Annual report and accounts 2013

Transcription

1 Annual report and accounts 2013 Bovis Homes Group PLC

2

3 Strategic report A review of our business model, strategy and summary financial and operational performance Our Governance Detailed discussion of our governance framework and remuneration policy Financial statements Financial statements and notes Supplementary information Our business highlights 4 Bovis Homes at a glance 6 Chairman s statement 8 Our strategy 10 Housing market overview 12 Our business model 14 Business objectives Our performance 16 Chief Executive s report 22 Key performance indicators 26 Financial review 30 Risks and uncertainties 32 Directors and officers 33 Corporate governance report 42 Remuneration report 62 Audit Committee report 64 Nomination Committee report 66 Directors report 72 Auditor s report 75 Group income statement 75 Group statement of comprehensive income 76 Balance sheets 77 Group statement of changes in equity 78 Statement of cash flows 79 Notes to the financial statements 101 Five year record AGM Notice 105 Explanatory notes to the AGM Notice 107 Shareholder information 108 Principal offices 6 Chairman s statement Ian Tyler, new Chairman, discusses how the Group is well placed for the future. 16 Chief Executive s report David Ritchie provides an overview of the year and discusses the plans ahead. 26 Financial review Jonathan Hill reports on the financial performance for the year. Contents Annual report and accounts

4 Strategic report Our business 2013 highlights Financial highlights 31% s in revenues 48% s in profit before tax* 50% s in dividends Revenue ( m) 556.0m Gross margin (%) 23.4% ROCE (%) 10.4% * *Adjusted for IAS19R s in ROCE to 10.4% Net assets per share of 604p Profit before tax ( m) 78.8m * 2013 Operating margin (%) 14.9% * 2013 Earnings per share (p) 44.9p * Annual report and accounts Strategic report Our business

5 The Group has delivered significant growth in Return on Capital Employed during 2013 Operational highlights 10% s in average active sales outlets 34% s in sales rate per site 14% s in average sales price 48% s in private reservations Active sales outlets 90 Net private sales per site Average sales price () 195,100 Private reservations 2, , , , , ,334 1,653 1,873 2, Legal completions 2,813 Consented land bank 14,638 plots ,903 2,045 2,355 2, ,766 13,723 13,776 14, Bovis Homes Group PLC 3

6 Strategic report Our business Bovis Homes at a glance Our vision returns measured through return on capital employed over the cycle premium price measured through high operating margin quality measured through customer surveys A quality housebuilder delivering high returns generated from a strategically bought land bank and quality homes sold at a premium price quality product land bank measured through HBF ratings measured through profit potential in the land bank Bovis Homes is a builder of high quality traditional homes in England and Wales. The Group s business involves the design, build and sale of new homes for both private customers and Registered Social Landlords. The Group employs around 800 staff directly and up to a further 3,000 sub-contractors work on its sites on a daily basis. In 2013, the Group legally completed 2,813 homes on a mixture of greenfield and brownfield sites. 4 Annual report and accounts Strategic report Our business

7 Bovis Homes is a builder of high quality homes in England and Wales Where we operate North 298 legal completions in : 270 Midlands 472 legal completions in : 405 South 2,043 legal completions in : 1,680 Our homes Private and social homes legally completed in 2013 Private homes by type legally completed in 2013 Homes Private 2,330 83% Social % Total 2,813 Property type 2 Bedroom % 3 Bedroom 1,015 43% 4 & 5 Bedroom % Apartments % Total 2,330 Our consented land bank Ageing of land at 31 December 2013 Location of land at 31 December 2013 Plots Post downturn 1 9,197 63% Pre downturn 1 3,943 27% Written down 2 1,498 10% Total 14,638 Plots South 10,401 71% Midlands 2,705 19% North 1,532 10% Total 14,638 1 Plots held at cost (downturn being July 2008) 2 Plots held below cost at net realisable value Bovis Homes Group PLC 5

8 Strategic report Our business Chairman s statement Ian Tyler Chairman This is my first report to shareholders following my appointment as Chairman in November This is an exciting time for Bovis Homes and I have been pleased with the strong results for 2013, the successful deployment of the growth strategy and the considerable opportunity that I see for the Group going forward. The economic backdrop has shown signs of improvement over the last year and this has been reflected in a recovery in the UK housing market. The availability of mortgage finance is increasing in terms of the number of mortgages being approved, and the rates being charged on these mortgages are increasingly competitive. Although indices report that UK house prices increased strongly in 2013, after excluding the effects of London, house price rises are considered to have been modest across the country. However, the Government has also provided positive assistance, particularly through the Help to Buy scheme. As a result of these factors, consumer confidence has improved. With this improving backdrop, the management team at Bovis Homes has produced a strong set of results in 2013, delivering the targeted improvements in return on capital employed. The Group is increasingly benefiting from the compound positive effects of stronger volumes, higher average sales price and improving profit margins, driving profits and return on capital employed higher. The Group has also set the foundations for ongoing growth through its carefully targeted land acquisition strategy, continued product development and focus on balance sheet strength. Financial performance The Group delivered a strong increase in the return on capital employed by 2.7 ppts to 10.4% in 2013 with both profit margins and capital turn contributing to this improvement. The Group continues to be well capitalised with a strong balance sheet with net debt at the end of 2013 of 18 million. Earnings per share and dividends Basic earnings per share for the year have grown by 49% to 44.9p. Consistent with the intention to increase dividends progressively as earnings per share increase, the Board will be recommending a final dividend of 9.5p per share, which, when combined with the 2013 interim dividend of 4.0p, totals 13.5p for the year, an increase of 50% on the 2012 dividend. The final dividend will be payable on 23 May 2014 to shareholders on the register on 28 March It is the Board s intention to continue to pursue this progressive dividend approach. Future prospects While delivering a strong profit result in 2013, the Group has built a significantly improved forward sales position at the start of 2014, which underpins volume growth for this year. With another year of carefully targeted but assertive land investment in 2013 ahead of utilisation and a strong land pipeline going into 2014, sales outlets are expected to grow during 2014 and 2015, supporting further growth in reservation volumes. Assuming current market conditions continue, the location of these new sales outlets and the nature of the homes being developed is expected to further increase the Group s average sales price and improve profit margins. Together with a continued focus on balance sheet efficiency, this is expected to deliver further strong growth in both capital turn, profitability, and ultimately shareholder returns. People The Board of directors has been delighted with the commitment and skill shown by the Group s employees in delivering growth during 2013 and, on behalf of the Board, I would like to thank them for their dedication and hard work. The Board would also like to extend its thanks to its subcontractors and suppliers. Corporate governance Bovis Homes is committed to high standards of corporate governance, including those related to the role and effectiveness of the Board and compliance with the UK Corporate Governance Code. Details are set out in the corporate governance section on pages 33 to Annual report and accounts Strategic report Our business

9 The Group has achieved excellent progress in 2013 with improved profitability and is well positioned for further growth Corporate social responsibility The Group remains committed to delivering strong Corporate Social Responsibility performance. During 2013, the Group was able to maintain its health and safety track record, as measured by incidence rate, notwithstanding a significant increase in build activity. In respect of customer satisfaction, 93% of customers were happy to recommend Bovis Homes to their friends. Focus remains high in the Group to make further improvements in both of these important areas, as part of the overall Corporate Social Responsibility strategy. Conclusion Looking ahead, I believe that the Group has the right strategy in place to deliver enhanced, sustainable shareholder returns in the years ahead and I look forward to working with the Board and executive team to continue the Group s success. Ian Tyler Chairman Bovis Homes Group PLC 7

10 Strategic report Our business Our strategy Improving returns The Group s strategy remains to deliver material improvement in shareholder returns in the short term and maintain strong returns over the housing market cycle. In the foreseeable future the Group aims to achieve this by increasing profitability whilst improving the efficiency of capital employed. At the same time the Group will target making investments to enhance future returns potential in the land bank. At a certain point the Group will reduce the current assertive level of consented land purchase and drive profitability from converting more strategic land assets. Enhanced operating profit The Group is aiming to deliver enhanced profits in the foreseeable future from the compound positive effect of: Volume growth from a greater number of sales outlets combined with an improving sales rate per site from an improvement in the quality of the average active sales outlet. Higher average sales price from traditional homes on better located sales outlets. Stronger profit margins from an increasing proportion of legal completions from new higher margin sites. Enhancing future returns potential The future growth and profitability of the Group is driven by improving the gross profit potential in the consented land bank. The Group aims to deliver this by: Adding new consented sites to the land bank which will achieve higher profit margins. Continuing investment in strategic land and delivering strategic land conversion through achievement of residential planning consent. Progressively trading out older, lower margin sites. The high quality investments over the past four years have delivered material improvements in the future profit potential of the Group. As the consented land market becomes more competitive, land acquisition will reduce closer to replacement level and the Group will source more of its land from strategic land conversion. Increasing efficiency of capital employed Whilst investing assertively and rapidly growing output capacity, the Group needs to control the growth of capital employed by: Efficient cash utilisation with larger sites being acquired on deferred terms. Managing the land bank through acquiring mainly smaller sites and selectively selling consented land parcels on larger sites. Maintaining tight control of work in progress ROCE (%) 10.4% * 2013 Operating margin (%) 14.9% * 2013 Embedded gross margin in land bank 727m Capital turn *Adjusted for IAS19R Annual report and accounts Strategic report Our business

11 The Group has made good progress having successfully delivered on the strategies set out for 2013 Bovis Homes Group PLC 9

12 Strategic report Our business Housing market overview UK housing market in the medium term 000 Source: DCLG Housing market transactions est The total UK housing stock is estimated to be around 26 million homes. The average activity level over the long term within this market has resulted in 1.1 million transactions per annum. Post 2007 the housing market suffered a significant fall in activity levels initially to between 700,000 and 800,000 transactions, down from circa 1.6 million transactions during During 2013, this is estimated to have increased back above one million transactions. The contraction in activity was due to a large reduction in demand, driven by the lack of availability of mortgage finance, as banks delevered in the aftermath of the financial crisis. The fall in activity was accompanied by a fall in the average sales price of homes from a peak of 199,600 in August 2007 to a low point of 154,700 in April 2009 (according to Halifax), a fall of 22%. Adjusted for inflation, the real decrease has been greater. Underlying demand from household formation, based on the Government s latest estimates released in April 2013, suggested that English households were expected to grow by 221,000 per year through to In terms of new build supply, the number of new home completions in England as reported by the Government for the 12 months to 30 September 2013 was 107,950, an 8% decrease on the previous 12 months. Housing starts according to the Government for the 12 months to 30 September 2013 reached 117,110, an increase of 16% compared to the year before. Therefore the mismatch between longer term demand and supply continues. UK housing market in the short term Annual HPI Annual HPI to Dec 2012 to Dec 2013 Halifax -0.3% +7.5% Nationwide -1.1% +8.4% Hometrack -0.3% +4.4% Pricing During 2013 pricing has moved positively, having been relatively flat in nominal terms for the last four years. This positive change is particularly driven by the London market, which is estimated to have increased by around 15% according to Nationwide. Excluding London, prices in England are estimated to have increased by between 5% and 7%. Pricing is driven by the factors affecting demand and supply within the overall housing market. Housing demand Although demand is affected by a range of factors, including affordability, confidence in the future direction of house prices and confidence over future employment prospects, the key demand determinant over the last five years has been the availability of mortgage finance. Approvals of mortgages for house purchases Jan 2010 Dec 2013 Source: Bank of England The three years to 31 December 2012 saw highly constrained, but relatively stable level of mortgage approvals, fluctuating primarily in the range of 45,000 to 55,000 approvals per month. This issue particularly affected customers requiring higher loan to value mortgages, many of whom were first time buyers. The experience during 2013 has been significantly more positive, with monthly mortgage approvals having reached a high of 71,638 in December The Government announced during March 2013 that two products supported by the Government under the name Help to Buy would be launched. This announcement gained a high level of customer awareness and interest. The first product, a shared equity scheme, was launched in April 2013 exclusively for new build properties. 10 Annual report and accounts Strategic report Our business

13 The UK housing market is recovering with greater consumer confidence and improved availability of mortgage finance In the first six months of the scheme, 5,375 properties were acquired using the product. 92% of the purchasers were first time buyers and the average price of a property bought was 194,167. The second element of the scheme, a mortgage guarantee scheme, was launched in September 2013, the impact of which has yet to be understood. The overall impact of the announcement and the launch of the first product has been positive, not only in enabling more customers to access mortgage finance, but also in increasing consumers confidence to purchase. The decision by the Bank of England to withdraw the existing Funding for Lending Scheme support for mortgages is viewed positively by the Group, as it shows that the mortgage market is becoming more competitive. Housing Supply Demand versus supply 80 Net balance % RICS new buyer enquiries -60 RICS new vendor instructions Source: RICS From 2010 to 2012 the quantity of buyers and vendors was relatively balanced. With the improving consumer confidence supported by the Government Help to Buy scheme, the level of demand in the housing market has improved substantially. Residential land The price of residential land is a residual value calculation, with a developer willing to pay a land price based on expected incomes less costs and a required development margin. When residential house prices change, the value of a piece of land tends to move by a factor of two or three. The value of residential land is also affected by the number of purchasers and the amount and type of residential land coming to market, as well as potential purchasers confidence of future house price movements. During the last four years, the number of residential land purchasers in the market has remained relatively stable. Private housebuilders have struggled to access bank finance to fund their purchase at the leverage and at the price that they require and have effectively not been significant market participants. The main purchasers have been publicly listed housebuilders, who have demonstrated a disciplined approach when acquiring land. Falling Rising Until more capital becomes available to the wider new build sector, it is unlikely that the number of purchasers will increase substantially. % Source: HBF Residential planning approvals Units Projects H12013 In terms of the supply of residential land, the quantity of planning applications made and granted fell significantly from 2008 to With the launch of the National Policy Planning Framework ( NPPF ) in March 2012, the supply of residential land has increased materially in 2012 and H Different types of residential land sites come to market in terms of size, product type, location and former use (greenfield or brownfield). Larger sites, particularly in the south of England, tend to attract relatively few purchasers due to capital commitments, whereas smaller sites up to 50 plots may attract many more. Again, the product mix on a site may attract different levels of demand with, for instance, apartment schemes in city centres (outside London) likely to attract a limited number of purchasers, compared to traditional two storey detached housing sites. Overall, the demand and supply dynamic of the land market remains favourable for well funded purchasers and residential land can be purchased at sensible returns. Competitors The second hand market remains the main competition for Bovis Homes. In a normal year, the Group would expect around 90% of residential transactions to be second hand, with pricing in the new build sector being set by reference to that market. The de-stocking by the housebuilders between 2008 and 2010 led to new build contributing a greater proportion of residential transactions. This was supported by housebuilders providing finance by way of shared equity products to home buyers, which enabled certain buyers to acquire homes with lower levels of equity in the new build market compared to the second hand market. With overall consumer confidence improving and transaction numbers increasing materially, it is likely that the new build sector will move back towards 10% of total housing market transactions. Bovis Homes Group PLC 11

14 Strategic report Our business Our business model Sales Build Design Land acquisition Driving value across the cycle A quality housebuilder delivering high returns generated from a strategically bought land bank and quality homes sold at a premium price Activities Driving value Investing in quality consented land Investing in and promoting strategic land Creating desirable homes Creating high quality environments Delivering efficient and cost effective build to a high standard Building strong relationships with materials suppliers and sub-contractors Providing great customer service Delivering a quality home at a premium price Bovis Homes DNA Long term strategic investment in land to drive returns over the cycle Operational effectiveness balancing contribution across all operating assets High quality homes sold for a premium price 12 Annual report and accounts Strategic report Our business

15 How the business invests in land over time will drive the Return on Capital Employed over the cycle, the key measure of success ROCE is expected to grow substantially with strong profit growth and material improvements in capital turn, assuming current market conditions continue Strategic objectives Risks involved Measuring success Delivering enhanced profits through: 1 Volume growth from increased outlets and improved sales rate Higher sales prices from traditional homes on better located sites Stronger profit margins from increasing legal completions on new sites Economic recession Constrained mortgage lending Ability to attract and retain good people Availability and cost of materials Availability and cost of subcontract labour Unsafe construction practices Growth in absolute profits Growth of operating margin % 2 Enhancing future returns in the land bank by: Adding new higher margin sites Investing in and converting strategic land Finishing older, lower margin sites Insufficient consented land available at hurdle rates due to: - Increased competition - Insufficient supply Embedded gross margin in land bank 3 Increasing efficiency of capital employed: Lower capital per site through a combination of acquiring smaller sites, deferring payment on larger sites and selectively selling land parcels on larger sites Maintaining tight control of work in progress Increased competition for land Increasing capital turn For more information on our strategy, see page 8 For more information on our risks, see page 30 For more information on our KPI s, see pages 22 to 23 Bovis Homes Group PLC 13

16 Strategic report Our business Business objectives Objective Key performance indicators Target in foreseeable future Improving returns ROCE c18% Enhancing operating profit Operating margin % c18% Enhancing future returns in the land bank Increasing average active sales outlets Improved net private sales rate per site per week Growth of private legal completions Higher average sales price Cost movements against latest plan Embedded gross margin in the land bank (Gross margin %) Number of consented plots and sites acquired Investment in strategic land Conversion of strategic land Written down land as % of land bank Increasing efficiency of capital employed Capital turn c1.0 Average plots per consented site acquired Average net capital employed per active site Work in progress capital turn Greater than 25% Delivering strong customer satisfaction NHBC customer satisfaction score At least 4 star Delivering strong health and safety and environmental standards HSE Construction Annual Injury Incidence Rate (AIIR) Annual incident rate RIDDOR Minor injuries NHBC risk incidence Waste (tonnes per plot) For performance against Key Performance Indicators, see pages 22 to 23 Better than HSE Construction AIIR 14 Annual report and accounts Strategic report Our business

17 Bovis Homes has a clear business model with a well defined strategy to drive improving returns Bovis Homes Group PLC 15

