Countryside Properties PLC Countryside - Annual Report 2019 and AGM 2020 (8916W)

TIDMCSP

RNS Number : 8916W

Countryside Properties PLC

13 December 2019

13 December 2019

COUNTRYSIDE PROPERTIES PLC (THE "COMPANY")

ANNUAL REPORT AND FINANCIAL STATEMENTS 2019 AND NOTICE OF

ANNUAL GENERAL MEETING 2020

The following documents have today been posted or otherwise made available to shareholders:

   --      Annual Report 2019 
   --      Notice of Annual General Meeting 
   --      Proxy Form 

In accordance with Listing Rule 9.6.1R, a copy of each of these documents has been uploaded to the National Storage Mechanism and will be available for viewing shortly at http://www.morningstar.co.uk/uk/NSM.

The above documents may also be viewed online at

   --      investors.countrysideproperties.com;  and 

-- investors.countrysideproperties.com/shareholder-information/meetings-and-voting respectively.

A condensed set of the Company's financial statements and information on important events that have occurred during the financial year and their impact on the financial statements were included in the Company's Preliminary Results Announcement on 21 November 2019. That information together with the information set out below, which is extracted from the Annual Report 2019, constitute the material required by Disclosure Guidance and Transparency Rule 6.3.5R which is required to be communicated to the media in full unedited text through a Regulatory Information Service. This announcement is not a substitute for reading the full Annual Report 2019. Page and note references in the text below refer to page numbers in the Annual Report 2019. To view the preliminary announcement, slides of the results presentation and the webcast please visit investors.countrysideproperties.com/results-reports-and-presentations.

Enquiries: Tel: [phone]

Ian Sutcliffe - Group Chief Executive

Mike Scott - Group Chief Financial Officer

Victoria Prior - IR and Strategy Director

OPTIMISING OUR RISK MANAGEMENT PROCESS

This section describes how Countryside determines its appetite for risk, how risks are identified and quantified, and how they are managed and mitigated appropriately in order to deliver the Group's strategic objectives. It describes Countryside's policies and procedures for the timely identification, assessment and prioritisation of the Group's material risks and uncertainties.

How we manage risk

The Board oversees risk management within Countryside. At its March 2019 Strategy Day, it determined the Group's overall risk profile and appetite for risk, the results of which have been implemented through the conduct and decisions of the Board and Executive Committee. In July 2019, the Board carried out its annual assessment of risks and it routinely considers individual risks at each of its Board Meetings.

Risk identification and management is built into every aspect of Countryside's daily operations, ranging from the appraisal of new sites, assessment of the prospects of planning success, building safely and selling effectively to achieve long-term success through the property market cycle. Risk management is built into standardised processes for each part of the business at every stage of the housebuilding process. Financial risk is managed centrally through maintenance of a strong balance sheet, forward selling new homes and the careful allocation of funds to the right projects, at the right time and in the right locations. Risk management also includes the internal controls described within the Corporate Governance Report on pages 62 to 66.

The Risk Management Committee ("RMC") meets at least four times a year and provides a focal point for the co-ordination of the Group's risk management efforts. Its membership comprises all members of the Executive Committee and the Director of Audit and Risk Assurance and it is chaired by the Group Chief Executive.

The standing business of the RMC includes reviewing:

   --      the Group risk register, mitigation plans and internal controls; 

-- for each risk, the assessment of gross and net risk versus risk appetite, risk progression and adequacy of mitigating actions;

   --      the Internal Audit plan, reports and progress against recommendations; 
   --      the management of claims and litigation; 
   --      reports of whistleblowing and fraud; 
   --      the forecast impact and preparation for proposed and new legislation; 

-- key policies and risk mitigation documentation (e.g. start on site or land acquisition checklists); and

   --      total cost of risk against insurance and bond requirements. 

At each RMC meeting, a different "principal risk" is also reviewed in depth. A description of the key areas of risk considered during 2019 is set out below.

Meetings of the management boards of each regional business are held regularly and review all operational risks. All such regional board meetings are attended by the relevant Divisional CEO, who in turn feeds back any matters requiring consideration by the RMC.

