Bovis homes group plc preliminary results

BOVIS HOMES GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2002 Issued 10 March 2003 The Board of Bovis Homes Group PLC today announced its preliminary results for 2002. · Pre tax profit increased by 30.9% to £104.7 million (2001: £80.0 million) · Earnings per share increased by 28.5% to 63.5p (2001: 49.4p) · Return on average capital employed of 25.1% (2001: 23.0%) · Operating margin of 23.8% (2001: 23.8%) · Plots with planning consent at 10,716 plots (owned: 10,243 plots/controlled: 473 plots) (2001: 10,465 plots (owned: 10,326 plots/controlled: 139 plots)) · Strategic land holdings of 21,841 potential plots (2001: 19,847 potential plots) · Final dividend of 9.4p net per ordinary share making 14.0p for the year, a 10.2% increase over the prior year (4.5 times covered) · Year end net cash in hand of £4.6 million (2001: net borrowings of £57.2 million) Commenting on the results, Malcolm Harris, the Chief Executive of Bovis Homes Group PLC said: "The Group has enhanced shareholder value by delivering a record pre tax profit, a high return on capital employed, increased land investment and positive cash flow. The fundamentals affecting the industry remain sound. Household formation continues to increase above the rate of new housing supply. High levels of employment, low interest rates and an increase in earnings above retail price inflation provide a solid base on which the industry can operate. The Group has commenced 2003 with excellent landholdings, products and processes. Reservations are in line with budget, with sales price improvements. The market, after a quiet start, has returned to a normal seasonal level of activity. Based upon the trading experience to date and an ongoing stable economic environment, the Board anticipates that 2003 will be another successful year." Enquir Malcolm Harris, Chief Results issued Andrew Best / ies: Executive by: Emily Bruning Bovis Homes Group PLC Shared Value Limited on Monday 10 March Tel: 020 7321 5022/5027 Tel: 020 7321 5022/5027 thereafter Tel: 01474 872427 Chairman's statement The Group has achieved a year of record performance. The good results announced at the interim stage were followed by a strong second half year performance, accompanied by positive cash flow and an increase in land held for development. Results Profit on ordinary activities before taxation for the year ended 31 December 2002 increased by 30.9% to £104.7 million, compared with £80.0 million in 2001. This result was achieved from total turnover of £461.3 million, 28.7% greater than the previous year. An expanding part of the Group's business is related to the provision of affordable housing on land owned by third parties. This activity provides early positive cash flow and high return on capital employed. For the first time in the commentaries on the full year results of the Group, the turnover associated with this element of the business, some £8.0 million (2001: £7.0 million), has been separately identified from housing turnover. Housing turnover stood at £445.4 million compared with £334.5 million in 2001. This increase arose primarily from an 11% increase in the volume of legal completions and a 20% increase in average sales price. For the year, the operating margin remained stable with the previous year at 23.8% whilst return on capital employed increased to 25.1%. Basic earnings per share improved by 28.5% to 63.5 pence per ordinary share. Dividend The Board proposes a final dividend for the year ended 31 December 2002 of 9.4 pence to be paid on 23 May 2003 to shareholders on the register at the close of business on 25 April 2003. This dividend, when added to the interim dividend of 4.6 pence paid on 22 November 2002, totals 14.0 pence for the year and is covered 4.5 times by the basic earnings per share of 63.5 pence. The total dividend per share for the year represents an increase of 10.2% over the total dividend for 2001. Market conditions Activity in the housing market during 2002 was strong with well publicised increases in house prices whilst property transactions in England and Wales increased by some 9% to 1.6 million transactions. According to the Office of the Deputy Prime Minister ('ODPM'), new private completions in Great Britain in 2002 increased by 7.6% to 150,800 units. Notwithstanding this increase, many forecasters are predicting a requirement to supply new housing over the next twenty years, in England alone, of some 225,000 homes per annum. Base interest rates at 4.0% remained unchanged during the financial year, and subsequent to the year end have been reduced by 25 basis points. Although house price increases have exceeded earnings growth during 2002 and as a result affordability as measured by the house price/earnings ratio has deteriorated, the competitive mortgage market and low base interest rates have ensured that buying a house with a mortgage remains approximately 39% cheaper than the average mortgage cost over the last twenty years. At the end of the third quarter of 2002, affordability trend indicators reported that first year mortgage interest payments as a percentage of average net earnings for a two income couple was 17%. The same indicator reported 37% for 1990, the highest the indicator has recorded in the last twenty years, coinciding with the housing 'boom' of the late 1980s. The average figure for this indicator between 1983 and 2002 was 19.8%, some 2.8 percentage points higher than the latest published figure. Notwithstanding that the demand versus supply relationship and affordability remain positive for the housing market, much of the resilience in the economy has been fuelled through consumer confidence which remained strong throughout 2002. Understandably, the geopolitical uncertainties in the Middle East have raised fears that consumer confidence may not remain so resilient. Strategy During 2002, the Group advanced its corporate strategy to grow the business organically whilst retaining its strong operating margins. This was, in part, facilitated through the launch of the Northern region which enjoyed a successful first full year of autonomy. The Group has now appointed a Managing Director to run