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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Taylor Wimpey Plc | LSE:TW. | London | Ordinary Share | GB0008782301 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -2.45 | -1.83% | 131.40 | 131.70 | 131.75 | 134.05 | 130.70 | 134.05 | 9,230,262 | 16:35:04 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Gen Contr-single-family Home | 3.51B | 349M | 0.0987 | 13.34 | 4.66B |
From Apr 2019 to Apr 2024
TIDMTW.
RNS Number : 2057R
Taylor Wimpey PLC
27 February 2019
27 February 2019
Taylor Wimpey plc
Full year results for the year ended 31 December 2018
Pete Redfern, Chief Executive, commented:
"2018 was another strong year for Taylor Wimpey with good progress against our strategic priorities. We delivered in line with our expectations, achieving a strong sales rate and record revenues. Despite ongoing macroeconomic and political uncertainty, we have made a very positive start to 2019 and are encouraged to see continued strong demand for our homes. We enter the year with a strong order book and a clear strategy in place to deliver long term value for shareholders.
We are very pleased with how our business is adapting to our customer-centred strategy. We are enhancing every step of our customers' buying and aftercare service so that we become the first choice homebuilder in all market conditions."
Group financial highlights:
-- Growth in Group completions of 2.9% to 15,275 (2017: 14,842) including joint ventures -- Further improvement in operating profit* margin to 21.6% (2017: 21.3%)
-- Growth in profit before tax and exceptional items of 5.5% to GBP856.8 million (2017: GBP812.0 million)
-- Increased profit for the year of GBP656.6 million (2017: GBP555.3 million) -- 2018 results in line with expectations with clear progress on strategic goals -- Record net cash(++) of GBP644.1 million (2017: GBP511.8 million) -- GBP499.5 million paid in total dividends in 2018 (2017: GBP450.5 million)
-- As previously announced, c.GBP600 million declared in total dividends for 2019, subject to shareholder approval
Operational highlights:
-- Strong UK forward order book of 8,304 units as at 31 December 2018 (31 December 2017: 7,136)
-- UK forward order book value of GBP1,782 million as at 31 December 2018 (31 December 2017: GBP1,628 million)
-- Achieved over 90% recommend score, as measured by the Home Builders Federation (HBF) 2017 / 18 survey
Hot Features
Premium
-- Top 10 employer by Glassdoor, as rated by employees
2018 2017 Change
Revenue GBPm 4,082.0 3,965.2 2.9%
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Operating profit* GBPm 880.2 844.1 4.3%
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Profit before tax and exceptional
items GBPm 856.8 812.0 5.5%
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Profit before tax GBPm 810.7 682.0 18.9%
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Profit for the year GBPm 656.6 555.3 18.2%
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Adjusted basic earnings per share
pence 21.3 20.2 5.4%
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Basic earnings per share pence 20.1 17.0 18.2%
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Tangible net asset value per
share pence 98.3 95.7 2.7%
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Net cash(++) GBPm 644.1 511.8 25.8%
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Operating profit* in 2018 was GBP880.2 million and is up 4.3%, driven by improved performance in both the UK and the Spanish businesses. Profit for the year at GBP656.6 million is up 18.2% with the improved underlying performance and a reduced post-tax exceptional charge of GBP37.9 million (2017: GBP105.0 million).
UK current trading and outlook
We have made a positive start to 2019 and, coming into the spring selling season, customer confidence remains robust. The net private sales rate for the year to date (w/e 24 February 2019) was 0.99 (2018 equivalent period: 0.82). This sales rate includes a forward build and sales contract that was entered into simultaneously with a large land purchase, reducing market risk. The underlying net private sales rate for the year to date, excluding this deal, was 0.90 (2018 equivalent period: 0.82).
We have continued to prioritise building a strong order book for the future, which is particularly important in an uncertain market, whilst ensuring we are managing our customers' timing and meeting their requirements. As at 24 February 2019, we were c.47% forward sold for private completions for 2019, with a total order book value of GBP2,170 million (2018 equivalent period: GBP1,961.0 million), excluding joint ventures. This order book represents 9,622 homes (2018 equivalent period: 8,385), with significant growth coming from affordable homes. In Central London c.50% of private completions for 2019 are forward sold, as at 24 February 2019 (2018 equivalent period: 49%).
In current market conditions, we continue to expect stable volumes in 2019 and for underlying build cost increases during 2019 to be at a similar level to 2018, at around 3-4%.
As previously announced, we will pay a total dividend in 2019 of c.GBP600 million, subject to shareholder approvals to be sought at the Annual General Meeting (AGM) on 25 April 2019, and confirm our intention to make further material cash returns in 2020 and beyond.
We have made a significant step change in our quality of delivery and customer service over the last four years and are pleased that we have seen material improvements across a number of metrics, including achieving over 90% in the Home Builders Federation (HBF) 2017/2018 survey. Our focus in 2019 is on making good progress on the key priorities that underpin our customer-led strategy. This includes ensuring our right first time approach is adopted consistently through all stages of build, supply chain improvements, ongoing people development and resourcing of future capacity, through our apprentice and our direct labour programmes.
While we are conscious of the wider political and economic risks, particularly as the UK plans its exit from the EU, we are confident that our strong balance sheet, with our high-quality landbank, and a strategy focused on customers makes us a more resilient business. This strategy also gives us the flexibility to increase our pace of build and accelerate growth in 2020, depending on market conditions, while maintaining focus on quality land investment in good locations.
* Operating profit is defined as profit on ordinary activities before net finance costs, exceptional items and tax, after share of results of joint ventures.
** Return on net operating assets (RONOA) is defined as rolling 12-month operating profit divided by the average of the opening and closing net operating assets, which is defined as net assets less net cash, excluding net taxation balances and accrued dividends.
*** Return on capital employed is defined as rolling 12-month operating profit divided by the average capital employed calculated on a monthly basis over the period.
**** Operating cash flow is defined as cash generated by operations (which is before taxes paid, interest paid and payments related to exceptional charges).
Tangible net assets per share is defined as net assets before any accrued dividends excluding goodwill and intangible assets divided by the number of ordinary shares in issue at the end of the period.
Adjusted basic earnings per share represents earnings attributed to the shareholders of the parent, excluding exceptional items and tax on exceptional items, divided by the weighted average number of shares in issue during the period.
* Net operating asset turn is defined as 12-month rolling total revenue divided by the average of opening and closing net operating assets.
(**) WIP turn is defined as total revenue divided by the average of opening and closing work in progress.
(++) Net cash / (debt) is defined as total cash less total financing.
(++++) Cash conversion is defined as operating cash flow divided by operating profit on a rolling 12-month basis.
(++++++) Contribution margin is defined as revenue less direct build costs, less gross land costs and less direct selling expenses. Contribution margin excludes the impact of supplier rebates, land provision utilisation and discounting of deferred land commitments.
(++++++++) Adjusted gearing is defined as adjusted net debt divided by net assets. Adjusted net debt is defined as net cash less land creditors.
The 2017 financial statements have been restated for the adoption of IFRS 9 - 'Financial Instruments' and IFRS 15 - 'Revenue from Contracts with Customers'. They have not been restated for IFRS 16 as it has been applied from 1 January 2018 using the 'modified retrospective' approach, as outlined in the standard.
Note: Alternative Performance Measures
The Group uses Alternative Performance Measures (APMs) as key financial performance indicators to assess underlying performance of the Group. The APMs used are widely used industry measures, form the measurement basis of the key strategic KPIs (return on net operating assets** and operating profit* margin) and are linked directly to executive remuneration. All references to operating profit* throughout this report meet the definition of an APM.
Definitions of the APMs discussed throughout our Annual Report and Accounts, and a reconciliation to the equivalent statutory measure are detailed in the APM section of this statement.
-Ends-
A presentation to analysts will be hosted by Chief Executive Pete Redfern, Group Finance Director Chris Carney and Group Operations Director Jennie Daly, at 9am on Wednesday 27 February 2019. This presentation will be webcast live on our website: www.taylorwimpey.co.uk/corporate
An archived version of the webcast will be available on our website in the afternoon of 27 February 2019.
For further information please contact:
Taylor Wimpey plc Tel: +44 (0) 7826 874 461
Pete Redfern, Chief Executive
Chris Carney, Group Finance Director
Debbie Archibald, Investor Relations
Finsbury Tel: +44 (0) 20 7251 3801
Faeth Birch
Anjali Unnikrishnan
Notes to editors:
Taylor Wimpey plc is a customer-focused residential developer, operating at a local level from 24 regional businesses across the UK. We also have operations in Spain.
For further information please visit the Group's website: www.taylorwimpey.co.uk/corporate
Follow us on Twitter @TaylorWimpeyplc
Developing best in class business resilience and creating high-quality growth and returns by putting customers first
We operate in an industry which is underpinned by a fundamental long term demand and supply imbalance. As one of the UK's largest homebuilders, we believe that we have a shared responsibility to create more choices for those wanting to access housing, and to deliver this housing with high quality and excellent service.
Traditionally housebuilders are land led. Over the last seven years, the land and planning environment has undergone a structural change, with more good-quality land available through the planning system and an increase in opportunities, including a reduced level of competition, in certain parts of the market, such as large scale sites. While land remains a key value driver, the easing of the land constraint through this cycle means that other elements of the business model have become increasingly important to future success. This includes operational ability, delivery capability and approach to customers, particularly in the context of significantly changed customer expectations.
These changes present an opportunity in an industry which has historically been very reactive to genuinely shift our focus to our customers' needs and their aspirations for their homes and communities. Over the coming years, by enhancing every step of our customers' buying and after service experience, building homes which are right first time and right for our customers' income and lifestyle, we can create real additional value for customers, and for our other stakeholders. In this way we can grow our business, providing more homes to more people, whilst continuing to manage the cycle cautiously and without compromising on quality.
Together with our response to the changes in the land and planning environment, our customer-centric strategy will offer further scope for differentiation and enable us to become the customer's first choice of homebuilder in all market conditions. This will make us a more efficient and resilient homebuilder throughout the cycle and ultimately enhance our brand and returns by:
1. Industry leading sales and service to customers through the cycle, providing increased resilience in weaker market conditions and a route to high-quality and sustainable growth
2. Optimising our strong landbank to deliver enhanced returns, by adopting a factory approach, to build more efficiently where there is market demand
3. Continuing to improve the operational business model to drive efficiency and reduce costs
The strategy focuses on five key pillars:
-- Customers and communities at the heart of our strategy -- Build quality: getting it right first time -- Optimising our strong landbank -- Becoming the employer of choice -- Best in class efficient engine room
Each of these five pillars are explored in more detail throughout the operational review.
Strategic goals
In May 2018, at our Capital Markets Day, we announced four strategic goals, aligned to our new strategy and which target further improvement in the next five years to 2023:
-- Increase of return on net operating assets** to 35% -- Maintaining operating profit* margins at c.21-22%
-- Operating cash conversion(++++) of between 70 and 100% of operating profit* into operating cash flow****
-- Increased landbank efficiency - reducing length of short term owned and controlled landbank years by c.1 year to 4-4.5 years
During 2018, we made progress towards these with the short term landbank remaining steady at c.5.1 years. Our strategic objectives, together with our revised and stretching Key Performance Indicators, target a broad basket of measures which we believe are more important than one single measure, and helps drive the right type of behaviour.
Returns and dividends
We are an extremely cash generative business, even in times of market weakness, because of the strength of our balance sheet, the length of the landbank and as a consequence of the control we have over the timing of land investment. This allows us to provide shareholders with a reliable dividend through the cycle which is a key priority.
Our strategy means that we can continue to drive further value from our landbank and our business model as we focus on our customers, delivery and efficiency which in turn drives increased cash generation.
As previously announced, commencing in 2019, subject to shareholder approval at the 2019 AGM scheduled for 25 April 2019, we intend to pay an enhanced ordinary dividend of GBP250 million per annum (c.7.6 pence) on an annual basis through the cycle (2018: GBP160 million), including during a 'normal' downturn. This has been stress tested in a variety of scenarios including a 20% fall in house prices and a 30% fall in volumes. The ordinary dividend will be paid equally as a final dividend (in May) and as an interim dividend (in November).
In addition to the ordinary dividend, we have also paid a special dividend in each of the last five years. As previously announced, and subject to shareholder approval at the 2019 AGM, we intend to pay c.GBP350 million to shareholders in July 2019 by way of a special dividend.
Accordingly, subject to shareholder approval, in 2019 shareholders will receive a total dividend of c.GBP600 million (c.18.3 pence per share), comprising an ordinary dividend of c.GBP250 million (c.7.6 pence per share) and a special dividend of c.GBP350 million (10.7 pence per share), a 20% increase on 2018 total dividend.
(A) 2018 actual paid 2019 announced
(B)
Ordinary dividend GBPm 159.5 c.250.0
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Special dividend GBPm 340.0 c.350.0
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Total dividend GBPm 499.5 c.600.0
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(A) All final ordinary and special dividends are subject to shareholder approval
(B) In line with previously announced Policy
The Board will continue to keep the mechanics of how the Company will pay special dividends, including the merits of undertaking a share buyback at some point in the future should it become appropriate to do so, under regular review.
Operational review
Taylor Wimpey plc is a customer-focused residential developer building and delivering homes and communities across the UK and in Spain.
Our operational review is for the UK only as the majority of metrics are not comparable in our Spanish business. A short summary of the Spanish business follows. The financial review of operations is presented at Group level, which includes Spain, unless otherwise indicated.
Joint ventures are excluded from the operational review and are separated out in the Group financial review of operations, unless stated otherwise.
Our Key Performance Indicators (KPIs)
We have updated our key performance indicators to ensure these are aligned to our five key strategic pillars and are the most appropriate management targets.
UK 2018 2017 Change
Customers and communities at the heart of our strategy
Customer satisfaction 8-week score
'Would you recommend?' 90% 89% 1ppt
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Customer satisfaction 9-month score
'Would you recommend?' 76% 76% -
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Build quality: getting it right first time
Construction Quality Review (average
score / 6) 3.93 3.74 5.1%
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Average reportable items per inspection 0.28 0.26 7.7%
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Optimising our strong landbank
Land cost as % of ASP on approvals 19.2% 19.8% (0.6)ppt
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Landbank years c.5.1 c.5.1 -
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% of completions from strategically
sourced land 58% 53% 5ppt
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Becoming the employer of choice
Employee turnover % (voluntary) 14.5% 14.0% 0.5ppt
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Number of people recruited into early
talent programmes: graduates, management
trainees and site management trainees 175 126 38.9%
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Directly employed key trades including
trade apprentices 748 581 28.7%
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Health and Safety Annual Injury Incidence
Rate (per 100,000 employees and contractors) 228 152 50.0%
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Best in class efficient engine room
Net private sales rate per outlet per
week 0.80 0.77 3.9%
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Private legal completions per outlet 41.8 40.4 3.5%
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Order book value GBPm 1,782 1,628 9.5%
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Order book volume - no. of homes 8,304 7,136 16.4%
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2018 sales, completions and pricing
Despite wider macroeconomic and political uncertainty, the UK housing market remained stable during 2018. Customer demand for new build homes continued to be robust, underpinned by low interest rates, a wide choice of mortgage deals and the Government's Help to Buy scheme. During the year, we saw good levels of demand throughout the country, which converted into strong sales rates across the business. Trading in Central London was stable, while the outer London market remained robust, despite, as previously reported, some signs of increasing customer caution in London and the south east towards the end of 2018.
In 2018, total home completions increased by 3% to 14,933, including joint ventures (2017: 14,541) with a further 14 homes sold into our pilot Springboard rent to buy scheme. During 2018, we delivered 3,416 affordable homes (2017: 2,809), including joint ventures, equating to 23% of total completions (2017: 19%).
Average selling prices on private completions increased by 2% to GBP302k (2017: GBP296k), with the overall average selling price remaining flat at GBP264k (2017: GBP264k). We estimate that market-led house price growth for our regional mix was c.3% in the 12 months to 31 December 2018 (2017: c.4%).
Our net private reservation rate for 2018 remained strong at 0.80 homes per outlet per week (2017: 0.77). Consistent with our strategy to optimise our large sites, and our long term approach to reducing cyclical risk by maintaining a strong order book, we achieved a very good sales rate of 0.76 in the second half of the year (H2 2017: 0.66). Cancellation rates remained low at 14% (2017: 13%). First time buyers accounted for 34% of total sales in 2018 (2017: 41%). Investor sales continued to be at a low level of c.5% (2017: 3%).
During 2018, approximately 36% of total sales used the Help to Buy scheme, and we worked with 5,828 households to take the first step to home ownership or to move up the housing ladder (2017: 43% and 6,069). Approximately 77% of sales through Help to Buy in 2018 were to first time buyers (2017: 77%) and at an average price of GBP270k (2017: GBP256k). During the year 29% of sales in the London market used Help to Buy London. We welcome the Government's announcement within the Autumn Budget to introduce tapering measures to the Help to Buy scheme as the Equity Loan Scheme transitions to a close in 2023. Help to Buy has been popular with our customers and has supported them in getting onto and moving up the housing ladder, however, we believe that the changes announced are appropriate and are in the best long term interests of the housing market and homebuyers.
We ended 2018 with a very strong order book which represented 8,304 homes (31 December 2017: 7,136 homes) with the growth due to affordable housing. The value of this order book stood at GBP1,782 million (31 December 2017: GBP1,628 million), excluding joint ventures.