18 Strategic report Our performance Chief Executive s report David Ritchie Chief Executive Bovis Homes has made significant progress in 2013, delivering a strong improvement in revenue, profits and return on capital employed. The Group has continued to acquire high quality land assets in the south of England and in prime locations in the midlands and northwest, where it is considered the housing market will be more robust. As a result, the Group has grown active sales outlets, leading to higher volumes. With an increasing proportion of legal completions from post downturn sites, average sales price and profit margins have improved. Furthermore through an improvement in the efficiency of capital employed by active management of the land bank and work in progress, the Group has increased its capital turn. The combination of improved profitability and increased capital turn has delivered a strong improvement in the Group s return on capital employed. Bovis Homes aims to be a quality housebuilder delivering high returns generated from a strong land bank, much of it strategically sourced, and quality homes sold at a premium price. In order to deliver improved returns, the following clear strategic objectives for 2013 were set out and have been delivered: Increase operating profits Enhance future returns through targeted land investment Improve efficiency of capital employed As a result of delivering against these three strategic objectives, the Group has achieved a significant increase in return on capital employed to 10.4% in 2013 from 7.7% in Additionally the Group has focused on the following objectives: Deliver strong health, safety and environmental standards Deliver a strong customer service experience Increase operating profits Operating profit increased in 2013 by 46% to 82.8 million, as a result of the compound positive effect of an increased volume of legal completions sold at a higher average sales price generating a stronger profit margin. During 2013, the Group achieved 2,773 private reservations, a 48% increase on the 1,873 achieved in Net private sales per site per week increased by 34% to 0.59 (2012: 0.44), as a result of the improving quality of the Group s active sales outlets and the benefit of a recovering housing market. Active sales outlets averaged 90 during 2013, an increase of 10% on the 82 achieved during One effect of the positive sales rate was that some sites were completed more quickly than expected. Also certain sites were launched later than anticipated due to planning delays. These two factors led to the Group achieving a marginally lower average number of active sales outlets than had been expected at the start of The higher level of private reservations enabled the Group to deliver a 26% increase in private legal completions to 2,330 (2012: 1,854), as well as carrying forward a significantly enhanced private forward order book of 692 private reservations, up from 249 at the beginning of This improved forward order book will support the Group s volume ambitions for 2014 and enable the Group to deliver a more balanced profile of legal completions through the year, with an increased proportion of its full year legal completions in the first half. Additionally, this will assist in improving the working capital cycle of the Group through the year. During 2013, the Group supported new customers accessing the housing market using the Government s Help to Buy shared equity scheme. In the year new homes were handed over to 872 customers who were able to use shared equity products, including the Help to Buy scheme, as part of their home purchase. During 2012, shared equity products (including Government backed schemes) were used to support customers buying 535 new homes. The Group sees the Help to Buy scheme as an attractive replacement for other shared equity products. 483 social homes were legally completed in 2013 (2012: 501), constituting 17% of total legal completions (2012: 21%). The Group decided to prioritise private build over social, particularly during Q4 2013, to ensure that private production was not constrained by tightness in the supply of sub-contract labour or materials lead times. At the beginning of 2014 the Group held 685 forward social reservations (2013: 529). In aggregate the Group delivered 2,813 legal completions in 2013, a 19% increase on the 2,355 in To support this significant increase in new home delivery, the Group increased its construction output in 2013 by 26% to 2,935 homes (2012: 2,322). 16 Annual report and accounts Strategic report Our performance

19 Strategy delivery is on track with further growth in returns supported by land investment The Group achieved a 13% increase in private average sales price to 212,700 in 2013 (2012: 188,700). This has been driven primarily by changes in the Group s product mix of private legal completions with an increase in larger traditional two storey homes and a decrease in townhouses. The Group considers that in its areas of operation sales prices have increased by between 2% and 3% with stronger gains in the south of England offset by modest movements in the midlands and north of England. Including social homes, the Group s average sales price was 14% higher at 195,100 (2012: 170,700). Housing gross margin increased from 22.6% in 2012 to 23.5% in 2013, resulting from the increased contribution from legal completions on stronger margin sites acquired post the housing market downturn. This margin progression was impacted by the planned incremental year on year cost of circa 3.5 million to promote strategic land assets. The housing gross margin was also affected for the first time in many years by increases in build costs, mainly from labour rates. Increased activity in the new homes market has led to demand for subcontract labour exceeding supply. As a result, subcontractors have seen the ability to renegotiate at higher rates. Given the timing of such increases, the Group has been able to limit the cost impact well within the benefit from increasing sales prices. As a result of the compound positive effect of volume growth, higher average sales price and improved gross profit margin, housing gross profit increased by 41% to million (2012: 92.1 million). With overheads well controlled, the operating margin increased to 14.9% (2012*: 13.3%). Enhance future returns through targeted land investment The Group applies rigorous criteria for the acquisition of consented land, reflecting not only the anticipated margin and return on capital, but also site specific risks and geographic concentration risk was a successful year for land investment. The Group continued to invest in high quality consented land assets, retaining its focus on specific areas of search in the south of England and prime locations in the midlands and northwest. During the year the Group added 3,737 plots on 27 sites to the consented land bank at a cost of 225 million (2012: 2,651 consented plots at a cost of 161 million). The plots added have an estimated future revenue of 841 million and an estimated future gross profit potential of 216 million, based on current sales prices and current build costs, and are expected to deliver a gross margin of over 25% and a ROCE well in excess of the Group s 20% hurdle rate. A further circa 2,800 plots on 12 sites were contracted at the end of 2013, awaiting satisfaction of legal conditions. In 2014 to date, circa 2,300 consented plots on nine sites have been added to the consented land bank, many of these plots arising from the successful completion of the contracts secured during Included in the sites added to date in 2014 is a major new settlement at Sherford in Devon, where the Group owns 1,658 consented plots. The land cost of this site is very low, due to the high level of infrastructure spend which is phased over the life of the site. As a result, the peak funding on this long term major project is expected to be between 1% and 2% of the Group s net assets. Sherford will be an anchor site within the South West region over many years and is expected to deliver a strong margin and an excellent return on capital employed. The consented land bank amounted to 14,638 plots as at 31 December 2013 (2012: 13,776). The Group estimates that the gross profit potential on these consented plots at the 2013 year end, based on current sales prices and current build costs, was 727 million with a gross margin of 24.2% (2012: 600 million at 22.7%). At the year end, the consented land bank included 9,197 consented plots (63% of total), which have been acquired since the housing market downturn (2012: 7,368 plots and 54% of total). The average consented land plot cost was 45,800 at the start of 2013 and increased over the year to 48,900, as a result of a lower number of written down plots held in the land bank (10% of land plots versus 13% at the start of the year) and the addition of new prime traditional housing sites where the average plot cost is higher. The strategic land bank at 31 December 2013 contained 20,108 potential plots (2012: 19,318). The Group converted circa 1,200 plots of strategic land having achieved consent during The Group has continued to invest in new strategic land assets to assist in replenishing its consented land bank at strong margins in the future. In addition, the Group has secured resolution to grant planning consent on three of its major strategic land assets at Winnersh, Witney and Bishops Stortford. These sites will deliver in aggregate over 1,200 consented plots at a significant discount to market value. Planning consents will be formally released once the planning agreements for each site are signed. Good progress continues to be made on a number of other major strategic projects, where material promotion costs are being incurred to achieve planning consents. This is expected to deliver significant numbers of consented plots over the next few years. Improve efficiency of capital employed Improving capital turn is critical to the Group s ability to deliver material growth in return on capital employed. Capital turn has continued to improve from 0.5 in 2011 to 0.7 in The consented land bank is the key element of capital employed. While this has grown in size with the investments made by the Group, the average number of plots per active sales outlet has continued to decrease from 188 in 2011 to 158 in The average number of plots per site acquired in 2013 was 138 plots, compared to 147 in Bovis Homes Group PLC 17

20 Strategic report Our performance Chief Executive s report Work in progress turn increased to 2.7 times in 2013 from 2.5 in Notional units of production at the end of 2013 increased to 1,040 (2012: 918), as a result of the increase in active sales outlets and to facilitate higher legal completion volumes in the first half of 2014 over the first half of The value of work in progress has increased to million from million. With the land investment undertaken to date and the strength of the ongoing land pipeline, the output capacity of the business is expected to increase. On the basis of current market conditions, capital turn should improve further in 2014 and beyond. Deliver strong health, safety and environmental standards The Group is committed to delivering strong health and safety standards for its employees, subcontractors and other site visitors. It maintains a high level of organisational focus on its health and safety regime through comprehensive staff training, clear and accountable management processes and through regular and transparent reporting of performance. This is overseen, firstly, through the operational line, which takes day to day accountability for this area and, secondly, via a Group-wide oversight committee with nominated regional directors responsible for safety, run by the Group Director of Health and Safety and chaired by a senior Group manager. The Group also seeks to ensure that all of its employees and subcontractors who operate at or visit sites carry a CSCS card, indicating its commitment to a fully trained workforce. As the Group increased its build activity by 26% during 2013, the health and safety risk incidence rate across the business was maintained positively at 22.4 (2012: 23.1), the lower rate meaning stronger performance. This reflects a robust performance given the magnitude of the increase in employee numbers and subcontractor population during the year. The Group set itself challenging targets at the start of 2013 with the ambition to further reduce health and safety risk incidence over a five year period. Disappointingly, the performance of the Group in the first year of this five year period was behind target. The Group continues to develop its health and safety processes and controls with the aim of improving performance in line with the targets set for Health and safety will remain a key focus for regional, divisional and Group management. The Group continues to regard sustainable development as critical to the long term creation of value for its shareholders. The housebuilding industry has an important role to play both in mitigating the impact of its building activities on the local environment and in the evolution of building techniques and advances, which reduce the carbon usage from new build developments. During 2013, the Group has continued to focus on waste in order to drive down the quantity of waste produced in building a home. The quantity of active waste generated per home in 2013 remained at 3.1 tonnes and the amount sent to landfill was reduced by 12%. The Group works with a range of external stakeholders to agree and carry out development in a mutually acceptable manner, thereby ensuring that its developments take place in a way which mitigates the impact on the local environment, thereby balancing the needs of local communities for new housing with the requirement to avoid environmental damage. Looking forward, the Group is focusing on ways to ensure that its products conform to good environmental standards, including the Code for Sustainable Homes. During 2013, 1,036 of the Group s homes were constructed to at least Code 3 of the Code for Sustainable Homes. Reflecting the existing contribution that the Group makes to the communities and environments in which it operates, the Group is pleased to report that it continues to be a member of the FTSE4Good index. Given the nature of our business, scope of operations in the UK, business relationships, supply chains and labour practices we have not included information specifically about human rights in this report. We have an Ethical Code of Conduct and an Equal Opportunities policy which recognise the importance of high standards and treating our employees fairly. All policies can be found on the Company s website at Further details of the Group s efforts and achievements during 2013 in regards to Corporate Social Responsibility will be published in a separate report, available from the Company s website ( Deliver a strong customer service experience for Bovis Homes customers The Group is focused on delivering its customers a high quality home alongside a good level of service through the period the customer is buying the home and thereafter as the customer enjoys their new home. During 2013, 93% of customers reported that they would recommend Bovis Homes to a friend and this was reinforced by the award during February 2013 of a five star customer satisfaction rating by the Home Builder Federation. During the course of 2013, the Group s score in the Home Builder Federation customer satisfaction survey has dropped marginally below the 90% benchmark for the five star rating at 89%. Whilst remaining a robust customer satisfaction score, the Group was disappointed to see this deterioration in its external customer satisfaction rating and the gap which has opened between this external score and the customers response to the Group s internal customer satisfaction survey. 18 Annual report and accounts Strategic report Our performance

21 Strategy delivery is on track with further growth in returns supported by land investment The Group has reinforced its Customer Journey processes across the business with the view to improving its customer satisfaction performance. The focus of the Group s customer communication has remained digitally based during 2013, with the Group using the power of the internet to directly market its products to consumers, utilising internally generated mailing lists as well as via intermediaries such as Rightmove and Zoopla. Over 70% of customer enquires originate via the web. IT connectivity is provided to the sales operations, enabling efficient and effective customer communication and the utilisation of an integrated CRM system. The selling process is supported by the Group s bespoke prospect management system, which delivers on-site technology whilst integrating the Group s prospect database with brochure fulfilment. Employee diversity The following table shows the gender split within the Group as at 31 December At Bovis Homes, 65% of the workforce is male, a relatively common proportion in the construction and housebuilding industries. While a lower proportion of senior management and directors are female, the Group encourages and supports gender diversity. As at 31 December 2013, there were five senior managers (all male) who were directors of Group subsidiaries. Male Female PLC Directors 6 0 Senior Managers 15 1 All employees % 65% 35% Structure In anticipation of increasing activity levels in 2014 and beyond, the Group is now operating from six regions in two divisions with plans for two further regions to become operational in the foreseeable future (previously the Group operated through a three region structure). This new structure will provide the Group with a business capacity of between 4,000 and 5,000 homes per annum, whilst maintaining close alignment to the localities in which it operates with significant local knowledge. The geographical focus of the Group remains exactly as before, being in the south of England and in prime locations in the midlands and northwest. Although this change will lead to a limited increase in the Group s overhead expenditure in absolute terms, overhead efficiency is expected to continue to improve in 2014 and beyond. The Board Colin Holmes has decided to retire from the Board at the 2014 Annual General Meeting to be held on 16 May 2014 after seven and a half years as a non-executive director and seven years as Remuneration Committee chairman. The Board would like to thank Colin for his valuable contribution during his time on the Board. Alastair Lyons will succeed as Remuneration Committee chairman following the AGM. Market conditions Housing market conditions improved materially during An increase in the number of mortgage products including a greater availability of high loan to value mortgages has supported a greater number of housing transactions. Bank of England mortgage approvals statistics show a significant increase during the second half of 2013 with monthly figures approaching a level more reflective of a healthy housing market. Homebuyer confidence appears to have improved materially with more positive views on the future direction of house prices, employment and security of earnings. With this improving backdrop, trading conditions are expected to remain broadly positive during 2014, supporting sales rates and sales prices. House prices have been rising at a modest rate across many regional markets with stronger rises in the south of England, offset by more modest changes in the midlands and north of England. As expected, with activity and sales prices rising, the cost of building houses is also rising as material suppliers enjoy increased demand for their products and subcontractors see an ability to increase rates. The Government s Help to Buy shared equity product, launched in April 2013, has provided strong impetus to the new build industry, supporting first time buyers in particular. The Help to Buy mortgage indemnity product was also launched in Q and, given it assists not just new build customers, the Group considers this Government backed product to be further support to activity in the wider housing market. As a result of the positive activity in the housing market, the support provided to banks to facilitate cost effective mortgage lending via the Government s Funding for Lending Scheme is being withdrawn. The Group views this development positively, as it signals that the mortgage market is beginning to operate more effectively without assistance. The two divisions, South and Central, are led by Divisional Managing Directors, Malcolm Pink and Keith Carnegie respectively. The strength and experience of the Group s existing senior management is demonstrated by six of the eight regional managing directors being internal appointments. Bovis Homes Group PLC 19

22 Strategic report Our performance Chief Executive s report Current trading The Group entered 2014 with a forward sales order position of 1,377 homes, a 77% improvement on the 778 homes brought forward at the start of Of these, 692 were private homes (2013: 249) and 685 were social (2013: 529). The Group has delivered 468 private reservations in the first seven weeks of 2014 (2013: 285), an increase of 64%. Operating from an average of 93 active sales outlets during this period (2013: 90), the Group has achieved a sales rate per site per week of 0.72, a 60% improvement on the 0.45 achieved in the comparable period in Sales prices achieved on these private reservations to date have been ahead of the Group s expectations by circa 2%. As at 21 February 2014, the Group held 1,875 sales for legal completion in 2014, as compared to 1,064 sales at the same point in 2013, an increase of 76%. Of these, private sales amounted to 1,160 homes (2013: 534), with social housing sales of 715 homes (2013: 530). Build to Rent scheme private rental sector In 2012, the Government announced its Build to Rent scheme, with the intention of providing funding support to assist in the establishment of PRS vehicles. Whilst not yet contracted, the Group has agreed terms and is at an advanced stage in finalising agreements to deliver new homes under two separate PRS transactions on sites owned by the Group, each using support from the Government s scheme. The two transactions involve approximately 500 homes, of which circa 250 would legally complete in 2014 with the remainder in The profit delivery combined with the acceleration of capital turn enabled by these transactions would act as a further positive contributor to increasing the Group s return on capital employed in both 2014 and Outlook The successful continued execution of the growth strategy in 2013 has positioned the Group strongly to continue to grow in 2014 and beyond. The sales achieved in 2014 to date combined with the expected growth in active sales outlets should enable the Group to deliver a strong increase in total reservations during 2014, assuming current market conditions continue. From these reservations excluding any potential volume arising from the PRS transactions (250 homes in 2014), the Group aims to deliver between 3,400 and 3,600 legal completions in 2014 and a stronger forward order book for This legal completion volume will represent major growth in the Group s output and will require a material increase in build activity compared to During a period of constrained capacity in the material and labour supply markets, build costs for 2014 legal completions are expected to increase by between 3% and 5%. However with a continuing tight focus on the Group s operational performance, market rises in sales prices are expected to at least cover such cost increases. The Group expects further growth in the proportion of legal completions from post downturn sites to increase both the average sales price and housing gross margin in When combined with improving overhead efficiency, the operating margin is expected to increase to approximately 17%. With a clear focus on controlling the capital employed of the Group through management of the land bank and control of working capital, improving capital turn is expected to be at least 0.8 in Based on current market conditions continuing and excluding any potential volume arising for the PRS transactions, the Group expects to deliver a strong increase in return on capital employed to at least 14% in 2014 with the expectation of further progress thereafter. David Ritchie Chief Executive 20 Annual report and accounts Strategic report Our performance

23 Bovis Homes Group PLC 21

24 Strategic report Our performance Key performance indicators Improving returns * Year ended 31 December % % Return on capital employed (1) Operating margin (2) Basic earnings per share (p) Capital turn (1) Return on capital employed is calculated as profit before interest and tax over the average of opening and closing shareholders funds plus net borrowings (2) Operating margin has been calculated as operating profit over revenue Enhancing operating profit Analysis of housing margin Group Year ended 31 December % % Revenue Land costs (24.7) (24.0) Construction costs (51.8) (53.4) Gross profit Administrative expenses (8.5) (9.9) Operating margin Average sales price () Active sales outlets Number of active sales outlets Brought forward Outlets opened in year Outlets closed in year (18) (17) Carried forward Average Year on year growth 10% 12% Private reservations Year ended 31 December Brought forward Reservations 2,773 1,873 Legal completions (2,330) (1,854) Carried forward Year on year reservation growth +48% +13% Net sales rate per site per week *Adjusted for IAS19R Building future profit in the land bank Split of consented land bank Total potential plots as at 31 December Plots % Plots % Post downturn at cost 9, , Pre downturn at cost 3, , Written down 1, , Total 14,638 13,776 Potential gross profit in land bank 727m 24.2% 600m 22.7% Consented land bank Total plots as at 31 December Plots Plots Brought forward 13,776 13,723 Additions 3,737 2,651 Legal completions (2,813) (2,355) Disposals (60) (257) Other (2) 14 Carried forward 14,638 13,776 South 10,401 10,171 Midlands 2,705 2,335 North 1,532 1,270 Group 14,638 13,776 Years supply based upon legal completions in the year Number of sites acquired Strategic conversion 32% 45% Strategic land bank Total potential plots as at 31 December Plots Plots South 12,568 11,236 Midlands 6,503 7,032 North 1,037 1,050 Group strategic land bank 20,108 19,318 Years supply based upon legal completions in the year Annual report and accounts Strategic report Our performance

