Bellway
Annual Report 2016

Plain-text annual report

Annual Report and Accounts 2016Building Homes, Building Value Bellway p.l.c. Annual Report and Accounts 2016Front cover images: Developments by each of our operating divisions1. North East – Cleadon Village, South Shields,South Tyneside. 2. South London – Four Oaks, Hurst Green,Surrey.3. West Midlands – Dickens Manor, DickensHeath, Solihull.4. Northern Home Counties – Studham Rise,Studham, Bedfordshire. 5. Essex – Mascalls Park, Brentwood, Essex.6. North West – Oak Meadow, Middlewich,Cheshire.7. Wales – Edenbrook, Ystradowen, Glamorgan.8. East Midlands – The Maltings, Barleythorpe,Rutland.9. Scotland – Fardalehill, Kilmarnock, Ayrshire.10. Manchester – Cotton Meadows, Bolton,Greater Manchester.11. Yorkshire – Parkside, Leeds, West Yorkshire.12. Thames Gateway – Hampton Grange,Bromley, Kent.13. Wessex – The Milldown, Blandford Forum,Dorset.14. South Midlands – Hathaway Gardens,Stratford-upon-Avon, Warwickshire.15. South West – Lyde Green, Bristol.16. North London – Bentley Place, Hammersmith,London Borough of Hammersmith and Fulham.17. Kent – Imperial Park, Maidstone, Kent.18. Thames Valley – Great Western Park, Didcot,Oxfordshire.19. Durham – launch of new division1 August 2016.1.3.4.8.12.16.13. 14. 15.18.17. 19.5.9.6. 7.10.11.2.After another record year, we remain focussed on our long-term growth strategy to help us build on our success in 2016/17 and beyond.Building on 70 years of homebuilding experience, Bellway has grown from a local north east of England family-owned business to a national FTSE 250 housebuilder. During the 2015/16 year we sold 8,721 homes, paid £105.4 million in dividends and employed an average of 2,366 employees.06 07 08 20 25 26 31 33 Chairman’s StatementStrategyBusiness ModelRisk ManagementGoing Concern and Long-Term Viability StatementsChief Executive’s Operating ReviewGroup Finance Director’s ReviewCorporate ResponsibilityGovernancepage 4040 42 44 48 49 54 69 73 Board of Directors and Group General Counsel and Company SecretaryChairman’s Statement on Corporate GovernanceCorporate Governance ReportNomination Committee ReportAudit Committee ReportReport of the Board on Directors’ RemunerationReport of the DirectorsIndependent Auditor’s Report to the Members of Bellway p.l.c. onlyAccountspage 7676 76 77 79 80 81 86 Group Income StatementStatements of Comprehensive IncomeStatements of Changes in EquityBalance SheetsCash Flow StatementsAccounting PoliciesNotes to the AccountsAnnual Report and Accounts 2016 Bellway p.l.c. 01For further details on our business please visit:Other Informationwww.bellway.co.ukpage 106About Us106 107 109 110 111 112 page 02Five Year RecordGlossaryShareholder InformationAdvisers and Company SecretaryFinancial CalendarNotes02 04 Key HighlightsAt a GlanceStrategic Reportpage 06+40.3%2014 2015 2016108.077.052.0Operating margin (%)22.0+160bps2014 2015 201622.020.4(1)17.2Profit before taxation (£m)497.9+40.6%2014 2015 2016497.9354.2246.0(2)02 Bellway p.l.c. Annual Report and Accounts 2016ABOUT USNet asset value per ordinary share Key Highlights(p)Financial highlights1,522Notes:1. Stated before exceptional item (see note 5 to the accounts).2. Restated following the adoption of IFRS 10 ‘Consolidated Financial Statements’ and IFRS 11‘Joint Arrangements’.+18.4%Group revenue 2014 2015 2016(£m)1,5221,2861,1182,240.7Return on capital employed +26.9%(%)28.2+430bps2014 2015 20162,240.71,765.41,484.8(2)2014 2015 2016Operating profit 28.223.9(£m)(1)492.019.6+36.5%2014 2015 2016492.0360.4(1)255.6(2)Earnings per ordinary share (p)328.7+42.0%2014 2015 2016328.7231.5157.0Proposed total dividend per ordinary share (p)108.0-3.4%2014 2015 201634,97936,21135,434Order book value at 31 July (£m)1,117.1+2.7%2014 2015 20161,117.11,087.9924.3Average selling price Annual Report and Accounts 2016 (£)Bellway p.l.c. 03252,793Operational highlightsCompleted sales (homes)8,721+12.5%2014 2015 2016+12.9%8,7217,7526,8512014 2015 2016Cash expended on land and land creditors in the year 252,793223,821213,182(£m)670.0+8.1%2014 2015 2016670.0620.0460.0Owned and controlled land bank (plots)34,979Building value at a local and national level – our Group structureWe are proud of our headquarters in Newcastle upon Tyne, from where we started 70 years ago and we now operate from 19 trading divisions which are located in the main population centres in England, Scotland and Wales. This structure enables our divisional management teams to use their local knowledge and working relationships to buy land, design, build and sell homes which are attractive to our customers and help to build local communities. The divisional teams are in turn supported by our three Regional Chairmen, who are each responsible for the oversight of a number of divisions, and by our specialist CR, finance, HR, IT, land, legal, planning, sales and technical Head Office teams.Building value locally – our product and customer mixWe build and sell high quality homes to suit local housing styles and our customers’ budgets from one-bedroom apartments up to five-bedroom family homes, as well as providing social housing to housing associations. Our focus is on providing desirable traditional family housing outside of London and apartments within the London boroughs, predominantly in zone 2 and beyond. 04 Bellway p.l.c. Annual Report and Accounts 2016ABOUT USAt a GlanceNorth East – Earsdon View, Shiremoor, North Tyneside.North London – Westside, Brentford, London Borough of Hounslow. East MidlandsYorkshire41 Building value locally – our geographic spreadEssex1217451510816181417511962031319271 Kent6 Manchester7 North East8 North London9 North West10 Northern Home Counties11 Scotland12 South London13 South Midlands (opened February 2016)14 South West15 Thames Gateway16 Thames Valley17Annual Report and Accounts 2016 Bellway p.l.c. 05WalesOur office locations18 Head OfficeWessex219 Durham (opened 1 August 2016)West Midlands320 This record set of results could not have been achieved without the outstanding contribution of those who work for and with the Group, enabling Bellway to safely and responsibly increase the number of homes sold for the seventh successive year. I would like to place on record the Board’s gratitude to all those who have contributed to this outstanding performance.John WatsonChairman17 October 201606 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORTChairman’s Statement2014Proposed final dividend per ordinary share “ The strong trading performance and resultant increase in earnings has resulted in the NAV of the Group growing by 18.4%.”John Watson Chairman(p)Introduction74.0I am delighted to report yet another excellent set of results for Bellway, with new records in respect of volume, operating margin and earnings. The Group is taking advantage of the strong market conditions, continuing its disciplined growth strategy, whilst maintaining a strict focus on return on capital employed ('ROCE'). In doing so, earnings per share has risen further by 42.0% to 328.7p per share (2015 – 231.5p per share).+42.3%Strategy for growth36.0201552.0201674.0Notwithstanding the risks to the wider economy following the result of the EU Referendum, the ongoing demand for new homes across the country is strong, supported by a low rate of unemployment and good availability of affordable mortgage finance, with this further enhanced by the government’s continuing support through the Help to Buy scheme. Interest rates remain low and the outlook is that this favourable trading environment will continue for the foreseeable future.Bellway has a strong balance sheet and operational capacity for growth, trading from 19 geographically spread divisions, six of which have been opened over the last three years. Longer-term, there remains a structural shortage of homes within the UK and Bellway, set against this favourable backdrop, is well placed to continue growing its contribution to the supply of new homes.Long-term value for shareholdersThe aim of Bellway’s growth strategy is to deliver enhanced long-term value for shareholders through the payment of an increasing dividend, together with an ongoing increase in net asset value ('NAV'), arising from reinvestment of retained earnings in order to secure further growth. The Group has achieved a 619p growth in NAV since the 903p attained in July 2007, before the onset of the global financial crisis. In addition, Bellway has paid dividends equivalent to 295.28p per share since July 2007, representing total growth in value of 914.28p per share and an accounting return of 101%. Revenue is 65% higher than that achieved in July 2007 and profit after tax is over 2.4 times ahead. The reinvestment of earnings back into the business continues to have a compounding effect on growth and this, together with a flexible dividend policy, is delivering long-term and superior returns for shareholders. For the year ended 31 July 2016, the strong trading performance and resultant increase in earnings has resulted in the NAV of the Group growing by 18.4% to 1,522p per share (2015 – 1,286p). Furthermore, it has also enabled the Board to recommend a 42.3% increase in the final dividend to 74.0p per share (2015 – 52.0p), increasing the proposed total dividend per share for the year by 40.3% to 108.0p (2015 – 77.0p). If approved the total dividend will be covered by earnings three times (2015 – three times). For the foreseeable future andassuming the opportunity for growth remainsunchanged, the Board expects to maintain adividend cover of around three times earnings.People and supply chain Customer demand is robust across the country. Help to Buy extended until 2021 in England and enhanced in London. Competition in mortgage market and low interest rates ensure new homes remain affordable. Household formation rate.Supply Good quality land opportunities at attractive rates of return. Positive planning environment supported by Housing Bill. Labour availability is manageable.Capacity New 18th division opened in Coventry during the year and a further division opened on 1 August 2016 in County Durham. Six new divisions opened since August 2013. Robust land bank. Balance sheet capacity provides ability to invest.Our operational capacity is currently centred around a nationwide structure of 19 trading divisions. The newest of these divisions is South Midlands which opened in February 2016 and is based in Coventry, and Durham, which opened in August 2016. Our strategy of volume growth is best achieved through complementing capacity in existing divisions with the expansion of the divisional structure in areas of high demand.We have significant balance sheet capacity with net assets of £1,867.0 million, including net cash of £26.5 million and undrawn bank facilities of £467.5 million as at 31 July 2016. As a result of these factors we have the capacity to invest in land that either meets or exceeds our investment criteria, which include gross margin and ROCE.Annual Report and Accounts 2016 Bellway p.l.c. 07StrategyBuilding on our success…Our strategy for growthOur short and medium-term  objectivesTHE GROWTH WE ACHIEVE THROUGH OUR BUSINESS MODEL IS EXPLAINED ON PAGES 08 – 19 Expand and enhance geographic coverage by opening new divisions principally in conurbations where demand is high and investing further in our existing operational divisional structure. Continue to invest in land in areas of high demand that meet  or  exceed our minimum hurdle rates. Achieve detailed planning permission (‘DPP’) on land. Proactive balance sheet management. Build the right product. Focus on retention, training and recruitment of people. Consistently excellent customer experience. Ensure sufficient resources are  available in our specialist Head  Office teams and that robust Group-wide systems are in place to support our expanding divisional network in delivering our growth strategy.To achieve our overall strategy we employ short and medium-term objectives. Each division and our Head Office teams are aligned behind this common set of objectives.Disciplined volume growthValue creation for shareholders through:• Progressive dividend policy• Reinvestment in the business generating growth in NAVDemandAnnual Report and Accounts 20162014STRATEGIC REPORTNo. of homes sold Business Model(homes)Managing the planning processSelecting theright landDelivering an excellent customer experienceConstruction of the right productInvesting in our people8,721The detailed aspects of the business model are shown on the next few pages, together with recent progress achieved and our future plans. We also report on the key performance indicators (‘KPIs’) we use to measure our performance against our strategy.+12.5%6,85120157,75220168,721Our principal KPIsThe Group has five principal KPIs and a larger number of secondary KPIs to support them. The principal KPIs are shown below and on page 9.Note:1. Stated before exceptional item (see note 5 to the accounts). Operating margin (%)22.0+160bps201520.4(1)201417.2201622.0 ROCE (%)28.2+430bps201523.9(1)201419.6201628.2 Reinvest profitEarnings for employeesPayments to sub-contractors and suppliersInvestment in communities through section 106 infrastructure paymentsDividendsShare capitalRetained profitBank financeBuy landBuy materialsEmploy peopleEngage sub-contractorsBuild and sell new homes and apartments which meet our customers' aspirations+++++++++The following timeline demonstrates how we create value from purchasing land to selling homesBuilding homes, building value08 Bellway p.l.c. Investing in our peopleProviding our people with a rewarding and fulfilling career, enabling them to achieve their full potential and deliver high levels of performance, contributing to the success of the business.For more information see pages 10 – 11For more information see pages 12 – 13For more information see pages 14 – 15For more information see pages 16 – 17For more information see pages 18 – 19 Net asset value per ordinary share (p)1,522+18.4%20161,52220141,11820151,286 Annual Report and Accounts 2016 2014Bellway p.l.c. 09Proposed total dividend per ordinary share Selecting the right land(p)Acquiring high quality sustainable sites in areas of high demand that meets or exceeds our financial and non-financial acquisition criteria is key to the success of the business.108.0Managing the planning process+40.3%Working with local planning authorities and communities in compliance with the National Planning Policy Framework ('NPPF') in order to deliver effective and sufficient planning consents for the business. 52.0201577.02016108.0Construction of the right product Providing an appropriate product range on housing and apartment developments, at prices that are affordable for our customers and which are built efficiently and to a high quality. Delivering an excellent customer experienceMaking sure that our customers receive an excellent experience when purchasing a new home, both prior to and following moving in.(%)28.2201523.9(2)201628.2Sufficient land bank of plots with DPP(1) 2015Achieved10 Bellway p.l.c. (1)Annual Report and Accounts 2016AchievedSTRATEGIC REPORTBusiness ModelSelecting the right land continuedDescription Land opportunities are identified by our divisional land and planning teams and the strategic land team using their local knowledge and contacts. A viability assessment and appraisal is prepared by the division, which is assessed in detail at regional and then Group level, where the final decision is taken on whether or not to purchase the site. Board approval may also be required depending upon the value and nature of the proposed acquisition. Land acquisitions are considered against a number of criteria, such as gross margin, ROCE, capital requirements, forecast sales rates and planning prognosis. The number of large long-term sites we own is strictly controlled to avoid having too much capital tied up or concentrated in one location. We often secure land without the benefit of an implementable DPP, typically brownfield sites, and use the expertise of our land teams to obtain a DPP which thereby adds value and enables higher returns.KPIs(1)Failure to have an adequate supply of land would put our ability to achieve our volume growth targets under pressure. We therefore link part of the executive directors’ bonuses to the delivery of a sufficient land bank to meet our growth aspirations2016(1)Note:1. Link to remuneration. For further information go to pages 54-68.2. Stated before exceptional item (see note 5 to the accounts).. ROCE is a key indicator of how we are delivering our strategy of building shareholder value which is reliant on land acquisition and the subsequent performance of our developments. Gross margin enables us to monitor the robustness of our land purchasing process and the level of profit on land purchases. All of these KPIs have improved during the year.Gross margin (%)25.7201524.2(2)201625.7ROCE How this links to strategy We need to have an adequate supply of land to meet our volume growth aspirations. The proposed land acquisition must meet or exceed our minimum gross margin and ROCE acquisition criteria. How this links to Corporate Responsibility By building homes on brownfield land we are contributing to the regeneration of areas in mainly urban locations. By collaborating with local communities we are delivering high quality sustainable housing developments.For more information see pages 33-39The risk we mitigate The inability to source suitable land at our minimum gross margin and ROCE hurdle rates. During the year there has been no change in this risk.For more information see pages 20-24How we performed in 2015/16 We strengthened the Head Office land team with the appointment of three regional strategic land directors. We increased the number of plots we own and control with DPP by 3,468 plots to 24,879 plots. The number of plots owned and controlled awaiting implementable DPP (‘pipeline’), has reduced by 4,700 to 10,100 plots, reflecting our success at obtaining DPP in the period and also as a result of the disposal of our interest in Barking Riverside Limited (see note 5 to the accounts). We have an interest in a number of long-term strategic land holdings, of which 6,300 plots have been identified as benefiting from a positive planning status. We only acquired land which met or exceeded our minimum acquisition criteria.Our plans for 2016/17 We aim to ensure that plots in our owned and controlled land bank with DPP at the year end are sufficient to meet the following year’s growth targets and to progress land through the planning system to contribute towards subsequent years' growth targets. We will continue to acquire land which meets or exceeds our acquisition criteria. We will continue to focus our land buying in areas of high demand and in sustainable locations. Annual Report and Accounts 2016 Bellway p.l.c. 11What we rely on Where sites require planning consent it may take many months to progress a parcel of land from contract through the planning consent process before we can start building and selling homes. We therefore require our land teams to purchase sufficient sites to ensure that we have the necessary amount of land to meet our short-term volume growth targets as well as a pipeline of land for subsequent years.No. of plots in ‘pipeline’ (plots)201514,800201610,100No. of plots in owned and controlled land bank with DPP (plots)201521,411201624,879No. of plots in strategic land bank with positive planning status (plots)20156,00020166,300No. of plots acquired with DPP 12 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORT(plots)Business Model20152,82020164,924 continuedNo. of plots converted from medium-term 'pipeline' Description(plots) Our land bank is comprised of three tiers: i) land with DPP; ii) medium-term ‘pipeline’ land;iii) strategic long-term land (eitherowned or under option) which has thebenefit of a positive planning status inapproved or emerging local plans. Our divisional and Head Office planning teams work closely with local authorities and communities to obtain DPP to construct homes which reflect planning and vernacular requirements. The divisional and Head Office planning departments progress a combination of medium-term ‘pipeline’ land and land from our strategic land bank throughout the planning system.20156,90920167,265Managing the planning processKPIsThese KPIs enable us to monitor the number of plots in each tier of our land bank to ensure they remain sufficient to help us deliver our strategy of volume growth. At the end of the year we had an appropriate number of plots in each land bank tier. How this links to strategy Without sufficient land with DPP we would be unable to achieve our volume growth targets. Furthermore, by not efficiently progressing land through the planning process, capital could be tied up in land for longer than necessary which may result in a reduction in ROCE. We continue to focus on acquiring land through our pipeline, often acquiring sites conditionally with a deposit. This approach to land buying helps secure a medium-term land supply, without consuming excessive capital. Strategic land helps to augment our land bank and complements our strategy of volume growth.How this links to Corporate Responsibility We consult with local residents as part of the planning process to help us build the homes our customers desire locally. We make contributions to local communities through section 106 and Community Infrastructure Levy (‘CIL’) payments. For more information see page 33-39The risk we mitigate Delays and increasing complexity in the planning process. During the year there has been no change in the risk.For more information see page 20-24How we performed in 2015/16 We secured DPP on sufficient land during the year to meet our requirements for 2016/17. The number of plots that were converted from our medium-term ‘pipeline’ land bank to land with DPP in 2015/16 was 7,265 plots (2015 – 6,909). We invested in sufficient ‘pipeline’ land to provide plots to progress through the planning process. We increased the number of strategic plots with a positive planning status from 6,000 to 6,300 plots.Our plans for 2016/17 We aim to have sufficient plots with DPP at 31 July 2017 to meet our 2017/18 volume growth aspirations. We aim to invest in sufficient ‘pipeline’ land to provide plots which can be reliably progressed through the planning process and replenish land being actively developed without tying up excess capital. We aim to increase the number of strategic option sites to complement the other tiers of the land bank.Annual Report and Accounts 2016 Bellway p.l.c. 13What we rely onOur planning teams build collaborative relationships with local councils, residents and interest groups so that our completed developments benefit the communities in which they are built and reflect local needs. We also rely on government support to make improvements to the planning process such as the continuation of the NPPF.NHBC health and safety incident rate20150.766(1)20160.936(1)No. of NHBC Health andSafety Awards (awards)2015520169No. of Pride in the Job Awards (awards)14 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORT201533201643Business ModelConstruction of the right productNo. of RIDDOR lost time accidents per 100,000site operatives continued(no.)Description2015430.752016445.19 We construct a wide range of homes to suit a variety of budgets and lifestyles. Our homes are built to specific building, technical, health and safety regulations and other regulatory requirements as well as to our own quality standards. We take very seriously the health and safety of our employees and sub-contractors who work on our sites and that of visitors to our sites. We strive to maintain long-term working relationships with reputable sub-contractors to reduce health and safety risks and to ensure the availability and quality of materials and labour. We seek to ensure that we have suitable building materials available at competitive prices to enable us to construct homes to the high standards expected of us by our customers, within budget and on time. We are signatories to the Prompt Payment Code and ensure that our sub-contractors and suppliers are paid in accordance with contractual requirements. We closely monitor work in progress to ensure that build rates are consistent with sales rates.KPIsThe health and safety of our employees, sub-contractors and visitors on site is paramount. We therefore include a health and safety target as part of the executive directors’ potential bonus payment*. Improvements in health and safety performance are indicated by a lower NHBC health and safety incident rate and by a reduction in the number of RIDDOR lost time accidents. Unfortunately the number of RIDDOR lost time accidents rose by 3%.Note:1. Link to remuneration. For further informationgo to pages 54-68.Our plans for 2016/17 A phased roll out of the new standard house type range across part of England. We will review and refresh our supplier arrangements to ensure we continue to achieve certainty of supply at a good price whilst further improving our controls on quality and compliance. We will target improvements during the year through improved design, construction processes and training. The Board will continue to monitor the health and safety performance against targets at each Board meeting. Our sites will continue to be regularly inspected by both internal and external specialists to ensure high standards of health and safety compliance and performance are maintained. We will have focussed site briefings this year on how to reduce slips, trips and falls to try to reduce the number of RIDDOR lost time accidents.What we rely onExperienced construction people, strong relationships with skilled sub-contractors and Group purchasing arrangements with suppliers and manufacturers are key to enabling us to deliver homes built to the right standard, at the right time and at the right price.How this links to strategy The homes we design and build must meet our customers’ needs and expectations and we use customer feedback to monitor this. Good quality homes enhance customer satisfaction and ultimately our reputation, which aids our ability to sell the homes we build. This in turn helps us achieve our strategy of volume growth. Having suitable materials at competitive prices (controlled through Group purchasing arrangements) enables us to meet our growth aspirations, helps support our returns and gives us better control over our cost base. It is important to have high standards of health and safety on our sites to create the appropriate working environment to deliver a good quality product and protect the well-being of our employees and sub-contractors and that of visitors to our sites. Ensuring we build the type of homes our customers want to buy and matching our build rates to our sales rates reduces the amount of capital tied up in work in progress and unsold finished properties, which could have an adverse impact on our ROCE.How this links to Corporate Responsibility The health and safety of everyone who works on and visits our sites is paramount. Reducing waste on-site delivers cost savings for the business and reduces the amount of waste sent to landfill. Building strong long-term relationships with sub-contractors and suppliers and manufacturers of materials generates benefits for us, those we do business with and the communities in which we operate. Adhering to the commitments we have signed up to in the Prompt Payment Code is consistent with our aim to be regarded as a responsible and reliable national housebuilder.For more information see page 33-39The risks we mitigate Shortage of appropriately skilled construction people and sub-contractors. During the year this risk has increased in certain areas of the country. Shortage of building materials at competitive prices. During the year there has been no change in this risk. There are significant health and safety risks inherent in the construction process. During the year there has been no change in this risk.For more information see page 20-24Annual Report and Accounts 2016 Bellway p.l.c. 15How we performed in 2015/16 We have trialled our standard house types and construction specification and will use the experience gained from those trials to begin a phased roll out across part of England. This standardisation will help us to control build cost and the quality of our homes. We have reviewed all of our standard contracts and trained our key employees in their use to help reduce the risk of cost escalation and claims during construction. Our construction programmes have benefited from certainty of materials' supply through good forward planning and supplier relationships. A good example of this is that the shortages of blockwork across the industry in 2016 was well managed by our team and did not hold up our production schedule. The Board continues to pay close attention to our health and safety performance at each Board meeting by monitoring performance against pre-determined targets and objectives. Our sites were regularly inspected by both internal and external specialists to ensure that high standards of health and safety compliance were maintained. We have recruited an additional health and safety manager dedicated to our more complex London schemes.(homes)20157,75220168,721Forward order book at31 July (£m)20151,087.9 20161,117.1 16 Bellway p.l.c. Reservation rate Annual Report and Accounts 2016(no.)STRATEGIC REPORT20151532016169Delivering an excellent customer experienceHBF/NHBC housebuilder status Description(star) We aspire to sell homes that are desirable and affordable for our customers. The satisfaction of our customers is paramount and ultimately this will determine the success or otherwise of our business. We aim to deliver an excellent experience to our customers, both before and after occupation of their homes, building upon our reputation as a quality national housebuilder. We aim to increase the number of homes sold through continued investment in appropriate land and our construction teams.Business Model continuedKPIsWe have chosen the following KPIs as they demonstrate progress made by the Group in delivering its strategy of volume growth. We believe that customer satisfaction plays a very important part in achieving this volume growth and part of the bonus available to the executive directors is based upon improvements made in customer service2015420164(1).All of these KPIs have improved during the year, apart from our 4 star housebuilder status, which has remained the same.Note:1. Link to remuneration. For further informationgo to pages 54-68.Customer care satisfaction (%)201583.8(1)201685.7(1)No. of homes sold How this links to strategy It is important to have sufficient demand and mortgage finance availability for the homes we construct to ensure the Group is able to meet its volume growth targets. Ensuring that our customers have an excellent experience is something we aim to deliver at all times. It also helps to perpetuate a positive reputation for the Group and assists in generating further sales through personal recommendation and brand awareness. We monitor customer satisfaction using feedback from our customers.How this links to Corporate Responsibility We continue to improve the energy efficiency of the homes we build by building homes which are on average more energy efficient than that required by building regulations. Customer handover folders now contain information on sustainable travel, local recycling centres and energy efficiency advice. For every completed customer survey we make a donation to our national charity partner.For more information see page 33-39The risks we mitigate Mortgage availability. Interest rate changes. Government housing policy.During the year there were no material changes in these risks although interest rates have fallen which has improved mortgage affordability. Market uncertainty following the EU Referendum. This is a new risk identified during the year.For more information see page 20-24How we performed in 2015/16 Our expanding national network of divisions, together with the development of attractive, affordable homes ranging from apartments to traditional five-bedroom homes has helped increase the number of homes sold and the average selling price. 48% of our apartments sold in the year were in the London boroughs. We have continued to train customer-facing employees throughout the year and are pleased to report that our independent net customer satisfaction score has increased slightly to 85.7%. We successfully opened one new division during the financial year which will help to augment our sales performance.Our plans for 2016/17 We will continue to sell a wide range of high quality homes to suit a variety of budgets in locations sought after by our customers. We will continuously revisit and refresh our training for all customer-facing employees. We aim to increase the number of new homes we bring to the market and thereby increase the number of homes we sell. We will seek to regain our HBF/NHBC 5 star housebuilder status. We have opened another operating division, based in County Durham, on 1 August 2016. We will increase the charitable donation for every completed customer survey from £5 to £10.Annual Report and Accounts 2016 Bellway p.l.c. 17What we rely on Sales and customer care teams who are well trained, have the right attitude and the resources available to them to deliver excellent service to our customers both before and after occupation of their home. Site Managers who are responsible for, and take genuine pride in, the quality of each finished home that we build.Graduates and apprentices(no.)201573201683Site Managers and Assistant Site Managers with NVQ Level 6 or above (%)201534201648Customer care training (hours)20153,58620165,800Employee turnover 18 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORT(%)Business ModelInvesting in our people201519.1201623.4 continuedKPIsDescriptionWe use the following KPIs as indicators of how successful we have been during the year in managing our people. Employee turnover and the proportion of our people who have worked with us for more than ten years indicate how good we are at retention. During the year employee turnover increased as a result of a general skills shortage in our sector, however, the proportion of our people who have ten or more years’ service also increased. The other KPIs demonstrate our progress against training for our existing workforce and our success in recruiting new entrants to the industry. Our people are key to the success of our business and we aim to provide them with a rewarding and fulfilling career.Employees who have worked for the Group for ten years or more (%)201518201621How this links to strategy Our employees are essential to the delivery of our strategy through the value they add at all stages of our operations.How this links to Corporate Responsibility Further improvements in training and development. Increase in the minimum employer matched pension contribution rate to 4% of salary.For more information see page 33-39The risk we mitigate The inability to attract and retain appropriate people. During the year this risk has not changed.For more information see page 20-24How we performed in 2015/16 We have increased the number of graduates and apprentices we recruit and train by 14%. Work continues on developing our Human Resources strategy, which is now led by a newly appointed Group Human Resources Director. We continue to increase the level of training provided to employees involved with sales, customer care and health and safety. The percentage of our Site Managers and Assistant Site Managers who have now achieved NVQ Level 6 qualifications or above has increased by 140bps. We increased the minimum employer and employee pension contributions for all employees from 3% to 4% of basic pay respectively. In June we launched the Bellway Learning Hub, an online learning platform which provides e-learning courses and online resources for new and existing employees.Our plans for 2016/17 Develop a structured induction programme. Create a suite of mandatory and developmental e-learning courses. Develop and implement management development training, tools and guidance. Review and develop a succession planning framework. Develop a structured apprenticeship and graduate training programme and increase the number of graduates and apprentices we recruit and develop.Annual Report and Accounts 2016 Bellway p.l.c. 19What we rely on Our skilled, professional and dedicated employees and sub-contractors are provided with the right level of training, support and resources.20 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORTRisk ManagementAudit Committee:• Oversee risk management policy,processes and structures.• Receive routine risk reports and utiliserisk information to review and approveassurance plans and priorities.• Provide assurance over riskmanagement to the Board.• Monitor progress against actionsand recommendations.Executive Management:• Review, challenge and approvethe risk management policy andcorresponding processes andstructures.• Review and challenge risk informationagainst stated business objectives.• Approve risk treatments and actions.• Approve risk reports for the Board.• Review and agree risk appetite.The Board:• Overall responsibility forrisk management.• Review, challenge and approvethe risk management policyand corresponding processesand structures.• Review and agree risk appetite.• Review and challenge riskreports received.Head of Risk:• Design and implement riskmanagement approach, supported by appropriate risk management policy.• Facilitate and implement riskmanagement approach and policy.