its new Eastern region which will follow the now established regional development model pioneered by Northern. This will ensure that the Eastern region utilises internal services provided by other regions until such time as it reaches critical mass, thus maintaining tight cost control on the administrative overheads of this embryonic region. The expansion plan of the Group will involve further launches of regions, particularly in locations where the Group has a satellite office of an already established region. As always, this expansion will be subject to market conditions. The financial objectives of the Group remain consistent, focusing on achieving strong operating profit margins, above target levels of return on capital employed and attention to sound management of health, safety and environmental matters. The Group has continued to invest in product innovation and research and development into build techniques with a view to enhancing profitability. The Board Further to the reconstitution of the Board on 1 February 2002, positions on the Board have remained unchanged. During 2002, Malcolm Harris continued to lead his executive team and Stephen Brazier became Group Operations Director on 1 February 2002. Previously, Stephen Brazier held the Board position of Regional Chairman. Ron Walford, having notified the Board of his intention to retire, did so effective from 30 June 2002. I would like to express my thanks to Ron Walford for his 30 years' service with the Group and for his wise and meaningful contribution to the Board. David Ritchie was appointed Finance Director effective from 1 July 2002, having previously been employed as the Group's Financial Controller. The three non-executive directors remained unchanged during 2002 including myself as Chairman. Corporate governance The Group continues to be committed to good corporate governance and applies the provisions of the Combined Code. After careful consideration of the Higgs Review (Review of the role and effectiveness of non-executive directors) issued in January 2003, the Group is generally supportive of the re-affirmation of the principles of best practice. However, the Board considers that certain recommendations contained in the report are too formulaic and prescriptive and as a result, if implemented, could lead to a control environment which subordinates the valuable judgement of the Board and a flexible and common sense approach to individual company circumstances. Consequently, the Board is making representations to the relevant authorities outlining its concerns. In raising these concerns, the Board aims to assist in the development of a strong corporate governance culture which in turn will assist the Group in its aim of maximising shareholder return. Employees On behalf of the Board I would like to thank all of our employees. It is only with their commitment, enthusiasm and expertise that the Group has been able to achieve the record profits during 2002. I am pleased that through their hard work our employees have been able to share in the success of the Group, historically by way of the Group's Profit Share Scheme and currently from the recently launched Share Incentive Plan. Many of the Group's employees hold shares in the Company and the strong take up for the Save As You Earn Share Option Scheme means that many employees are saving monthly to acquire shares. This will enable our employees to participate further in the future of the Company. At the 2002 Annual General Meeting the Company passed a resolution approving and adopting a Share Incentive Plan. This plan has been launched and will allow the award of shares in the Company to employees based on performance. It will also provide employees with an opportunity to purchase shares in the Company each month. Prospects The housing market in 2002 witnessed a period of strong growth both in activity and in sales prices. It is unlikely that the growth in sales prices, reported by the Halifax for the year to December 2002 at 26.4%, will be repeated in 2003. A period of sales price growth more in line with earnings growth is expected and would most likely return a sense of stability to the housing market. The fundamentals of the housing market are sound with demand in the areas in which the Group operates exceeding supply and affordability remaining positive. Underlying retail price inflation in 2003 is expected to be benign, at or around the Government's target rate of 2.5%. This will support continued interest rate stability such that the cost of mortgage finance should not adversely affect affordability during 2003. The Group's strategy is to offer good value housing in locations close to large conurbations within easy commuting distance and along strong employment corridors. The Group has no current developments in central London and monitors closely investment levels within the M25. This approach, established by the Group some years ago, minimises its exposure to changes in the housing market. The Group's trading experience to date in 2003 suggests that the housing market will be less buoyant than in 2002 but that demand in the sectors in which the Group specialises will remain firm and that prices will continue to rise. Nigel Mobbs Chairman Chief Executive's operational review Trading environment 2002 witnessed a stable economic environment with the base interest rate remaining at 4.0% throughout the year, high levels of employment and an average increase in earnings of 3.7%. This resulted in an improved level of consumer confidence. According to HM Land Registry, UK total property transactions were at the highest level since 1989 and it reported average price increases for the year ended 31 December 2002 for all properties of 22.2% broken down with new homes increasing by 13.5% and older properties increasing by 22.9%. This compared with an average increase of 26.4% for all properties as published by the Halifax and of 25.3% by the Nationwide. Looking over a twenty year period the average increase in house prices, as reported by the Halifax, was 6.8% compared with average earnings increases of 6.1%. Taking into account the value added through home extensions, loft conversions, refurbishment, conservatories