// BLOCK WATNE GRUPPEN QUARTER //

Transcription

1 // BLOCK WATNE GRUPPEN QUARTER //

2 Block Watne Gruppen ASA REPORT FOR THE THIRD QUARTER 2006 Strong profit Stable progress for margins Solid order intake and backlog Key figures Block Watne Gruppen ASA NOK Q Q (*) (*) 2005 (*) Operating revenue Operating costs Operating profit (EBIT) Profit before tax (EBT) Net profit of the period Cash flow from operating activities (26 416) New orders Order backlog EBIT margin 14.5 % 13.3 % 14.5 % 13.1 % 14.0 % EBT margin 12.2 % 10.7 % 12.4 % 10.6 % 11.6 % Operating profit margin 8.8 % 7.7 % 9.5 % 7.6 % 8.3 % Earnings per share (NOK) Closing price (NOK) n/a n/a No. of employees (*) Comparing figures are pro forma figures as the group was established per 30 November // PAGE 1 //

3 Operating revenue The group achieved operating revenues of NOK 355 million in the third quarter of 2006, a reduction of roughly NOK 9 million from the same period of A warning of this decline was given when presenting the interim report for the second quarter, and reflects displacements in certain projects as well as capacity challenges for some district office in relation to subcontractors and in-house staffing. Operating revenues totalled NOK million for the first nine months, about NOK 11 million down from the same period of Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Operating revenues per quarter Operating profit Operating profit (EBIT) for the third quarter came to NOK 52 million, roughly NOK 3 million higher than in the same period of last year. The EBIT margin rose from 13.3 per cent in the third quarter of 2005 to 14.5 per cent. Operating profit for the first nine months was NOK 157 million (14.5 per cent), compared with NOK 144 million (13.1 per cent) for the same period of This represents an increase of 9.1 per cent. The improvement reflects a relatively higher turnover for Residential project developments and Property sales with a commitment to construction % Profit before tax (EBT) came to NOK 44 million for the third quarter, compared with NOK 39 million for the same period of last year. The corresponding figures for the first nine months were NOK 135 million and NOK 116 million, representing a growth of 16.1 per cent. Order backlog The order backlog at 30 September totalled NOK 980 million, compared with NOK 856 million a year earlier. Representing a 14.5 per cent increase, this provides a good basis for future production Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 EBIT EBIT margin 16 % 14 % 12 % 10 % 8 % 6 % 4 % 2 % 0 % Operating profit (EBIT) per quarter Cash flow Cash flow from operations was NOK 18 million during the third quarter and NOK 52 million for the first nine months. No investment worth mentioning was made during the first nine months. Group liquidity is good. IFRS The consolidated accounts have been presented in accordance with the International Financial Reporting Standards (IFRS) and interpretations specified by the International Accounting Standards Board (IASB). This represents the second set of interim accounts presented by the group under the IFRS, and IFRS 1 has been applied. Further details are provided in the notes to the consolidated accounts. // PAGE 2 //