The Group's risk register is maintained to record all principal risks and uncertainties identified in each part of the business. The most appropriate member of the Executive Committee is allocated as the "risk owner" for each risk. The risk owners call upon the appropriate expertise to conduct an analysis of each risk, according to a defined set of assessment criteria which includes:

   --      How does the risk relate to the Group's business model and/or strategy? 
   --      What is the likelihood of the risk occurring? 
   --      What is the potential impact were the risk to occur? 
   --      Would the consequences be short, medium or long-term? 
   --      What mitigating actions are available and which are cost effective? 
   --      What is the degree of residual risk and is it within the Group's risk appetite parameters? 
   --      Has the risk assessment changed and what is expected to change going forward? 

The RMC reviews the assessments made, compares them to the Group's appetite for each risk, reviews the current level of preparedness and determines whether further actions or resource are required. In reviewing and agreeing the mitigating actions, the RMC considers the impact of risks individually and in combination, in both the short and the longer term.

Our approach to risk

The Board - Role and responsibilities

   --      Sets the Group strategy 

-- Determines the Group's risk policy, overall appetite for risk and the procedures that are put in place

-- Regularly monitors Group risks and their progression in comparison to the agreed appetite for each risk

   --      Reviews the effectiveness of the Group's risk management and internal control procedures. 

Audit Committee - Role and responsibilities

-- Has delegated responsibility from the Board to oversee risk management and internal financial controls

   --      Monitors the integrity of the Group's financial reporting process 

-- Monitors the effectiveness of the Internal Audit function and the independence of the external audit

Internal Audit - Role and responsibilities

   --      Undertakes independent reviews of the effectiveness of internal control procedures 
   --      Reports on the effectiveness of management actions 
   --      Provides assurance to the Audit Committee 

Risk Management Committee - Role and responsibilities

   --      Manages the Group's risk register and assessment of net risk versus risk appetite 
   --      Determines the appropriate controls for the timely identification and management of risk 
   --      Monitors the effective implementation of action plans 
   --      Reviews reports from the Internal Audit function 
   --      Reviews principal claims and litigation 
   --      Reviews the annual renewal of Group insurance cover 

Executive Committee - Role and responsibilities

   --      Responsible for the identification of operational and strategic risks 
   --      Responsible for the ownership and control of specific risks 
   --      Responsible for establishing and managing the implementation of appropriate action plans 

Key areas of focus during 2019

Market

Given that Countryside continues to grow, there has been renewed focus during 2019 on the Group's mixed-tenure approach to both improve the quality of returns and maintain resilience in the event of a market downturn. Improvements have been made to the timely reporting of key sales data to enable management to monitor and react appropriately to any changes in market activity. With the opening of the Warrington modular panel factory in April 2019, we are committed to embracing innovation to reduce reliance on sub-contract labour, secure the supply chain and achieve on-site efficiencies. Increasing off-site production will further improve product quality and drive improvements in customer satisfaction.

Government policy and regulatory change

Whilst the current Government backed Help to Buy scheme arrangements will end in 2021, the Government has announced that a revised Help to Buy scheme will extend to spring 2023. During the extension period, regional caps (set at 1.5 times the current average first-time buyer price in each region) will apply. Measures have been introduced so that all new site proposals reviewed by management and the Board for approval take account of the availability of Help to Buy funding when determining product mix.

Following Government consultation after the Grenfell Tower tragedy and in light of recommendations made by Dame Judith Hackitt's final report on building regulations and fire safety, an amendment to Approved Document B of the Building Regulations was issued in December 2018. The amendment bans the use of combustible materials in the external walls of high rise residential buildings and bans the use of assessments in lieu of testing (so-called desktop studies). Measures are in place to ensure all ongoing and future building projects fully comply with the amended regulations. A Technical Standards Fire Committee, made up of the technical directors from each division, representatives of health and safety and legal and chaired by the Divisional CEO of Partnerships South, has been established to ensure uniform compliance across the Group with the revised regulations and any advice issued by Government, such as the June 2019 advice relating to buildings with balconies.

Following concerns raised by homeowners about the leasehold tenure of their property or the terms of their ground rent escalation clause, the Government has launched two consultations into leasehold properties and potential reform. The proposals include a ban on the sale of leasehold houses and plans to lower future ground rents to a nominal fee. Countryside now longer sells leasehold houses and has signed the Public Pledge for Leaseholders (https://www.gov.uk/government/publications/leaseholder-pledge/public-pledge-for-leaseholders).