• Undertake risk management activitiesand produce reports in accordancewith risk management policy.We have a long-established and effective framework for managing risks. It is the responsibility of management across the Group to implement the Board’s policies on risk and internal control.Our risk management objectives are to:assess risks against an agreed appetite for risk, which is regularly reviewed;ensure risk management roles and responsibilities are defined and understood;improve the balance of risk and return through developing and maintaining a proactive, risk aware culture;ensure there is a consistent approach for the identification, assessment, control, monitoring, follow up and reporting of risks;develop and implement action plans so as to ensure that risks are within our agreed risk appetite and that improvements are made to our control environment;ensure the approach to risk management meets the needs of the business, senior management and all key stakeholders.ppppppppppppRisk management roles and responsibilitiesRisk management is the responsibility of every employee. In undertaking their individual roles and responsibilities, employees are assisting in managing risk. Specific to our detailed risk management policy and processes, roles and responsibilities are:Key: Reports to Direct and monitorSeverity of risksTreat To bring within risk appetiteActions Mitigate risks (where needed)Report Monitor and report progressAnnual Report and Accounts 2016 Bellway p.l.c. 21Risk management processManagement maintains a comprehensive risk register of all identified risks, including operational, financial, compliance and strategic risks. The risk management processes have been set up in such a way so as to ensure all aspects of the business are considered, from strategy through to business execution. Specifically, specialist areas are also incorporated into the risk processes, for example, Corporate Responsibility and joint ventures.The risk register is reviewed on a regular basis as part of the management reporting process resulting in the regular assessment of each risk, its severity and any required mitigating actions. The severity of risks is determined based on a defined scoring system assessing risk impact and likelihood.Derived from the comprehensive risk register is a summary of principal risks specifically reserved for review by the Board. This is mainly, but not exclusively comprised of risks, after mitigation, which score above a certain threshold. This summary is reviewed by the Board throughout the year, with the Board systematically considering the risks taking into account any changes which may have occurred. Once a year, via the Audit Committee, the Board determines whether the system of risk management is operating effectively.More information on risk management and internal controls is included within the Audit Committee Report on pages 49 to 53. Identify All business areasEvaluate Annual Report and Accounts 2016STRATEGIC REPORTRisk Management continuedWE HAVE IDENTIFIED, EVALUATED AND PUT IN PLACE MEASURES TO MITIGATE THE PRINCIPAL RISKS FACED BY THE BUSINESS, AS SHOWN BELOW.Risk and descriptionRelevance to strategy KPIs Mitigation Change in yearLandInability to source suitable land at appropriate gross margins and ROCE.• Failure to buy land at the right margin would have a detrimentaleffect on future returns.• Insufficient land would affect ourvolume growth targets.• EPS.• ROCE.• Land bank with DPP.• Gross margin.• We prepare thorough pre-purchase due diligence and pre-purchase viabilities on all of our proposed land purchases. Theseare kept under regular review to ensure capital is invested appropriately.• Authorisation of all land purchases (regardless of value) in accordance withGroup procedures at Head Office.The land market remained competitive during the year. We have strengthened our land teams, both through new appointments and new regional roles.PlanningDelays and complexity in the planning process.• Failure to obtain planning within appropriate, pre-planned timescales would have a detrimental impact on our growthprospects and have an adverse effect on returns.• EPS.• ROCE.• Number of plots acquireddirectly in land bank with an implementable DPP.• Number of plots convertedfrom medium-term pipeline to land with DPP.• Number of plots in ourpipeline land bank.• Number of plots identified in our strategic land bank with a positive planning status.• Centralised and divisional planning specialists provide advice and supportto the divisions to assist with securing planning permissions.• Management of immediate, medium-term and strategic land to maintain an appropriate balance of land in terms ofquantity and location.Despite complexity in the planning process, this risk has continued to be well managed in the year, with the number of planning permissions granted increasing.Construction resourcesShortage of appropriately skilled sub-contractors and shortages of building materials at competitive prices.• Failure to secure required resources causes delays in construction, impacting the abilityto deliver volume growth targets.• Pricing pressure wouldimpact returns.• EPS.• Employee turnover.• Number of homes sold.• Systems are in place to select, appoint,monitor and manage sub-contractors.• Competitive rates are in place forsub-contractors.• Group purchasing arrangements arein place.• Continued review of forward planningand key supplier performance.• We build long-term relationships with sub-contractors and always aim to treatthem fairly and pay promptly.This risk has increased slightly during the year due to increased competitive pressure in the sub-contractor labour market and as a result of uncertainties following the EU Referendum.Health and safetyThere are significant health and safety risks inherent in the construction process.• In addition to the moral obligation and the requirement to act in a responsible manner, injuries to any individual while at one of our business locations could delay construction and result in criminal prosecution, civil litigation and reputational damage.• Number of RIDDOR seven-day lost time accidents.• NHBC health and safetybenchmark.• NHBC Health and SafetyAwards.• The Board considers health and safetyissues at every meeting.• Regular visits to sites by senior management (independent of our divisions) and external consultants to monitor health and safety standards and performance against the health and safetypolicies and procedures.There have been no changes to this risk during the year.22 Bellway p.l.c. Failure to comply with legislation and regulatory requirements.• Lack of appropriate procedures and compliance would result in delays in land development and construction, have a detrimentalimpact on profitability and reputation and potentially lead to financial penalties and other regulatory consequences.• Volume growth.• EPS.• Central Secretariat, Legal and Technical functions advise and support divisions on compliance and regulatory matters.• Group-wide policies, procedures andtraining for key regulatory matters.There have been no changes to this risk during the year.Annual Report and Accounts 2016 Bellway p.l.c. 23Risk and descriptionRelevance to strategy KPIs Mitigation Change in yearEnvironmentThe impact of our operations on the environment must be managed in a responsible and sustainable manner.• Ineffective management of environmental matters would lead to financial loss, reputationaldamage and a potential inability to build and sell homes.• Percentage of compounds with energy saving devices.• Energy efficiency ofour homes.• Waste diversion rates.• We have a range of procedures in place to address issues around ecology, biodiversity, resource use, waste management and sustainable sourcing, with the objective that a development should create an attractive and sustainableenvironment.There have been no changes to this risk during the year.SalesThere are a number of external factors that could affect our ability to generate sales:• market uncertaintyfollowing the EU Referendum;• access to creditfacilities;• mortgage availability;• interest rate changes; and• government housing policy.• The ultimate impact of these external factors would be onthe ability to sell homes and apartments and on returns.• EPS.• ROCE.• Number of homes sold.• Forward order book.• Reservations rate.• Customer care satisfaction.• Ongoing monitoring of key business metrics such as reservation rates, cancellation rates and customer carescores.• Action plans developed from monitoringof metrics.• Active management of construction ratesto match with sales rates.• Product range and pricing strategy determined based on regional market conditions.• Use of sales incentives, such as part-exchange, to encourage the selling process.• Use of government-backed schemesto encourage home ownership.This risk has increased slightly during the year due to uncertainties following the EU Referendum but partially offset by reducing interest rates.Human resourcesInability to attract and retain appropriate people.• Failure to attract and retain people with appropriate skills will affect ourability to perform and deliver our volume growth target.• EPS.• Employee turnover.• People who have worked for the Group for ten yearsor more.• Graduates andapprentices.• Number of homes sold.• We have appointed a new Group HumanResources Director who will oversee the development of our people strategy. • Competitive salary and benefits packageswhich are regularly reviewed.• Succession plans in place and key persondependencies identified.• Graduate and apprentice trainingprogrammes in place.This risk has not changed during the year as the labour market has remained competitive.Information technologyFailure to have suitable systems in place and appropriate back up, contingency plans and security policies.• Poor performance of our systems would affect operational efficiency,profitability and our control environment.• EPS. • Group-wide systems are in operation which are centrally controlled with an outsourced support function in place.• Continued investment in systems. • Regular review and testing of our securitymeasures, contingency plans and IT security policies.There have been no changes to this risk during the year.Legal and regulatory complianceThe main risks associated with the Group’s financial instruments held during the year have been identified as credit risk, liquidity risk, interest rate risk and housing market risk. The Board is responsible for managing these risks and the policies adopted, which have remained unchanged during the year, are set out below.Credit riskThe Group’s exposure to credit risk is largely mitigated as the vast majority of the Group’s sales are made on completion of a legal contract, at which point monies are received in exchange for transfer of legal title.There is no specific concentration of credit risk in respect of home sales as the exposure is spread over a number of customers. In respect of trade receivables, the amounts presented in the balance sheet are stated after adjusting for any doubtful receivables, based on the judgement of the Group’s management through using both previous experience and knowledge of the current position (see note 15 to the accounts). In managing risk, the Group assesses the credit risk of its counterparties before entering into a transaction. As part of the disposal of the Group's interest in Barking Riverside Limited, as set out in note 5 to the accounts, the Group has a receivable with a fair value of £27.430 million due from L&Q New Homes Limited. The credit risk associated with this receivable is considered to be low as it is a reputable counterparty. No credit limits were exceeded during the reporting period or subsequently and the Group does not anticipate any losses from non-performance by these counterparties.The Board considers the Group’s exposure to credit risk to be acceptable and normal for an entity of its size, in the industry in which it operates.Liquidity riskThe Group finances its operations through a mixture of equity (comprising share capital, reserves and reinvested profit) and debt (comprising bank overdraft facilities and borrowings). The Group manages its liquidity risk by monitoring existing facilities and cash flows against forecast requirements based on a three-year rolling cash forecast.The Group’s Treasury Policy has, as its principal objective, the maintenance of flexible bank facilities in order to meet anticipated borrowing requirements. The Group’s banking arrangements outlined in note 18 to the accounts are considered to be adequate in terms of flexibility and liquidity for its medium-term cash flow needs. Relationships with banks and overall cash management are co-ordinated centrally. The Group is operating well within its financial covenants and available bank facilities.Short-term cash surpluses are placed on deposit at competitive rates with high quality counterparties. Other than disclosed, there are no financial instruments or derivative contracts. The Board therefore considers the Group’s liquidity risk to be mitigated.In relation to land payables, certain payables are secured on the respective land asset held (see note 17 to the accounts). No other security is held against any other financial assets of the Group.Interest rate riskThe Group’s attitude to interest rate risk and forecast debt is influenced by the existing and forecast conditions prevailing at the time that each new interest-bearing instrument is entered into. This will determine, amongst other things, the term and whether a fixed or floating interest rate is obtained.Interest rate risk reflects the Group’s exposure to fluctuations in interest rates. The risk arises because the Group’s overdraft and floating rate bank loans bear interest based on LIBOR.During the year ended 31 July 2016, it is estimated that an increase of 1% in interest rates applying for the full year would decrease the Group’s profit before taxation by £0.986 million (2015 – £1.399 million).Housing market riskThe Group is affected by movements in UK house prices. These in turn are affected by factors such as credit availability, employment levels, interest rates, consumer confidence and supply of land with planning.While it is not possible for the Group to fully mitigate housing market risk on a national macroeconomic basis, the Group does continually monitor its geographical spread within the UK, seeking to balance investment in areas offering the best immediate returns with a long-term spread of its operations throughout the UK to minimise the effect of local microeconomic fluctuations.EU Referendum24 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORTRisk Management continuedFinancial risk managementAlthough there has been volatility in Bellway’s share price and that of other listed UK housebuilders since the result of the EU Referendum, the uncertainty around the UK’s decision to leave the EU has not translated into a decline in demand for our homes nor any change in the willingness of lenders to provide mortgage finance. We continue to monitor the situation carefully and the economic environment generally and are confident that given our strong balance sheet and disciplined approach to land buying, together with the demand for new homes, that Bellway is well placed to continue its long-term growth strategy.The Group’s financial instruments comprise cash, bank loans and overdrafts and various items such as trade receivables and trade payables that arise directly from its operations. The main objective of the Group’s policy towards financial instruments is to maximise returns on the Group’s cash balances, manage the Group’s working capital requirements and finance the Group’s ongoing operations.The Company’s only financial instruments are cash, other receivables and amounts owed by Group undertakings.Capital managementThe Board’s policy is to maintain a strong capital base to underpin the future development of the business in order to deliver value to shareholders. The Group finances its operations through reinvested profits, bank borrowings, cash in hand and the management of working capital. Management of financial riskAnnual Report and Accounts 2016 Bellway p.l.c. 25Going Concern and Long-Term Viability StatementsGoing Concern StatementAfter conducting a full review, the directors have a reasonable expectation that the Group has adequate resources to fund its operations for the next three years. For this reason, they continue to adopt the going concern basis in preparing the accounts as discussed further on page 81.Long-Term Viability StatementAs required by provision C.2.2 of the UK Corporate Governance Code, the directors have assessed the prospects of the Group over a three-year period, taking account of the Group’s current position and principal risks. The directors consider that a three-year period is appropriate as this is the period covered by the Group’s near-term business plan. To assess the Group’s prospects the directors conduct an annual strategic review of the Group’s business model and strategy, to ensure it remains fit for purpose. A robust assessment was also carried out of the principal risks facing the business that would have an adverse impact on the Group’s viability over the three-year period. The Group has in place considerable flexible bank facilities with three lenders, which provides access to finance in tranches until 2020. In advance of these facilities expiring, a review is undertaken to determine whether a facility needs to be renewed based on the strategy, cash forecast and pricing. The land bank consists of land with DPP to meet our land requirements for the short and medium-term needs of the business bolstered by a further pipeline of sites which are being progressed through the planning process. In addition, the Group has for the last seven consecutive financial years achieved year on year growth in legal completions, revenue and operating margin.Having considered all the factors described above, the directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment. Private Social Total201620162016North3,0706263,696South3,1089484,0566,1781,5747,7523,6515364,1873,6948404,534Group total 7,3451,3768,721Average selling price (£000)201520152015Private Social Total201620162016North212.087.2190.9South290.9132.5253.8251.7114.5223.8220.692.2204.2335.6131.3297.7Group average 278.4116.1252.8“ Demand for new homes has remained robust throughout the year…the land market continues to produce attractive opportunities at good rates of return.”Ted AyresChief ExecutiveTrading performance Demand for new homes has remained robust throughout the year, with the Group taking an average of 169 reservations per week (2015 – 153), an increase of over 10% compared to last year. Interest in new sites has been encouraging, with overall visitor numbers ahead of the prior financial year, whilst monthly ‘hits’ to the Bellway website continued to grow. Customer confidence is robust and the cancellation rate for the year remained low at only 11% (2015 – 11%).More recently, the result of the EU Referendum on 24 June has cast some uncertainty with regards to the wider economic outlook. Reassuringly, reservations net of cancellations, since that date until 31 July, were 13% ahead of the same period in the prior year. The Bank of England’s monetary policy response should help to at least maintain the favourable conditions in which customers are able to purchase a new home.Throughout the year, the pricing environment has remained positive and sales prices achieved on reservations have generally been at, or slightly ahead of the assumptions made when sites were initially acquired. Incentives have been utilised sparingly with their use low by historical standards. One of the main selling incentives continues to be part-exchange on selected developments, with this inducement being used in 7% (2015 – 8%) of reservations. Help to Buy continues to be an important government stimulus and has been used in 32% (2015 – 27%) of reservations. In England, the extension of Help to Buy until 2021 has created additional visibility with regards to the ongoing availability of affordable, higher loan to value mortgage finance. This further supports long-term demand, aiding the Group when making investment decisions. In London, the increase in the maximum Help to Buy equity loan percentage to 40% on 1 February has helped widen access to mortgage finance for potential purchasers, further underpinning the investment in our London business. Since the higher equity share loan was introduced, the use of Help to Buy in the Capital has risen to 39% of reservations. The Group opened a new South Midlands division, located in Coventry in February 2016 and latterly it has opened a further division, located in County Durham, on 1 August 2016. Bellway now has 19 operating divisions, six of which have been opened in the three years since 1 August 2013. The more established new divisions are all performing well and the newest divisions in Coventry and County Durham should make a positive contribution to completions and profitability in the year ahead. The table below shows the number and average selling price of homes completed in the year, analysed geographically, between private and social homes:26 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORTChief Executive’s Operating ReviewHomes sold (number)201520152015The total number of completions has risen by almost 13% to 8,721 (2015 – 7,752) and has been positively influenced by the number of private homes sold rising by 18.9% to 7,345 (2015 – 6,178), representing 84% (2015 – 80%) of the total. Our northern divisions have performed well, benefiting from significant investment in high quality land and work in progress over recent years. This, together with strong market conditions, has contributed to notable volume growth in divisions such as West and East Midlands, which completed the sale of 780 and 744 homes respectively. Our new Manchester division, opened in August 2013, has also performed well, delivering 360 new homes, an increase of 100 compared to the prior year. In the south, the market is also strong, with divisions such as Thames Gateway, North London and Essex all delivering in excess of 700 homes, resulting in record profits in each of these regions.The average selling price has risen by 12.9% to £252,793 (2015 – £223,821), with the improvement driven by a higher proportion of private homes sold, continued investment in higher value locations, together with a modest benefit arising from house price inflation. This focus on higher value areas has aided divisions such as West Midlands, Essex and Northern Home Counties to deliver increases in their average selling price in excess of 14%. In London, demand remains strongest in more affordable locations, which is principally where Bellway continues to focus its activities. Our average selling price in London has risen by 30.7% to £377,118 (2015 – £288,514), firmly within the scope of Help to Buy. The rise in average selling price has been influenced by an unusually low proportion of social completions, which represented only 4% (2015 – 14%) of homes sold in the Capital. In addition,there has been a positive effect arising fromthe completion of a number of higher valueapartments, at sites in locations such asGreenwich, Brentford and Park Royal. Overall,London accounted for 14% (2015 – 19%) of theGroup’s completions and 21% (2015 – 24%) ofhousing revenue.Construction and material costsThere is still some upward pressure with regards to labour costs, particularly in the South East, where the availability of certain trades, predominantly ground workers, brick layers and scaffolders is most restricted. These pressures are, however, manageable in the context of the growth of the Group.Material cost increases have largely abated and whilst there still remains occasional availability issues, longer lead in times have been factored into build programmes and strong relationships with suppliers are helping to ensure that construction timetables are being met.The Group does not directly import any materials from overseas and despite the volatility following the outcome of the EU Referendum, the overall cost of any adverse currency fluctuations is expected to be minimal when considered as part of the overall cost of constructing a new home.Planning and improving the land bankThe land market continues to produce attractive opportunities at good rates of return. The planning environment is supportive and is generally favourable towards land buying, with the number of new planning permissions granted continuing to exceed national housing output. There are, however, a large number of local authorities that still do not have adopted local plans in place. In addition, the conclusion of planning obligation agreements and the satisfaction of pre-commencement conditions, in the context of a complex planning environment, can often add cost and cause delay to site starts. We await the detail of the amended Housing and Planning Act and in particular the obligations surrounding the provision of Starter Homes, but welcome the government’s initiative to assist first-time buyers to get onto the housing ladder.Against this backdrop, the Group has continued its controlled investment in land, identifying and acquiring sites that meet or exceed its minimum hurdle rates in respect of both gross margin and ROCE. Accordingly, the Group has expended a record £670 million on land and land creditors (2015 – £620 million) and has contracted to acquire 9,555 plots (2015 – 9,128 plots) across 88 sites (2015 – 88 sites),thereby ensuring it is well positioned to deliverfurther volume growth in the years ahead.The Group has a disciplined approach towardsland buying, assigning capital to opportunitiesin areas where demand is strongest andwhere returns are most attractive. This hasled to a geographically balanced approachto investment, with 46% of plots contracted inthe north (2015 – 49%) and 54% in the south(2015 – 51%).Annual Report and Accounts 2016 Bellway p.l.c. 27The number of plots with an implementable detailed planning permission (‘DPP’) has risen by 16% to 24,879 (2015 – 21,411), representing 2.9 years' supply (2015 – 2.8 years) at current rates of output. The Group has all of its land in place with the benefit of DPP in order to meet this current year’s planned growth target. The increase in the number of plots with DPP reflects the success of our land and planning teams, both in acquiring new land and also in obtaining a planning permission on already owned or contracted land, with some 7,265 plots having been converted from the Group’s land ‘pipeline’ during the year. One such site on which the Group obtained DPP was Copenhagen Place in Limehouse, London, a small brownfield redevelopment opportunity acquired for £5 million in summer 2015. This site was bought without any planning status, but our experience and strong knowledge of this local area helped secure DPP for 45 homes.The number of plots within the land pipeline has reduced to 10,100 (2015 – 14,800), with these plots defined as those which either benefit from an outline planning permission, or are assessed as likely to obtain the benefit of a DPP within the next three years. The reduction in the number of pipeline plots is in part attributable to our success in obtaining DPP on the 7,265 plots converted from the pipeline land bank during the year. In addition, the Group disposed of its interest in Barking Riverside Limited, its joint venture company with the Greater London Authority, to London & Quadrant New Homes Limited. As part of the disposal, Bellway entered into a new pre-emption agreement, which based on the existing outline planning permission, entitles it to purchase around 2,600 development plots on attractive commercial terms. This represents some 2,100 fewer plots compared to the previous entitlement, which would have been available for purchase over the estimated remaining twenty year life of the scheme, provided Bellway made a significant, long-term capital contribution to the on-site infrastructure costs. The reduction in plots has been shown as a decrease in the pipeline land bank, resulting in a more concentrated residual land pipeline, accessible over a shorter time period and requiring less initial capital outlay.The Group still continues to focus on acquiring land through its pipeline, often acquiring sites conditionally with a deposit. This approach to land buying helps secure a medium-term land supply, without consuming excessive capital. Contracting land in this manner typically results in the acquisition of higher return, brownfield opportunities, where the planning prognosis is often positive and is supported by the government’s presumption in favour of brownfield development.In total, the Group’s owned and controlled land bank, comprising land with DPP and land in the pipeline, consists of 34,979 plots (2015 – 36,211 plots), with brownfield land representing approximately 61% of these plots (2015 – 66%).In addition to the owned and controlled land bank, the Group recognises that greenfield strategic land can be a valuable source of supply, more so as Bellway continues to expand and therefore requires a wide variety of land sources in order to meet the growth demands of the future. The Group has therefore appointed three regional strategic land directors whose remit is to identify and acquire longer-term land, further complementing the approximate 6% of additions in the year to the top tier of the land bank that have historically originated from strategic land assets.Strategic land holdings have increased to 6,300 plots (2015 – 6,000 plots), with those reported representing only those plots that have a positive planning prognosis, being either identified for residential development in an emerging local plan or subject to a current planning application. The table below analyses the Group’s land holdings at 31 July:20162015Owned and controlled plots 34,979Strategic plots with a positive planning status 6,30036,211Comprising:DPP: plots with implementable detailed planning permission 24,879 21,411'Pipeline': plots pending an implementable DPP 10,100 14,8006,00028 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORTChief Executive’s Operating Review continuedDeveloping our peopleThe average number of people employed has risen by 9% to 2,366 (2015 – 2,164), which is in addition to those engaged indirectly, both through the provision of sub-contractor labour and in associated supply chain industries, demonstrating the positive economic contribution arising from the increase in volume output.Identifying, recruiting and retaining experienced, high calibre individuals remains the greatest constraint to long-term growth for the wider industry. Upward pressure with regards to salary costs has remained a feature over the past year, particularly in London and the South East, where the demand for skilled individuals is most pronounced.The Group recognises its responsibility to contribute to reducing the industry wide skills shortage and also the importance of its people in delivering this outstanding set of results. Accordingly, Bellway has increased the number of apprentices and graduates within the business by 14% to 83 people (2015 – 73) and has also continued to develop and invest in our Site Managers and Assistant Site Managers, with 48% (2015 – 34%) of these individuals now having achieved NVQ Level 6 or higher. Ongoing training is also important across the wider organisation, ensuring that Bellway continues to meet high standards in all aspects of its business activities. This is reflected by the number of training hours undertaken by our employees increasing by 36% to 12,514 (2015 – 9,234).Bellway has appointed a new Group Human Resources Director with the remit to further develop the Group’s people strategy, initially focusing on attraction, development and retention of talent across the business.Bellway4GoodWhilst growing the business, we wish to do so in a sustainable and ethical manner and accordingly, Bellway has for the second year in succession continued to set and monitor performance against a number of objectives under the banner of Bellway4Good, itscorporate responsibility function. This focuses on the principal areas of environment, construction, society and economy. Key achievements during the year include increasing the percentage of construction compounds fitted with energy saving devices to 84% (2015 – 52%), exceeding the minimum energy efficiency requirement on our new homes by 6%, as measured by the Dwelling Emission Rate, improving waste diversion rates to 95.9% (2015 – 92.9%) and providing customer handover folders to home purchasers containing information on sustainable travel, local recycling centres and energy efficiency advice.Bellway has also taken a proactive approach to the way in which it manages charitable engagement, undertaking a range of initiatives to support a number of different charities and in particular, its two chosen national charity partners, being British Heart Foundation and Construction Youth Trust. We are pleased to report that our total charitable donations, made through a combination of employee fundraising, matched funding and direct donations amounted to £284,704 (2015 – £183,540), of which £74,704 (2015 – £37,530) was donated by employees.Tyler Monk started working for us in November 2014 as an apprentice at our East Midlands division and has won several awards for his carpentry skills, academic studies and project based work, including Apprentice of the Year and Student of the Year at West Nottingham College.Annual Report and Accounts 2016 Bellway p.l.c. 29Current trading and outlookWhilst delivering significant volume growth, the Group ended the year with an increased order book comprising 4,644 homes (2015 – 4,568 homes), with a value of £1,117.1 million (2015 – £1,087.9 million). In the nine weeks since 1August, the Group has taken an average of 162reservations per week (2015 – 149), an increaseof 9% compared to the same time last year.As a result, as at 2 October the order book hasgrown further to 4,701 homes (4 October 2015– 4,432 homes), with a value of £1,159.3 million(4 October 2015 – £1,032.9 million). Sales priceson reservations taken during this period havecontinued to be in line with or slightly aheadof expectations.From its structure of 19 operating divisions, the Group has the capacity to deliver around 11,000 new homes per annum and is well placed to increase this capacity, through the opening of further new divisions, should market conditions remain robust. Given this capacity, the strong order book and encouraging start to trading, the Group should be able to deliver further, but more moderate growth in volume in the current financial year and beyond. The extent of volume growth this year will depend on whether customer confidence is maintained and strong sales rates continue throughout the autumn and subsequent spring selling seasons.The strength of the Group’s balance sheet and divisional structure mean that Bellway is well placed to deliver its strategy of further volume growth over the longer-term and this, together with a disciplined focus on ROCE, should result in additional value creation for shareholders.Ted AyresChief Executive17 October 201630 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORTChief Executive’s Operating Review continuedA focus on customer careEnsuring that our customers enjoy a positive experience when purchasing a new home is a key priority for the Group. We offer a wide range of product to suit individuals and families, with varying budgets at different stages of their lives.We strive to ensure that our product is built to a high standard, thus helping to reduce the expense of costly remedial work and minimise subsequent disruption for our customers. We continue to focus on build quality and the efforts of our Site Managers have been rewarded, with 43 of them receiving NHBC Pride in the Job Awards (2015 – 33), the highest the Group has ever achieved and an increase of 30% compared to last year.Customer feedback is important to us so that we can identify areas for improvement and build these into our future processes. We invite all of our customers to participate in a survey, obtaining feedback across a number of key areas. In order to obtain a true representation of where we can improve, we focus on six key questions, covering build quality, standard of finish and home condition, amongst other topics. We use the results of these surveys to calculate an average overall customer care score which has risen by 190bps to 85.7% (2015 – 83.8%).In order to further improve our customer care processes, we have also invested in a Group Customer Care Manager, supplementing our existing divisional resources.Building new homes safelyEnsuring the health and safety of all of our site operatives is of utmost importance and we therefore undertake regular onsite training for all of our Site Managers. In addition to a focus on reducing accident rates, during the year we have placed added emphasis on dust suppression in an attempt to mitigate the risk to those individuals working on our sites.We conduct regular health and safety inspections on all our sites using a combination of both in-house health and safety managers and externally appointed consultants. During these inspections, each site is appraised against a number of criteria and appropriate action is taken where improvements can be made. As a result of this approach, our NHBC health and safety incident rate has fallen again to 0.766 (2015 – 0.936), with a low score representing a lower incidence of health and safety contraventions. This low score compares favourably when benchmarking against those companies that adopt a similar scoring metric.In addition, we are pleased to report that five of the Group’s Site Managers have been given NHBC Health and Safety Awards (2015 – nine), with two of these then going on to secure highly commended awards.(1)), with the acquisition of good quality land contributing to this improvement. The positive effects of house price inflation, net of inevitable industry-wide build cost increases over recent years, has also contributed to this improvement.Increased output has helped improve the absorption of the administrative overhead base, which has fallen slightly to 3.7% of revenue (2015 – 3.8%), a reflection of a continued emphasis towards cost control. This comparatively low ratio has been achieved notwithstanding the investment in resource in order to deliver ongoing growth. In addition, there has been some upward pressure on salary costs, reflecting the continuing demand for good quality individuals. The total administrative overhead has risen to £82.8 million (2015 – £67.5 million), with the prior year benefiting from a one-off profit of £2.8 million, principally arising from the disposal of a non-core residential estate maintenance business.A strong trading performance has resulted in the operating margin rising by 160bps to 22.0% (2015 – 20.4%(1)), a record for the Group. This has contributed to the 36.5% rise in operating profit which grew to £492.0 million (2015 – £360.4 million(1)).Barking RiversideIn addition to the strong operating performance, the Group recognised an exceptional profit of £17.3 million, arising on disposal of its interest in Barking Riverside Limited (see note 5 to the accounts).The disposal of Barking Riverside will result in a net cash inflow with a fair value of £43.5 million and will also relieve the Group from its substantial funding obligations with regards to the ongoing remediation and infrastructure requirements of this long-term, capital intensive site. The disposal provides the Group with the opportunity to reallocate underperforming capital into higher return land opportunities.Net finance expenseThe net finance expense has fallen slightly to £11.1 million (2015 – £13.1 million) and is mainly made up of imputed interest arising on land acquired on deferred terms, which has risen to £7.6 million (2015 – £6.6 million). The remaining net interest expense principally relates to bank interest, comprising interest on drawn monies, commitment fees and refinancing costs on the Group’s £500 million banking facilities. This has fallen to £4.3 million (2015 – £6.5 million) reflecting the timing of tranche renewals.Annual Report and Accounts 2016 Bellway p.l.c. 31Group Finance Director’s ReviewProfitability“ The strong trading performance, together with a focus on balance sheet efficiency, has resulted in ROCE rising by 430bps to 28.2%Profit before taxation has risen by 40.6% to £497.9 million (2015 – £354.2 million) and the Group incurred a corporation tax charge of £95.0 million (2015 – £71.1 million), reflecting an effective tax rate of 19.1% (2015 – 20.1%). The Group’s effective tax rate is below the standard rate of corporation tax of 20% (2015 – 20.7%), primarily as a result of the non-taxable disposal of Barking Riverside Limited, together with the benefit of an enhanced tax deduction for remediating previously developed, brownfield land.Overall, profit after taxation has risen by 42.3% to £402.9 million (2015 – £283.1 million), resulting in EPS growing by 42.0% to 328.7p (2015 – 231.5p).