and other value added items, it would appear that the average increase in house prices was broadly in line with the increase in earnings over this twenty year period. When comparing the combination of low interest rates, earnings growth and average sales price rises, the real cost of mortgages was approximately 39% cheaper during 2002 than the average cost over the last twenty years and in most areas of the country it was cheaper to buy than to rent. Group performance Operating in a good housing market the Group delivered an excellent performance with all segments of the business increasing their profit compared with the previous year. The overall result was the achievement of a record profit before taxation of £104.7 million, over 30% up on 2001. The return on average capital employed increased to 25.1%. Legal completion volumes improved by 10.7% to 2,556 homes. In addition, the Group legally completed 135 dwellings constructed on third party owned land. Positive cash flow was generated, resulting in a small net cash in hand position at the year end, albeit that additional investment was made in the Group's consented landholdings which increased to 10,716 controlled plots (including 473 plots of third party owned land). The Group also made significant further investment in its strategic landholdings which closed the year at 21,841 potential plots. The Group's average house sales price at £174,300 increased by 20.3% compared with 2001. After taking account of an 11.5% increase in the average size of unit to 1,186 square feet, sales price per square foot, net of incentives, increased by 8.1%. The large increase in average unit size was as a result of the additional contribution from the Group's range of three storey townhouses and room in the roof homes which are now an integral part of the Group's product range. By comparison construction costs increased by 7.0% including specification upgrades and increases in taxation relating to aggregate tax, landfill tax and climate change levy. Product mix and average sales price Year ended 31 December 200 2001 2 % Unit Averag % Unit Avera s e s ge House type sales sales price price £ £ Two bedroom 10 271 108,30 17 420 97,10 0 0 Three bedroom 33 887 148,10 26 636 118,6 0 00 Four bedroom 27 728 186,60 34 834 165,4 0 00 Five or more bedroom 17 442 273,30 8 200 275,7 0 00 Retirement Living 4 114 172,80 5 110 160,2 0 00 Group (exc. partnership housing) 2,44 179,00 2,20 148,6 2 0 0 00 Partnership housing 4 114 73,600 5 109 69,60 0 Group (exc. third party owned land 2,55 174,30 2,30 144,9 units) 6 0 9 00 Third party owned land units 5 135 59,300 5 120 58,70 0 Group 100 2,69 168,50 10 2,42 140,6 1 0 0 9 00 Regional performance Unit completions and average sales price Year ended 31 December 2002 2001 Unit Average Units Averag s e sales sales price price £ £ Central 660 191,900 { 7 150,00 Northern 244 134,100 { 6 0 9 South East 894 185,800 839 152,50 0 South West 644 155,500 591 124,50 0 Retirement Living 114 172,800 110 160,20 0 Group (exc. third party owned land 2,55 174,300 2,309 144,90 units) 6 0 Third party owned land units 135 59,300 120 58,700 Group 2,69 168,500 2,429 140,60 1 0 All regions achieved a year on year increase in respect of volume and profit. The new Northern region commenced operating independently from the Central region with effect from 1 January 2002. In its first year as a separate business it achieved 244 legal completions which compared with 156 legal completions reported within Central region's results in 2001. The legal completions achieved on third party owned land were predominantly contributed by South West region with 116 legal completions. The balance of 19 units arose in South East region. Operating margins Year ended 31 December 200 200 2 1 % % Central 31. { 26 Northern 1 { .4 17. 5 South East 22. 25. 2 1 South West 18. 16. 3 9 Retirement Living 29. 25. 5 6 Group 23. 23. 8 8 The operating margin for Northern region, shown separately for the first time, demonstrates a good performance as the results of the region have not been derived from selling houses on strategically sourced land and the region has absorbed a full overhead. The South East region's operating margin was lower in 2002 compared with 2001 due to a reduction of legal completions arising from strategic sourced land compared with the previous year. A number of sites where planning consent had been delayed have now received consent, which will provide the region with the opportunity to increase its operating margin in 2003. The South West region's figures included the 116 legal completions which were built on third party owned land. The operating profit margins from this area of the business are lower than from traditional private sector sales. However, it provides early positive cash flow and a high return on average capital employed. Land and planning Consented land bank Total plots as at 31 December 2002 2001 Plots Plots Central 2,628 { 4,288 Northern 1,324 { South East 3,458 3,470 South West 2,514 2,200 Retirement Living 319 368 Group (exc. third party owned 10,243 10,326 land plots) Third party owned land plots South West 473 116 South East - 23 Group 10,716 10,465 Years' supply based upon legal completions in 4.0 4.5 the year (exc. third party owned land plots) Years' supply based upon legal completions in 4.0 4.3 the year (inc. third party owned land plots) The cost and time period involved in processing planning applications has again increased in 2002. The major problem that exists is with the process rather than the planning framework. The reduction in resources within many local authority planning and legal departments creates delays. Hopefully this will be re-balanced following substantial further increases in planning application costs. Despite these difficulties the Group once again managed to increase its landholdings with planning consent to 10,716 plots as at 31 December 2002 which represented approximately 4 years' supply based upon 2002 legal completion levels. The average plot cost of the consented land bank (excluding partnership housing) was £39,000 which represented 21.8% of the average sales price in the year of £179,000 (excluding partnership