During 2018, we opened 82 new outlets (2017: 109) in locations in villages, towns and cities where people want to live, and which are supported by strong demographics and local economies. As at 31 December 2018 we were operating from 256 outlets (31 December 2017: 278). We traded on an average of seven Central London schemes in 2018, of which the average size was 141 plots.
Customers and communities at the heart of our strategy
Each of the decisions we take, from the location of the land we buy, to the house types we choose and the location and timing of community facilities, has a significant impact on our customers' lives and their lifestyles. Understanding what our customers need has been a key priority for everyone at Taylor Wimpey. During 2017 and 2018, we conducted a wide ranging customer research project to help set our customer facing priorities.
We have made a significant step change in our business over the last four years and are pleased to have achieved a customer satisfaction score of over 90% as measured by the Home Builders Federation (HBF) survey. Whilst we have made great progress and over 90% of customers would recommend Taylor Wimpey to a friend (2017: 89%), this performance often drops over time, a common trend across the industry. There are of course a number of contributing factors, and not all within our control, but we start from the point that to be genuinely customer-centric, we have to understand the causes and look for solutions. We have therefore introduced the HBF 9-month 'would you recommend' score, as an additional Key Performance Indicator, which captures the feedback from customers living in their homes for nine months.
We aim to give our customers clear and useful information so they know what to expect throughout the home buying process and so they know how to contact us when they need to. Technology has a key part to play in this. TouchPoint, our online portal, is now available to all new customers.
Widening routes to market
As one of the largest homebuilders in the UK, we believe that we have a shared responsibility, and the opportunity, to meet a wider customer need by ensuring our products are affordable and accessible to more people. This will mean we are well placed in all market conditions.
During 2018 we ran a pilot for a new Taylor Wimpey rent to buy scheme, Springboard. This scheme enables first time buyers to rent a property for up to five years, without a rental deposit which we know is often a challenge for those renting and trying to save up for a deposit at the same time. After a minimum of two years the customer is given an option to purchase the property at a 5% discount. We piloted Springboard at one site, with 14 new one, two and three-bedroom properties. This proved to be very popular, with 12 of the 14 homes reserved within the first weekend. Springboard enables us to explore different customer needs, and gives us the potential to open up a different, and further, route to market, depending on market conditions.
Responsible business
Whilst the majority of our customers would recommend us to their friends, we acknowledge that we do not always get it right for our customers and sometimes fall short of our high standards. Where this is the case, we work with customers to put this right and learn from our mistakes. We remain supportive of the Government plans to introduce an independent ombudsman service to the new build sector to provide impartial rulings on unresolved customer issues and help to raise standards in the wider industry.
The Ground Rent Review Assistance Scheme (GRRAS) announced in April 2017 is progressing well with a continuing number of customers accessing the GRRAS. Our objective is to ensure our customers are put back into a position they would have been had the doubling lease not been in place, by converting the ten-year doubling ground rent clause to an industry standard RPI-based structure, comparable to that used in the majority of residential leases in the UK. We have reached agreement with freeholders representing 95% of the leases concerned, with a further 2% in advanced legals. All of our customers that currently have the option of converting their ten-year doubling lease to an RPI-based structure have been contacted about this either by Taylor Wimpey or the freeholder directly.
Following the tragic fire at Grenfell Tower, we conducted a detailed review into all legacy and current buildings with Aluminium Composite Material (ACM) cladding and worked with building owners, management companies, and the Fire Service to implement Government advice on interim mitigation measures, where applicable. Whilst each situation is different, and this is an exceptionally complex issue, we have in a number of cases, having regard to all of the relevant facts and circumstances, agreed to support our customers both financially and practically with removal and replacement of ACM, even though the buildings concerned met the requirements of building regulations at the time construction was formally approved. We took this decision for buildings we constructed recently because we believe that it is morally right, not because it is legally required. At the year end, replacement works had been completed on one development and were underway on another. Since the year end we have started work on a further development.
Communities
Our customers have a very strong desire to become part of a community and to do so quickly after they move in. Our research showed that customers believe we should play a more active role in facilitating the relationship between the new residents, their new community and their neighbours. This is an area we will be exploring further in 2019 and we will be undertaking a number of pilots at a community level to test effectiveness and impact. Our customer research also shows a clear relationship between good placemaking and long term customer satisfaction.
We want communities to welcome Taylor Wimpey to their area and recognise the positive contribution we can make to their existing community, as well as trusting us with the responsibility of creating a new one. We know housebuilding, particularly in its early stages, can be disruptive. In order to mitigate this, we seek to engage, consult and work in partnership with communities and all interested stakeholders on each and every site, both before we submit a planning application and throughout the life of our developments. During 2018 we ran 200 community meetings and events, including public exhibitions.
We are very proud of the significant contribution we make via our planning obligations each year, providing local infrastructure, affordable homes, public transport, education facilities and other forms of social infrastructure. In 2018, we contributed GBP455 million to local communities in which we build across the UK via planning obligations (2017: GBP413 million). Our teams across the business get involved in local life, organising competitions with primary schools, inviting schools to site for health and safety training and sponsoring local sports clubs, as part of their daily working life. In addition, we contributed over GBP170k to other organisations, such as scout groups, local football teams and various local community causes (2017: c.GBP90k).
Build quality: getting it right first time
Having spent time and resources on ensuring the quality of products handed over to customers is consistent and meets our high standards, including the introduction of a Taylor Wimpey national quality manual, we are now focused on ensuring that a right first time approach is adopted consistently through all stages of build. Our customer research made very clear that this is an absolute foundation stone for customer satisfaction. Our customers rightly expect high-quality homes that are professionally built and free from defects. We believe that investment in quality upfront effectively benefits all stakeholders as getting it right first time saves significant time, cost and energy in putting things right.
During 2018 we rolled out our Consistent Quality Approach (CQA) guidelines to make sure our Site Managers, subcontractors, production and customer service teams all have a consistent understanding of the finishing standards we expect on all Taylor Wimpey homes. We are developing specific guidance within the CQA for the different trades working on our sites that will form part of our framework agreements with contractors in the future. We plan to produce a version of the CQA for customers in 2019 so they know what they should expect from us.
We have introduced the National House-Building Council (NHBC) Construction Quality Review score as a new KPI in the business which measures build quality at key build stages. In 2018 we scored an average of 3.93 (2017: 3.74) from a possible score of six. This compares with an industry average score of 3.68 and we have moved from 12th to 5th nationally over the last year. We aim to improve this further by ensuring our quality assurance processes are embedded at every stage of build. Our target is to achieve at least a four rating by 2020 for each regional business.
We are also exploring how technology can help us improve quality. For example, using 3D animated drawings can help site teams to visualise site plans and improve accuracy. We have equipped our Site Managers with mobile devices they can use to help them monitor quality on site and reduce paperwork. This allows them to complete the Build Quality Checklist electronically, attaching photographs to enable them to better monitor progress.
Optimising our strong landbank
The land and planning environment is structurally different in this cycle and is more balanced and effective today than at any point over the last 30 years. We are confident that, barring a fundamental change in Government policy, this will continue to be the case for the foreseeable future. Our investment and scale continue to be based on our view of land quality and capital risk in a cyclical market. Although the planning approval process remains complex and often slow, land is no longer the totally dominant constraint on the success and scale of our business and for the industry that it once was. The easing of this constraint means it is no longer a necessity to hold a very long landbank, and we are instead focused on delivering value and maximising returns from our land investments. One of our key strategic objectives is to work our existing landbank harder and smarter and reduce the length of the short term landbank by one year by 2023. We will do this by taking a more strategic approach to our build on site, adopting a factory approach, scaling up build teams on large sites, to align with the market demand, to deliver more homes. The short term owned and controlled landbank includes 92 large (including 'super large') sites as at 31 December 2018. The increase in the proportion of large sites that we have seen in the market, and those we have secured in our land pipeline, brings both opportunities and risks. Our approach to these sites is core to our belief that we can deliver significant benefits to our customers and deliver further financial value to our shareholders.
We continue to see a key competitive advantage in our high-quality landbank. This remains an important driver of value as it enables us to build and sell the right product, create the right community and deliver the right service to our customers. Our short term landbank stands at c.76k plots (2017: c.75k plots), which has been sourced using strict criteria, including location quality. Over 51% of this short term landbank has been strategically sourced (2017: 52%).
We currently have c.5.1 years of land supply at current completion levels in towns, villages and cities where customers aspire to live in all types of market. During 2018 we acquired 8,841 plots (2017: 8,040 plots) at anticipated contribution margins(++++++) of c.27% and return on capital employed*** of c.32%. In the year, we achieved a 0.5 percentage point margin upside on completions from land acquired since 2009, compared with the expected margin at the point of acquisition. We achieve this optimisation of value by undertaking a series of thorough reviews of each site at all stages of its life cycle, using our value improvement and tracking processes to ensure that we are continually optimising and delivering the value within our land portfolio and capturing market inflation.
The average cost of land as a proportion of average selling price within the short term owned landbank remains low at 15.2% (2017: 14.8%). The average selling price in the short term owned landbank in 2018 increased by 0.4% to GBP281k (2017: GBP280k).
A key strength of Taylor Wimpey is our strategic land pipeline. This is an important input to the short term landbank and provides an enhanced supply of land at a reduced cost, giving us increased flexibility and choices. Importantly, it gives us greater control over the planning permissions we receive. We have one of the largest strategic pipelines in the sector which stood at a record of c.127k potential plots as at 31 December 2018 (31 December 2017: c.117k potential plots). During 2018, we converted a further 7,619 plots from the strategic pipeline to the short term landbank (2017: 7,863 plots). We continue to seek new opportunities and added a net 17.8k new potential plots to the strategic pipeline in 2018 (2017: 17.1k new potential plots). In the year, a record 58% of our completions were sourced from the strategic pipeline (2017: 53%).
Becoming the employer of choice
Our people are the backbone of our customer-centric approach and we are investing in their development to ensure they have the right skills and to help underpin our future growth. We aspire to be the employer of choice in our sector, offering a unique and valued employee experience by investing in our people, giving them more challenge, more ownership and more flexibility, where it counts. We were pleased to have been named in the top 10 places to work in the UK for 2019, by Glassdoor, as voted for by employees, once again the only commercial housebuilder to make the list. This is the second consecutive year we have featured on the list, having ranked number 15 in 2018.
During 2018 we directly employed, on average, 5,358 people across the UK (2017: 4,893) and provided opportunities for over 13k further operatives on our sites. Our voluntary employee turnover rate remained low at 14.5% (2017: 14.0%).
Against industry-wide skills shortages, we continue to invest in order to future-proof our workforce and deliver on our strategy. During 2018, we recruited 175 people into our early talent programmes which includes graduates, management trainees and site management trainees (2017: 126). A key priority for 2019 will be creating a more consistent framework and development path for early and ongoing talent management.
During 2018, we began our first direct labour model, increasing the number of trades people we hire directly (as well as through subcontractors). This includes both experienced trades people and new recruits to the industry, such as apprentices and people looking for a career change. We piloted this approach in six regions during 2017 and 2018, focusing on five key trades: bricklayers, carpenters, scaffolders, painters and joiners. We currently directly employ 748 key trades including apprentices (2017: 581), a 29% increase on 2017. Our approach includes recruiting a greater diversity of candidates to join our apprenticeship schemes. This includes working with St Mungo's, one of our national charities, to support their long term unemployed clients to transition from their Train and Trade scheme into paid employment.
We may be a national homebuilder, but for customers, it is their interactions with the local site and sales team and regional office that matter. This is where their impression of Taylor Wimpey is formed and where we strive to prove to them that they made the right choice by choosing a Taylor Wimpey home. Embedding our approach to customers and getting buy in and commitment from our employees has been a key part of our strategy. During 2018 we ran a very successful engagement programme featuring emails, presentations, meetings and focus groups hosted by senior management across the country, as well as an all staff survey.
We are pleased to report that Taylor Wimpey was once again recognised in the NHBC Pride in the Job Awards, achieving a total of 67 Quality Awards (2017: 62), 19 Seal of Excellence Awards (2017: 24) and three Regional Awards in 2018 (2017: two). Paul McLachlan from our North Yorkshire business also won the 2018 Supreme Award in the Large Builder category, after achieving Runner-up in 2017.
Health and safety
There is nothing more important to our Board and our employees than health and safety. Building sites are, by their very nature, dangerous and so we do everything we can possibly do to minimise those risks. We embed a safety culture through training, awareness and visible health and safety leadership. Whilst our Annual Injury Incidence Rate (AIIR) remains well below both the HBF Home Builder Average and Health and Safety Executive Construction Industry Average, we are not complacent and we will continue to seek to improve this. Our AIIR for reportable injuries per 100,000 employees and contractors was 228 in 2018 (2017: 152). Our AIIR for major injuries per 100,000 employees and contractors was 64 in 2018 (2017: 54).
We were deeply saddened by the tragic death of a subcontractor on our Stoneley Park site in Crewe in 2018 following a serious accident. We are assisting the Health and Safety Executive with the accident investigation and await their findings. We have offered support to everyone working on the site, encouraging them to access counselling via our confidential and free employee assistance scheme.
The rates of mental health issues can be higher than average in the construction sector. We strive continually to be a workplace where people feel supported and can get help when they need it. We launched our first mental health and wellbeing campaign and training in 2018, and will roll out further initiatives throughout 2019.
Charity partnerships
During 2018, we continued our partnership with our national charities as well as local charity partners across the UK. Our six national charities are the Youth Adventure Trust, End Youth Homelessness, Crisis, CRASH, St Mungo's and Foundations Independent Living Trust. Our national charity partners are selected by our Charity Committee, with regional charities selected by our regional businesses.
In total, during 2018 we donated and fundraised over GBP1.1 million for registered charities (2017: over GBP1 million), which includes GBP167k raised by our employees on the annual Taylor Wimpey Challenge. More information about our charity partnerships and local sponsorships can be found within our Sustainability Report, which will be published on our website in March 2019.
Best in class efficient engine room
As land and planning has become less of a constraint, the operational capacity of the industry as a whole has become more constrained through this cycle. Through structured investment and by developing our skills and supply chain, we believe we can grow the capacity of our operational business and our delivery capability. This will be an ongoing effort, and whilst it cannot be done overnight, we have started by putting in place a number of initiatives that will increase our capacity to deliver and, importantly, maintain and improve quality. We have begun this by strengthening and investing in our people and skills, including investment in direct labour, our apprentices, our production teams as a whole, as well as technology and process improvements.
It remains our belief that homebuilding is inherently cyclical and so we remain committed to retaining a strong balance sheet, not over stretching investment, and maintaining financial discipline. Our ability to constantly increase efficiency and tightly control costs is part of the Taylor Wimpey culture and remains central to delivering enhanced returns. This extends to and encompasses all aspects of our business as we strive to optimise and capture value at every level from procurement through to delivery.
We achieved an annual return on net operating assets** for the Group of 33.4% in 2018 (2017: 32.5%). The annual return on net operating assets ** for the UK business was 33.1% in 2018 (2017: 32.1%).
We have improved our UK net operating asset turn * to 1.55 times (2017: 1.52 times), benefitting from a low land cost as a percentage of average selling price in the short term owned landbank, as a result of higher margin land acquired in recent years and increased strategic pipeline conversion.
As announced previously, we have undertaken a cost and efficiency review to identify and validate opportunities for performance improvement and cost efficiencies. As a consequence, we have initiated a number of workstreams during the year which are primarily targeted at applying technology and standardisation to increase productivity.
Procurement, product and process
Our scale affords us the benefit of strong purchasing power, and we can achieve significant cost savings across our regional businesses through national agreements with a number of suppliers. We continue to work to improve our relationships with our supply chain, both in procurement and via Taylor Wimpey Logistics, to deliver solutions to build quality and efficiency issues on an ongoing basis. Taylor Wimpey Logistics plays an important part in our supply chain management, providing us with an alternative route to delivery and aiding efficiency with the preparation of 'just in time' build packs for each stage of the building process. With focus and greater standardisation on process, compliance, house types, design, suppliers and through collaboration, we believe we can deliver a greater quality and efficiency from our supply chain. This includes increasing efficiency by reducing stock items and improving visibility on programming for material demands.
During 2019, we will finalise our new house type range and begin the initial stages of the roll out. This has been developed using extensive customer research and will include further consultation with customers, with the objective of identifying customer needs while delivering as aspirational a product as possible, within practical and commercial limitations. This house type range will have the added benefit of reducing costs and will offer us new choices in how we deliver homes to our customers in a way that serves the needs of more customers effectively and adds additional value.
We are prioritising research and development, seeking out new processes and products that can improve efficiency and sustainability, and also improve quality and the final product for customers. The build of our Project 2020 prototype homes in 2018, following our design competition with the Royal Institute of British Architects (RIBA), has been particularly useful in providing new insights.
We aim to use natural resources efficiently and to reduce our impact on the environment. We are pleased to have reduced our emissions by 38.7% since 2013. Whilst our emissions in 2018 increased to 24,837 tonnes of CO(2) e (2017: 23,683), we are still on track towards our target of 50% reduction in direct emissions (scope 1 and 2) by 2023.
Spain
The Spanish housing market remained positive throughout 2018. We completed 342 homes in 2018 (2017: 301) at an average selling price of EUR344k (2017: EUR352k). The total order book as at 31 December 2018 was 284 homes (31 December 2017: 329 homes).