25 Bovis Homes has a clear business model with a well defined strategy to drive improving returns Capital employed Customer satisfaction (internal) Analysis of net assets * Year ended 31 December m m Land bank Land creditors (123.8) (123.8) Net land bank Work in progress Other assets Other liabilities (132.5) (138.9) Net (debt)/cash (18.0) 18.8 Net assets at 31 December Net assets per share 604p 567p % 94% 93% Would recommend a Bovis Home to a friend Capital efficiency metrics 2012/ /2012 Year ended 31 December HBF rating 5 star 4 star Capital turn (1) Average plots per site acquired Work in progress turn (2) (1) Capital turn is calculated as revenue divided by average capital employed (2) Work in progress turn is calculated as revenue divided by work in progress Increase in net assets * Year ended 31 December m m Net assets at 1 January Profit for the year Dividends (13.3) (8.7) Share capital issued Net actuarial movement on defined benefits pension scheme 2.9 (2.7) Health and safety Year ended 31 December RIDDOR reportables (1) 17 8 Minor injuries NHBC risk incidence (2) (1) Reporting of Injuries, Diseases and Dangerous Occurrences Regulations (2) NHBC risk incidence is calculated as the absolute risk score divided by the average annual population multiplied by 100,000 Annual injury incidence rate (AIIR) Deferred tax on other employee benefits - (0.1) 600 Adjustment to reserves for share-based payments Net assets at 31 December Bovis Homes Group PLC 2013 Bovis Homes Group PLC 2012 HSE Construction AIIR 2012/13 HSE Construction AIIR 2011/12 0 *Adjusted for IAS19R Sustainability Year ended 31 December Number of homes built to Level 3 CSH 1, Active waste generated per plot (tonnes) Active waste sent to land fill per plot (tonnes) Bovis Homes Group PLC 23

26 Strategic report Our performance 24 Annual report and accounts Strategic report Our performance

27 Bovis Homes Group PLC 25

28 Strategic report Our performance Financial review Jonathan Hill Group Finance Director The Group has delivered a strong financial performance, with profits and earnings growing significantly and with capital employed under control, delivering improved shareholder returns. At the same time the Group has maintained a prudent balance sheet position. Revenue During 2013, the Group generated total revenue of million, an increase of 31% on the previous year (2012: million). Housing revenue in 2013 was million, 36% ahead of the prior year (2012: million) and other income was 4.3 million (2012: 5.7 million). Land sales revenue, associated with one land sale and the recognition of deferred income on land sales legally completed in prior years, was 3 million in 2013, compared to three land sales achieved in 2012 with a total revenue of 17.8 million. Operating profit The Group delivered a 46% increase in operating profit for the year ended 31 December 2013 to 82.8 million (2012*: 56.7 million) at an operating margin of 14.9% (2012*: 13.3%). Housing operating margin in 2013 was 15.0% (2012: 12.7%) and reached 16.8% in the second half of Housing gross margin increased to 23.5% in 2013 from 22.6% in The gross margin benefited from the increased contribution from legal completions on sites acquired post the housing market downturn. As previously disclosed, the Group increased the promotional expenditure on strategic land by circa 3 million in 2013 over 2012, which held back the year on year margin growth. This level of cost incurred in 2013 to promote strategic land is expected to remain relatively stable during The profit on land sales in 2013 was 0.1 million (2012 benefited from a material profit of 4.8 million at a margin of 27%). Total gross profit was million (gross margin: 23.4%), compared with 96.9 million (gross margin: 22.8%) in Overheads, including all sales and marketing costs, increased in 2013 by 18%, as the Group invested early to support the large number of land assets acquired and the increased number of sales outlets. The overheads to revenue ratio improved to 8.5% in 2013 from 9.5% in 2012*. Profit before tax and earnings per share Profit before tax increased by 48% to 78.8 million, comprising operating profit of 82.8 million, net financing charges of 4.3 million and a profit from joint ventures of 0.3 million. This compares to 53.2 million of profit before tax in 2012*, comprising 56.7 million of operating profit, 3.7 million of net financing charges and a profit from joint ventures of 0.2 million. Basic earnings per share for the year improved by 49% to 44.9p compared to 30.2p in 2012*. Financing Net financing charges during 2013 were 4.3 million (2012*: 3.7 million). Net bank charges were 3.5 million (2012: 2.6 million), as a result of higher net debt during 2013 compared to The Group incurred a 3.1 million finance charge (2012: 3.1 million charge), reflecting the imputed interest on land bought on deferred terms. The Group also benefited from a finance credit of 2.3 million (2012: 1.7 million) arising from the unwinding of the discount on its available for sale financial assets during There were 0.3 million of other financing credits during Taxation The Group has recognised a tax charge of 18.7 million at an effective tax rate of 23.7% (2012*: tax charge of 13.1 million at an effective rate of 24.5%). The Group has a current tax liability of 9.2 million in its balance sheet as at 31 December 2013 (2012*: current tax liability of 5.7 million). 26 Annual report and accounts Strategic report Our performance

29 The Group has delivered a strong financial performance, with profits, earnings and shareholder returns improving Dividends Given the ongoing material improvement in the Group s performance and the confidence of the Board in the continued delivery of the Group s strategy, the Board has proposed a 2013 final dividend of 9.5p per share. This dividend will be paid on 23 May 2014 to holders of ordinary shares on the register at the close of business on 28 March The dividend reinvestment plan gives shareholders the opportunity to reinvest their dividends in ordinary shares. Combined with the interim dividend paid of 4.0p, the dividend for the full year totals 13.5p compared to a total of 9.0p paid in 2012, an increase of 50%. The Board expects to grow dividends progressively as earnings per share increase. Net assets * m m Net assets at 1 January Profit after tax for the year Share capital issued Net actuarial movement on pension scheme through reserves 2.9 (2.7) Deferred tax on other employee benefits - (0.1) Adjustment to reserves for share based payments Dividends paid to shareholders (13.3) (8.7) Net assets at 31 December *Adjusted for IAS19R As at 31 December 2013 net assets of million were 51.5 million higher than at the start of the year. Inventories increased during the year by million to million. The value of residential land, the key component of inventories, increased by 84.2 million, as the Group invested ahead of usage. At the end of 2013, the remaining provision held against land carried at net realisable value was 19.9 million, after utilisation of 8.7 million during the year. Other movements in inventories were an increase in work in progress of 29.5 million, offset by a decrease in part exchange properties of 6.3 million. Trade and other receivables reduced by 23.1 million, with a reduction in debtors related to land sales of 12.7 million and lower amounts owing from housing associations. Available for sale financial assets held as current assets at 2012 year end of 7.2 million, relating to units held in an investment fund into which the Group sold show home properties, were fully recovered during Trade and other payables totalling million (2012: million) comprised land creditors of million (2012: million) and trade and other creditors of million (2012: million). Net assets per share as at 31 December 2013 were 604p (2012: 567p). Pensions Taking into account the latest estimates provided by the Group s actuarial advisors, the Group s pension scheme on an IAS19R basis had a surplus of 3.2 million at 31 December 2013 (2012*: deficit of 3.2 million). Scheme assets grew over the year to 94.7 million from 85.2 million and the scheme liabilities increased to 91.5 million from 88.4 million. Scheme assets benefited from a 2.8 million special cash contribution made by the Group in December As at 30 June 2013, an actuarial valuation was undertaken on behalf of the pension scheme trustee, which showed a deficit of 12.8 million at that date. The difference to the IAS19R basis results from more conservative assumptions on discount rate and mortality, as well as the additional special cash contribution of 2.8 million made during December A new schedule of contributions is in the process of being agreed between the Group and the pension scheme trustee. Net cash and cash flow Having started the year with a net cash balance of 18.8 million, the Group generated an operating cash inflow before land expenditure of 204 million (2012: 130 million), demonstrating the strong underlying cash generation from the Group s existing assets. Net cash payments for land investment were 203 million (2012: 139 million). Non-trading cash outflow was 38 million. As at 31 December 2013 the Group s net debt balance was 18.0 million with 12.0 million of cash in hand, offset by a drawn term loan of 25.0 million, 4.8 million of loans received from the Government and 0.2 million being the fair value of an interest rate swap. At the 31 December 2013, the Group had in place a committed revolving credit facility of 175 million, of which 50 million expires in December 2015 and 125 million in March Additionally the Group had a fully drawn three year term loan of 25 million, repayable in January Financial risk and liquidity The Group largely sees three categories of financial risk: interest rate risk, credit risk and liquidity risk. Currency risk is not a consideration as the Group trades exclusively in the UK. With regard to interest rate risk, the Group from time to time will enter into hedge instruments to ensure that the Group s exposure to excessive fluctuations in floating rate borrowings is adequately hedged. The Group does not have a defined policy for interest rate hedging. Bovis Homes Group PLC 27

30 Strategic report Our performance Financial review Credit risk is largely mitigated by the fact that the Group s sales are generally made on completion of a legal contract at which point monies are received in return for transfer of title. During 2013, the Group made a limited number of sales with the provision of a shared equity investment by the Group as a key part of the Group s sales incentive packages, either via the Government FirstBuy scheme or via the Group s own Jumpstart scheme. This has led to a limited increase in the size of the Group s long term receivable Available for Sale Financial Asset balance which at 31 December 2013 was 44.8 million versus 43.9 million at 31 December Whilst this does represent an increase in credit risk in total, each individual credit exposure is small given the high number of counter parties. On average, individual shared equity exposure amounts to 21,000 (2012: 20,000). Details of the Group s financing arrangements are included on page 27. The Group regards this new facility as adequate in terms of both flexibility and liquidity to cover its medium term cash flow needs. Financial reporting The Group has adopted IAS19 (Revised 2011) Employee Benefits, which outlines the accounting requirements for employee benefits. The application of IAS19 (Revised 2011) has resulted in the interest cost and expected return on assets being replaced by a net interest charge/credit on the net defined benefit pension liability/ surplus. Certain costs previously recorded as part of finance costs or other comprehensive income have now been presented within administrative expenses. The comparative period has been restated with profit being 0.7 million lower and other comprehensive income 0.7 million higher including the tax impact of the changes. The impact on both basic and diluted earnings per share was a reduction of 0.5 pence. The Group records actuarial adjustments immediately so there has been no effect on the prior year pension deficit. Other than IAS19R, 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. Jonathan Hill Group Finance Director 28 Annual report and accounts Strategic report Our performance

31 The Group has delivered a strong financial performance, with profits, earnings and shareholder returns improving Bovis Homes Group PLC 29

32 Strategic report Our performance Risks and uncertainties Risk Change in 2013 Economic environment Economic recession reducing consumer demand Political environment Changes in Government policy towards the housing market affecting supply or demand Mortgage finance Limited mortgage availability to new home buyers Land procurement Insufficient investment in land to support business strategy t s t = Description Continued uncertainty in the global economy and particularly the Euro area adversely affects consumer confidence and demand for new homes, with consequential impact on revenues, profits and potentially asset carrying values. Changes to Government policies, which affect demand ranging from policies indirectly affecting consumer confidence (such as taxation levels) to direct policies such as Help to Buy, may affect demand, and thus revenues, profits and potentially asset carrying values. Additionally changes to Government policies which affect supply, particularly planning, may have an impact on the Group s ability to prosecute its growth strategy. The availability of mortgage finance, particularly deposit requirements for first time buyers, is fundamental to customer demand. Further restrictions on mortgages granted could reduce demand for homes and therefore revenues and profits. Expansion of the business and the delivery of the Group s strategy to improve shareholder returns from the development of land is curtailed, with existing activity levels compromised. Mitigations Close monitoring of lead indicators in the housing market, notably visitors to sales outlets, sales rates and ASP. Managing build rates against sales activity. Maintaining a rigorous approach to land acquisition, with spend focused in the south of England, where the economy is expected to remain more robust. A cautious gearing position with a conservatively structured balance sheet is retained. Proactive engagement with Government, both directly and through industry bodies, primarily the HBF. See mitigations above for demand issues. Proactive engagement with Government, both directly and through industry bodies, primarily the HBF. Maintenance of land bank of at least 4 years to mitigate against short term changes. Investing in land more suited to traditional homes, with reduced focus on the first time buyer. Providing a range of purchase assistance schemes to our customers. Continually innovating to find additional ways to assist customers to purchase a home. Clearly defined strategy and geographical focus. Rigorous due diligence for land acquisition to preserve defined hurdle rates. Regular review of the pipeline of new land purchases. Investment in procurement and promotion of strategic land opportunities. Maintaining larger land bank to deal with periods of reduced investment. 30 Annual report and accounts Strategic report Our performance

33 The availability of mortgage finance and customer deposit requirements are the key issues currently facing the Group Risk Change Description Mitigations in 2013 Materials and subcontract labour Inability to source adequate materials and subcontract labour at the right cost s Increasing competition with growing industry build volumes may lead to shortages of both materials and subcontract labour, which may constrain the Group s ability to build and may impact profitability if costs for both rise. Maintain clear visibility of future production requirements and it s impact on suppliers and subcontractors. Maintain close relationships with key suppliers and subcontractors to gain visibility of future supply against need. People An inability to attract, develop or retain good people s The loss of key staff or the failure to attract, develop and retain suitable talent may inhibit the Group s ability to achieve its strategy. A reward system that motivates achievement of performance targets. Development programmes individually tailored for our employees. Apprenticeship schemes. Health, safety and environment Unsafe practices in our construction activities causing injury or death to our stakeholders and damage to communities = A loss of trust in the ability of Bovis Homes to build homes safely and in an environmentally responsible way. Affecting the reputation and financial health of the business. A consultative committee reviews performance and regulatory requirements for health, safety and environmental matters. Monitoring health, safety and environmental performance against a standard of excellence. A requirement for regular training for all staff and site based personnel. Planning and regulations Changes in legislation and industry regulations = Increased costs and significant delays in production. Land acquisition costs appropriately reflect latest and impending building regulations that cannot be mitigated. Close monitoring of changes in planning policy by experienced team. New building techniques and advances continue to be investigated, in response to the Code for Sustainable Homes. As the activities of the Group evolve, the nature of the risks on which it is focused change. For instance, as the Group has acquired land successfully, the operational risk shifts to the progression of these sites into the build and sales phase, with the challenges of gaining detailed planning and of operationally gearing up the Group to increase build and sales activity. With sales conditions improving, risks move to our people and the stresses within the supply chain. Strategic report approval The strategic report outlined on pages 2 to 31, incorporates the financial highlights, the chairman s statement, the strategic review, the chief executive s review, the financial review and the risks and uncertainties review. By Order of the Board Jonathan Hill Group Finance Director 21 February 2014 Bovis Homes Group PLC 31

34 Our governance Directors and officers Ian Tyler (53) Non-executive Chairman Appointed non-executive Chairman on 29 November 2013 and Chairman of the Nomination Committee. Ian is a Chartered Accountant and a non-executive director of BAE Systems plc, Cairn Energy PLC and Cable & Wireless Communications Plc, where he is also Chairman of the audit committee, and non-executive Chairman of Al Noor Hospitals Group Plc. Previously, Ian was Chief Executive of Balfour Beatty plc from 2005 to March 2013, having joined the company in 1996 as Finance Director and becoming Chief Operating Officer in Prior to that, Ian was Financial Comptroller of Hanson and Finance Director of ARC Ltd, one of its principal subsidiaries, and held financial roles at Storehouse plc. He was a non-executive director of VT Group plc until 2010 and is president of CRASH, the construction and property industry charity for the homeless. Ian has considerable international business experience. John Warren (60) Non-executive Director Appointed an independent non-executive director in 2006 and Chairman of the Audit Committee in John is a Chartered Accountant and a non-executive director of Spectris plc, where he is the senior independent director, Welsh Water, 4imprint Group plc and Greencore Group plc. At all the companies where John is a nonexecutive director, he chairs the Audit Committee. He was previously Group Finance Director of WH Smith PLC and United Biscuits plc and a non-executive director of Arla Foods UK plc, BPP Holdings plc, RAC plc, Uniq plc, Rexam plc and Rank Group plc. John has detailed financial and accounting expertise and considerable experience in chairing audit committees. Alastair Lyons CBE (60) Non-executive Deputy Chairman Appointed non-executive Deputy Chairman and Senior Independent Director in 2008, Alastair is non-executive Chairman of Admiral, Serco and Towergate Insurance. Previously, Alastair was Chief Executive of the National Provident Institution and the National and Provincial Building Society, Managing Director of the Insurance Division of Abbey National plc and Director of Corporate Projects at National Westminster Bank plc. He served as the Senior Independent Director of the Phoenix Group until September He has a broad base of business experience with a particular focus on mortgage lending and insurance industries. He was awarded the CBE in 2001 for services to social security. David Ritchie (44) BA (Hons) ACA, Chief Executive Appointed Chief Executive in 2008, David was Group Managing Director from 2007 to 2008 and Group Finance Director from 2002 to He joined Bovis Homes in 1998 as Group Financial Controller and was previously employed by KPMG. David has significant experience and knowledge of the sector, including land acquisition, planning, construction, marketing and customer service. Martin Palmer (55) FCIS, Group Company Secretary Joined Bovis Homes in 2001 and was previously Group Company Secretary of London Forfaiting Company PLC from 1997 to Colin Holmes (48) Non-executive Director Colin was appointed an independent nonexecutive director in 2006 and Chairman of the Remuneration Committee in He is a member of both the Audit and Nomination Committees. Colin is also a non-executive director of Admiral Group plc, where he is the Chairman of the Audit Committee. Additionally, he is the Chairman of GoOutdoors Ltd, a rapidly growing retailer of outdoor equipment and clothing. Colin is a Chartered Management Accountant and was formerly a member of the Executive Committee of Tesco plc. During his 22 year career at Tesco he held a wide range of positions including UK Finance Director and CEO Tesco Express. Jonathan Hill (45) BSc (Hons) ACA, Group Finance Director Joined Bovis Homes in 2010 as Group Finance Director. Previously, he was employed by TUI Travel plc in both group finance and divisional roles and held positions with Centrica plc, BT Group plc and Price Waterhouse. 32 Annual report and accounts Our governance

35 Corporate governance report Dear Shareholder, Ian Tyler Chairman Bovis Homes made demonstrable progress during 2013, delivering a further significant improvement in returns, a continuation of substantial land investment and a materially increased forward order book for I am excited by the Group s growth strategy and the progress that has been made against a backdrop of improving market conditions. The foundations are in place that will help to drive growth for the future. I am delighted to introduce my first Corporate Governance Report, following my appointment as Chairman at the end of November Bovis Homes has a reputation for high standards of corporate governance, which enables the Board to function effectively in supporting and monitoring senior management in the implementation of strategy. Strong growth is being delivered and this is translating into increased shareholder returns. I am excited and optimistic about the future at Bovis Homes and have learnt a great deal about the way it delivers value during my formal tailored induction and through discussions with the other directors and senior management. These discussions have reinforced my perception of good corporate governance as a strength at Bovis Homes, and my first Board and Committee meetings confirmed my view of a strong Board and a well managed Group. This report has been prepared and approved by the Board. On behalf of the Board, I confirm that during 2013 your Company was compliant with the provisions of the UK Corporate Governance Code ( the Code ), with the exception that a performance evaluation of the previous Chairman, Malcolm Harris, was not carried out at the end of the year, given the timing of his retirement from the Board. The Company remains compliant with the Code in all other respects. I personally carried out the 2013 Board performance evaluation, which enabled me to gain first-hand knowledge of recent performance and valuable insights for the future. Further information is provided on page 36 including the outcomes that we will be pursuing during saw the full range of Board activities from review and challenge of strategy, including our strategy day, to presentations from regional management, site visits and review of succession planning for both our non-executive directors and executives. The non-executive directors provided constructive challenge and assisted in developing strategy and proposals put forward by the executive directors and the balance of non-executive and executive directors worked well. Board meetings were again held in all of the operating regions during the year and included open discussion with management teams on land acquisitions, new sales outlets and progress with their objectives. There were no changes in our corporate governance best practice during During the year, the Board reviewed its policy on diversity, without making any substantive changes to the published version, which states that we will always make appointments to the Board based on merit. I would like to thank my colleagues on the Board for their warm and open welcome and I look forward to their collective support and strong individual contributions during the coming year. My predecessor, Malcolm Harris, retired from the Board at the end of November 2013 after five and a half years as Chairman, having been Chief Executive for twelve years, and the Board would like to recognise and thank him for his enormous contribution to Bovis Homes. On behalf of the Board, I would also like to thank Colin Holmes, who is retiring at the AGM after seven years as Remuneration Committee Chairman, both for his valuable contribution in this role and as a non-executive director. Bovis Homes values its dialogue with all our shareholders, whether in meetings and presentations during the year or at our AGM. I look forward to meeting as many major shareholders as possible during the year. Our 2014 AGM will be held on 16 May 2014 and you will find the Notice at the end of this Annual Report. I look forward to chairing my first AGM and meeting shareholders that can attend. Ian Tyler Chairman Bovis Homes Group PLC 33