(2)Cash flow and debt.”Bellway remains highly cash generative and produced cash from operations of £650.5 million (2015 – £426.5 million) before increasing the amount of capital invested in land and work in progress, in order to facilitate the future growth of the business. After taking this into consideration, the Group generated £249.4 million from operations (2015 – £98.1 million). After expending £82.4 million on tax, paying a dividend of £105.4 million and taking into consideration other minor cash inflows of £3.4 million, the Group ended the year with net cash of £26.5 million (2015 – net bank debt of £38.5 million), reflecting an ungeared balance sheet (2015 – gearing of 2.4%).Land creditors, which are considered to be a source of longer-term debt finance, stood at £304.2 million (2015 – £192.6 million) and continue to be used only when it is cost effective to do so. Including land creditors, total debt stood at £277.7 million (2015 – £231.1 million), representing adjusted gearing of 14.9% (2015 – 14.7%).Keith AdeyGroup Finance DirectorOperating performanceOngoing delivery of the growth strategy with another year of significant volume growth, together with further improvement in the average selling price, has resulted in housing revenue growing substantially, by 27.1% to a record £2,204.6 million (2015 – £1,735.1 million).This, together with other revenue of £36.1 million (2015 – £30.3 million), principally comprising receipts from the usual disposal of the Group’s ground rent portfolio, resulted in total revenue for the Group increasing by 26.9% to £2,240.7 million (2015 – £1,765.4 million).The gross margin has risen to a record 25.7% (2015 – 24.2%Operating profit (£m)492.0+36.5%2015360.4(1)2014255.6(3)2016492.0 32 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORTGroup Finance Director’s Review Profit before taxation continued(£m)Balance sheet497.9Investment in land has risen by 25.3% to £1,625.6 million (2015 – £1,297.0 million) as the Group continues to invest in order to secure future growth. The amount invested in land with a detailed planning permission has increased by 31.9% to £1,373.1 million (2015 – £1,040.9 million) and is represented by 24,879 plots (2015 – 21,411 plots), reflecting the success of our land teams in acquiring or progressing land through the planning system.Work in progress has risen to £836.1 million (2015 – £763.7 million) as significant investment has been made in order to meet the ongoing demand for new homes. Bellway now has 9,621 plots under construction (2015 – 7,923 plots), including developments in the early stages of production on a number of London schemes, where completions are expected in later years.There is a modest pension scheme deficit of £8.0 million (2015 – £7.5 million), which comprises assets of £51.9 million (2015 – £47.3 million), less liabilities of £59.9 million (2015 – £54.8 million). The increase in the deficitis principally attributable to the reduction in corporate bond rates.+40.6%Delivering enhanced shareholder returns2015354.22014246.0The strong trading performance, together with a focus on balance sheet efficiency, has resulted in ROCE rising by 430bps to 28.2%(3)(2)2016497.9 Earnings per ordinary share (p) (2015 – 23.9%(1),(2)). Notwithstanding a conservative approach to debt and a lowly geared balance sheet, post-tax return on equity has risen by 410bps to 23.5% (2015 – 19.4%). This has led to an 18.5% rise in net assets to £1,867.0 million (2015 – £1,575.9 million), after accounting for the cash dividend payment of £105.4 million (2015 – £74.6 million). The NAV per share has risen by 18.4% to 1,522p (2015 – 1,286p), which together with the total proposed dividend of 108.0p (2015 – 77.0p), demonstrates another year of significant value creation for shareholders.Keith Adey328.7Finance Director+42%17 October 20162015231.52014157.02016328.7Notes:1. Stated before exceptional item (see note 5 to the accounts).2. Calculated as pre-exceptional operating profit, divided by average capital employed. Capital employed is equityand net bank debt.3. Restated following the adoption of IFRS 10 'ConsolidatedFinancial Statements' and IFRS 11 'Joint Arrangements'. Group revenue (£m)2,240.7+26.9%20151,765.420141,484.8(3)20162,240.7 Proposed total dividendper ordinary share (p)108.0+40.3%201577.0201452.02016108.0 Operating margin (%)22.0+160bps201520.4(1)201417.2201622.0 ••Annual Report and Accounts 2016 Bellway p.l.c. 33Corporate ResponsibilityBiodiversity, Carbon emissions, Ecology, Energy, Transport and WaterCharities, Customers, Economic development, Employees, Health & safety and StakeholdersPlanning, Procurement, R&D,  Site management, Sustainability and WasteEnvironmentConstructionSociety and economyOur priority as a housebuilder is to provide high quality new homes in desirable surroundings and in doing so deliver benefits to our shareholders, customers, employees and other stakeholders. We believe we can fulfil these aims whilst at the same time operating our business in a socially responsible, ethical and sustainable way; a way that isn’t just beneficial for the environment and wider society, but one which also makes commercial sense. We brand our approach to Corporate Responsibility (‘CR’) as Bellway4Good and while our Chief Executive is ultimately responsible for delivering the overall CR programme, the Head of Sustainability and functional heads meet on a quarterly basis to review progress within a steering group convened by the Group Finance Director. The Head of Sustainability has helped develop a more strategic and robust approach to CR and provides support to our national network of divisions on CR matters. We concentrate our efforts on three core CR ‘pillars’, each with its own clear areas of focus and commitments to ensure we consider the interests of our diverse stakeholder groups and make positive social, environmental and economic contributions across our business. Our key achievements in 2015/16We have made progress against targets relating to each of these three pillars. Some of our key achievements are outlined below:Environment• Increased the percentage of constructioncompounds fitted with energy saving devicesto 84.3% (2015 – 51.9%).• The energy efficiency of our homes,measured by the Dwelling Emission Rate, wason average 5.7% better than that required bybuilding regulations.• Customer handover folders now containinformation on sustainable travel, localrecycling centres and energy efficiencyadvice.Construction• Improved waste diversion rates to 95.9%(2015 – 92.9%).• Increased section 106 and CIL payments to£147.9 million (2015 - £79.0 million).Society and Economy• Increased the minimum employer matchedpension contribution rate to 4%.• Achieved an improved overall customersatisfaction score by reference to theaverage of six customer care relatedquestions of 85.7%.• Achieved an improved NHBC health andsafety incident rate of 0.766 (2015 – 0.936).• Donated £159,228 to our nationalcharity partners.• Matched and topped-up employees’fundraising to a total of £111,220.In total we set ourselves 17 targets for the year, covering a wide range of CR focus areas. A summary of our performance is set out below with more detail available on our web site www.bellway.co.uk/corporate-responsibility. 13 targets were achieved. 1 target is progressing and will be rolled-overinto 2016/17. 3 targets were missed.In addition we continue to be a constituent of the FTSE4Good Index Series and we participate in the annual Carbon Disclosure Project for ‘Climate Change’ and ‘Forests’. In November 2015 we received a score of 91% for disclosure and performance band D under ‘Climate Change’ (2014 – 81% / C) whilst in our first participating year of the ‘Forests’ programme we were graded ‘Management – B’, the third highest grade available (out ofseven grades).•Corporate Responsibility continuedScotland – Hallside Farm, Cambuslang, South Lanarkshire.EnvironmentClimate change and the protection of the environment are two significant challenges for both industry and society as a whole. We aim to minimise the deleterious effect our sites have on these two important aspects through adopting a sustainable approach to our operations.Biodiversity and ecology We undertake thorough risk assessments, including ecological surveys, to understand the potential impact our developments may have on the local area. Where necessary, appropriate mitigation work is undertaken prior to, or during construction and we contribute financially to help safeguard Special Protection Areas. In accordance with the NPPF, which places greater emphasis on sustainable development, we have continued to invest in brownfield sites. In 2016 62% (2015 – 74%) of our new homes were built on brownfield land which, along with the planting of around 195,400 (2015 – 203,900) trees and shrubs, has helped improve the environment and ecological biodiversity of local areas. EnergyWe have continued our work on energy efficiency and all new construction compounds in 2015/16 were fitted with energy saving technology to reduce usage. The percentage of construction compounds fitted with energy saving devices is now 84.3% (2015 – 51.9%). We have also introduced a temperature limit on thermostat heating in our showhomes to avoid wasteful energy consumption and reduce bills. Our customers also benefit from our work. The energy efficiency of our news homes continues to be better than the relevant building regulations, with Dwelling Emission Rates in 2015/16 on average 5.7% better than that required by building regulations. In addition, our house type standardisation work will deliver increased controllability of heating systems, all leading to reduced energy bills.We also provide ‘Go Green’ energy efficiency information for new homeowners, setting out how customers can further reduce their energy bills, while information on sustainable travel options and local recycling centres is also included in customers' welcome packs. Northern Home Counties – Estone Grange, Aston Clinton, Buckinghamshire.34 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORT5,050 5,972Total Emissions 18,895 22,3344,358 5,17414,992 18,397Emissions Intensity:tCO2e per home sold(5)2.2 2.61.9 2.4tCO2e per employee(6)Carbon reporting8.0 9.4In accordance with the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013, we are reporting on our greenhouse gas (‘GHG’) emissions as part of the annual Strategic Report. Our GHG reporting year is the same as our financial year, 1 August 2015 to 31 July 2016, and the previous year’s figures have been provided as comparators. Our overall carbon emissions have increased by 49% to 22,334 tonnes CO6.9 8.52e (2015 – 14,992), driven by a number of factors: • Improved data capture and reporting –this year our emissions include gas andelectricity consumption from our inventoryof completed homes (prior to handover tocustomers) and an estimate of consumptionfor offices where utilities are included in abuilding service charge. Together theseelements represent over 53% of the increase.• Increased construction activity – the numberof legal completions has increased by 12.5%to 8,721 (2015 – 7,752).On a like-for-like comparison (excluding carbon from our inventory of completed homes and offices with a utility recharge) our carbon emissions have increased by 26% to 18,895 (2015 – 14,992). On this same basis carbon emissions per home sold have increased by 16% to 2.2 (2015 – 1.9) and carbon emissions per employee have risen by 16% to 8.0 (2015 – 6.9).The methodology used to calculate our emissions is based on the UK government’s Environmental Reporting Guidelines (2013) and emission factors from the 2016 government GHG Conversion Factors for Company Reporting. The reported emission sources includes those which we are responsible for, as required under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013, with the exception of the following sources of emissions which were excluded from this report:• Gas and electricity from part-exchangeproperties due to immateriality anddifficulty in accurately reporting andrecording this data.• Emissions from site-based combined heatand power units for which we do not haveoperational control.Both the 2014/15 and 2015/16 emissions have been externally verified by Zeco Energy to a ‘reasonable assurance level’ as part of a review of our carbon footprint.2016 saw the appointment of a third party company to help manage our utility portfolio, delivering improvements in the accuracy and collection of carbon data. This has given greater visibility to the areas of significant energy consumption across the business. Along with a move to internal quarterly reporting, this will enable us to consider carbon reduction targets in future years.Greenhouse Gas Emissions (tonnes of CO2e) (1)Notes:1. Carbon dioxide equivalent as per the meaning given in section 93(2) of the Climate Change Act 2008.2. Carbon impact for offices with landlord recharged utilities is estimated based on average consumption per square metre for offices with billed utilities.3. Carbon impact of inventory plots is estimated from known consumption data for c. 60% of plots, extrapolated across all plots for the year.4 Scope 2 emissions have been reported using a location based emission factor.5. Based on number of legal completions.6. Based on the average number of employees during the year.2016Excl. inventory plots/office recharged utilitiesIncl. inventory plots/office recharged utilitiesAnnual Report and Accounts 2016 2015Bellway p.l.c. 35(2)Excl. inventory plots/office recharged utilities Incl. inventory plots(3)/office recharged utilities(2)Scope 1 – Combustion of fuel & operation of facilities (including diesel and petrol used on-site and in company cars on Group business) 10,634 13,223Scope 2 – Electricity purchased for our own use13,845 16,362(4)QualityWe are pleased to report that a record 43 Site Managers were awarded NHBC Pride in the Job Awards this year, a 30% increase on last year (2015 – 33). Along with the success of our Site Managers in the NHBC’s safety awards (see page 30), we are extremely proud of this external recognition, reflecting the quality and high standards our employees are encouraged and supported to achieve.George Carty, Site Manager, Scotland division.Notes:1. The Programme for the Endorsement of Forest Certification (PEFC) is an international non-profit, non-governmental organisation dedicated to promoting Sustainable Forest Management through independent third-party certification.2. The Forest Stewardship Council (FSC) is an international not-for-profit, multi-stakeholder organisation established in 1993to promote responsible management of the world's forests.ConstructionWe take a partnership approach to the construction of our developments. Working closely with suppliers, sub-contractors, local authorities and local communities, we aim to create new, attractive and sustainable communities and developments. 36 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORTCorporate Responsibility continuedCommunities Creating sustainable communities is something we are passionate about. In order to succeed, developments must meet the needs not only of potential customers, but also of existing residents in already established, neighbouring communities. To this end, for all new developments of 50 homes or more, we undertake two way consultation and dialogue with local communities, including communication through information leaflets, public exhibitions and meetings, workshops and websites. We take on board feedback we receive and, where appropriate, make changes thereby ensuring local people have the opportunity to help shape developments within their community. Our contribution to local communities extends beyond the creation of new developments. Each year, as part of securing planning permission for our developments, we enter into planning obligations via section 106 agreements and provide affordable housing contributions and Community Infrastructure Levy ('CIL') payments for the provision and enhancement of such things as education facilities, healthcare, sports facilities, transport improvements, ecology and biodiversity and recreation space. In 2015/16 we made section 106 CIL payments totalling £147.9 million, almost double our payments last year (2015 – £79.0 million).WasteOur primary objective remains to reduce the amount of waste produced, beginning with the planning and design process, filtering down through the management of the construction process and across the lifetime of the development. Our work on standardisation of house types will deliver further savings on waste and materials as they are rolled out across our divisions.Waste however is an inevitable by-product of what we do and accordingly we continue to re-use and recycle waste where we can. Our waste diversion rate improved to 95.9% this year (2015 – 92.9%), leading to a 36% reduction in tonnes of waste sent to landfill. We continue to work with our key waste contractors to improve waste management, reduce costs and control reporting. Supply chainOur aim is to be the preferred partner for our suppliers and sub-contractors through the development of long-term relationships. We operate a range of group contracts for key raw materials, providing security of supply, quality consistency and costs benefits to our business. We are also committed to supporting the local economy where we operate and our divisions source their remaining material requirements from a range of local suppliers, as well as employing local sub-contractors to undertake work on our developments. Wherever possible we purchase our materials from sustainable sources, with all our solid timber sourced from managed stewardship forests accredited to PEFCOur East Midlands division sponsors AFC Chellaston girls’ football team.(1) or FSCC(2) standards. We continue to be a signatory of the Prompt Payment Code and are committed to paying our sub-contractors and suppliers within clearly defined terms. We continue to focus on providing excellent service to our customers and the appointment of a Group Customer Care Manager this year has provided additional resource in this area as we continue to grow. Although we narrowly missed out on regaining our 5 star status from the HBF, we exceeded our internal customer care target which is measured by reference to the average of six customer care related questions across quality and service, and scored an average of 85.7% against a target of 83.8%. Increased training on quality and service levels ensures that we continue to push hard to regain our 5 star status in the coming year. AffordabilityAffordability is often an obstacle for customers wishing to get onto the property ladder and/or moving up to larger properties as their needs change. The extension of the government’s Help to Buy Scheme in England and the introduction of the London scheme in February has proved to be a huge help to all prospective purchasers and 2,626 of our customers purchased their home using Help to Buy in 2015/16. A varied range of houses and apartments is important to enable customers to identify the right home for their needs and budget. In 2015/16 our average selling price was £252,793 (2015 – £223,821) with 11% of our homes being sold to unassisted first-time buyers. We also continue to provide a part-exchange service for existing home owners, a facility that can help remove some of the uncertainties surrounding home buying chains, and in 2015/16 7% of our customers took advantage of this service. Our continued commitment to building sustainable communities saw us deliver 1,376 social homes in 2016 (2015 – 1,574). This represents 16% (2015 – 20%) of our legal completions and helps to support social inclusion within the developments and communities we create.Employees Our employees are key to the success of our business and we are committed to ensuring that they, and our contractors, are treated with fairness, consideration and respect. We have policies and procedures in place to ensure that equal opportunities exist for all, with no discrimination based on age, colour, disability, ethnic origin, gender, marital status, nationality, parental status, race, religion, belief or sexual orientation. We also operate policies covering bribery, bullying or harassment Society and economyThe UK housebuilding industry is a key component of the national economy. Annual Report and Accounts 2016 Bellway p.l.c. 37Christel Winch, Sales Advisor, South West division.and whistleblowing, ensuring we operate in accordance with the highest standards of honesty and integrity. We act in accordance with the Modern Slavery Act 2015 and we will be publishing a slavery and human trafficking statement for the financial year to 31 July 2016 on our website.We aim to provide all employees with a rewarding and fulfilling career and this year saw further steps taken, including the appointment of a Group Human Resources Director and a Group Learning and Development Manager. Training hours have increased by around 36% and 48% of Site Managers and Assistant Site Managers now have their NVQ Level 6 or higher qualification (2015 – 34%). We also launched the Bellway Learning Hub, an online learning platform that will allow us to deliver a wide range of mandatory and developmental training across the entire Group.Continued growth in legal completions and new divisions has seen employee numbers rise by around 9% to an average of 2,366 across the year (2015 – 2,164), although the continuing industry-wide skills shortage has seen employee turnover increase to 23.4% (2015 – 19.1%). We have however increased the number of apprentices and graduates within the business by 14% to 83 (2015 – 73) and we improved the minimum employer matched pension contribution rate from 3% to 4%, helping employees invest for their retirement. EconomyThe contribution of the UK housebuilding industry to social and economic sustainability has been highlighted in a report commissioned by the Home Builders Federation ('HBF')(1). Headline figures for the industry from the 2014 year include:£12.5 billion invested in land and building for homes.£5.5 billion spent in the supply chain, 90% of which stayed in the UK.More than 600,000 jobs created. £2 billion contribution to public services through tax paid and infrastructure improvements.£3 billion investment in affordable housing.£131 million invested in open spaces, community, sports and leisure facilities.£3.8 billion spent in the local economy by residents of new homes. As the UK’s fourth largest housebuilder by volume, we are committed to helping satisfy the supply/demand imbalance in the UK housing market and have an important role in delivering these added-value benefits.ppppppppppppppNote:1. ‘The Economic Footprint of UK House Building’ (March 2015), prepared by the independent planning, design and economics consultancy Nathanial Litchfield & Partners.CustomersThe following table shows the gender split in the Group as at 31 July 2016:Male no.Male %Female no.Female %Total no.Workforce %Board of directors 6 86 1 14 7 <1Senior managers 103 87 16 13 119 5Other employees 1,616 71 645 29 2,261 95Total 1,725 72 662 28 2,387 100Award-winning Site Managers from our East Midlands division.38 Bellway p.l.c. Annual Report and Accounts 2016STRATEGIC REPORTCorporate Responsibility continuedSociety and economy continuedSafetyWe remain committed to ensuring all our developments operate in a safe manner and that employees, sub-contractors, suppliers, customers and members of the public are not put at risk. We understand that training plays an important role in maintaining high standards of health and safety. The appointment of a Group Learning and Development Manager will improve the monitoring and delivery of training across the Group and help to ensure all employees remain in compliance with our training matrix.We are proud that we continue to be recognised as amongst the best and safest in the industry with our Site Managers winning five awards in the 2016 NHBC Health and Safety Awards, two of whom went on to achieve Highly Commended awards. Our health and safety and site management teams have continued their excellent work over the past year and our NHBC health and safety incident rate of 0.766 (2015 – 0.936), where a lower incident rate reflects fewer reportable health and safety issues raised, has fallen for the third year running.It is therefore disappointing that our RIDDOR incident rate rose for the first time in four years, to 445.19 accidents per 100,000 site operatives (2015 – 430.75), 3% up on 2015/16. ‘Slips, trips and falls’ were the most frequent reason for reportable incidents in 2015/16 and increased focus will be given to this area in the coming year, with a specific target to deliver site briefings on this issue at 100% of sites.Director and employee profile Looking forward to 2016/17A new set of 15 targets for the 2016/17 financial year are now in place covering a range of focus areas, with five targets allocated to each of our three CR ‘pillars' (Environment; Construction; Society and Economy). A few examples of the new targets are listed below: • We will limit the engine size of fork lift trucksto 55 watts on all sites by 2019, delivering fueland carbon savings.• We will maintain the proportion of wastediverted from landfill on construction sitesat 95% or above.• We will deliver ‘slips, trips and falls’ sitebriefings at 100% of sites to aid a reductionin our RIDDOR incident rate.All 15 targets for 2016/17 can be viewed on our website, along with details on our performance against our 2015/16 targets and more information on activities in each of our CR ‘pillars’: www.bellway.co.uk/corporate-responsibilityIn summary, this has been a successful year in the development of the Bellway4Good strategy and we remain committed to the principles of operating our business in a socially responsible and sustainable way. We have delivered a strong performance against our 2015/16 CR targets and we look forward to making further progress in the coming year. Approval of the Strategic ReportThe Strategic Report was approved by the Board of Directors and signed on its behalf by:Ted AyresChief Executive17 October 2016Employees from our Thames Valley division took part in the Race for Life to raise funds for Cancer Research UK.Annual Report and Accounts 2016 Bellway p.l.c. 39Charitable engagement As a responsible business, part of our ethos is to support both the local communities where we build as well as those sections of society less fortunate than ourselves. The past two years have seen a marked change in the way we manage our charitable engagement with focus now split across three key areas:• Supporting national charities – each yearwe enter into partnership with charities whobenefit from direct donations and employeefundraising.• Supporting our divisions – each operatingdivision (and Head Office) manages aseparate budget to support local charitableand community causes.• Supporting our employees – we ‘match’fundraising for our national charity and ‘top-up’ employee fundraising undertaken fortheir chosen causes.In 2015/16 our national charities were again the British Heart Foundation and the Construction Youth Trust. We are very proud to report that through a combination of employee fundraising, matched funding and direct donations, we successfully donated £159,228 to these two great causes in 2015/16, bringing the total donated since the start of the partnerships in January 2015 to £265,117. In the coming financial year we begin a new partnership with Cancer Research UK and with the continued help of our generous employees we hope to raise a similar amount for this charity which is close to the hearts of many of our people. In total 2015/16 saw £284,704 (2015 – £183,540) donated to charities, community groups and local good causes, an increase of 55.1% on last year. Our donations totalled £210,000 (2015 – £146,010), up 43.8% on last year, while employees raised £74,704 (2015 – £37,530), up 99.1% on last year. Ted joined Bellway in January 2002 as a divisional Managing Director, becoming Southern Regional Chairman in 2006. Ted was appointed to the Board as Operations Director on 1 August 2011 and succeeded John Watson as Chief Executive on 1  February 2013. Keith AdeyGroup Finance DirectorCommittee NRAppointed to the Board on 1 February 2012Background and experienceKeith, a Chartered Accountant, joined Bellway in December 2008 as Group Chief Accountant, becoming Group Finance Director on 1 February 2012. Prior to joining Bellway he worked at KPMG and Grainger plc. Other appointmentsBellway p.l.c. 1972 Pension Scheme – Trustee.John Cuthbert OBE DLSenior independent non-executive directorCommittees A N* RAppointed to the Board on 1 November 2009Background and experienceJohn, a Chartered Accountant, worked in the water industry from 1991 to 2010, when he retired as Managing Director of Northumbrian Water Group plc, having formerly been Managing Director of North East Water plc and Managing Director of Essex and Suffolk Water plc. John became senior independent non-executive director on 1 February 2014.Other appointmentsNorth Music Trust – Trustee.Amazing Media Group Limited – Board Member.Let’s Grow Investment Panel – Chair.Sunderland University Development Committee – Chair.Mike Toms40 Bellway p.l.c. Non-executive directorAnnual Report and Accounts 2016Committees GOVERNANCEABoard of Directors and Group General Counsel and Company Secretary John WatsonNChairman (non-executive) Committee R*NAppointed to the Board on 1 February 2009Appointed to the Board in 1995, becoming Chairman on 1 February 2013Background and experience Mike was formerly an executive director of BAA plc. He has also been a non-executive Chairman of Northern Ireland Electricity plc, a non-executive director of Viridian Group PLC and of UK Coal PLC. He is a member of the Royal Institution of Chartered Surveyors (‘MRICS’) and a member of the Royal Town Planning Institute (‘MRTPI’).Background and experienceOther appointments John, a Chartered Surveyor, joined Bellway in 1978 and was later appointed Managing Director of the North East division, a position which he held for 12 years. John joined the Board as Technical Director in 1995 and became Chief Executive on 1 November 1999. On 31 January 2013 he stepped down as Chief Executive to become Chairman.Birmingham Airport Holdings Limited – non-executive director.J Murphy & Sons Limited – non-executive director.Oxera Consulting LLP – director (non-statutory).Ted AyresChief ExecutiveCommittee NR*Appointed to the Board on 1 August 2011Background and experience RAppointed to the Board on 1 August 2013Background and experienceDenise, a solicitor, has been a partner at Eversheds LLP since 2004. Previously she was Company Secretary and General Counsel at ASDA Group plc, later part of Wal-Mart, from 1993 to 2004. Prior to this she worked in the City in corporate finance with Slaughter and May. Denise’s previous non-executive directorships include The British Olympic Association, Redrow plc, SCS Upholstery plc and Scarborough Building Society. Other appointmentsPool Reinsurance Limited – non-executive director.University of York – council member.St Giles Trust – Trustee.Eversheds LLP – partner.Paul Hampden SmithNon-executive directorCommittees A* N RAppointed to the Board on 1 August 2013Annual Report and Accounts 2016 Background and experiencePaul is a Chartered Accountant and was Group Finance Director of Travis Perkins plc from 1996 until his retirement in February 2013, having worked for Travis Perkins since 1988. He was previously a non-executive director and Chairman of the Audit Committee of Pendragon PLC and Redrow plc.Bellway p.l.c. 41AOther appointments Audit CommitteeClipper Logistics plc – senior independent non-executive director and Chairman of the Audit Committee.Grafton Group plc – non-executive director and Chairman of the Audit & Risk Committee and a member of the Nomination and Remuneration Committees.Delapre Abbey Preservation Trust – Chairman.Cumberland Lodge, Windsor Great Park – Chairman of the Audit Committee.NSimon Scougall Nomination CommitteeGroup General Counsel and Company Secretary R Board Committee on Executive Directors’ RemunerationNR Board Committee on Non-Executive Directors’ RemunerationAppointed on 1 February 2016Background and experienceSimon, a solicitor, was appointed Group General Counsel and Company Secretary in February 2016. Simon joined Bellway in March 2011 and has held senior positions within the Group including that of Group Commercial Director. He has over 15 years’ experience in the housebuilding sector, working either in-house or for clients in private practice. *Denotes Committee ChairmanDenise JaggerNon-executive directorCommittees A NMain activities of the Board during  the yearThe Board met formally seven times and other times informally during the year, considering strategy, performance, risk, major land acquisitions, potential conflicts of interest and reports from senior employees and external advisers at each Board meeting. One meeting a year is usually devoted almost entirely to the consideration of strategy. However as this year’s meeting was scheduled to take place in July 2016, shortly after the EU Referendum vote, it was decided to postpone the strategy meeting until later in the calendar year at which stage the directors would have a clearer insight into any short- to medium-term impact the decision to leave the EU may be having on the business. That delayed strategy meeting will be held in November 2016. Throughout the year the directors independently visited divisions and collectively visited at least two regions. In addition, the executive directors and Group General Counsel and Company Secretary meet regularly with the Regional Chairmen, divisional boards, and Head Office senior management team, which gives an appropriate level of oversight and direction to the business.Board effectivenessThe Board comprises seven directors and the balance of non-executive and executive directors continues to work well. There were no changes to the Board during the year although a new company secretary was appointed in February 2016 with the combined role of Group General Counsel and Company Secretary.The areas highlighted for improvement in last year’s Board evaluation were:• more time and resources to be devoted tothe consideration of risk;• below Board level succession planning; and• further improvements to the nature andquality of information reported to the Board.A Head of Risk has therefore been appointed who will help the Board to deliver and embed best practice on risk identification and management throughout the Group. As a result, the risk register has been enhanced and further developed during the year. The recent appointment of a Group Human Resources Director will permit greater focus to be given to the development of people below Board level, which will enable the Board to have more robust succession planning in place for those below Board level positions. The format and content of Board papers and minutes have been revised during the year to provide greater consistency and more focussed content. All of these areas continue to be monitored and improved.42 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEChairman’s Statement on Corporate Governance“ The Board believes that instilling high standards of corporate governance throughout all areas of our operations will help to deliver our strategy.”John Watson ChairmanDear ShareholderThe Board believes that instilling high standards of corporate governance throughout all areas of our operations will help to deliver our strategy of building shareholder value as well as benefiting other stakeholders. As Chairman of the Board it is my responsibility to lead the Board, to shape and measure culture and to promote the highest standards of integrity, probity and corporate governance throughout the Group and particularly at Board level. Compliance with the UK Corporate Governance CodeI am pleased to confirm that the Board considers that it has complied with the detailed provisions of the UK Corporate Governance Code (the ‘Code’) published in September 2014 throughout the year. The Company is required to comply with the 2016 revision of the Code from 1 August 2016 and I anticipate that the Board will be able to report its compliance with the 2016 version of the Code in next year’s report. The Code is available, free of charge, from the Financial Reporting Council, online at www.frc.org.uk or by telephoning 020 7492 2300. Annual Report and Accounts 2016 Bellway p.l.c. 43Every year the Board conducts a Board evaluation pursuant to the requirements of the Code. This evaluation is externally facilitated every three years with internal evaluations being carried out in the intervening years. The next external Board evaluation will take place in the 2016/17 financial year. This year’s Board evaluation, which was internally facilitated by me and the Group General Counsel and Company Secretary, concluded that the Board and Committees were well run and continued to be operating effectively. The following areas were highlighted for further development and improvement: • greater prominence and discussion in relationto KPIs;• further evolution in relation to themanagement of risk;• board papers/agendas to be more forward- looking and strategy focussed;• greater clarity on the Group’s culture; and• succession planning at and belowBoard level.As a result the Board and the Group General Counsel and Company Secretary will work with senior management to develop and improve these areas during the year and progress made will be reported on in next year’s report.DiversityThe Board is committed to making appointments on merit, against objective criteria and the Board strongly supports the principle of boardroom diversity in all its aspects. I am pleased to report that during the year three women have been appointed to senior Head Office positions. Our female employees make up 28% (2015 – 27%) of our total workforce, while 14% (2015 – 14%) of the Board and 13% (2015 – 14%) of our senior management are women. Shareholder engagementThe Company encourages active dialogue with its private and institutional shareholders, both current and prospective, and the directors communicate with both existing and prospective institutional shareholders on a regular basis and as requested.Shareholders are also kept up-to-date with our progress throughout the year through the Annual Report and announcements to the Stock Exchange for the full year and half year results and four trading updates. The whole Board is available for questions at the Annual General Meeting ('AGM') in December, to which institutional and private investors are invited to attend. I am pleased to report that at the last AGM over 92% of the votes cast were cast in favour of the resolutions put to shareholders by the Board.The Chairman and senior independent non-executive director are always