4 Key figures by project category NOK Q Q (*) (*) 2005 (*) Residential project development (GR) Revenues Contribution margin Gross contribution margin ratio 31.4 % 30.8 % 32.0 % 30.1 % 30.4 % Residential construction for individual customers (EAT) Revenues Contribution margin Gross contribution margin ratio 27.9 % 34.0 % 29.6 % 32.3 % 31.7 % Property sales with commitment to construction (EF) Revenues Contribution margin Gross contribution margin ratio 35.2 % 32.7 % 35.1 % 33.0 % 34.5 % Construction for professional clients (SK) Revenues Contribution margin Gross contribution margin ratio 22.8 % 33.5 % 23.6 % 29.0 % 28.6 % Other Revenues (2 182) Contribution margin (6 683) (6 308) (14 511) (11 956) (18 294) Total Revenues Contribution margin Gross contribution margin ratio 29.5 % 29.3 % 30.3 % 29.2 % 29.2 % (*) Comparing figures are pro forma figures as the group was established per 30 November Contribution margin is revenues deducted variable project costs. Gross contribution margin ratio is contribution margin dived by revenues. The contribution margin ratio for the group as a whole in the third quarter was 29.5 per cent, compared with 29.3 per cent for the same period of This increase reflects improved earnings from Residential project developments and Property sales with a commitment to construction. The contribution margin ratio for Residential construction for individual customers and Professional clients was rather lower than in the third quarter of For the first nine months, the contribution margin ratio was 30.3 per cent, compared with 29.2 per cent for the same period of This increase largely reflects better earnings for Residential project developments. Description of project categories: Residential project development (GR) - Block Watne acquires and develops land, constructing and selling houses to end customers. Residential construction for individual customers (EAT) - Block Watne constructs one of its standard single-unit houses on property owned by the customer, who is responsible for foundations and land development Property sales with a commitment to construction (EF) - Block Watne sells pre-regulated properties prepared for construction work with an obligation to build a Block Watne house. Construction for professional clients (SK) - Residential construction for professional clients, typically tenants associations, housing cooperatives, local authorities or property developers building for resale. Other items - Sales to employees (construction materials, kitchen), reinvoiced rents, hire of carpenters, repayments, and the cost of guarantees and complaints. // PAGE 3 //

5 Order intake Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Construction for professional clients Property sales Residential construction Residential project development Order intake in the third quarter was NOK million, compared with NOK million for the same period of 2005, a decline of 4.8 per cent. Based on the strong order intake in the first half 2006, sales starts are postponed in certain projects in third quarter to gain a better balance between order backlog and production capacity. Net order intake for the first nine months was NOK million, seven per cent higher than the NOK million in the same period of Order backlog per project cathegory Q4 05 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Construction for professional clients Property sales Residential construction Residential project development The order backlog is defined as remaining to be invoiced under registered contracts Block Watne Gruppen s order backlog at 30 September was NOK 980 million, a decrease of NOK 25 million or 2.5 per cent in the third quarter. This reduction related primarily to Residential project developments (NOK 23 million). Compared with 30 September 2005, the order backlog rose by NOK 123 million or 14.4 per cent. // PAGE 4 //

6 Order backlog by housing starts and non-starts Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Starts Non-starts Total order backlog (remaining to be invoiced) at the end of each quarter, broken down by contract starts and non-starts. A distinction is made between the backlog of housing starts and non-starts, since the time until revenues are received will normally be shorter for contracts under way than those waiting to start. The backlog of started contracts at 30 September was NOK 574 million, compared with NOK 555 million at 30 June 2006 and NOK 481 million at 30 September last year. The group had 121 started but unsold units at 30 September, as against 101 at the same date in A total of 17 unsold units were completed at 30 September, including 16 show houses. That compares with 20 unsold units at 30 June 2006, including 16 show houses. Employees The company had 605 employees doing at least 50 per cent of a full-time job at 30 September. Of these, 210 were white-collar staff and 395 were carpenters (including apprentices). Comparable figures for the same date in 2005 were 566 employees, 200 white-collar staff and 366 carpenters (including apprentices). The increase of 10 white-collar staff relates largely to production-oriented functions. Growth in the Norwegian building industry as a whole also means higher demand for carpenters and productionoriented expertise. Block Watne recruited five production-oriented white-collar staff and 35 carpenters and apprentices during the third quarter. A particular commitment is being made to recruiting apprentices, and the business employed 50 such trainees at 30 September. Further measures aimed at recruiting production-oriented personnel will continue during the year. Sickness absence Q Q Short-term 2.9 % 2.5 % 3.4 % 3.1 % 3.2 % Long-term 3.4 % 4.8 % 4.3 % 3.4 % 4.0 % Total 6.3 % 7.3 % 7.7 % 6.5 % 7.2 % One accident causing lost time was recorded in the third quarter, compared with two for the same period of There were 14 accidents leading to lost time in the first nine months, as against 10 in the same period of last year. None of these incidents led to serious injury or permanent disability. Long-term sickness absence declined over the year from 5.5 per cent at 1 January 2006 to 3.4 per cent at 30 September. Such absence was 1.4 per cent lower in the third quarter than in the same period of As a member of Norway s inclusive workplace (IA) scheme, the company observes established IA procedures. // PAGE 5 //