The Spanish business delivered an improved operating profit* of GBP29.2 million for 2018 (2017: GBP26.8 million) and an operating profit* margin of 28.0% (2017: 28.5%). Looking ahead, we believe the business is well positioned for further growth in 2019.
Group financial review of operations
Performance of the Group is monitored internally using a variety of statutory and alternative performance measures (APMs) as outlined below. APMs are used where management considers they are more representative of underlying trading or in monitoring performance against strategy. The APMs used form the measurement basis of key strategic targets and are linked directly to executive remuneration. Definitions of the APMs and reconciliations to the equivalent statutory measures are detailed in the Alternative Performance Measures section of this statement.
During the period, the Group adopted three new accounting standards, being IFRS 9 - 'Financial Instruments'; IFRS 15 - 'Revenue from Contracts with Customers'; and IFRS 16 - 'Leases'. Although there is limited impact to the financial statements from their adoption, IFRS 16 has the greatest impact, with the recognition of GBP27.1 million of leased cars, office properties and other smaller items as assets at 31 December 2018, with a corresponding lease liability. In addition, with the adoption of IFRS 16, the cash spend on cars and leased property has moved from Net Cash from Operating Activities to Financing Activities. The 2017 financial statements have been restated for IFRS 9 and IFRS 15. They have not been restated for IFRS 16 as it has been applied from 1 January 2018 using the 'modified retrospective' approach, as outlined in the standard.
Income statement
Group revenue increased by 2.9% to GBP4,082.0 million in 2018 (2017: GBP3,965.2 million). This increase was driven by increased completions both in the UK and in Spain, with completions (excluding joint ventures) increasing by 3.2% to 15,164 (2017: 14,688). Whilst UK selling prices for both private and affordable completions increased in the year, the average selling price of UK completions remained flat at GBP263.9k (2017: GBP264.4k), due to the greater proportion of affordable housing completions in 2018. The average selling price on UK private completions was GBP301.8k (2017: GBP296.4k).
The UK land cost per completed unit, at GBP41.7k, was 8.1% lower than prior year (2017: GBP45.4k). This reflected the greater proportion of affordable housing in 2018, an increased proportion of completions from strategically sourced land of 58% (2017: 53%), and a lower proportion of completions from the Central London business. Total UK land cost per completion as a percentage of selling price was 15.8% (2017: 17.2%).
Build cost per unit in the UK increased to GBP147.4k (2017: GBP143.7k), with the greater level of strategically sourced sites requiring higher infrastructure costs, together with marginal build cost inflation, regional mix and specification improvements. Underlying annual build cost inflation (excluding house type mix impact) was c.3.5% year on year (2017: c.3.5%), largely due to continued pressure on resources to deliver the higher level of homebuilding. Direct selling expenses per unit decreased marginally to GBP5.9k (2017: GBP6.0k), due to sales efficiencies.
Whilst the average UK gross profit per private completions increased in the year, the average UK gross profit per completion was down marginally by 0.6% to GBP68.9k (2017: GBP69.3k), reflecting the higher proportion of affordable completions in the year.
Group gross profit of GBP1,074.5 million (2017: GBP1,031.8 million) increased by 4.1%, and included a positive contribution of GBP7.7 million (2017: GBP17.4 million). Positive contribution represents previously written down inventory allocated to a plot which has subsequently resulted in a gross profit on completion. This can be due to revenue outperformance, cost efficiencies or product mix improvements since the inventory was assessed for its forecast profitability. These amounts are stated before the allocation of overheads, which are excluded from the Group's net realisable value of inventory exercise.
In 2018, only 2% (2017: 5%) of the Group's UK completions were from sites that had been previously impaired. In Spain, 17 plots (2017: 35 plots) were completed that had previously been impaired. The Group anticipates that c.2% of UK 2019 completions will come from sites that have been previously impaired.
During the year, completions from joint ventures were 111 (2017: 154), with new phases of existing sites, at Chobham Manor and Greenwich Millennium Village, starting to deliver completions in the second half of the year. The total order book value of joint ventures as at 31 December 2018 was GBP22 million (31 December 2017: GBP4 million), representing 58 homes (31 December 2017: 7), for 2019 completions. Our share of results of joint ventures in the period was a profit of GBP5.3 million (2017: GBP7.6 million).
Group operating profit* increased by 4.3% to GBP880.2 million (2017: GBP844.1 million), delivering an operating profit* margin of 21.6% (2017: 21.3%). There was a slight reduction in margin from the net impact of market effects on selling and build cost inflation, which was more than offset through increased standardisation and operational efficiency and a small increase in our commercial property sales associated with our mixed use developments. Profit on ordinary activities before net finance costs increased by 17.3% to GBP828.8 million (2017: GBP706.5 million). This increase is driven by the increased operating profit* and a reduction in the exceptional charge in 2018.
Net finance costs for the period were GBP23.4 million (2017: GBP32.1 million). The reduction is primarily due to the lower notional interest charge of GBP1.1 million (2017: GBP5.9 million) on the defined benefit pension scheme deficit. This is a result of the deficit falling from GBP232.7 million in December 2016 to GBP63.7 million at December 2017, which drives the following period's notional interest charge. Unwind of the discount on land creditors and other items was GBP18.5 million (2017: GBP20.9 million), primarily due to a lower weighted average discount rate applied to land creditors. Interest on overdraft, bank and other loans decreased by GBP0.8 million year on year.
Profit before tax and exceptional items increased by 5.5% to GBP856.8 million (2017: GBP812.0 million). The pre-exceptional tax charge was GBP162.3 million (2017: GBP151.7 million) with an underlying tax rate of 18.9% (2017: 18.7%) that largely reflects the statutory tax rate in the UK. This resulted in a profit, before exceptional items, for the year of GBP694.5 million (2017: GBP660.3 million), 5.2% up on the prior year due to the improvement in the operational result and lower net finance costs.
The Group discloses material, financial impacts arising from events which are one-off or unusual in nature as exceptional items. An exceptional charge of GBP46.1 million was recognised in the year, which comprises two elements (2017: GBP130 million in relation to leasehold property matters and doubling ground rents). As previously reported, a charge totalling GBP30.0 million has been recognised for the removal of Aluminium Composite Material (ACM) cladding at a small number of sites. We have sought professional advice on each building and believe the GBP30.0 million exceptional provision to be an appropriate estimate of the final outcome. Further, following the landmark legal judgment in October last year, which ruled on the equalisation of guaranteed minimum pensions for men and women in UK defined benefit pension plans, we have reviewed our own position with our pension scheme Trustee. We estimate that the scheme's liabilities will increase by GBP16.1 million on an accounting basis and recognised this as an exceptional charge. The position will be kept under review, including the amount of the liability, pending any further clarification and Government guidance. An exceptional tax credit of GBP8.2 million was recognised in respect of the GBP46.1 million exceptional charge recognised in the year.
Profit on ordinary activities before tax increased by 18.9% to GBP810.7 million mainly as a result of higher operating profit* and lower exceptional charges (2017: GBP682.0 million). Profit for the year was GBP656.6 million, up by 18.2% on 2017 (2017: GBP555.3 million).
Basic earnings per share was 20.1 pence (2017: 17.0 pence). The adjusted basic earnings per share was 21.3 pence (2017: 20.2 pence), up 5.4%.
Balance sheet
Net operating assets** were GBP2,611.9 million (31 December 2017: GBP2,654.1 million). This reflects a net investment of GBP112.5 million (2017: GBP91.7 million) in the year in land and work in progress (WIP), funded by a GBP99.5 million increase in land creditors. In addition, there has been a GBP68.8 million increase in the retirement benefit obligations. Return on net operating assets** increased by 0.9 percentage points to 33.4% (2017: 32.5%), as a result of improved profitability and maintaining balance sheet discipline. Similarly, net operating asset turn * remained at a strong 1.55 times (2017: 1.53 times). Asset turn has benefitted from the combination of on-going competitive land acquisition terms and strong revenues.
As at 31 December 2018, the UK short term landbank comprised 75,995 plots, with a net book value of GBP2.5 billion. Short term owned land comprised GBP2.3 billion (2017: GBP2.3 billion), representing 53,279 plots (2017: 56,619). The controlled short term landbank represented 22,716 plots (31 December 2017: 18,230). The value of long term owned land increased by 11% to GBP100 million (2017: GBP90 million), representing 32,354 plots (2017: 26,836), with a further total controlled strategic pipeline of 95,063 plots (31 December 2017: 90,409). Total potential revenue in the owned and controlled landbank increased to GBP50 billion in the period (31 December 2017: GBP47 billion), reflecting the increase in the scale of the strategic land pipeline.
Average WIP per UK outlet at 31 December 2018 increased by 12.5% to GBP5.4 million (2017: GBP4.8 million). UK WIP turn ** remained flat at 2.95 times (2017: 2.95 times).
As at the balance sheet date, the Group held certain land and work in progress that had been written down by GBP83.0 million (31 December 2017: GBP93.3 million) to a net realisable value of GBP73.8 million (31 December 2017: GBP87.7 million). The balance of previously written down land and work in progress in the UK was GBP46.6 million (31 December 2017: GBP69.9 million), following the associated write-downs of GBP38.7 million (31 December 2017: GBP46.9 million) and principally relates to eight locations.
As at 31 December 2018, in the UK, 86% of the short term owned and controlled landbank was purchased after 2009, 59% of which was sourced through our strategic pipeline. This results in a land cost to average selling price in the short term owned landbank of 15.2% (31 December 2017: 14.8%).
We continue to use land creditors as a way of funding land acquisitions where this results in better return on our investment for longer dated delivery schemes and is value-enhancing for the business. Land creditors increased to GBP738.6 million (31 December 2017: GBP639.1 million) and, combined with net cash(++) , resulted in a low adjusted gearing(++++++++) of 2.9% (31 December 2017: 4.1%). Included within the land creditor balance is GBP102.0 million of UK land overage commitments (31 December 2017: GBP117.0 million). GBP359.5 million of the land creditors is expected to be paid within 12 months and GBP379.1 million thereafter.
The mortgage debtor balance was GBP45.3 million at 31 December 2018 (31 December 2017: GBP63.1 million), with the decrease due to redemption receipts of GBP21.6 million.
Provisions increased to GBP170.3 million (31 December 2017: GBP161.6 million) following the recognition of the GBP30.0 million exceptional cladding provision in the year, offset by payments amounting to GBP25.5 million for the settlement with regard to the GRRAS.
Our net deferred tax asset of GBP40.7 million (31 December 2017: GBP29.3 million) relates to our pension deficit, employee share schemes and the temporary differences of our Spanish business, including brought forward trading losses.
Net assets at 31 December 2018 increased by 18.8% to GBP3,726.3 million before dividends paid in the year, and by 2.9% overall year on year to GBP3,226.8 million (31 December 2017: GBP3,137.3 million). The net asset increase from 31 December 2017 was driven by strong profitability in the year offset by the GBP499.5 million dividends paid and the pension actuarial assumptions and asset performance increasing the pension deficit year on year.
Pensions
As previously announced, further to our 31 December 2016 triennial valuation, we agreed a funding plan with the Trustee to December 2020. This included a contribution mechanism, tested quarterly, such that should the Taylor Wimpey Pension Scheme (TWPS) reach a technical provisions surplus, further contributions would be suspended and only recommence if the funding level fell below 96%. The first quarterly test as at 29 March 2018, identified a deficit of GBP23.0 million which was paid in April 2018. The subsequent quarterly tests to 30 September 2018 resulted in a small deficit. However, as the TWPS remained 99% funded, regular contributions were suspended through the remainder of the year.
The quarterly test for 31 December 2018 showed that the TWPS funding had declined to 94%, following a fall in global equity valuations and other related financial markets in Q4 2018. As a result of this latest quarterly test, the Group will recommence regular contributions from January 2019, until the scheme is valued as fully funded. In addition, the Group will continue to cover scheme expenses and make contributions via the Pension Funding Partnership. Total scheme contributions totalled GBP34.1 million in 2018 (2017: GBP23.1 million). Payments are expected to increase to GBP47.1 million per annum from 2019, assuming the TWPS remains less than 100% funded.
At 31 December 2018, the IAS 19 valuation of the scheme remained in surplus at GBP30.9 million. Due to the rules of the TWPS, this surplus cannot be recovered by the Group and therefore a deficit has been recognised on the balance sheet under IFRIC14. This deficit is equal to the present value of the remaining committed payments under the 2016 triennial valuation. Total retirement benefit obligations of GBP133.6 million at 31 December 2018 (31 December 2017: GBP64.8 million) comprise a defined benefit pension liability of GBP133.0 million (31 December 2017: GBP63.7 million), with the increase reflecting the new pension funding plan, and a post-retirement healthcare liability of GBP0.6 million (31 December 2017: GBP1.1 million).
The Group continues to work closely with the Trustee in managing pension risks, including management of interest rate, inflation and longevity risks. The underlying volatility of the TWPS remains low due to the c.GBP200 million buy-in completed in 2014 (c.10% of the liabilities), combined with c.90% liability hedging against interest rates and inflation risk exposure on the scheme's long term, 'self-sufficiency' basis.
Cash flow
Net cash(++) increased to GBP644.1 million at 31 December 2018 from GBP511.8 million at 31 December 2017. This is despite returning GBP499.5 million to shareholders by way of dividends in the year (2017: GBP450.5 million) and paying GBP25.5 million in relation to the GRRAS set up to assist certain of our customers to move their ground rent escalating terms to less expensive terms. This improvement in net cash(++) is largely as a result of strong performance in underlying trading and maintaining balance sheet discipline.
Net land spend, including the payment of land creditors, was GBP581.4 million (2017: GBP645.6 million) and we invested GBP2,406.6 million in work in progress (2017: GBP2,386.7 million). In 2018, we paid GBP8.6 million in interest costs (2017: GBP5.1 million) and GBP139.6 million in corporation tax (2017: GBP126.7 million). GBP8.3 million was paid for the car fleet and certain office properties capitalised under IFRS 16. GBP9.9 million was spent during the year to acquire shares for satisfying future share scheme awards (31 December 2017: GBP13.3 million).
In the 12 months to 31 December 2018 we converted 92.6% of operating profit* into operating cash flow**** (2017: 87.2%).
Financing structure
At 31 December 2018 our committed borrowing facilities were GBP640 million of which GBP550 million was undrawn. Average net cash(++) for 2018 was GBP259.6 million (2017: GBP186.5 million net cash(++) ).
During the year, we completed an amendment and extension of the GBP550 million revolving credit facility to mature in 2023 on improved terms with an option to extend for a further two years. At the start of 2019 we extended the facility by a further year to 2024. This extends the average maturity of the committed borrowing facilities to 5.0 years.
Dividends
As announced in May 2018, subject to shareholder approval each year, the Company will pay an ordinary dividend of approximately 7.5% of Group net assets from 2019, which will be at least GBP250 million per annum. This is intended to provide a reliable minimum annual return to shareholders throughout the cycle and will be paid equally as a final dividend (in May) and as an interim dividend (in November). This Ordinary Dividend Policy was subject to prudent and comprehensive stress testing against various downside scenarios, which also included a reduction of 20% in average selling prices and a 30% reduction in volumes.
The payment of ordinary dividends will continue to be supplemented by additional significant special dividends at appropriate times in the cycle. Our Special Dividend Policy will pay out to shareholders the free cash generated by the Group after land investment, all working capital, taxation and other cash requirements of the business in executing our strategy in the medium term, and once the Group's ordinary dividends have been met.
Subject to shareholder approval at the AGM scheduled for 25 April 2019, the 2018 final ordinary dividend of 3.80 pence per share will be paid on 17 May 2019 to shareholders on the register at the close of business on 5 April 2019 (2017 final dividend: 2.44 pence per share). In combination with the interim dividend of 2.44 pence per share (2017 interim dividend: 2.30 pence per share) this gives a total ordinary dividend for the year of 6.24 pence (2017 ordinary dividend: 4.74 pence per share).
This dividend will be paid as a cash dividend, and shareholders are once again being offered the opportunity to reinvest all of their ordinary dividend under the Dividend Re-Investment Plan (DRIP), details of which are available from our Registrar and on our website. Elections to join the Plan must reach the Registrar by 25 April 2019 in order to be effective for this dividend. Further details can be found on our website www.taylorwimpey.co.uk/corporate
In addition, on 13 July 2018, we returned GBP340.0 million to shareholders by way of a special dividend, equating to 10.40 pence per ordinary share. As previously announced in May 2018 we intend to return c.GBP350 million to shareholders in July 2019, equating to 10.7 pence per ordinary share, subject to shareholder approval at the AGM. This is proposed to be paid on 12 July 2019 as a cash dividend to all shareholders on the register at close of business on 7 June 2019. Shareholders will be offered the opportunity to reinvest all of their 2019 special cash dividend under the DRIP, for which elections to join the Plan must reach the Registrar by 21 June 2019.
The Board continues to keep the mechanics of how the Company will pay special dividends, including the merits of undertaking a share buyback at some point in the future should it become appropriate to do so, under regular review.
Going concern
The Directors remain of the view that the Group's financing arrangements and balance sheet strength provide both the necessary facilities and covenant headroom to enable the Group to conduct its business for at least the next 12 months. Accordingly, the consolidated financial statements are prepared on a going concern basis.