housing). The plots held with consent as at 31 December 2002 are anticipated to generate a high average sales price as new products are developed in prime locations. The strategic landholdings as at the end of the financial year increased to 21,841 potential plots after transferring 459 plots from strategic land to consented land during the year at an average 33% discount to market value. A large number of strategic holdings are now at an advanced planning stage. We are therefore hopeful of an increase in the transfer of plots to consented land during 2003 and 2004. Legal completions originating from strategic land contributed 39% (2001: 52%) of the Group's development profit in the year, and 33% (2001: 28.0%) of the legal completions in the year were built on previously used land. Strategic land bank Total potential plots as at 31 2002 2001 December Plots Plots Central 3,582 { 4, Northern 597 { 10 3 South East 11,067 11,259 South West 6,472 4,485 Retirement Living 123 - Group 21,841 19,847 Years' supply based upon 8.1 8.2 completions in the year Included in strategic land holdings are 10,843 potential plots in strategic "growth locations". Growth locations are areas designated for development within draft or adopted development plans by local, county or unitary planning authorities. Total potential plots as at 31 2002 2001 December Plots Plots Central 1,309 { 1, Northern 227 { 50 7 South East 5,151 5,334 South West 4,033 1,486 Retirement Living 123 - Group 10,843 8,327 Further to the publication of Planning Policy Guidance Note 3 (PPG3) the Group has invested in potential re-development sites, a number of which are allocated for residential use in current Development Plans and on which the Group anticipates receiving planning consent in the short to medium term. Research and development The Group undertakes continuous reviews of all of its activities with an objective of achieving a safe working environment whilst maximising efficiency and profitability. In addition to process reviews, an extensive research and development programme is underway relating to site based activities, the objective of which is to: · achieve construction in all weather conditions; · attain consistent high quality; · maximise mechanical handling and use of factory finished components; · minimise waste by utilising lean, efficient construction techniques; · develop multi-skilled team working and new trade sequencing; · achieve partnering agreements involving suppliers, skilled tradesmen, industry bodies and Government, to develop new products and methods of operating. During 2002 further progress has been made by the Group through increased usage of pre-assembled and pre-finished components. The results are shown in the table below. Component usage Averag Target Averag e e total total Year Year Year 2001 2002 2002 Factory pre-finished, pre-glazed 87% 95% 94% windows Factory pre-finished soffits, fascias, 87% 95% 96% barge boards Factory pre-assembled, pre-finished 98% 99% 97% GRP porches Factory pre-assembled, pre-finished 46% 81% 85% GRP dormers Factory assembled pre-glazed external 81% 99% 99% steel doorsets Factory assembled internal doorsets 16% 62% 65% Factory assembled pre-glazed cassette 71% 88% 82% doorsets Factory assembled pre-glazed external 77% 92% 96% feature doorsets Factory pre-finished garage doors 100% 100% 100% Factory pre-fabricated engineered 62% 91% 93% joist sets Factory finished radiators 100% 100% 100% Factory pre-assembled stair 98% 100% 99% parts/balusters New technology snap fit plumbing 82% 97% 99% Factory pre-plumbed thermal store 82% 91% 95% cylinders Due to the above stated components now being specified in respect of all new developments, the objective set of increased usage of pre-assembled and pre-finished components has now been achieved. The Group is participating in a number of research projects with the Building Research Establishment and has recently embarked upon a Partners In Innovation (P.I.I.) project: "Adding Value to UK Timber". Bovis Homes has, during 2002, participated in the much publicised ZETHUS project (Zone for education and training in housing using systems) which is designed to publicly exhibit innovative technology. Bovis Homes erected the first demonstration unit on the project campus utilising innovative construction materials and production techniques involving thin joint aircrete construction, brick slip cladding systems, solid walling, 'Tilebricks' and large format storey height aircrete wall panels and aircrete stair parts, together with a high degree of factory pre-assembled, pre-finished components. The unit is now nearing completion and other exhibitors are due to commence construction on site shortly. Partnership Developments Bovis Homes Partnership Developments is actively involved with housing associations, local authorities and other similar bodies providing quality new homes at affordable prices, for either rent or shared ownership, to communities throughout the country. The Group has total in-house capability to handle all aspects of each project including major regeneration schemes. In addition to design and build, there exists expertise to provide cross subsidies from the development and sale of open market housing and commercial buildings. Health, safety and environment Best practice in health, safety and environmental awareness and management is an important element in the continuing success of the Group. The objective is to maintain the highest practical levels of health and safety and effective environmental policies. The Health, Safety and Environmental Consultative Committee oversees these important matters, formulating and promulgating policy to all stakeholders. The Committee is chaired by a Bovis Homes Limited director by annual rotation to ensure that fresh ideas and initiatives are constantly introduced, assessed and, where appropriate, implemented on a consistent basis. He is supported by a committee comprising Group employees from numerous disciplines complemented by the Health and Safety Director and external independent professional advisers. He reports formally to the Board through submission of a Health and Safety report tabled at each Board