Preliminary Results 2007

Bovis Homes Group PLC 10 March 2008 BOVIS HOMES GROUP PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 Issued 10 March 2008 The Board of Bovis Homes Group PLC today announced its preliminary results for 2007 which have been prepared in accordance with International Financial Reporting Standards as adopted by the EU ('IFRS'). â€¢ Pre tax profit of Â£123.6 million (2006: Â£132.0 million stated before one-off pension credit of Â£3.5 million; Â£135.5 million inclusive of pension credit) â€¢ Basic earnings per share of 72.4p per share (2006: 77.8p per share pre one-off pension credit) â€¢ Continuing sector-high operating margin at 22.8% pre Elite acquisition one-offs and fair value charges: 22.4% inclusive (2006: 23.1% pre one-off pension credit) â€¢ A year of successful investment: acquisition and integration of Elite Homes, purchase of Filton, Bristol and achievement of outline planning in early 2008 for key strategic site at Wellingborough â€¢ Full year dividend increased by 17% to 35.0p net per ordinary share (2006: 30.0p) with final dividend at 17.5p per share reflecting half of full year dividend as announced at interim â€¢ Strategic land holdings increased to 24,868 potential plots (2006: 24,719 potential plots) â€¢ 11,413 plots with planning consent owned/controlled (2006: 12,395 plots) â€¢ Modest gearing, with Â£44 million of year end net debt Commenting on the results, Malcolm Harris, the Chief Executive of Bovis Homes Group PLC said: '2007 was a challenging year for the industry following several interest rate increases, allied with a reduction in availability of funding, particularly for first-time buyers. Against that background, the Group delivered a good performance, in particular in maintaining a strong operating margin. Shareholder value was added through the successful promotion of strategic land including Filton in Bristol and Stanton Cross, Wellingborough. 'Looking forward, although the long term position relating to supply and demand has not changed, the current housing market is weak. Cumulative sales reservations for 2008 to 7 March 2008 are 1,262 as compared to 1,582 at the same point in the previous year. Our performance through the spring period remains critical in establishing the likely volume outcome for the current year. For the year as a whole, unless decisive action is taken now to reduce interest rates and more normal conditions return to the mortgage market, it is likely that volumes will be well below those achieved in 2007. 'Looking beyond 2008, the Board believes that with its strong land position, healthy balance sheet, and highly experienced management team, the Group is well placed to benefit when sentiment improves.' Enquiries: Malcolm Harris, Chief Executive Neil Cooper, Finance Director Bovis Homes Group PLC On Monday 10 March - tel: 020 7321 5010 Thereafter - tel: 01474 876200 Results issued by: Andrew Best / Emily Bruning Shared Value Limited On Monday 10 March - tel: 020 7321 5010 Chairman's statement With activity in the housing marketplace slowing during 2007, Bovis Homes has delivered a good performance whilst maintaining a sector-high operating profit margin. During 2007, the Group continued to focus on its long term investment programme, and was successful in the second half of 2007 in both gaining a 'resolution to grant' planning permission at its major project in Filton, Bristol and in subsequently acquiring this key site. Good progress has also been made at Wellingborough. After receiving a 'resolution to grant' planning permission in December 2006, this major project received its outline planning consent in January 2008. Whilst the Group remained cautious in investing in consented land during 2007, it is well positioned to take advantage of opportunities to acquire consented land that may arise during 2008. The Group successfully acquired Elite Homes Group Ltd, a regional housebuilder, during the second half of 2007, which complements the Group's existing activities in the north of England. Physical integration is now complete, as is the re-branding of existing outlets, and the land bank acquired is enabling the region to deliver against its existing growth plans, in a geography where land acquisition has been difficult given planning constraints. Whilst the Group made several large investments during the year, the Group exited 2007 with low gearing, and only Â£44 million of net debt, leaving it well placed to continue to develop going forward. Results For the year ended 31 December 2007, the Group achieved a pre-tax profit of Â£123.6 million, as against a comparable Â£132.0 million in 2006 (stated before a one-off non-cash pension credit of Â£3.5 million). Earnings per share was 72.4p in 2007 as compared to 77.8p per share before pension credit in 2006. Total revenue generated was Â£555.7 million (2006: Â£597.3 million), and the Group legally completed on 2,930 homes (2006: 3,123) in the year. The average sales price of private homes grew by 3.8% year against year. However, the overall average sales price fell by 2.3%, from Â£183,700 in 2006 to Â£179,500 in 2007. The main factor behind this movement was mix, with social housing taking a greater proportion of the whole in 2007, as compared to 2006. The operating margin of the Group remained strong at 22.4%. This was somewhat diluted by the impact of one-off restructuring and other fair value adjustments associated with the acquisition of Elite Homes. Adjusting for these, the underlying operating margin was 22.8%, only marginally behind the prior year: 23.1% pre one-off pension credit. Dividend The Group remains committed to its existing guidance on dividends, which is that dependent on business environment, and conditional on any necessary approvals, the Group will double its dividend from 20.0p per share in 2004 to 40.0p per share in 2008. Looking beyond 2008, the Board remains intent on a progressive dividend policy over the long term, business environment permitting. Consistent with the Group's existing guidance, but also reflecting the changes in interim payout ratio announced and made at the half year 2007, the Group is proposing a final dividend for the year of 17.5p per share. In total, taken together with the interim dividend of 17.5p per share paid in November 2007, the Group's total dividend for 2007 is 35.0p per share, a year on year increase of 16.7%. This