7 Health, safety and the environment The group regularly carries out legally-required training activities in the HSE field as well as unannounced inspections at its building sites. A number of measures were initiated during the first nine months in such areas as observing regulations on the use of scaffolding and building site supervision. Unannounced HSE inspections of building sites are carried out by third parties. The frequency of such checks has been increased in the second half to achieve further improvements in HSE work. HSE receives continuous management attention. Financial aspects CASH FLOW BWG ASA group NOK Q Q3-2005(*) (*) 2005 (*) Net cash flow from operating activities Net cash flow from investing activities (1 622) (2 376) (5 243) (6 321) (2 752) Net cash flow from financing activities (9 223) (53 847) (88 464) (78 289) Net change in cash and cash equivalents (23 773) (41 391) Net interest-bearing debt (*) Comparing figures are pro forma figures as the group was established per 30 November Only minor investments were made in the third quarter. The net sum of NOK 144 million in new equity was received from the initial public offering in connection with the stock market listing during the first quarter. NOK 252 million in long-term loan was repaid during the first half-year. Shareholders Block Watne Gruppen ASA was listed on the Oslo Stock Exchange with effect from 17 March The group was included in the OSE s Match list with effect from 16 June. The company had 739 shareholders at 30 September, of whom 45 (6.1 per cent) were foreigners. Foreign shareholders owned 9.7 million shares at 30 September, corresponding to 21.6 per cent. Chief executive Lars Nilsen held per cent of the shares through his companies Lani Development AS and Lani Industrier AS, while 161 Block Watne employees owned 0.33 per cent of the shares between them. At 30 September, the 10 largest shareholders were: Shareholder No of shares % of shares Lani Development AS shares % Lani Invest AS shares % Morgan Stanley & Co. Inc (NOM) shares 3.82 % Pareto Aksje Norge shares 3.18 % Bank of New York, Brussels Branch shares 2.57 % GMO Small Foreign Companies Fund shares 2.46 % Bank of New York, Brussels Branch (NOM) shares 2.01 % Vital Forsikring ASA shares 1.97 % AG Invest AS shares 1.94 % Verdipapirfond Odin Norden shares 1.88 % Total 10 largest shareholders shares % Total number of shares shares % A total of 34 million BWG shares were traded on the Oslo Stock Exchange from 17 March to 30 September. The figure for the third quarter was 2.9 million. The closing price on 30 September was NOK // PAGE 6 //

8 Outlook We continue to expect a good and stable market for our products during the months to come and into We also take a positive view of demand in our business detached/low-rise houses and flats outside city centres for 2007 and The Norwegian construction business in general continues to experience heavy pressure on capacity, and particularly on labour. This pressure is not expected to ease in the short term, but we expect an improvement over time. In light of this position, we have seen no financial benefit in forcing an increase in operating revenues. We are accordingly maintaining our goal of operating revenues for 2006 on a par with last year s performance, combined with stronger margins and higher earnings. To ensure sensible growth in 2007, we have worked purposefully during recent months to expand our production capacity. During the third quarter, we increased in-house capacity for building supervisors/project managers by five new employees, and the number of carpenters by 35 new recruits. We expect a further increase in our production-oriented capacity during the present year. The group had a very high order backlog at 30 September, which was 14.4 per cent higher than a year earlier. Oslo, 6 November 2006 Board of directors of Block Watne Gruppen ASA // PAGE 7 //