available to discuss issues with current and prospective shareholders and institutions, as required. In addition, the whole Board is regularly updated at Board meetings on shareholder and investor views and activities by the Chief Executive and the Group Finance Director. Further information for shareholders is available in the Other Information section of this report on pages 109 to 111 and also on our website at www.bellwaycorporate.com.John WatsonChairman17 October 2016GOVERNANCECorporate Governance Report01 0503 0702 0604 08Main Principles of the UK Corporate Governance Code • Leadership• Effectiveness• Accountability• Remuneration• Relations with shareholdersStatement about applying the Principles of Good GovernanceThe Board acknowledges the importance of, and is committed to the principle of, achieving and maintaining a high standard of corporate governance. We have applied the Principles of Good Governance, including both the Main Principles and the Supporting Principles, by complying with the UK Corporate Governance (the 'Code'). Further explanations of how the Main Principles and Supporting Principles have been applied are set out below and in connection with the remuneration of the directors, in the Report of the Board on Directors’ Remuneration. John Watson Simon Scougall Keith Adey Paul Hampden Smith Denise Jagger Mike Toms Ted Ayres John Cuthbert OBE DL010203040506070844 Bellway p.l.c. Annual Report and Accounts 2016LeadershipAt the date of this report the Board consists of seven directors whose names, responsibilities and other details appear on pages 40 to 41. Two of the directors are executive and five of the directors, including the Chairman, are non-executive.The Board sets the strategic aims, ensures that the necessary finances, people and materials are in place for the Company to meet these objectives and also reviews management performance. It defines the Company’s values and standards and ensures that its obligations to its shareholders are understood and met.The Board has agreed clearly defined roles for the Chief Executive and the Chairman, and the non-executive directors challenge management and contribute to the development of strategy. The Group Finance Director is responsible for devising and implementing the financial strategy and policies and the Group General Counsel and Company Secretary supports the Chairman and Chief Executive in fulfilling their duties and keeping the Board regularly updated on corporate governance matters and ensuring policies and procedures are maintained and updated on a regular basis.The Board has put in place the following structure which allows it to provide entrepreneurial leadership of the Group and to delegate authority for operational matters through a framework of prudent and effective controls, which enables risk to be assessed and managed.The Board has adopted a schedule of matters which are specifically reserved for its decision, which includes strategy and management, structure and capital, financial reporting and controls, internal controls covering both financial and operational areas of the business, contracts and agreements, communication, Board membership and other appointments, remuneration, delegation of authority, corporate governance matters, policies and other miscellaneous items. In addition, it has a series of matters that are dealt with at regular Board meetings including both an operational and a strategic review, a financial review, major land acquisitions, major projects, risk, health and safety, HR, reporting requirements, corporate governance and internal control. Annual Report and Accounts 2016 Bellway p.l.c. 45Audit CommitteeExecutive DirectorsDivisional Boards Nomination Committee Board Committee on Executive Directors' RemunerationGroup General Counsel and Company SecretaryHead Office Management TeamRegional ChairmenBoard Committee on Non-Executive Directors' RemunerationBoard of DirectorsPAGES 49–53 PAGE 48 PAGES 54–68 PAGE 47Board effectivenessAll directors have access to the advice and services of the Group General Counsel and Company Secretary and all of the directors may take independent professional advice at the Group’s expense where they judge it necessary to discharge their responsibilities as directors.In accordance with the Code, all of the directors retire from the Board and offer themselves for re-election at the forthcoming AGM. None of the executive directors hold external directorships.The Board, its Committees and individual directors are subject to annual performance evaluation and all directors are subject to annual re-election by shareholders. The Board regularly reviews the directors’ other interests and appointments to ensure there are no conflicts of interest.The Chairman is responsible for leading the Board and ensuring it operates effectively. In this regard it pays due cognisance to the FRC’s document entitled ‘Guidance on Board Effectiveness’, dated March 2011. The directors possess an appropriate balance of skills and experience to meet the requirements of the business.During the year there were seven Board meetings, three Audit Committee meetings, six meetings of the Board Committee on Executive Directors’ Remuneration, one meeting of the Board Committee on Non-Executive Directors’ Remuneration and three Nomination Committee meetings. The Board normally holds a separate meeting at least once a year dedicated almost entirely to strategy. The non-executive directors met twice during the year, including once without the Chairman present.Mike Toms was unable to attend one Board meeting during the year due to illness and there were no other absences from any other Board or Committee meetings.Board activity during the yearThe Board visited both the North East and Essex divisions which provided the non-executive directors with the opportunity to see at first hand the work of the divisions and to meet with construction and sales people on site and other members of the divisional teams. The Board has a programme of matters which it considers at each Board meeting and also an annual programme of presentations and reports from senior Head Office, regional and divisional management and external advisers. In between Board meetings the directors receive interim papers to keep them updated on the Group’s performance.During the year the work carried out by the Board included:• Strategy.• Risk and internal control.• Approval of the revised Anti-Bribery andCorruption Policy.• Consideration of recommendations from theBoard Committees.• Scrutiny of reports from the Chief Executive,Group Finance Director, Group GeneralCounsel and Company Secretary and seniormanagement at each Board meeting.• Regular reports on health and safetymatters from the Chief Executive and areview of procedures and Board training byoutside consultants.• Approval of major land purchases.• Board evaluation.• Approval of the sale of the Group’s interest inBarking Riverside Limited.• Approval for the opening of the new SouthMidlands division in February 2016 andapproval for the opening of a further newdivision in County Durham on 1 August 2016.• Appointment of Simon Scougall asGroup General Counsel and CompanySecretary from 1 February 2016 followingKevin Wrightson’s retirement as GroupCompany Secretary.• Corporate responsibility progressagainst targets.• Approval of the renewal of existing bankfacilities and the extension of existing andnew bank facilities.• Presentations from each of the three RegionalChairmen on the performance of thedivisions under their responsibility.• Presentation on progress with thedevelopment and roll out of standardhouse types.• Presentations from sales, technical, IT andCR Head Office departments.• Approval of revised terms of reference forBoard Committees.• Approval of IT expenditure.• Review and update of thewhistleblowing procedure.• Approval of Annual Report and Accountsfor 2014/15.• Approval of preliminary announcement,interim results and trading updates.• Recommending the final dividend for2014/15 to be approved by shareholders andapproval of the interim dividend for 2015/16.46 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCECorporate Governance Report continuedAction ProgressMore time and resources to be devoted to the consideration of risk at Board meetings.A Group Head of Risk has been appointed who will help the Board to deliver and embed best practice on risk identification and management throughout the Group. The risk register has been enhanced and further developed.Below Board level succession planning. The recent appointment of a Group Human Resources Director will permit greater focus to be given to the development of people below Board level, which will enable the Board to have more robust succession planning in place for those below Board level positions.Further improvement to the nature and quality of information reported to the Board.The format and content of Board papers and minutes have been revised during the year to provide greater consistency and more focussed content.Annual Report and Accounts 2016 Bellway p.l.c. 47Training and developmentThe Board receives appropriate training and updates on various matters relevant to its role and responsibilities, as and when required. Training needs are reviewed as part of the performance evaluation process and on an ongoing basis. Following this year’s evaluation no specific training needs were identified, however, the Board does receive annual training on health and safety and also received a presentation from an external adviser on current developments in the UK and London housing markets. Non-executive directors regularly attend external training sessions designed specifically for non-executives and members of Board committees.Board balance and independenceThe roles of Chairman and Chief Executive are separate, with a clear division of responsibilities ensuring a balance of responsibility and authority at the head of the Group.The Chairman is not regarded as independent as he was formerly Chief Executive of the Company. The Company considers all of its other non-executive directors, excluding the Chairman, to be independent, as defined in the Code. Each of the independent non-executive directors has, at all times, acted independently of management and has no relationship which would materially affect the exercise of his or her independent judgement and decision-making. The senior independent non-executive director is John Cuthbert, with whom shareholders may raise any queries or concerns they may have.Whenever any director considers that he or she is interested in any contract or arrangement to which the Group is or may be a party, due notice is given to the Board. No such instances have arisen during the year.Board evaluationThis year’s evaluation of the performance and effectiveness of the Board, its committees and individual directors, was again conducted internally. Each director completed a questionnaire in relation to the performance of the Board and any committees of which they were a member which was followed by the Chairman meeting individually with each director to discuss the points raised. The Chairman’s performance was assessed by the senior independent non-executive director, who considered the views of the other directors as part of that process. The Chairman evaluated the performance and effectiveness of each of the directors. Each committee chairman reviewed and discussed the committee questionnaires with the committee members before reaching their conclusions on how the committees had performed during the year and finally the Board, led by the Chairman, evaluated its own performance. The evaluation concluded that, overall, the Board and its committees are performing well. The Chairman’s Statement on Corporate Governance above provides further information on this year’s Board evaluation process and progress made against the areas for improvement which were identified in last year’s evaluation process.The Board committeesThe Board has formally constituted Audit, Remuneration and Nomination Committees. The terms of reference for these committees are available either on request from the Group General Counsel and Company Secretary, at the AGM or on our website: www.bellwaycorporate.com. Other committees of the Board are formed to perform certain specific functions as required from time to time.The work carried out by each of the Board committees during the year is described in the reports of the committee Chairmen which follow.Board Committee on Non-Executive Directors’ RemunerationThe Board Committee on Non-Executive Directors’ Remuneration comprises the executive directors and is chaired by the Chief Executive. It meets at least once a year to review and recommend the terms, conditions and remuneration of the non-executive directors (excluding the Chairman). Last year it met on one occasion to review the fees and terms of appointment of the non-executive directors.Progress against actions from the 2015/16 reviewFocus areas for 2016/17 To further develop the Board succession plan. To further develop, with support from the Group Human Resources Director, the succession plan for those immediately below Board level.Nomination Committee ReportThe main areas of the Nomination Committee’s (the 'Committee') responsibility are:• To review the structure, size and compositionof the Board and recommend to the Boardany changes it considers appropriate. Thisencompasses membership of the Boardcommittees and the re-appointment of non-executive directors at the end of their termof office.• To consider succession planning not onlywithin the Board but also immediately belowBoard level and ensure appropriate plans arein place.• To identify candidates to fill Board vacanciesand nominate these to the Board forapproval. Appointments to the Board aremade on merit using a formal, rigorous andtransparent process against objective criteriarecommended by the Committee. Thecriteria take into account the skills, knowledgeand experience of existing members of theBoard and the importance of diversity, in all itsaspects, within the Board. The appointmentof a non-executive director is for a specifiedterm and re-appointment is not automaticand is made on the recommendation of theCommittee.• To carry out an annual performanceevaluation of the Committee and review theresults of the Board performance evaluationin relation to the composition of the Board.The Committee meets at least twice a year and operates under its own terms of reference. These have been agreed by the Board and are available at www.bellwaycorporate.com/corporategovernance. The members of the Committee are shown in the table on the left. Activities during 2015/16The Committee met on three occasions during 2015/16. The main activities of the Committee during the year were:• To approve the Nomination Committeereport for inclusion in the 2014/15annual report.• To initiate preliminary discussions on Boardsuccession with a specific focus on thechanges in the composition of the Boardover the next two to three years as existingnon-executive directors reach the end oftheir terms of appointment.• To recommend to the Board that PaulHampden Smith and Denise Jagger bere-appointed as non-executive directorsfor a three-year period from 1 August 2016.The Committee concluded that they eachcontinued to be independent of characterand judgement and make a valuablecontribution both to the work of the Boardand its committees to which they areappointed. They were not present whendiscussions regarding their ownre-appointments took place.• Oversaw the appointment of the GroupGeneral Counsel and Company Secretaryand other senior appointments.• To carry out an evaluation of theperformance of the Committee.The main area of focus for the Committee in 2016/17 will be to further develop the Board succession plan and, with support from the Group Human Resources Director, the plan for those immediately below Board level.John CuthbertChairman of the Nomination Committee17 October 2016John Cuthbert48 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCENomination Committee Report“ The main area of focus for the Committee in 2016/17 will be to further develop the Board succession plan and, with support from the Group Human Resources Director, the plan for those immediately below Board level.”MembershipChairman of the Nomination CommitteeDirectorDate appointed to CommitteeJohn Cuthbert (Chairman)1 November 2009, appointed Chairman on 1 February 2013Mike Toms 1 February 2009John Watson 1 February 2013Paul Hampden Smith 1 August 2013Denise Jagger 1 August 2013Main focus in 2015/16 Approval of the Nomination Committee report for inclusion in the 2014/15 annual report. Board succession focussing on changes in the composition of the Board over the next two to three years. Recommending the re-appointment to the Board of Paul Hampden Smith and Denise Jagger. To oversee the appointment of the Group General Counsel and Company Secretary and other senior appointments. Performance evaluation of the Committee. Review annual report and accounts Review and assess systems and controls in place to assess the significant financial reporting judgements Review and assess risk and internal controls Monitor performance and independence of external auditor Review the effect of adopting IFRS 15 ‘Revenue from contracts with customers’ and IFRS 16 ‘Leases’ on the Group’s financial statementsAudit Committee ReportAnnual Report and Accounts 2016 Bellway p.l.c. 49Audit Committee ReportIntroductionI am pleased to present the Audit Committee (the ‘Committee’) report for the year ended 31 July 2016. The Committee is an important component of the governance framework of the Group, with its principal activities focussed on the integrity of financial reporting, the quality and effectiveness of internal controls, risk management and reviewing the performance of the external auditor.Paul Hampden SmithCommittee membership and meetingsChairman of the Audit CommitteeThe Committee comprises four independent non-executive directors and I confirm that between them they have an appropriate and relevant combination of experience and knowledge. Furthermore the Code requires that the Committee has at least one member with recent and relevant financial experience and the Board has confirmed that they believe that I, as Chairman of the Committee, satisfy these criteria. The Board has also confirmed that they are confident that the collective experience of the Committee members enables them to act effectively as an Audit Committee. Further information on the experience and knowledge of the Committee members is included in the directors’ biographies on pages 40 to 41.In line with the Terms of Reference, there were three scheduled meetings of the Committee during the year and all members were in attendance at each meeting.The Group Finance Director and Group Finance Manager attend meetings by invitation and were present at all meetings during the year. The Committee is supported by the Group General Counsel and Company Secretary who acts as secretary to the Committee. Two of the meetings during the year were also attended by representatives from the external auditor, KPMG LLP (‘KPMG’), who also met with the Committee independently of management. No issues were raised during these discussions. I also had further discussions, independently of each other, with the Group Finance Director and KPMG and reported relevant information to other members of the Committee.In advance of Committee meetings, detailed papers are prepared both by management and KPMG, thereby allowing informed discussions and decisions to take place.Responsibilities and terms of referenceThe main responsibilities of the Committee are:1. Financial reporting• To monitor the integrity of the financialstatements of the Group and any otherformal announcements relating to theGroup’s financial performance, reviewing andreporting to the Board on significant financialreporting issues and judgements containedin them, whilst having regard to matterscommunicated by the external auditor.• To review and challenge where necessary,the actions and judgements of management,in relation to the preliminary and interimannouncements and Annual Report andAccounts, before submission to the Board.• Where the Committee is not satisfied with anyaspect of the proposed financial reporting bymanagement, it shall report its views to theBoard.• Where requested by the Board, theCommittee should review the content of theAnnual Report and Accounts and advise theBoard on whether, taken as a whole, it is fair,balanced and understandable and providesthe information necessary for shareholders toassess the Group’s position and performance,business model and strategy.“ The Committee is an important component of the governance framework of the Group, focussed on financial reporting, risk management and internal and external audit.”Membership DirectorDate appointed to CommitteePaul Hampden Smith (Chairman)1 August 2013, appointed Chairman on 1 February 2014Mike Toms 1 February 2009John Cuthbert 15 January 2010Denise Jagger 1 August 2013Main focus in 2015/16 Reviewed annual report and accounts Reviewed and assessed systems and controls in place to assess the significant financial reporting judgements Reviewed and assessed internal controls and risk management systems Oversaw creation of risk and internal audit function Updated the Bribery Act Policy and ProcedureUpdated the Whistleblowing Procedure Monitored performance and independence of external auditorFocus areas for 2016/17Main activities during the yearThe main activities performed by the Committee during the year in each area of responsibility are described below:1. Financial reporting• Reviewed the final draft of the AnnualReport and Accounts, together with areport produced by KPMG which detailedtheir findings both on areas of key financialreporting judgement and other areas of auditfocus.• Reviewed the final draft of the 2016 InterimAnnouncement.• Obtained an update on the Group’s progressin determining the likely new revenuerecognition accounting policy in relationto the adoption of IFRS 15 ‘Revenue fromcontracts with customers’.• The Committee confirmed that they believethe significant financial reporting judgementsduring the year continued to be: – profit recognition; and– the carrying value of land and workin progress.50 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEAudit Committee Report continuedResponsibilities and terms of reference continued2. Internal control and risk management• To review the Group’s internal financialcontrols and, unless expressly addressed bya separate Board risk committee composedof independent directors or by the Boarditself, the Group’s internal control, internalaudit and risk management systems.• To assess the scope and effectiveness ofthe systems established by management toidentify, assess, manage and monitor financialand non-financial risks.• To review the Group’s arrangements for itsemployees to raise concerns, in confidence,about possible wrong-doing or financialreporting or other matters through theGroup’s ‘Whistleblowing’ procedure and toensure that arrangements are in place for theproportionate and independent investigationof such matters and for appropriate follow-up action.• To review annually the Group’s policies andprocedures to ensure compliance with theBribery Act 2010.3. External audit• To oversee the process for selecting theexternal auditor, including approval of theirterms of engagement and negotiation andagreement of their remuneration.• To consider the appointment/re-appointmentof the external auditor and to assess theindependence of the external auditor,ensuring that key partners are rotated atappropriate intervals.• To make appropriate recommendationsthrough the Board to the shareholders fortheir approval at the AGM in relation to theappointment, re-appointment and removalof the external auditor.• To agree with the external auditor, before theaudit commences, the nature and scope ofthe audit and to review the auditor’s qualitycontrol procedures and steps taken by theauditor to respond to changes in regulatoryand other requirements.• To review the external auditor's managementletter and management's response.• To consider management's response to anymajor external audit recommendations.• To authorise the provision of non-auditservices by the external auditor and toensure that the provision of non-auditservices dos not impair the external auditor’sindependence or objectivity.• To ensure that the audit services contractis put out to competitive tender at regularintervals as required by regulation or bestpractice, and in respect of such tenderoversee the selection process and ensurethat all tendering firms have such access asis necessary to information and individualsduring the duration of the tender process.A comprehensive version of the Committee’s terms of reference is available on our website at www.bellwaycorporate.com/corporategovernance.Annual Report and Accounts 2016 Bellway p.l.c. 51The table below sets out the matters considered and the action performed by the Committee during the year in relation to the significant financial reporting judgements:Profit recognition The carrying value of land and work in progressMatters consideredAction performed by the CommitteeGross profit of £574.8 million has been recognised on housing and other revenue. Gross profit for completed housing sales is recognised based on the latest whole site/phase margin, which is derived as part of the site/phase valuation process. These valuations are updated frequently throughout the life of the site/phase and include both actual and forecast selling prices, land costs and construction costs. The forecast costs and revenues are estimates and are inherently uncertain due to potential changes in market conditions.Land and work in progress (including showhomes) are the most significant assets on the Group’s balance sheet and at 31 July 2016 had a book value of £2,532.1 million. All inventory is held at the lower of cost and net realisable value, which is determined by the whole site/phase margin as set out in the ‘profit recognition’ section. The risk is that for any site/phase, currently trading or not, that the whole site/phase margin may be negative resulting in a net realisable value that is below cost. Management have reviewed all sites/phases to ensure those with a forecast negative whole site/phase margin have an appropriate provision and this has been re-assessed at regular intervals during the year.The Committee understands the Group’s Revenue and Gross Profit Recognition Policy and the related systems and controls. Management outlined the existing systems and controls surrounding revenue recognition, gross profit recognition and the valuation process. The Committee discussed these controls, challenging management where appropriate.The external auditor explained to the Committee the work they have undertaken in relation to the systems and controls surrounding revenue recognition, gross profit recognition and the valuation process and provided an explanation of the detailed substantive testing performed. The Committee also reviewed a summary prepared by KPMG explaining their findings from their work testing the design and operating effectiveness of the Group’s systems and controls pertaining to revenue recognition and the valuation process.Following enquiry with management and the external auditor, the Committee concluded that there are appropriate systems and internal controls in place to assess and quantify both actual and forecast selling prices and costs and that the Group’s Revenue and Gross Profit Recognition Policy is appropriate and has been properly applied in these financial statements.The Committee understands the Group’s methodology in reviewing the carrying value of land and work in progress and the surrounding controls. Management provided a summary of the work undertaken which was considered by the Committee.The external auditor explained to the Committee the work they performed in relation to the carrying value of land and work in progress. This included the procedures identified in relation to profit recognition and a review of the latest site/phase valuation for all sites/phases active during the year and those that are yet to commence production.Following enquiry with management and the external auditor, the Committee concluded that there are appropriate systems and internal controls in place to assess the carrying value of land and work in progress and that the carrying value of these assets in the financial statements is appropriate.2. Internal control and risk managementThe Committee is responsible for reviewing and assessing the Group’s internal controls and risk management systems and providing guidance on these to the Board. The Board is responsible for reviewing the effectiveness of the system of internal controls.Throughout the year the risk register has been reviewed and updated by management. This review included ensuring the completeness of risks, assessing their likelihood, impact and the control effectiveness. Risk is considered at each Board meeting, with a full review of the risk register taking place at least annually. The internal control and risk management processes only reduce the risk of material misstatement or loss, and do not eliminate this risk completely.During the year a detailed analysis of the risk register was prepared by management and was considered by the Committee. This analysis set out both the existing controls and included consideration of additional controls that could be implemented to further enhance the control environment. Our principal risks, which are described in the Strategic Report on pages 22 to 23, are regularly reviewed and cover all aspects of our operations including land acquisition, planning, construction, health and safety, sales, legal and human resources. The continuing role of the Board is, on a systematic and ongoing basis, to review the key risks inherent in the business, the operation of the systems and controls necessary to manage such risks and their effectiveness and to satisfy itself that all reasonable steps are being taken to mitigate these risks. The key areas of control are as follows:• The Board has agreed the principal risks,which are reviewed throughout the yearand has considered the extent to which themeasures taken by the Group mitigate thoserisks.• The acquisition of land and land interestsis initiated by divisional management andreviewed by the appropriate RegionalChairman prior to submission to Head Officefor approval. All land acquisitions mustachieve minimum financial acquisition criteriaand are subject to approval by the GroupGeneral Counsel and Company Secretaryor the executive directors (depending uponvalue) and in certain circumstances, approvalby the Board.• A comprehensive monitoring and reportingsystem is in place including annual budgets,monthly forecasting and managementreporting, including variance analysis andcommentary. This is produced by divisionalmanagement and reviewed by the RegionalChairmen and function heads at Head Office.Summaries are also provided to the executivedirectors.• Monthly divisional board meetings are heldto review divisional performance, whichare attended by the Regional Chairmen.The executive directors and Group GeneralCounsel and Company Secretary attendcertain divisional board meetings on aregular basis during the year and thisis supplemented with main Board visitsto divisions.3. External auditAudit effectiveness and re-appointmentKPMG is the external auditor and their performance is monitored by the Committee and the Board. The Committee reviewed the performance of KPMG during the year utilising the guidance note titled ‘Audit Quality’ produced by the Financial Reporting Council.This review consisted of:• Considering the robustness andappropriateness of KPMG’s approach toauditing the significant risk areas facing theGroup.• Considering whether KPMG’s materialityproposal for the 2014/15 financial year,which was the most up-to-date informationheld at the date of the review, was set at anappropriate level for the component partsof the Group.• Discussions with management who wereinvolved in the financial reporting processes.• Gaining an understanding of the findings ofthe Audit Quality Review (‘AQR’) team of theFinancial Reporting Council following theirinspection of audit firms including KPMG.This included understanding whether anyof the findings would have affected the audit.• An understanding of the AQR and internalKPMG quality review findings specifically inrelation to the engagement partner, NickPlumb.• Considering KPMG’s independence,objectivity and professional scepticism.• Reviewing the performance of KPMG againsttheir audit strategy for the 2014/15 financialyear, the most recent fully completedaudit cycle, and their interaction with theCommittee during the process.• Considering how KPMG have added valueand demonstrated proactivity.The outcome of the review was that the Committee recommended to the Board, which is in turn recommending to the shareholders, that KPMG be re-appointed as the auditor of the Group.KPMG has been the auditor of the Group since 1979 when Bellway p.l.c. was listed and the audit has not been tendered in the intervening period. Nick Plumb is the lead audit partner and has just completed his third year out of a maximum of five years in this role. We are aware of the Order of the Competition and Markets Authority in relation to FTSE 350 companies which will require us to change our external auditor by the date of the AGM prior to June 2020 and intend to tender the audit in the next three years.52 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEAudit Committee Report continuedMain activities during the year continued2. Internal control and risk managementcontinued• Site/phase valuations are producedperiodically throughout the life of a site/phase, with the actual and forecast costs andrevenues produced at a divisional level priorto review by the divisional management teamand Head Office team.• Regular visits to sites are undertaken by in-house health and safety teams and externalconsultants to monitor health and safetystandards and performance.• A central treasury function operates at HeadOffice ensuring that optimum financing isobtained for the Group as a whole.• A number of our key functions are dealtwith centrally. These include taxation,pensions, insurance, information technology,legal, health and safety, human resourcesand company secretarial functions. Thiscentralisation ensures a consistent approachand the appropriate range of skills to managethese specialised areas.Where any control recommendations are made by the external auditors, these are considered and where relevant are implemented to further strengthen the control environment.During the year, as required by the Code, the Committee considered the need for a specific risk and internal audit function. Notwithstanding the robust systems and controls that we have in place, we decided to create a risk and internal audit function during the year given the significant growth experienced by the Group over recent years. A Head of Risk has been recruited who has a direct reporting line into both the Group Finance Director and the Chairman of the Audit Committee.The focus of the risk and internal audit function has been designed to consider both areas of risk within the Group and how they can be better mitigated, as well as the overall control environment of the Group thereby providing assurance to the Committee on the robustness of controls in place. A rolling risk and internal audit plan is being developed to ensure all aspects of Group activities are considered on an on going basis. The results of all risk and internal audit work will be presented to the Committee at each of their meetings, with control recommendations being made as part of each piece of work. When necessary, and as agreed by management and the Committee, the Head of Risk will utilise specialists from within relevant functions to assist in delivering the plan.Paul Hampden SmithChairman of the Audit Committee17 October 2016Annual Report and Accounts 2016 Bellway p.l.c. 53Auditor independence and non-audit feesDuring the year the Committee reviewed the Group Independent Auditor Policy which seeks to preserve the independence of the external auditor by defining those non-audit services the external auditor may and may not provide. There are clearly defined levels of approval depending on the value of the work to be provided. Where fees exceed £100,000 or where total non-audit fees equate to 100% of audit fees, Board approval is required. In relation to any material project with fees in excess of £200,000 where the auditor is considered for the provision of services, this would be subject to a competitive tendering process.The external auditor would not be engaged for any of the following non-audit related services:• bookkeeping or other services related to theaccounting records or financial statements;• financial information system design andimplementation;• appraisal or valuation services, fairnessopinions, or contributions in kind reports;• actuarial services;• internal audit services;• management functions or human resources;• broker or dealer, investment adviser orinvestment banking services;• legal services and expert services unrelatedto the audit; and• any other service that is impermissible byregulation.For an analysis of fees paid to KPMG see note 4 to the accounts. The non-audit fees are for tax compliance and ad hoc tax advisory work and the audit of the final salary pension scheme. The ratio of non-audit fees for the year to the external audit fee was 9.4%.KPMG have also provided written confirmation that they remain independent.The Group’s Independent Auditor Policy has been updated following the year-end to reflect the implementation of the EU Audit Directive and Regulation that became effective in June 2016. As a result tax services are no longer provided by KPMG. The Committee confirms there are no independence issues in relation to the external auditor and that the policy has been adhered to throughout the year.Audit Committee assessmentDuring the year the Committee assessed both the performance of the Committee as a whole and that of its individual members utilising a questionnaire that was independently completed. I reviewed the results and no issues were raised.WhistleblowingThe Group’s Whistleblowing Procedure is well publicised at all locations and allows all employees to raise concerns in confidence to either the Group General Counsel and Company Secretary or Deputy Group Company Secretary or alternatively, an independent third party. The Committee reviewed the Whistleblowing Procedure and updated it to adhere to best practice.Bribery ActThe Group’s Anti-Bribery and Corruption Policy and procedures are circulated throughout the Group and are included on our intranet. This already robust Policy and procedures were further strengthened by management and external advisers during the year, with these amendments being approved by the Committee. The Group General Counsel and Company Secretary presented specific sections of the revised Policy to Regional Chairmen, Managing Directors and Land Directors to further emphasise the importance of compliance with the Policy and an on-line training module is currently being devised for all employees for 2016/17.