meeting. Bovis Homes promotes all aspects of safety and environmental management throughout its operations in the interests of all stakeholders. Its record of success was once again recognised in 2002 with the Gold Medal Award from the Royal Society for the Prevention of Accidents and the National Award from the British Safety Council. Further details are available in the Group's free-standing Corporate Social Responsibility Report. Bovis Homes' objective is to achieve sustainable construction and reduce environmental impact. The Group seeks to protect and, wherever possible, improve the environment by retaining mature landscaping and introducing new planting and habitats. It is also committed to planning for the most efficient and effective use of development land. The Group has introduced higher density properties with flexible accommodation which addresses the changing lifestyles of its customers, including the ability to work from home. The Group has issued to employees an Environmental Management Manual containing the Environmental Policy, Environmental Effects Document and Best Practice Checklists. It is a comprehensive approach consolidating policies, procedures and systems, explaining how all employees can assist the Group in achieving its environmental aims and make a positive contribution to the environment. Legislation No improvement in the planning system was witnessed during 2002. A continuing lack of resources within many local authorities prevented the efficient processing of applications. Despite a substantial increase in planning application costs, which were initiated to fund additional staffing within both the planning and legal departments of local authorities, to date only the imposition of further costs, with no benefits, has transpired. The Planning and Compulsory Purchase Bill and the new Communities Bill are currently before Parliament and time will tell as to whether improvements will emanate from such legislation. The housebuilding industry continues to be adversely affected by increased taxes levied by Government. Aggregate tax A new levy on aggregate materials of £1.60 per tonne was introduced in April 2002 which added considerable cost to all infrastructure, roads and sewers as well as general construction costs. Landfill tax The active waste tax was increased by a further £1.00 per tonne during 2002 and further increases are proposed for 2003 and 2004. Climate change levy Additional taxes have been imposed on electricity, gas, liquefied petroleum gas and solid fuels. Stamp duty All significant land purchases attract stamp duty at 4.0% and the majority have a non recoverable VAT element of 17.5% added. This is in addition to the stamp duty that purchasers pay upon legal completion of the home. Employee costs Employee and employer National Insurance costs will rise from 1 April 2003 adding an additional 1.0% to the cost of employment. Pension schemes Historical changes in the taxation treatment of pension schemes have imposed a considerable burden on the Group regarding contribution rates. Further adverse tax changes for pension schemes are currently being promulgated by the Inland Revenue which could add additional burdens. Group structure A framework is in existence to enable Group expansion. The new Northern region, based at Wilmslow, was established as a separate operation with effect from 1 January 2002 and a new Eastern region, operating from Cambourne, near Cambridge, was created with effect from January 2003. Initially this new region will utilise facilities and services available from existing regions. Central region relocated to their new purpose built offices at Coleshill, near Birmingham, in the summer of 2002 achieving an improvement in operating efficiency, reduced running costs and a net cash saving resulting from the sale proceeds of Castle Bromwich Hall compared with the freehold cost of the new office. Employees Bovis Homes is a people business and I would like to thank all our employees for their contribution during the year. It is essential that the right individuals are recruited, trained and motivated. The objective is to ensure that the Group employs the highest calibre of employees who add value to the business and are sensitive to the demands and requirements of the Group's customers whilst having the entrepreneurial drive and flair to move the operation forward without compromising sound corporate governance. Outlook for 2003 The fundamentals affecting the industry remain sound. Household formation is increasing annually above the rate of new housing supply. High levels of employment, low interest rates and an increase in earnings above retail price inflation provide a solid base on which the industry can operate. The Group has commenced the new year with good landholdings, an excellent product range, efficient processes and a good sales position. The Group continues to be led by a capable management team who are supported by able, experienced and enthusiastic employees. The combined team have a clear commitment to deliver ongoing positive results for the Group's shareholders. Malcolm Harris Chief Executive Financial review Overview A further year of growth has delivered record earnings per share and profits before taxation. Earnings per share increased by 28.5% to 63.5 pence per share and profit before taxation increased by 30.9% to £104.7 million. The Group maintained its four year land bank supply with 10,716 controlled plots with planning. These results were achieved whilst generating positive cash flow and ending the year with net cash in hand of £4.6 million. The Group has adopted unchanged accounting policies for this financial year, although adjustment has been made to reflect the adoption of Financial Reporting Standard 19 ('FRS 19'), 'Deferred tax'. Comparative figures have been restated for the adoption of this new standard as necessary. Review of results Profit before taxation The profit on ordinary activities before taxation for the year ended 31 December 2002 amounted to £104.7 million. This compared with £80.0 million in the previous year and represented an increase of 30.9% year on year. There were no exceptional items during 2002 whilst 2001 included