9 Principal figures - Block Watne Gruppen ASA, consolidated accounts The group was established on 30 November 2005 through the acquisition by Block Watne Gruppen of all the shares in Block Watne AS and Hetlandhus AS. Block Watne owns the Norpartner Sp.z.o.o. subsidiary in Poland. Pro forma profit and loss accounts have been prepared for the third quarter of 2005 and fiscal 2005 as well as a pro forma balance sheet for the third quarter of 2005, in each case as if the group were established at 1 January The pro forma figures cover the business operations of the companies corrected for pro forma financial expenses and amortisation of additional value as shown below. PROFIT AND LOSS ACCOUNT Block Watne Gruppen ASA group NOK Notes Q Q (*) (*) 2005 (*) Operating revenue Cost of stocks 2 ( ) ( ) ( ) ( ) ( ) Payroll expenses (70 277) (70 534) ( ) ( ) ( ) Other operating expenses 4 (20 764) (18 265) (72 653) (58 810) (99 246) EBITDA Depreciations (1 275) (1 200) (3 694) (3 975) (5 253) EBIT Financial income and costs 1 (8 058) (9 531) (22 032) (27 661) (37 256) EBT Tax 5 (12 221) (10 926) (31 914) (32 505) (47 784) Net profit of the period Earnings per share (NOK) Diluted earnings per share (NOK) EBITDA margin 14.9 % 13.7 % 14.8 % 13.5 % 14.4 % EBIT margin 14.5 % 13.3 % 14.5 % 13.1 % 14.0 % EBT margin 12.2 % 10.7 % 12.4 % 10.6 % 11.6 % Operating profit margin of the period 8.8 % 7.7 % 9.5 % 7.6 % 8.3 % Change operating revenue (2.4 %) (1.1 %) Change EBIT 6.3 % 9.1 % Change EBT 11.6 % 16.1 % Tax % of EBT 5 28 % 28 % 24 % 28 % 28 % Pro forma adjustments 1. Charged added value land (4 202) (12 606) (16 808) 2. Interest received Interest expenses (6 581) (19 744) (26 325) Pro forma adjustments before tax (10 490) (31 469) (41 958) 4. Tax 28 % of Pro forma adjustments after tax (7 552) (22 657) (30 210) (*) Comparing figures are pro forma figures as the group was established per 30 November EQUITY Changes in equity - consolidated Block Watne Gruppen ASA group NOK Q Q (*) (*) 2005 (*) Net dividends and group contribution to shareholders 0 ( ) ( ) Corrected for pro forma adjustments Conversion differences Net charged equity ( ) ( ) Net new equity connected to the IPO Costs connected to the IPO 0 0 (20 654) 0 0 Profit of the period Total changes in equity of the period (69 320) (39 319) (*) Comparing figures are pro forma figures as the group was established per 30 November // PAGE 8 //

10 BALANCE SHEET Block Watne Gruppen ASA group NOK Notes ASSETS Fixed assets Other intangible fixed assets Trademark Goodwill Total intangible fixed assets Land and buildings Machinery and plant Total tangible fixed assets Investments in subsidiaries Loans to associates Other receivables Total financial fixed assets Total fixed assets Current assets Buildings under construction Properties for sale 2, Land Total buildings and land Trade receivables Other receivables Market value of financial instruments Total accounts receivable Cash and cash equivalents Total current assets Total assets EQUITY AND LIABILITIES Equity Share capital ( ) shares á NOK Share premium reserve Total contributed equity Group reserve (31 771) Total retained earnings (31 771) Total equity Liabilities Pension liabilities Deferred tax liability Total provisions Subordinated loans Liabilities to financial institutions Total non-current liabilities Liabilities to financial institutions Trade payables Tax payable Tax deduction and other deduction Current liabilities related to land and projects Other current liabilities Total current liabilities Total liabilities Total equity and liabilities (*) Comparing figures are pro forma figures as the group was established per 30 November // PAGE 9 //

11 CASH FLOW Block Watne Gruppen ASA group NOK Q Q (*) (*) Net cash flow from operating activities (26 416) Net cash flow from investing activities (1 622) (2 376) (5 243) (6 321) (2 752) Net cash flow from financing activities (9 223) (53 847) (88 464) (78 289) Net change in cash and cash equivalents (23 773) (41 391) Cash and cash equivalents by start of period Cash and cash equivalents by end of period Interest-bearing debt Subordinated loan Liabilities to financial institutions Current liabilities to financial institutions Cash and cash equivalents (88 088) (68 953) ( ) Net interest-bearing debt (*) Comparing figures are pro forma figures as the group was established per 30 November // PAGE 10 //

