement movement in trade and other payables was understated by £4,630,000 and the movement in provisions and employee benefits was overstated by an equal and opposite amount. In the 2008 Report and Accounts, in the prior year cashflow statement comparatives, the movement in trade and other payables is now £44,149,000 (previously £39,519,000) and the movement in provisions and other employee benefits is now £1,671,000 (previously £6,301,000).
Finalisation of the fair valuation exercise arising on acquisition of Elite Homes Group Ltd in 2007 has now taken place. This has had the effect of increasing goodwill arising on acquisition as at 31 December 2007 from the previously reported £9,176,000 to £10,036,000, reducing inventories to £869,355,000 (previously reported £870,550,000) and increasing deferred tax to £3,568,000 (previously £3,233,000).
6. Exceptional items
Write-down of inventories
The Group has reviewed the carrying costs of its inventory items, comparing the carrying costs of the asset against estimates of net realisable value. Net realisable value has been arrived at using the Board's estimates of achievable selling prices taking into account current market conditions, and after deduction of an appropriate amount for selling costs. This has given rise to a land write-down totalling £69.9 million and a write-down of £5.3 million on unsold part-exchange properties: a provision of £75.2 million in total.
Impairment of goodwill
At 31 December 2008 the Group conducted an impairment review of its goodwill. This resulted in a £10.0 million write-down, reflecting the write-off of all goodwill held at the balance sheet date.
Restructuring costs
During the year ended 31 December 2008 the Group incurred £5.7 million (2007: £nil) of costs in relation to reorganising and restructuring the Group. Of this total, £4.6 million related to staff redundancies.
Other exceptional items
The Group has reviewed the carrying value of its fixed assets, and has made a £1.0 million provision to reflect the impairment to carrying values of its freehold offices following a fall in commercial property values during 2008. The Group has also taken an impairment charge to income relating to the impairment of its available-for-sale financial assets, totalling £1.2 million.
7. Earnings or Loss per share
Basic earnings per ordinary share before exceptional items for the year ended 31 December 2008 is calculated on profit after tax of £11,075,000 (year ended 31 December 2007 profit: £86,859,000) over the weighted average of 120,268,986 (year ended 31 December 2007: 119,984,811) ordinary shares in issue during the period.
Basic loss per ordinary share on exceptional items for the year ended 31 December 2008 is calculated on an exceptional loss after tax of £70,070,000 for 2008 (2007: £nil) over the weighted average of 120,268,986 (year ended 31 December 2007: 119,984,811) ordinary shares in issue during the period.
Basic loss per ordinary share for the year ended 31 December 2008 is calculated on loss after tax of £58,995,000 (year ended 31 December 2007 profit: £86,859,000) over the weighted average of 120,268,986 (year ended 31 December 2007: 119,984,811) ordinary shares in issue during the period.
Diluted earnings per ordinary share before exceptional items for the year ended 31 December 2008 is calculated on profit after tax of £11,075,000 (year ended 31 December profit: £86,859,000) expressed over the diluted weighted average of 120,314,451 (year ended 31 December 2007: 120,244,911) ordinary shares potentially in issue during the period. Diluted loss per ordinary share on exceptional items for the year ended 31 December 2008 is calculated on an exceptional loss after tax of £70,070,000 for 2008 (2007: £nil) and diluted loss per ordinary share is calculated on loss after tax of £58,995,000 (year ended 31 December 2007 profit: £86,859,000) both expressed over the weighted average of 120,268,986 ordinary shares in issue during the period. The average number of shares is diluted in reference to the average number of potential ordinary shares held under option during the period. This dilutive effect amounts to the number of ordinary shares which would be purchased using the aggregate difference in value between the market value of shares and the share option exercise price. The market value of shares has been calculated using the average ordinary share price during the period. Only share options which have met their cumulative performance criteria have been included in the dilution calculation. A loss per share cannot be further reduced through dilution.
8. Dividends
The following dividends were paid by the Group.
|
|
|
|
2008 |
|
2007 |
|
|
|
|
£000 |
|
£000 |
|
|
|
|
|
|
|
|
Prior year final dividend per share of 17.5p (2007: 20.0p) |
|
|
21,031 |
|
23,976 |
|
Current year interim dividend per share of 5.0p (2007: 17.5p) |
|
|
6,018 |
|
21,014 |
|
Dividend cost |
|
|
27,049 |
|
44,990 |
The Board has decided not to propose a final dividend in respect of 2008.
9. Income taxes
Income tax is the expected tax payable or receivable on the taxable income or loss for the year, calculated using a corporation tax rate of 28.5% applied to the pre-tax income or loss, adjusted to take account of deferred taxation movements and any adjustments to tax payable for previous years. Tax receivable for current and prior years is classified as a current asset.