36 Corporate governance report Introduction This report sets out the Company s compliance with the UK Corporate Governance Code ( the Code ) issued by the Financial Reporting Council (publicly available at uk) and also describes how the governance framework, set out in the annex to this report, is applied. The Board is pleased to report that the Company has, throughout 2013, complied with and applied the provisions of the UK Corporate Governance Code, as set out below, with the exception that a performance evaluation of the outgoing Chairman was not completed at the end of 2013 as a result of his retirement from the Board towards the year end. Bovis Homes Group PLC Board Group Executive Committee (Bovis Homes Ltd Board) Audit Committee The Board The Board is responsible to the Company s shareholders for the long-term success of the Group and its strategy, values and governance. It provides leadership, sets the Group s strategic objectives and approves and monitors progress with business plans, budgets and forecasts, applying independent judgment. The schedule of matters reserved for the Board is reviewed and approved annually by the Board and a copy is available on the Company s website ( corporate-governance). The governance structure in 2013 is shown below. Remuneration Committee Nomination Committee South West Regional Board South East Regional Board Central Regional Board Our governance Throughout the year and up to the date of this report, the Board comprised the Chairman, who is non-executive, three independent non-executives and two executive directors. On 29 November 2013, Malcolm Harris retired from the Board and Ian Tyler was appointed as the new non-executive Chairman. Ian was considered independent by the Board on appointment, which followed a recommendation from the Nomination Committee. Name Date of appointment Current role Malcolm Harris 28/06/1996 (retired 29/11/2013) (current role 03/07/2008) Tenure in current role Attendance at meetings Chairman 5.5 years 7/7 Ian Tyler 29/11/2013 Chairman 1 month 1/1 Alastair Lyons 01/10/2008 Deputy Chairman 5 years 7/8 Colin Holmes 01/12/2006 Non-executive 7 years 8/8 John Warren 01/03/2006 Non-executive 7.5 years 7/8 David Ritchie 01/07/2002 (current role 03/07/2008) A formal, comprehensive and tailored induction was provided, including visits to the regions and meetings with senior management. Biographical details for the directors are provided on page 32. Their dates of appointment / retirement, length of service to the end of 2013 and attendance at Board meetings in 2013 are shown below. Chief Executive 5.5 years 8/8 Jonathan Hill 23/08/2010 Group Finance Director 3.5 years 8/8 34 Annual report and accounts Our governance

37 The Board benefits from a broad range of expertise and experience and has a strong blend of skills, which has allowed it to perform effectively to a high level during The new non-executive Chairman brings a strong track record of commercial experience in construction and infrastructure related industries which are expected to benefit the Group in the ongoing execution of its growth strategy. The three non-executive directors have been determined by the Board to be independent in character and judgement with no relationships or circumstances likely to affect, or that could appear to affect, their judgement. In accordance with the Code, all the directors will be offering themselves for re-election at the forthcoming AGM, with the exception of Colin Holmes who has decided to retire from the Board at the AGM. The Board strongly supports all the individual director s re-elections, taking account of the balance of skills and expertise and the performance of the Board as a whole. All the directors have service agreements or contracts and the details are set out in the Remuneration Report on page 47. A further term for John Warren running until the AGM in 2015 was approved by the Board on 21 January In accordance with the Companies Act 2006 and as permitted by the Company s Articles of Association, the Board has authorised an actual conflict of interest and reviews annually a number of potential conflicts of interest. The Board is satisfied that powers to authorise actual and potential conflicts are operating effectively. As mentioned in the Nomination Committee report, a progressive and orderly refreshing of the Board through to 2015 and beyond is underway, led by the new Chairman, and diversity is one consideration as part of this process. Board meetings There were eight meetings during The Board maintains and reviews a rolling agenda plan, which ensures that all key issues and matters reserved to the Board are discussed at the appropriate time. The Chairman reviews draft meeting agendas with the CEO and Company Secretary and the Company Secretary maintains a schedule of matters arising which is reviewed at each meeting. At each Board meeting during 2013: the CEO provided a review of business and current trading performance, recent developments and strategic issues. the GFD provided a financial review, including results and latest projections, budgets, forecasts, Group KPIs and an analysis of share price valuation and movements. the Board received regular reports covering health and safety, customer satisfaction, major shareholdings, litigation and human resources. At particular points in the year, the Board reviewed: strategy, management of risk, financial statements and regulatory announcements, dividend policy and bank facility refinancing. use of information technology and the marketing programme. succession planning and the outcome of the 2012 Board performance evaluation. The Board also reviewed other topics, such as the market environment, land acquisitions, land sales, analysis of competitors, investor and analyst feedback, and regulatory and governance developments. Four meetings were held in London and four were held in the regions, providing the opportunity to meet and interact with local management teams. Each of the three regions provided a presentation to the Board at these meetings and question and answer sessions followed. One meeting was preceded by an informal evening meeting with the Group Executive Committee (the senior management below the Board) and the Board also met its members at other points in the year. Visits to sites and sales outlets, including product viewings, took place in each of the three regions. The annual strategy day in July provided the Board with the opportunity for an in-depth review of the immediate and longer term strategy for the Group and was preceded by an informal evening meeting with external guests. The previous and current Chairmen also held meetings with the non-executive directors without the executives present. The Board receives a comprehensive electronic meeting pack a week in advance of each meeting plus any other information required to enable it to discharge its duties. Meetings are conducted in an atmosphere of open discussion and debate, which enables the non-executive directors to challenge and test the strategy, policy and proposals put forward by the executive directors. Bovis Homes Group PLC 35

38 Corporate governance report Our governance Board performance evaluation The Board undertook an internal formal evaluation of its own performance towards the end of This started with a questionnaire designed to assess performance and ongoing effectiveness across key areas in 2013 and to maintain visibility on progress and outcomes since the 2011 external performance evaluation. It was followed by an interview process, conducted by the new Chairman with the directors, which explored and expanded on the views expressed. A report was then presented to the Board and discussed. The overall conclusion was positive. The Board continues to operate effectively, with meetings being held in an atmosphere of open discussion and challenge, which facilitates debate and decision making. A common sense of purpose, strong communication and positive relationships were maintained during The broad range of expertise and experience amongst the non-executive directors is a key strength and the size and structure of the Board was thought appropriate for the current business. Future succession planning will include consideration of Board diversity, whilst looking to maintain the strengths on the Board. The Board undertook the first external independent performance evaluation towards the end of This was conducted by Independent Audit (who have no other connection with the Company) using a document review, followed by an interview process. Priority action items were addressed during 2012 and during 2013 ongoing progress with secondary action items was kept under review. Following the internal formal evaluation completed in 2012 the Board: increased focus on specific strategic issues reviewed the risk appetite and selected past investment decisions, continued to review the composition of the Board, including through the Nomination Committee Focus areas Objectives for 2014 Strategy Board meetings Succession planning Market conditions increased its knowledge of alternative business models and their relative performance. Individual director assessments were carried out by the new Chairman towards the end of 2013, using a discussion and interview process which covered overall understanding of the business, effectiveness of contribution and challenge, communications, time commitments and training and development. The outcomes showed that all the directors are contributing effectively and are demonstrating commitment to their roles. As explained in the introduction, a 2013 performance evaluation of the outgoing Chairman was not carried out as a result of his retirement from the Board at the end of November A performance evaluation of the new Chairman will be led by the Senior Independent Director at the end of Board committees The Board is supported by standing Audit, Nomination and Remuneration Committees and their memberships, roles and activities are set out in separate reports: Audit Committee on pages 62 and 63, Nomination Committee on page 64, and Remuneration Committee on pages 43 to 61. Each Committee reports to and has terms of reference approved by the Board and the minutes of Committee meetings are circulated to and are reviewed by the Board. The Audit Committee is chaired by John Warren, the Remuneration Committee is chaired by Colin Holmes and the Nomination Committee is chaired by Ian Tyler. With the retirement of Colin Holmes at the AGM, Alastair Lyons will be appointed chairman of the Remuneration Committee. The Board completed a performance evaluation of its Committees during 2013 and it was concluded that they were contributing and functioning effectively and all were achieving their respective remits. Continue to increase the Board s focus on specific strategic issues, including early discussion planning input from the non-executivies for the strategy day. Further increase engagement with regional management teams on visits to the regions. Continue to focus on non-executive succession planning, and to review the composition of the Board, including skills, experience and with regard to diversity. Further improve non-executive visibility of changing market trends and anticipated changes in operational performance. 36 Annual report and accounts Our governance

39 Governance supporting the business The Board aims to meet governance best practice where it fits our business and further details are set out below. Amongst matters reserved for the Board are leadership of the Group, approval of strategy and budgets, oversight of operations and performance, capital structure, financial reporting, internal controls and approval of major expenditure and transactions. The Board has approved a written division of responsibilities between the non-executive Chairman and the Chief Executive and the role of the non-executive Deputy Chairman has been similarly defined. The Chairman is primarily responsible for: the effective working of the Board, taking a leading role in determining the Board s composition and structure, and ensuring that effective communications are maintained with shareholders. The Chief Executive is responsible for: the operational management of the Group, developing strategic operating plans and presenting them to the Board, and the implementation of strategy agreed by the Board. The Deputy Chairman supports the Chairman in ensuring that the Board is effective and constructive relations are maintained, in addition to acting as the Senior Independent Director, in which capacity he leads the annual performance evaluation of the Chairman and provides an additional point of contact for shareholders. The Company s Management Paper is subject to regular Board review. It contains appropriate controls, authorities and procedures across the range of the Group s activities and includes the authorities and decision making delegated by the Board to management. The advice and services of the Group Company Secretary are available to the directors. All directors have access to the Company s professional advisers and can seek independent professional advice at the Company s expense. No such advice was sought during the year. Training is made available to directors when required and the Chairman is responsible for ensuring that directors continually update and refresh their knowledge and skills and familiarity with the Company, as appropriate to their role on the Board and on Board Committees. During 2013 the directors received governance, regulatory and technical updates. The Company has an insurance policy in place which insures directors against certain liabilities, including legal costs. Information on share capital is provided on page 67. Shareholder engagement The Company has a comprehensive investor relations programme, which allows the Chief Executive and Group Finance Director to regularly engage with our major shareholders. In addition to oneto-one meetings through the year, the Company holds a series of presentations and meetings following the announcement of the final and half-yearly results. These presentations are made publicly available so that all shareholders can access them on the Group s website at At the beginning of June 2013, the Company hosted an analyst and investor visit to its sales outlets at Filton, which included a site tour, product viewings and a presentation focused on progress in delivering strategy. Regional management attended and were available for discussion and the event was well received. The Board reviews feedback on investor relations meetings, visits and presentations, including the matters communicated and discussed. During 2013, the feedback was positive and helpful to the Board. The Board also values other channels to obtain shareholders views. The Chairman is responsible for ensuring that all directors are aware of any issues or concerns that major shareholders may have. In addition, the Deputy Chairman (also the Senior Independent Director) is accessible to shareholders. During the year, the previous Chairman and the Deputy Chairman met with the Group s largest shareholder for discussion, which included Chairman succession. The Chairman, Deputy Chairman and the other non-executive directors attend analyst and investor presentations, giving major shareholders the opportunity to put their views and hold discussion with them. All shareholders are invited to attend the Company s AGM, which this year will be held on 16 May The full Board, including all Committee chairmen, attend and it values this meeting as a means of communicating with private investors and encourages their participation. All shareholders have the opportunity to exercise their right to vote and can appoint proxies if they are unable to attend. To facilitate this we provide an electronic voting facility. Shareholders attending the AGM have the opportunity to ask questions relevant to the business of the meeting and hear the views of other shareholders before voting. After the meeting the results of voting on all resolutions are published on the Group s website. Bovis Homes Group PLC 37

40 Corporate governance report Our governance Additional information Risk management and internal control The Code states that a board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. The Board has agreed that this important principle should form part of its consideration of strategy and all major decisions. The Board also has responsibility for maintaining sound risk management and internal control systems and, whilst monitoring and review forms part of the work undertaken by the Audit Committee, the Board is ultimately responsible for the management of risk. Risk is a regular agenda item, which allows all directors to review the quality of risk management processes, risk mitigation and the risk appetite. The Board has complied with Principle C.2 of the Code by establishing a continuous process for identifying, evaluating and managing the risks that are considered significant by the Company, in accordance with the FRC s Internal Control: Guidance to Directors. This process has been in place for the period under review and up to the date of approval of the Annual Report and Accounts and includes compliance with provision C.2.1. It is designed to manage rather than eliminate risk and can only provide reasonable and not absolute assurance against material misstatement or loss. Monitoring is based principally on reviewing reports from Internal Audit and from management and covers all controls, including financial, operational and compliance controls and risk management processes. The Board operates a robust process of risk reporting and has clear procedures for identification and monitoring of key risks. The Audit Committee reviews the system of internal control and risk management systems annually and reports its findings to the Board. It receives reports from the internal and external auditors and management which assess the effectiveness of internal control and risk management and make recommendations for improvements. Risk assessment As the activities of the Group evolve and grow, the nature of the risks on which it focuses evolve. A key part of the system of internal control is the maintenance of the risk analysis and matrix, compiled using the risk universe as the basis of identification and a process of evaluation that distils the impact of key risks, mitigation measures and residual risk for Board review, leading to assessment of changing risk tolerance and, ultimately, the risk appetite. During 2013, a full risk review and an interim risk review took place. In setting its approach, the Board aims to ensure that the Company is neither prevented from taking opportunities nor exposed to unreasonable risk. Control framework The Group maintains a control environment, which is regularly reviewed by the Board. As new procedures and working practices are adopted, risk factors are reviewed and internal controls embedded into systems. The principal elements of the control environment include regular board meetings, the regional structure, defined operating controls and authorisation limits, an Internal Audit function and a comprehensive financial reporting system. There are a number of elements of the Group s internal control and risk management systems that are specifically related to the Group s financial reporting process: there is a well understood management structure which allows for clear accountability and an appropriately granular level of financial control. the structure is underpinned by documented authority levels for business transactions laid out in the Group s Management Paper. the process is further supported by process documents for both internal management reporting and external Group reporting which stipulates amongst other things reporting timetables and contents of key management reports. The Group maintains computer systems that record financial transactions and whose effectiveness is reviewed by the Internal Audit function on a regular basis. Any findings arising from these exercises are reported to the Audit Committee. Control over cash expenditure, which lies at the heart of any financial reporting process, is key. The Group maintains tight control in this area through a centralised Group payment function, regularly maintained authorisation documents and segregation of authorisation accountability. The Group maintains a regular weekly and monthly financial reporting cycle, allowing management to assess the financial progress of the Group. This is further supported by a formal budget and forecast process which ensures that there is a robust and relatively recent financial forecast in place at all times against which to assess performance. Together with this financial reporting, the Group requires its regional management teams to report key business issues as part of a monthly regional reporting pack on a standardised basis. Finally, there is a process of accounts preparation which ensures that there is an audit trail between the output from the Group s financial reporting system and the Group s financial statements as they are prepared for reporting. 38 Annual report and accounts Our governance

41 Going concern After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operation for the foreseeable future. These enquiries consist of the production and review of detailed financial forecasts covering the period January 2014 to December These forecasts take into account current market trends with reasonable judgements and estimates applied to arrive at future cash flow estimates. As part of this review, the Group has analysed its forecast covenant compliance over this period linked to its banking facility, arriving at an assessment of the headroom evident between the forecast covenant test outcomes and the outcomes necessary to achieve covenant compliance. The Group entered into a new banking arrangement on 29 January This arrangement provides a committed revolving credit facility with a limit of 125 million maturing in March 2017 and a three year term loan of 25 million maturing in January On 23 August 2013, the limit for the committed revolving credit facility was increased by 50 million until 31 December As at 31 December 2013, the Group had no drawings under the 175 million revolving credit facility, and had net debt of 18 million. The Group regards the new banking arrangement as adequate in terms of flexibility and liquidity for its needs, particularly as the committed facility was increased by 50 million as recently as August More details on the Group s approach to financial risk management are laid out in note 4.6. For these reasons, the Group continues to adopt the going concern basis in preparing its accounts. Bovis Homes Group PLC 39

42 Corporate governance report Annex to corporate governance report Corporate governance policy guidelines These guidelines have been adopted by the Board and provide guidance on how corporate governance principles are applied by the Company. 1 Board membership and balance The composition of the Board is reviewed on a regular basis to ensure that it remains appropriate for the successful direction of the business activities of the Group. Consideration is given to boardroom diversity and the mix of experience, skills, ability and vision of executive and nonexecutive directors by the Nomination Committee. The Nomination Committee and the Board give regular consideration to planning for succession to Board and senior management positions, ensuring that appropriate management development measures are in place. The Board currently comprises the Chairman, the Deputy Chairman (also the Senior Independent Director), two further independent non-executive directors and two executive directors. 5 Number of directors An appropriate balance between executive and nonexecutive directors is maintained and the size of the Board is set as necessary to achieve this. The number of nonexecutive directors is decided so as to provide the diversity of skills, ability, vision and experience necessary for a sound independent contribution to the Board and the successful management of the Group s business. By way of guidance, at least half the Board, excluding the Chairman, will comprise independent non-executive directors. 6 Length of appointment Executive directors are employed on service contracts with notice periods which do not exceed one year. Non-executive directors service agreements set the length of their appointments at periods of up to three years and their notice periods up to twelve months. Their total length of appointment would not normally exceed nine years from the date of their first AGM election. Our governance 2 Board selection The Board receives recommendations on the appointment of directors from the Nomination Committee, following an evaluation of the balance of knowledge, skills, experience and diversity available on the Board. This Board committee comprises the independent non-executive directors, the Chairman and the Chief Executive and meets as required in considering proposed changes to Board membership. 3 Non-executive director independence The non-executive directors are independent in character and judgement and free from any business or other relationship which could affect or appear to affect the exercise of their independent judgement on matters under consideration by the Board. The receipt of fair remuneration and being a shareholder is not considered to prejudice independence or prevent a non-executive director from acting independently. 4 Chairman and Chief Executive The roles of Chairman and Chief Executive are separate and there is a clear division of responsibilities between the two roles which has been set out in writing and approved by the Board. It is normal practice for the role of Chairman to be a non-executive position. The role of the Deputy Chairman has also been set out in writing and approved by the Board. The renewal of service agreements after two three year terms is subject to rigorous review and based on annual re-appointment thereafter, with the third year of the third term extending until the next following AGM. Under the Articles of Association, all directors are subject to retirement by rotation at least once in every three years at the AGM New directors appointed by the Board must be re-appointed by shareholders at the following AGM. The Board has agreed that, in accordance with the Code, all directors will offer themselves for re-election at each AGM. 7 Director training On appointment, new directors are given a comprehensive tailored induction to the Group s business activities, strategy and methods of operating, policies, procedures and management structure. Directors receive training to complement their roles on the Board and Board Committees, as necessary. 8 Director remuneration The Remuneration Committee determines, on behalf of the Board, the policy for executive remuneration and remuneration for the Chairman, each of the executive directors and senior management in accordance with its terms of reference. The Remuneration Committee comprises the independent non-executive directors and meets as required. 40 Annual report and accounts Our governance

