Annual Report and Accounts 2007

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• Business Review
  • Chairman's Statement
  • Group Chief Executive's Review
  • UK Housing
  • North America Housing
  • Spain and Gibraltar Housing
  • Construction
  • Group Financial Review
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Focusing on the basics

North America strategy

• Goal to be the homebuilder of choice in each of our markets
• Current priority is cash management and cost control, followed by growing operations to scale in existing markets

North America approach to challenging market

• Drive sensible sales rates for each site
• Deliver additional build cost and overhead savings
• Further reduce investment in land and work in progress

North America housing market

Markets in the US have proved to be extremely challenging throughout 2007, with initial signs of stabilisation in the first quarter being overtaken by worsening credit conditions from April onwards. Of our markets, Texas has remained the least affected, although credit issues have had an increasing impact in the fourth quarter of 2007.

Whilst Arizona still exhibits good demographic and employment trends, it continues to suffer from an over supply of homes. California has seen a sharp increase in the number of foreclosures, although markets in the San Francisco Bay area have proved to be more resilient to date than those in the south of the State.

Florida remains the worst of our markets, with high levels of housing inventory and potential buyers continuing to delay their purchasing decisions in the expectation of further price falls.

In marked contrast, our Canadian business continues to benefit from a robust Ontario operating environment. Inventory levels remain in line with normal conditions and the market has seen stable volumes and modest price increases over the last 12 months.

Strategy and integration

Our markets in North America benefit from significant inward migration and job growth and our long term strategy remains to grow the business. However, current conditions in the US require us to focus in the short to medium term on cost reductions and cash management, whilst preserving the inherent value in our long term land positions.

We are closely monitoring sales rates at each of our sites, actively adjusting our pricing and incentive packages to ensure that we remain competitive in local markets. Where we have high quality land holdings in areas of current market weakness we are opting to postpone production in order to preserve longer term value.

Both the legacy Taylor Woodrow and Morrison Homes businesses had already achieved significant build cost and overhead cost reductions prior to the merger in response to the slowdown in 2006. As this has continued through 2007 we have increased our savings in these areas through renegotiation with suppliers and rationalisation of our operations.

We are not currently approving further new land acquisitions in the US and we are exercising our right to exit option deals where the price is no longer attractive. We are also reducing the amount of cash invested in work in progress through a number of initiatives to lower the level of inventory homes in our operations.

These short term actions will both maintain the underlying value of the business and put us in the best position to reinvest in new sites as value becomes available.

The merger provides the North American business with:

• Strong geographical overlap, with critical mass in more of its markets;
• A broader product offering;
• Synergy savings; and
• Combined homebuilder/land developer business model.

We are now operating as a combined business, with four regions and a total of 13 divisions. All of the personnel decisions were taken by 31 July 2007, with all property moves completed by 30 September 2007. An implementation programme for a common integrated suite of business systems is underway and is expected to be complete by early 2009.

We remain on target to deliver merger related cost savings at an exit rate of £20 million by the end of 2009, in addition to the market related savings outlined above. The majority of these savings are expected to impact on 2008.

* Profit on ordinary activities before finance costs, exceptional items and amortisation of brands.
** The basis of preparation of pro forma financial information is set out in Additional Pro Forma Unaudited Financial Information for Continuing Operations.