dividend is covered 2.1 times by the basic earnings per share of 72.4p. The proposed final dividend of 17.5p per share for 2007 will be paid on 23 May 2008 to shareholders on the register at the close of business on 28 March 2008. The Board intends to offer a scrip dividend alternative. Shareholders will be able to choose between new ordinary shares or cash, for some or all of their dividend under this programme. The Board Following the retirement of Mr Mark Nicholls from the Board at the AGM in 2007, the make-up of the Board has remained stable: with four non-executive directors including myself, and three executive directors. Looking ahead, on 2 July 2008 I shall be standing down and will be succeeded as non-executive Chairman by Mr Malcolm Harris, the current Chief Executive. Mr David Ritchie, the current Group Managing Director will step up as Chief Executive, and his current position will cease to exist. Whilst the Group recognises that the appointment of the new chairman diverges from the Combined Code's recommended practice, the Group has actively canvassed its major shareholders and is therefore confident that this change is not only in the best interests of the Group but is also strongly supported by shareholders. The Group is in the process of appointing an independent non-executive deputy Chairman as part of these changes. Employees The Board would like to thank its employees and sub-contractors for their efforts and achievements during a year that has been challenging in many respects. In particular, the Board would like to thank Mr Peter Baker, the regional Managing Director of South West region who retired during the year after 26 years service and its Northern regional team for its efforts in support of the Elite Homes acquisition, as well as welcoming Elite Homes employees to the Bovis Homes Group. Market conditions & prospects The housing market during 2007 has been impacted by the tightening of interest rates over the first half of 2007, and then the banking crisis during the second half, which has had an impact in terms both of availability of credit and consumer confidence. In fact, the ongoing GfK NOP omnibus survey on consumer confidence suggested that the consumer climate for major purchases was at its lowest ebb for 15 years in December 2007. The Group remains confident in the long term prospects for housebuilding in the UK, and notes the announcement of Government targets for housebuilding well in excess of current rates of development: an indicator of a long term excess of demand over supply. However, the Group also recognises that the short term outlook for the market remains uncertain. Notwithstanding this, the Group is well placed to trade across a range of differing market conditions: with its good quality mid-market product mix, long term investment programme in strategic land, and present low gearing. As a result, the Group remains confident in its ability to deliver shareholder value over the mid and long term. Tim Melville-Ross Chairman Performance Review During the year, Bovis Homes legally completed 2,930 homes, of which 2,293 were private, and 637 were social and partnership. This is as compared to 3,123 legal completions during 2006 of which 2,714 were private and 409 were social and partnership. The average sales price achieved for private homes increased by 3.8% compared with the previous year. The average size of private homes legally completed was broadly the same, at 1,023 square feet, as the previous year, at 1,028 square feet, with the Group's migration in mix to a smaller and more marketable good quality mid-market offering largely complete. With a large increase in social and partnership properties in the mix, moving from 13% in 2006 to 22% in 2007, the average sales price for the Group reduced by 2.3%, from Â£183,700 in 2006 to Â£179,500 in 2007, and the average size of property legally completed was 969 square feet compared with 992 square feet in 2006. The successful acquisition of Elite Homes in October 2007 added 118 legal completions to the Group's total 2007 performance and had a small dilutive impact on average sales price, driven by the fact that property prices in the north of England are typically lower than those elsewhere in England. The operating margin remained strong in 2007, given prevailing market conditions. The reported operating margin at 22.4% was adversely impacted by the one-off restructuring costs and fair value adjustments associated with the acquisition of Elite Homes. Adjusting for these, the underlying operating margin at 22.8% was ahead of that at the half year, only marginally reduced versus 23.1% achieved in 2006. Market sector analysis Year ended 31 December 2007 2006 % Units Average % Units Average House type sales price sales price Â£ Â£ ------------------------------------------------------------------------------ One and two bedroom 31 916 141,100 32 996 134,300 Three bedroom 27 793 210,700 31 957 200,700 Four bedroom 12 340 278,800 14 436 265,000 Five or more bedroom 6 182 351,600 7 230 324,100 Retirement Living 2 62 283,400 3 95 242,200 Social housing 15 430 85,500 9 274 88,200 Partnership housing (third 7 207 79,200 4 135 78,400 party owned land units) ------------------------------------------------------------------------------ Group 100 2,930 179,500 100 3,123 183,700 ------------------------------------------------------------------------------ Product mix analysis Year ended 31 December 2007 2006 % Units Average % Units Average House type sales price sales price Â£ Â£ ------------------------------------------------------------------------------ Traditional 23 664 199,600 30 941 189,500 Room-in-roof 10 295 322,200 13 389 300,400 Three storey 21 632 220,500 21 646 213,400 Apartments 22 640 138,000 20 643 129,000 Retirement Living 2 62 283,400 3 95 242,200 Social housing 15 430 85,500 9 274 88,200 Partnership housing (third 7 207 79,200 4 135 78,400 party owned land units) ------------------------------------------------------------------------------ Group 100 2,930 179,500 100 3,123 183,700 ------------------------------------------------------------------------------ Unit completions and average sales price Year ended 31 December 2007 2006 Units Average Units Average sales price sales price Â£ Â£ South East 703 207,600 906 212,100 South West 819 138,200 836 148,700 Central 567 194,200 510 204,200 Eastern 