43 External remuneration advice appropriate to the size and position of the Company is sought when required. Non-executive director remuneration, excluding that of the Chairman, is determined by the Board without their participation. 9 Financial information and internal control The review of submissions for Board approval in respect of the Group s annual report and accounts, half-yearly financial report, preliminary statement, interim management statements and other public financial information is the responsibility of the Audit Committee. The Audit Committee reviews the Group s system of internal control and oversees compliance therewith. The Audit Committee comprises the independent non-executive directors. 10 Supply of information Senior management are responsible for providing the Board with appropriate, complete and timely information relevant to the Board s discharge of its responsibilities, the monitoring of the performance of business activities, including significant variances, and progress with the implementation of strategies. Directors have reasonable access to senior management to enable them to make further enquiries as they consider in their judgement appropriate. 11 Board procedures and authorities The Chairman, Chief Executive and Group Company Secretary determine the agenda for each Board meeting and papers are circulated in advance so that matters can be properly considered by the directors. A schedule of matters reserved to the Board for decision is maintained and detailed authorities and associated procedures have been established for individual directors in the performance of their duties. The Board undertakes annual performance evaluations and a formal external performance evaluation every third year. 12 Relations with shareholders The Board as a whole accepts responsibility for ensuring that a satisfactory dialogue is maintained with shareholders. The aim is to ensure that this dialogue is based on a mutual understanding of objectives. Investors are encouraged to attend the AGM and to vote and participate. 13 Corporate policies The Board ensures that corporate policies and procedures on ethical and corporate social responsibility matters, including sustainability, health and safety and the environment are maintained, monitored and reviewed on a regular basis. Bovis Homes Group PLC 41

44 Our governance Remuneration report 42 Annual report and accounts Our governance

45 Directors remuneration report Dear Shareholder, Colin Holmes Committee Chairman I am pleased to introduce the 2013 Directors remuneration report. It covers the remuneration of the executive and non-executive directors and is divided into two sections, as required by the new remuneration reporting regulations. The policy report contains the three year remuneration policy to be submitted to shareholders in a binding vote at the 2014 AGM and the annual remuneration report explains the application of the policy in 2013 and Overview In 2013 Bovis Homes again delivered significant revenue and profit growth. In the year, basic earnings per share rose by 49% and Return on Capital Employed ( ROCE ) reached 10.4% (2012: 7.7%). The Group also acquired significant levels of high quality consented land, entering 2014 well positioned to further improve returns for shareholders. The remuneration policy of the Group underpins the achievement of these results and the long term goals of the Group for the coming years. The policy remained unchanged in the period under review and will do so for 2014, with the exception of the proposed increase to maximum award levels for the Long Term Incentive Plan (LTIP), which are set out below. Remuneration in 2013 For 2013, the strong performance against the stretching financial and operational targets resulted in 98% of maximum being awarded for the annual bonus. The year saw the achievement of strong pre-tax profit growth (+48%) and importantly the Return on Invested Capital also increased to 10.4%. The LTIP awards granted in 2011 will see 50% of awards vest due to the earnings per share ( EPS ) performance condition being met in full. This demonstrates the strong EPS outperformance of the Group over the past three financial years, against stretching targets, with absolute cumulative EPS reaching 93.1 pence. The second half of the LTIP award, based on relative total shareholder return ( TSR ), will lapse given that the comparator group achieved a median TSR of 188% over the last three years. Changes in remuneration for 2014 The Board is optimistic about the future prospects of the Group and wants to ensure that the executive directors are fully motivated to ensure all the potential opportunities are fully realised for the benefit of its shareholders. The Remuneration Committee, as part of an overall review of executive remuneration policy, therefore focused on long term performance related pay to ensure it is appropriately set for the future. As a result, the Committee is proposing that the maximum award under the LTIP be increased from 100% to 150% of salary for the Chief Executive and to 125% of salary for the Group Finance Director. All other terms of the LTIP will remain unchanged and vesting will ultimately be dependent on the achievement of stretching performance targets. A resolution will be put to shareholders at the 2014 AGM to approve this change. Given the importance of this proposal, I have consulted with the Group s major shareholders, who have indicated their support, subject to stretching targets being set by the Committee. The Committee also considered the scale of the roles performed by both the Chief Executive and the Group Finance Director, deciding that it was appropriate to increase their base salaries by 3.33% and 3.70% respectively with effect from the start of The Committee is confident that both the salary and LTIP award increases are fully justified and commercially appropriate for the Group. Conclusion I do hope you find that this report clearly explains the remuneration approach adopted at Bovis Homes and enables you to appreciate how it underpins the business growth and returns strategy. The Committee considers the remuneration policy fair and fully aligned with the interests of shareholders and looks forward to your support for the associated AGM votes. Lastly, I am stepping down from the Board at the AGM on 16 May 2014, after seven years as Chairman of the Remuneration Committee. The role of Committee chair will be taken on by Alastair Lyons, whose significant experience will be of great benefit to the position. In retiring from the Board, I would like to thank my colleagues and the Group s shareholders for their support during my time at Bovis Homes. Colin Holmes Chairman of the Remuneration Committee Bovis Homes Group PLC 43

46 Policy report Remuneration report Role of the Remuneration Committee The Committee s principal responsibilities are to set, review and approve the remuneration policy and to determine the remuneration packages (including incentive plans and their performance criteria) and any changes to service contracts of the Chairman, executive directors and other designated senior executives including the Group Company Secretary. The Committee s terms of reference are available on the Company s website ( The remuneration policy The Committee s remuneration policy is designed to provide a market competitive, performance-related package which supports and facilitates the delivery of the Company s strategy and the creation of long-term shareholder value. This remuneration policy will be proposed for adoption at the 2014 AGM. If approved it will apply on a legislative basis immediately following shareholder approval on 16 May The Committee keeps the remuneration policy under review to ensure it promotes the attraction, retention and motivation of the high performing executive talent required to deliver the business strategy. It is required that the policy be put to shareholders for approval every three years. Should any changes be required before the end of a three year period, the amended policy will be put to shareholders, following shareholder consultation as appropriate. Components of the remuneration framework for executive directors The policy table below summarises the main components of the remuneration framework, as detailed further in the report, a large proportion of which is performance related. Purpose and link to strategy Operation Opportunity Performance metrics Fixed pay Base salary To attract and retain high performing talent required to deliver the business strategy, providing core reward for the role. Ordinarily reviewed annually. The review typically considers competitive positioning, the individual s role, experience and performance, business performance and salary increases throughout the Group. Market benchmarking exercises are undertaken periodically and judgement is used in their application. Whilst we do not consider it appropriate to set a maximum base salary level, any increases will take into account the individual s skills, experience, performance, the external environment and the pay of employees throughout the Group. Whilst generally the intention is to maintain a link with employee pay and conditions, in circumstances such as significant changes in responsibility or size and scope of role or progression in a role, higher increases may be awarded. Thus, where a new director is appointed at a salary below market competitive levels to reflect initial experience, it may be increased over time subject to satisfactory performance and market conditions. Not applicable. Our governance Benefits To provide market competitive benefits consistent with role. Pension To attract and retain talent by enabling long term pension saving. Benefits typically include medical insurance, life assurance, membership of the Bovis Homes Regulated Car Scheme for Employees or cash car allowance, annual leave, occupational sick pay, health screening, personal accident insurance, and participation in all employee share schemes (SAYE and SIP). In line with business requirements, other expenses may be paid, such as relocation expenses. Executives joining the Group since January 2002 can choose to participate in a defined contribution arrangement, or may receive a cash equivalent. A salary supplement may also be paid as part of a pension allowance arrangement. Executives who joined the Group prior to January 2002 can continue to participate in the defined benefit pension arrangement, which is closed to new members. We do not consider it appropriate to set a maximum benefits value as this may change periodically. A pension allowance of up to 20% of base salary may be paid to include membership of a pension arrangement, with any balance payable as a salary supplement. Not applicable. Not applicable. 44 Annual report and accounts Our governance

47 Purpose and link to strategy Operation Opportunity Performance metrics Variable pay Annual bonus To incentivise and reward the delivery of near term business targets and objectives. The annual bonus scheme is a discretionary scheme and is reviewed prior to the start of each financial year to ensure that it appropriately supports the business strategy. Performance measures and stretching targets are set by the Committee. Bonuses are normally paid in cash. In any year in which no dividend is proposed discretion may be exercised to pay part, or all, of the bonus in ordinary shares, deferred for two years. Actual bonus amounts are determined by assessing performance against the agreed targets after the year end. The results are then reviewed to ensure that any bonus paid accurately reflects the underlying performance of the business. The annual bonus scheme offers a maximum opportunity of up to 100% of base salary. Achievement of stretching performance targets is required to earn the maximum. Performance measures are selected to focus executives on strategic priorities, providing alignment with shareholder interests and are reviewed annually. Weightings and targets are reviewed and set at the start of each financial year. Financial metrics will comprise at least 70% of the bonus and are likely to include one or more of: a profit based measure a cash based measure a capital return measure Non-financial metrics, key to business performance, will be used for the balance. Below threshold performance delivers no bonus and target performance achieves a bonus of 50% of base salary. Long Term Incentive Plan ( LTIP ) To incentivise, reward and retain executives over the longer term and align the interests of management and shareholders. Typically, annual awards are made under the LTIP. Performance is measured over a performance period of not less than three years. LTIP awards do not normally vest until the third anniversary of the date of the grant. Awards may be granted with the benefit of dividend equivalents, so that vested shares are increased by the number of shares equal to dividends paid from the date of grant to the date of exercise. The maximum annual award, under normal circumstances, is as follows: 150% of base salary for the CEO. 125% of base salary for the GFD. In exceptional circumstances an award may be granted under the LTIP rules up to 200% of base salary. The performance measures applied to LTIP awards are reviewed annually to ensure they remain relevant to strategic priorities and aligned to shareholder interests. Weightings and targets are reviewed and set prior to each award. Performance measures will include long term performance targets, of which relative TSR will comprise at least one third and financial performance metrics will comprise the balance. Below threshold performance realises 0% of the total award, target performance realises 30% and maximum performance realises 100%. Notes to the policy table The Committee may make minor amendments to the policy set out above (for regulatory, exchange control, tax or administrative purposes or to take account of a change in legislation) without obtaining shareholder approval for that amendment. There are no provisions for the recovery of sums paid. The Company does not operate malus or clawback because the majority of measures approved by the Committee are outcome measures. Flexibility is retained to amend bonus outcomes if they do not reflect business performance. The executive directors may request and the Company may grant salary and bonus sacrifice arrangements. The LTIP rules permit the substitution or variance of performance conditions to produce a fairer measure of performance as a result of an unforeseen event or transaction and include discretions for upwards adjustment to the number of shares to be realised in the event of a takeover, scheme of arrangement or voluntary winding up. Non-significant changes to the performance metrics may be made by use of discretion under the LTIP rules. Awards are normally satisfied in shares, although there is flexibility to settle in cash. The Committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments) that are not in line with the policy table set out above where the terms of the payment were agreed: (i) before the policy came into effect; or (ii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the Company. For these purposes payments includes the Committee satisfying awards of variable remuneration and an award over shares is agreed at the time the award is granted. Performance measures for the annual bonus scheme and the LTIP are selected to focus the executive directors on strategic priorities, both short term and those related to long term sustainable performance, providing alignment with shareholder interests. Targets for each performance measure are then set by the Committee in light of strategic objectives over the short term for the annual bonus scheme and over at least a three year performance period for the LTIP. In setting targets the Committee takes into account a number of reference points including internal and analysts forecasts. Bovis Homes Group PLC 45

48 Policy report Remuneration report Illustration of the application of the remuneration policy Our aim is to ensure that superior reward is only paid for exceptional performance, with a substantial proportion of executive directors reward opportunity being performance related. The charts below set out remuneration scenarios for each executive director at three levels of performance, as a percentage of the total reward opportunity and as a total value. Maximum In line with expectations 28% 47% David Ritchie Chief Executive 6% 10% 82% 18% 26% 23% 20% 1,037 40% 1,757 Maximum In line with expectations 30% Jonathan Hill Group Finance Director 4% 7% 29% 51% 18% 24% 87% 13% 37% Minimum 595 Minimum s s Salary and benefits Pensions Bonus LTIP The following basis of calculation and assumptions have been used in the scenarios above: Minimum performance reflects base salary as at 1 January 2014 and benefits and pension paid in 2013 (2014 policy for the defined contribution arrangement) as set out in the single figure on page 50. Target performance reflects base salary as at 1 January 2014, benefits and pension paid in 2013 (2014 policy for the defined contribution arrangement) as set out in the single figure on page 50, cash bonus at 50% of maximum and LTIP vesting at threshold of 30% of maximum. Maximum performance reflects base salary as at 1 January 2014, benefits and pension paid in 2013 (2014 policy for the defined contribution arrangement) as set out in the single figure on page 50, cash bonus at 100% of maximum and LTIP vesting at maximum of 100%. No share price, dividends or discount rate assumptions have been included in the charts above. Our governance Non-executive director and chairman fees The Board, comprising the Chairman and the executive directors, sets the remuneration of the non-executive directors, without their participation. The Remuneration Committee, with the Chairman absenting himself from discussions, sets the remuneration of the Chairman who receives an all-inclusive fee. The level of fees must be within the limit approved by shareholders, contained in the Articles of Association. Non-executive directors and the Chairman do not participate in the annual bonus scheme or the LTIP and are not eligible to join the Group s pension schemes. All non-executive director and chairman fees are payable in cash and there are no additional fees or other items in the nature of remuneration. Purpose and link to strategy To attract and retain non-executive directors and a chairman of the appropriate calibre. Operation Opportunity Performance metrics Typically reviewed on a biennial basis. Market benchmarking exercises are undertaken periodically and judgement is used in their application. Fee increases may be applied in line with the outcome of any review. A basic fee is paid. Additional fees may be paid for additional responsibilities such as chairmanship / membership of a committee. Fees are set at a level considered appropriate taking account of competitive positioning, the individual s responsibilities, the time commitment required and the size and complexity of the Company. Not applicable. 46 Annual report and accounts Our governance

49 Approach to recruitment In agreeing a remuneration package for a new executive director, it would be expected that the structure and quantum of variable pay elements would reflect those set out in the policy table above. However, the Committee would retain the discretion to flex the balance between annual and long-term incentives and the measures used to assess performance for these elements, with the intention that a significant proportion would be delivered in shares. Salary would reflect the skills and experience of the individual, and may be set at a level to allow future progression to reflect performance in the role. On recruitment, relocation benefits may be paid as appropriate. This overall approach would also apply to internal appointments, with the proviso that any commitments entered into before promotion which are inconsistent with this policy can continue to be honoured under the policy. Similarly, if an executive director is appointed following the Company s acquisition of or merger with another company, legacy terms and conditions would be honoured. An executive director may initially be hired on a contract requiring 24 months notice which then reduces pro-rata over the first year of the contract to requiring 12 months notice. The Committee may award compensation for the forfeiture of awards from a previous employer in such form as the Committee considers appropriate taking account of all relevant factors including the expected value of the award, performance achieved or likely to be achieved, the proportion of the performance period remaining and the form of the award. There is no specific limit on the value of such awards, but the Committee s intention is that the value awarded would be equivalent to the value forfeited. Maximum variable pay will be in line with the maximum set out in the policy table above (excluding buy-outs). The Committee retains discretion to make appropriate remuneration decisions outside the standard Policy to meet the individual circumstances when: An interim appointment is made to a fill an executive director role on a short-term basis. Exceptional circumstances require that the Chairman or a non-executive director takes on an executive function on a short-term basis. For non-executive directors, the Board would consider the appropriate fees for a new appointment taking into account the existing level of fees paid to the non-executive directors, the experience and ability of the new non-executive director and the time commitment and responsibility of the role. Service contracts and exit payments policy The current executive directors service contracts contain the key elements shown below. Provision Notice period Termination payment Detailed terms 12 months by either employer or director Up to 12 months salary (excluding bonus or other enhancement) The executive directors service contracts do not contain specific provision for compensation in the event of early termination, with the exception of 12 months base salary in the event of removal at an AGM. When determining exit payments, the Committee would take account of a variety of factors, including individual and business performance, the obligation for the director to mitigate loss (for example, by gaining new employment), the director s length of service and any other relevant circumstances, such as ill health. A departing director may also be entitled to a payment in respect of statutory rights. Should a departing director be required to retire and be eligible for an early retirement pension under the terms of the defined benefit pension arrangement, an actuarial reduction will only be applied, in accordance with the rules, if the departing director has not reached age 55. The Committee would distinguish between types of leaver in respect of incentive plans. Good leavers (death, ill-health, agreed retirement, redundancy or any other reason at the discretion of the Committee) may be considered for a bonus payment having completed the full year and part year bonus payments may be paid and LTIP awards may vest taking into account performance conditions and pro rating for time in employment during the performance period, unless the Committee determines otherwise. The LTIP rules include discretion for upwards adjustment to the number of shares to be realised for good leavers and, in exceptional circumstances, adjustment to the realisation date. In all other leaver circumstances, the Committee would decide the approach taken, which would ordinarily mean that leavers would not be entitled to consideration for a bonus and LTIP awards would lapse. The appointment of the Chairman and each of the non-executive directors is for an initial period of three years, which is renewable for further terms, and is terminable by the Chairman / non-executive director (as applicable) or the Company on twelve months notice. No contractual payments would be due on termination. There are no specific provisions for compensation on early termination for the non-executive directors, with the exception of entitlement to compensation equivalent to 12 months fees or, if less, the balance of appointment, in the event of removal at an AGM. Bovis Homes Group PLC 47