Assessment of Prospects
We consider the long term prospects of the Group in light of our business model. Our strategy to deliver sustainable value is achieved through delivering high-quality homes in the locations where people want to live, with excellent customer service, whilst carefully managing our cost base and the Group's balance sheet. Management re-evaluates the medium to long term strategy, in the light of external, economic and industry changes. If appropriate, management adapts the strategy accordingly, in light of changes; for example, for material changes in planning and the wider housing market fundamentals. The Group strategy is underpinned by our short term landbank, which supports c.5.1 years of development at current completion levels. Additionally, the Group ensures a strong, long term supply of land, with its strategic land business promoting land through the constrained planning process. The Group has above eight years supply of land at current completion levels in its strategic land pipeline.
Viability Statement
In accordance with provision C.2.2 of the 2014 revision of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the 12 months required by the 'Going Concern' provision. The Board conducted their viability assessment for a period of five years, having extended the assessment period from three to five years in 2017, and similarly extended the horizon of the 2018 operating plan to better reflect the forecast period that the Board considers. The Company operates in a market which is prone to cyclicality, tending to follow the UK economic cycle. It is impacted by Government policy, planning regulation and the mortgage market. However, the Board considers that the Company has reasonable visibility over a five-year time horizon. This period aligns with the average build out time for a development phase from the point of land acquisition to final delivery to our customers.
The viability assessment includes the Group's income statement, balance sheet, cash flows, KPIs and debt covenants, and considers the potential impacts which may arise from the Principal Risks of the business. It includes macro-economic and industry-wide projections as well as matters specific to the Group.
The assessment considers sensitivity analysis on a series of realistically possible, but severe and prolonged, changes to principal assumptions. This downside scenario reflected the potential impact of a sharp decline in customer confidence, disposable incomes, and higher interest rates as may be experienced as a secondary impact to the Group from the UK leaving the EU. During 2019, we reduced volumes from 2018 levels by 30% and selling prices by 20%, with no recovery. The assessment also reflects a one-off exceptional charge and cash cost of GBP150 million for an unanticipated event or fine. Finally, the recommencement of the pension contribution at GBP40 million per annum has been modelled and continued throughout the five-year period. We considered mitigating actions, assuming continued investment in land, albeit at a reduced level, and the continued payment of the annual ordinary dividend of GBP250 million throughout the period. Based on the results of this analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period of their assessment.
Shareholder information
The Company's 2018 Annual General Meeting (AGM) will be held at 11am on 25 April 2019 at the British Medical Association, BMA House, Tavistock Square, London WC1H 9JP.
Copies of the Annual Report and Accounts 2018 will be available from 18 March 2019 on the Company's website www.taylorwimpey.co.uk/corporate Hard copy documents will be posted to shareholders who have elected to receive them and will also be available from our registered office at Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR from 21 March 2019.
A copy of the Annual Report and Accounts 2018 will be submitted to the National Storage Mechanism and will be available for inspection at: www.Hemscott.com/nsm.do
Directors' responsibilities
The responsibility statement below has been prepared in connection with the Company's full Annual Report and Accounts for the year ended 31 December 2018. Certain parts thereof are not included within this announcement.
We confirm to the best of our knowledge that:
-- the financial statements, prepared in accordance with IFRS as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
-- the management report, which is incorporated into the Strategic Report and Directors' Report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face.
This responsibility statement was approved by the Board of Directors on 26 February 2019 and is signed on its behalf by:
Kevin Beeston, Chairman
Pete Redfern, Chief Executive
Principal risks and uncertainties
As with any business, Taylor Wimpey faces risks and uncertainties in the course of its operations. It is only by timely identification and effective management of these risks that we are able to deliver our strategy and five-year goals.
The following table summarises the Group's principal risks and uncertainties. Control of each of these is critical to the ongoing success of the business. As such, their management is primarily the responsibility of the Chief Executive and the Group Management Team (GMT), together with the roles noted. The Board has finalised its assessment of these risks and has concluded that the likelihood of these principal risks affecting the business has remained at the level previously reported.
In addition to the principal industry related risks set out in the following pages, we also monitor closely several other key factors. These may be risks with an increasing potential impact or likelihood, individual risks with a potentially high impact but which are very unlikely to occur, or risks arising as a result of a combination of unlikely events which together create a major event.
The Group considers risk from a wider technology and cyber perspective. We have continued to improve and invest in our information technology to mitigate against increasing cyber threats and data loss, theft or corruption. In 2018, we have adopted a series of measures to reduce our exposure to breaching the EU's General Data Protection Regulation (GDPR), which was implemented in May 2018, and we continue to deliver against the recommendations from an independent cyber security audit that was conducted in the year.
Our customers and our corporate obligation are at the heart of Taylor Wimpey's cultural values, with our Customer Journey heavily focused on product quality and delivering an enhanced buying experience. The Group considers the potential impact to the business in the event that either of these were to fall below our high standards. We acknowledge concerns raised by some of our customers in connection to mortar durability on a development in Peebles, Scotland. While a significant number of houses on the development are unaffected, a robust technical solution, supported by an appointed structural engineer and the NHBC, to fix the durability of the mortar has been identified and homes are being remediated as soon as possible. Our Group-wide approach has been enhanced in the year through development of new tools and processes, which when fully embedded, will further support the delivery of our homes as promised to our customers.
Housing remains high on agendas of the Government and the main political parties. The sector continues to face scrutiny and pressure from social media and pressure groups, with the potential for greater oversight from Government through a Design Champion and a single New Homes Ombudsman. We endeavour to deliver both the letter and the spirit of regulations and maintain this same ethos in our relationships with our customers.
Following the tragic fire at Grenfell Tower, we conducted a detailed internal review into Aluminium Composite Material (ACM) cladding used in the construction of our recent and historic developments, working with building owners, management companies, independent fire safety experts and local fire and rescue services as appropriate. Where ACM cladding was identified on defined tall buildings in which we retain an ongoing interest, we sought advice from independent fire safety experts, and, where required, took action with those responsible to ensure that the buildings are fully compliant with the Government's guidance on interim fire safety measures. During the year, the Group recognised an exceptional provision amounting to GBP30.0 million, for the removal of Aluminium Composite Material cladding at a small number of sites where the ownership aspects and specific circumstances deemed this to be appropriate.
We also maintain a Sustainability and Climate Change Risk and Opportunity Register to monitor other sustainability issues that could affect the Group. In addition, our climate change related risks and opportunities are available as part of our 2018 CDP submission. For more information please visit www.taylorwimpey.co.uk/corporate/sustainability
Risk Relevance to Potential impact Mitigation Progress in
strategy on KPIs 2018
Government policy Our ability Unforeseen We operate Our customer
and planning to build great delays, our within our and community
regulations places to live inability to comprehensive engagement
Additional initiatives is dependent obtain suitable community led strategy is
and legislative upon creating planning consents planning strategy. embedded and
and regulatory site plans and disruption This improves having a positive
amendments which inspire from changes communications effect. We
to the National and delight to planning with all parties, have been successful
Planning Policy our customers, regulations, but especially in gaining
Framework (NPPF) delivered at could impact local communities, planning consents
were signalled by an affordable on the number thereby enhancing throughout
a Housing White price. Obtaining or type of our ability the year with Paper in February timely planning homes that to deliver particular 2017, to address permissions we build. developments emphasis on the delivery of and achieving With the consultation that meet local the conversion greater housing other regulatory on changes requirements. of the strategic availability for requirements to developer We continually land pipeline. the UK. Consultations and permits, contributions review changes We continue continued into 2018, is key to starting and CIL, we to Building to represent and the Government on site as may be required Regulations the Group, subsequently introduced soon as possible to meet higher and supporting via the HBF, amendments, resulting and home delivery. levels of planning guidance. on broader in the issue in There remains obligations, We consult planning and July 2018 of NPPF a risk of delayed so incurring with Government local plan (2018) and or refused additional agencies and matters, to consequential planning applications, costs. The Opposition ensure local changes to the National increased timescales locally produced parties on plans are robust Planning Policy to the discharge CIL charge housing policy, and CIL charge Guidance (NPPG). of planning schedules may both directly schedules are The Government-backed conditions increase costs, and indirectly appropriate. Help to Buy (HtB) and complexity impacting the as a member We have met scheme has helped around Section viability of of industry with Government to fund the home 106 agreements developments groups, to officials on deposit for certain and Community in our short highlight potential a number of homebuyers. During Infrastructure term landbank. issues and occasions through 2018, the Government Levy (CIL). Changes to to understand the year including announced that the As elements Building Regulations any proposed discussions current scheme would of the anticipated on tall and changes to on HtB, New end as expected changes from other buildings, regulations Homes Ombudsman, in 2021, and announced the introduction although likely and policy. leasehold, an extension scheme of the NPPF to be limited We implemented and building which will be in (2018) take in impact to the Taylor remediation place from 2021 effect, together the Group, Wimpey Ground following the to 2023, for first with the amendments could introduce Rent Review Hackitt Review. time buyers and to the HtB delays to Assistance Following the which will be subject scheme announced implementation, Scheme (GRRAS) amendment to to regional home in October re-work to in April 2017, Approved Document price caps. The 2018, there sites and increased for our customers B of the Building proposed changes could be a costs. wishing to Regulations will allow an orderly change in demand Together, these alter the terms in December unwind from the for specific changes could of their lease 2018, we have scheme, but as products. In have a detrimental to materially taken measures predicated turn, this impact on the less expensive to ensure all will require a critical may lead to contribution terms based future home review of sales changes to per plot. on RPI. We designs will rates assumptions, site mixes, The end of take a prudent meet and fully unit mixes and likely and to extended HtB in 2021 approach to comply with customer behaviour. timeframes and the extension the potential the relevant In light of the to gaining scheme for sale of freeholds amended regulations Grenfell Tower tragedy, revised planning first time with regard and standards. the Government consents. buyers subject to our apartment Internally, consulted to regional schemes, by we issued guidance on proposals to caps until excluding the in March 2018 ban the use of 2023, could potential for which banned combustible see lower sales their sale the use of materials in the rates and potentially revenues in combustible external walls of a greater number our land purchasing materials on high rise residential of smaller decisions. all new buildings buildings. Following homes required over 18 metres the consultation, by our customers. tall, and which an amendment to also banned Approved Document the use of B of the Building desktop studies Regulations was as a means issued in December to demonstrate 2018, implementing compliance the proposals in with Approved full for works where Document B. an initial notice Following the was issued to the implementation local authority of the GRRAS, on or after 21 December by the end 2018. Changes to of 2018 we the Building had varied Regulations over 2,600 are forward looking leases, with in terms of a further c.1,900 implementation. accepted onto In May 2018, Dame the scheme. Judith Hackitt's Independent Review of Building Regulations and Fire Safety (the Hackitt Review) was published, and the Government subsequently committed to the full implementation of the recommendations contained within the review. The review was wide ranging, taking in the regulatory frameworks around the design, construction and management of buildings, the advice and guidance that supports those regulatory frameworks and the responsibilities of those involved throughout the life cycle of the building. The review recommended restrictions on the use of assessments in lieu of tests (commonly referred to as desktop studies) to demonstrate compliance with Approved Document B of the Building Regulations. The Government consulted on this in spring 2018 and consequently included a full ban on the use of desktop studies within the December 2018 amendment to Approved Document B. Sir Oliver Letwin delivered his final report in November 2018 (the Letwin Review) on the gap between planning permissions and starts on site. The Government's response to the recommendations of the review is expected in early 2019. Late in 2016, some customers expressed concern about the ground rent escalating terms of their leasehold agreements with their freeholder. These clauses exist for some Taylor Wimpey homes, on sites commenced
between 2007 and
2011, and specified
that ground rents
will double every
ten years until
the 50th year, at
which point the
rent is capped.
We resolved that
such clauses were
not consistent with
our cultural values.
In October 2018,
the Government launched
a second consultation
into leasehold
properties,
following their
proposals to ban
the sale of houses
on a leasehold basis
and plans to lower
future ground rents
to a nominal fee.
Whilst Taylor Wimpey
no longer sells
houses on a leasehold
basis, like most
other volume
housebuilders,
our business model
is to transfer the
freehold, management
and upkeep of
apartments
and other developments
to third party
organisations.
Responsibility
Group Operations
Director
Regional Managing
Directors
----------------------- ----------------------- -------------------- ---------------------
Risk Relevance to Potential impact Mitigation Progress in
strategy on KPIs 2018
Impact of the market The majority A reduction Our local teams We continue
environment on of the homes in demand for select the to promote
mortgage that we build new homes below locations and the Government-backed
availability and are sold to normal levels home designs HtB scheme
housing demand individual could negatively that best meet and our customers
The cost of servicing purchasers impact on both the needs of demonstrate
a mortgage continues who take on profit and the local community strong demand
to be at historic mortgages to cash generation. and customer for the scheme.
lows. However, a finance their This would demand in the We monitor
change in business purchases. have an adverse present and usage of HtB
confidence, employment Loss of economic effect on return future. We by our customer
opportunities or confidence on net operating evaluate new base to understand
significant changes as the UK leaves assets. outlet openings how the planned
in the Bank of England the EU, may on the basis change to the
base rate that is impact on demand of local market scheme in 2021,
not combined with for new build conditions and its withdrawal
wage growth could housing and and regularly in 2023, may
negatively impact sales prices. review the impact the
the demand for This may be pricing and desired design
housing, tempered to incentives and location
which may also lead some extent that we offer. of homes required
to lower selling by the current We work closely in the future.
prices. imbalance between with the financial Throughout
The ability of first demand and services industry 2018 we continued
time buyers to supply. Future to ensure customers to develop
purchase decisions made receive advice good working
homes is constrained by the Government on the procurement relationships
by changes in mortgage around homebuyer of mortgage with established
availability at initiatives, products. mainstream
the higher new legislation, lenders and
loan-to-value or stamp duty those wishing
levels. The and by the to increase
Government-backed Bank of England volume within
Help to Buy (HtB) about interest the new build
scheme helps to rates, are market.
fund the home deposit likely to create
for these and other both risks
homebuyers. During and opportunities
2018, the Government for homebuilders
announced that the and their customers.
current scheme would
end as expected
in 2021. However,
the Government also
announced an extension
scheme which will
be in place between
2021 until 2023,
for first time buyers
only and which will
be subject to regional
home price caps.
Sustained growth
in interest rates,
together with low
wage inflation or
reduced confidence
in continued
employment,
could challenge
mortgage
affordability.
Strict guidelines
are in place for
lenders to assess
mortgage affordability
if interest rates
were to rise.
Furthermore,
the Bank of England
has powers to set
loan-to-value and
debt-to-income limits
for financial
institutions
selling residential
mortgages.
Responsibility
UK Sales and Marketing
Director
Regional Sales and
Marketing Directors
---------------------- ---------------------- ---------------------- ----------------------
Material costs and We aim to commence If the availability We maintain Availability
availability of work on new of subcontractors regular contact of materials
subcontractors sites as soon or materials with suppliers, is generally
A continued increase as planning is insufficient negotiating in line with
in housing demand consents allow, to meet demand, contract volumes, demand but
and production may to accelerate this could pricing and there remain
further strain the build progress lead to longer duration through pinch points
availability of and optimise build times our procurement with key products
skilled subcontractors return on capital and increased and logistics such as bricks,
and materials and employed. The costs, thereby function. We blocks, roof
put pressure on majority of reducing profitability provide high tiles and doors.
utility firms to work performed and return level and The Group has
keep up with the on our sites on capital site-specific agreed product
pace of installation. is subcontracted, employed. programme information lines and volumes
Leaving the EU could providing flexibility Lack of skilled to the subcontractor with key suppliers
reduce the and supporting subcontractors base to aid to mitigate
availability our strategy. could also with demand long lead times
of skilled workers result in higher planning. When and shortages,
given the relatively levels of waste selecting our and can maintain
large proportion being produced subcontractors, a flexible
of the labour force, from our sites we consider level of particularly
particularly in and lower build competencies scarce materials
the South East, quality. particularly at its national
that is from Eastern in relation warehouse.
Europe. Further to health and We are continuing
in the event of safety, quality, to trial several
no deal being agreed previous performance different build
between the UK and and financial methods as
the EU, on leaving stability. alternatives
the EU the company We announced to conventional
could experience a number of brick and block.
some materials mitigating The use of
shortages measures at timber frame
as World Trade our Capital has been extended
Organisation Markets Day during the
rules are applied in May 2018. year, with
through the supply We commenced plans to increase
chain. a programme its usage further
Together, this could to take on over the coming
result in build more direct 3-5 years.
programme and trades across Employment
completion key skills, of direct trades
delays and unexpected adopting a has been successfully
cost increases. hybrid labour trialled across
model where six regions
Responsibility we look to in the country.
Group Operations employ experienced
Director hires and develop
Head of Procurement new talent
Regional Commercial for the industry
Directors through Apprenticeship
and Career
Conversion
Schemes. This
supports Diversity
and Inclusion
and the Government's
Social Mobility
Pledge, Armed
Forces Resettlement
and working
with disadvantaged
groups such
as ex -offenders
and the homeless.
We are closely
aligned with
the Construction
Industry Training
Board and House
Builders Federation.
We also assess
alternative
build methods
to reduce reliance
on traditional
brick and block
techniques
and resources.