“The Committee considers that the three main components of the remuneration paid to the executive directors fairly reflects both Group and individual performance during the 12-month and three-year period to 31 July 2016.”Annual StatementI am pleased to present the Report of the Board on Directors’ Remuneration for the 2015/16 financial year. This has been a year in which the Group has made significant progress which is reflected in this report.The Board Committee on Executive Directors’ Remuneration (the ‘Committee’) considers that the use of targets based on annual profitability and non-financial metrics provide a rounded assessment of performance, and that a focus on total shareholder return provides an appropriate link with our aim of generating long-term returns for our shareholders. The remuneration policy is structured so that a significant proportion of the executive directors’ total remuneration comprises performance-linked bonuses and long-term share awards. The Committee also considers that the current policy, which has been approved by shareholders, continues to reward appropriately the directors for delivering the strategy of building shareholder value through disciplined volume growth. As we enter the third and final year of our current policy, the Committee will review it during this year and a new policy will be put forward for shareholder approval at the 2017 AGM.How the remuneration policy was applied in 2015/16The basic salaries of the executive directors were increased by 3% in line with the average increases awarded to the rest of the workforce generally. The annual bonus payments are linked to KPIs which require the directors to deliver improved operating profit as well as meeting non-financial targets all of which the Committee considers aligns the directors’ interests with those of shareholders, by building shareholder value. Progress made during the year on those targets is set out briefly below and in more detail on pages 62 to 63.• Pre-exceptional operating profit increased by36.5% from £360.4 million to £492.0 million.• Short-term land bank of plots available forconstruction with planning permissionincreased by 8.4%.• NHBC health and safety incident rateimproved from 0.936 to 0.766.• Customer care score improved from 83.8%to 85.7%.These results reflect performance over a broader range of performance indicators that demonstrate the management’s success in delivering the strategy. As a result the directors earned a total bonus of 115% out of a maximum of 120% of salary, which the Committee believes has been fully justified by the progress made by the Group. It will be payable in November 2016. Looking forward, we have a strong order book and are prudently financed to withstand any turbulence in the market.Long-term incentive awards made in 2013 to Ted Ayres and Keith Adey were subject to three-year performance conditions based on relative total shareholder return (‘TSR’), which were tested at the end of 2015/16. For 50% of these awards, the Company’s TSR was compared to the companies within the FTSE 250 (excluding financial services companies and investment trusts). Bellway’s TSR of 90.6% ranked it within the upper quartile and therefore this part of the award vested in full. The TSR condition relating to the other 50% was measured against a group of other listed housebuilders and Bellway’s TSR outperformed the median by more than 7.5% p.a. and this part of the award also vested in full.The three-year TSR performance reflects a period in which we have consistently and significantly improved our performance compared with other companies. Since 2013, completions have increased by 54.3%, operating margin has increased from 13.6% to 22.0% and operating profit has increased by £340.9 million. This growth has been achieved while maintaining robust finances. In addition, during the year ROCE has risen by 430bps to 28.2% (2015 – 23.9%) and the NAV has increased by 18.4% to 1,522p (2015 – 1,286p).The Committee considers that the three main components of the remuneration paid to the executive directors fairly reflects both the Group and individual performance during the 12-month and three-year period to 31 July 2016. How we will implement the remuneration policy in 2016/17From 1 August 2016 the directors have been awarded salary increases which are consistent with the average general workforce increase of around 3%.The bonus structure and opportunity remains as before (the maximum annual bonus potential is 120% of salary, with 90% of salary based on operating profit and 30% of salary based on non-financial performance measures). Long-term incentive award levels are set at 130% of basic salary and executive directors are required to retain shares which vest (net of any shares required to be sold to settle the relevant taxes), for a period of at least two years from vesting and in any event, to a level of at least one year’s basic salary. Shortly after the year-end we received the GC100 and Investor Group Directors’ Reporting Remuneration Guidance. The Committee believes that its policies, practices and procedures reflect best practice but it will take into account this guidance in its deliberations in future.At the last AGM over 99% of our shareholders who cast their votes, voted in favour of the Report of the Board on Directors’ Remuneration (which consists of this Annual Statement and the Annual Report on Remuneration). Shareholders will be asked to give their support again by voting in favour of the Report of the Board on Directors’ Remuneration at this year’s AGM. Further information on this resolution is set out in the Notice of Meeting of the AGM to be held on Tuesday 13 December 2016.Mike TomsChairman of the Board Committee on Executive Directors’ Remuneration17 October 2016Mike TomsChairman of the Board Committee on Executive Directors’ Remuneration54 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEReport of the Board on Directors’ RemunerationThe remuneration policy has been developed taking into account the principles of the UK Corporate Governance Code published in 2014, the views of the Company’s major shareholders and the Investment Association (‘IA’) and Institutional Shareholder Services Inc. (‘ISS’) guidelines on remuneration. Objectives of remuneration policyThe aim of the Committee is to ensure that the Company has competitive remuneration packages in place in order to recruit, retain and motivate executive directors in the overall interests of shareholders, the Group, its employees and its customers.The Committee has a policy of paying a level of remuneration at around the mid-market level of a peer group of similar UK housebuilding businesses, subject to experience and performance. The Committee uses this comparative approach to benchmarking with caution, recognising the relatively low number of direct housebuilding comparators, their differing size and the risk of an upward ratchet effect with any peer-based analysis. The structure of the package has been designed to ensure that the performance-related elements of remuneration (annual bonus and long-term incentives) constitute a significant proportion of an executive’s potential total remuneration package, but are only receivable if stretching performance targets are achieved.The structure of the performance conditions for annual bonus and long-term incentives has been designed to provide a strong link to the Group’s performance, namely a focus on maximising profit in a sustainable fashion and producing superior shareholder returns, thereby generating a strong alignment of interest between senior executives and shareholders. Consideration of employment conditions elsewhere in the Group Whilst we do not consult directly with employees when drawing up the executive remuneration policy, in determining the elements of remuneration for the executive directors the Committee takes into consideration the pay and conditions of employees throughout the Group as a whole, paying particular attention to the levels of basic pay increase awarded to the workforce generally. Normally, the salaries of the directors are increased in accordance with the general pay increase awarded to the workforce and it is the intention of the Committee to revert to this practice now that the executive directors’ salaries have reached mid-market levels(1). All employees, including the executive directors, can join the Group’s savings related share option arrangements, have life assurance benefits and have access to pension arrangements. A significant proportion of employees benefit from health insurance, a company car or car allowance and are eligible to participate in a discretionary bonus scheme. The Committee is apprised regularly of any significant policy changes for the workforce generally and management below Board level in particular. Consideration of shareholder views The Committee takes into account the views of shareholders. When any significant changes are proposed to the remuneration policy, the Chairman of the Committee will consult with major shareholders and representative bodies in advance. In setting the policy, the Committee consulted with major shareholders, the IA and ISS in 2013/14 on the proposed salary increases for the executive directors to bring them in line with their peers, the proposed changes to the non-financial annual bonus performance measures and long-term incentive provision going forward. Note:1. Since 2015, salary increases have been in accordance with the general pay increase awarded to the workforce.Annual Report and Accounts 2016 Bellway p.l.c. 55This part of the remuneration report, the Directors’ Remuneration Policy, was approved by shareholders at the AGM on 12 December 2014. Although not required by the regulations, the substantive terms of the policy are reproduced here for ease of reference. Any details, however, that were specific to 2015/16 (for example, the application of remuneration policy chart) have been updated, where applicable, to reflect the current position. As no changes are being made to the policy, there will be no vote on the remuneration policy at the 2016 AGM. The policy will be reviewed during the coming year, including consultation with stakeholders in advance of a shareholder vote at the 2017 AGM.Directors’ Remuneration Policy(1). For future awards the Committee may choose a financial measure such as EPS, ROCE or NAV in conjunction with or as an alternative to TSR depending on the medium- to long-term priorities of the Group at the time of grant.If the Committee decides to introduce a financial measure, it will carry out prior consultation with major shareholders.Further details of the performance metrics applying to the awards for 2016/17 are set out in the Annual Report on Remuneration.To provide a structure and value that is market competitive.Pension contributions into the Company’s Group Self Invested Personal Pension Plan and/or a salary supplement in lieu of pension contributions.20% of salary. Not applicable.To provide a range and value that is market competitive.Comprises car or car allowance, life assurance and health insurance. Other benefits may be provided where appropriate.Any expenses incurred in carrying out duties will be fully reimbursed by the Company including any personal taxation associated with such expenses.Not applicable. Not applicable.PENSIONBENEFITS56 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEReport of the Board on Directors’ Remuneration continuedPolicy table This section of the report describes the key components of the remuneration arrangements for each element of remuneration for executive and non-executive directors which, having been approved by shareholders, has been in operation since the 2014 AGM:Component and link to strategyOperation Maximum opportunity Framework to assess performance SALARYANNUAL BONUSLONG-TERM INCENTIVES (PERFORMANCE SHARE PLAN (‘PSP’))To be market competitive and therefore assist in recruiting, retaining and motivating high quality executives. Reflects individual role and experience.Salaries are normally reviewed in July each year and changes normally take effect from 1 August. They are determined by reference to market levels of a peer group of similar UK housebuilding businesses, taking account of salaries at other companies of a similar size and by taking account of individual performance and experience. Where salaries of new executive directors are positioned below market levels, the Committee’s policy is to progress these over time as experience is gained, subject to performance.No prescribed maximum. Increases normally in line with the average for the workforce generally. Increases may be below or above this e.g. due to promotion or role change or a significant change in the size and scope of the Company.Salaries for 2016/17 are set out in the Annual Report on Remuneration.In addition to the reviews by the Chairman, as part of the annual Board evaluation, the performance of the executives and the Company is kept under continuous review by the Board.To reward achievement with a combination of financial and non-financial operational based performance targets in accordance with Group KPIs.Annual bonuses are normally payable in November following the year end on 31 July, subject to the achievement of performance targets that were set at the start of the year on 1 August. The Company operates a clawback mechanism which allows the Company, in exceptional circumstances, to clawback some or all of the payments made under the variable components of an individual’s remuneration.120% of basic salary maximum.The bonus is based on a combination of financial and non-financial objectives, with financial performance accounting for a majority of the overall bonus opportunity. The Committee determines the choice of measure(s) and their weighting for each year to ensure alignment with the Board’s priorities over the short to medium term.Details of the performance targets for the forthcoming year are set out in the Annual Report on Remuneration.To encourage long-term value creation, aid retention, encourage shareholding and promote alignment of interests with shareholders.The Company operates a PSP as its primary long-term incentive.Annual awards of nil cost options or conditional awards may be made under the PSP to the executive directors, at the discretion of the Committee. Awards normally vest three years after grant, subject to the achievement of stretching performance targets.Dividend equivalents (in cash or shares) may be payable.The Company operates a clawback mechanism which allows the Company, in exceptional circumstances, to clawback some or all of the payments made.A post-vesting minimum holding period of two years applies to awards granted from 2014 onwards.150% of basic salary. PSP awards are subject to stretching three-year targets. The current awards are subject to relative TSR conditions against relevant comparator companiesAnnual Report and Accounts 2016 Bellway p.l.c. 57Component and link to strategyOperation Maximum opportunity Framework to assess performance CHAIRMAN AND NON-EXECUTIVE DIRECTORSTo set appropriate fees in light of the time commitment, responsibilities, wider market and best practice.The Chairman’s fee is determined by the Board Committee on Executive Directors’ Remuneration.The remuneration of the non-executive directors is determined by the Board committee on Non-Executive Directors’ Remuneration, which comprises the executive directors. Fee levels are normally reviewed annually, taking into account the time commitment and responsibilities of the roles including membership or chairmanship of Board committees and the level of fees for similar positions in comparable companies.Non-executive directors are not normally entitled to any benefits (with the exception of the Chairman who receives health and life assurance benefits) or pension. They do not participate in any bonus or long-term incentive plans (with the exception of the Chairman’s outstanding PSP awards which he retained when he left his role as Chief Executive(2)) and they are not entitled to compensation on termination of their arrangements, other than normal notice provisions of three months given by either party.Travel, accommodation and other related expenses incurred in carrying out the role will be paid by the Company including any personal taxation associated with such expenses.Not applicable.The performance of the non-executive directors is assessed by the Chairman. The senior independent non-executive director reviews the performance of the Chairman in conjunction with the directors.SHARE OWNERSHIP GUIDELINE FOR EXECUTIVE DIRECTORSTo align executive directors’ interests with those of shareholders.Executive directors are required to accumulate a minimum shareholding equivalent to 100% of basic salary. Within a period of three months of appointment an executive director must acquire a minimum of 1,000 ordinary shares in the Company and must retain at least 50% of any shares awarded under the PSP (or SMP in respect of awards granted in 2014 or before), after allowance for paying tax, until the requisite number of shares has been accumulated. If personal circumstances make this difficult, the Committee would exercise discretion.Not applicable.Not applicable.Notes:1. The Committee believes that relative TSR is an appropriate long-term performance metric as it generates an alignment of interest between executives and institutional shareholders byproviding a reward mechanism for delivering superior stock market performance. The TSR performance is independently calculated for the Committee by the Company’s brokers.2. For the avoidance of doubt, in approving this Directors’ Remuneration Policy, authority has been given to the Company to honour any commitments entered into with current or formerdirectors (such as in connection with the unvested SMP awards and the final SMP award which was granted in 2014, notwithstanding that the SMP will not form part of the Company’s policy going forward). Details of any payments made to former directors will be set out in the Annual Report on Remuneration as they arise. The Chairman’s PSP awards which were outstanding when he left his role as Chief Executive have now all been exercised and details were provided in the Annual Report and Accounts for the financial years in which the exercises took place.3. The executive directors may also participate in any all-employee plan operated by the Company up to prevailing HMRC limits.58 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEReport of the Board on Directors’ Remuneration continuedApproach to recruitment remunerationIn arriving at a total package and in considering the quantum for each element of the package, the Committee will take into account the skills and experience of the candidate and the market rate for a candidate of that experience as well as the importance of securing the preferred candidate.Element General policy DetailSalary At a level required to attract the most appropriate candidate. Discretion to pay lower basic salary with incremental increases as new appointee becomes established in the role.Pension and benefits In accordance with Company policies. Additional benefits in relation to recruitment may be provided where considered appropriate. For example, relocation expenses or allowances, legal fees and other recruitment-related costs may be payable.Bonus In accordance with existing schemes. Specific targets could be introduced for an individual within the maximum individual limits of the annual bonus plan applicable at the time. Pro-rating would be applied as appropriate for intra-year joiners.Long-term incentives (‘PSP’)In accordance with Company policies and maximum limits in the PSP rules.An award may be made in the year of joining or, alternatively, the award can be delayed until the following year. Targets would normally be the same as for other directors and grant levels consistent within the permitted individual maximum under the rules of the plan.Other share awards The Committee may make an incentive award to replace deferred or incentive pay forfeited by an executive leaving a previous employer (and, if required, by relying on the flexibility provided in the Listing Rules to grant such replacement awards).Awards would, where possible, be consistent with the awards forfeited in terms of vesting periods, expected value and performance conditions.Notes:1. For example, normal resignation from the Company or termination for cause (e.g. disciplinary issues).2. This may cover a range of circumstances such as business reorganisation, changes in reporting structure, change in requirement for the role, termination as a result of a failure to bere-elected at an AGM, etc. 3. Leaver for compassionate reasons such as death, injury, disability or retirement, with the agreement of the employer.The details of the executive directors’ service contracts are as follows:Executive director First appointed as a directorCurrent contract commencement dateTed Ayres 1 August 2011 1 August 2011Keith Adey 1 February 2012 1 February 2012The executive directors may accept external appointments provided that such appointments do not, in any way, prejudice their ability to perform their duties as executive directors of the Company. The extent to which any executive director is allowed to retain any fees payable in respect of such appointments, or whether such fees are remitted to the Company, will be assessed on a case-by-case basis. None of the executive directors currently hold any outside appointments.Annual Report and Accounts 2016 Bellway p.l.c. 59Service contracts and loss of office payment policy The executive directors have service contracts with a 12-month notice period from the Company and a 6-month notice period from the executive. The overriding principle for payments on loss of office will be to honour contractual remuneration entitlements. The Committee would determine, on an equitable basis, the appropriate treatment of performance-linked elements of the package, taking account of the circumstances, in accordance with the rules of each respective plan. Failure will not be rewarded.Element Leaver(1)Departure on agreed terms(2)Good leaver(3)Salary, pension and benefits (after cessation of employment)Nil. Up to 12 months’ basic salary, benefits and pension.Payments may be phased and subject to offset against alternative income from elsewhere during the notice period.The Company may pay in lieu of notice an amount equivalent to 12 months’ salary, pension and benefits.Apart from death, up to 12 months’ basic salary, benefits and pension, less any period of notice worked.Payments may be phased and subject to offset against alternative income from elsewhere during the notice period.The Company may pay in lieu of notice an amount equivalent to 12 months’ salary, pension and benefits.Annual bonus No bonus payable. For the proportion of the financial year worked, bonus may be payable pro-rata at the discretion of the Committee. There will be no bonus payment in respect of any period of notice not worked.For the proportion of the financial year worked, bonus may be payable pro-rata at the discretion of the Committee.PSP (and SMP awards granted to the current executive directors in 2014 or before)All awards, including those which have vested but are unexercised will lapse immediately upon cessation of employment.Awards will lapse upon cessation of employment, unless the Committee decides otherwise, in which case awards may vest.Where employment ends before the vesting date, awards may vest at the normal time (other than by exception) to the extent that the performance conditions have been satisfied.The level of vested award will be reduced, pro-rata, based upon the period of time after the grant date and ending on the date of cessation of employment, relative to the three-year performance period unless the Committee, acting fairly and reasonably, decides that such a scaling back is inappropriate in any particular case.Awards may be exercised within 12 months of the vesting date.Where employment ends before the vesting date, awards may be exercised at the normal vesting time (other than by exception) and only to the extent that the performance conditions have been satisfied.The level of vested award will be reduced, pro-rata, based upon the period of time after the grant date and ending on the date of cessation of employment, relative to the three-year performance period unless the Committee, acting fairly and reasonably, decides that such a scaling back is inappropriate in any particular case.Other payments Nil. Depending upon circumstances, the Committee may consider payments in respect of an unfair dismissal award, outplacement support and assistance with legal fees.The Company may pay for outplacement support and assistance with legal fees.1,4069414762,3871,591794100% 50% 33%100% 50% 34%24%26%32%34%24%32%35%26%60 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEReport of the Board on Directors’ Remuneration continuedAll non-executive directors have letters of appointment with the Company of no more than three years, subject to annual re-appointment at the AGM, with a three-month notice period by either side. The appointment letters for the Chairman and non-executive directors provide that no compensation is payable on termination, other than fees accrued and expenses.Non-executive director First appointed as a director Current letter of appointment commencement dateCurrent letter of appointment expiry date John Watson 1 August 1995 1 February 2016 31 January 2019Mike Toms 1 February 2009 1 February 2015 31 January 2018John Cuthbert 1 November 2009 1 November 2015 31 October 2018Paul Hampden Smith 1 August 2013 1 August 2016 31 July 2019Denise Jagger 1 August 2013 1 August 2016 31 July 2019Illustrations of application of remuneration policyThe remuneration policy results in a significant portion of remuneration received by executive directors being dependent on the Group’s performance. The chart below illustrates how the total pay opportunities for the executive directors vary under three performance scenarios: minimum, target and maximum. The chart, which has been based on the simplified long-term incentive policy applying from 2015 onwards (i.e. PSP awards at 130% of salary with the SMP no longer operated), is indicative, as share price movement and dividend accrual have been excluded.Note:1. Chart labels show proportion of total package comprised of each element.AssumptionsMinimum – fixed pay only (salary + benefits + pension/pay in lieu of pension), salary is actual for 2016/17, benefits are based on the value of actual benefits received in 2015/16 and pension/pay in lieu of pension is based on policy of 20% of salary applied to the 2016/17 salary.Target – fixed pay plus 50% of maximum bonus payout plus PSP award of 130% of salary with 50% of the award vesting. Maximum – fixed pay plus 100% of maximum bonus payout plus PSP award of 130% of salary with 100% of the award vesting. Fixed pay Annual bonus Long-term share awardsGROUP FINANCE DIRECTORCHIEF EXECUTIVEMinimum Target MaximumMinimum Target Maximum£0002,0001,5001,0005002,5000Annual Report and Accounts 2016 Bellway p.l.c. 61Annual Report on RemunerationThe Board Committee on Executive Directors’ RemunerationThe Board Committee on Executive Directors’ Remuneration (the ‘Committee’) comprises Mike Toms (Chairman), John Cuthbert, Paul Hampden Smith and Denise Jagger, who were members of the Committee throughout the year.Director Date appointed to the CommitteeMike Toms (Chairman) 1 February 2009 and appointed as Committee Chairman 1 February 2014John Cuthbert 1 November 2009Paul Hampden Smith 1 August 2014Denise Jagger 1 August 2014None of the Committee members have a personal financial interest, other than as shareholders, in the matters to be decided. There are no conflicts of interest arising from cross-directorships and no day-to-day involvement in running the business.The Committee meets at least twice a year and operates under its own terms of reference which have been agreed by the Board. These are available at www.bellwaycorporate.com/corporategovernance. Activities during 2015/16The Committee met six times during the year to conduct the following:• To approve the bonus payments and long-term incentive awards vesting levels for the 2014/15 year.• To approve the 2014/15 Report of the Board on Directors’ Remuneration.• To set the bonus targets for the 2016/17 year.• To make awards under the long-term incentive scheme.• To amend its terms of reference to include the remuneration of the Group General Counsel and Company Secretary and to agree his remunerationon appointment on 1 February 2016.• To review and determine the remuneration packages for the executive directors and the Group General Counsel and Company Secretary.• To review and determine the fee payable to the Chairman.• To review current market practice and future trends in executive remuneration.• To review remuneration policies for senior management below Board level.The Committee receives independent external advice from New Bridge Street (‘NBS’), part of Aon plc. NBS was appointed by the Committee and does not provide any other services to the Company other than to the Board Committee on Non-Executive Directors’ Remuneration. NBS is also a member of the Remuneration Consultants Group and abides by its Code of Conduct. The Committee is satisfied that NBS is independent. The total fee paid to NBS for advice to the Committees during the year was £57,245. The Committee also benefited from advice received from the former Group Company Secretary until his retirement on 31 January 2016 and from 1 February 2016 onwards from the Group General Counsel and Company Secretary on issues other than those relating to their own remuneration. The remuneration of the non-executive directors (apart from the Chairman) is determined by the Board Committee on Non-Executive Directors’ Remuneration, which comprises the executive directors. It also receives advice from the Group General Counsel and Company Secretary and NBS. 62 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEReport of the Board on Directors’ Remuneration continuedImplementation of remuneration policy in 2015/16The auditor is required to report on the information contained in the following part of this report.Single figure of total remunerationSalary and fees £Taxable benefits(2) £Pension(3) £Annual bonus £Sub-total £Long-term incentives(4) £Other items(5) £Total £Non-executive ChairmanJohn Watson2016200,000827––200,827––200,8272015195,000672––195,672––195,672Executive directors Ted Ayres2016618,00030,211123,600710,7001,482,5111,174,642–2,657,1532015600,00028,238120,000639,0001,387,238568,1174,4991,959,854Keith Adey2016354,197(1)30,09172,200415,150871,638696,4012,2331,570,2722015350,00027,96970,000372,750820,719355,4073,7861,179,912Non-executive directorsMike Toms201659,941–––59,941––59,941201558,195–––58,195––58,195John Cuthbert201662,593–––62,593––62,593201560,770–––60,770––60,770Paul Hampden Smith201659,941–––59,941––59,941201558,195–––58,195––58,195Denise Jagger201654,636–––54,636––54,636201553,045–––53,045––53,045Totals20161,409,30861,129195,8001,125,8502,792,0871,871,0432,2334,665,36320151,375,20556,879190,0001,011,7502,633,834923,5248,2853,565,643Notes:1. Keith Adey’s basic salary for 2015/16 was £361,000 and where reference is made in this report to his basic salary for 2015/16 this is the amount to which reference is being made. The figureshown in the table above is the actual amount paid during the financial year, reflecting a reduction in his take-home pay during a period of paternity leave.2. Taxable benefits include car or car allowance and health insurance.3. Pension includes both payments in lieu of pension of £145,890 and contributions to a defined contribution scheme of £49,910. None of the directors are members of the Group’s definedbenefit scheme and both of the executive directors are members of a defined contribution scheme. 4. The value of long-term incentives in 2016 reflects the vesting of the 2013 PSP awards, which will be exercisable from 18 December 2016 and the vesting of the 2013 SMP awards which will beexercisable from 28 November 2016, including additional shares in lieu of dividends accrued from the date of the 2013 SMP award to vesting. The value shown is based on a share price of £23.33, being the average share price for the last quarter of the financial year i.e. 1 May – 31 July 2016 as a proxy for the share price at vesting. The 2015 figures have been restated to reflect the actual share prices at the dates of vesting of the partially vested 2012 PSP and SMP awards, which took place after the publication of last year’s report.5. Other items refer to the discount on the awards, during the year, under the Group’s savings related share option scheme.Annual bonus for the year ended 31 July 2016The annual bonus is payable in November 2016 for performance during the year ended 31 July 2016. The performance targets for the 2015/16 bonus comprised operating profit and three non-financial measures. The actual bonus payment against operating profit was determined on the following basis:MeasureWeighting (% of salary)ThresholdTargetMaximum valueActualPayment (% of maximum)Payment (% of salary)Operating profit (pre-exceptional) 90% £415.0 million£437.0 million£445.0 million£492.0 million100% 90% The actual operating profit exceeded the maximum value forecast by the directors, shareholders and analysts at the start of the year. This was the result of the success of management in acquiring land and constructing and selling more homes at higher prices, in a very favourable business environment, whilst at the same time controlling construction costs and maintaining a high level of financial prudence.Since 2014/15 the payment of any bonus for non-financial performance has been based on a sliding scale of targets. For land bank, a 10% payment would be triggered for a predetermined percentage increase in plots with detailed planning permission (‘DPP’), with an additional 1% payment for further improved performance, up to a maximum of 15% of salary. Similarly, for health and safety and customer care there is a minimum payment of 4.5% for no deterioration in scores, with additional 1% increments payable up to a maximum of 7.5% for improved performance.Number of shares at grantGuaranteed number of shares to vestEstimated value at vesting(1) (£000)Ted Ayres SMP 14,501 14,501(2)338.3PSP 34,506 34,506 805.0Keith Adey SMP 9,320 9,320(2)217.4PSP 19,668 19,668 458.9Notes:1. Based on a share price of £23.33, being the average share price for the last quarter of the financial year i.e. 1 May – 31 July 2016 as a proxy for the share price at vesting.2. Additional shares (not included above) will be awarded in lieu of dividends accrued from the date of the 2013 SMP award to vesting in respect of each director as follows: Ted Ayres 1,342shares and Keith Adey 862 shares.Annual Report and Accounts 2016 Bellway p.l.c. 63The basis for payment of the actual bonus against the three non-financial metrics that applied are set out in the table below:Non-financial measure Objectives ScoreLand bank Increase in the land bank of plots with DPP (available for completion in the following financial year) in the year to 31 July 2016 to ensure our growth aspirations are not frustrated by land shortages in future years.Maximum – 15% of salaryThe land bank of plots with DPP (available for completion in the following financial year) grew by 8.4% during the year which exceeded the threshold required for a partial payment but did not reach the target for a maximum payment.Partially achieved – 10% of salary awardedHealth and safety No deterioration of the NHBC health and safety incident rate from the baseline as a minimum and additional payments made for improvements in health and safety performance by reference to the NHBC health and safety incident rate. Improvements in health and safety performance are indicated by a lower NHBC health and safety incident rate.Maximum – 7.5% of salaryOur baseline NHBC health and safety incident rate was 0.986, which represents a level of safety very significantly better than other housebuilders. The target for a maximum payment in 2016 was 0.986. The actual rate was 0.766, which exceeded the target for a maximum payment.Achieved – 7.5% of salary awardedCustomer care No deterioration of previous year’s net assessment of customer satisfaction score as a minimum, with additional bonus opportunity for improvement in the Group’s customer satisfaction score.Maximum – 7.5% of salaryThe Group's customer care score in 2016 was 85.7% compared with 83.8% in 2015. Achieved – 7.5% of salary awardedOverall, the Committee is satisfied that the resulting bonus payment of 115% of salary (out of 120%) is reflective of the Company’s record performance during the year.Long-term incentives vesting in respect of performance period ended 31 July 2016The SMP and PSP awards granted in 2013 which will vest in November and December 2016 respectively, were based on a three-year TSR performance for the period to 31 July 2016. The applicable vesting percentages will be as follows:Metric Performance condition Threshold targetStretch targetActual % Vesting 50% of awards Relative TSR against an index of peer housebuilders comprising Barratt Developments PLC, The Berkeley Group plc, Bovis Homes Group PLC, Crest Nicholson Holdings plc, Persimmon plc, Redrow plc and Taylor Wimpey plc: 25% of this part of an award vests at the Index, increasing, pro-rata, to full vesting at Index + 7.5% p.a.22.0% TSR (Index)29.5% TSR (Index + 7.5% p.a.)30.2% Bellway TSR50%50% of awards Relative TSR against the FTSE 250 (excluding financial services companies and investment trusts): 25% of this part of an award vests at median, increasing, pro-rata, to full vesting at the upper quartile.83 rank (median)41.5 rank (upper quartile)22 Bellway rank50%An underpin also applied to the 2013 PSP and SMP awards. Regardless of TSR performance, no part of an award will vest unless the Committee is satisfied that there has been an improvement in the underlying financial performance of the Group over the performance period, taking into account, inter alia, operating profit, operating margin, ROCE and NAV. The Committee agreed that this underpin had been met and the following SMP and PSP awards are expected to be exercisable on 28 November and 18 December 2016 respectively.Total 100% 64 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEReport of the Board on Directors’ Remuneration continuedDirectors’ share-based rewards and optionsDetails of all directors’ interests in the Company’s share-based reward schemes are shown below:Ted AyresSchemeAwards/options held at 1 August 2015Granted/ awarded during the yearLapsed during the yearExercised during the yearAwards/options held at 31 July 2016Exercise price/ market price at date of award (p)Date of grant/award Exercisable/ capable of vesting fromPSP(1)30,960–(15,480)(15,480)–2,415.013.11.201213.11.2015PSP(2)34,506–––34,5061,449.018.12.201318.12.2016PSP(3)35,842–––35,8421,674.010.11.201410.11.2017PSP(4)–33,727––33,7272,382.013.11.201513.11.2018SMP(1)15,504–(7,752)(7,752)–2,473.023.11.201223.11.2015SMP(2)14,501–––14,5011,448.028.11.201328.11.2016SMP(3)14,562–––14,5621,918.04.12.20144.12.20172013 SRSOS(7)1,306–––1,3061,378.017.11.20141.2.2018Totals147,18133,727(23,232)(23,232)134,444Keith AdeySchemeAwards/options held at 1 August 2015Granted/ awarded during the yearLapsed during the yearExercised during the yearAwards/options held at 31 July 2016Exercise price/ market price at date of award (p)Date of grant/award Exercisable/ capable of vesting fromPSP(1)23,220–(11,610)(11,610)–2,365.013.11.201213.11.2015PSP(2)19,668–––19,6681,449.018.12.201318.12.2016PSP(3)20,908–––20,9081,674.010.11.201410.11.2017PSP(4)–19,701––19,7012,382.013.11.201513.11.2018SMP(1)6,204–(3,102)(3,102)–2,405.023.11.201223.11.2015SMP(2)9,320–––9,3201,448.028.11.201328.11.2016SMP(3)8,298–––8,2981,918.04.12.20144.12.20172003 SRSOS(6),(7)3,463––(3,463)–439.612.11.20101.2.20162013 SRSOS(7)1,099–––1,0991,378.017.11.20141.2.20202013 SRSOS(7)–439––4392,048.8016.11.20151.2.2019Totals92,18020,140(14,712)(18,175)79,433Notes:1. The performance period was 1 August 2012 – 31 July 2015. The TSR performance condition was in two parts. Half was measured by reference to an index of UK housebuilders comprising Barratt Developments PLC, The Berkeley Group plc, Bovis Homes Group PLC, Persimmon plc, Redrow plc and Taylor Wimpey plc. If Bellway’s TSR matched that of the index, 25% of the awards would vest. Full vesting would be achieved for 7.5% per annum outperformance of the index. The other half was measured by reference to the companies in the FTSE 250 Index (excluding financial services companies and investment trusts). Awards would start to vest at 25% if Bellway’s TSR matches the median of the companies in the Group, increasing on a straight-line basis so that full vesting would be achieved if Bellway’s TSR reached the upper quartile. Regardless of TSR performance, no part of an award will vest unless the Committee is satisfied that there has been an improvement in the underlying financial performance of the Company over the performance period, taking into account, inter alia, operating profit, operating margin, ROCE and NAV. The first part of the performance condition was not met and the second part was met in full so only the 50% of these awards which were linked to the FTSE 250 Index TSR performance condition vested, and the remaining 50% lapsed.2. Details of the vesting of these awards which will take place in November and December 2016 is set out in full under the heading ‘Long-term incentives vesting in respect of performance period ended 31 July 2016’ above.3. The performance period is 1 August 2014 – 31 July 2017. The awards are subject to the same TSR performance condition set out in note 1 above except that the UK housebuilders group also includes Crest Nicholson Holdings plc, and these awards are also subject to clawback provisions.4. On 13 November 2015 awards of performance shares under the 2013 PSP were made to Ted Ayres and Keith Adey. The awards were in the form of nil cost options. The face value of awards granted were equal to 130% of their respective salaries, which is in line with the Committee’s prevailing grant policy. Ted Ayres was granted an award over 33,727 shares with a face value, on grant, of £803,400 and Keith Adey’s award was over 19,701 shares with a face value, on grant, of £469,300. The performance period is 1 August 2015 – 31 July 2018. The awards are subject to the same TSR performance condition set out in note 1 above except that the UK housebuilders group also includes Crest Nicholson Holdings plc, and these awards are also subject to clawback provisions.5. All of the above options set out in notes 1–4 were granted for nil consideration. 