50 Policy report Remuneration report Change of control The LTIP rules include discretion for upwards adjustment to the number of shares to be realised, subject to the performance conditions and awards being pro-rated for service, in the event of a takeover, scheme of arrangement or voluntary winding up. Additionally, all the Company s share plans contain provisions relating to change of control. In general, outstanding awards would normally vest and become exercisable on a change of control, to the extent that any applicable performance conditions have been satisfied at that time, reflecting the time period to the date of the event. External directorships Executive directors may, if so authorised by the Board, accept appointments as non-executive directors of suitable companies and organisations outside the Group. Pay and conditions throughout the Group The pay and conditions of employees throughout the Group are considered by the Committee in setting remuneration policy for the executive directors and senior management. The Committee is kept regularly informed on the pay and benefits provided to employees and base salary increase data from the annual salary review for general staff is considered when reviewing executive directors salaries and those of senior management. The Committee does not directly consult with employees when setting remuneration policy for the executive directors. Difference in the Company s policy on remuneration of directors compared to employees The remuneration policy for the executive directors is designed with pay and conditions throughout the Group in mind. The Committee believes that some differences are necessary to reflect responsibility and provide appropriate focus and motivation for delivery of the Group s strategy. Executive directors, therefore, have a higher bonus opportunity than employees generally to motivate them to achieve stretching annual targets and they participate in the LTIP to provide focus on long term sustainable performance. This approach is designed to provide an appropriate emphasis on performance related pay. Consideration of shareholder views The Company is committed to ongoing dialogue with shareholders and welcomes feedback on directors remuneration. Feedback received from meetings during the year and in relation to the AGM is considered, together with guidance from shareholder representative bodies more generally, and taken into account in the annual review of remuneration policy. The Committee believes that it has a responsible approach to directors pay and that its policy is appropriate and fit for purpose. Support from shareholders is evidenced by the 99.3% approval of the 2012 Directors Remuneration Report at the 2013 AGM (see the annual remuneration report for further details). A letter was sent to major shareholders on 8 January 2014 setting out the proposed increase to maximum award levels for the LTIP and their feedback indicated that they were supportive of this change. Our governance 48 Annual report and accounts Our governance

51 Bovis Homes Group PLC 49

52 Annual remuneration report Remuneration report This annual remuneration report explains how the remuneration policy has been implemented in the year ended 31 December 2013 and how it will be implemented for Details of remuneration in 2013 is set out first, followed by the approach for Implementation of remuneration policy for the year ending 31 December 2013 Single figure of executive directors remuneration (audited) The following table reports a single figure for total remuneration for each executive director who served during the 2013 financial year. David Ritchie (appointed CEO 3 July 2008; appointed an executive director in 2002) Jonathan Hill (appointed GFD 23 August 2010) Base salary (5) 450 (5) 430 (6) 270 (6) 260 Benefits (1) Annual bonus 440 (7) (7) 219 Long Term Incentives (incl. options) (2) (9) 363 (8) 404 (9) 210 (8) 281 Sub-total 1,275 1, Pension (3) Other pension salary supplement (4) Total remuneration 1,383 1, Our governance Notes: (1) Taxable benefits include medical insurance and a reconciliation payment relating to membership of the Bovis Homes Regulated Car Scheme, plus income tax and national insurance due on this payment. (2) The 2010 LTIP measured over the three year period to 31 December 2012 vested to the extent of 50% on 9 March The 2011 LTIP measured over the three year period to 31 December 2013 will vest to the extent of 50% on 15 March (3) The single value for David Ritchie has been calculated as 20 times the increase in accrued pension during the year (net of inflation), less the director s own contributions. The single figure for Jonathan Hill has been calculated as the employer s cash contribution. (4) David Ritchie receives a non-bonusable and non-pensionable salary supplement. (5) In May 2012, David Ritchie requested and was granted a salary sacrifice arrangement, which commenced in June 2012, under which 137,480 of salary was sacrificed during 2012 and 108,920 was sacrificed during the period under review, in exchange for equivalent employer contributions to a qualifying personal pension arrangement. For clarity, the pre-sacrifice amounts have been shown in the table above. (6) In September 2012, Jonathan Hill requested and was granted a salary sacrifice arrangement, which commenced in October 2012, under which 13,354 of salary was sacrificed during 2012 and 45,590 was sacrificed during the period under review, in exchange for equivalent employer contributions to the Bovis Homes Group Personal Pension Plan. For clarity, the pre-sacrifice amounts have been shown in the table above. (7) Prior to the consideration of the 2012 bonus awards, David Ritchie and Jonathan Hill requested and were granted bonus sacrifice arrangements. David Ritchie sacrificed 200,000 of performance bonus and Jonathan Hill also sacrificed 200,000 of performance bonus, in exchange for equivalent employer contributions to qualifying personal pension arrangements. For clarity, the pre-sacrifice amounts have been shown in the table above. (8) This is the actual value for the EPS element of the 2010 LTIP calculated using the share prices on the vesting dates (668 pence for David Ritchie on 11 March 2013 and 793 pence for Jonathan Hill on 26 August 2013). Executive share options granted in 2003 vested on 24 February 2012 and a value of 51k, representing the taxable gain, has been included in 2012 for D J Ritchie, calculated using the share price on the vesting date (505.5 pence). (9) This is an estimated value based on the average share price over the last quarter of 2013 of pence for the EPS element of the 2011 LTIP which vests on 15 March Neither of the executive directors currently has any external directorships. 50 Annual report and accounts Our governance

53 The following table shows the remuneration for the non-executive directors who served during the 2013 financial year. Salary / fees Non-executive directors Malcolm Harris (retired ) Ian Tyler (appointed ) 14 - Alastair Lyons Colin Holmes John Warren Total Annual bonus payment in respect of 2013 The maximum opportunity for executive directors for the year ending 31 December 2013 was 100% of salary, the same as in previous years. A breakdown of the performance against the measurement criteria is shown below. All targets were set towards the end of The Committee has decided not to disclose the full detail of performance targets retrospectively as they are considered commercially sensitive and are expected to remain so for some time, being indicative performance indicators closely linked to the Group s growth strategy. Measure Weighting (as a % of maximum) Threshold On target Stretch Award achieved (% of maximum) Financial measures (90%) Profit before tax 50% 0% of maximum 50% of maximum 100% of maximum 50% Cash flow 15% 0% of maximum 50% of maximum 100% of maximum 15% ROIC 25% On target is threshold 50% of maximum 100% of maximum 25% Non-financial measures (10%) Customer service 10% On target is threshold 50% of maximum 100% of maximum 7.8% Total bonus for executive directors (% salary) 97.8% Profit before tax: 78.8 million was achieved representing a 48% increase on Stretch performance was delivered and 100% of the 50% weighting to this performance measure was awarded. 100% 0% 25% 50% 75% 100% Cash flow: The Group ended the year with 18.8 million of net debt, having achieved stretch performance for the 2013 trading cash flow target. 100% of the 15% weighting to this performance measure was awarded. Return on invested capital: This metric reached 10.4% in Stretch performance was delivered and 100% of the 25% weighting to this performance measure was awarded. 100% 0% 25% 50% 75% 100% 100% 0% 25% 50% 75% 100% Customer service: The Group delivered an average customer satisfaction score of 87.8%. Performance was between on target (85%) and stretch (90%) against this measure and 78% of the 10% weighting to this performance measure was awarded. 78% 0% 25% 50% 75% 100% Bovis Homes Group PLC 51

54 Annual remuneration report Remuneration report Executive director Maximum bonus % of salary Target bonus % of salary Actual bonus % of salary Total 2013 bonus David Ritchie % 440 Jonathan Hill % 264 The Committee considered this level of bonus fully justified given the performance achieved against each of the specific metrics. Bovis Homes Group Long Term Incentive Plan Long term incentive awards are made in the form of performance shares or nil-cost options under the Bovis Homes Group Long Term Incentive Plan which was approved by shareholders at the 2010 Annual General Meeting. Each award is made subject to the achievement of performance criteria as set out below and will ordinarily vest after three years. Discretions available to the Committee contained in the LTIP rules are set out in the policy table and also in the exit payments policy. Awards vesting in respect of 2013 The LTIP awards made in 2011 were measured over the three year period to 31 December 2013 and will vest to the extent of 50% on 15 March Half of the award was measured against EPS performance, whilst the other half of the award was measured against TSR performance against an index. The threshold EPS target was 55p, and maximum target was 80p measured on a cumulative three year basis. Absolute cumulative EPS over the three year performance period was 93.1p. Therefore, all of the part of the award based on EPS will vest. The threshold TSR target was performance equal to the index and the maximum target was performance equal to 10% annual outperformance of the index. Actual TSR was below the median of the index of 188% and therefore none of the award based on TSR will vest. Awards granted on 26 February 2013 (audited) Awards of 110,854 shares were made to executive directors at 100% of basic salary at a grant price of 6.495, exercisable in 2016 and subject to a three year performance period ending on 31 December 2015, as follows: Executive director Type of award Number of shares awarded Face value at date of grant % of face value that would vest at threshold David Ritchie Performance share award 69, Jonathan Hill Performance share award 41, The performance measures are unchanged from the prior year, namely TSR (33.3%), EPS (33.3%) and ROCE (33.3%). Our governance The performance targets are: TSR threshold performance equal to the median of the comparator group and maximum performance at median plus 10% per annum (unchanged from the prior year). EPS threshold performance at cumulative EPS of 130 pence and maximum performance at cumulative EPS of 165 pence. ROCE threshold performance at 11.5% and maximum performance at 14.5%. 52 Annual report and accounts Our governance

55 Performance conditions Total Shareholder Return (one-third of total award) One-third of the award vests according to the Company s TSR performance over a three year period against a bespoke unweighted index of housebuilding comparators. TSR performance relative to an unweighted index has been chosen as a performance measure as the Committee believe that this aligns reward with the delivery of superior market performance over the long term. TSR Target performance Maximum performance Quantum 10% of the total award One-third of the total award The 2013 constituents of the TSR index, which may be subject to change, are as listed below: TSR comparator group Barratt Developments plc The Berkeley Group plc Taylor Wimpey plc Bellway plc Persimmon plc Redrow plc Earnings per share (one-third of total award) One third of the award vests according to the Company s EPS performance, measured on a cumulative basis over a three year performance period. EPS Target performance Maximum performance Quantum 10% of the total award One-third of the total award Return on Capital Employed (one-third of total award since the 2012 awards) One third of the award vests according to the Company s ROCE performance, measured in the third year of the performance period. ROCE Target performance Maximum performance Quantum 10% of the total award One-third of the total award Historical LTIP awards The table below summarises the historical long term incentive awards made to the executive directors. Year of grant Performance period Award size (% salary) Performance criteria Percentage of award vesting /01/ /12/ % 50% TSR 50% EPS /01/ /12/ % 50% TSR 50% EPS /01/ /12/ % 33.3% TSR 33.3% EPS 33.3% ROCE /01/ /12/ % 33.3% TSR 33.3% EPS 33.3% ROCE 50% 50% Ongoing Ongoing Bovis Homes Group PLC 53

56 Annual remuneration report Our governance Remuneration report Executive Share Option Scheme The Bovis Homes Group PLC Executive Share Option Scheme was established in 1997 and expired in 2007, with the granting of options being suspended in The last options granted under the Scheme in 2003 vested in Pensions David Ritchie is a senior executive member of the Bovis Homes Pension Scheme ( BHPS ). This is a contributory funded, defined benefit scheme, approved by HMRC. He receives a pension allowance of 20% of salary and some or all of this allowance can be used in relation to his membership of the BHPS, to the extent that it remains beneficial in light of new pension legislation. The balance is paid as a non-bonusable and non-pensionable salary supplement. Jonathan Hill is a member of the Bovis Homes Group Personal Pension Plan ( GPP ). The Plan is a contracted-in defined contribution arrangement. The Company s contribution for Jonathan Hill is 15% of his base salary. There are no special early retirement or early termination provisions for executive directors, except as noted in the exit payments policy. Any new appointments would include eligibility for membership of the GPP, unless the appointee was already a member of the BHPS. Directors pension accruals (audited) Executive director Employer contributions to pension scheme during the year Director contributions to pension scheme during the year Accumulated total accrued pension at 31 Dec 2013 p.a. Increase in accrued pension during the year (net of inflation) p.a. Transfer value of accrued pension at 31 Dec 2013 (1) Single value at 31 Dec 2013 (3) David Ritchie 39,646 7,929 60,503 3, ,076 52,915 Notes: 1. The transfer value has been calculated using the transfer basis introduced in January The accrued pension figures above are the aggregate pension resulting from two periods of service. The first period relates to service up to 5 April 2011 and the second period relates to service from 6 April 2011 to 31 December The single value has been calculated as 20 times the increase in accured pension during the year (net of inflation), less the director s own contributions. Directors shareholdings and share interests (audited) Directors beneficial share interests The directors interests in the share capital of the Company are shown below. All interests are beneficial. Executive directors Ordinary shares Share Options 31 Dec Dec 2012 Shares under the LTIP (shares subject to performance conditions) SAYE options (options subject to continuous employment) Ordinary shares Share Options Shares under the LTIP (shares subject to performance conditions) SAYE options (options subject to continuous employment) David Ritchie 120, ,316 4,570 85,224 34, ,852 4,570 Jonathan Hill 19, ,735 2, ,170 2,341 Non-executive directors Malcolm Harris , (retired 29 November 2013) Alastair Lyons 25, , Ian Tyler (appointed 29 November 2013) Colin Holmes 50, , John Warren 2, , There were no changes in the holdings of ordinary shares of any of the directors between 31 December 2013 and 21 February 2014 other than the normal monthly investment in partnership shares through the Bovis Homes Group Share Incentive Plan. The directors interests in share options and awards under the Long Term Incentive Plan are detailed on page 55. There were no changes in the holdings of share options and awards under the Long Term Incentive Plan between 31 December 2013 and 21 February Annual report and accounts Our governance

57 Shareholding guidelines Guidelines have been approved for executive directors in respect of ownership of Bovis Homes shares. The Board expects executive directors benefiting from the exercise of Long Term Incentive Plan awards or exercise of share options to retain 100% of the net value derived from the exercise as shares, after settling all costs and income tax due, until such time as the executive director holds shares with an historic cost equal to their basic annual salary. The executive directors progress in achieving the guidelines is shown below. Executive director Shareholding at 31 Dec 2013 Historic aquisition cost Salary at 1 Jan 2014 % of shareholding guideline achieved at 31 Dec 2013 David Ritchie 120, , , % Jonathan Hill 19, , ,000 52% David Ritchie meets the shareholding guideline and, following exercise of the 2010 LTIP award, Jonathan Hill is making progress towards doing so. Directors interests in Long Term Incentive Plan shares Executive director Award date Vesting date Interest as at 31 Dec 2012 Interest as at 31 Dec 2013 Value of shares at date of award () Vesting and exercised in year Lapsed in year Expiry date Market value at vesting () Gain on exercise () Shares retained on vesting David Ritchie 09/03/10 09/03/13 105, ,910 52,910 09/09/ ,992 15/03/11 15/03/14 94,253 94, /03/ /02/12 28/02/15 83,779 83, /02/ /02/13 26/02/16-69, /02/ Jonathan Hill 25/08/10 25/08/13 71, ,502 35,503 25/08/ ,782 15/03/11 15/03/14 54,508 54, /03/ /02/12 28/02/15 50,657 50, /02/ /02/13 26/02/16-41, /02/ Directors interests in share options Executive director Date of grant Scheme Interest as at 31 Dec 2012 Granted in year Lapsed in year Exercised in year Interest as at 31 Dec 2013 Exercise price per share Option exercise period David Ritchie 18/03/2003 Exec 34, , /06 03/13 07/04/2010 SAYE 4, , /15 12/15 Jonathan Hill 13/04/2011 SAYE 2, , /14 12/14 All of the share options granted by the Company were granted at the market price prevailing on the date of grant, with the exception of Save As You Earn options which were granted at a 10% discount to the market price on the prevailing date of grant. There was no payment required to secure the grant of any share options. There was no change in the terms and conditions of any outstanding options granted under either the Executive Share Option Scheme ( Exec ) or the Save As You Earn Scheme ( SAYE ) during the financial year. Share options held in the Save As You Earn Option Scheme, which are not subject to performance conditions, may under normal circumstances be exercised during the six months after maturity of the savings contract. Bovis Homes Group PLC 55

58 Annual remuneration report Remuneration report Total Shareholder Return performance graph* TSR Performance Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 FTSE 250 index Bovis Homes Group PLC Median of FTSE 250 housebuilders (excluding Bovis Homes) *This graph illustrates five year TSR performance and therefore does not represent the period under which the Long Term Incentive Plan is measured. As required by the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended), the above graph shows the Total Shareholder Return of an ordinary share held in Bovis Homes Group PLC over the last five financial years, compared to the FTSE 250 index and the median of the FTSE 250 housebuilders over the same period. As a constituent of the FTSE 250, the Committee considers both these indices to be relevant benchmarks for comparison purposes. The middle market price of the Company s shares at 31 December 2013 was 7.93 (2012: 5.75). During the year ended 31 December 2013 the share price recorded a middle market low of 5.75 and a high of As at the date of this report the share price stood at Total CEO remuneration David Ritchie Single figure total 518 1, ,315 1,383 Annual bonus against maximum % Long Term Incentive Plan vesting against maximum % Change in remuneration of CEO Our governance The table below sets out the percentage change in the remuneration awarded to David Ritchie between 2012 and 2013 compared to the average percentage change for employees as a whole. Executive director Base salary Benefits Annual bonus David Ritchie 4.6% 0% 21.5% Employees as a whole 3.3% 0% 11.5% 56 Annual report and accounts Our governance

59 Relative importance of spend on pay The graph below details Group wide expenditure on pay for all employees (including variable pay, social security, pensions and share based payments) as reported in the audited financial statements for the last two financial years, compared with profit before tax and dividends paid to shareholders m Total spend on pay Profit before tax Dividends paid Notes: Total spend on pay in 2012 was 32.5 million and in 2013 was 34.2 million, representing an increase of 5.2%. Profit before tax in 2012 was 53.2 million and in 2013 was 78.8 million, representing an increase of 48%. Dividends paid to shareholders totalled 8.7 million in 2012 and 13.4 million in 2013, representing an increase of 54%. Implementation of remuneration policy for the year ending 31 December 2014 Changes in the way that remuneration policy will be implemented in 2014 versus 2013 include base salary increases for the executive directors and an increase in the maximum annual award under the LTIP from 100% to 150% of base salary for the CEO and from 100% to 125% of base salary for the GFD. Executive directors base salaries The salaries of the executive directors with effect from 1 January 2014 are as follows: Executive directors Position 2014 base salary % increase from 2013 David Ritchie CEO 465, % Jonathan Hill GFD 280, % The increase for the CEO, David Ritchie, of 3.33% is warranted given his continued outstanding leadership and contribution to the Group. This is reflected in the strong profit improvement delivered by the Company in 2013 and the excellent positioning of the Group for 2014, following a difficult period for the house building industry. The Committee decided that given his performance, increased experience and strong contribution to the Group, an increase of 3.70% would be made to the salary of Jonathan Hill, the GFD. An allowance of just over 3% of salary roll was provided for general staff increases. Benefits will continue on the same basis as for Bovis Homes Group PLC 57