435 185,400 504 167,400 Northern 344 170,000 272 168,500 Retirement Living 62 283,400 95 242,400 ------------------------------------------------------------------------------ Group 2,930 179,500 3,123 183,700 ------------------------------------------------------------------------------ The Group's consented land bank fell by 982 plots from 12,395 plots at 1 January 2007 to 11,413 plots at 31 December 2007. This closing land bank represented 3.9 years of supply at 2007 activity levels. In a manner consistent with its approach in recent years, the Group has been somewhat cautious during 2007 in its approach to acquiring consented land, having regard to prevailing land prices. Of the 2,266 plots added, 641 plots were transferred from the strategic land bank, and 1,625 plots were secured in the market, including 824 as part of the acquisition of Elite Homes. The strategic land bank as at 31 December 2007 was 24,868 potential plots (2006: 24,719 potential plots). The Group transferred 598 plots into the consented land bank during 2007, and added a further net 747 potential plots. Contained within the strategic land bank, but enjoying a 'resolution to grant' residential planning consent at 31 December 2007 were 5,300 plots in two locations: Filton in Bristol and Wellingborough. The 2,200 plots associated with Filton are expected to be in the consented land bank by the half year, together with 900 plots at Wellingborough. This latter amount will reflect that proportion of land likely to be on the balance sheet by the half year, with the remainder of the 3,100 plots relating to Wellingborough remaining under control via an option. These remaining plots will stay disclosed in the strategic land bank until ownership is taken through exercise of the Group's option. Excluding both social housing and third party owned land, the average plot cost was Â£48,400, which represented 23.5% of the average private sales price during the year. The equivalent figure for 2006 was Â£46,900 representing 23.6% of the average private sales price for that year. Consented land bank Total plots as at 31 December 2007 2006 Plots Plots ----------------------------------------------------------------------------- South East 2,687 3,237 South West 2,565 3,135 Central 2,162 2,143 Eastern 1,946 2,199 Northern 1,765 1,313 ----------------------------------------------------------------------------- Group (exc. third party owned land plots) 11,125 12,027 Third party owned land plots South East 93 88 South West 195 280 ----------------------------------------------------------------------------- Group consented land bank 11,413 12,395 ----------------------------------------------------------------------------- Urban redevelopment - Legal agreement exchanged* 536 700 Development approved by planning committee subject to S106 being signed* 5,304 3,100 ----------------------------------------------------------------------------- Aggregate holdings 17,253 16,195 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Years' supply based upon legal completions in the year (Consented land bank) 3.9 4.0 Years' supply based upon legal completions in the year (Aggregate holdings) 5.9 5.2 ----------------------------------------------------------------------------- * held in strategic land bank Strategic land bank Total potential plots as at 31 December 2007 2006 Plots Plots -------------------------------------------------------------------------------- South East 8,440 8,400 South West 5,161 4,545 Central 9,306 9,417 Eastern 702 1,268 Northern 1,259 1,089 -------------------------------------------------------------------------------- Group strategic land bank 24,868 24,719 -------------------------------------------------------------------------------- Years' supply based upon completions in the year 8.5 7.9 -------------------------------------------------------------------------------- Although 20% ROCE remains the Group's objective over the business cycle, and remains a criterion for land investments, the Group will take decisions from time to time that affect the short term delivery of this measure where opportunities arise to add shareholder value in the longer term. Firstly, the Group has invested in major strategic land sites, ahead of their conversion into land with residential planning permission and subsequent generation of returns. Secondly, the Group acquired Elite Homes towards the end of the financial year for a total consideration of Â£72.3 million; of which Â£25.7 million was paid to the shareholders of Elite, with the Group assuming Â£46.2 million of debt. Allied to these decisions, the performance of the Group in terms of its volume of legal completions has impacted ROCE during 2007, which was 17%. In terms of senior management progression, Mr Tim Melville-Ross who joined the Board in 1997 is retiring from his position as Chairman on 2 July 2008. The Board wishes to thank him for the significant contribution that he has made towards the Group's progress and would like to acknowledge the skill and expertise he has brought to bear as a highly effective Board member and Chairman over this period. Outlook for 2008 In the shorter term, economic uncertainties coupled with the cost and availability of credit have adversely affected consumer confidence. The Group expects that the outcome of the spring selling season during 2008 will be a good marker to allow a balanced assessment of likely performance in a year where wider macro-economic trends are currently depressing confidence and thus activity. For the year as a whole, unless decisive action is taken now to reduce interest rates and more normal conditions return to the mortgage market, it is likely that volumes will be well below those achieved in 2007. Given current sales trends, a further increase in social mix is likely to occur in 2008. In current conditions the Group has a number of clear priorities: to focus on controlling its cost base and ensuring that cash flow is well managed, enabling it to act quickly when opportunities present themselves; to continue to leverage its strength in the acquisition and promotion of strategic land, a key source of long term superior shareholder value; and to continue its existing pricing strategy. As already outlined, the Group believes that the long term supply and demand dynamic in its industry remains extremely positive, with Government