10. Reconciliation of net cash flow to net debt
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
£000 |
|
£000 |
|
|
|
|
|
|
|
|
|
|
Net increase / (decrease) in net cash and cash equivalents |
|
|
14,876 |
|
(146,083 |
) |
|
Drawdown of borrowings after issue costs |
|
|
(70,730 |
) |
(1,000 |
) |
|
Fair value adjustments to interest rate swaps |
|
|
- |
|
160 |
|
|
Net (debt)/cash at start of period |
|
|
(44,242 |
) |
102,681 |
|
|
Net debt at end of period |
|
|
(100,096 |
) |
(44,242 |
) |
|
|
|
|
|
|
|
|
|
Analysis of net debt: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
11,634 |
|
(3,242 |
) |
|
Unsecured bank loan |
|
|
(120,000 |
) |
(41,000 |
) |
|
Issue Costs |
|
|
8,270 |
|
- |
|
|
Net debt |
|
|
(100,096 |
) |
(44,242 |
) |
11. Related party transactions
Transactions between fellow subsidiaries, which are related parties, have been eliminated on consolidation, as have transactions between the Company and its subsidiaries during this period.
Transactions between the Group and key management personnel in the year ending 31 December 2008 were limited to those relating to remuneration, which are disclosed in the Report on directors' remuneration which can be found in the full Report and Accounts available on the Group's website.
Mr Malcolm Harris, a Group Director, is a non-executive Director of the National House Building Council (NHBC), and the Home Builders Federation (HBF). The Group trades in the normal course of business, on an arms-length basis, with the NHBC for provision of a number of building-related services, most materially for provision of warranties on new homes sold and for performance bonding on infrastructure obligations, The Group pays subscription fees and fees for research as required to the HBF.
Total net payments were as follows:
|
|
|
|
2008 |
|
2007 |
|
|
|
|
£000 |
|
£000 |
|
NHBC |
|
|
1,258 |
|
2,346 |
|
HBF |
|
|
92 |
|
119 |
There have been no related party transactions in the current financial year which have materially affected the financial performance or position of the Group, and which have not been disclosed.
12. Capital and reserves
Reconciliation of movement in capital and reserves - Group
|
Attributable to equity holders of the parent |
|||||||||
|
For the year ended 31 December 2008 |
Own shares held* £000 |
Retirement benefit obligations £000 |
Other reserves £000 |
Other retained earnings £000 |
Total retained earnings £000 |
Issued capital £000 |
Share premium £000 |
Hedge reserve £000 |
Total £000 |
|
Balance at 1 January 2007 |
(3,380) |
(11,060) |
1,290 |
475,312 |
462,162 |
60,288 |
155,494 |
(112) |
677,832 |
|
Total recognised income |
|
|
|
|
|
|
|
|
|
|
and expense |
- |
2,425 |
(790) |
86,859 |
88,494 |
- |
- |
112 |
88,606 |
|
Issue of share capital |
- |
- |
- |
- |
- |
127 |
1,240 |
- |
1,367 |
|
Own shares disposed |
422 |
- |
- |
(422) |
- |
- |
- |
- |
- |
|
Share-based payments |
- |
- |
- |
928 |
928 |
- |
- |
- |
928 |
|
Dividends paid to shareholders |
- |
- |
- |
(44,990) |
(44,990) |
- |
- |
- |
(44,990) |
|
Balance at 31 December 2007 |
(2,958) |
(8,635) |
500 |
517,687 |
506,594 |
60,415 |
156,734 |
- |
723,743 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 1 January 2008 |
(2,958) |
(8,635) |
500 |
517,687 |
506,594 |
60,415 |
156,734 |
- |
723,743 |
|
|
|
|
|
|
|
|
|
|
|
|
Total recognised income and expense |
- |
(6,350) |
476 |
(58,995) |
(64,869) |
- |
- |
- |
(64,869) |
|
Issue of share capital |
- |
- |
- |
- |
- |
82 |
393 |
- |
475 |
|
Own shares disposed |
154 |
- |
- |
(154) |
- |
- |
- |
- |
- |
|
Revaluation reserve movement |
- |
- |
(202) |
202 |
- |
- |
- |
- |
- |
|
Share-based payments |
- |
- |
- |
(22) |
(22) |
- |
- |
- |
(22) |
|
Dividends paid to shareholders |
- |
- |
- |
(27,049) |
(27,049) |
- |
- |
- |
(27,049) |
|
Balance at 31 December 2008 |
(2,804) |
(14,985) |
774 |
431,669 |
414,654 |
60,497 |
157,127 |
- |
632,278 |
*Own shares held totalled 643,176 at 31 December 2008 (2007: 678,571).
This information is provided by RNS
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