an exceptional profit of £1.2 million from the sale of one of the Group's freehold properties. Turnover Total turnover achieved was £461.3 million (2001: £358.5 million). Included within this figure was housing turnover of £445.4 million (2001: £334.5 million). The increase in housing turnover was primarily due to the 10.7% increase in unit legal completions to 2,556 units compared with 2,309 legal completions in 2001 and the increase in average sales price to £174,300 compared with £144,900 in 2001, an increase of 20.3%. Overall, the average sales price per square foot increased by 8.1% and the average size of unit by 11.5%. In addition, the Group handed over 135 affordable units to housing associations where the Group constructed houses under JCT contracts on land owned by the housing association. This generated £8.0 million of turnover and compared with 120 units handed over in 2001 and £7.0 million of turnover. This turnover and associated units have in previous years been included within housing turnover. Given that the Group intends to focus more significantly on this element of its business, it was considered important to segregate it in this year's disclosure of results. Taken together, total legal completions amounted to 2,691 units (2,556 units on owned land and 135 units on third party owned land) and compared with 2,429 legal completions in 2001 (2,309 units on owned land and 120 units on third party owned land). Total turnover from legal completions was £453.4 million compared with £341.5 million in 2001. Land sales amounted to £4.4 million compared with £15.2 million in 2001 whilst other income mainly arising from sales of commercial interests was £3.5 million compared with £1.8 million in 2001. Operating profit The Group achieved an operating profit of £109.6 million, an increase of 28.6% over £85.2 million in the previous year, and achieved a stable operating margin of 23.8%. Land sale profits less option costs was a net cost of £1.9 million in 2002 (2001: net profit of £2.7 million). Administrative expenses as a percentage of turnover were 7.8%, an improvement of 0.6 percentage points compared with 8.4% in 2001. Administrative expenses increased to £36.0 million compared with £30.0 million in the previous year. The increase included additional headcount from the expansion of the regional structure. Average staff numbers in 2002 were 730 compared with 693 in 2001. Financing Net interest payable amounted to £4.9 million (2001: £6.4 million), and was covered 22 times by profit before interest. Taxation The corporation tax charge for the year amounted to £31.2 million, and was after crediting an adjustment in respect of prior years amounting to £0.3 million. In adopting the new accounting standard FRS 19 on deferred tax, the Group has recognised, through a prior year adjustment, a deferred tax asset of £0.6 million. This has increased the brought forward reserves of the Group by the same amount. At 31 December 2002, this deferred tax asset had reduced to £0.5 million resulting in a current year deferred tax charge of £0.1 million (2001 deferred tax charge: £0.3 million). Dividends Dividends paid and proposed totalled £16.4 million (2001: £14.5 million) resulting in a retained profit for the financial year of £57.1 million. The total annual dividend was covered 4.5 times by post tax earnings. Review of balance sheet Shareholders' funds Shareholders' funds increased during the year to £397.0 million as a result of retained earnings of £57.1 million and the issue of £4.3 million of share capital and share premium arising from the exercise of share options by employees. The prior year shareholders' funds has been restated given the adoption of FRS 19 on deferred taxation. Net cash in hand The Group ended the year with net cash in hand of £4.6 million having started 2002 with net borrowings of £57.2 million. The Group utilised its existing bilateral committed revolving loan facilities to varying degrees throughout 2002 such that the average net borrowing was £61.2 million. The Group had fixed rate borrowings at 31 December 2002 of £75.0 million, £55.0 million on five year fixed terms and £20.0 million on seven year fixed terms. Cash deposited on the money market amounted to £81.5 million and there was a small net operating overdraft of £1.9 million. Working capital Land increased from £397.9 million to £413.5 million, whilst there was a reduction in land creditors from £102.9 million to £94.7 million. Work in progress reduced from £143.9 million (including £23.7 million of part exchange properties) to £127.2 million (including £14.4 million of part exchange properties). As at 31 December 2002 2001 Increase/ (decrease) £m £m £m Land held for development 413. 397.9 15.6 5 Land creditors (94. ) (102. ) 8.2 7 9 Net investment in land 318. 295.0 23.8 8 Raw materials and work in progress 112. 120.2 (7.4 ) 8 Part exchange properties 14.4 23.7 (9.3 ) The Group has maintained 4 years' supply of controlled land, based on the previous year's profit unit output, with 10,243 plots of owned land with planning consent and 473 plots of third party owned land which the Group controls through the establishment of JCT contracts with these third parties to construct affordable housing. Return on average capital employed Return on average capital employed for 2002 amounted to 25.1% based on the operating profit of the Group of £109.6 million and average capital employed of £436.5 million. For the fifth consecutive year, the Group has exceeded its objective of achieving a minimum return on average capital employed of 20%. Cash flow and treasury Cash flow Cash inflow from operating activities amounted to £107.4 million (2001: £43.9 million). The strength of the cash flow in the year allowed the Group to reduce its net borrowings at 31 December 2001 of £57.2 million to the zero geared net cash in hand position of £4.6 million at 31 December 2002. Bank facilities and liquidity risk The Group held total bank facilities of £216.0 million at 31 December 2002, including £5.0 million of overdraft facility. The balance of the facilities were made up of bilateral committed revolving loan facilities held with seven banks, mainly five