---------------------- ---------------------- ---------------------- ----------------------
Ability to attract Our business Not filling We monitor We extended
and retain model requires critical roles employee turnover the management
high-calibre significant or having a levels closely training and
employees input from significantly and conduct graduate programme
Recruiting employees skilled people changing work exit interviews in response
with inadequate to deliver force could to identify to emerging
skills or in quality homes lead to delays any areas for gaps in our
insufficient and communities. in build, quality improvement. pipeline, leading
numbers, or not There continues issues, reduced We benchmark to an increase
being able to retain to be competition sales levels, our remuneration in trainee
key staff with the amongst employers poor customer to ensure that and graduate
right skills for in the housebuilding service and we are competitive numbers and
the future, could and construction reduced profitability. within the the types of
have a detrimental industries industry. programme we
impact on our for sector-specific Clear succession offer. We also
business. staff. Shortages plans are in increased our
exist across place for key employment
Responsibility the industry roles within brand exposure,
Group HR Director in the main the Group. with greater
Every employee manual trades Our renewed content being
managing and in certain approach to posted on channels
people managerial succession such as LinkedIn
and professional planning enables and Glassdoor.
occupations. more internal Taylor Wimpey
This could candidates were in the
impact our to be promoted top 10 companies
ability to to senior roles. to work for
achieve our We hold regular according to
strategic goals. development Glassdoor,
reviews to and we increased
identify training our LinkedIn
requirements. following by
over 30%.
Since 2017,
227 customer
service employees
have been enrolled
onto the Academy
for Customer
Excellence,
to improve
the skills
and confidence
of our customer
facing employees,
and all new
starters are
automatically
enrolled onto
the "Learning
the Essentials"
module.
The Production
Academy provides
a clear development
pathway supported
by an NVQ for
Assistant Site
Managers, Site
Managers and
Production
Managers. We
are supporting
over 250 site-based
staff and c.20
office-based
Production
Managers through
the academy,
with 77 people
who have now
achieved the
Taylor Wimpey
Diploma. We
have increased
the numbers
of apprentices,
both direct
and indirect,
in the year.
---------------------- ---------------------- ---------------------- ----------------------
Land purchasing Land is of Purchasing Our land teams The short term
The purchase of primary importance poor-quality prepare annual land market
land of poor quality, to the Group. or mispriced Land Strategy remained relatively
at too high a price, Limited availability land, or incorrectly documents to benign throughout
or incorrect timing of good-quality timing land guide their 2018, although
of land purchases land at an purchases, land searches increasing
in relation to the attractive would have to match the competition
economic cycle could price, can a detrimental needs of each was observed
impact future lead to significant impact on our individual in a number
profitability. and unsustainable profitability business. They of geographies
competition. and return select and particularly
Responsibility The disciplined on capital appraise each for smaller
Divisional Managing purchasing employed. site, with sites and good
Directors of land on Acquiring insufficient the appraisal quality strategic
Regional Managing attractive land would process ensuring land opportunities.
Directors terms and at reduce our that each project We continued
Regional Land and the right time ability to is financially to invest in
Planning Directors and scale in actively manage viable, consistent value-creating
Strategic Land the economic our land portfolio with our strategy land opportunities,
Managing cycle, will and create and appropriately maintaining
Directors support the value for authorised. strong discipline
Group's ability shareholders. We strive to on quality,
to deliver be the developer margin and
enhanced and of choice, return on capital
sustainable through a employed.
margins and comprehensive We are mindful
returns on approach encompassing of external
capital employed. land vendors, factors and
land agents, continue to
local councils critically
and local communities. assess opportunities
Our strategic for robustness
land teams in changing
work alongside circumstances.
regional businesses The strong
to identify level of conversion
and secure from the strategic
land with the pipeline means
potential for our reliance
future development on purchasing
and to promote short term
it through land is diminished,
the planning providing some
system. insulation
from land price
increases.
====================== ====================== ====================== ======================
Risk Relevance to Potential impact Mitigation Progress in
strategy on KPIs 2018
Site and product Our operations In addition A comprehensive Our Annual
safety involve, and to the potentially Health, Safety Injury Incidence
Construction sites interface with, tragic personal and Environmental Rate (AIIR)
and operations can a large number impact of an (HSE) Management for reportable
present risk to of people. accident on System is embedded injuries per
health and safety. This ranges site or involving throughout 100,000 employees
Suitable and from employees a customer the business, and contractors
sufficient and subcontractors after completion, supported by was 228 in
controls to eliminate to customers there is potential policies and 2018, an increase
or reduce the risk and their families for legal proceedings procedures from our record
must be implemented who live on, and civil action, to ensure that low of 152
and constantly or visit, our financial penalties, we provide in 2017. Our
monitored sites each reputational a safe and AIIR for major
and measured. Unsafe day. We want damage and healthy working injuries per
practices by our everyone to subsequent environment 100,000 employees
employees or go home at delay to operations. and build homes and contractors
subcontractors, the end of that comply was 64 in 2018
and unsafe product the day uninjured with the required (2017: 54).
quality, have the and healthy. building standards Our AIIR remains
potential to cause and regulations. below both
death or serious We provide the HBF Home
injury. extensive ongoing Builder Average
In light of the HSE training and the Health
Grenfell Tower for our employees and Safety
tragedy, and provide Executive Construction
the Government HSE inductions Industry Average,
consulted and regular and we are
on proposals to Site Safe Briefings committed to
ban use of for our contractors reducing it
combustible and operatives further.
materials in the to supplement Following the
external walls of their HSE training. very sad death
high rise residential 'Blue Hat' in July of
buildings. Following support teams a subcontractor
the consultation, from our employee following a
an amendment to and contractor serious accident
Approved Document base on site, on site, we
B of the Building are integrated are assisting
Regulations was into our site the Health
issued in December management and Safety
2018, implementing and support Executive with
the proposals in teams, where the ongoing
full for works where they assist investigation
an initial notice our site managers and await their
was issued to the to demonstrate findings. We
local authority and communicate offered support
on or after 21 the HSE ethos to everyone
December and support working on
2018. Changes to maintaining the site, encouraging
the Building a safe site. them to access
Regulations Following guidance counselling
are forward looking from the Government's via our employee
in terms of Independent assistance
implementation. Expert Advisory scheme.
In May 2018, Dame Panel, we have As a result
Judith Hackitt's identified of our incident
Independent Review all buildings analysis, we
of Building over 18 metres continued our
Regulations tall constructed increased focus
and Fire Safety by or for Taylor on site housekeeping
(the Hackitt Review) Wimpey, which and ensuring
was published. The incorporate that both our
Government Aluminium Composite site management
subsequently Material (ACM) teams and contractors
committed to the into their check work
full implementation façade. areas prior
of the For all such to the commencement
recommendations buildings, of new tasks
contained within we have notified and activities
the review, including the persons to ensure the
restricting the responsible relevant controls
use of assessments for the buildings are in place
in lieu of tests and have directed and the work
(commonly referred them to the area is safe.
to as desktop interim mitigation We continued
studies) advice issued to expand our
to demonstrate by Government. successful
compliance In a number 'Supervisory
with Approved of instances Safety' initiative
Document where the special with over 5,000
B of the Building circumstances Groundworks
Regulations. The deemed it to Supervisors
Government consulted be appropriate, trained to
on this in spring we have also date. Over
2018 and consequently followed Government 400 groundworkers
included a full guidance by were provided
ban on the use of seeking independent with HSE refresher
desktop studies professional training and
within the December advice on any HSE training
2018 amendment to further action for our 'Blue
Approved Document that should Hat' support
B. be taken. workers as
HSE performance part of our
Responsibility and issues 'Creating a
Director of Health, are reviewed Site Team Approach'.
Safety and by the GMT
Environment on a timely
Group Operations basis and actions
Director put in place
Group Director of to continually
Design drive improvement
Every employee and and rectify
subcontractor issues and
help prevent
a recurrence.
------------------- ----------------------- ------------------------ -----------------------
Following
the amendment
to Approved
Document B
of the Building
Regulations
in December,
we took measures
to ensure
all future
designs will
meet and fully
comply
with the relevant
amended regulations
and standards.
Internally,
we issued
guidance in
March which
banned the
use of combustible
materials
on all new
buildings
over 18 metres
tall and banned
the use of
desktop studies
as a means
to demonstrate
compliance
with Approved
Document B.
In light of
Government
advice on
tall buildings,
we have undertaken
expert reviews
on a number
of buildings.
Where the
ownership
aspects and
specific
circumstances
deemed this
to be appropriate,
we have worked
with building
owners, management
companies,
independent
fire safety
experts and
local fire
and rescue
services to
agree a schedule
of works to
remediate
tall buildings
with combustible
ACM.
--------------------- ----------------------- ------------------------ ---------------------
Cautionary note concerning forward looking statements
This report contains certain forward looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report, and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying such forward looking information.
Financial statements
Consolidated Income Statement
for the year to 31 December 2018
Before
Before exceptional
exceptional items Exceptional Total
Exceptional
items items Total 2017 items 2017
GBP million Note 2018 2018 2018 (restated) 2017 (restated)
========================= ==== ============= =========== ========= ============= =========== ===========
Revenue 4,082.0 - 4,082.0 3,965.2 - 3,965.2
Cost of sales (3,007.5) - (3,007.5) (2,933.4) - (2,933.4)
========================= ==== ============= =========== ========= ============= =========== ===========
Gross profit before
positive contribution 1,066.8 - 1,066.8 1,014.4 - 1,014.4
Positive contribution
from written down
inventory 7.7 - 7.7 17.4 - 17.4
========================= ==== ============= =========== ========= ============= =========== ===========
Gross profit 1,074.5 - 1,074.5 1,031.8 - 1,031.8
Net operating
expenses 3 (199.6) (46.1) (245.7) (195.3) (130.0) (325.3)
========================= ==== ============= =========== ========= ============= =========== ===========
Profit on ordinary
activities before
finance costs 874.9 (46.1) 828.8 836.5 (130.0) 706.5
Interest receivable 4 2.9 - 2.9 0.8 - 0.8
Finance costs 4 (26.3) - (26.3) (32.9) - (32.9)
Share of results
of joint ventures 5.3 - 5.3 7.6 - 7.6
========================= ==== ============= =========== ========= ============= =========== ===========
Profit on ordinary
activities before
taxation 856.8 (46.1) 810.7 812.0 (130.0) 682.0
Taxation (charge)/credit 5 (162.3) 8.2 (154.1) (151.7) 25.0 (126.7)
========================= ==== ============= =========== ========= ============= =========== ===========
Profit for the
year 694.5 (37.9) 656.6 660.3 (105.0) 555.3
------------------------- ---- ------------- ----------- --------- ------------- ----------- -----------
Attributable to:
Equity holders of
the parent 656.6 555.3
656.6 555.3
========================= ==== ============= =========== ========= ============= =========== ===========
Note 2018 2017
================================== ==== ===== =====
Basic earnings per share 6 20.1p 17.0p
Diluted earnings per share 6 20.0p 16.9p
Adjusted basic earnings per share 6 21.3p 20.2p
Adjusted diluted earnings per
share 6 21.2p 20.1p
---------------------------------- ---- ----- -----
Financial statements
Consolidated Statement of Comprehensive Income
for the year to 31 December 2018
GBP million Note 2018 2017
================================================= ==== ====== ======
Items that may be reclassified subsequently
to profit or loss:
Exchange differences on translation of
foreign operations 1.5 2.2
Movement in fair value of hedging instruments (0.7) (1.2)
Items that will not be reclassified subsequently
to profit or loss:
Actuarial (loss)/gain on defined benefit
pension schemes 9 (84.3) 154.8
Tax credit/(charge) on items taken directly
to other comprehensive income 7 14.7 (26.5)
================================================= ==== ====== ======
Other comprehensive (expense)/income for
the year net of tax (68.8) 129.3
================================================= ==== ====== ======
Profit for the year 656.6 555.3
================================================= ==== ====== ======
Total comprehensive income for the year 587.8 684.6
================================================= ==== ====== ======
Attributable to:
Equity holders of the parent 587.8 684.6
587.8 684.6
================================================= ==== ====== ======
Financial statements
Consolidated Balance Sheet
at 31 December 2018
GBP million Note 2018 2017
=============================== ==== ========= =========
Non-current assets
Intangible assets 3.2 3.9
Property, plant and equipment 21.6 22.8
Right-of-use assets 27.1 -
Interests in joint ventures 48.3 50.9
Trade and other receivables 55.7 60.1
Deferred tax assets 7 40.7 29.3
=============================== ==== ========= =========
196.6 167.0
=============================== ==== ========= =========
Current assets
Inventories 8 4,188.2 4,075.7
Trade and other receivables 134.7 122.2
Tax receivables 0.5 0.7
Cash and cash equivalents 734.2 600.5
=============================== ==== ========= =========
5,057.6 4,799.1
=============================== ==== ========= =========
Total assets 5,254.2 4,966.1
=============================== ==== ========= =========
Current liabilities
Trade and other payables (1,044.3) (1,024.5)
Lease liabilities (8.2) -
Tax payables (70.4) (58.6)
Provisions (76.9) (87.3)
=============================== ==== ========= =========
(1,199.8) (1,170.4)
=============================== ==== ========= =========
Net current assets 3,857.8 3,628.7
=============================== ==== ========= =========
Non-current liabilities
Trade and other payables (491.3) (430.6)
Lease liabilities (19.2) -
Bank and other loans (90.1) (88.7)
Retirement benefit obligations 9 (133.6) (64.8)
Provisions (93.4) (74.3)
=============================== ==== ========= =========
(827.6) (658.4)
=============================== ==== ========= =========
Total liabilities (2,027.4) (1,828.8)
=============================== ==== ========= =========
Net assets 3,226.8 3,137.3
=============================== ==== ========= =========
Equity
Share capital 288.5 288.5
Share premium 762.9 762.9
Own shares (22.7) (21.3)
Other reserves 45.0 44.2
Retained earnings 2,153.1 2,063.0
=============================== ==== ========= =========
Equity attributable to parent 3,226.8 3,137.3
Total equity 3,226.8 3,137.3
=============================== ==== ========= =========
Financial statements
Consolidated Statement of Changes in Equity
for the year to 31 December 2018
For the year to 31 December 2018 Share Share Own Other Retained GBP million capital premium shares reserves earnings Total ===================================== ======== ======== ======= ========= ========= ======= Balance as at 1 January 2018 288.5 762.9 (21.3) 44.2 2,063.0 3,137.3 ===================================== ======== ======== ======= ========= ========= ======= Exchange differences on translation of foreign operations - - - 1.5 - 1.5 Movement in fair value of hedging instruments - - - (0.7) - (0.7) Actuarial loss on defined benefit pension schemes - - - - (84.3) (84.3) Tax credit on items taken directly to other comprehensive income - - - - 14.7 14.7 ===================================== ======== ======== ======= ========= ========= ======= Other comprehensive income/(expense) for the year net of tax - - - 0.8 (69.6) (68.8) Profit for the year - - - - 656.6 656.6 ===================================== ======== ======== ======= ========= ========= ======= Total comprehensive income for the year - - - 0.8 587.0 587.8 Impact to reserves of IFRS 16 adoption (Note 12) - - - - (1.5) (1.5) Own shares acquired - - (9.9) - - (9.9) Utilisation of own shares - - 8.5 - - 8.5 Cash cost of satisfying share options - - - - (7.0) (7.0) Share-based payment credit - - - - 12.2 12.2 Tax charge on items taken directly to statement of changes in equity - - - - (1.1) (1.1) Dividends approved and paid - - - - (499.5) (499.5) ===================================== ======== ======== ======= ========= ========= ======= Total equity as at 31 December 2018 288.5 762.9 (22.7) 45.0 2,153.1 3,226.8 ===================================== ======== ======== ======= ========= ========= ======= For the year to 31 December 2017 Share Share Own Other Retained GBP million capital premium shares reserves earnings Total ------------------------------------- -------- -------- ------- --------- --------- --------- Balance as at 1 January 2017 288.4 762.9 (12.2) 43.2 1,817.3 2,899.6 ------------------------------------- -------- -------- ------- --------- --------- --------- Exchange differences on translation of foreign operations - - - 2.2 - 2.2 Movement in fair value of hedging instruments - - - (1.2) - (1.2) Actuarial gain on defined benefit pension schemes - - - - 154.8 154.8 Tax charge on items taken
directly to other comprehensive income - - - - (26.5) (26.5) ------------------------------------- -------- -------- ------- --------- --------- --------- Other comprehensive income for the year net of tax - - - 1.0 128.3 129.3 Profit for the year - - - - 555.3 555.3 ------------------------------------- -------- -------- ------- --------- --------- --------- Total comprehensive income for the year - - - 1.0 683.6 684.6 New share capital subscribed 0.1 - - - - 0.1 Own shares acquired - - (13.3) - - (13.3) Utilisation of own shares - - 4.2 - - 4.2 Cash cost of satisfying share options - - - - (0.7) (0.7) Share-based payment credit - - - - 11.5 11.5 Tax credit on items taken directly to statement of changes in equity - - - - 1.8 1.8 Dividends approved and paid - - - - (450.5) (450.5) ------------------------------------- -------- -------- ------- --------- --------- --------- Total equity as at 31 December 2017 288.5 762.9 (21.3) 44.2 2,063.0 3,137.3 ------------------------------------- -------- -------- ------- --------- --------- ---------
Financial statements
Consolidated Cash Flow Statement
for the year to 31 December 2018
GBP million Note 2018 2017 ========================================== ==== ======= ======= Net cash from operating activities 10 641.3 604.1 ========================================== ==== ======= ======= Investing activities: Interest received 2.8 0.8 Dividends received from joint ventures 14.3 0.7 Proceeds on disposal of property, plant and equipment 0.4 - Purchases of property, plant and equipment (2.1) (4.2) Purchases of software (0.3) (1.5) Amounts (invested in)/repaid by joint ventures (6.4) 6.1 Proceeds from sale of interest in subsidiary - 2.7 Net cash generated from investing activities 8.7 4.6 ========================================== ==== ======= ======= Financing activities: Lease capital repayments (8.3) - Proceeds from issue of own shares - 0.1 Cash received on exercise of share options 1.5 3.5 Purchase of own shares (9.9) (13.3) Dividends paid (499.5) (450.5) ========================================== ==== ======= ======= Net cash used in financing activities (516.2) (460.2) ========================================== ==== ======= ======= Net increase in cash and cash equivalents 133.8 148.5 Cash and cash equivalents at beginning of year 600.5 450.2 Effect of foreign exchange rate changes (0.1) 1.8 ========================================== ==== ======= ======= Cash and cash equivalents at end of year 734.2 600.5 ========================================== ==== ======= =======
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
1. Basis of preparation
The financial information set out herein does not constitute the Group's statutory accounts for the years ended 31 December 2018 and 2017, but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered following the Company's Annual General Meeting to be held on 25 April 2019. The external auditor has reported on those accounts; its reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006 or equivalent preceding legislation.