6. The gross gain made by Keith Adey on the exercise of the 2003 SRSOS award in the year was £73,221 (the total gain made by Ted Ayres and Keith Adey on the exercise of share options in 2015 was £106,402). The value of long-term incentive plans for both Ted Ayres and Keith Adey, which were exercised in the year and those which will become exercisable in 2016/17, are shown in the single figure of total remuneration table on page 62.7. Further details of the 2003 and 2013 SRSOS are shown in the summary of outstanding share options in note 19 to the accounts.8. The market price of the ordinary shares at 31 July 2016 was 2,096p and the closing range during the year was 1,689p to 2,848p.Annual Report and Accounts 2016 Bellway p.l.c. 65Dilution limits/shares held in Trust to satisfy awardsThe Bellway Employee Share Trust (1992) (the ‘Trust’) holds market purchased shares to satisfy awards made under some of the Company’s executive and employee share schemes. At 31 July 2016 the Trust held 304,136 shares. It is the Company’s current intention to use market-purchased shares to satisfy awards made under the PSP and SMP. Awards made under the deferred bonus plans (to which the executive directors are not eligible) must be satisfied using market-purchased shares. The SRSOS uses new issued shares. The Company’s share plans comply with the ABI guidance on dilution limits and the position as at 31 July 2016 was:Limit of 5% in any 10 years under all executive share plansActual 0.02%Limit of 10% in any 10 years under all share plans Actual 1.58%Statement of directors’ shareholdings and share interests The directors’ interests (including family interests) in the ordinary share capital of the Company are set out below:DirectorBeneficially owned at 31 July 2016Beneficially owned at 31 July 2015Outstanding and unvested PSP awardsOutstanding and unvested SMP awardsOutstanding and unvested share optionsShare options vested but unexercisedShare options exercised in the yearJohn Watson425,535425,535N/AN/AN/AN/AN/ATed Ayres52,49841,920104,07529,0631,306––Keith Adey18,5267,15860,27717,6181,538–3,463Mike Toms2,0001,500N/AN/AN/AN/AN/AJohn Cuthbert6,0006,000N/AN/AN/AN/AN/APaul Hampden Smith12,5488,196N/AN/AN/AN/AN/ADenise Jagger1,2501,000N/AN/AN/AN/AN/ANotes:1. There has been no change in any of the above interests between 31 July 2016 and the date of this report.2. A share ownership guideline is in place requiring executive directors to build up a holding of 100% of their basic salary. Both Ted Ayres and Keith Adey meet this guideline. Further details onthe guideline are set out in the remuneration policy above.The following section of this report is not required to be audited.Implementation of remuneration policy in 2016/17This section sets out how the Company will implement the remuneration policy for the 2016/17 financial year.Basic salariesThe Committee has awarded salary increases in line with the increases given to the general workforce of around 3% for 2016/17. Accordingly, from 1 August 2016, the Chief Executive’s salary was increased to £637,000 p.a. and the Group Finance Director’s salary was increased to £372,000 p.a.Annual bonusFor the 2016/17 financial year, the bonus opportunity will continue to be limited to 120% of basic salary. The performance conditions relate to a stretching target of pre-exceptional operating profit (with a maximum payment of 90% of basic salary achievable) and the following non-financial performance measures which provide a maximum bonus opportunity of 30% of basic salary. Non-financial measureObjectivesScoreLand bankIncrease in the land bank of plots with DPP (available for completion in the following financial year) in the year to 31 July 2017 to ensure our growth aspirations are not frustrated by land shortages in future years.Maximum – 15% of salaryHealth and safetyNo deterioration of the NHBC health and safety incident rate from the baseline as a minimum and additional payments made for improvements in health and safety performance by reference to the NHBC health and safety incident rate. Improvements in health and safety performance are indicated by a lower NHBC health and safety incident rate.Maximum – 7.5% of salaryCustomer careNo deterioration of previous year’s net assessment of customer satisfaction score as a minimum, with additional bonus opportunity for improvement in the Group’s customer satisfaction score.The customer care element is assessed using the average of six key indicators, as measured by the NHBC. This measure is used as it reflects the metrics by which the performance of each division is managed by the executives.Maximum – 7.5% of salaryFor each non-financial element sliding scale targets will apply whereby a proportion of the bonus will be payable if a base threshold is achieved, with further bonus paid on a sliding scale for improvements in performance up to the maximum bonus opportunity. In the event that the threshold profit criterion is not met, no bonus will be payable under the non-financial elements.The graph below shows the TSR performance over the past seven years of the Company, the FTSE 250 Index and the bespoke Housebuilders’ Index (as defined in note 1 on page 64). The FTSE 250 Index has been selected as the most appropriate ‘broad equity market index’ as the Company has been a constituent of the FTSE 250 Index over this period and the bespoke Housebuilders’ Index has been selected as this index is used for the Company’s long-term incentive plans.This graph shows the value, by 31 July 2016, of £100 invested in Bellway p.l.c. on 31 July 2009 compared with the value of £100 invested in the FTSE 250 Index and £100 invested equally in each of the housebuilders currently contained in the FTSE 350 Index (excluding Bellway). The other points plotted are the values at intervening financial year ends.05031 July 201031 July 2009Bellway Housebuilders’ Index FTSE 250 Index31 July 2011 31 July 2012 31 July 2013 31 July 201531 July 201631 July 2014100150200250300350500450Total shareholder return (rebased)400781002461184503612639280372334115202227152 151222208259261128Total shareholder returnSource: Datastream (Thomson Reuters)66 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEReport of the Board on Directors’ Remuneration continuedLong-term incentivesThe Company anticipates making a grant under the PSP in November 2016 with a face value equivalent to 130% of salary to the executive directors. Awards will vest to executives after three years, subject to the achievement of performance conditions based around TSR, which measures the total return on a notional investment in Bellway shares, compared to the return on the same notional investment in shares in a group of other companies or an index. The PSP award granted in 2016/17 will be subject to a relative TSR condition with 50% of awards measured against a group of housebuilders and the other 50% against the constituents of the FTSE 250 (excluding financial services companies and investment trusts). Awards will also only vest subject to the achievement of an underpin, which requires an improvement in the underlying financial performance of the Company over the performance period. A two-year minimum holding period for any shares which vest after allowing for tax will apply. This will increase the alignment of directors’ interests with the longer-term interests of shareholders.Chairman and non-executive director feesFrom 1 August 2016 the Chairman’s fee increased by 3% from £200,000 p.a. to £206,000 p.a. The base fee for non-executive directors increased by 2.5% from £54,636 to £56,000 while the fees for chairing the Audit Committee and the Board Committee on Executive Directors’ Remuneration have increased from £5,305 to £8,000 (providing an overall increase of 6.8%) and the additional fee for the senior independent non-executive director has increased from £7,957 to £8,000 in each case to reflect the mid-market level of remuneration of a peer group of similar UK housebuilding businesses. Performance graph and table Importance of remuneration relative to dividends and section 106 and CIL paymentsThe table below shows the relative expenditure of the Group in respect of employee remuneration, dividends and section 106 and Community Infrastructure Levy ('CIL') payments, together with the percentage change in each, for the financial years ended 31 July 2015 and 31 July 2016. The directors have chosen dividends and section 106 and CIL payments as comparators to employee costs as they consider that these demonstrate the relative importance of the remuneration of its employees to the returns the Group generates to shareholders and the contribution it makes to developing communities through section 106 and CIL payments.2016 £0002015 £000% change Employee costs(1)118,899103,423 +15Dividends(2)132,486Annual Report and Accounts 2016 94,330 +40Section 106 and CIL paymentsBellway p.l.c. 67(3)Chief Executive total remunerationThe table below sets out the total remuneration for the Chief Executive over the same seven-year period as for the chart above, together with the percentage of annual bonus paid and the vesting of long-term incentives as a percentage of the maximum (relating to the performance periods ending in that year).2010 2011 2012 2013 2014 20152016Total remuneration (£000) 1,532 1,899 1,396 1,243(1)147,9001,450 1,96079,000 +87(2)Notes:1. Employee costs are calculated as wages and salaries, bonus and taxable benefits (including the directors).2. The dividend figures shown are the interim and final dividends paid or payable for the relevant financial year less forfeited dividends (see note 7 to the accounts).3. The section 106 and CIL payments figures are calculated from invoices received for these payments.2,65795.8%100.0%Annual bonus paid (as % of maximum) 76.9% 100.0% 99.3% 100.0% 91.6% 88.8%PSP vesting (as % of maximum) 48.3% 99.6% 0.0% 0.0% 50.0% 50.0%Notes:1. John Watson held the role of Chief Executive up until 31 January 2013 and Ted Ayres was Chief Executive for the remainder of the financial year from 1 February 2013 to 31 July 2013.The total remuneration for the period as Chief Executive was £714,053 for John Watson and £528,500 for Ted Ayres.2. Restated as per note 4 to the table on page 62.Percentage change in remuneration of the Chief Executive The table below shows the percentage change over the prior year in respect of the Chief Executive’s base salary, benefits and annual bonus compared to the average increase across all employees.% changeSalaryBenefitsAnnual bonusChief Executive +3All other employees +3Chief Executive +7All other employees +2Chief Executive +11All other employees +4Chairman of the Board Committee on Executive Directors’ Remuneration17 October 201668 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEReport of the Board on Directors’ Remuneration continuedStatement of voting at AGMs The votes cast by proxy at AGMs in relation to resolutions regarding director remuneration are set out in the table below: Directors’ Remuneration Policy (binding vote at AGM on 12 December 2014)Report of the Board on Directors’ Remuneration (advisory vote at AGM on 11 December 2015)Number of votes % of votes cast Number of votes % of votes castVotes cast in favour 89,575,994 97.67 91,626,703 99.85Votes cast against 2,136,039 2.33 139,435 0.15Total votes cast 91,712,033 100.00 91,766,138 100.00Votes withheld 1,132,868 N/A 1,633,131 N/AThis report will be put to an advisory vote of the Company’s shareholders at the AGM on 13 December 2016.On behalf of the BoardMike TomsSimon ScougallGroup General Counsel and Company Secretary Annual Report and Accounts 2016 Bellway p.l.c. 69The directors of Bellway p.l.c. present their report in accordance with section 415 of the Companies Act 2006. Bellway p.l.c. is the holding company of the Bellway Group of companies and is a UK publicly listed company whose shares are traded on the London Stock Exchange. The main trading company is Bellway Homes Limited and this and all other subsidiaries and joint arrangements of the Group are listed at note 27 to the accounts.The following table sets out where information can be found which is required to be reported on in the directors’ report but has been included elsewhere in the Annual Report and Accounts and is simply cross-referenced here to avoid repetition. Where information that is required to be set out in this Directors’ Report has been included in the Strategic Report reference is made to the Strategic Report in the table below:Topic Page numberDirectors 40–41Appointment and replacement of directors 46 and in the ArticlesDirectors’ interests 65Future developments 30Group undertakings 105Environmental issues 33–39Greenhouse gas emissions 35 of the Strategic ReportWhistleblowing 53Financial risk management 24 of the Strategic ReportGoing concern 25Results and dividendsThe profit for the year attributable to equity holders of the parent company amounts to £402.9 million (2015 – £283.1 million).The directors have proposed a final ordinary dividend for the year ended 31 July 2016 of 74.0p per share. This has not been included within creditors as it was not approved by shareholders before the end of the financial year. The directors recommend payment of the final dividend on Wednesday 11 January 2017 to shareholders on the Register of Members at the close of business on Friday 2 December 2016.Dividends paid during the year comprise a final dividend of 52.0p per share in respect of the year ended 31 July 2015, together with an interim dividend in respect of the year ended 31 July 2016 of 34.0p per share.Directors’ indemnities and Directors’ and Officers’ liability insurance The Company carries appropriate insurance cover in respect of possible legal action being taken against its directors, officers and senior employees. The Articles provide the directors and officers with further protection against liability to third parties, subject to the conditions set out in the Companies Act 2006. Such qualifying third party indemnity provision remains in force as at the date of this report.Report of the DirectorsThere were no post balance sheet events.Information on those third parties with which the Company has contracts or arrangements essential to its businessThe Company is party to a number of banking agreements with major clearing banks. The withdrawal of such facilities could have a material effect on the financing of the business. There are no other arrangements which the Group considers to be critical to the performance of the business.Takeovers Directive and change of control The Company is party to a number of banking agreements which may be terminable in the event of a change of control of the Company.On a change of control any outstanding options and awards granted under the Group’s share schemes would become exercisable, subject to any performance conditions being met.Share capitalThe Company’s total issued share capital, as at 31 July 2016, consisted of 122,685,986 ordinary shares of 12.5p each. Further details of the issued capital of the Company can be found in note 19 to the accounts. The rights and obligations attaching to the ordinary shares in the Company are set out in the Articles of Association (the ‘Articles’). Copies of the Articles can be obtained from Companies House or by writing to the Group General Counsel and Company Secretary at the Company’s registered office.Restrictions on the transfer of shares The restrictions on the transfer of shares are set out in the Articles. In addition, in compliance with the Company’s Share Dealing Code, Company approval is required for directors, certain employees and those persons closely associated with them to deal in the Company’s ordinary shares. No person has special rights of control over the Company’s share capital.Rights in relation to the shares held in the employee benefit trust70 Bellway p.l.c. The voting rights on shares held in the Bellway Employee Share Trust (1992) in relation to the Company’s employee share schemes are exercisable by the trustees.Annual Report and Accounts 2016Restrictions on voting rightsGOVERNANCEDetails of the deadlines for exercising voting rights are set out in the Articles. The directors are not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or on voting rights.Major interests in sharesAmendments to the ArticlesAs at 31 July 2016 and as at the date of this report, the Company had been notified under DTR 5 of the following interests, amounting to 3% or more of the voting rights in the issued ordinary share capital of the Company:The Company may amend its Articles by passing a special resolution at a general meeting of its shareholders.As at 31 July 2016Number of shares with voting rights% total voting rights Report of the DirectorsAs at 17 October 2016Number of shares with voting rights% total voting rights continuedStandard Life Investment Limited13,365,105 10.89Fidelity International Ltd/FMR Corp6,547,274 5.33BlackRock Inc6,510,966 5.30MFS Investment Management5,996,308 4.89JP Morgan Chase & Co5,715,902 4.66AXA Framlington Investment Management5,603,638 4.57Credit Suisse Securities (Europe) Limited3,890,282 3.17Norges Bank3,706,270 3.0212,323,067 10.046,829,274 5.576,510,966 5.305,996,308 4.895,715,902 4.665,603,638 4.573,890,282 3.17N/A Below 3%Post balance sheet eventsListing RulesThere are no disclosures required by LR9.8.4 which apply to the Company.Accountability and auditThe Going Concern Statement, Long-Term Viability Statement and the Statement of Directors’ Responsibilities in respect of the Annual Report and Accounts are shown on pages 25, 25 and 72 respectively.The Audit Committee, whose role is detailed on pages 49 to 53, has meetings at least twice a year with the Company’s auditor, KPMG LLP.PeopleThe important role our people perform is described throughout the Strategic Report. The following disclosures provide additional information on how we treat our people and how we engage with them. We are an equal opportunities employer. It is our policy to develop and apply, throughout the Group, procedures and practices which are designed to ensure that equal opportunities are provided to all our employees, or those who seek employment with the Group, irrespective of their age, colour, disability, ethnic origin, gender, marital status, nationality, parental status, race, religion, belief or sexual orientation. All employees, whether part-time, full-time or temporary, are treated fairly and equally. Selection for employment, promotion, training or other matters affecting their employment is on the basis of aptitude and ability. All employees are supported and encouraged to develop their full potential and the talents and resources of the workforce are fully utilised to maximise the efficiency of the organisation.It is our policy to give full and fair consideration to the employment needs of disabled persons (and persons who become disabled whilst employed by the Group) and to comply with any current legislation with regard to disabled persons. Training at each division is planned and monitored through an annual training plan. The importance of good communications with employees is recognised by the directors and senior management team. A newsletter is issued to all our employees on a regular basis and each division maintains good employee relations using a variety of means appropriate to its own particular needs, with guidance when necessary from Head Office. All new employees, when eligible, are automatically entered into the Group’s pension arrangements. In addition, we operate a savings related share option scheme and have discretionary bonus arrangements in place. We also provide life assurance cover to all our employees and offer a private medical scheme (depending on seniority) and childcare vouchers. Health and safety at workWe promote all aspects of health and safety throughout our operations in the interests of employees, sub-contractors, suppliers, customers and visitors to our sites and premises. Health and safety issues are considered at each Board meeting and are addressed in the Strategic Report and on our website at www.bellway.co.uk/corporate-responsibility. The Board also receives external advice and training from specialist advisers on both the directors’ and the Company’s regulatory obligations.Auditor In accordance with section 489 of the Companies Act 2006, a resolution for the appointment of KPMG LLP as auditor of the Company is to be proposed at the forthcoming AGM. Annual Report and Accounts 2016 Bellway p.l.c. 71Powers of the BoardThe business and affairs of the Company are managed by the directors, who may exercise all such powers of the Company as are, not by law or by the Articles, required to be exercised by the Company in general meetings. Subject to the provisions of the Articles, all powers of the directors are exercised at meetings of the directors which have been validly convened and at which a quorum is present.Allotment of sharesDuring the year, 164,071 new ordinary shares were issued to satisfy awards made under the Company’s employee share schemes. The directors have authority to allot shares within limits agreed by shareholders. Details of the renewal of this authority including the resolutions which seek to renew this authority are set out in the Notice of Meeting of the AGM, to be held on Tuesday 13 December 2016.Purchase of the Company’s own sharesThe Company was given authority at the AGM on 11 December 2015 to purchase its own ordinary shares. As at the date of this report, no market purchases have been made by the Company. This authority will expire at the end of the forthcoming AGM. Details of the renewal of this authority including the resolution which seeks to renew this authority for a further year are set out in the Notice of Meeting of the AGM, to be held on Tuesday 13 December 2016.Seven resolutions will be proposed as special business at the AGM to be held on Tuesday 13 December 2016. Explanatory notes on these resolutions are set out in the Notice of Meeting of the AGM.Disclosure of all relevant information to the auditorThe directors who held office at the date of this report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware and that each director has taken all the steps that he or she ought to have taken as a director to make himself or herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.Statement of Directors’ Responsibilities in respect of the Annual Report and AccountsThe directors are responsible for preparing the Annual Report and Accounts and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently;• make judgements and estimates that are reasonable and prudent;• state whether they have been prepared in accordance with IFRSs as adopted by the EU; and• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company willcontinue in business.The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement of the directors in respect of the Annual Report and AccountsWe confirm that to the best of our knowledge:• the financial statements, prepared in accordance with the applicable set of accounting standards, 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 Strategic Report includes a fair review of the development and performance of the business and the position of the issuer and the undertakingsincluded in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.By order of the BoardSimon ScougallGroup General Counsel and Company Secretary17 October 2016Report of the Directors continued72 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCEAGM – special business• Inspecting a sample of land additions to evaluate the terms of the transaction and checking to the amounts recorded in the financial statements,including re-performing the calculation of fair value for a sample of land acquired on deferred payment terms.• Assessing a sample of land not currently being developed to confirm that the Group still intended to develop this site by reference to confirmedplanning permission• Testing the Group’s controls over the authorisation and recording of costs, including agreeing a sample of costs incurred to date from job costreports to invoice and/or payment, including verifying that they relate to the site against which they have been allocated.• Testing the performance of the Group’s controls over the production of site valuations, including the reconciliation of actual costs incurred andincluded in work in progress to date to job costs reports.• Attendance at a selection of site valuation meetings, where incurred costs and revenues were reviewed against budgets and estimates of futurecost and selling prices were discussed, challenged and updated, to check that senior operational, commercial and financial management wereeffectively challenging the forecast margins utilised to recognise profit.• We used a variety of quantitative and qualitative factors to select those sites with a higher risk of material misstatement and conducted detailedsite reviews for these sites to understand the associated risks and ascertain whether these risks had been factored into the site valuations. Thesite reviews included the following procedures, among others, where relevant, i) making inquiries of senior operational, commercial and financialmanagement about their assessment of risks for these sites; ii) reviewing site plans to gain an understanding of progress made and problems arisingon the site; iii) comparing actual and budgeted unit sales and average selling prices to date to identify potential build or sale issues; and iv) for asample of costs, agreeing total estimated costs to purchase orders/sub-contractor agreements (including variations from initial estimates).• For all active sites and sites completed in the year we performed a comparison of budgeted and latest forecast margin at July 2016 in order toassess the Group’s ability to forecast accurately.Independent Auditor’s Report to the Members of Bellway p.l.c. onlyAnnual Report and Accounts 2016 Bellway p.l.c. 73Opinions and conclusions arising from our audit1 Our opinion on the financial statements is unmodified We have audited the financial statements of Bellway p.l.c. for the year ended 31 July 2016 set out on pages 76 to 105. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 July 2016 and of the Group’sprofit for the year then ended;• the financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the EuropeanUnion (IFRSs as adopted by the EU);• the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied inaccordance with the provisions of the Companies Act 2006; and• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financialstatements, Article 4 of the IAS Regulation.2 Our assessment of risks of material misstatementIn arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit were as follows:Profit recognition on current sites and the carrying amount of land held for development and work in progress (gross profit £574.8 million; land held for development and work in progress £2,532.1 million). Risk vs 2015: Refer to pages 50 to 51 (Audit Committee Report), pages 82 and 85 (Accounting Policies) and note 13 on page 93 (financial disclosures).The risk – Profit recognition on current sites and the net realisable value of land held for development and work in progress are both reliant on the Group’s forecast of future selling prices and build costs, both of which are uncertain. Forecast selling prices are inherently uncertain due to challenges in assessing market conditions. Build costs, and in particular sub-contractor costs, can vary with market conditions and may also be incorrectly forecast due to unforeseen events during construction. Gross profit is recognised on house sales based on the latest whole site gross margin which is an output of the site valuations prepared by the Group’s divisional technical teams. These valuations use actual and forecast selling prices and build costs and are sensitive to inaccuracies in recording actual costs incurred, forecast costs to complete and expected selling prices. Land held for development and work in progress are held at the lower of cost and net realisable value (i.e. the forecast selling price less the remaining costs to build and sell). An assessment of the net realisable value of land held for development and work in progress is carried out at each balance sheet date and is dependent on the Group’s estimates of future selling prices and build costs, together with the likelihood of receiving planning permission for land held for development. Planning permission is dependent on local and national policies and without planning permission sites cannot be developed. A change in the Group’s estimate of sales price and build cost could have a material impact on the carrying value of land held for development and work in progress and the level of profit recognition in the Group’s financial statements.Our response – our audit procedures included:continued• On a site by site basis, we compared the gross margin recognised in the financial statements with the latest site valuations to determine whether themargin recognised was appropriate.• We developed an expectation, based on our attendance at site valuation meetings, our detailed site reviews and other procedures, includinginquiries and reviews of divisional board reports, of sites to be included in the Group’s net realisable value provision. We obtained the Group’s netrealisable value provision and compared land held for development and work in progress sites included to our expectations and, with reference tosite valuations, determined whether amounts included had been calculated appropriately for these sites.• For a sample of developments completed in the year, we compared the cost to complete accrual created to the latest site valuation and obtainedconfirmation for significant differences.• Challenging the adequacy of the Group’s disclosures in relation to areas of judgement and estimation in relation to these balances by performingsensitivity analysis on key assumptions.3 Our application of materiality and an overview of the scope of our auditThe materiality for the Group financial statements as a whole was set at £23 million determined with reference to a benchmark of profit before tax adjusted for the removal of exceptional items, of which it represents 4.8%. In the prior year materiality was set at £21 million, also determined with reference to a benchmark of profit before tax, of which it represented 5.9%. We report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £1 million, in addition to other identified misstatements that warranted reporting on qualitative grounds. The Group audit team performed the audits of the Group’s principal components which covered 100% of total Group revenue, 99% of total Group profit before taxation and 99% of total Group assets. The audit undertaken for Group reporting purposes at the Group’s main trading subsidiary was performed to a materiality level of £17 million, as set by the Group audit team. 4 Our opinion on other matters prescribed by the Companies Act 2006 is unmodified In our opinion:• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006;• the information given in the Strategic Report and the Directors’ Report for the financial year is consistent with the financial statements; and• the information given in the Corporate Governance Statement set out on pages 50 to 52 with respect to internal control and risk managementsystems in relation to financial reporting processes and about share capital structures ('the specified Corporate Governance information') isconsistent with the financial statements. Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic Report, the Directors’ Report and the Corporate Governance Statement:• we have not identified material misstatements in the Strategic Report, the Directors’ Report, or the specified Corporate Governance information;• in our opinion, the Strategic Report and the Directors’ Report have been prepared in accordance with the Companies Act 2006; and• in our opinion, the Corporate Governance Statement has been prepared in accordance with rules 7.2.2, 7.2.3, 7.2.5, 7.2.6 and 7.2.7 of the DisclosureRules and Transparency Rules of the Financial Conduct Authority.5 We have nothing to report on the disclosures of principal risksBased on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to: • the directors’ Long-Term Viability Statement on page 25, concerning the principal risks, their management and, based on that, the directors’assessment and expectations of the Group’s continuing in operation over the three years to 2019; or• the disclosures in the 'Accounting Policies' section of the financial statements concerning the use of the going concern basis of accounting.Independent Auditor’s Report to the Members of Bellway p.l.c. only continued74 Bellway p.l.c. Annual Report and Accounts 2016GOVERNANCE2 Our assessment of risks of material misstatement Nick Plumb (Senior Statutory Auditor)for and on behalf of KPMG LLP, Statutory AuditorChartered Accountants Quayside House, 110 Quayside, Newcastle upon Tyne NE1 3DX17 October 2016Annual Report and Accounts 2016 Bellway p.l.c. 756 We have nothing to report in respect of the matters on which we are required to report by exception Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading. In particular, we are required to report to you if: • we have identified material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they considerthat the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary forshareholders to assess the Group’s position and performance, business model and strategy; or• the Audit Committee’s Report dos not appropriately address matters communicated by us to the Audit Committee.Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branchesnot visited by us; or• the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with theaccounting records and returns; or• certain disclosures of directors’ remuneration specified by law are not made; or• we have not received all the information and explanations we require for our audit; or• a Corporate Governance Statement has not been prepared by the Company.Under the Listing Rules we are required to review: • the directors’ statements, set out on page 25, in relation to going concern and longer-term viability; and• the part of the Corporate Governance Statement on pages 44 to 68 relating to the Company’s compliance with the eleven provisions of the 2014UK Corporate Governance Code specified for our review.We have nothing to report in respect of the above responsibilities.Scope and responsibilitiesAs explained more fully in the Directors’ Responsibilities Statement set out on page 72, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to the Company’s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/auditscopeukco2014a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.76 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTSGroup Income Statementfor the year ended 31 July 2016Notes2016 Pre-exceptional item £0002016 Exceptional item (note 5) £0002016 Total £0002015 Pre-exceptional item £0002015 Exceptional item (note 5) £0002015 Total £000Revenue12,240,651–2,240,6511,765,405–1,765,405Cost of sales5(1,665,892)–(1,665,892)(1,337,464)6,865(1,330,599)Gross profit574,759–574,759427,9416,865434,806Administrative expenses(82,751)–(82,751)(67,489)–(67,489)Operating profit4492,008–492,008360,4526,865367,317Profit on disposal of investment in joint venture5–17,30617,306–––Finance income21,186–1,186643–643Finance expenses2(12,326)–(12,326)(13,719)–(13,719)Share of result of joint ventures11(306)–(306)(50)–(50)Profit before taxation 480,56217,306497,868347,3266,865354,191Income tax expense6(94,966)–(94,966)(69,621)(1,421)(71,042)Profit for the year*385,59617,306402,902277,7055,444283,149* All attributable to equity holders of the parent.Earnings per ordinary share – Basic8328.7p231.5pEarnings per ordinary share – Diluted8328.0p230.8pStatements of Comprehensive Incomefor the year ended 31 July 2016NotesGroup 2016 £000Group 2015 £000Company 2016 £000Company 2015 £000Profit for the period402,902283,149173,950300Other comprehensive expenseItems that will not be recycled to the income statement:Remeasurement losses on defined benefit pension plans25(1,806)(3,239)––Income tax on other comprehensive expense6(136)648––Other comprehensive expense for the period, net of income tax(1,942)(2,591)––Total comprehensive income for the period*400,960280,558173,950300* All attributable to equity holders of the parent.Annual Report and Accounts 2016 Bellway p.l.c. 77Statements of Changes in Equityat 31 July 2016GroupNotesIssued capital £000Share premium £000Capital redemption reserve £000Other reserves £000Retained earnings £000Total £000Non-controlling interest £000Total equity £000Balance at 1 August 201415,273166,94520,0001,4921,162,4201,366,130(66)1,366,064Total comprehensive income for the periodProfit for the period––––283,149283,149–283,149Other comprehensive expense*––––(2,591)(2,591)–(2,591)Total comprehensive income for the period––––280,558280,558–280,558Transactions with shareholders recorded directly in equity:Dividends on equity shares7––––(74,614)(74,614)–(74,614)Shares issued19412,067–––2,108–2,108Credit in relation to share options and tax thereon6, 25––––1,7961,796–1,796Total contributions by and distributions to shareholders412,067––(72,818)(70,710)–(70,710)Balance at 31 July 201515,314169,01220,0001,4921,370,1601,575,978(66)1,575,912Total comprehensive income for the periodProfit for the period––––402,902402,902–402,902Other comprehensive expense*––––(1,942)(1,942)–(1,942)Total comprehensive income for the period––––400,960400,960–400,960Transactions with shareholders recorded directly in equity:Dividends on equity shares7––––(105,411)(105,411)–(105,411)Shares issued19211,134–––1,155–1,155Purchase of own shares20––––(6,864)(6,864)–(6,864)Credit in relation to share options and tax thereon6, 25––––1,2641,264–1,264Total contributions by and distributions to shareholders211,134––(111,011)(109,856)–(109,856)Balance at 31 July 201615,335170,14620,0001,4921,660,1091,867,082(66)1,867,016* Additional breakdown is provided in the Statements of Comprehensive Income.78 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTSStatements of Changes in Equity continuedat 31 July 2016CompanyNotesIssued capital £000Share premium £000Capital redemption reserve £000Other reserves £000Retained earnings £000Total equity £000Balance at 1 August 201415,273166,94520,0002,145432,348636,711Total comprehensive income for the periodProfit for the period––––300300Other comprehensive income*––––––Total comprehensive income for the period––––300300Transactions with shareholders recorded directly in equity:Dividends on equity shares7––––(74,614)(74,614)Shares issued19412,067–––2,108Credit in relation to share options25––––1,5441,544Total contributions by and distributions to shareholders412,067––(73,070)(70,962)Balance at 31 July 201515,314169,01220,0002,145359,578566,049Total comprehensive income for the periodProfit for the period––––173,950173,950Other comprehensive income*––––––Total comprehensive income for the period––––173,950173,950Transactions with shareholders recorded directly in equity:Dividends on equity shares7––––(105,411)(105,411)Shares issued19211,134–––1,155Purchase of own shares20––––(6,864)(6,864)Credit in relation to share options25––––1,5681,568Total contributions by and distributions to shareholders211,134––(110,707)(109,552)Balance at 31 July 201615,335170,14620,0002,145422,821630,447* Additional breakdown is provided in the Statements of Comprehensive Income.Annual Report and Accounts 2016 Bellway p.l.c. 79NotesGroup 2016 £000Group 2015 £000Company 2016 £000Company 2015 £000ASSETSNon-current assetsProperty, plant and equipment914,90414,774––Investment property10 – 1,609––Investments in joint ventures and subsidiaries11 4,550 28,99735,21933,651Other financial assets14 – – ––Trade and other receivables15 11,406 – ––Deferred tax assets12 2,490 2,761––33,35048,14135,21933,651Current assetsInventories132,548,3392,135,298––Trade and other receivables1580,18564,454542,766483,935Cash and cash equivalents2258,96841,49152,76248,7612,687,4922,241,243595,528532,696Total assets2,720,8422,289,384630,747566,347LIABILITIESNon–current liabilitiesRetirement benefit obligations258,0367,452––Trade and other payables1787,86652,561––Deferred tax liabilities12314333––96,21660,346––Current liabilitiesInterest-bearing loans and borrowings1632,50080,000––Corporation tax payable50,50037,730– – Trade and other payables17674,610535,396300298757,610653,126300298Total liabilities853,826713,472300298Net assets1,867,0161,575,912630,447566,049EQUITYIssued capital1915,33515,31415,33515,314Share premium170,146169,012170,146169,012Capital redemption reserve2020,00020,00020,00020,000Other reserves1,4921,4922,1452,145Retained earnings1,660,1091,370,160422,821359,578Total equity attributable to equity holders of the parent1,867,0821,575,978630,447566,049Non-controlling interest(66)(66)––Total equity1,867,0161,575,912630,447566,049Approved by the Board of Directors on 17 October 2016 and signed on its behalf by: John Watson Keith AdeyDirectorDirectorRegistered number 1372603Balance Sheetsat 31 July 201680 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTSNotesGroup 2016 £000Group 2015 £000Company 2016 £000Company 2015 £000Cash flows from operating activitiesProfit for the year402,902283,149173,950300Depreciation charge93,0442,776––Exceptional profit5(17,306)(6,865)––Profit on sale of property, plant and equipment4(74)(247)––Loss/(profit) on sale of investment properties187(1,980)––Finance income2(1,186)(643)––Finance expenses212,32613,719––Share-based payment expense251,5681,544––Share of post tax result of joint ventures30650––Income tax expense694,96671,042––Increase in inventories(413,041)(338,691)––(Increase)/decrease in trade and other receivables(68)(6,141)(62,831)72,207Increase in trade and other payables165,73747,940212Proceeds from sale of available-for-sale portfolio – exceptional item5–32,462––Cash from operations249,36198,115111,12172,519Interest paid(4,284)(6,783)––Income tax paid(82,384)(61,895)––Net cash inflow from operating activities162,69329,437111,12172,519Cash flows from investing activitiesAcquisition of property, plant and equipment(3,373)(5,402)––Proceeds from sale of property, plant and equipment273403––Proceeds from sale of investment in joint venture – exceptional item516,600–––Proceeds from sale of investment properties1,4226,742––Dividends received––4,000–Increase in loans to joint ventures(1,768)(1,190)––Interest received250404––Net cash inflow from investing activities13,4049574,000–Cash flows from financing activities(Decrease)/increase in bank borrowings(47,500)50,000––Proceeds from the issue of share capital on exercise of share options 1,1552,1081,1552,108Purchase of own shares by employee share option plans(6,864)–(6,864)–Dividends paid7(105,411)(74,614)(105,411)(74,614)Net cash outflow from financing activities(158,620)(22,506)(111,120)(72,506)Net increase in cash and cash equivalents17,4777,8884,00113Cash and cash equivalents at beginning of year41,49133,60348,76148,748Cash and cash equivalents at end of year2258,96841,49152,76248,761Cash Flow Statementsfor the year ended 31 July 2016Annual Report and Accounts 2016 Bellway p.l.c. 81Accounting PoliciesBasis of preparationBellway p.l.c. (the 'Company') is a company incorporated in England and Wales. Both the Company financial statements and the Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU ('Adopted IFRSs') and have been prepared on the historical cost basis except for assets recognised at fair value through profit or loss and other financial assets, which are stated at their fair value. On publishing the Company financial statements here together with the Group financial statements, which were approved for issue on 17 October 2016, the Company is taking advantage of the exemption in section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these financial statements.The preparation of financial statements in conformity with Adopted IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive’s Operating Review on pages 26 to 30. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Group Finance Director's Review on pages 31 to 32 and the Director's Report on page 69, The Risk Management section on pages 20 to 24 sets out the Group’s policies and processes for managing its capital, financial risk, and its exposure to credit, liquidity, interest rate and housing market risk.The Group’s activities are financed principally by a combination of ordinary shares and bank borrowings less cash in hand. At 31 July 2016, net cash was £26.5 million having generated cash of £65.0 million during the year. The Group has operated within all of its banking covenants throughout the year. In addition, the Group had bank facilities of £500.0 million, expiring in tranches up to November 2020, with £467.5 million available for drawdown under such facilities at 31 July 2016.The directors consider that the Group is well placed to manage business and financial risks in the current economic environment and have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly they continue to adopt the going concern basis in preparing the Annual Report and Accounts.Judgements made by the directors, in the application of these accounting policies and Adopted IFRSs, that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year, are discussed below.The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements.Effect of new standards and interpretations effective for the first timeThe Group adopted the following amendment during the current financial year:• IAS 19 ‘Defined Benefit Plans: Employee Contributions’. The amendment simplifies the accounting for contributions that are independent of thenumber of years of employee service. The adoption of this amendment has not had any effect on the Group’s profit for the period or equity.The Group also adopted Annual Improvements 2010–2012 and Annual Improvements 2011–2013 during the current financial year. The adoption of these has not had a material effect on the Group’s profit for the period or equity.The other standards and interpretations that are applicable for the first time in the Group’s financial statements for the year ended 31 July 2016 have had no effect on these financial statements.Basis of consolidationThe consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company made up to 31 July. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of these entities are included in the consolidated financial statements from the date that control commences until the date that control ceases.Joint arrangements are those entities over whose activities the Group has joint control, established by contractual agreement. A joint arrangement can take two forms:(i) Joint venture – These entities are consolidated using the equity method of accounting.(ii) Joint operation – The Group's share of the assets, liabilities and transactions of such entities are consolidated as if they were assets, liabilities andtransactions of the Group.Inventories are stated at the lower of cost and net realisable value. Cost, in relation to work in progress and showhomes, comprises direct materials and, where applicable, direct labour costs and those overheads, not including any general administrative overheads, that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less all estimated costs of completion and overheads.Land held for development, including land in the course of development until legal completion of the sale of the asset, is initially recorded at cost. Regular reviews are carried out to identify any impairment in the value of the land by comparing the total estimated selling prices less estimated selling expenses against the book cost of the land plus estimated costs to complete. Provision is made for any irrecoverable amounts. Where, through deferred payment terms, the fair value of land purchased differs from the amount that will subsequently be paid in settling the liability, the difference is charged as a finance expense in the income statement over the period to settlement.Options purchased in respect of land are capitalised initially at cost. Regular reviews are carried out for impairment in the value of these options, and provisions made accordingly to reflect loss of value. The impairment reviews consider the period elapsed since the date of purchase of the option given that the option contract has not been exercised at the review date. Further, the impairment reviews consider the remaining life of the option, taking account of any concerns over whether the remaining time available will allow a successful exercise of the option. The carrying cost of the option at the date of exercise is included within the cost of land purchased as a result of the option exercise.Investments in land without the benefit of planning consent, either through the purchase of land or non-refundable deposits paid on land purchase contracts subject to planning consent, are included initially at cost. Regular reviews are carried out for impairment in the values of these investments and provision made to reflect any irrecoverable element. The impairment reviews consider the existing use value of the land and assess the likelihood of achieving planning consent and the value thereof.Trade and other receivablesTrade receivables are stated at their fair value at the date of initial recognition and subsequently at amortised cost less allowances for impairment.Consideration which is contingent on future events is recognised based on the estimated amount if it is probable and can be reliably measured. Any subsequent changes to the fair value of the contingent consideration are recognised in profit or loss.Other fnancial assetsOther financial assets are classified as being available-for-sale and are stated at fair value, with any resultant gain or loss being recognised directly in equity within retained earnings, except for impairment losses and changes in future cash flows, which are recognised directly in the income statement. When these investments are de-recognised, the cumulative gain or loss previously recognised directly in equity is recognised in the income statement. Where these investments are interest-bearing, interest calculated using the effective interest method is recognised in the income statement.A description of the valuation technique is given in note 14.Accounting Policies continued82 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTSProperty, plant and equipmentItems are stated at cost less accumulated depreciation and impairment losses. Depreciation on property, plant and equipment is charged to the income statement on a straight-line basis over their estimated useful lives over the following number of years:Plant, fixtures and fittings – 3 to 10 years.Freehold buildings – 40 years.Freehold land is not depreciated.Investment propertyInvestment property is initially recognised at cost. Subsequent to recognition, investment property is measured using the cost model and is carried at cost less any accumulated depreciation and accumulated impairment losses. Depreciation is charged, where material, so as to write off the cost less residual value of the investment properties over their estimated useful lives. The residual values and useful lives of investment properties are reviewed at each financial year end. The useful life of investment properties has been assessed as: 10 – 100 years.Land is not depreciated.Investments in subsidiariesInterests in subsidiary undertakings are valued at cost less impairment.InventoriesClassification of equity instruments and financial liabilities issued by the GroupEquity instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions: (a) they include no contractual obligations upon the Company (or Group as the case may be) to deliver cash or other financial assets or to exchangefinancial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company (or Group); and(b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no obligation todeliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company’s exchanging a fixedamount of cash or other financial assets for a fixed number of its own equity instruments.To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares. GrantsGrants are included within work in progress in the balance sheet to the extent that they contribute to construction costs and within deferred income to the extent that they contribute to site income. Grants are credited to the income statement over the life of the developments to which they relate.Revenue recognition(a) Private and social (turnkey and plot sale) housing sales and land salesRevenue is recognised in the income statement when the significant risks and rewards of ownership have transferred to the purchaser, which is when legal title is transferred.(b) Social housing properties as part of a land sale and design and build contractRevenue is recognised in the income statement when the significant risks and rewards of ownership have transferred to the purchaser, which is when the homes are build complete and all material contractual obligations have been fulfilled.IncentivesAnnual Report and Accounts 2016 Bellway p.l.c. 83Cash and cash equivalentsSales incentives are substantially cash in nature but include part-exchange costs which mainly relate to amounts written down, where the part-exchange allowance given to the purchaser of the new home is greater than the valuation of the part-exchange property. Incentives are accounted for by reducing the housebuild revenue by the cost to the Group of providing the incentive. Cash and cash equivalents are defined as cash balances in hand and in the bank (including short-term cash deposits). The Group utilises bank overdraft facilities, which are repayable on demand, as part of its cash management policy. As a consequence, bank overdrafts are included as a component of net cash and cash equivalents within the cash flow statement.Rental incomeInterest-bearing loans and borrowingsRental income is recognised in the income statement on a straight-line basis over the term of the lease.Interest-bearing loans and borrowings are stated at their fair value at the date of initial recognition and subsequently at amortised cost.Part-exchange propertiesTrade and other payablesThe purchase and subsequent sale of part-exchange properties is an activity undertaken in order to achieve the sale of a new property. As such, the activity is regarded as a mechanism for selling. Impairments and gains or losses on the sale of part-exchange properties are classified as a cost of sale.Trade payables on normal terms are not interest-bearing and are stated at their nominal value. Trade payables on deferred terms, most notably in relation to land purchases, are recorded initially at their fair value. The discount to nominal value is amortised over the period to settlement and charged to finance expenses. DividendsDividends on equity shares are recognised as a liability in the period in which they are approved by the shareholders. Interim dividends are recognised when paid. The fair value of equity settled share options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured as at the date the options are granted and the charge is only amended if vesting does not take place due to non-market conditions not being met. Various option pricing models are used according to the terms of the option scheme under which the options were granted. The fair value is spread over the period during which the employees become unconditionally entitled to the options. The amount recognised as an expense is adjusted to reflect the actual number of options that vest. At the balance sheet date, if it is expected that non-market conditions will not be satisfied, the cumulative expense recognised in relation to the relevant options is reversed.With respect to share-based payments, a deferred tax asset is recognised on the relevant tax base. The tax base is then compared to the cumulative share-based payment expense recognised in the income statement. Deferred tax arising on the excess of the tax base over the cumulative share-based payment expense recognised in the income statement has been recognised directly in equity outside the SOCI as share-based payments are considered to be transactions with shareholders.Where the Company grants options over its own shares to the employees of its subsidiaries it recognises, in its individual financial statements, an increase in the cost of investment in its subsidiaries equivalent to the equity settled share-based payment charge recognised in its consolidated financial statements, with the corresponding credit being recognised in equity. Own shares held by ESOP trustTransactions of the Company-sponsored ESOP trust are included in both the Group financial statements and the Company's own financial statements. The purchase of shares in the Company by the trust are charged directly to equity. Operating leasesOperating lease rentals are charged to the income statement on a straight-line basis over the period of the lease.Finance income and expensesFinance income includes interest receivable on bank deposits. Other financial assets relate to the deferred element of revenues receivable from the sale of homes under shared equity schemes. The discounting of these other financial assets produces a notional interest receivable amount and this is credited to cost of sales. Finance expenses includes interest on bank borrowings. The discounting of the deferred payments for land purchases produces a notional interest payable amount and this is also charged to finance expenses.Accounting Policies continued84 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTSContingent liabilitiesWhere the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within the Group, the Company considers these to be insurance arrangements, and accounts for them as such.  In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.TaxationThe charge for taxation is based on the result for the year and takes into account current and deferred taxation. The charge is recognised in the income statement except to the extent that it relates to items recognised in equity in which case it is recognised in equity.Deferred taxation is provided for all temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that the related tax benefit will be realised. Employee benefts – retirement beneft costsThe defined benefit scheme liability is the present value of the defined benefit obligation at the balance sheet date less the fair value of scheme assets. The calculation is performed by a qualified actuary using the projected unit credit method. All remeasurement gains and losses are recognised immediately in the Statement of Comprehensive Income ('SOCI'). Net interest cost is calculated on the defined benefit liability for the period by applying the discount rate used to measure the defined benefit liability at the start of the year. Return on plan assets in excess of the amounts included in the net interest cost are recognised in the SOCI. Further details of the scheme and the valuation methods applied may be found in note 25 to the accounts.Defined contribution pension costs are charged to the income statement in the period for which contributions are payable.Employee benefts – share-based paymentStandards and interpretations in issue but not yet effectiveAt the date of authorisation of these financial statements, the following relevant amendments which have not been applied in these financial statements, were in issue and endorsed by the EU but not yet effective:• IAS 1 'Disclosure Initiative'. The amendment explores opportunities to see how those applying IFRS can improve and simplify disclosures withinexisting disclosure requirements. This is effective for the period beginning on 1 August 2016.• Annual Improvements to IFRSs 2012 – 2014 Cycle. This is effective for the period beginning on 1 August 2016.Of the other IFRSs that are available for early adoption, none are expected to have a material effect on the financial statements.The following standards, which are expected to effect the financial statements of the Group, have not been applied in these financial statements, but were in issue although not yet endorsed by the EU:• IFRS 15 'Revenue from contracts with customers'. This is a converged standard from the IASB and FASB on revenue recognition to assist withcomparability of revenue globally. This is effective for the period beginning on 1 August 2018. It is expected that this standard will result inpresentation changes to the income statement to show part-exchange revenue and expenses separately between gross profit and operating profit.They are currently recognised on a net basis within cost of sales.• IFRS 16 'Leases'. This standard replaces the existing standard, IAS 17 'Leases', where lessees are required to make a distinction between a financelease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 requires lessees to recognise a lease liability reflecting future leasepayments and a 'right of use asset' for virtually all lease contracts. This is effective for the period beginning on 1 August 2019, with earlier adoptionpermitted if IFRS 15 'Revenue from contracts with customers' is also applied. The Group has not yet assessed the full effect of this standard.Of the other IFRSs that are available for early adoption, none are expected to have a material effect on the financial statements.Annual Report and Accounts 2016 Bellway p.l.c. 85Exceptional itemsExceptional items are those which, in the opinion of the Board, are material by size or nature, non-recurring, and of such significance that they require separate disclosure on the face of the income statement.Accounting estimates and judgementsManagement considers the key estimates and judgements made in the financial statements to be related to: Valuation of work in progress and land held for development Inventories are carried at the lower of cost and net realisable value. Net realisable value represents the estimated selling price (in the ordinary course of business) less all estimated costs of completion and overheads. Valuations of site/phase work in progress are carried out at regular intervals and estimates of the cost to complete a site/phase and estimates of anticipated revenues are required to enable a development profit to be determined. Management are required to employ considerable judgement in estimating the profitability of a site/phase and in assessing any impairment provisions which may be required.For both the years ended 31 July 2016 and 31 July 2015, a full review of inventories has been performed and write-downs have been made where cost exceeds net realisable value. Estimated selling prices have been reviewed on a site by site/phase by phase basis and have been amended based on local management and the Board's assessment of current market conditions. For the years ended 31 July 2016 and 31 July 2015 no exceptional charge has resulted from the review.Gross profit recognitionGross profit is recognised for completed house sales based on the latest whole site/phase gross margin which is an output of the site/phase valuation. These valuations, which are updated at frequent intervals throughout the life of the site/phase, use actual and forecast selling prices, land costs and construction costs and are sensitive to future movements in both the estimated cost to complete and expected selling prices. Forecast selling prices are inherently uncertain due to changes in market conditions. 86 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTSNotes to the Accounts1 Segmental analysis The executive Board (the Chief Operating Decision Maker as defined in IFRS 8) regularly reviews the Group’s performance and balance sheet position at both a consolidated and divisional level. Each division is an operating segment as defined by IFRS 8 in that the executive Board assess performance and allocates resources at this level. All of the divisions have been aggregated in to one reporting segment on the basis that they share similar economic characteristics including:• National supply agreements are in place for key inputs including materials.• Debt is raised centrally and the cost of capital is the same at each division.• Sales demand at each division is subject to the same macro economic factors, such as mortgage availability and government policy.Additional information on average selling prices and the unit sales split between north, south, private and social has been included in the Chief Executive's Operating Review on pages 26 to 30. The Board does not, however, consider these categories to be separate reportable segments as they review the entire operations at a consolidated and divisional level when assessing performance and making decisions about the allocation of resources. 2 Finance income and expenses2016 £0002015 £000Interest receivable on bank deposits211 340 Interest on fair value through profit or loss533 –Other interest income442 303 Finance income1,186 643Interest payable on bank loans and overdrafts4,4976,888Interest on deferred term land payables7,5896,580Interest element of movement in pension scheme deficit240251Finance expenses12,32613,7193 Employee informationGroup employment costs, including directors, comprised:2016 £0002015 £000Wages and salaries117,215101,954Social security11,6159,584Pension costs (note 25)4,5143,889Share-based payments (note 25)1,5681,544134,912116,971The average number of persons employed by the Group during the year was 2,366 (2015 – 2,164) comprising 810 (2015 – 708) administrative and 1,556 (2015 – 1,456) production and others employed in housebuilding and associated trading activities. The executive directors and the Group General Counsel and Company Secretary are the only employees of the Company and the emoluments of the executive directors are disclosed in the Report of the Board on Directors' Remuneration on pages 54 to 68.Key management personnel remuneration, including directors, comprised:2016 £0002015 £000Salaries and fees2,5062,392Taxable benefits125129Annual bonus – cash 2,054 1,899Pension costs141158Share-based payments 995 8035,8215,381Key management personnel, as disclosed under IAS 24: 'Related party disclosures', comprises the directors and other senior operational management. Annual Report and Accounts 2016 Bellway p.l.c. 874 Operating proft2016 £0002015 £000Operating profit is stated after charging/(crediting):Staff costs (note 3)116,971Profit on sale of property, plant and equipment(247)Exceptional item (note 5)(6,865)Depreciation of property, plant and equipment2,776Hire of plant and machinery12,755Operating lease charges for land and buildings1,171Auditor's remuneration:Audit of these financial statements30Amounts receivable by the auditor and its associates in respect of: Audit of financial statements of subsidiaries pursuant to legislation152Other services relating to taxation42Pension scheme audit4Amounts paid to the Company's auditor and their associates in respect of services to the Company, other than the audit of the Company's financial statements, have not been disclosed as the information is required instead to be disclosed on a consolidated basis. The relevant proportion of amounts paid to the auditor for the audit of financial statements of joint ventures is £0.016 million (2015 – £0.007 million).134,912(74) – 3,04413,8441,407301541545 Exceptional item Exceptional items are those which, in the opinion of the Board, are material by size or nature, non-recurring, and of such significance that they require separate disclosure on the face of the income statement.On 7 March 2016, the Group disposed of its entire interest in Barking Riverside Limited, its joint venture company with the Greater London Authority, to L&Q New Homes Limited. Bellway will receive total consideration with a fair value of £43.5 million over the next three years, including £17.0 million received in March on completion. The deferred consideration is recognised as a 'fair value through profit or loss' (note 18) financial asset. In addition to the disposal proceeds, the Group will be relieved from its substantial funding obligations with regards to the ongoing remediation and infrastructure requirements of this long-term, capital intensive site. The profit of £17.3 million, arising on disposal, has been treated as an exceptional item during the year ended 31 July 2016.On 22 May 2015 the Group sold its remaining shared interest assets (note 14) for cash consideration of £32.462 million. This resulted in a profit on disposal of £6.865 million during the year ended 31 July 2015. This was treated as an exceptional item.88 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTS6 Income tax expense2016 £0002015 £000Current tax expense:UK corporation tax95,77070,435Adjustments in respect of prior years(616)(562)95,15469,873Deferred tax (income)/expense:Origination and reversal of temporary differences911,090Reduction in tax rate(298)–Adjustments in respect of prior years1979(188)1,169Total income tax expense in income statement94,96671,0422016 %2016 £0002015 %2015 £000Reconciliation of effective tax rate:Profit before taxation497,868354,191Tax calculated at UK corporation tax rate 20.099,57420.773,318Enhanced deductions and non-taxable income(0.8)(4,011)(0.5)(1,793)Adjustments in respect of prior years – current tax(0.1)(616)(0.1)(562)– deferred tax –19–79Effective tax rate and tax expense for the year 19.194,96620.171,042The corporation tax rate reduced to 21% with effect from 1 April 2014 and to 20% with effect from 1 April 2015.The deferred tax assets/(liabilities) held by the Group at the start of the comparative year that were expected to be realised after 31 March 2015 were valued at 20%, the substantively enacted tax rate that will be effective when they are expected to be realised.The deferred tax assets/(liabilities) held by the Group at the start of the current year have been revalued at the substantively enacted corporation tax rate that will be effective when they are expected to be realised. Reductions in the UK corporation tax rate to 19% from April 2017 and to 18% from April 2020 have been announced and were substantively enacted at the balance sheet date. A further reduction in the UK corporation tax rate, from the aforementioned April 2020 rate of 18%, to 17% has been announced but was not substantively enacted at the balance sheet date.The effective income tax expense is 19.1% of profit before taxation (2015 – 20.1%) and compares favourably to the Group’s standard tax rate for the year of 20.0% (2015 – 20.7%). The lower effective tax rate in the current year is principally due to the non-taxable exceptional profit arising on the disposal of the Group's investment in Barking Riverside Limited (note 5 to the accounts) and enhanced tax deductions received by the Group in relation to land remediation relief.2016 £0002015 £000Deferred tax recognised directly in equity: (Charge)/credit relating to equity-settled transactions(304)252 (Charge)/credit relating to remeasurements on the defined benefit pension scheme(136)648Notes to the Accounts continuedEarnings 2015 £000Weighted average number of ordinary shares 2015 NumberEarnings per share 2015 pFor basic earnings per ordinary share283,149 122,315,198 231.5Dilutive effect of options and awards380,546 (0.7)For diluted earnings per ordinary share283,149 122,695,744 230.8402,902 122,558,261 328.7 291,845 (0.7)402,902 122,850,106 328.0Annual Report and Accounts 2016 Bellway p.l.c. 897 Dividends on equity shares2016 £0002015 £000Amounts recognised as distributions to equity holders in the year:63,71241,709(10)105,41190,787Final dividend for the year ended 31 July 2015 of 52.0p per share (2014 – 36.0p)43,996Interim dividend for the year ended 31 July 2016 of 34.0p per share (2015 – 25.0p)30,625Dividends forfeited(7)74,614Proposed final dividend for the year ended 31 July 2016 of 74.0p per share (2015 – 52.0p)63,712The 2016 proposed final dividend is subject to approval by shareholders at the Annual General Meeting on 13 December 2016 and, in accordance with IAS 10 'Events after the Reporting Period', has not been included as a liability in these financial statements. At the record date for the final dividend for the year ended 31 July 2015 shares were held by the Trust (note 20) on which dividends had been waived.The level of distributable reserves are sufficient in comparison to the proposed dividend.8 Earnings per ordinary shareBasic earnings per ordinary share is calculated by dividing earnings by the weighted average number of ordinary shares in issue during the year (excluding the weighted average number of ordinary shares held by the Bellway Employee Share Trust (1992) which are treated as cancelled).Diluted earnings per ordinary share uses the same earnings figure as the basic calculation. The weighted average number of shares has been adjusted to reflect the dilutive effect of outstanding share options allocated under employee share schemes where the market value exceeds the option price. Diluted earnings per ordinary share is calculated by dividing earnings by the diluted weighted average number of ordinary shares.Reconciliations of the earnings and weighted average number of shares used in the calculations are outlined below:Earnings 2016 £000Weighted average number of ordinary shares 2016 NumberEarnings per share 2016 p90 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTS9 Property, plant and equipmentGroupLand and property £000Plant, fixtures and fittings £000Total £000Cost At 1 August 20147,99316,81224,805Additions1,2964,1065,402Disposals(30)(3,009)(3,039)At 1 August 20159,25917,90927,168Additions1653,2083,373Disposals–(1,892)(1,892)At 31 July 20169,42419,22528,649DepreciationAt 1 August 20141,55710,94412,501Charge for year1912,5852,776On disposals–(2,883)(2,883)At 1 August 20151,74810,64612,394Charge for year2082,8363,044On disposals–(1,693)(1,693)At 31 July 20161,95611,78913,745Net book valueAt 31 July 20167,4687,43614,904At 31 July 20157,5117,26314,774At 31 July 20146,4365,86812,304The Company has no property, plant and equipment.Notes to the Accounts continuedAnnual Report and Accounts 2016 Bellway p.l.c. 9110 Investment propertyGroupTotal £000Cost At 1 August 20147,297Disposals(5,040)At 1 August 20152,257Disposals(1,834)At 31 July 2016423DepreciationAt 1 August 2014926On disposals(278)At 1 August 2015648On disposals(225)At 31 July 2016423Net book valueAt 31 July 2016–At 31 July 20151,609At 31 July 20146,371Investment properties represent homes which have been sold under a shared ownership scheme and where Bellway has retained an equity stake. They are valued under the cost model and are held at cost less accumulated depreciation and accumulated impairment losses. A formal internal valuation of investment properties was carried out at the end of the financial