projections for required housing completions running well ahead of current building volumes across the industry. Looking beyond 2008 therefore, the Board believes that with its strong land position, healthy balance sheet, and highly experienced management team, the Group is well placed to benefit when sentiment improves. Malcolm Harris Chief Executive Financial review Profit before tax and earnings per share Pre-tax profit for the Group for the year ended 31 December 2007 was Â£123.6 million. This is as compared to Â£132.0 million for the year ended 31 December 2006, stated before a one-off pension credit of Â£3.5 million. Basic earnings per share for 2007 was 72.4p, a reduction of 5.4p or 7% on the prior year stated before the one-off pension credit. Revenue Total revenue for the Group was Â£555.7 million in 2007 as compared to Â£597.3 million in 2006. The key component of revenue for the Group is housing revenue, which was Â£525.9 million for the year ended 31 December 2007, as compared to Â£573.7 million for the prior year. The Group legally completed 2,930 homes in 2007, of which 118 were contributed by the Group's recent acquisition, Elite Homes. This is as compared to 3,123 legal completions in 2006. The average sales price of legal completions fell slightly, from Â£183,700 in 2006 to Â£179,500 in 2007. Within this, the average sales price for private completions in 2007 increased by 3.8%. More than offsetting this, social housing as a share of the selling mix grew from 13% in 2006 to 22% in 2007 depressing the overall average sales price. Over the recent past, the Group has been repositioning its sales mix away from larger, more discretional properties towards good quality mid-market homes. This process is now largely complete, as evidenced by the relatively small 0.5% year over year change in the average size of its private completions. The overall year over year decline of 2.3% in the Group's average size of legal completions is more marked than this, from 992 square feet in 2006 to 969 square feet in 2007, because of the aforementioned increased social mix. The Group disposed of Â£25.1 million of land during 2007, as compared to Â£19.5 million in 2006. Other income at Â£4.7 million for 2007 was broadly in line with the prior year at Â£4.1 million. Operating profit The Group delivered Â£124.4 million of operating profit for the year ended 31 December 2007 at an operating margin of 22.4%. This margin was diluted by the impact of the Â£1.0 million one-off restructuring costs associated with the acquisition of Elite Homes, as well as by the Â£1.0 million impact of the fair value adjustments made to the inventory of Elite Homes acquired by the Group. Adjusting for these two items, the underlying operating margin of the Group for 2007 was 22.8%, as compared to 23.1%, pre pension credit, delivered in 2006. This was a creditable performance, and demonstrates the Group's focus in this area, being particularly pleasing given the impact of both interest rate hikes and the financial crisis on consumer sentiment during 2007, as well as the associated market dislocation in credit availability. Profit from land sales, less option costs, was Â£10.0 million in 2007, as compared with Â£7.8 million of profit from land sales, less option costs, in 2006. Given the nature of trading during 2007, the Group maintained a tight control over overhead costs by reducing its absolute cost and holding its ratio to revenue static despite falling levels of legal completions and housing revenue. The Group's administrative expenses as a percentage of revenue, which include sales and marketing costs, together with any bonus payable, was in line with the previous year: at 8.7% of sales in 2007 as compared to 8.7% of sales in 2006 after adjusting for the one-off pension credit. Analysis of margin Total housing Group 2007 2006 2007 2006 % % % % --------------------------------------------------------------------------------- Revenue 100.0 100.0 100.0 100.0 Land costs (19.7) (19.6) (20.2) (19.8) Construction costs (50.0) (49.2) (48.7) (48.4) --------------------------------------------------------------------------------- Gross profit 30.3 31.2 31.1 31.8 Administrative expenses (inc. sales and marketing costs) (8.7) (8.7) --------------------------------------------------------------------------------- Operating profit 22.4 23.1 --------------------------------------------------------------------------------- Note: 2006 data excludes Â£3.5 million pension credit Financing Net financing costs were Â£0.8 million in 2007 (2006: Â£5.8 million). The key driver of this year over year movement was the interest earned from the positive net cash balance held by the Group for the majority of the year, but the Group also benefited from a favourable net pension financing credit during 2007. Bank interest net income for 2007 was Â£2.4 million, which included arrangement fee and commitment fee charges. This is as compared to a Â£3.6 million net charge in 2006. Offsetting this, the Group incurred a Â£4.1 million finance charge (2006: Â£2.2 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. The Group benefited from a Â£0.9 million net pension financing credit during 2007: this credit arose as a result of the expected return on plan assets being in excess of the interest on the plan obligations. The equivalent number in 2006 was Â£0.3 million, which was reported in administrative expenses in that year. Taxation The Group has accounted for a tax charge of Â£36.7 million through the income statement at an effective rate of 29.7% (2006: 29.9%). Of this charge, the current year tax was Â£37.2 million, the deferred tax charge was Â£0.1 million and the Group enjoyed the benefit of a Â£0.6 million rebate relating to a prior year. The deferred tax charge related in part to the final Â£2.0 million special cash contribution made by the Group to the pension scheme, offset by the deferred tax credit arising in the year following changes made in the initial carrying value of assets and liabilities of Elite Homes arising from its fair value exercise. All deferred tax balances at the end of 2007 have been restated at 28%, given the upcoming change in corporation tax in April 2008. Dividends The Group paid the 2006 final dividend of 20.0p per share, and the 2007 interim dividend of 17.5p per share during 2007. In total, this equated to Â£45.0 million (2006: Â£31.8 million). Post-tax earnings in 2007 were 1.9 times the dividend paid as compared to 2.9 times in 2006. At the 2007 half year, the Group announced that it would rebalance the payment of its interim and final dividend, and so the interim 2007 dividend reflected half of the expected full payment, as opposed to the previous one-third. Had this previous treatment been applied, the Group would have covered its dividend payment 2.3 times. The Board is recommending a 17.5p per share final dividend for 2007, which would take the total dividend for the year to 35.0p per share, in line with its previously announced commitment on dividends. Net assets The Group's net assets at 31 December 2007 were Â£723.7 million, Â£45.9 million higher than the net asset position as at 31 December 2006. Whilst the movement was predominantly driven by the movement in retained earnings, the Group's net assets position also benefited from an increase in share capital and share premium through the uptake of scrip dividends and from an actuarial gain arising from the Group's defined benefit pension scheme. Net assets per share as at 31 December 2007 was Â£5.99 as compared to Â£5.62 at 31 December 2006. Analysis of net assets 2007 2006 Â£m Â£m -------------------------------------------------------------------------- Net assets at 1 January 677.8 598.1 Profit for the year 86.9 95.0 Dividends (45.0) (31.8) Share capital issued 1.4 9.2 Net actuarial gain on defined benefits pension scheme 2.4 6.1 Deferred tax on other employee benefits (0.8) 0.2 Adjustment to the fair value of cash flow hedges 0.1 0.5 Adjustment to reserves for share based payments 0.9 0.5 -------------------------------------------------------------------------- Net assets at 31 December 723.7 677.8 -------------------------------------------------------------------------- Acquisition of Elite Homes Group Ltd On 12 October 2007, the Group acquired Elite Homes Group Ltd, a northern housebuilder together with its three subsidiaries. The acquisition was for a total consideration of Â£72.3 million; of which Â£25.7 million was paid to the shareholders of the company, with the Group assuming Â£46.2 million of debt. The Group's consolidated results contain the trading results of Elite Homes from 12 October through to 31 December and the balance sheet of Elite Homes, following a fair value exercise on acquisition. The Group has expensed Â£1.0 million of one-off restructuring costs in 2007 relating to the acquisition and integration of this business. This cost is included in administrative expenses. As at the balance sheet date, the Group has recognised Â£9.2 million of acquired goodwill arising on consolidation. The Group believes that this goodwill is sustained by the overhead cost benefits arising as a result of the substantial geographic overlap between Elite Homes and the Group's existing Northern region, together with the subsequent rationalisation of structure and organisations which has occurred. The Group has also gained access to strategic land capability and opportunities across the north of England. Pensions Following an actuarial valuation of the Group's defined benefit pension scheme in 2004, which revealed a deficit, the Group agreed with the trustees of the pension scheme a number of special cash contributions to be made by the Group to the scheme to help mitigate the deficit that existed at that point. The final payment of Â£2.0 million was made during 2007. An actuarial valuation was undertaken as at 30 June 2007, revealing that the scheme was then in surplus. This valuation has been rolled forward to 31 December 2007, with the help of estimates provided by the Group's actuarial advisors. Positively, the Group's deficit of Â£5.1 million at the end of 2006 is now a surplus of Â£1.0 million as at the end of 2007, benefiting from the Â£2.0 million special contribution outlined above, together with an actuarial gain of Â£3.7 million. The actuarial gain is made up of two elements: firstly, Â£1.5 million arising from changes between previous actuarial assumptions, and the actual outturn, and secondly Â£2.2 million arising from movements in the underlying actuarial assumptions used. Specifically, the movement in bond yields during 2007 has led to a reassessment of the discount rate to be applied in calculating the value of the scheme's liabilities. Analysis of pension scheme (surplus) / deficit 2007 2006 Â£m Â£m --------------------------------------------------------------------------- Pension deficit at 1 January 5.1 22.4 Contributions into the pension scheme (3.4) (7.5) One-off pension credit - (3.5) Expense to the income statement 1.0 2.3 Actuarial gain on defined benefits pension scheme (3.7) (8.6) --------------------------------------------------------------------------- Pension (surplus) / deficit at 31 December (1.0) 5.1 --------------------------------------------------------------------------- Cashflow 2007 has seen a marked swing in the Group's cash balances over the year. For the majority of the year, the Group held substantial sums of cash on deposit. The Group entered the year with Â£102.7 million net cash in hand, and had Â£107.8 million net cash in hand at the half year. During the second half of 2007, the Group made two major investments: firstly, the acquisition of Elite Homes, and secondly, the purchase of its strategic site at Filton, Bristol. As a result of this investment, the Group closed the year with a modest gearing position and net borrowings. Excluding the impact of these large individual investments, the Group saw an increase in working capital between the start and the end of 2007, with an increased Â£8 million investment in home exchange properties reflecting an increased use of this effective selling tool. Work in progress was Â£18 million higher, and land creditors fell by Â£40 million. The increase in land sales and in social and partnership housing sales has led to an increase in trade receivables. Net borrowings & banking facilities As at 31 December 2007, the Group had Â£0.3 million of cash in hand, and borrowings of Â£44.6 million. The Group has in place currently Â£225 million of banking facilities, made up of bilateral committed revolving loan facilities effective until early 2010, together with a short term overdraft facility to facilitate cash management. On average, the Group held Â£49 million of cash during 