12 NOTES TO THE CONSOLIDATED ACCOUNTS ACCOUNTING PRINCIPLES The Block Watne Gruppen ASA group is domiciled in Norway. The consolidated accounts for the business for the first quarter of 2006 embrace the parent company (business office in Oslo) and its subsidiaries Block Watne AS (Oslo), Norpartner Sp.z.o.o. (Opole, Poland) and Hetlandhus AS (Oslo). The interim accounts were presented by the board on 6 November DECLARATION THAT THE FINANCIAL STATEMENTS ACCORD WITH THE IFRS The consolidated accounts have been presented in accordance with the International Financial Reporting Standards (IFRS) and interpretations specified by the International Accounting Standards Board (IASB). This represents the third set of accounts presented by the group under the IFRS, and IFRS 1 has been applied. The interim accounts have been presented in accordance with the rules in IAS 34. BASIS FOR PREPARING THE STATEMENTS The financial statements are presented in Norwegian kroner, rounded off to the nearest thousand. They have been prepared on the basis of the historical cost convention with the exception of financial derivatives, which are recognised in the balance sheet at their fair value. Fixed assets held for sale are recognised at the lower of the amount carried in the balance sheet and fair value less sales expenses. Preparing financial statements in conformity with the IFRS requires the management to make use of estimates and assumptions which affect the application of the accounting principles and the reported amounts of assets and liabilities, revenues and expenses. Estimates and associated assumptions are based on historical experience and other factors regarded as reasonable in the circumstances. These calculations form the basis for assessing the capitalised value of assets and liabilities which do not find clear expression from other sources. The actual result can vary from these estimates. Estimates and the underlying assumptions are assessed on a continuous basis. Changes in accounting estimates are recognised in the period when the changes arise providing that they apply only to that period. Should the changes also apply to future periods, the effect will be allocated over the present and future periods. Assumptions made by the management when applying the IFRS which have a substantial effect on the financial statements and estimates which involve a substantial risk of being significantly adjusted in the next fiscal year are described in note 3. The accounting principles specified below have been applied consistently for all the periods presented in the consolidated accounts and in preparing an IFRS balance sheet at 1 January 2004 in connection with the transition to the IFRS. These accounting principles have been applied consistently by all the companies in the group. CONSOLIDATION PRINCIPLES Subsidiaries Subsidiaries are units controlled by the group. Control exists when the group has a controlling influence, directly or indirectly, on the unit s financial and operational management, and thereby benefits from its operations. When determining whether a controlling influence exists, the effect of potential voting rights which can be exercised or converted immediately is taken into account. Financial statements for subsidiaries are consolidated from the time when control transfers to the group, and de-consolidated when the control ceases. Associated companies Associated companies are entities where the group exercises significant influence, but not control, over financial and operational management. The consolidated accounts include the group s share of the associated company s profit or loss in accordance with the equity method from the time when significant influence is established and until such influence ceases. Insignificant holdings in associated companies are recognised in accordance with the historical cost method. When the group s share of a loss exceeds the investment in an associated company, the carrying amount in the group balance sheet is reduced to zero and no further losses are recognised in the profit // PAGE 11 //