In June 2019, the Competition & Markets Authority commenced an investigation into the sale of leasehold properties and in July 2019, the Government published its response to the Housing, Communities and Local Government Select Committee report on Leasehold Reform. Countryside is working closely with industry peers, the HBF and other stakeholders to prepare for and address any required changes.

Brexit

Since the result of the referendum vote to leave the European Union ("EU") in June 2016 ("Brexit"), management and the Board have developed and maintained detailed reviews on Countryside's exposure to risks that may flow from the United Kingdom's departure from the EU. Key risks has been identified, such as the supply of materials and labour, the availability of capital and potential changes to Government regulation and policy, and mitigating actions and plans are in place to address the challenges should they arise.

Most of our building supplies are manufactured in the UK and are not at risk from Brexit. Where possible, we endeavour to purchase key supplies in bulk via national agreements and have preferred partnerships with many of our suppliers. Those products that have an element imported from the EU are mainly sourced through a network of UK-based suppliers. In the event of a worst case no-deal Brexit outcome, there is a risk that our supplier network may experience delays in their own

supply chain and we are working closely with these distributors to understand any issues they may face. We have conducted a thorough analysis of this risk, including reviewing all such first and second tier material origins, fixed price duration, World Trade Organisation ("WTO") tariff impact and logistical restrictions. Where appropriate, we have worked with supply chain partners who have increased stock levels and, where necessary, the quantum of stock held at sites has been increased to secure critical EU-sourced goods

The Government has published details of the UK's temporary tariff regime in the event of a worse case no-deal Brexit. The tariff regime is designed to minimise costs to business and its effect would be that the bulk of Countryside's EU imports would be eligible for tariff-free access. The only commodity that appears to impact our business is ceramics. We have worked with relevant suppliers to ensure we can access materials from outside the EU to mitigate this risk where required.

We are working with our workforce and suppliers to monitor any trends, but to date have not experienced material changes that might affect production. The introduction of the Government's "settled status" scheme is reasonably expected to materially mitigate the risk that large numbers of EU workers would otherwise be required to leave the UK.

Our internal auditor, KPMG, has recently tested Countryside's resilience in areas of business continuity and disaster recovery, including in the event of a no-deal Brexit. Actions have been taken to address all potential areas identified for improvement.

Attracting and retaining talent

Recruiting, retaining and developing highly skilled, competent people at all levels of the organisation remains a key challenge whilst the competition for talent in a growing homebuilding industry remains fierce. During 2019 considerable effort has been made to ensure that Countryside is able to participate and win in the competition for talent. The roll-out of extended flexible benefits has proven very successful, along with improved study support, enhanced maternity and paternity policies, personal and professional development and training, enlarged graduate and apprenticeship schemes, additional recruitment resources and the determination to implement feedback obtained from employee engagement (as described on pages 38 to 40).

Westleigh acquisition

Following the acquisition of Westleigh in 2018, its integration into the Countryside Group and its compliance with Countryside's policies and procedures is now complete. This has resulted in considerable strengthening of a number of Westleigh's compliance functions, including health and safety, legal, environmental and quality. In November 2018, all Westleigh branding was replaced with the Countryside brand name.

Improving assurance and standardisation

As Countryside continues to grow, both organically and through the acquisition of Westleigh, ensuring that processes, procedures and risk mitigation actions are implemented, standardised and uniformly applied is critical. Countryside's investment in audit and assurance has been increased to address this ongoing requirement, leading in June 2019 to the appointment of a new Director of Audit and Risk Assurance.

Board, Audit Committee and Risk Management Committee responsibility

The Audit Committee reviewed the Group's risk register and the assessment of the Group's principal risks and uncertainties prepared by the Risk Management Committee at its meetings in July and October 2019. The Audit Committee also considered the effectiveness of the Group's systems and has taken this into account in preparing the Viability Statement on the previous page.

The Audit Committee reported on its findings at the Board's July and October 2019 meetings, in order to support it in making its confirmation that it had carried out a robust assessment of the principal risks.