The statutory accounts have been prepared based on the accounting policies and method of computations consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2017 with the exception of the new accounting standards listed below which have been adopted by the Group with an effective date of 1 January 2018. Information on the initial application of these new standards can be found in Note 12.
-- IFRS 9 'Financial Instruments' -- IFRS 15 'Revenue from Contracts with Customers' -- IFRS 16 'Leases'
While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS. The Group expects to publish full financial statements on 18 March 2019 that comply with both IFRS as adopted for use in the European Union and IFRS as compliant with the Companies Act 2006 and Article 4 of the EU IAS Regulations.
Going concern
The Group has prepared forecasts, including certain sensitivities considering the principal risks identified. Having considered these forecasts, the Directors remain of the view that the Group's financing arrangements and capital structure provide both the necessary facilities and covenant headroom to enable the Group to conduct its business for at least the next 12 months.
Accordingly, the consolidated financial statements have been prepared on a going concern basis.
2. Operating segments
IFRS 8 'Operating Segments' requires information to be presented in the same basis as it is reviewed internally.
The Group operates in two countries, being the United Kingdom and Spain.
The United Kingdom is split into three geographical operating segments, each managed by a Divisional Chair who sits on the Group Management Team. In addition, there is an operating segment covering the corporate functions, Major Developments and Strategic Land.
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
2. Operating segments (continued)
Segment information about these businesses is presented below:
Central London
For the year to 31 December & South & South
2018 North West East
GBP million Division Division Division Corporate Spain Total
----------------------------------- --------- --------- --------- --------- ------- ---------
Revenue
External sales 1,418.7 1,347.2 1,210.3 1.6 104.2 4,082.0
Result
Profit/(loss) on ordinary
activities before joint
ventures, finance costs
and exceptional items 307.0 344.7 265.3 (71.3) 29.2 874.9
Share of results of joint
ventures 0.1 - 5.3 (0.1) - 5.3
----------------------------------- --------- --------- --------- --------- ------- ---------
Profit/(loss) on ordinary
activities before finance
costs, exceptional items
and after share of results
of joint ventures 307.1 344.7 270.6 (71.4) 29.2 880.2
Exceptional items (Note
3) - - - (46.1) - (46.1)
----------------------------------- --------- --------- --------- --------- ------- ---------
Profit/(loss) on ordinary
activities before finance
costs, after share of results
of joint ventures and exceptional
items 307.1 344.7 270.6 (117.5) 29.2 834.1
Net finance costs (23.4)
----------------------------------- --------- --------- --------- --------- ------- ---------
Profit on ordinary activities
before taxation 810.7
Taxation (including exceptional
tax) (154.1)
----------------------------------- --------- --------- --------- --------- ------- ---------
Profit for the year 656.6
----------------------------------- --------- --------- --------- --------- ------- ---------
Assets and liabilities
At 31 December 2018
Segment operating assets 1,213.0 1,290.7 1,504.3 254.0 168.5 4,430.5
Joint ventures 2.0 3.7 40.5 2.1 - 48.3
Segment operating liabilities (375.5) (520.9) (510.0) (355.0) (105.5) (1,866.9)
----------------------------------- --------- --------- --------- --------- ------- ---------
Net operating assets/(liabilities) 839.5 773.5 1,034.8 (98.9) 63.0 2,611.9
Net current taxation (69.9) Net deferred taxation 40.7 Net cash 644.1 ----------------------------------- --------- --------- --------- --------- ------- --------- Net assets 3,226.8 ----------------------------------- --------- --------- --------- --------- ------- ---------
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
2. Operating segments (continued)
Central
For the year to 31 December & South London
2018 North West & South
GBP million Division Division East Division Corporate Spain Total
------------------------------- --------- --------- -------------- --------- ----- -----
Other information
Property, plant and equipment
additions 0.2 0.8 - 1.0 0.1 2.1
Right-of-use asset additions 1.5 0.8 5.7 2.5 0.2 10.7
Software development additions - - - 0.3 - 0.3
Depreciation - property,
plant and equipment (0.6) (0.9) (0.5) (1.1) - (3.1)
Depreciation - right-of-use
assets (2.5) (1.5) (2.6) (2.2) (0.2) (9.0)
Software amortisation - - - (1.0) - (1.0)
------------------------------- --------- --------- -------------- --------- ----- -----
Central
For the year to 31 December & South London
2017 North West & South
GBP million Division Division East Division Corporate Spain Total
----------------------------------- --------- --------- -------------- ----------- ------ ---------
Revenue
External sales 1,334.5 1,291.2 1,236.3 9.0 94.2 3,965.2
Result
Profit/(loss) on ordinary
activities before joint
ventures, finance costs
and exceptional items 295.4 318.0 263.1 (66.8) 26.8 836.5
Share of results of joint
ventures (0.5) - 8.3 (0.2) - 7.6
----------------------------------- --------- --------- -------------- ----------- ------ ---------
Profit/(loss) on ordinary
activities before finance
costs, exceptional items
and after share of results
of joint ventures 294.9 318.0 271.4 (67.0) 26.8 844.1
Exceptional items (Note
3) - - - (130.0) - (130.0)
----------------------------------- --------- --------- -------------- ----------- ------ ---------
Profit/(loss) on ordinary
activities before finance
costs, after share of results
of joint ventures and exceptional
items 294.9 318.0 271.4 (197.0) 26.8 714.1
Net finance costs (32.1)
----------------------------------- --------- --------- -------------- ----------- ------ ---------
Profit on ordinary activities
before taxation 682.0
Taxation (including exceptional
tax) (126.7)
----------------------------------- --------- --------- -------------- ----------- ------ ---------
Profit for the year 555.3
----------------------------------- --------- --------- -------------- ----------- ------ ---------
Assets and liabilities
At 31 December 2017
Segment operating assets 1,192.5 1,233.2 1,501.3 212.7 145.0 4,284.7
Joint ventures 2.1 3.5 42.3 3.0 - 50.9
Segment operating liabilities (353.9) (486.9) (486.9) (264.2) (89.6) (1,681.5)
----------------------------------- --------- --------- -------------- ----------- ------ ---------
Net operating assets/(liabilities) 840.7 749.8 1,056.7 (48.5) 55.4 2,654.1
Net current taxation (57.9)
Net deferred taxation 29.3
Net cash 511.8
----------------------------------- --------- --------- -------------- ----------- ------ ---------
Net assets 3,137.3
----------------------------------- --------- --------- -------------- ----------- ------ ---------
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
2. Operating segments (continued)
Central
For the year to 31 December & South London
2017 North West & South
GBP million Division Division East Division Corporate Spain Total
------------------------------- --------- --------- -------------- --------- ----- -----
Other information
Property, plant and equipment
additions 0.7 0.7 0.9 1.9 - 4.2
Software development additions - - - 1.5 - 1.5
Depreciation - property,
plant and equipment (0.1) (0.9) (0.4) (0.9) - (2.3)
Software amortisation - - - (1.1) - (1.1)
------------------------------- --------- --------- -------------- --------- ----- -----
3. Net operating expenses and profit on ordinary activities before finance costs
GBP million 2018 2017 ======================== ====== ====== Administration expenses 212.9 201.9 Other expense 3.9 8.7 Other income (17.2) (15.3) Exceptional items 46.1 130.0 ======================== ====== ======
Other income includes profits on the sale of property, plant and equipment and the revaluation of certain shared equity mortgage receivables, pre-acquisition and abortive costs, and profit/loss on the sale of part exchange properties.
Exceptional items: GBP million 2018 2017 ================================================= ===== ====== Provision in respect of ACM cladding 30.0 - GMP equalisation charge 16.1 - Provision in respect of leasehold review - 130.0 Tax credit (8.2) (25.0) ================================================= ===== ====== Post-tax exceptional items charged to the income statement 37.9 105.0 ================================================= ===== ======
Aluminium Composite Materials (ACM) cladding provision
Following the tragic fire at Grenfell Tower, the Group conducted a detailed review into all legacy and current buildings with ACM cladding and worked with building owners, management companies, and the Fire Service to implement Government advice on interim mitigation measures, where applicable. Whilst each situation is different, and this is an exceptionally complex issue, the Group has in a number of cases, having regard to all of the relevant facts and circumstances, agreed to support our customers both financially and practically with removal and replacement of ACM cladding, even though the buildings concerned met the requirements of building regulations at the time construction was formally approved. This decision was taken for buildings recently constructed by the Group because Management believe that it is morally right, not because it is legally required. At the year end, replacement works had been completed on one development and were underway on another. Since the year end we have started work on a further development.
Uncertainty over the remediation costs will remain until all the works are fully designed and contracted. Following the creation of the exceptional provision, the Government issued further guidance which the Group considered as part of its ongoing review. As at 31 December 2018, GBP30.0 million continues to represent Management's best estimate of the cost of replacing the cladding at all buildings identified.
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
3. Net operating expenses and profit on ordinary activities before finance costs (continued)
Guaranteed Minimum Pension (GMP) equalisation
A High Court judgement handed down in October 2018, relating to defined benefit pension schemes, held that the GMP element of pension accrued by men and women should be comparable and any additional obligation required to equalise the members' benefits must be allowed for in the scheme liabilities. The additional obligation is considered a past service cost and recognised through the income statement in accordance with IAS 19. As at 31 December 2018, the Group has estimated that the additional obligation required to equalise benefits accrued under the Group's defined benefit pension scheme is GBP16.1 million and has recognised this amount as an exceptional past service cost in the current year income statement. The impact of future changes in estimates and assumptions related to the equalisation of GMP will be accounted for as scheme experience and recognised in other comprehensive income.
Leasehold provision
Following concerns raised by certain customers in the latter part of 2016 relating to the mortgageability and saleability of their homes due to the ground rents structure in their leases, the Group undertook a review of historic leasehold structures on developments which were commenced between 2007 and 2011. As a result of this review, in order to address these concerns and to make the future ground rent more affordable, a voluntary help scheme - the Taylor Wimpey Ground Rent Review Assistance Scheme (GRRAS), was announced in April 2017, together with a provision of GBP130.0 million. This was designed to help affected customers to convert the ground rent structure of their leases from one which doubles every ten years until the fiftieth anniversary, to one based on RPI.
As part of the GRRAS, the Group completed negotiations with the respective freehold owners of virtually all the leasehold homes to convert our customers' leases to an RPI structure, with the Group bearing the financial cost of doing so. The provision was calculated using a range of assumptions including the total number of properties owned by each freeholder and whether the applications are likely to fall within the eligibility criteria of the GRRAS. Assumptions are regularly reviewed.
Profit on ordinary activities before finance costs has been arrived at after charging/(crediting):
GBP million 2018 2017 ================================================== ======= ======= Cost of inventories recognised as expense in cost of sales 2,921.1 2,794.6 Depreciation - property, plant and equipment 3.1 2.3 Depreciation - right-of-use assets 9.0 - (Gain)/loss on disposal of property, plant and equipment (0.2) 0.1 Amortisation of intangible assets 1.0 1.1 Payments under operating leases(1) -- 6.4 ================================================== ======= =======
(1) Under IFRS 16 'Leases', which the Group adopted in the current year, payments under operating leases are not charged to the income statement.
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
4. Finance costs and interest receivable
Interest receivable
GBP million 2018 2017
-------------------------------------------------- ---- ----
Interest receivable 2.9 0.8
-------------------------------------------------- ---- ----
Finance costs are analysed as follows:
GBP million 2018 2017
-------------------------------------------------- ---- ----
Interest on overdrafts, bank and other loans 5.2 6.0
Foreign exchange movements 1.0 0.1
-------------------------------------------------- ---- ----
6.2 6.1
Unwinding of discount on land creditors and other
items 18.5 20.9
Interest on IFRS 16 lease liabilities 0.5 -
Net notional net interest on pension liability
(Note 9) 1.1 5.9
-------------------------------------------------- ---- ----
26.3 32.9
-------------------------------------------------- ---- ----
5. Taxation
Tax (charged)/credited in the income statement is analysed as follows:
GBP million 2018 2017
------------------------------------------------------ ------- -------
Current tax:
UK corporation
tax: Current year (143.4) (122.6)
Adjustment in respect of prior years (5.3) 1.5
Foreign tax: Current year (3.6) (3.3)
(152.3) (124.4)
----------------------------------------------------- ------- -------
Deferred tax:
UK: Current year (4.1) (2.8)
Adjustment in respect of prior years 3.7 -
Foreign tax: Current year (1.4) 0.5
(1.8) (2.3)
----------------------------------------------------- ------- -------
(154.1) (126.7)
----------------------------------------------------- ------- -------
Corporation tax is calculated at 19.0% (2017: 19.25%) of the estimated assessable profit for the year in the UK. Taxation outside the UK is calculated at the rates prevailing in the respective jurisdictions. The effective tax rate, before exceptional items, is 18.9% (2017: 18.7%).
The tax charge for the year includes credits of GBP5.1 million in respect of the exceptional provision for ACM cladding replacement and GBP3.1 million relating to the exceptional charge for the impact of GMP equalisation on the Group's defined benefit pension scheme. The tax charge for the prior year includes a credit of GBP25.0 million in respect of the exceptional charge relating to the leasehold review.
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
5. Taxation (continued)
The charge for the year can be reconciled to the profit per the income statement as follows:
GBP million 2018 2017 ------------------------------------------------------- ------- ------- Profit before tax 810.7 682.0 ------------------------------------------------------- ------- ------- Tax at the UK corporation tax rate of 19.0% (2017: 19.25%) (154.0) (131.3) Net (under)/over provision in respect of prior years (1.7) 1.5 Net impact of items that are not taxable or deductible 1.7 0.2 Recognition of deferred tax asset relating to Spanish business 2.3 3.9 Other rate impacting adjustments (2.4) (1.0) ------------------------------------------------------- ------- ------- Tax charge for the year (154.1) (126.7) ------------------------------------------------------- ------- -------
6. Earnings per share
2018 2017
----------------------------------------------------- ------- -------
Basic earnings per share 20.1p 17.0p
Diluted earnings per share 20.0p 16.9p
Adjusted basic earnings per share 21.3p 20.2p
Adjusted diluted earnings per share 21.2p 20.1p
Weighted average number of shares for basic/adjusted
earnings per share - million 3,266.3 3,264.0
Weighted average number of shares for diluted
basic/adjusted earnings per share - million 3,275.7 3,280.4
----------------------------------------------------- ------- -------
Adjusted basic and adjusted diluted earnings per share, which exclude the impact of exceptional items and any associated net tax charges, are presented to provide a measure of the underlying performance of the Group. A reconciliation of earnings attributable to equity shareholders used for basic and diluted earnings per share to that used for adjusted earnings per share is shown below.
GBP million 2018 2017 -------------------------------------------------- ----- ------ Earnings for basic and diluted earnings per share 656.6 555.3 Adjust for exceptional items (Note 3) 46.1 130.0 Adjust for tax on exceptional items (Note 5) (8.2) (25.0) Earnings for adjusted basic and adjusted diluted earnings per share 694.5 660.3 -------------------------------------------------- ----- ------
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
7. Deferred tax
The following are the major deferred tax assets and liabilities recognised by the Group, and movements thereon during the current and prior reporting year.