2007. Accordingly, the Group had no average gearing excluding land creditors. Including land creditors, the Group's average gearing was 5%. Year end gearing was 6% excluding land creditors or 15% including land creditors. The Group's peak monthly borrowing was Â£114 million at the end of November. Financial risk & liquidity In general, the Group seeks to mitigate any exposure to material interest rate fluctuations through interest rate swaps. The maturity terms on these swaps will be reviewed when taken out, with care taken to ensure that borrowings of an appropriate term are likely to be in place to match the interest rate swaps being taken out. The Group's outstanding interest rate swaps expired in December 2007, and having regard to current and future estimates of monetary policy, the Group has delayed entering into further swaps at present. This position will be reviewed during the first half of 2008. The Group's banking arrangements outlined above are considered to be adequate in terms of flexibility and liquidity for its medium term cashflow needs. With less than Â£1 million of net financing charges, net interest cover during 2007 was over 154 times, as compared with over 24 times during 2006. As the Group functions wholly in the UK, currency risk management is not a consideration. Financial Reporting There have been no changes to the Group's accounting policies during 2007. The Group has adopted IFRS7 during the year, which has altered the disclosures given in respect of financial instruments. Neil Cooper Group Finance Director Bovis Homes Group PLC Group income statement For the year ended 31 December 2007 2007 2006 Â£000 Â£000 ------------------------------------------------------------------------- Revenue - continuing operations 555,702 597,290 Cost of sales (382,659) (407,204) ------------------------------------------------------------------------- Gross profit 173,043 190,086 Administrative expenses (48,653) (48,803) ------------------------------------------------------------------------- Operating profit before financing costs 124,390 141,283 Financial income 6,158 654 Financial expenses (6,962) (6,453) ------------------------------------------------------------------------- Net financing costs (804) (5,799) ------------------------------------------------------------------------- Profit before tax 123,586 135,484 ------------------------------------------------------------------------- Income tax expense (36,727) (40,446) ------------------------------------------------------------------------- Profit for the period attributable to equity holders of the parent 86,859 95,038 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic earnings per ordinary share 72.4p 79.8p ------------------------------------------------------------------------- Diluted earnings per ordinary share 72.2p 79.5p ------------------------------------------------------------------------- Bovis Homes Group PLC Group balance sheet At 31 December 2007 2007 2006 Â£000 Â£000 ------------------------------------------------------------------------- Assets Goodwill 9,176 - Property, plant and equipment 14,451 14,778 Available for sale financial assets 1,085 - Investments 22 22 Deferred tax assets 3,233 6,089 Trade and other receivables 2,589 2,850 Retirement benefit asset 1,010 - ------------------------------------------------------------------------- Total non-current assets 31,566 23,739 ------------------------------------------------------------------------- Inventories 870,550 758,078 Trade and other receivables 52,725 22,446 Cash 346 142,841 ------------------------------------------------------------------------- Total current assets 923,621 923,365 ------------------------------------------------------------------------- Total assets 955,187 947,104 ------------------------------------------------------------------------- Equity Issued capital 60,415 60,288 Share premium 156,734 155,494 Hedge reserve - (112) Retained earnings 506,594 462,162 ------------------------------------------------------------------------- Total equity attributable to equity holders of the parent 723,743 677,832 ------------------------------------------------------------------------- Liabilities Bank loans 25,000 25,100 Trade and other payables 28,816 44,264 Retirement benefit obligations - 5,140 Provisions 1,463 1,512 ------------------------------------------------------------------------- Total non-current liabilities 55,279 76,016 ------------------------------------------------------------------------- Bank overdraft 3,588 - Bank loans 16,000 15,060 Trade and other payables 142,291 159,368 Provisions 500 602 Current tax liabilities 13,786 18,226 ------------------------------------------------------------------------- Total current liabilities 176,165 193,256 ------------------------------------------------------------------------- Total liabilities 231,444 269,272 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total equity and liabilities 955,187 947,104 ------------------------------------------------------------------------- These accounts were approved by the Board of directors on 7 March 2008. Bovis Homes Group PLC Group statement of cash flows For the year ended 31 December 2007 2007 2006 Â£000 Â£000 --------------------------------------------------------------------------- Cash flows from operating activities Profit for the year 86,859 95,038 Depreciation 1,421 1,499 Financial income (6,158) (654) Financial expense 6,962 6,453 Profit on sale of property, plant and equipment (43) (120) Equity-settled share-based payment expenses 133 455 Income tax expense 36,727 40,446 Other non-cash items 996 - --------------------------------------------------------------------------- Operating profit before changes in working capital and provisions 126,897 143,117 --------------------------------------------------------------------------- (Increase) / decrease in trade and other receivables (29,821) 51,099 (Increase) / decrease in inventories (42,195) 23,295 (Decrease) / increase in trade and other payables (39,519) 19,619 Decrease in provisions and employee benefits (6,301) (8,590) --------------------------------------------------------------------------- Cash generated from operations 9,061 228,540 --------------------------------------------------------------------------- Interest paid (4,812) (5,829) Income taxes paid (39,052) (35,342) --------------------------------------------------------------------------- Net cash from operating activities (34,803) 187,369 --------------------------------------------------------------------------- Cash flows from investing activities Interest received 5,420 512 Acquisition of property, plant and equipment (879) (1,668) Proceeds from sale of plant and equipment 106 174 Acquisition of subsidiary net of cash acquired (73,304) - --------------------------------------------------------------------------- Net cash from investing activities (68,657) (982) --------------------------------------------------------------------------- Cash flows from financing activities Dividends paid (44,990) (31,757) Proceeds from the issue of share capital 1,367 9,234 Drawdown / (repayment) of borrowings 1,000 (15,000) --------------------------------------------------------------------------- Net cash from financing activities (42,623) (37,523) --------------------------------------------------------------------------- Net (decrease) / increase in cash and cash equivalents (146,083) 148,864 Cash and cash equivalents at 1 January 142,841 (6,023) --------------------------------------------------------------------------- Cash and cash equivalents at 31 December (3,242) 142,841 --------------------------------------------------------------------------- Bovis Homes Group PLC Group statement of recognised income and expense For the year ended 31 December 2007 2007 2006 Â£000 Â£000 -------------------------------------------------------------------------- Effective portion of changes in fair value of interest rate cash flow hedges 160 642 Deferred tax on changes in fair value of interest rate cash flow hedges (48) (193) Actuarial gain on defined benefits pension scheme 3,750 8,640 Deferred tax on actuarial movements on defined benefits pension scheme (1,325) (2,592) Deferred tax on other employee benefits (790) 218 -------------------------------------------------------------------------- Net expense recognised directly in equity 1,747 6,715 Profit for the period 86,859 95,038 -------------------------------------------------------------------------- Total recognised income and expense for the period attributable to equity holders of the parent 88,606 101,753 -------------------------------------------------------------------------- Notes to the accounts 1 Basis of preparation 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 2007 comprise the Company and its subsidiaries (together referred to as 'the Group') and the Group's interest in associates. The consolidated financial statements were authorised for issue by the directors on 7 March 2008. 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 2006 or 2007. The information contained in this statement has been extracted from the statutory accounts of Bovis Homes Group PLC for the year ended 31 December 2007, 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 consolidated financials statements have been prepared in accordance with IFRS as adopted by the EU, and the accounting policies have been applied consistently for all periods presented in the consolidated financial statements. The preparation of financial statements in conformity with IFRS 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 judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. In 2006, the total Provisions balance of Â£2,114,000 as at 31 December 2006 was disclosed on the face of the balance sheet as a non-current liability. This has been reclassified for the 2006 comparative balance sheet in 2007, to be consistent with the presentation of this item in 2007. The impact is to move Â£602,000 from non-current into current liabilities on the face of the 2006 comparative balance sheet. 2 Basis of consolidation The consolidated financial statements incorporate the accounts 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. 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. 3 Accounting policies There have been no changes to the Group's accounting policies. These accounting policies will be disclosed in full within the Group's forthcoming financial statements. 4 Reconciliation of net cash flow to net debt 2007 2006 Â£000 Â£000 -------------------------------------------------------------------------- Net (decrease) / increase in net cash and cash equivalents (146,083) 148,864 (Drawdown) / repayment of borrowings (1,000) 15,000 Fair value adjustments to interest rate swaps 160 642 Net debt at start of period 102,681 (61,825) -------------------------------------------------------------------------- Net debt at end of period (44,242) 102,681 -------------------------------------------------------------------------- Analysis of net debt: Cash and cash equivalents (3,242) 142,841 Bank loans (41,000) (40,000) Fair value of interest rate swaps - (160) -------------------------------------------------------------------------- Net debt (44,242) 102,681 -------------------------------------------------------------------------- 5 Income taxes Current tax Current tax expense is the expected tax payable on the taxable income for the year, calculated using a corporation tax rate of 30% applied to the pre-tax income, adjusted to take account of deferred taxation movements and any adjustments to tax payable for previous years. Current tax for current and prior years is classified as a current liability to the extent that it is unpaid. Amounts paid in excess of amounts owed are classified as a current asset. 