Principal risks and uncertainties

The Group's principal risks are monitored by the Risk Management Committee, the Audit Committee and the Board. The table below sets out the Group's principal risks and uncertainties and mitigation.

 
 Risk and impacts                           How we monitor and manage the risk 
 1   Adverse macroeconomic conditions* (Responsible Executive: 
      Group Chief Executive) 
      (Impact on strategy-Growth/Returns) (risk change-no change) 
     A decline in macroeconomic 
      conditions, or conditions               *    Funds are allocated between the Housebuilding and 
      in the UK residential property               Partnerships businesses. 
      market, can reduce the propensity 
      to buy homes. Higher unemployment, 
      interest rates and inflation            *    In Housebuilding, land is purchased based on planning 
      can affect consumer confidence               prospects, forecast demand and market resilience. 
      and reduce demand for new 
      homes. Constraints on mortgage 
      availability, or higher costs           *    In Partnerships, contracts are phased and, where 
      of mortgage funding, may                     possible, subject to viability testing. 
      make it more difficult to 
      sell homes. 
                                              *    In all cases, forward sales, cash flow and work in 
                                                   progress are carefully monitored to give the Group 
                                                   time to react to changing market conditions. 
 2   Adverse changes to Government policy and regulation* (Responsible 
      Executive: Group Company Secretary and General Counsel) 
      (Impact on strategy - Growth/Returns/Resilience) (risk change-risk 
      increased) 
     Adverse changes to Government 
      policy in areas such as tax,            *    The potential impact of changes in Government policy 
      housing, the environment                     and new laws and regulations are monitored and 
      and building regulations                     communicated throughout the business. 
      may result in increased costs 
      and/or delays. Failure to 
      comply with laws and regulations        *    Detailed policies and procedures are in place to 
      could expose the Group to                    address the prevailing regulations. 
      penalties and reputational 
      damage. 
 3   Constraints on construction resources* (Responsible Executive: 
      Chief Executive, Partnerships North) 
      (Impact on strategy-Growth/Returns) (risk change-no change) 
     Costs may increase beyond 
      budget due to the reduced               *    Optimise use of standard house types and design to 
      availability of skilled labour               maximise buying power. 
      or shortages of sub-contractors 
      or building materials at 
      competitive prices to support           *    Use of strategic suppliers to leverage volume price 
      the Group's growth ambitions.                reductions and minimise unforeseen disruption. 
      The Group's strategic geographic 
      expansion may be at risk 

      if new supply chains cannot             *    Robust contract terms to control costs. 
      be established. 
 
                                              *    Modular panel factory. 
 4   Programme delay (rising project complexity) (Responsible Executive: 
      Chief Executive, Partnerships South) 
      (Impact on strategy-Growth/Returns) (risk change-no change) 
     Failure to secure timely 
      planning permission on economically     *    The budgeted programme for each site is approved by 
      viable terms or poor project                 the Divisional Board before acquisition. 
      forecasting, unforeseen operational 
      delays due to technical issues, 
      disputes with third-party               *    Sites are managed as a portfolio to control overall 
      contractors or suppliers,                    Group delivery risk. 
      bad weather or changes in 
      purchaser requirements may 
      cause delay or potentially              *    Weekly monitoring at both divisional and Group level. 
      termination of project. 
 5   Inability to source and develop suitable land (Responsible 
      Executive: Chief Executive, Housebuilding 
      (Impact on strategy-Growth/Returns) (risk change-no change) 
     Competition or poor planning 
      may result in a failure to              *    A robust land appraisal process ensures each project 
      procure land in the right                    is financially viable and consistent with the Group's 
      location, at the right price                 strategy. 
      and at the right time. 
 6   Inability to attract and retain talented employees* (Responsible 
      Executive: Group HR Director 
      (Impact on strategy-Growth/Returns/Resilience) (risk change-no 
      change) 
    ---------------------------------------------------------------------------------------------------- 
     Inability to attract and 
      retain highly skilled, competent        *    Remuneration packages are regularly benchmarked 
      people at all levels could                   against industry standards to ensure competitiveness. 
      adversely affect the Group's 
      results, prospects and financial 
      condition.                              *    Succession plans are in place for all key roles 
                                                   within the Group. 
 