60 Annual remuneration report Remuneration report Approach to annual bonus Following the annual review, it was concluded that the annual bonus scheme continues to measure key elements of performance that are in line with the Company s stated strategy over the shorter term and so no changes are to be made for 2014 in terms of either performance measures or quantum. The Committee has decided not to disclose the detail of performance targets in advance as they are considered commercially sensitive, being indicative performance indicators closely linked to the Group s growth strategy. It is not intended to provide this information in future years. However, the 2014 performance measures are described below. Measure (%weighting) Rationale / link to strategy Profit before tax (50%) Financial measures (90%) Profit before tax Explicitly ties reward to financial performance. Challenges management to deliver and out-perform profit target. 50% Cash flow Demands tight cash management in the operational running of the business. A strong balance sheet is a key determinant of the Company s ability to invest for the future, and thus deliver future profitability. 15% ROIC Aligns the way the business is managed with the key interest of shareholders, being the return achieved on invested capital. 25% Non-financial measures (10%) Customer service Quality of service is key to reputation and future success, both in terms of customer demand and achieved selling prices. 10% Total opportunity 100% Approach for Long Term Incentive Plan awards The key features of the long term incentive arrangements remain the same as those for 2013 with the exception of: Award sizes increased to 150% of salary for the CEO and 125% of salary for the GFD (subject to 2014 AGM approval). Performance conditions Total Shareholder Return (one-third of total award) Our governance The target for maximum vesting of outperformance of the index by 10% per annum is historically equal to at least upper quartile performance, and is thus deemed appropriately stretching. TSR will be calculated using a three month averaging period at the start and end of the period to smooth the impact of share price volatility on vesting. Performance measurement Target performance Maximum performance TSR Equal to the median of the Index Median plus 10% per annum The constituents of the TSR index to be used for the 2014 awards have been increased by the addition of Crest Nicholson Holdings plc. 58 Annual report and accounts Our governance

61 Earnings per share (one-third of total award) The Committee adopted cumulative EPS targets for the 2014 awards. When setting minimum and maximum absolute EPS targets for the 2014 awards, the Committee considered data providing visibility over the three year performance period, including internal forecasts and analysts forecasts, and set absolute minimum and maximum EPS targets of 230p and 280p per share to be measured on a cumulative basis over the three year performance period. Where EPS falls below the minimum, none of the shares in the award judged by reference to EPS can be realised. Performance measurement Target performance Maximum performance EPS Cumulative EPS of 230p Cumulative EPS of 280p Return on Capital Employed (one-third of total award) When setting minimum and maximum absolute ROCE targets for the 2014 awards, the Committee again considered data providing visibility over the three year performance period, including internal forecasts and analysts forecasts. The Committee set absolute minimum and maximum ROCE targets for the 2014 awards of 17.0% and 20.0%, to be measured in the third year of the performance period (2016). Performance measurement Target performance Maximum performance ROCE 17.0% 20.0% Pensions Pension arrangements will continue on the same basis as in Non-executive directors remuneration The fees for the non-executive director positions in 2013 and for 2014 are set out below Chairman fee 135, ,000* Deputy Chairman fee 63,000 63,000 Non-executive director base fee 43,000 43,000 Additional fees: Audit Committee chair 8,000 8,000 Remuneration Committee chair 8,000 8,000 * The new non-executive Chairman was appointed on 29 November 2013 at a market competitive rate, following the conclusion of a robust recruitment process. In setting the appropriate fee level, the Committee considered competitive positioning, the Chairman s responsibilities, time commitment for the role and the size and complexity of the Company. The fees for the non-executive directors were increased to their current levels with effect from 1 January 2013 and will next be reviewed with effect from 1 January Bovis Homes Group PLC 59

62 Annual remuneration report Remuneration report Remuneration of senior management and other below board employees In addition to its responsibility for executive directors, the Committee is also involved in the consideration of the remuneration arrangements for the senior management team, in conjunction with the Chief Executive. Alignment is delivered by ensuring that senior management participate in the same bonus and incentive schemes as the executive directors, with the same performance measures and targets. The Remuneration Committee Committee membership and meetings All members of the Committee are independent non-executive directors who have no personal financial interest, other than as shareholders, in the matters to be decided. Biographical details are provided on page 32. Name Date of appointment Role Attendance at meetings Colin Holmes 01/12/2006 Chairman 5/5 Alastair Lyons 01/10/2008 Member 5/5 John Warren 01/03/2006 Member 5/5 The Committee met five times in 2013 and an overview of the main activities is provided below. No director or senior executive is involved in any decisions regarding his own remuneration. Main activities during the year The key activities undertaken were: Reviewed the 2013 bonus scheme and set financial and non-financial performance targets Reviewed the performance measures and set performance targets for 2013 LTIP awards Completed the annual review of remuneration policy Assessed performance against 2012 bonus scheme targets and approved bonus payments Assessed performance of 2010 LTIP awards against performance targets and approved level of vesting Considered and granted 2013 LTIP awards Reviewed and approved the directors remuneration report for inclusion in the 2012 Annual Report Considered and approved the offer of the SAYE scheme in 2013 Reviewed the performance of 2010 CSOP options and confirmed vesting Considered and approved the grant of 2013 CSOP options Our governance Reviewed mid-year performance against the 2013 bonus scheme targets Considered the requirements for the new directors remuneration report and reviewed a draft report Considered and approved terms and conditions for the appointment of the new Company Chairman Considered pay and employment conditions throughout the Group Reviewed the remuneration of the executive directors and other senior management and approved changes for 2014 Reviewed the annual bonus scheme and considered performance targets for 2014 Reviewed the Committee s terms of reference 60 Annual report and accounts Our governance

63 Advisers to the Committee Deloitte LLP were appointed advisers to the Committee in August Deloitte provide independent advice on all aspects of executive remuneration and attend Remuneration Committee meetings when invited by the Chairman of the Committee. The Committee reviews the advice, challenges conclusions and assesses responses from Deloitte to ensure objectivity and independence. Deloitte did not provide any other services to the Company during the period. Deloitte are a founder member of the Remuneration Consultants Group and have signed the voluntary Code of Practice for remuneration consultants. The fees paid to Deloitte for services provided in 2013 were 26,400. The Committee starts its meetings without executive management present. During 2013, the Committee asked Malcolm Harris (former Chairman), Ian Tyler (Chairman) and David Ritchie (Chief Executive) to attend meetings and assist its discussions. This excludes matters connected to their own remuneration, service agreements or terms and conditions of employment. The Group Company Secretary acts as secretary to the Committee. Shareholder voting at the 2013 AGM At the AGM held on 16 May 2013, shareholder proxy voting on the directors remuneration report for the year ended 31 December 2012 was as follows: Resolution For % Against % Total votes Withheld (1) Directors remuneration report ,919, , ,626,526 4,218 (1) A vote withheld is not a vote in law and is not counted in the calculation of votes for and against. The Company is committed to ongoing shareholder dialogue and seeks to understand any concerns investors may have. Should there be a significant level of votes against resolutions relating to directors remuneration, the Company will seek to understand the reasons for this and will set out any actions taken in response. By order of the Board Colin Holmes Chairman of the Remuneration Committee 21 February 2014 Note: This Directors Remuneration Report has been prepared in accordance with the requirements of Schedule 8 to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended). The report also meets the relevant requirements of the Listing Rules of the Financial Conduct Authority, and describes how the Board has complied with the principles and provisions of the UK Corporate Governance Code relating to remuneration matters. Remuneration tables subject to audit in accordance with the relevant statutory requirements are contained in the annual remuneration report. Bovis Homes Group PLC 61

64 The Committee plays a fundamental role in protecting shareholders interests, with a remit that covers financial reporting, risk, internal control and oversight of external and internal audit. Audit Committee report John Warren Committee Chairman Committee membership and meetings The three members of the Committee are independent nonexecutive directors and have relevant experience as required by the UK Corporate Governance Code. Biographical details are provided on page 32. Recommendations on Committee membership are made to the Board by the Nomination Committee and it is also reviewed as part of the Committee s performance evaluation. There were no changes to Committee membership during the year. The Company Chairman, Chief Executive and Group Finance Director attend meetings by invitation and all were present at all meetings in The external auditors, KPMG LLP, and the Internal Audit Director were also in attendance at all meetings. Name Date of appointment Role Attendance at meetings Main activities during the year The Committee followed a programme structured around the annual reporting cycle and received reports from Internal Audit, the external auditors and management. The key activities undertaken were: Discussed with the external auditors the key accounting considerations and judgements reflected in the Group s results for the 12 months ending 31 December Reviewed the 2012 annual report and accounts, to be able to recommend to the Board that they presented a true and fair view. Considered and recommended to the Board the presentations for analysts. Assessed the results and effectiveness of the 2012 final audit. Our governance John Warren 01/03/2006 Chairman 3/3 Alastair Lyons 01/10/2008 Member 3/3 Colin Holmes 01/12/2006 Member 3/3 The Committee met three times in 2013 and an overview of the main activities is provided below. Detailed papers and information were received sufficiently in advance of meetings to allow proper consideration of matters for discussion. The Committee also met with the external auditors and Internal Audit, without executive management, following the final audit and the review of the 2012 financial statements and the 2012 Internal Audit report. No matters of concern were raised in these discussions. John Warren also met privately with both the audit engagement partner of the external auditors and the Internal Audit Director during the year. The Group Company Secretary acts as secretary to the Committee. Responsibilities and terms of reference The key responsibilities of the Committee are: Monitoring the integrity of the financial statements, the accompanying reports to shareholders and corporate governance statements, including reviewing the findings of the external auditors. Reviewing and monitoring the effectiveness of systems for internal control, financial reporting and risk management. Overseeing and reviewing the effectiveness of Internal Audit. Making recommendations to the Board in relation to the appointment and removal of external auditors and approving their remuneration and terms of engagement. Reviewing and monitoring the external audit process and the independence and objectivity of the auditors, as well as the nature and scope of the external audit and its effectiveness. Developing the policy on the engagement of the external auditors to supply non-audit services, taking into account relevant ethical guidance. The Committee s terms of reference are available on the Company s website ( corporate-governance). Reviewed and discussed with the external auditors the key accounting considerations and judgements reflected in the Group s results for the six months ending 30 June Evaluated and agreed the external auditors audit strategy memorandum in advance of their 2013 year-end audit. Received reports from internal audit covering various aspects of the Group s operations, controls and processes. Assessed and agreed the internal auditor s audit plan for 2014, based on the agreed risk universe, together with the required level of resource. Monitored progress against actions from the external formal review of the effectiveness of the Internal Audit function completed in Reviewed the effectiveness of the system of internal control and risk management systems and reported to the Board that there were no material control weaknesses. Reviewed the management s going concern assessment at each reporting period end, considering detailed financial forecasts, future cash flow projections and the resources available to the Group, including the current banking facility and forecast covenant compliance. Assessed and concluded queries and points of clarification raised by the FRC in a letter concerning certain accounting disclosures in the 2011 accounts. Reviewed the Committee s terms of reference. Reviewed the Company s whistleblowing policy and arrangements. At its meeting in February 2014, the Committee discussed with the external auditors the key accounting considerations and judgements reflected in the Group s results for the 12 months ending 31 December 2013 and reviewed the 2013 annual report and accounts, to be able to recommend to the Board that, taken as a whole, it was fair, balanced and understandable and provided the information necessary for shareholders to assess the Company s performance, business model and strategy. 62 Annual report and accounts Our governance

65 Significant areas The key accounting judgements considered by the Committee in relation to the 2013 accounts and discussed with the external auditors, were: Inventory provisioning - the level of inventory provisioning impacts the carrying value of the most significant balance on the balance sheet. Since the downturn in the land market in 2008 the Company has carried a provision to write down the carrying value of the land held within inventories to the lower of cost and net realisable value, less costs to sell, where this is less than the historic cost. The assessment of the level of provision required, requires the exercise of significant judgement by management. The Committee receives a regular report on this provision, updated by management, at relevant Committee meetings. At this year end the paper proposed an immaterial adjustment, which was in line with the forecast position and had been audited by the external auditors prior to the year end. The written down sites and any adjustments proposed were discussed and justified by management and the land write down provision remaining at the period end ( 19.9 million) was reviewed, together with the profit attributable to the reversal of the provision on the sale of written down units during the year, which was not considered to be material. Following discussion, the Committee was satisfied that the judgements exercised were appropriate and that the provision was appropriately stated at the year end. Details of the movements in the provision are provided in note 3.1 to the accounts on page 83. Available for sale financial assets - the assumptions used to fair value available for sale financial assets, (otherwise known as shared equity and details of which are provided in note 4.2 on page 86), affects the carrying value on the balance sheet. These assumptions require the exercise of significant judgement by management. This is assessed through the Committee discussing with management and the auditors the assumptions adopted and any adjustments made to those assumptions, including, in particular, the long run HPI assumption which is a key determinant of the expected final redemption value. Following discussion the Committee considered that the assumptions adopted were reasonable. External auditors During the year, KPMG Audit Plc resigned as auditors as a result of KPMG s decision to gradually wind down activity in KPMG Audit Plc and the Board appointed KPMG LLP to fill the casual vacancy. The Committee reviewed the independence and objectivity of the external auditors, which was confirmed in an independence letter containing information on procedures providing safeguards established by the external auditor. Regulation, professional requirements and ethical standards were taken into account, together with consideration of all relationships between the Company and the external auditors and their staff. Relations with the external auditors were managed through a series of meetings and regular discussions and we ensure a high quality audit by challenging the key areas of the external auditor s work. The relationship is kept under review and, following adopted practice, the audit engagement partner rotated on completion of the 2011 final audit after five years in the post. At its meeting in February 2014, the Committee reviewed the effectiveness of the external audit process as part of its consideration of the 2013 final audit. This included assessing delivery and content against the audit plan for the 2013 year end audit, including perceived changes in audit risks, consideration of the performance of the audit team and the quality of reporting, reviewing comprehensive papers from the external auditors, discussing and challenging conclusions and audit judgements and assessing responses from the external auditor, and obtaining feedback about the effectiveness and conduct of the audit from those involved. Our 2014 AGM Notice contains a resolution for the re-appointment of KPMG LLP as auditors to the Company. In making this recommendation, the Committee took into account, amongst other matters, the independence and objectivity of KPMG LLP, the effectiveness of the external audit process and cost. The 2014 AGM Notice also contains a resolution to give the directors authority to determine the auditors remuneration, which provides a practical flexibility to the Committee. The external auditors have been in post since flotation in 1997 and there are no contractual restrictions on the choice of external auditor. The Committee has considered the length of KPMG s tenure and the UK Corporate Governance Code requirements to tender external audit contracts at least every ten years and, whilst satisfied with KPMG s effectiveness and independence, intends to conduct an audit tender process in the second half of In doing so, the Committee would comply with the Competition Commission Order relating to the statutory audit market for FTSE 350 companies expected to come into effect from 1 October The Committee keeps under review its policy which requires the Committee to approve all non-audit services proposed to be undertaken by the external auditors, with the exception of tax advisory and compliance work undertaken in the ordinary course of business and audit related services, which are treated as pre-approved. When an approval request is made, the Committee has due regard to the nature of the non-audit service, whether the external auditor is a suitable supplier, and whether there is likely to be any threat to independence and objectivity in the conduct of the audit. The related fee level, both separately and relative to the audit fee is also considered. For an analysis of fees paid to the external auditors, see note 2.1 on page 81. The non-audit services provided during the year related to tax advisory and compliance work. Provision of these services is not considered to impair the external auditor s independence or objectivity. Performance evaluation The Committee commenced a performance evaluation towards the end of 2013, using a discussion and interview process designed to produce an objective assessment of the Committee s performance and audit effectiveness. The Committee was found to be effective and continued to be well run, with the level of accounting and financial expertise providing strong challenge. It was also concluded that the Committee had appropriate terms of reference and had fulfilled its remit in 2013 and that the audit process continued to be effective. John Warren Chairman of the Audit Committee 21 February 2014 Bovis Homes Group PLC 63

66 The Committee reviews the balance and composition of the Board and maintains a focus on succession planning. Ian Tyler Committee Chairman Nomination Committee report Our governance Committee membership and meetings All members of the Committee are independent non-executive directors, with the exception of the Chairman of the Company and the Chief Executive. Malcolm Harris chaired the Committee until 29 November 2013 when Ian Tyler was appointed and took over. The other members of the Committee during 2013 were Alastair Lyons, Colin Holmes, John Warren and David Ritchie. Name Date of appointment Role Malcolm Harris 18/12/1998 (retired 29/11/2013) Attendance at meetings Chairman 3/5 Ian Tyler 29/11/2013 Chairman 1/1 Alastair Lyons 01/10/2008 Member 6/6 Colin Holmes 01/12/2006 Member 6/6 John Warren 01/03/2006 Member 6/6 David Ritchie 03/07/2008 Member 6/6 The Committee met six times in Alastair Lyons chaired two meetings and parts of other meetings that discussed Chairman succession planning. The new Chairman of the Company, Ian Tyler, chaired the final meeting of the year. For all meetings, papers were circulated sufficiently in advance to allow proper consideration of matters for discussion. The Group Company Secretary acts as secretary to the Committee. Responsibilities and terms of reference The key responsibilities of the Committee are: Reviewing the structure, size and composition of the Board (including skills, knowledge, experience and diversity) and making recommendations to the Board. Considering succession planning for directors and senior executives, taking into account the challenges and opportunities facing the Company and the skills and expertise needed in the future. Monitoring the leadership needs of the Company and leading the process for Board appointments, ensuring they are conducted on merit, against objective criteria (including diversity), using the services of an appropriate external search consultant. Making recommendations to the Board, including on the re-appointment of non-executive directors, the re-election of directors at the AGM, and membership of the Audit and Remuneration Committees. The Committee also reviews the results of the Board performance evaluation that relate to the composition of the Board. External legal or other independent professional advice can be obtained at the Company s expense, although this facility was not utilised during the year. The Committee s terms of reference are available on the Company s website ( corporate-governance). Main activities during the year During 2013, the Committee: Reviewed the structure, size and composition of the Board and concluded that the present Board balance and composition remained appropriate, but would be kept under review. Ran the recruitment process for the new Chairman of the Company, using objective criteria and the external search services of The Zygos Partnership (who have no other connection with the Company), and recommended appointment of the new Chairman to the Board. Considered succession planning for the other non-executive directors looking forward to 2015, including the phasing of new appointments, as part of a progressive and orderly refreshing of the Board. Reviewed planning for executive director and senior management succession, against a background of organisational development. Recommended that all the directors stand for re-election at the 2013 AGM in accordance with the UK Corporate Governance Code. Approved the Nomination Committee report for the 2012 Annual Report. Reviewed and updated the Committee s terms of reference. The Committee also reviewed the results of the 2012 internal Board performance evaluation relating to the composition of the Board and to ensure all the directors had sufficient time to devote to their duties. Non-executive directors service contracts are renewed on an annual basis following the conclusion of a second three year term, subject to satisfactory performance and no need to re-balance the Board, with the third year of the third term extending until the subsequent AGM. Recommendations were made to the Board that service contracts for John Warren and Colin Holmes be renewed for further terms, following rigorous review, including their respective contributions, performance and commitment to their roles. The principle of boardroom diversity is strongly supported and the Committee reviewed the diversity policy, first published in September The policy sets out that appointments to the Board will always be based on merit, so that the Board has the right individuals in place, and explains that diversity is seen as an important consideration as part of the objective criteria used to assess candidates to achieve a balanced board. A decision was taken not to set measurable objectives and the Committee will continue to consider boardroom diversity in its succession planning discussions. Performance evaluation The Committee completed a performance evaluation towards the end of 2013 and a report was presented to the Committee and discussed. The Committee was found to be effective and it was concluded that it had fulfilled its remit in 2013 and had appropriate terms of reference. Ian Tyler Chairman of the Nomination Committee 21 February Annual report and accounts Our governance