13 and loss account unless the group has incurred legal or constructive obligations or has made payments on behalf of an associated company. Joint ventures A merged enterprise which embraces companies or activities under joint control is a joint venture when all the joint companies or activities are controlled by the same party or parties both before and after the creation of the joint venture, and where this control is not temporary. In the absence of more specific guidance, fair value is utilised for all transactions under joint control. Elimination of transactions in the consolidation Intra-group balances and possible unrealised gains and losses or revenues and expenses related to intra-group transactions are eliminated when preparing the consolidated accounts. Unrealised gains related to transactions with associated companies are eliminated in accordance with the equity interest in the company. Unrealised losses are eliminated in the same way, but only to the extent that no indications exist of an impairment in value. FOREIGN CURRENCIES Transactions in foreign currencies Transactions in foreign currencies are translated at the exchange rate prevailing on the transaction date. Monetary assets and liabilities in foreign currencies are translated to Norwegian kroner at the exchange rate prevailing on the balance sheet date. Currency differences arising from the translation are recognised in the profit and loss account. Financial statements of foreign businesses Assets and liabilities in foreign businesses which arise in connection with the consolidation are translated to Norwegian kroner at the exchange rate prevailing on the balance sheet date. Revenues and expenses for foreign businesses are translated to Norwegian kroner at the approximate exchange rate prevailing on the transaction date. FINANCIAL DERIVATES The company uses financial derivatives to hedge against the interest rate risk which arises through operational, financial and investment activities. Under the holding company s financial guidelines, financial derivatives are not purchased or issued for trading purposes. Financial derivatives are recognised initially at historical cost. In subsequent periods, they are assessed for fair value. Gains or losses arising from a reassessment of fair value are recognised immediately in the profit and loss account. The fair value of interest swap agreements is the estimated amount that the group will receive or be required to pay in order to settle the contract on the balance sheet date when account is taken off the current level of interest rates and the creditworthiness of the counterparty. PROPERTY, PLANT AND EQUIPMENT Own assets Property, plant and equipment are recognised in the balance sheet at their acquisition cost less accumulated depreciation and possible impairment loss. The acquisition cost of operating assets of own manufacture includes material costs, direct pay costs and a share of overheads. When parts of the property, plant and equipment have different useful lives, they are recognised as separate items of property, plant and equipment. Leased assets Leases where the group acquires substantially all the risks and benefits are classified as financial leases. Depreciation Depreciation is calculated on a straight-line basis over the estimated lifetime of an item of property, plant or equipment and recognised in the profit and loss account. Land is not depreciated. Estimated useful lives are: Buildings years Machinery and equipment 3-5 years Fixtures and fittings 3-5 years // PAGE 12 //

14 INTANGIBLE FIXED ASSETS All merged enterprises are recognised in accordance with the acquisition method. Goodwill represents the amount which arises when acquiring a subsidiary, and is the difference between the acquisition cost at the acquisition date and the fair value of the net identified assets acquired. Goodwill is recognised in the balance sheet at acquisition cost less possible accumulated impairment. Goodwill is attributed to cash-generating units, and is not amortised but tested annually for impairment. Research and development Spending on research activities made with the expectation of achieving new scientific or technical knowledge and understanding is recognised as an expense in the profit and loss account for the period in which it is incurred. Expenditure on development activities in which research results are applied in a plan or model for producing new or significantly improved products or processes are recognised in the balance sheet to the extent that the product or process is technically and commercially feasible and the group has sufficient resources to complete the development. The expenses carried in the balance sheet include material costs, direct pay costs and a share of overheads. Other development costs are recognised in the profit and loss account for the period in which they are incurred. Development expenses carried in the balance sheet are recognised at their acquisition cost less accumulated depreciation and impairment. Amortisation Amortisation is calculated on a straight-line basis and recognised in the profit and loss account over the estimated useful life of the intangible fixed asset, unless such life is indefinite. Goodwill, trademarks and intangible fixed assets with an indefinite useful life are tested for impairment on the balance sheet date. LAND Land represents sites where development has not yet begun. Land is recognised in the profit and loss account at the lower of acquisition cost and net realisable value. Net realisable value is the estimated sales price in ordinary operation less estimated costs for completion and sales. BUILDINGS UNDER CONSTRUCTION Buildings under construction include acquisition cost and profit earned at the balance sheet date less a provision for bad debts and advance payments. Acquisition cost includes expenditures directly related to specific projects and a share of fixed and variable indirect costs incurred in the company s contract activities based on normal capacity utilisation. ASSETS FOR SALE Assets for sale comprise show houses it has been resolved to sell, but which remain unsold on the balance sheet date. Assets are valued at the lower of acquisition costs and estimated net market value. Assets for sale are not depreciated, but written down in the event of impairment. TRADE DEBTORS Trade debtors and other debtors are recognised in the profit and loss account at acquisition cost less impairment loss. CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash in hand and bank deposits. IMPAREMENT The carrying amounts of group assets, with the exception of investment property, holdings and deferred tax assets, are reviewed on the balance sheet date to assess whether there are indications of impairment. Should such indications be found, the recoverable amount of the asset is estimated. Recoverable amounts are estimated annually on the balance sheet date for goodwill and assets with an indefinite useful life. An impairment loss is recognised when the carrying amount of an asset or a cash-generating unit exceeds the recoverable amount. Impairment loss is recognised in the profit and loss account. Calculated impairment of cash-generating units is allocated so that the carrying amount of possible goodwill in the cash-generating unit is reduced first. The remaining impairment is then allocated proportionately between the remaining assets in the unit on the basis of their carrying amount. // PAGE 13 //