 
                                              *    Exit interviews are used to identify any areas for 
                                                   improvement. 
    -------------------------------------  ------------------------------------------------------------- 
 7   Inadequate health, safety and environmental procedures (Responsible 
      Executive: Group Company Secretary and General Counsel) 
      (Impact on strategy-Returns) (risk change-no change) 
     A deterioration in the Group's 
      health, safety and environmental        *    Procedures, training and reporting are all carefully 
      standards could put the Group's              monitored to ensure that high standards are 
      employees, contractors or                    maintained. 
      the general public at risk 
      of injury or death and could 
      lead to litigation or penalties         *    An environmental risk assessment is carried out prior 
      or damage the Group's reputation.            to any land acquisition. 
 
 
                                              *    Appropriate insurance is in place to cover the risks 
                                                   associated with housebuilding. 
 
 
 *   The Board's review of risk, including the principal risks, 
      takes into account the known and forecast developments flowing 
      from plans being made for Brexit. Brexit affects many of the 
      principal risks, but particularly those marked with an asterisk. 
 

RELATED PARTY TRANSACTIONS

Transactions with joint ventures and associate

 
                                                  Joint ventures      Associate 
----------------------------------------------  -----------------  -------------- 
                                                  2019     2018     2019    2018 
                                                  GBPm      GBPm     GBPm    GBPm 
----------------------------------------------  -------  --------  ------  ------ 
 Sales during the year                            29.8     20.2      2.4     1.7 
----------------------------------------------  -------  --------  ------  ------ 
 Net advances to joint ventures and associate     56.1     67.6       -       - 
  at 1 October 
  Net repayments during the year                  (6.8)    (11.5)     -       - 
----------------------------------------------  -------  --------  ------  ------ 
 Net advances to joint ventures and associate 
  at 30 September                                 49.3     56.1       -       - 
----------------------------------------------  -------  --------  ------  ------ 
 

The transactions noted above are between the Group and its joint ventures and associate, the details of which are described in Note 15 and Note 16 respectively.

Sales of goods and services to related parties related principally to the provision of services to the joint ventures and associate at contractually agreed prices. No purchases were made by the Group from its joint ventures or associate. The amounts outstanding ordinarily bear no interest and will be settled in cash.

Remuneration of key management personnel

Key management personnel are deemed to be the Executive Committee, along with other Directors of the Company, including the Non-Executive Directors. The aggregate remuneration of these personnel during the year was GBP11.0m (2018: GBP8.8m).

Transactions with key management personnel

In 2014, properties were sold at market value by the Group to a company of which Graham Cherry is a Director and shareholder. The Group leased back these properties incurring rental expenses of GBP21,000 in the prior financial year. The Group no longer leases these properties and therefore payments during the year ended 30 September 2019 were GBPNil.

During the prior financial year, a close family member of Ian Sutcliffe and a close family member of Graham Cherry were employed by a subsidiary of the Group. During the year ended 30 September 2019, two close family members of Phillip Lyons were also employed by a subsidiary of the Group. All of these individuals were recruited through the normal interview process and are employed at salaries commensurate with their experience and roles. The combined annual salary and benefits of these individuals is less than GBP190,000 (2018: less than GBP110,000).

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union and parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law). 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 the profit or loss of the Group and parent company for that period. In preparing the financial statements, the Directors are required to:

   --      select suitable accounting policies and then apply them consistently; 

-- state whether applicable IFRSs as adopted by the European Union have been followed for the Group financial statements and United Kingdom Accounting Standards, comprising FRS 102, have been followed for the Company financial statements, subject to any material departures disclosed and explained in the financial statements;

   --      make judgements and accounting estimates that are reasonable and prudent; and 

-- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and parent company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and parent company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and parent company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

The Directors are also responsible for safeguarding the assets of the Group and parent company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the parent company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The Directors consider that 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.

Each of the Directors, whose names and functions are listed in the Board of Directors section, confirms that, to the best of their knowledge:

-- the parent company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law), give a true and fair view of the assets, liabilities, financial position and loss of the Company;

-- the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

-- the Directors' Report includes a fair review of the development and performance of the business and the position of the Group and parent company, together with a description of the principal risks and uncertainties that it faces.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact [e-mail] or visit www.rns.com.

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December 13, 2019 11:50 ET (16:50 GMT)