6 Reconciliation of 2006 Income statement and key performance metrics from reported to underlying Group Income Statement Year ended 31 2006 Reported Pension credit 2006 Underlying December 2006 Â£000 Â£000 Â£000 ---------------------------------------------------------------------------- Revenue - continuing operations 597,290 - 597,290 ---------------------------------------------------------------------------- Gross profit 190,086 - 190,086 Administrative expenses (48,803) (3,470) (52,273) ---------------------------------------------------------------------------- Operating profit before financing costs 141,283 (3,470) 137,813 Net financing costs (5,799) - (5,799) ---------------------------------------------------------------------------- Profit before tax 135,484 (3,470) 132,014 Income tax expense (40,446) 1,041 (39,405) ---------------------------------------------------------------------------- Profit for the period 95,038 (2,429) 92,609 Administrative expenses ratio to revenue 8.2% 8.7% Operating profit margin 23.7% 23.1% Return on capital employed 20.5% 20.0% 7 Acquisition of Elite Homes Group Ltd On 12 October, the Group acquired Elite Homes Group Ltd. Total consideration was Â£72.3 million, of which Â£25.7 million was paid to the shareholders of Elite, Â£46.2 million related to the settlement of outstanding loans, and Â£0.4 million related to directly attributable transaction costs. Pre acquisition Fair value Fair value adjustment Â£000 Â£000 Â£000 ------------------------------------------------------------------------------------ Property, plant and equipment 278 - 278 Inventory 69,175 2,099 71,274 Trade and other receivables 1,428 - 1,428 Cash and cash equivalents (1,051) - (1,051) Trade and other payables (10,269) - (10,269) Current tax 2,025 - 2,025 Deferred tax - (608) (608) ------------------------------------------------------------------------------------ Total 61,586 1,491 63,077 Goodwill 9,176 ------------------------------------------------------------------------------------ Consideration 72,253 ------------------------------------------------------------------------------------ Satisfied by Cash 25,700 Assumption of debt 46,154 Transaction costs 399 ------------------------------------------------------------------------------------ Total consideration 72,253 ------------------------------------------------------------------------------------ The Â£2,099,000 uplift to the carrying value of inventory has been recognised to reflect the fair value of land and WIP acquired. The Â£608,000 deferred tax adjustment relates to the fair value change in inventory. These fair value adjustments are provisional, and will be confirmed within 1 year of the transaction. Elite Homes contributed Â£16.7 million of revenue and Â£2.9 million to gross profit for the period 12 October to 31 December 2007. Had the acquisition been made on the first day of 2007, the combined revenue of the Group would have been Â£593.5 million and the combined operating profit would have been Â£125.7 million. The goodwill balance relates to the acquisition of Elite Homes Group Ltd during 2007. Goodwill has arisen as a result of two main factors. Firstly, synergy arising from the integration of and subsequent rationalisation of Elite Homes with the existing Bovis Homes Northern region as a result of the overlap and duplication of the organisational structures existing alongside each other in the North West and Yorkshire in a highly replicated way. Secondly, the acquisition has allowed the Group access to the expertise and contacts of the Elite Homes buying team which the Group anticipates will offer future strategic and consented land opportunities. The Group has performed an impairment review on Elite Homes, and is satisfied that its recoverable amount as determined by value-in-use calculations is in excess of the carrying value of assets and liabilities, together with the goodwill arising on consolidation. The key assumptions for this include a discount rate of 7.0% based on the Group's post-tax weighted average cost of capital, and the internal management forecasts covering the period determined by the full utilisation of the existing consented land bank. These forecasts were generated at the point of acquisition, using forward looking estimates and growth rates based on market assessments made at the time of the transaction, and have been reviewed following the first quarter's trading. For the purposes of this review the goodwill has been allocated to the cash generation unit of Elite Homes. 8 Dividends The following dividends were paid by the Group. 2007 2006 Â£000 Â£000 ------------------------------------------------------------------------------ Prior year final dividend per share of 20.0p (2006: 16.7p) 23,976 19,826 Current year interim dividend per share of 17.5p (2006: 10.0p) 21,014 11,931 ------------------------------------------------------------------------------ Dividend cost 44,990 31,757 ------------------------------------------------------------------------------ A final dividend in respect of 2007 of 17.5p per share, amounting to a total dividend of Â£21,026,000 based on the shares in issue as at 7 March 2008, was proposed by the Board on 7 March 2008. This final dividend will be paid subject to approval on 23 May 2008 to shareholders on the register at the close of business on 28 March 2008. This dividend has not been recognised as a liability at the balance sheet date. 9 Earnings per share Basic earnings per ordinary share for the year ended 31 December 2007 is calculated on profit after tax of Â£86,859,000 (year ended 31 December 2006: Â£95,038,000) over the weighted average of 119,984,811 (year ended 31 December 2006: 119,103,110) ordinary shares in issue during the period. The impact of the 2006 one-off pension credit of Â£3.5 million on basic earnings per share can be analysed as follows: 2007 2006 Pence Pence --------------------------------------------------------------------------- Basic earnings per share 72.4 79.8 Effect of one-off pension credit, net of related tax - (2.0) --------------------------------------------------------------------------- Earnings per share stated before pension credit, net of related tax 72.4 77.8 --------------------------------------------------------------------------- Diluted earnings per ordinary share is calculated on profit after tax of Â£86,859,000 (year ended 31 December 2006: Â£95,038,000) over the diluted weighted average of 120,244,911 (year ended 31 December 2006: 119,523,151) ordinary shares potentially 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. 10 Circulation to shareholders The consolidated financial statements will be sent to shareholders on or about 8 April 2008. Further copies will be available on request from the Company Secretary, Bovis Homes Group PLC, The Manor House, North Ash Road, New Ash Green, Longfield, Kent DA3 8HQ. Further information on Bovis Homes Group PLC can be found on the Group's corporate website www.bovishomes.co.uk/plc, including the slide presentation document which will be presented at the Group's results meeting on 10 March 2008. This information is provided by RNS The company news service from the London Stock Exchange

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