year facilities but with some seven year facilities. The earliest maturity date for these facilities is 10 December 2005 in respect of £35 million of facilities, with £124 million maturing on 9 January 2007, £20 million on 5 February 2007, £12 million on 2 May 2007 and £20 million on 10 December 2007. This compared with £160.0 million at 31 December 2001. During the year, two new banks were introduced to the Group through the establishment of five year facilities for £20 million and £12 million, whilst an existing bank facility maturing on 2 November 2002 was not renewed. On 10 January 2002, £80 million of the bilateral committed revolving loan facilities which were scheduled to mature on 2 November 2002 were cancelled early to facilitate the establishment of new bilateral committed revolving loan facilities amounting to £124 million. Given the Group's net cash in hand position at 31 December 2002 and its moderate average net borrowing for 2002 of £61.2 million, the Group believes that total bank facilities of £216.0 million are sufficient to enable funding of foreseeable cash flows required for the medium term plans for the Group. As bilateral revolving committed loan facilities, of which £75.0 million are drawn down and fixed through interest rate swaps, there is considerable flexibility available to the Group to manage its borrowing needs. Interest rate risk By fixing £75.0 million of borrowings through interest rate swaps with varying maturities, the Group has made certain its interest costs on what is considered its core borrowing requirement. Borrowings in addition to this core borrowing are judged on a case by case basis at the time of drawing down the loans in terms of interest rate flexibility and loan maturity. The Group has the ability to borrow using its bilateral committed revolving loan facilities for as little as a few days or up to the period through to maturity of the relevant facility. The Group can decide with its various banks whether to fix the interest rate of borrowing through the further use of interest rate swaps, although care is taken to marry together the dates of draw down and maturity of the floating rate borrowing and interest rate swap. Fair value The fair value of the Group's fixed rate borrowings at 31 December 2002 exceeded its book value by £3.7 million. This reflected the movement in long term interest rates since these financial instruments were established. Further, the fair value of land creditors due after more than one year (deemed financial instruments under FRS 13: "Derivatives and Other Financial Instrument Disclosures") amounted to £13.4 million compared with their book value of £16.1 million, derived from the discounting of future cash flows in settling land creditors. The fair values of the Group's other long term assets and liabilities were not materially different from their book values. Accounting standards The Group has adopted the new accounting standard FRS 19: "Deferred tax", and has continued the stage implementation of FRS 17: "Retirement Benefits", in accordance with the standard. In respect of FRS 17 an independent actuary has valued the Group's defined benefits scheme, as at 31 December 2002, on the basis defined in the standard. The valuation shows a deficit, net of deferred tax, on the scheme of £9.4 million, which is a disclosure item only in the 2002 Report and Accounts in accordance with the standard. Under FRS 18: "Accounting Policies" the Group has reviewed its accounting policies to ensure that they remain the most appropriate to its particular circumstances for the purpose of giving a true and fair view. As a result of the adoption of FRS 19, a previously unrecognised deferred tax asset has now been recognised and accounted for by way of a prior year adjustment increasing debtors due after more than one year and the profit and loss account reserve in the Group balance sheet. David Ritchie Finance Director Bovis Homes Group PLC Group profit and loss account Continuing operations For the year ended 31 December 2002 2002 2001 Restated (see note 1) £000 £000 Turnover 461,284 358,543 Cost of sales (315,668 ) (243,284 ) Gross profit 145,616 115,259 Administrative expenses (36,025 ) (30,034 ) Operating profit 109,591 85,225 Profit on sale of freehold property - 1,213 Profit before interest 109,591 86,438 Interest receivable and similar 807 172 income Interest payable and similar (5,695 ) (6,604 ) charges Profit on ordinary activities 104,703 80,006 before taxation Taxation on profit on ordinary (31,200 ) (23,677 ) activities Profit on ordinary activities after 73,503 56,329 taxation Dividends paid and proposed (16,365 ) (14,549 ) Retained profit for the financial 57,138 41,780 year Basic earnings per ordinary share 63.5p 49.4p Diluted earnings per ordinary share 63.0p 48.8p Bovis Homes Group PLC Group statement of total recognised gains and losses Continuing operations For the year ended 31 December 2002 2002 2001 Restated (see note 1) £000 £000 Profit for the financial year after taxation 73,503 56,329 Total recognised gains and losses relating 73,503 56,329 to the year Prior year adjustment to recognise deferred 614 - tax asset (see note 1) Total recognised gains and losses recognised 74,117 56,329 since the last annual report Note of Group historical cost profit and losses Continuing operations For the year ended 31 December 2002 2002 2001 Restated (see note 1) £000 £000 Profit on ordinary activities before 104,703 80,006 taxation Realisation of property revaluation gains of - 614 previous years Historical cost profit on ordinary 104,703 80,620 activities before taxation Historical cost profit for the year retained 57,138 42,394 after taxation and dividends Bovis Homes Group PLC Group balance sheet At 31 December 2002 2002 2001 Restated (see note 1) £000 £000 Fixed assets Tangible assets 8,215 6,844 Investments 1,123 1,356 9,338 8,200 Current assets Stock and work in progress 544,49 544,00 6 0 Debtors due within one year 13,185 10,134 Debtors due after more than one year 5,082 8,465 Cash and short term deposits 81,548 6,386 644,31 568,98 1 5 Creditors: amounts falling due within one (163,2 ) (128,8 ) year 24 10 Net current assets 481,08 440,17 7 5 