Share- Retirement Other
based Capital benefit temporary
GBP million payments allowances Losses obligations differences Total
------------------------------ --------- ----------- ------ ------------ ------------ ------
At 1 January 2017 4.8 3.4 8.8 40.0 0.4 57.4
(Charge)/credit to income (0.2) (0.3) 0.3 (2.8) 0.7 (2.3)
Charge to other comprehensive
income - - - (26.5) - (26.5)
Credit to equity 0.4 - - - - 0.4
Foreign exchange - - 0.3 - - 0.3
------------------------------ --------- ----------- ------ ------------ ------------ ------
At 31 December 2017 5.0 3.1 9.4 10.7 1.1 29.3
Impact of IFRS 16 adoption
(Note 12) - - - - 0.3 0.3
(Charge)/credit to income (0.7) (0.7) (1.1) (2.8) 3.5 (1.8)
Credit to other comprehensive
income - - - 14.7 - 14.7
Charge to equity (2.0) - - - - (2.0)
Foreign exchange - - 0.2 - - 0.2
------------------------------ --------- ----------- ------ ------------ ------------ ------
At 31 December 2018 2.3 2.4 8.5 22.6 4.9 40.7
------------------------------ --------- ----------- ------ ------------ ------------ ------
Closing deferred tax on UK temporary differences has been calculated at the tax rates that are expected to apply for the period when the asset is realised or the liability is settled. Accordingly, the temporary differences have been calculated at rates between 19% and 17% (2017: 19% and 17%).
The net deferred tax balance is analysed into assets and liabilities as follows:
GBP million 2018 2017
------------------------- ----- -----
Deferred tax assets 42.1 30.9
Deferred tax liabilities (1.4) (1.6)
------------------------- ----- -----
40.7 29.3
------------------------- ----- -----
The Group has not recognised temporary differences relating to tax losses carried forward and other temporary differences amounting to GBP3.0 million (2017: GBP2.8 million) in the UK and GBP47.8 million (2017: GBP58.0 million) in Spain. The UK temporary differences have not been recognised as they are predominantly non-trading in nature and insufficient certainty exists as to their future utilisation. The temporary differences in Spain have not been recognised due to uncertainty of sufficient taxable profits in the future against which to utilise these amounts.
At the balance sheet date, the Group has unused UK capital losses of GBP269.6 million (2017: GBP269.6 million). No deferred tax asset has been recognised in respect of the capital losses at 31 December 2018 because the Group does not believe that it is probable that these capital losses will be utilised in the foreseeable future.
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
8. Inventories
GBP million 2018 2017
-------------------------------------------------------- ------- -------
Raw materials and consumables 1.8 1.9
Finished goods and goods for resale 43.3 24.0
Residential developments:
Land 2,757.7 2,682.6
Development and construction costs 1,378.9 1,360.0
Commercial, industrial and mixed development properties 6.5 7.2
-------------------------------------------------------- ------- -------
4,188.2 4,075.7
-------------------------------------------------------- ------- -------
Inventory impairment
The markets in our core geographies, which are the primary drivers of our business, continue to trade positively. However, we are alert to the potential risk of a change in customer confidence given the on-going Brexit negotiations.
At 31 December 2018, the Group completed a net realisable value assessment of inventory with these factors in mind. This review did not result in any net change to the total provision (2017: no net change) but resulted in a reallocation of GBP1.1 million (2017: GBP2.4 million) of historically booked provision between two sites which continue to hold a provision due to poor site location and complex site requirements. There was no further change to the provision.
At the balance sheet date, the Group held land and work in progress in the UK that had been written down to net realisable value of GBP46.6 million (2017: GBP69.9 million) with associated impairments of GBP38.7 million (2017: GBP46.9 million). As at 31 December 2018, 2% (31 December 2017: 2%) of the UK short term owned and controlled land is impaired. In the year 2% (2017: 5%) of the Group's UK completions were from pre-2009 impaired sites.
In the year, 17 plots (2017: 35) were completed in Spain that had previously been impaired. At 31 December 2018 Spain had land and work in progress that has been written down to net realisable value of GBP27.2 million (2017: GBP17.7 million) with associated impairments of GBP44.3 million (2017: GBP46.4 million).
The table below details the movements on the inventory provision recorded in the year.
Inventory provision GBP million 2018 2017 -------------------- ------ ------ 1 January 93.3 147.0 Utilised (10.8) (52.9) Foreign exchange 0.5 (0.8) -------------------- ------ ------ 31 December 83.0 93.3 -------------------- ------ ------
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
9. Retirement benefit obligations
Retirement benefit obligations comprise a defined benefit pension liability of GBP133.0 million (2017: GBP63.7 million) and a post-retirement healthcare liability of GBP0.6 million (2017: GBP1.1 million).
Defined benefit pension schemes
The Group's defined benefit pension scheme in the UK is the Taylor Wimpey Pension Scheme (TWPS). The TWPS is a funded defined benefit pension scheme which provides benefits to beneficiaries in the form of a guaranteed level of pension payable for life. The level of benefits provided depends on members' length of service and their salary in the final years leading up to retirement or date of ceasing active accrual if earlier. Pension payments are generally increased in line with inflation.
The Group operates the TWPS under the UK regulatory framework. Benefits are paid to members from a Trustee-administered fund and the Trustee is responsible for ensuring that the scheme is well-managed and that members' benefits are secure. Scheme assets are held in trust.
The TWPS Trustee's other duties include managing the investment of scheme assets, administration of scheme benefits and exercising of discretionary powers. The Group works closely with the Trustee to manage the TWPS. The Trustee of the TWPS owes fiduciary duties to the TWPS' beneficiaries. The appointment of the Directors to the Trustee Board is determined by the TWPS trust documentation.
During 2017 the Group engaged with the Trustee on the triennial valuation of the pension scheme with a reference date of 31 December 2016. The result of this valuation was a Technical Provisions deficit at 31 December 2016 of GBP222.0 million.
A revised funding plan was agreed in February 2018 which commits the Group to GBP40.0 million per annum of deficit reduction contributions from 1 April 2018 until 31 December 2020 and GBP2.0 million per annum for scheme expenses from 1 February 2018 until 31 January 2023. In addition, GBP5.1 million per annum is received by TWPS from the Pension Funding Partnership (see below). However, the GBP40.0 million per annum of cash contributions are only required whilst the scheme remains in a Technical Provisions deficit position. Should the TWPS become fully funded, then cash contributions will pause until such time that the scheme falls to below 96% funded at the end of any quarter. In April 2018, the Group paid a one-off contribution of GBP23.0 million into the scheme to increase the funding level to 100% and thereby pause future contributions from 31 March 2018. The funding level of the scheme remained above the threshold of 96% until 31 December 2018. Contributions of GBP40.0 million per annum recommenced from 1 January 2019 and will be payable until 31 December 2020, or until such time as the funding level increases to at least 100%, if earlier.
On an IAS 19 accounting basis the underlying surplus in the scheme as at 31 December 2018 was GBP30.9 million (2017: GBP23.9 million). The terms of the TWPS are such that the Group does not have an unconditional right to a refund of surplus. As a result, the Group has recognised an adjustment to the underlying surplus of GBP163.9 million, resulting in an IFRIC 14 deficit of GBP133.0 million, which represents the present value of future commitments under the current funding plan.
In 2013, the Group introduced a GBP100.0 million Pension Funding Partnership utilising show homes, as well as seven offices, in a sale and leaseback structure. This provides an additional GBP5.1 million of annual funding for the TWPS. The assets held within this scheme do not affect the IAS 19 (before IFRIC 14) figures as they remain assets of the Group, and are not assets of the TWPS. As at 31 December 2018, there was GBP89.9 million of property and GBP22.4 million of cash held within the structure (2017: GBP101.5 million of property and GBP9.5 million of cash). The terms of this Funding Partnership are
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
9. Retirement benefit obligations (continued)
such that, should the scheme be in Technical Provisions deficit at 31 December 2028, then a bullet payment will be due to the scheme equal to the lower of GBP100.0 million or the Technical Provisions deficit at that time. The IFRIC 14 deficit at 31 December 2018 does not include any value in respect of this bullet payment as modelling undertaken by an independent actuary indicates that the scheme is expected to be fully funded by 2028, and no bullet payment is expected to be required.
The Group continues to work closely with the Trustee in managing pension risks, including management of interest rate, inflation and longevity risks. The TWPS assets are approximately 90% hedged against changes in both interest rates and inflation expectations on the TWPS long-term, 'self-sufficiency' basis. The TWPS also benefits from a bulk annuity contract which covers some of the largest liabilities in the scheme, providing protection against interest rate, inflation and longevity risk.
Accounting assumptions:
The assumptions used in calculating the accounting costs and obligations of the TWPS, as detailed below, are set by the Directors after consultation with independent actuaries. The basis for these assumptions is prescribed by IAS 19 and they do not reflect the assumptions that may be used in future funding valuations of the TWPS.
TWPS
------------------------
Accounting valuation assumptions 2018 2017
------------------------------------- ----------- -----------
As at 31 December
Discount rate for scheme liabilities 2.95% 2.55%
General pay inflation n/a n/a
Deferred pension increases 2.25% 2.20%
Pension increases 2.15%-3.70% 2.10%-3.65%
------------------------------------- ----------- -----------
The table below shows the impact to the liability of movement in key assumptions.
Impact on
defined benefit
Impact on defined obligation
Assumption Change in assumption benefit obligation (%)
------------------- --------------------- -------------------- ----------------
Decrease by 0.1%
Discount rate p.a. Increase by GBP32m 1.4
Increase by 0.1%
Rate of inflation* p.a. Increase by GBP24m 1.1
Members live 1 year
Life expectancy longer Increase by GBP97m 4.3
------------------- --------------------- -------------------- ----------------
* Assumed to affect deferred revaluation and pensioner increases in payment.
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
9. Retirement benefit obligations (continued)
The table below details the movements in the TWPS pension liability and assets recorded through the income statement and other comprehensive income.
Asset/
(liability)
Present Fair value recognised
value of scheme on balance
GBP million of obligation assets sheet
-------------------------------------------- -------------- ---------- ------------
At 1 January 2018 (2,327.2) 2,263.5 (63.7)
Past service cost related to GMP
equalisation (16.1) - (16.1)
Administration expenses - (1.9) (1.9)
Interest (expense)/income (57.9) 56.8 (1.1)
---------------------------------------------- -------------- ---------- ------------
Total amount recognised in income
statement (74.0) 54.9 (19.1)
---------------------------------------------- -------------- ---------- ------------
Remeasurement loss on scheme assets
not included in income statement - (132.2) (132.2)
Change in demographic assumptions 15.9 - 15.9
Change in financial assumptions 121.3 - 121.3
Experience loss (13.0) - (13.0)
Adjustment to liabilities for IFRIC
14 (76.3) - (76.3)
Total remeasurements in other comprehensive
income 47.9 (132.2) (84.3)
---------------------------------------------- -------------- ---------- ------------
Employer contributions - 34.1 34.1
Employee contributions - - -
Benefit payments 116.1 (116.1) -
At 31 December 2018 (2,237.2) 2,104.2 (133.0)
---------------------------------------------- -------------- ---------- ------------
Asset/
(liability)
Present Fair value recognised
value of scheme on balance
GBP million of obligation assets sheet
At 1 January 2017 (2,368.8) 2,136.1 (232.7)
Current service cost - - -
Administration expenses - (3.0) (3.0)
Interest (expense)/income (62.0) 56.1 (5.9)
--------------------------------------------- -------------- ---------- ------------
Total amount recognised in income
statement (62.0) 53.1 (8.9)
--------------------------------------------- -------------- ---------- ------------
Return on scheme assets not included
in income statement - 193.7 193.7
Change in demographic assumptions 78.9 - 78.9
Change in financial assumptions (44.1) - (44.1)
Experience gains 13.9 - 13.9
Adjustment to liabilities for IFRIC
14 (87.6) - (87.6)
Total remeasurements in other comprehensive
income (38.9) 193.7 154.8
--------------------------------------------- -------------- ---------- ------------
Employer contributions - 23.1 23.1
Employee contributions - - -
Benefit payments 142.5 (142.5) -
At 31 December 2017 (2,327.2) 2,263.5 (63.7)
--------------------------------------------- -------------- ---------- ------------
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
10. Notes to the cash flow statement
GBP million 2018 2017 ------------------------------------------------- ------- ------- Profit on ordinary activities before finance costs 828.8 706.5 Adjustments for: Depreciation of buildings, plant and equipment 3.1 2.3 Depreciation of right-of-use assets 9.0 - Amortisation of software development 1.0 1.1 Pension contributions in excess of charge to the income statement (16.1) (20.1) Share-based payment charge 12.2 11.5 (Gain)/loss on disposal of property, plant and equipment (0.2) 0.1 Increase in provisions excluding exceptional payments 32.1 128.5 ------------------------------------------------- ------- ------- Operating cash flows before movements in working capital 869.9 829.9 Increase in inventories (1.7) (61.7)
Increase in receivables (10.9) (15.8) Decrease in payables (41.9) (16.5) Cash generated by operations 815.4 735.9 Payments related to exceptional charges (25.9) - Income taxes paid (139.6) (126.7) Interest paid (8.6) (5.1) ------------------------------------------------- ------- ------- Net cash from operating activities 641.3 604.1 ------------------------------------------------- ------- -------
Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short term highly liquid investments with an original maturity of three months or less.
Movement in net cash/(debt)
Cash and Overdrafts, Total
cash banks and net cash/
GBP million equivalents other loans (debt)
------------------------- ------------ ------------ ----------
Balance 1 January 2017 450.2 (85.5) 364.7
Net cash flow 148.5 - 148.5
Foreign exchange 1.8 (3.2) (1.4)
------------------------- ------------ ------------ ----------
Balance 31 December 2017 600.5 (88.7) 511.8
Net cash flow 133.8 - 133.8
Foreign exchange (0.1) (1.4) (1.5)
------------------------- ------------ ------------ ----------
Balance 31 December 2018 734.2 (90.1) 644.1
------------------------- ------------ ------------ ----------
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
11. Dividends
GBP million 2018 2017
============================================== ===== =====
Proposed
Interim dividend 2018 2.44p (2017: 2.30p)
per ordinary share of 1p each 79.7 75.2
Final dividend 2018 3.80p (2017: 2.44p) per
ordinary share of 1p each 125.0 80.0
============================================== ===== =====
204.7 155.2
============================================== ===== =====
Amounts recognised as distributions to equity
holders
Paid
Final dividend 2017 2.44p (2016: 2.29p) per
ordinary share of 1p each 79.8 74.8
Interim dividend 2018 2.44p (2017: 2.30p)
per ordinary share of 1p each 79.7 75.2
Special dividend 2018 10.40p (2017: 9.20p)
per ordinary share of 1p each 340.0 300.5
============================================== ===== =====
499.5 450.5
============================================== ===== =====
The Directors recommend a final dividend for the year ended 31 December 2018 of 3.80 pence per share subject to shareholder approval at the Annual General Meeting, with an equivalent final dividend charge of c.GBP125.0 million (2017: GBP79.8 million). The final dividend will be paid on 17 May 2019 to all shareholders registered at the close of business on 5 April 2019.
The Directors additionally recommend a special dividend of c.GBP350.0 million (2017: GBP340.0 million) subject to shareholder approval at the Annual General Meeting. The special dividend will be paid on 12 July 2019 to all shareholders registered at the close of business on 7 June 2019.
In accordance with IAS 10 'Events after the balance sheet date' the proposed final or special dividends have not been accrued as a liability as at 31 December 2018.
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
12. Adoption of new accounting standards
In the current year, the Group has adopted and applied the following accounting standards issued by the International Accounting Standards Board that are relevant to the operations of the Group.
-- IFRS 9 'Financial Instruments'
-- IFRS 15 'Revenue from Contracts with Customers'
-- IFRS 16 'Leases'
The impact of the adoption of these new standards on the Group's financial statements is explained below. None of these standards had a material impact on the financial statements of the Company.
IFRS 9 'Financial Instruments'
IFRS 9 became effective for accounting periods beginning on or after 1 January 2018 and replaced IAS 39 'Financial Instruments: Recognition and Measurement'. IFRS 9 introduced new requirements for the classification and measurement of financial instruments, impairment of financial assets using an expected credit loss (ECL) model, and hedge accounting.
The adoption of IFRS 9 did not have a material impact on the Group financial statements, the effect being limited to a reclassification of certain mortgage receivables. This reclassification did not have an impact on the net assets or profit for the year of the Group. The Group has elected to restate comparative information for the effect of applying IFRS 9.
Classification and measurement of financial assets
All financial assets within the scope of IFRS 9 are initially measured at fair value and subsequently measured at amortised cost, or fair value through profit and loss (FVTPL) or fair value through other comprehensive income (FVOCI).
The Directors have reviewed and assessed the Group's financial assets and concluded that the application of IFRS 9 has had the following impact on the classification and measurement of the Group's financial assets:
Financial assets classified as land, trade and other receivables under IAS 39 'Financial Instruments: Recognition and Measurement' continue to be measured at amortised cost under IFRS 9. They are held to collect contractual cash flows which consist only of payments of principal and, where relevant, interest on the principal amount outstanding.
The Group's mortgage receivables contain non-closely related embedded derivatives. In accordance with IAS 39, the Group's previous accounting policy was to separately measure the embedded derivative and the mortgage receivable host. The mortgage receivable host was measured at amortised cost with the associated unwind of discount credited to the income statement within finance costs. Fair value gains and losses arising from the remeasurement of the embedded derivative were presented within net operating expenses. On adoption of IFRS 9, mortgage receivables are no longer separated but instead measured at FVTPL in their entirety with associated fair value gains and losses presented within net operating expenses. This reclassification has not impacted net assets or profit for the year of the Group.
Impairment of financial assets
IFRS 9 requires an ECL approach to impairment rather than the incurred credit loss model under IAS 39. This requires the assessment of the expected credit loss on each class of financial asset at the reporting date. This assessment should take into consideration any changes in credit risk since the initial recognition of the financial asset.