15 Calculation of recoverable amount The recoverable amount is the higher of net sales price and value in use. The latter is calculated by discounting estimated future cash flows to their present value, using the discount rate before tax which reflects the market s pricing of the value of money over time and the risk associated with the specific assets. For assets which do not primarily generate independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses on goodwill are not reversed. For other assets, impairment losses are reversed if a change occurs in the estimates used to calculate the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount which would have been determined net after depreciation or amortisation if no impairment loss had been calculated. EMPLOYEE BENEFITS Defined benefit pension plans The net obligation relating to defined benefit pension plans is calculated separately for each plan by estimating the size of future benefits earned by the employee through their work contribution in the present and previous periods. These future benefits are discounted in order to calculate their present value, and the fair value of pension fund assets deducted in order to establish the net obligation. The discount rate comprises the interest rate on the balance sheet date for company bond loans with particularly high creditworthiness and roughly the same duration as the group s obligations. These calculations are made by a qualified actuary, and based on a straight-line pension-earning model. When benefits in a plan are improved, the share of the improvement in benefits earned by the employee is recognised as an expense in the profit and loss account. All actuarial gains and losses are recognised immediately in the profit and loss account. PROVISIONS A provision is recognised in the balance sheet when the group has an existing legal or constructive obligation as a result of past events and it is more likely than not that an outflow of financial resources from the group will be required to settle the obligation. If the effect is substantial, the provision is calculated by discounting the estimated future cash flows with a discount rate before tax which reflects the market s pricing of the value of money over time and, where relevant, risks specifically associated with the obligation. Loss-making contracts A provision for loss-making contracts is recognised when the group s expected revenue from a contract is lower than unavoidable costs which would be incurred to settle the obligations under the contract. TRADE CREDITORS AND OTHER CURRENT LIABILITIES Trade creditors and other payment liabilities are recognised at cost. Interest-bearing loans and credits Interest-bearing loans and credits are recognised initially at their fair value less directly-attributable transaction costs. In subsequent periods, the interest-bearing liabilities are assessed at amortised cost and any difference between acquisition cost and redemption value is recognised over the life of the loan in accordance with the effective interest rate method. OPERATING REVENUES Construction contracts As soon as a reliable estimate of the outcome of a construction contract can be made, revenues and costs under the contract are recognised proportionately in the profit and loss account in relation to the degree of completion of the contract. As a basis for calculating the degree of completion, the group uses costs incurred in the project as a proportion of total expected project costs. Expected losses on contracts are recognised immediately in the profit and loss account. Project calculations are revised by the company on a continuous basis and assessed on a quarterly basis through specific reviews of the contract portfolio. The group s business consists in part of the purchase and development of real property for the construction and sale of houses, and in part of the construction of houses on land owned by others. When building houses on land owned by others, each contract is normally modest in size, and virtually all the value creation (accrual) period consists of a construction process which lasts for less than six months. // PAGE 14 //