67 Bovis Homes Group PLC 65

68 Directors report The directors have pleasure in submitting their annual report for the year ended 31 December Results and dividends The Group made a profit after taxation of 60.1 million (2012: 40.2 million). An interim dividend of 4.0p (2012: 3.0p) net per share was paid on 22 November The Board proposes to pay, subject to shareholder approval at the 2014 Annual General Meeting, a final dividend of 9.5p (2012: final dividend of 6.0p) net per share in respect of the 2013 financial year on 23 May 2014 to shareholders on the register at the close of business on 28 March On this basis, the total dividend for 2013 will be 13.5p (2012: 9.0p). The dividend reinvestment plan, introduced in 2012, gives shareholders the opportunity to reinvest dividends. Annual General Meeting Notice of the 2014 Annual General Meeting to be held on Friday 16 May 2014 is set out on pages 102 to 104. Members wishing to vote should return forms of proxy to the Company s Registrar not less than 48 hours before the time for holding the meeting. Shareholders with internet access may register their voting instructions via the internet by going to Following a review of remuneration policy by the Remuneration Committee to ensure an approach to remuneration that underpins the Company s long term growth and returns strategy, a resolution will be submitted to shareholders to increase the usual maximum award under the Long term Incentive Plan from 100% to 150% of basic salary. Following a consultation, major shareholders were supportive of this change, which focuses on the long term sustainable performance of the Company. The directors believe that all the resolutions to be considered at the Annual General Meeting are in the best interests of the Company and its shareholders as a whole. The directors unanimously recommend that all shareholders vote in favour of the resolutions, as the directors intend to do in respect of their own shares in the Company. Directors Details of the directors are shown on page 32. Malcolm Harris retired as non-executive Chairman on 29 November 2013 and Ian Tyler was appointed on the same date. Colin Holmes has decided to retire from the Board at the 2014 AGM after seven and a half years as a director and seven years as chairman of the Remuneration Committee. Details of directors pay, pension rights, service contracts and directors interests in the ordinary shares of the Company are included in the Directors Remuneration Report on pages 43 to 61. In accordance with the UK Corporate Governance Code, all the directors will retire at the Annual General Meeting, to be held on Friday 16 May 2014, and being eligible, offer themselves for re-appointment, with the exception of Colin Holmes. Ian Tyler also offers himself for re-appointment in accordance with the Articles of Association. Directors indemnities As at the date of this report, indemnities are in force under which the Company has agreed to indemnify the directors, to the extent permitted by law and the Company s Articles of Association, in respect of all losses arising out of or in connection with, the execution of their powers, duties and responsibilities, as directors of the Company or any of its subsidiaries. Our governance As in prior years, it is proposed that a general meeting that is not an Annual General Meeting can be called on not less than 14 clear days notice. This resolution is required as a result of the implementation of the Shareholder Rights Directive, which increased the notice period for general meetings of the Company to 21 days, unless shareholders have approved the calling of meetings on 14 days notice. Ability to call a general meeting on 14 days notice would only be utilised in limited circumstances and where it was to the advantage of shareholders as a whole. The Board has also resolved that a resolution be submitted to shareholders proposing the renewal of the authority to enable the Company to purchase up to 10% of its own shares. Presently, the directors have no wish to exercise the authority, but consider it appropriate to have the flexibility to do so. Any shares purchased would be cancelled. Corporate governance The Board remains committed to high standards of corporate governance. Details relating to the Company s compliance with the UK Corporate Governance Code are given in the Corporate Governance report on pages 33 to Annual report and accounts Our governance

69 Powers of the directors Subject to the Company s Articles of Association, UK legislation and any directions given by special resolution, the business of the Company is managed by the Board, which may exercise all the powers of the Company. The directors have been authorised to allot and issue ordinary shares and to make market purchases of the Company s ordinary shares and these powers may be exercised under authority of resolutions of the Company passed at its Annual General Meeting. The rules in relation to the appointment and replacement of directors are set out in the Company s Articles of Association. Share capital At the date of this report the Company s issued share capital comprised a single class of share capital which is divided into ordinary shares of 50 pence. As at 21 February 2014, 134,098,952 ordinary shares of 50 pence each have been issued, are fully paid up and are quoted on the London Stock Exchange. The rights and obligations attaching to the Company s ordinary shares are set out in the Company s Articles of Association, copies of which can be obtained from Companies House in the UK or by writing to the Group Company Secretary. In particular, subject to applicable statutes, shares may be issued with such rights or restrictions as the Company may by ordinary resolution determine, or (if there is no such resolution or so far as it does not make specific provision) as the Board may determine. Shareholders are entitled to attend, speak and vote at general meetings of the Company, to appoint one or more proxies and, if they are corporations, to appoint corporate representatives. The instrument of transfer of a certificated share may be in any usual form or in any other form which the Board may approve. The Board may refuse to register any instrument of transfer of a certificated share which is not fully paid, provided that the refusal does not prevent dealings in shares in the Company from taking place on an open and proper basis. The Board may also refuse to register a transfer of a certificated share unless the instrument of transfer: (i) is lodged, duly stamped (if stampable), at the registered office of the Company or any other place decided by the Board accompanied by the certificate for the share to which it relates and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer; (ii) is in respect of only one class of shares; and (iii) is in favour of not more than four transferees. Transfers of uncertificated shares must be carried out using the relevant system and the Board can refuse to register a transfer of an uncertificated share in accordance with the regulations governing the operation of the relevant system and with UK legislation. There are no other limitations on the holding of ordinary shares in the Company and the Company is not aware of any agreements between holders of securities that may result in restrictions on the transfer of securities or on voting rights. On a show of hands at a general meeting of the Company every shareholder present in person or by proxy and entitled to vote has one vote and on a poll every shareholder present in person or by proxy and entitled to vote has one vote for every ordinary share held. Further details regarding voting, including the deadlines for voting, at the Annual General Meeting can be found in the notes to the Notice of the Annual General Meeting at the back of this annual report and accounts. No shareholder is, unless the Board decides otherwise, entitled to attend or vote either personally or by proxy at a general meeting or to exercise any other shareholder rights if he or any person with an interest in shares has been sent a notice under section 793 of the Companies Act 2006 and has failed to supply the Company with the requisite information within the prescribed period. Shareholders may receive a dividend and on a liquidation may share in the assets of the Company. None of the ordinary shares of the Company, including those held by the Company s share schemes, carry any special rights with regard to control of the Company. Employees participating in the Bovis Homes Group Share Incentive Plan may direct the trustee to exercise voting rights on their behalf at any general meeting. Bovis Homes Group PLC 67

70 Directors report Substantial shareholdings As at 31 December 2013, the following interests of 3% or more in the Company s issued share capital had been notified to the Company: Ordinary shares of 50p each % direct holding % indirect holding % financial instruments Total number of shares held % of voting rights of the issued share capital BlackRock, Inc ,736, BlackRock UK Special Situations Fund ,448, Legal & General Group ,076, Norges Bank ,650, Sanderson Asset Management ,655, Between 1 January and 21 February 2014, the following interests of 3% or more in the Company s issued share capital were notified to the Company: 21 February 2014 Ordinary shares of 50p each % direct holding % indirect holding % financial instruments Total number of shares held % of voting rights of the issued share capital BlackRock, Inc ,411, Norges Bank ,103, Our governance Employees The Group s employment policies do not discriminate between employees, or potential employees, on the grounds of gender, sexual orientation, age, colour, creed, ethnic origin or religious belief. It is Group policy to give full and fair consideration to the employment needs of disabled persons (and persons who become disabled whilst employed by the Group) where requirements may be adequately covered by these persons and to comply with any current legislation with regard to disabled persons. It is the policy of the Group to train and develop employees to ensure they are equipped to undertake the tasks for which they are employed, and to provide the opportunity for career development equally and without discrimination. Employees receive regular training in health, safety and environmental matters. Information about the Group s performance and other matters is provided regularly by a news magazine and s and through consultations at staff meetings and personal briefings from elected employee representatives. The CEO and GFD provide presentations to staff at all regional offices at key points in the year. The Group operates both a defined benefit pension scheme and a defined contribution pension scheme. The Company has a Share Incentive Plan, a Save As You Earn Share Option Scheme, a Share Option Plan and a Long Term Incentive Plan to motivate employees and encourage strong involvement with the Group. Corporate social responsibility The Group continues to pursue its commitment to sustainable development and transparent corporate conduct in social and ethical matters, corporate governance, health and safety and the environment. The Group s corporate social responsibility policy focuses on sustainable development, the environment, health and safety, research and development, human resources, an ethical code of conduct and stakeholder engagement. The Group Executive Committee co-ordinates developments in this area and an established process of risk identification and management is embedded in all activities. The Health, Safety and Environmental Consultative Committee monitors and maintains the high health and safety and environmental standards expected from offices and sites. The Board addresses risk in its own decision making and takes regular account of the significance of sustainability, environmental, social and ethical matters through consideration of relevant information and data in Board reports and other documentation provided. Ultimate responsibility rests with the Board and induction and training in this area is supported. Further details of risks and policies and procedures for their management are included in the Group s Corporate Social Responsibility report dated 21 February 2014, which includes key developments and performance data. A copy of the report is available on the Group s website co.uk and on request to the Group Company Secretary. 68 Annual report and accounts Our governance

71 Greenhouse gas emissions Greenhouse gas (GHG) emissions data for the period 1 January 2013 to 31 December 2013 Emissions from: Quantity Unit Combustion of fuel at our facilities and construction sites as well as fleet vehicle use (Scope 1 emissions) Purchased electricity (Scope 2 emissions) 4,118 Tonnes of CO 2 e 1,408 Tonnes of CO 2 e Total GHG emissions (Scope 1 and Scope 2) 5,526 Tonnes of CO 2 e Company s chosen intensity measurements: (i) Total GHG emissions per legally completed unit 1.96 Tonnes of CO 2 e per legally completed unit (ii) Total GHG emissions per 1,000 sq ft legally completed 2.02 Tonnes of CO 2 e per 1,000 sq ft legally completed Methodology GHG emissions have been reported from all sources required under the Companies Act 2006 (Strategic Report and Directors Report) Regulations These sources fall within the Group s operational control and the consolidated statements. The Group does not have responsibility for any emission sources that are not included in the consolidated financial statements and are outside the boundary of operational control. During the year, measures were put in place to collect emissions data from our construction sites for the first time. Where this data was incomplete at the year end, we have extrapolated total emissions by using (i) an averaging approach to extend data to a full year for sites with part-year data, and (ii) applied an average calculated from all sites to sites returning inadequate data. The calculations allow for sites which opened and closed during the year. GHG emissions have been calculated using emission factors from UK Government s GHG Conversion Factors for Company Reporting Scope 1 emissions arise from the consumption of gas at our facilities, diesel on construction sites and UK business mileage in fleet cars. Emissions from air conditioning in offices have been excluded as not being material. Scope 2 emissions represent purchased electricity. Takeover directive On a change of control, provisions in the Group s syndicated banking facility agreements (described in note 4.3 to the accounts) would allow lenders to withdraw the facility. All of the Group s share schemes contain provisions relating to a change of control. Under these provisions, a change of control would be a vesting event, allowing exercise of outstanding options and awards, subject to satisfaction of performance conditions, as required. There are a number of commercial contracts that could alter in the event of a change of control. None is considered to be material in terms of their potential impact on the Group in this event. Financial risk management Details of financial risk management and exposure to credit / liquidity risks are included in note 4.6 to the accounts. Political donations No political donations were made during the year ended 31 December The Group has a policy of not making donations to political parties or incurring political expenditure. Auditors Each person who is a director at the date of approval of this report confirms that: so far as the director is aware, there is no relevant audit information of which the Company s auditors are unaware; and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Company s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act The auditors, KPMG LLP, have indicated their willingness to continue in office and, in accordance with the provisions of the Companies Act 2006, resolutions concerning their re-appointment and remuneration will be placed before the Annual General Meeting. Bovis Homes Group PLC 69

72 Directors report Directors responsibilities statement The directors are responsible for preparing the annual report, the directors remuneration report and the Group and Parent Company financial statements, in accordance with applicable law and regulations. Company law requires the directors to prepare Group and Parent Company financial statements for each financial year. Under that law the directors are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Parent Company financial statements on the same basis. Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgments and estimates that are reasonable and prudent; for the Group and Parent Company financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; Under applicable law and regulations, the directors are also responsible for preparing a strategic report, a directors report, a directors remuneration report and a report on corporate governance that comply with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Each of the directors, whose names and functions are listed on page 32 of this annual report confirm that, to the best of their knowledge: a) the Group and Parent Company financial statements in this report, which have been prepared in accordance with IFRS as adopted by the EU, IFRIC interpretation and those parts of the Companies Act 2006 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and of the Group taken as a whole; and b) the strategic report contained in this report includes a fair, balanced and understandable review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties they face. Our governance prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business. The directors confirm that they have complied with the above requirements in preparing the financial statements. The directors also confirm that they consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Parent Company s performance, business model and strategy. The directors are responsible for keeping proper accounting records that are sufficient to show and explain the Parent Company s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. By Order of the Board M T D Palmer Group Company Secretary 21 February 2014 Bovis Homes Group PLC Registered number Annual report and accounts Our governance

73 Bovis Homes Group PLC 71

74 Auditor s report Independent auditor s report to the members of Bovis Homes Group PLC Opinions and conclusions arising from our audit 1 Our opinion on the financial statements is unmodified We have audited the financial statements of Bovis Homes plc for the year ended 31 December 2013 set out on pages 75 to 100. In our opinion: the financial statements give a true and fair view of the state of the group s and of the parent company s affairs as at 31 December 2013 and of the group s profit for the year then ended; the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU); to sales prices achieved and list prices of comparable houses as published by estate agents. We compared sales price trends forecast recorded in the appraisals to published indices. We also challenged the group s forecast of build cost per square foot by comparing to the build costs for similar units on other sites and where there were differences we corroborated management s explanations to subcontractor quotes. Our audit work was focused on low margin sites which are considered to have the most sensitivity to the Directors assumptions. We also considered the adequacy of the group s disclosures in respect of the provision held against inventory carried at net realisable value. Valuation of available for sale financial assets shared equity ( 44.8 million) Our governance the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. 2 Our assessment of risks of material misstatement In arriving at our audit opinion above on the group financial statements the risks of material misstatement that had the greatest effect on our group audit were as follows: Net realisable value of inventories ( million) Refer to page 63 (Audit committee report), page 83 (accounting policy) and page 83 (financial disclosures). The risk - Inventories, which principally comprise the group s land held for development and work in progress, are stated at the lower of cost and net realisable value (i.e. the forecast selling price less the remaining costs to build and sell). An assessment of the net realisable value of inventory is carried out at each balance sheet date and is dependent upon the group s estimate of forecast selling prices and build costs by reference to current prices million of inventory is held at net realisable value. Accordingly, a change in the group s estimate of sales price and build cost could have a material impact on the carrying value of inventories in the group s financial statements. Our response - Our audit procedures in this area included, among others, challenging the group s forecast sales prices by comparing the forecast sales price of a sample of houses Refer to page 63 (Audit committee report), page 85 (accounting policy) and pages 86 and 90 (financial disclosures). The risk - Available for sale financial assets are amounts receivable on extended terms granted as part of a sales transaction where the final amount repayable is dependent upon the value of the house at the repayment date and are carried at fair value. The valuation method for these assets is not based upon observable market data. Hence, the group uses a valuation model for which a number of assumptions have to be made, the key ones being expected house price movements and the discount rate reflecting, inter alia, the time value of money and the risk that the borrower is unable to repay the amount receivable. Changes in the assumptions used could have a material effect on the output of the valuation model and hence on the carrying value of the assets. Our response - Our audit procedures in this area included, among others, comparing the discount rate used in the valuation model to our own research on private transactions in mortgage and secured loans portfolios (with assistance from our own valuation specialist) and house price movements to house price forecasts published by real estate agents. We challenged the group s estimate of the fair value by checking profits/losses earned from redemptions in the year and assessing how the experience to date had been included as part of the reassessment of assumptions. We also re-performed the group s sensitivity analysis on the valuation and assessed whether the group s disclosures about the sensitivity of the outcome of the valuation to changes in key assumptions properly reflected the risks inherent in the valuation of available for sale assets. 72 Annual report and accounts Our governance

75 3 Our application of materiality and an overview of the scope of our audit The materiality for the group financial statements as a whole was set at 3.9 million. This has been determined with reference to a benchmark of group profit before taxation (of which it represents 5%) which we consider to be one of the principal considerations for members of the company in assessing the financial performance of the group. We agreed with the audit committee to report to it all uncorrected misstatements we identified through our audit with a value in excess of 0.2 million, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds. In addition we considered whether any misstatements corrected by management identified during the course of the audit should be communicated to the Audit Committee to assist it in fulfilling its governance responsibilities. The group s operations are all accounted for at the group s head office in New Ash Green, Kent. The group audit team performed the audit of the group as if it was a single aggregated set of financial information. The audit was performed using the materiality level set out above and covered 100% of total group revenue; group profit before taxation; and total group assets. Visits were made to regional offices for the purposes of performing tests of controls or making enquiries of regional management). 4 Our opinion on other matters prescribed by the Companies Act 2006 is unmodified In our opinion: the part of the Directors Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and the information given in the Strategic Report and the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. 5 We have nothing to report in respect of matters on which we are required to report by exception Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading. In particular, we are required to report to you if: we have identified material inconsistencies between the knowledge we acquired during our audit and the directors statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the group s performance, business model and strategy; or the Audit Committee report does not appropriately address matters communicated by us to the audit committee. Under the Companies Act 2006 we are required to report to you if, in our opinion: adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements and the part of the Directors Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: the directors statement, set out on page 39, in relation to going concern; and the part of the Corporate Governance Statement on pages 33 to 41 relating to the company s compliance with the nine provisions of the 2010 UK Corporate Governance Code specified for our review. We have nothing to report in respect of the above responsibilities. Scope of report and responsibilities As explained more fully in the Directors Responsibilities Statement set out on page 70, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council s website at This report is made solely to the Company s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at auditscopeukco2013a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions. Stephen Wardell (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants London 21 February 2014 Bovis Homes Group PLC 73

76 Financial statements Annual report and accounts Financial statements