Total assets less current liabilities 490,42 448,37 5 5 Creditors: amounts falling due after more (91,65 ) (111,3 ) than one year 7 05 Provisions for liabilities and charges (1,794 ) (1,552 ) Net assets 396,97 335,51 4 8 Capital and reserves Called up share capital 58,359 57,444 Share premium account 138,97 135,57 4 1 Revaluation reserve 203 203 Profit and loss account 199,43 142,30 8 0 Equity shareholders' funds 396,97 335,51 4 8 Bovis Homes Group PLC Group cash flow statement For the year ended 31 December 2002 2002 2001 £000 £000 Net cash inflow from operating activities 107,39 43,908 9 Returns on investments and servicing of finance Interest received 667 172 Interest paid (5,042 ) (6,720 ) (4,375 ) (6,548 ) Taxation paid (27,61 ) (23,49 ) 2 1 Capital expenditure and financial investment Purchase of tangible fixed assets (2,706 ) (3,368 ) Sale of tangible fixed assets 327 4,797 Purchase of investments (400 ) (668 ) Sale of fixed asset investments 72 36 (2,707 ) 797 Equity dividends paid (15,18 ) (13,67 ) 2 8 Cash inflow before management of liquid resources 57,523 988 and financing Management of liquid resources and financing Increase in short term deposits (75,54 ) (6,000 ) 4 Increase in borrowings 12,000 2,000 Issue of ordinary share capital 4,318 2,795 (59,22 ) (1,205 ) 6 Decrease in cash (1,703 ) (217 ) Bovis Homes Group PLC Group reconciliation of movements in shareholders' funds For the year ended 31 December 2002 2002 2001 Restated (see note 1) £000 £000 Opening shareholders' funds (restated to 335,51 290,94 reflect recognition of deferred tax asset) 8 3 Issue of ordinary shares 4,318 2,795 Total recognised gains and losses for the 73,503 56,329 year Dividends paid and proposed (16,36 ) (14,54 ) 5 9 Closing shareholders' funds 396,97 335,51 4 8 Group reconciliation of operating profit to operating cash flows For the year ended 31 December 2002 2002 2001 £000 £000 Operating profit 109,59 85,225 1 Depreciation and amortisation 1,636 2,050 Profit on disposal of non property tangible fixed (19 ) (67 ) assets Increase in stocks (496 ) (85,41 ) 5 Decrease/(increase) in debtors 332 (4,430 ) (Decrease)/increase in creditors (3,645 ) 46,545 Net cash inflow from operating activities 107,39 43,908 9 Group reconciliation and analysis of net debt For the year ended 31 December 2002 2002 2001 £000 £000 Decrease in cash in the year (1,703 ) (217 ) Cash outflow from change in debt 63,544 4,000 Change in net debt 61,841 3,783 Opening net debt (57,22 ) (61,01 ) 8 1 Closing net funds/(debt) 4,613 (57,22 ) 8 Analysis of net funds/(debt): Cash 4 386 Short term deposits 81,544 6,000 Bank overdraft (1,935 ) (614 ) Borrowings (75,00 ) (63,00 ) 0 0 4,613 (57,22 ) 8 Notes to the accounts 1 Basis of preparation The Group accounts include the accounts of the Company and its subsidiary undertakings all of which are made up to 31 December 2002. The financial information included within this statement does not constitute the Company's statutory accounts for the year ended 31 December 2002 or 2001. The information contained in this statement has been extracted from the statutory accounts of Bovis Homes Group PLC for the year ended 31 December 2002, 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. The Group has adopted the new accounting standard FRS 19: "Deferred tax" during the year. As a result of the implementation of this standard a previously unrecognised deferred tax asset has now been recognised. In the current year, a deferred tax asset of £481,000 has been recognised and the tax charge has been adjusted to take account of £133,000 of deferred taxation arising from the reversal of timing differences during 2002. The opening profit and loss reserve has been increased to reflect the opening deferred tax asset which would have been recognised as at 31 December 2001 amounting to £614,000. The comparative figures for the year ended 31 December 2001 have been restated to reflect the recognition of the deferred tax asset. The Group has implemented stage two of the transitional rules of FRS 17: "Retirement Benefits" during the year. Required disclosures arising from this implementation are included in the Company's statutory accounts for the year ended 31 December 2002. 2 Earnings per ordinary share Basic earnings per ordinary share for the year ended 31 December 2002 is calculated on profit after tax of £73,503,000 (2001: £56,329,000) over the weighted average of 115,667,157 (2001: 113,977,097) ordinary shares in issue during the year. Diluted earnings per ordinary share is calculated on profit after tax of £73,503,000 (2001: £56,329,000) over the diluted weighted average of 116,616,844 (2001: 115,391,819) ordinary shares potentially in issue during the year. The diluted average number of shares is calculated in accordance with FRS 14: "Earnings Per Share". The dilutive effect relates to the average number of potential ordinary shares held under option during the year. 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 year. Only share options which have met their cumulative performance criteria have been included in the dilution calculation. There is no dilutive effect on the profit after tax used in the diluted earnings per share calculation. The weighted average number of shares excludes shares held in employee share trusts where dividends have been waived. Notes to the accounts (continued) 3 Taxation 2002 2001 £000 £000 Current tax for the year 31,403 23,728 Adjustment in respect of prior years (336 ) (328 ) Total current tax 31,067 23,400 Deferred tax charge for reversal of 133 277 timing differences 31,200 23,677 During the year prior year tax positions were finalised leading to the release of a tax provision amounting to £336,000 (2001: £328,000). A deferred tax charge of £133,000 (2001: £277,000) arose as a result of the reversal of timing differences during the year. 4 Dividends The proposed final dividend of 9.4 pence net per ordinary share will be paid on 23 May 2003 to holders of ordinary shares on the register at the close of business on 25 April 2003. The dividend when added to the already paid interim dividend of 4.6 pence, totals 14.0 pence for the year.

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