16 When building for the group s own account, large construction sites are subdivided into smaller sites which can normally be sold and completed within the space of months. Only sold contracts are recognised as revenue, and continuing recognition is based on the expected final results (project calculation). Provisions have been made on the basis of experience for guarantee work on jobs recognised in revenue. An individual assessment is also carried out for possible major guarantee cases in order to assess the need to make a special provision in addition to the ordinary provision. The guarantee period for houses is normally five years. Disputed amounts and supplementary claims are either not recognised as revenue, or provisions are made for completing the work. EXPENCES Payments under operational leases Payments made under operational leases are recognised in the profit and loss account on a straight-line basis over the period of the lease. Net financial expenses Net financial expenses include interest charges on loans in accordance with the effective interest rate method, dividends, interest income on invested funds, currency gains or losses, and gains or losses on hedging instruments recognised in the profit and loss account. Fees paid for guarantees on advance payments under construction costs are also recognised as financial expenses. Income tax Income tax on the result for the period comprises tax for the period and deferred tax. Income tax is recognised in the profit and loss account with the exception of tax on items recognised directly against equity. The tax effect of the latter is recognised directly against equity. Tax for the period comprises expected tax payable at prevailing rates on the taxable result for the period and possible corrections of tax payable for earlier years. Deferred tax is calculated using the liability method on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the balance sheet. No account is taken of goodwill which is not tax-deductible. Provision for deferred tax is based on expectations about the realisation of or settlement for assets and liabilities in the balance sheet, and calculated on the basis of tax rates prevailing on the balance sheet date. Deferred tax assets are recognised only to the extent that it is probable that the asset can be utilised through future taxable profit. SEGMENT REPORTING A business segment is an identifiable part of the business which either delivers products or services (operational segment) or delivers products and services within a defined economic area (geographical segment), and which is subject to risks and returns which differ from those in other segments. Since the group s turnover is homogenous and primarily in Norway, only one segment has been identified. TRANSITION FROM NGAAP TO THE IFRS Block Watne Gruppen ASA is a new group formed on 1 December 2005, and has accordingly not published interim reports before. The main business of the group is activities which have been pursued for a number of years through the Block Watne subsidiary. This company has also not presented interim reports earlier. For information purposes, however, transition effects are presented in pro forma accounts for the first quarter of 2005 and fiscal The main adjustments from Norwegian generally-accepted accounting principles (NGAAP) to the IFRS are as follows: The group owns four commercial buildings which were each depreciated as a single unit under NGAAP. Under the IFRS, the various components are depreciated on a straight-line basis over their expected useful life. Accounting treatment of pension plans differs between the IFRS and NGAAP, primarily because of differences in discount rates. Intangible fixed assets such as goodwill and trademarks are not amortised under the IFRS, but tested for impairment in accordance with IAS 36. // PAGE 15 //

17 Dividend and group contribution are first recognised under the IFRS following a resolution of the general meeting. The IFRS sets stricter requirements for provisions. Certain general provisions under NGAAP have therefore been reversed in the IFRS accounts. NOTE 1 FINANCIAL DERIVATES The group entered into hedging contracts totalling NOK in the first quarter. These agreements do not satisfy the requirements for hedge accounting under IAS 39, and have been recognised at fair value on the balance sheet date. Changes in fair value are recognised in the profit and loss account. This had a gross negative effect on results of NOK for the third quarter 2006, but a positive effect of NOK per NOTE 2 - ESTIMATES Operating revenues and the cost of goods in the group derive from housing projects. Operating revenues and the cost of goods in uncompleted projects are influenced by estimates. See the note on the accounting principles. NOTE 3 ASSETS HELD FOR SALE Assets held for sale relate to show houses which it has been resolved to sell. This item has been reclassified from fixed assets to current assets. NOTE 4 SHARE ISSUE/STOCK EXCHANGE LISTING The group was listed on the Oslo Stock Exchange on 17 March In addition to costs recognised directly against equity, NOK was recognised in the profit and loss account for the first quarter as one-off costs under other operating expenses. NOTE 5 - TAX One-off costs for the IPO/stock market listing are tax-deductible This means that the tax rate per has been reduced from the normal level of roughly 28 per cent to about ca 24 per cent. // PAGE 16 //

18 Block Watne Gruppen ASA Munkedamsveien 45 P.O. Box 1817 Vika NO-0123 Oslo Tel