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
12. Adoption of new accounting standards (continued)
The Directors have reviewed and assessed the Group's financial assets, and amounts due from customers, using reasonable and supportable information to determine the credit risk of each item, and concluded that there is no financial impact on the Group. The main financial assets held by the Group are cash and cash equivalents which are placed on deposit with a number of institutions based on a minimum credit rating and maximum exposure and accordingly the expected credit loss is considered low. Financial assets also include mortgage receivables where the expected credit loss is included in the assessment of fair value. Other receivables include completion monies for house sales and other deposits which are both held for short periods of time and mainly relate to the Help to Buy scheme, exposing the Group to limited credit risk. Land debtors have been assessed for credit risk but, this is also considered to be limited, as the period of deferment is short.
Classification and measurement of financial liabilities
All the Group's financial liabilities are held at amortised cost. The IFRS 9 requirements regarding the classification and measurement of financial liabilities are broadly consistent with the previous standard, IAS 39. Accordingly, the adoption of IFRS 9 has had no impact on the classification and measurement of the Group's financial liabilities.
Hedge accounting
In accordance with the allowed transition provisions, the Group has applied the IFRS 9 hedge accounting requirements prospectively from 1 January 2018. The qualifying hedge relationships in place under IAS 39 also qualify for hedge accounting in accordance with IFRS 9, and therefore have been regarded as continuing hedge relationships. The critical terms of the hedging instruments match those of the hedged items and all hedge relationships have continued to be effective under the assessment requirements of IFRS 9. There are no hedging relationships under IFRS 9 which would not have qualified for hedge accounting under IAS 39.
The only hedge relationship within the Group is a net investment hedge to manage the Group's exposure to movements in the Euro exchange rate impacting the results from the Spanish business. There are no changes to the treatment of net investment hedges under IFRS 9 and therefore the application of IFRS 9 hedge accounting requirements has had no impact on the results or financial position of the Group.
IFRS 15 'Revenue from Contracts with Customers'
IFRS 15 became effective for accounting periods beginning on or after 1 January 2018 and replaces IAS 18 'Revenue', IAS 11 'Construction Contracts' and related interpretations. IFRS 15 establishes a comprehensive framework for determining whether, how much, and when revenue is recognised.
The adoption of IFRS 15 did not have a material impact on the Group financial statements, the effect being limited to a presentational adjustment associated with the purchase and sale of part exchange properties. This reclassification did not have an impact on the net assets or profit for the year of the Group. Comparative information has been restated for the effect of applying IFRS 15.
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
12. Adoption of new accounting standards (continued)
An assessment of the Group's main revenue streams against the requirements of IFRS 15 compared with previous accounting policies is set out below:
Nature, timing of satisfaction
of performance obligations, Nature of change in accounting
Revenue stream significant payment terms policy
==================== =============================== =================================
Private development, Customers obtain control Under IAS 18 revenue was
certain partnership of a unit once the sale recognised when the risks
housing contracts is complete and monies and rewards were transferred
and land sales have been received by Taylor to the customer which was
Wimpey. A house sale invoice also at the point when
is generated and revenue monies were received by
recognised at this point. Taylor Wimpey.
Under IFRS 15, there is
no change to the point
of revenue recognition
as the performance obligations
are deemed to be satisfied
at the point when legal
title is transferred to
the purchaser.
==================== =============================== =================================
Partnership The Group has determined These contracts were previously
housing long that, where contracts with accounted for under IAS
term contracts Housing Associations (HA) 11 and IFRIC 15 'Agreements
or Local Councils are such for the Construction of
that cash is received during Real Estate' and as such
the manufacture of the were recognised over time
units, that the customer when certain milestones
controls all the work in in the development were
progress as the house is reached.
being built. This is because There is no change to the
the unit is being built timing of revenue recognition
to an agreed specification under IFRS 15. The conditions
and if the contract is of the sale include the
terminated by the customer requirement for the customer
then the Group is entitled to make stage payments
to reimbursement of the throughout the contract
costs incurred to date. and accordingly the revenue
Therefore, revenue from should continue to be recognised
these contracts and associated over time.
costs are recognised overtime
and invoices are issued
accordingly. Un-invoiced
amounts are presented as
contract assets.
==================== =============================== =================================
Historically, under IAS 18, the purchase and sale of part exchange (PX) properties was treated as a linked transaction with the sale of the new build unit, and as such the net impact of the purchase and sale of a PX property was recognised in cost of sales. Under IFRS 15, this is now a separate transaction as it can no longer be linked with the sale of the new build house. However, this has not been reclassified as revenue and cost of sales because the Group does not consider the purchase and sale of PX properties to be a principal activity and therefore the net impact has been reclassified to other income/expense. Sales of PX properties amounted to GBP154.3 million with an associated acquired value of GBP156.5 million.
Impact on adoption of IFRS 9 and IFRS 15
The financial statement line items impacted by the adoption of IFRS 9 and IFRS 15 for the current and previously reported year is shown below. There was no impact on current or previously reported balance sheet information or current year earnings per share.
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
12. Adoption of new accounting standards (continued)
Impact on adoption of IFRS 9 and IFRS 15
31 December 2018 IFRS IFRS
GBP million 15 9 Total
======================================================= ===== ===== =====
Impact on profit/(loss) for the year
Cost of sales
Reclass of net impact of PX sales to net operating
expenses (0.2) - (0.2)
Net operating expenses
Reclass of net impact of PX sales to net operating
expenses 0.2 - 0.2
Mortgage receivable classified as FVTPL in entirety - 1.8 1.8
Finance costs
Mortgage receivable classified as FVTPL in entirety - (1.8) (1.8)
======================================================= ===== ===== =====
Impact on profit for the year - - -
======================================================= ===== ===== =====
31 December 2017 As previously IFRS
GBP million reported* IFRS 15 9 Restated
===================================== ============= ======= ===== =========
Revenue 3,965.2 - - 3,965.2
Cost of sales (2,932.2) (1.2) - (2,933.4)
===================================== ============= ======= ===== =========
Gross profit 1,033.0 (1.2) - 1,031.8
Net operating expenses
Other income 2.5 1.2 2.9 6.6
Administration expenses (201.9) - - (201.9)
Profit on ordinary activities before
finance costs and tax 833.6 - 2.9 836.5
Net finance costs (29.2) - (2.9) (32.1)
Share of results of joint venture 7.6 - - 7.6
===================================== ============= ======= ===== =========
Profit before tax 812.0 - - 812.0
===================================== ============= ======= ===== =========
Operating profit 841.2 - 2.9 844.1
Operating profit margin 21.2% - 0.1% 21.3%
* Before exceptional items, see Alternative Performance Measures.
IFRS 16 'Leases'
IFRS 16 replaces IAS 17 'Leases' and IFRIC 4 'Determining whether an Arrangement contains a Lease' and is mandatorily effective for accounting periods beginning on or after 1 January 2019. The Group has elected to early adopt IFRS 16 with a date of initial application of 1 January 2018. The Group has applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of the initial application is recognised in retained earnings at 1 January 2018. Comparative information has therefore not been restated and is reported under the previous accounting policies.
The details of the changes in accounting policies are described below.
Definition of a lease
Prior to the adoption of IFRS 16, the Group determined at inception whether an arrangement is a lease under IAS 17 or contains a lease under IFRIC 4. Under IFRS 16, the Group assess whether an arrangement is or contains a lease based on the definitions in the new standard.
The Group elected to apply the practical expedient in the transition provisions of IFRS 16 to grandfather the assessment of arrangements undertaken in prior periods. Accordingly, IFRS 16 has only been applied to contracts that were either previously identified as leases or entered into subsequent to the initial application of IFRS 16 on 1 January 2018.
Financial statements
Notes to the Condensed Consolidated Financial Statements
for the year to 31 December 2018
12. Adoption of new accounting standards (continued)
The Group as a lessee
The Group previously classified leases as either operating or finance leases based on an assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the leased asset. Immediately prior to the initial application of IFRS 16, the Group had operating leases related to office premises and equipment and no finance leases.
Under IFRS 16, most leases previously classified as operating leases under IAS 17 are recognised on the balance sheet as a right-of-use asset along with a corresponding lease liability.
The lease liability is initially measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate. The lease term comprises the non-cancellable period of the contract, together with periods covered by an option to extend the lease where the Group is reasonably certain to exercise that option. Subsequently, the lease liability is measured by increasing the carrying amount to reflect interest on the lease liability, and reducing it by the lease payments made. The lease liability is remeasured when the Group changes its assessment of whether it will exercise an extension or termination option.
Right-of-use assets are initially measured at cost, comprising the initial measurement of the lease liability, plus any initial direct costs and an estimate of asset retirement obligations, less any lease incentives. Subsequently, right-of-use assets are measured at cost, less any accumulated depreciation and any accumulated impairment losses, and are adjusted for certain remeasurements of the lease liability. Depreciation is calculated on a straight-line basis over the length of the lease.
The Group has elected to apply exemptions for short-term leases and leases for which the underlying asset is of low value. For these leases, payments are charged to the income statement on a straight-line basis over the term of the relevant lease. For the year ended 31 December 2018, payments charged to the income statement related to low value and short-term leases were insignificant.
Right-of-use assets are presented within non-current assets on the face of the balance sheet and lease liabilities are shown separately on the balance sheet in current liabilities and non-current liabilities depending on the length of the lease term.
Impact on the financial statements
On transition to IFRS 16, the group recognised an additional GBP26.5 million of right-of-use assets, GBP28.5 million of lease liabilities and GBP0.5 million of other assets, primarily related to deferred tax and lease prepayments and accruals. The net difference of GBP1.5 million was recognised in retained earnings.
The lease liabilities were determined by discounting the relevant lease payments at the Group's incremental borrowing rate of between 1.3% and 1.8%.
The Group uses a number of Alternative Performance Measures (APMs) which are not defined within IFRS. The Directors use these measures to assess the underlying operational performance of the Group and, as such, these measures should be considered alongside the IFRS measures. The following APMs are referred to throughout the full year results. Prior year comparatives have been restated where necessary following the application of IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers'. See Note 12 for more detail.
Profit before taxation and exceptional items and profit for the period before exceptional items
The Directors consider the removal of exceptional items from the reported results provides more clarity on the performance of the Group. They are reconciled to profit before tax and profit for the period respectively, on the face of the Consolidated Income Statement.
Operating profit and operating profit margin
Within the highlights and throughout, operating profit is used as one of the main measures of performance, with operating profit margin being a Key Performance Indicator (KPI). Operating profit is defined as profit on ordinary activities before net finance costs, exceptional items and tax, after share of results of joint ventures. The Directors consider this to be an important measure of underlying performance of the Group. Operating profit margin is calculated as operating profit divided by total revenue. The Directors consider this to be a metric which reflects the underlying performance of the business.
Operating profit to profit before interest and tax reconciliation
2018 2018 2018 2017 2017 2017
Profit Revenue Margin Profit Revenue Margin
GBPm GBPm % GBPm GBPm %
-------------------- ------- -------- ------- ------- -------- -------
Profit before
interest and
tax 828.8 4,082.0 20.3 706.5 3,965.2 17.8
Adjusted for:
Share of results
of joint ventures 5.3 - 0.1 7.6 - 0.2
Exceptional
items 46.1 - 1.2 130.0 - 3.3
--------------------- ------- -------- ------- ------- -------- -------
Operating profit 880.2 4,082.0 21.6 844.1 3,965.2 21.3
--------------------- ------- -------- ------- ------- -------- -------
Net operating assets and return on net operating assets
Net operating assets is defined as basic net assets less net cash, excluding net taxation balances and accrued dividends. Return on net operating assets, another KPI, is defined as 12-month operating profit divided by the average of the opening and closing net operating assets. The Directors consider this to be an important measure of the underlying operating efficiency and performance of the Group.
Net operating assets
GBPmillion 2018 2017 2016 ------------------------------ -------- -------- -------- Basic net assets 3,226.8 3,137.3 2,900.3 Average basic net assets 3,182.1 3,018.8 Adjusted for: Cash (734.2) (600.5) (450.2) Borrowings 90.1 88.7 85.5 Net taxation 29.2 28.6 4.0 Accrued dividends - - - ------------------------------ -------- -------- -------- Net operating assets 2,611.9 2,654.1 2,539.6 ------------------------------ -------- -------- -------- Average net operating assets 2,633.0 2,596.9 ------------------------------ -------- -------- --------
Return on net operating assets
2018 2018 2018 2017 2017 2017
Return Return
on net on net
Net assets Profit assets Net assets Profit assets
GBPm GBPm % GBPm GBPm %
----------------------- ----------- ------- -------- ----------- ------- --------
Average basic
net assets 3,182.1 828.8 26.0 3,018.8 706.5 23.4
Adjusted for:
Average cash (667.4) - 6.6 (525.4) - 4.7
Average borrowings 89.4 - (0.9) 87.1 - (0.8)
Average taxation 28.9 - (0.3) 16.4 - (0.1)
Share of results
of joint ventures - 5.3 0.2 - 7.6 0.3
Exceptional items - 46.1 1.8 - 130.0 5.0
----------------------- ----------- ------- -------- ----------- ------- --------
Average net operating
assets 2,633.0 880.2 33.4 2,596.9 844.1 32.5
----------------------- ----------- ------- -------- ----------- ------- --------
Net operating asset turn
This is defined as total revenue divided by the average of opening and closing net operating assets. The Directors consider this to be a good indicator of how efficiently the Group is utilising its assets to generate value for the shareholders.
2018 2018 2018 2017 2017 2017
Net Net Net
assets Revenue asset assets Revenue Net asset
GBPm GBPm turn GBPm GBPm turn
----------------------- -------- -------- ------- -------- -------- ----------
Average basic
net
assets 3,182.1 4,082.0 1.28 3,018.8 3,965.2 1.31
Adjusted for:
Average cash (667.4) - 0.33 (525.4) - 0.27
Average borrowings 89.4 - (0.04) 87.1 - (0.04)
Average taxation 28.9 - (0.02) 16.4 - (0.01)
Average net operating
assets 2,633.0 4,082.0 1.55 2,596.9 3,965.2 1.53
------------------------ -------- -------- ------- -------- -------- ----------
Tangible net assets per share
This is calculated as net assets before any accrued dividends excluding goodwill and intangible assets divided by the number of ordinary shares in issue at the end of the period. The Directors consider this to be a good measure of the value intrinsic within each ordinary share.
Tangible net assets per share
2018 2018 2018 2017 2017 2017
Net Net
Ordinary assets Ordinary assets
Net assets shares per share Net assets shares per share
GBPm in issue pence GBPm in issue pence
------------------- ----------- ---------- ----------- ----------- ---------- -----------
Basic net assets 3,226.8 3,278.1 98.4 3,137.3 3,275.4 95.8
Adjusted for:
Intangible assets (3.2) - (0.1) (3.9) - (0.1)
-------------------- ----------- ---------- ----------- ----------- ---------- -----------
Tangible net
assets 3,223.6 3,278.1 98.3 3,133.4 3,275.4 95.7
-------------------- ----------- ---------- ----------- ----------- ---------- -----------
Net cash/(debt)
Net cash/(debt) is defined as total cash less total financing. This is considered by the Directors to be the best indicator of the financing position of the Group. This is reconciled in Note 10.
Cash conversion
This is defined as cash generated by operations divided by operating profit. The Directors consider this measure to be a good indication of how efficiently the Group is turning profit into cash.
Cash conversion
2018 2018 2018 2017 2017 2017
Cash generated Cash generated
Profit by operations Cash conversion Profit by operations Cash conversion
GBPm GBPm % GBPm GBPm %
-------------------- ------- --------------- ---------------- ------- --------------- ----------------
Profit before
interest and
tax 828.8 815.4 98.4 706.5 735.9 104.2
Adjusted for:
Share of results
of joint ventures 5.3 - (0.6) 7.6 - (0.9)
Exceptional
items 46.1 - (5.2) 130.0 - (16.1)
--------------------- ------- --------------- ---------------- ------- --------------- ----------------
Operating profit 880.2 815.4 92.6 844.1 735.9 87.2
--------------------- ------- --------------- ---------------- ------- --------------- ----------------
Adjusted gearing
This is defined as adjusted net debt divided by basic net assets. The Directors consider this to be a more representative measure of the Group's gearing levels. Adjusted net debt is defined as net cash less land creditors.
Adjusted gearing
2018 2017
GBPm GBPm
------------------------------ -------- --------
Cash 734.2 600.5
Private placement loan notes (90.1) (88.7)
------------------------------- -------- --------
Net cash 644.1 511.8
Land creditors (738.6) (639.1)
------------------------------- -------- --------
Adjusted net debt (94.5) (127.3)
------------------------------- -------- --------
Basic net assets 3,226.8 3,137.3
------------------------------- -------- --------
Adjusted gearing 2.9% 4.1%
------------------------------- -------- --------
Adjusted basic earnings per share
This is calculated as earnings attributed to the shareholders, excluding exceptional items and tax on exceptional items, divided by the weighted average number of shares. The Directors consider this provides an important measure of the underlying earnings capacity of the Group. Note 6 shows a reconciliation from basic earnings per share to adjusted basic earnings per share.
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 rns@lseg.com or visit www.rns.com.
END
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