year. The fair value of the investment properties was assessed at £nil million (2015 – £1.991 million).Investment properties are held at cost and categorised as level 3 within the hierarchical classification of IFRS 7 Revised (as defined within the standard). The fair value is calculated on the same basis as other financial assets (see notes 14 and 18).The Company has no investment properties.11 Investments in subsidiaries and joint venturesThe Group and Company have the following investments in subsidiaries and joint ventures:Subsidiary undertakingsGroup 2016 £000Group 2015 £000Company 2016 £000Company 2015 £000Interest in subsidiary undertakings' shares at cost – – 35,219 33,651 Investments accounted for using equity methodInterest in joint ventures – loan 4,557 31,060 – – Interest in joint ventures – equity(7)(2,063) – – 4,550 28,997 – – 4,550 28,997 35,219 33,651 The subsidiary undertakings and joint arrangements in which the Group has interests are incorporated in England and Wales. In each case their principal activity is related to housebuilding. The Group is made up of 58 subsidiaries and 8 joint arrangements. Further details are included in note 27.Where Bellway owns 100% of the voting rights of a business, the company is considered to be controlled by Bellway and is treated as a subsidiary.North Solihull Partnership LP, Cramlington Developments Limited and Leebell Developments Limited are classified as joint operations as the shareholders have substantially all of the economic benefit of the assets and fund the liabilities of the entities.Ponton Road LLP, Fradley Residential LLP and Barking Riverside Limited (until it was classified as held for sale) were classified as joint ventures as the Group has rights to the net assets of the arrangements rather than the individual assets and liabilities.92 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTS11 Investments in subsidiaries and joint ventures continuedThe movement on the investment in the joint ventures during the year is as follows:2016 £0002015 £000At the start of the year 28,997 26,794 Net increase in loans 2,050 1,246 Transfer to assets held for sale(26,191) – Disposal of joint venture – 1,007Share of results(306)(50)At the end of the year 4,550 28,997 The Group's share of the joint ventures' net assets/(liabilities), income and expenses is made up as follows:2016 £0002015 £000Non-current assets 24 156 Current assets 8,599 43,052 Current liabilities(8,099)(42,836)Non-current liabilities – (2,435)Share of net assets/(liabilities) of joint ventures524(2,063)Revenue 4,204 1,498 Costs(4,191)(1,201)Operating profit13 297 Interest(319)(347)Share of results of joint ventures(306)(50)Guarantees relating to the overdrafts of the joint ventures have been given by the Company (see note 23).On 31 January 2016 the Group reclassified its investment in Barking Riverside Limited from investment in joint ventures to assets held for sale. On 7 March 2016 the Group disposed of its entire interest in Barking Riverside Limited for consideration with a fair value of £43.5 million.12 Deferred taxationThe following are the deferred tax assets and liabilities recognised by the Group and the movements thereon during the current and prior year: GroupCapital allowances £000Retirement benefit obligations £000Share-based payments £000Other temporary differences £000Total £000At 1 August 2014591,587970812,697Income statement (charge)/credit(203)(743)47(270)(1,169)Credit to statement of comprehensive income–648––648Credit to equity––252–252At 31 July 2015(144)1,4921,269(189)2,428Income statement credit/(charge)499277(30)188Charge to statement of comprehensive income–(136)––(136)Charge to equity––(304)–(304)At 31 July 2016(95)1,4481,042(219)2,176Notes to the Accounts continued Annual Report and Accounts 2016 Bellway p.l.c. 9312 Deferred taxation continuedThe following is an analysis of the deferred tax balances for financial reporting purposes:2016 £0002015 £000Retirement benefit obligations 1,448 1,492Share-based payments 1,042 1,269Deferred tax assets 2,490 2,761Capital allowances(95)(144)Other temporary differences(219)(189)Deferred tax liabilities(314)(333)Net deferred tax asset2,1762,428The carrying amount of the deferred tax asset is reviewed at each balance sheet date and is recognised to the extent that there will be sufficient taxable profits to allow the asset to be recovered.There are no deferred tax balances in respect of the Company.13 InventoriesGroup2016 £0002015 £000Land1,625,619 1,296,976 Work in progress 836,080 763,664 Showhomes70,357 57,491 Part-exchange properties16,283 17,167 2,548,339 2,135,298Inventories of £1,630.8 million were expensed in the year (2015 – £1,305.8 million). In the ordinary course of business inventories have been written back by a net £9.4 million (2015 – £11.2 million) in the year.Land with a carrying value of £109.9 million (2015 – £83.2 million) was used as security for land payables (see note 17).The directors consider all inventories to be essentially current in nature although the Group's operational cycle is such that a proportion of inventories will not be realised within 12 months. It is not possible to determine with accuracy when specific inventory will be realised as this is subject to a number of issues including consumer demand and planning permission delays.The Company has no inventory.14 Other financial assetsGroup2016 £0002015 £000At 1 August–32,186Redemptions–(32,317)Imputed interest–131At 31 July – – Other financial assets carried at fair value are categorised as level 3 within the hierarchical classification of IFRS 7 Revised (as defined within the standard). On 22 May 2015 the Group sold its remaining interest in shared equity assets (see note 5).Other financial assets previously comprised loans, largely with non fixed repayment dates and variable repayment amounts, provided as part of sales transactions that are secured by way of a second legal charge on the related property. The assets were recorded at fair value, being the estimated amount receivable by the Group, discounted to present day values.Trade receivables26,743–Other receivables30,6296Amounts owed by Group undertakings–483,929Prepayments and accrued income7,082 – 64,454483,935The Group assesses the ageing of trade receivables in terms of whether amounts are receivable in less than one year or more than one year. None of the trade receivables are past their due dates (2015 – nil).Other receivables includes £22.172 million (2015 – £18.699 million) in relation to VAT recoverable.24,383–51,833––542,7663,969 – 80,185542,766Non-current receivablesGroup 2016 £000Company 2016 £000Group 2015 £000Company 2015 £000Other receivables––––11,406–11,406–16 Interest-bearing loans and borrowingsCurrent liabilitiesGroup 2016 £000Company 2016 £00094 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTSGroup 2015 £000Company 2015 £00014 Other fnancial assets Bank loans80,000–80,000–continued32,500–32,500–The fair value of future anticipated cash receipts takes into account the directors’ view of significant unobservable inputs including future house price movements, the expected timing of receipts and the likelihood that a purchaser defaults on a repayment. The directors revisited the future anticipated cash receipts from the assets at the end of each reporting period. The difference between the anticipated future receipt and the initial fair value was charged over the estimated deferred term to cost of sales, with the financial asset increasing to its full expected cash settlement value on the anticipated receipt date. The imputed interest credited to cost of sales for the year ended 31 July 2015 was £0.131 million.Credit risk, which the directors considered to be largely mitigated through holding a second legal charge over the assets, was used in determining present values. The directors review the financial assets for impairment at the end of each reporting period. At initial recognition, the fair value of the assets is calculated using a discount rate, appropriate to the class of assets, which reflects market conditions at the date of entering into the transaction. The directors considered at the end of each reporting period whether the initial market discount rate still reflects up to date market conditions. If a revision is required, the fair value of the asset is re-measured at the present value of the revised future cash flows using this revised discount rate; the difference between this value and the carrying value of the asset is recorded against the carrying value of the asset and recognised directly in the Statement of Comprehensive Income. The directors considered that there was no material difference between the initial market discount rate and the market discount rate at 22 May 2015, the date of disposal, and accordingly did not recognise any movements directly within the Statement of Comprehensive Income.The Company has no other financial assets.Notes to the Accounts15 Trade and other receivables continuedCurrent receivablesGroup 2016 £000Company 2016 £000Group 2015 £000Company 2015 £000Group 2015 £000Company 2015 £000Trade payables209,868–Land payables144,745–Social security and other taxes3,836–Other payables4,157298Accrued expenses and deferred income74,028–Payments on account98,762–535,396298Land payables of £95.400 million (2015 – £60.465 million) are secured on the land to which they relate. The carrying value of the land used for security is £93.696 million (2015 – £58.745 million).216,335–221,201–4,051–2,57630082,547–147,900–674,61030018 Financial instrumentsLand purchased on deferred termsThe Group sometimes acquires land on deferred payment terms. In accordance with IAS 39 'Financial Instruments: Recognition and Measurement' the creditor is initially recorded at fair value, being the price paid for the land discounted to present day, and subsequently at amortised cost. The difference between the nominal value and the initial fair value is amortised over the deferred term to finance expense, increasing the land creditor to its full cash settlement value on the payment date. The maturity profile of the total contracted cash payments in respect of amounts due on land creditors at the balance sheet date is as follows: Balance at 31 July £000Total contracted cash payment £000Within one year or on demand £0001–2 years £0002–5 years £000More than 5 years £000At 31 July 2016 304,160 310,271 223,016 52,563 34,692 –At 31 July 2015 192,642 196,693 146,220 43,644 6,829 –Annual Report and Accounts 2016 Bellway p.l.c. 9517 Trade and other payables Non-current liabilitiesGroup 2016 £000Company 2016 £000Group 2015 £000Company 2015 £000Land payables47,897–Other payables4,664–52,561–Land payables of £16.448 million (2015 – £26.798 million) are secured on the land to which they relate. The carrying value of the land used for security is £16.183 million (2015 – £24.462 million).82,959–4,907–87,866–Current liabilitiesGroup 2016 £000Company 2016 £00096 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTS18 Financial instruments continued The maturity profile of the total contracted payments in respect of financial liabilities (excluding amounts due on land creditors shown separately above) is as follows: Balance at 31 July £000Total contracted cash payment £000Within one year or on demand £0001–2 years £0002–5 years £000More than 5 years £000Bank loans – floating rates32,50032,52632,526–––Trade and other payables227,869227,869222,962––4,907At 31 July 2016260,369260,395255,488––4,907Bank loans – floating rates80,00080,16380,163–––Trade and other payables222,525222,525217,861––4,664At 31 July 2015302,525302,688298,024––4,664The imputed interest rate on land payables reflects market interest rates available to the Group on floating rate bank loans at the time of acquiring the land.At the year end, the Group had £467.5 million (2015 – £320.0 million) of undrawn bank facilities available.Cash and cash equivalentsThis comprises cash held by the Group and short-term bank deposits with a maturity date of less than one month.The amounts of cash and cash equivalents for the years ended 31 July 2016 and 31 July 2015 for both the Group and the Company are shown in note 22. At 31 July 2016 the average interest rate earned on the temporary closing cash balance, excluding joint ventures, was 0.46% (2015 – 0.50%).Fair valuesThe carrying values of financial assets and liabilities reasonably approximate their fair values. Financial assets and liabilities by categoryGroup 2016 £000Group 2015 £000Company 2016 £000Company 2015 £000Loans and receivables60,19257,372542,766483,935Fair value through profit or loss27,430–––Cash and cash equivalents58,96841,49152,76248,761Financial liabilities at amortised cost(560,478)(491,331)(300)(298)(413,888)(392,468)595,228532,398Bank facilitiesThe Group has bank facilities of £500 million which expire during the course of the following financial years:Group 2016 £000Group 2015 £000Company 2016 £000Company 2015 £000By 31 July 2016–80,000––By 31 July 201770,00070,000––By 31 July 201850,00050,000––By 31 July 2019125,00025,000––By 31 July 2020175,000175,000––By 31 July 202180,000–––500,000400,000––Notes to the Accounts continued(a) Bellway p.l.c. (2003) Savings Related Share Option Scheme(b) Bellway p.l.c. (2013) Savings Related Share Option SchemeTotal 507,79514 November 2011 38,832 556.00 1 February 2017 to 31 July 201716 November 2012 781 805.60 1 February 2016 to 31 July 201616 November 2012 15,366 805.60 1 February 2018 to 31 July 201815 November 2013 70,253 1,218.40 1 February 2017 to 31 July 201715 November 2013 26,579 1,218.40 1 February 2019 to 31 July 2019151,81117 November 2014 176,252 1,378.00 1 February 2018 to 31 July 201817 November 2014 37,019 1,378.00 1 February 2020 to 31 July 202016 November 2015 124,503 2,048.80 1 February 2019 to 31 July 201916 November 2015 18,210 2,048.80 1 February 2021 to 31 July 2021355,984Details of directors' share options are contained within the Report of the Board on Directors' Remuneration on pages 54 to 68.Annual Report and Accounts 2016 Bellway p.l.c. 9718 Financial instruments continuedCapital managementThe Group is financed through the proceeds of issued ordinary shares, re-invested profits and bank borrowings less cash in hand. The following table analyses the capital structure:Group 2016 £000Company 2016 £000Group 2015 £000Company 2015 £000Equity1,575,912566,049Net bank debt38,509–Capital employed1,614,421566,0491,867,016630,447––1,867,016630,44719 Issued capitalGroup and Company 2016 Number 0002016 £0002015 Number 0002015 £000Allotted, called up and fully paid 12.5p ordinary shares122,522 15,314164 21122,686 15,335At start of year122,191 15,273Issued on exercise of options331 41At end of year122,522 15,314Share optionsAt 31 July 2016 all outstanding options to purchase ordinary shares in Bellway p.l.c., in accordance with the terms of the applicable schemes, were as follows:Grant date Number of sharesExercise prices (p)Dates from which exercisableExpiry date98 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTS20 ReservesOwn shares heldThe Group and Company holds shares within the Bellway Employee Share Trust (1992) (the 'Trust') for participants of certain share-based payment schemes as outlined in note 25. During the period the Trust made a market purchase of 342,143 shares (2015 – nil) at an average price of 2,006p (2015 – nil) and transferred 55,823 (2015 – 70,627) shares to employees and directors. The number of shares held within the Trust, and on which dividends have been waived, at 31 July 2016 was 304,136 (2015 – 17,816). These shares are held within the financial statements at a cost of £5.908 million (2015 – £0.273 million). The market value of these shares at 31 July 2016 was £6.375 million (2015 – £0.430 million).Capital redemption reserveOn 7 April 2014 the Company redeemed 20,000,000 £1 preference shares, being all of the preference shares in issue. An amount of £20 million, equivalent to the nominal value of the shares redeemed, was transferred to a capital redemption reserve on the same date. Income statement As permitted by section 408 of the Companies Act 2006, the Company's income statement has not been included in these financial statements. The Company's profit for the financial year was £173.950 million (2015 – £0.300 million). 21 Reconciliation of net cash flow to net cash/(debt)Group2016 £0002015 £000Increase in net cash and cash equivalents17,4777,888Decrease/(increase) in bank borrowings47,500(50,000)Decrease in net debt/(cash) from cash flows64,977(42,112)Net (debt)/cash at 1 August(38,509)3,603Net cash/(debt) at 31 July26,468(38,509)Company2016 £0002015 £000Increase in net cash and cash equivalents4,00113Increase in net cash from cash flows4,00113Net cash at 1 August48,76148,748Net cash at 31 July52,76248,76122 Analysis of net (debt)/cashGroupAt 1 August 2015 £000Cash flows £000At 31 July 2016 £000Cash and cash equivalents41,49117,47758,968Bank loans (80,000)47,500(32,500)Net (debt)/cash(38,509)64,97726,468CompanyAt 1 August 2015 £000Cash flows £000At 31 July 2016 £000Cash and cash equivalents48,7614,00152,762Net cash48,7614,00152,762Notes to the Accounts continuedRole of TrusteesThe Scheme is managed by the Trustees, who are appointed by either the Company or the members. The role of the Trustees is to manage the Scheme in line with the Scheme trust deed and rules, to act prudently, responsibly and honestly, impartially and in the interests of all beneficiaries. The main responsibilities of the Trustees are to agree with the employer the level of contributions to the Scheme and to make sure these are paid, to decide how the Scheme’s assets are invested so the Scheme is able to meet its liabilities, and to oversee that the payment of benefits, record keeping and administration of the Scheme complies with the Scheme trust deed and rules and legislation.Annual Report and Accounts 2016 Bellway p.l.c. 9923 Contingent liabilitiesThe Company is liable, jointly and severally with other members of the Group, under guarantees given to the Group's bankers in respect of overdrawn balances on certain Group bank accounts and in respect of other overdrafts, loans and guarantees given by the banks to or on behalf of other Group undertakings. At 31 July 2016 there were bank overdrafts of £nil (2015 – £nil) and loans of £32.5 million (2015 – £80.0 million). The Company has given performance and other trade guarantees on behalf of subsidiary undertakings. The Company has guaranteed the overdrafts of joint arrangements up to a maximum of £0.3 million (2015 – £0.3 million). It is the directors' expectation that the possibility of cash outflow on these liabilities is considered minimal and no provision is required.24 CommitmentsFundingGroup2016 £000UK legislation requires that pension schemes are funded prudently (i.e. to a level in excess of the current expected cost of providing benefits). The last full actuarial valuation of the Scheme was carried out by a qualified independent actuary as at 31 July 2014 and updated on an approximate basis to 31 July 2016.With regard to the Scheme, regular contributions made by the employer over the financial year were £1.21 million (2015 – £0.77 million). The employer paid no special contributions (2015 – £3.20 million) and reimbursed the pension fund £0.25 million (2015 – £nil million) for expenses incurred by the fund.The Group is expected to make regular contributions of £nil million during the year ending 31 July 2017.2015 £000Capital commitments200–Operating leasesContracted not provided67Authorised not contracted–At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which expire as follows:2016 £0002015 £000Expiring within one year31Expiring within the second to fifth years2,586Expiring in more than five years9093,526Operating lease payments principally relate to rents payable by the Group for office premises. These leases are subject to periodic rent reviews.842,1113,1175,312CompanyThe commitments of the Company were £nil (2015 – £nil).25 Employee benefits(a) Retirement benefit obligationsThe Group sponsors the Bellway plc 1972 Pension Scheme (the 'Scheme') which has a funded defined benefit arrangement which is closed to new members and to future service accrual. The Group also sponsors the Bellway plc 2008 Group Self Invested Personal Pension Plan ('GSIPP') which is a defined contribution contract-based arrangement.Contributions of £4.514 million (2015 – £3.889 million) were charged to the income statement for the GSIPP.Defined contributions have been excluded from the assets and liabilities.100 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTS25 Employee benefits continued(a) Retirement benefit obligations continuedRegulationThe UK pensions market is regulated by the Pensions Regulator whose key statutory objectives in relation to UK defined benefit plans are:• to protect the benefits of members of occupational pension schemes;• to promote, and to improve understanding of the good administration of work-based pension schemes;• to reduce the risk of situations arising which may lead to compensation being payable from the Pension Protection Fund, and• to maximise employer compliance with employer duties and the employment safeguards introduced by the Pensions Act 2008.RiskThe Scheme exposes the Group to a number of risks, the most significant are:RiskDescriptionAsset volatilityThe Scheme's defined benefit obligation is calculated using a discount rate set with reference to corporate bond yields. However, a significant proportion of the Scheme's assets are invested in growth assets, such as equities, that would be expected to outperform corporate bonds in the long-term but create volatility and risk in the short term.Inflation riskA significant proportion of the Scheme's defined benefit obligation is linked to inflation, with higher inflation increasing the liabilities. However, there are caps of either a 3% p.a. or 5% p.a. increase in place to limit the effect of higher inflation.Life expectancyThe majority of the Scheme's liabilities are to provide a pension for the life of the member, with any increase in life expectancy also increasing the Scheme's defined benefit obligation.Movements in net defined benefit obligationsDefined benefit obligationFair value of Scheme assetsNet defined benefit liability2016 £0002015 £0002016 £0002015 £0002016 £0002015 £000Balance at 1 August (54,721)(50,364)47,26942,432(7,452)(7,932)Included in the income statementInterest (cost)/income(1,924)(2,080)1,6841,829(240)(251)(1,924)(2,080)1,6841,829(240)(251)Included in other comprehensive expenseRemeasurement (loss)/gain arising from:– Change in demographic and financial assumptions(6,834)(4,461)––(6,834)(4,461)– Experience adjustments1,018478––1,018478Return on plan assets excluding interest income––4,0107444,010744(5,816)(3,983)4,010744(1,806)(3,239)OtherContributions paid by the employer––1,4623,9701,4623,970Benefits paid2,5521,706(2,552)(1,706)––2,5521,706(1,090)2,2641,4623,970Balance at 31 July(59,909)(54,721)51,87347,269(8,036)(7,452)The weighted average duration of the defined benefit obligation at the end of the reporting period is 17 years (2015 – 17 years).Notes to the Accounts continuedAnnual Report and Accounts 2016 Bellway p.l.c. 10125 Employee benefits continued(a) Retirement benefit obligations continuedScheme assetsThe fair value of the Scheme assets is:2016 £0002015 £000Equity instruments – quoted25,93328,007Corporate bonds10,45616,431Government bonds13,6162,432Cash and cash equivalents1,868399Total51,87347,269Equity instruments and government bonds have quoted prices in active markets. Other plan assets are not quoted in active markets. All government bonds are issued by the UK government and are AA minus rated (2015 – AAA minus). Actuarial assumptionsThe following are the principal actuarial assumptions at the reporting date:2016 % per annum2015 % per annumDiscount rate2.403.60Future salary increases3.503.90Allowance for pension in payment increases of RPI or 5% p.a. if less2.903.40Allowance for deferred pension increases of CPI or 5% p.a. if less2.002.40Allowance for commutation of pension for cash at retirement50% of maximum50% of maximumThe mortality assumptions adopted at 31 July 2016 are based on the S2PxA tables and allow for future improvement in mortality. The tables used imply the following life expectancies at age 65:Male retiring at age 65 in 201623.3 yearsFemale retiring at age 65 in 201625.3 yearsMale retiring at age 65 in 203625.5 yearsFemale retiring at age 65 in 203627.7 yearsSensitivitiesThe calculation of the defined benefit obligation is sensitive to the assumptions set out above. The following table summarises the effect on the defined benefit obligation at the end of the reporting period if different assumptions were used:AssumptionChange in assumptionChange in liabilities (%)Discount rate-0.25% p.a.Increase by 4.3%Future salary increases+0.25% p.a.Increase by 0.2%Inflation – RPI+0.25% p.a.Increase by 3.7%Mortality+1 year life expectancyIncrease by 3.1%The calculations for the sensitivity analysis are not as accurate as a full valuation carried out using these assumptions. Each assumption change is considered in isolation, which in practice is unlikely to occur, as changes in some of the assumptions are correlated.Outstanding at the beginning of the year294,402Granted during the year117,458Lapsed during the year(37,489)Exercised during the year(70,627)Outstanding at the end of the year303,744Exercisable at the end of the year–The options outstanding at 31 July 2016 have a weighted average contractual life of 1.3 years (2015 – 1.5 years).303,74490,969(34,754)(55,823)304,136–1995, 1996, 2005 and 2007 ESOS and SRSOS2016 Number of options2015 Number of optionsOutstanding at the beginning of the year731,582Granted during the year250,405Lapsed during the year(44,302)Forfeited during the year(45,761)Exercised during the year(330,537)Outstanding at the end of the year561,387Exercisable at the end of the year14,000The options outstanding at 31 July 2016 have an exercise price in the range of 556.0p to 2,048.8p (2015 – 439.6p to 1,470.0p) and have a weighted average contractual life of 2.3 years (2015 – 2.4 years). The weighted average share price at the date of exercise for share options exercised during the year was 2,656.1p (2015 – 1,842.2p).561,387153,473–(42,994)(164,071)507,795781Notes to the Accounts continued102 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTS25 Employee benefts continued(b) Share-based paymentsThe Group operates a long-term incentive plan ‘LTIP’ a share matching plan (‘SMP’), a deferred bonus plan (‘DBP’), employee share option schemes (‘ESOS’) and Savings Related Share Option Schemes (‘SRSOS’), all of which are detailed below.Awards under the LTIP and SMP have been made to executive directors, the Group Company Secretary, and senior employees, with awards under the DBP also made to senior employees. The awards take the form of ordinary shares in the Company.Share options issued under the Bellway p.l.c. (1995) Employee Share Option Scheme (‘1995 ESOS’) have been granted to employees at all levels as well as to executive directors. The last tranche of shares was awarded to directors in October 2003. No further options may be granted under this scheme. Options issued under the Bellway p.l.c. (1996) Employee Share Option Scheme (‘1996 ESOS’) have been granted to employees at all levels as well as to executive directors. The last tranche of shares was awarded to employees in May 2006. No further options may be granted under this scheme. The Bellway p.l.c. (2005) Employee Share Option Scheme (‘2005 ESOS’) replaces the 1995 ESOS. Awards may be granted on a discretionary basis to employees at all levels as well as to executive directors and are subject to performance conditions. The Bellway p.l.c. (2007) Employee Share Option Scheme (‘2007 ESOS’) replaces the 1996 ESOS. It is an unapproved discretionary scheme which provides for the grant of options over ordinary shares to employees and executive directors. It is, however, the current intention that no executive directors of the Company should be granted options under these schemes. Awards will be available to vest after three years, subject to objective performance targets.Options issued under the SRSOS are offered to all employees including the executive directors.An outline of the performance conditions in relation to the LTIP and the SMP is detailed under the long-term incentive scheme section on pages 61 to 64 within the Report of the Board on Directors’ Remuneration.Various small share option awards were made for years 2003 through to 2007 to employees, mainly at divisional management level, under the terms of the DBP. These shares are held in the Bellway Employee Share Trust (1992) normally for three years. The shares can then be transferred into the employee’s name.Share-based payments have been valued by an external third party using various models detailed below, based on publicly available market data at the time of the grant, which the directors consider to be the most appropriate method of determining their fair value.The number and weighted average exercise price of share-based payments is as follows:LTIP, SMP and DBP2016 Number of options2015 Number of options25 Employee benefts continued(b) Share-based payments Valuation methodologycontinuedFor LTIP and SMP options granted after 24 October 2011 half of the performance criteria is based on TSR against comparator companies with the other half based on TSR measured against the FTSE 250 Index (excluding investment trusts and financial service companies). A simplified Monte Carlo simulation method has been used to determine the Group's TSR performance against the FTSE 250 Index (excluding investment trusts and financial service companies).In the case of the DBP, a simplified Black Scholes method is applied with an exercise price and dividend yield of zero. This is because no performance conditions attach to the award and no dividends are credited to the individual. The result is that the fair value equates to the face value of the award. The Black Scholes method is used for the SRSOS due to the relatively short exercise window of six months.For the 1995, 1996, 2005 and 2007 ESOSs, a lattice method is used which enables early exercise behaviour to be modelled in a more sophisticated manner than under Black Scholes.The fair value of services received in return for share options granted is measured by reference to the fair value of the share options granted. The inputs into the models for the various grants in the current and previous year were as follows: 2016November 2015January 2016November 2015November 2015December 20152015November 2014November 2014November 2014December 2014December 2014Scheme descriptionLTIP 3 Year SRSOS5 Year SRSOSSMP DBPGrant date 10-Nov-14 17-Nov-14 17-Nov-14 04-Dec-14 22-Dec-14Risk free interest rate 0.0% 1.0% 1.5% 0.0% 0.0%Exercise price – 1,378.0p 1,378.0p – – Share price at date of grant1,674.0p 1,783.0p 1,783.0p 1,919.0p 1,935.0pExpected dividend yield3.00% 3.00% 3.00% n/a n/aExpected life3 years 3 years 2 months5 years 2 months3 years 3 yearsVesting date10-Nov-17 01-Feb-18 01-Feb-20 04-Dec-17 22-Dec-17Expected volatility30% 30% 30% 30% n/aFair value of option950p 480p 517p 1,296p 1,935pThe expected volatility for all models was determined by considering the volatility levels historically for the Group. Volatility levels for more recent years were considered to have more relevance than earlier years for the period reviewed.The Group recognised total expenses of £1.568 million (2015 – £1.544 million) in relation to equity-settled share-based payment transactions. LTIP LTIP 3 Year SRSOS5 Year SRSOSDBP12-Nov-15 20-Jan-16 16-Nov-15 16-Nov-15 15-Dec-150.0% 0.0% 0.9% 1.4% 0.0% – – 2,048.8p 2,048.8p – 2,382.0p 2,558.0p 2,406.0p 2,406.0p 2,772.0p3.00% 3.00% 3.00% 3.00% n/a3 years 3 years 3 years 2 months5 years 2 months3 years12-Nov-18 20-Jan-19 01-Feb-19 01-Feb-21 15-Dec-1825% 25% 25% 30% n/a1,267p 1,701p 481p 617p 2,772pAnnual Report and Accounts 2016 Bellway p.l.c. 103The Board and certain members of senior management are related parties within the definition of IAS 24 'Related Party Disclosures'. Summary information of the transactions with key management personnel is provided in note 3. Detailed disclosure of individual remuneration of Board members is included in the Report of the Board on Directors' Remuneration on pages 54 to 68. The Chief Executive has conditionally contracted a property for £390,995, subject to shareholder approval, at one of the Group's developments using shareholder discount. The reservation price was calculated on an arm's length basis using prices already achieved for similar properties on the same development. If shareholder approval is given, Ted Ayres will purchase the property from Bellway Homes Limited.Transactions between fellow subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed.During the year the Group entered into the following related party transactions with its joint arrangements:Group2016 £0002015 £000Invoiced to joint arrangements in respect of accounting, management fees, interest on loans, land purchases and infrastructure works1,312Invoiced from joint arrangements in respect of fees, land purchases and infrastructure works(6,723)Amounts owed to joint arrangements in respect of land purchases and management fees at the year end(5,417)Amounts owed by joint arrangements in respect of accounting, management fees, interest, land purchases and infrastructure works45,496During the year the Company entered into the following related party transactions with its subsidiaries and joint arrangements:1,104(5,156)(5,267)10,076Company2016 £0002015 £000Amounts received in the year from subsidiaries for share options exercised by subsidiary company employees and dividends received2,136Amounts paid in the year by subsidiaries on behalf of the Company in respect of dividends, finance expenses and share purchases, and receivable from subsidiaries on disposal of investments(74,314)Amounts owed by subsidiaries in respect of dividends and shares issued net of amounts paid on behalf of the Company483,929Investments in subsidiaries and joint ventures33,651The Company has suffered no expense in respect of bad or doubtful debts of subsidiary undertakings in the year (2015 – £nil).171,155(112,318)542,76635,219Notes to the Accounts continued104 Bellway p.l.c. Annual Report and Accounts 2016ACCOUNTS26 Related party transactionsBellway Financial Services LimitedBellway Homes (North Solihull G P) LimitedBellway Homes LimitedBellway Housing Trust LimitedBellway Properties LimitedBellway (Services) LimitedLitrose Investments LimitedThe Victoria Dock Company Limited (60% owned)Other entities^^HBF Insurance PCC LimitedSubsidiaries – dormant ^(5)Ashberry Homes LimitedB.C.P. (Transport) LimitedBellway (Builders) LimitedBellway (North East) LimitedBellway (Scotland) LimitedMI New Home Insurance PCC Limited(3)(5)Notes:^ Dormant. ^^ These shares are held indirectly.1. Registered address is Persimmon House, Fulford, York, YO19 4FE.2. Registered address is Council House, Manor Square, Solihull, West Midlands, B91 3QB.3. Registered address is Bothwell House, Hamilton Business Park, Caird Street, Hamilton,ML3 0QA. 4. Registered address is 1 St James' Gate, Newcastle upon Tyne, NE99 1YQ.5. Registered address is Mill Court, La Charroterie, St Peter Port, Guernsey, GY1 4EY.Bellway City Solutions Limited Bellway Conversions Limited Bellway Homes (Anglia) LimitedBellway Homes (Barking Reach) LimitedBellway Homes (Cupernham Lane) LimitedBellway Homes (Hertfordshire) LimitedBellway Homes (North Solihull) LimitedBellway Homes (Social Housing) LimitedBellway Homes (Wales) LimitedBellway Homes (West Midlands) LimitedBellway Housebuilders LimitedBellway I LimitedBellway Marine LimitedBellway Residential LimitedBellway Trustee Company LimitedBellway Urban Renewals (Contracts) LimitedBellway Urban Renewals LimitedBulldog Premium Growth I LimitedBulldog Premium Growth II LimitedCommercials LimitedD. F. W. Golding (Southern) LimitedD. F. W. Golding LimitedDymock Properties Limited(4)George Blackett LimitedHeron Electrical Contractors LimitedHomes2Let Limited J. T. B. (Chapel Farm) Estates LimitedJ. T. B. Estates LimitedJohn T Bell & Sons (1976) LimitedMansions LimitedMetier Properties LimitedMoorfield Investments Limited Nixons Kitchens LimitedSeaton GR SPV 4 LimitedSeaton GR SPV 5 LimitedSeaton GR SPV 6 LimitedSeaton GR SPV 7 LimitedSeaton GR SPV 8 LimitedSeaton GR SPV 9 LimitedSeaton GR SPV 10 LimitedSeaton GR SPV 11 LimitedTelvec Investments LimitedTerraces LimitedThe Barking Reach Company LimitedTyneside Land & Property Company LimitedJoint arrangementsAngst Limited (50% owned)^ Cramlington Developments Limited (50% owned, year end of 30 June)^^,(1)Easel Leeds Limited (50% owned)^Fradley Residential LLP (50% owned)^^Leebell Developments Limited (50% owned, year end of 30 June)^^,(1)North Solihull (GP) Limited (25% owned, year end of 31 March)^,^^,(2)North Solihull Partnership LP (49.8% owned, year end of 31 March)^^,(2)Ponton Road LLP (50% owned)^^Annual Report and Accounts 2016 Bellway p.l.c. 10527 Group undertakingsThe directors set out below information relating to the Group undertakings as at 31 July 2016. All of these companies are registered in England and Wales, are engaged in housebuilding and associated activities, have coterminous year ends with the Group, 100% of their ordinary share capital is held by the Company and the registered address is the same as the Company (unless otherwise stated).Subsidiaries – trading106 Bellway p.l.c. Annual Report and Accounts 2016OTHER INFORMATIONFive Year Record2012 £m2013 £m2014 Restated £m2015 £m2016 £mIncome statementRevenue1,004.2 1,110.7 1,484.8 1,765.4 2,240.7 Operating profit 114.6151.1255.6360.5*492.0Net finance expenses(9.3)(10.2)(9.9)(13.1)(11.1)Share of results of joint ventures––0.3(0.1)(0.3)Profit before taxation 105.3140.9246.0347.3*480.6*Income tax expense(26.0)(32.3)(54.6)(69.6)*(95.0)Profit for the year (all attributable to equity holders of the parent)79.3108.6191.4277.7*385.6*Balance sheetASSETSNon-current assets59.456.780.448.133.3Current assets1,492.41,594.91,882.02,241.22,687.5LIABILITIESNon-current liabilities(69.4)(54.1)(74.3)(60.3)(96.2)Current liabilities(349.3)(378.7)(522.0)(653.1)(757.6)EQUITYTotal equity1,133.11,218.81,366.11,575.91,867.0StatisticsNumber of homes sold 5,226 5,652 6,851 7,752 8,721 Average price of new homes£186.6k£193.0k£213.2k£223.8k£252.8kGross margin16.1%18.3%21.3%24.2%*25.7%Operating margin11.4%13.6%17.2%20.4%*22.0%Basic earnings per ordinary share65.5p89.3p157.0p231.5p328.7pDividend per ordinary share20.0p30.0p52.0p77.0p108.0pReturn on capital employed10.1%12.3%19.6%23.9%*28.2%Gearing (including preference shares)5.3%2.1%–2.4%–Net assets per ordinary share933p1,001p1,118p1,286p1,522pLand portfolio – plots with planning permission 17,636 18,991 19,434 21,411 24,879 Weighted average no. of ordinary shares 121,036,846 121,572,688 121,919,049 122,315,198 122,558,261 No. of ordinary shares in issue at end of year121,450,797 121,772,058 122,191,378 122,521,915 122,685,986 * Stated before exceptional item (see note 5 to the accounts).The land bank is comprised of three tiers: i) land with an implementable detailed planning permission (‘DPP’); ii) medium-term ‘pipeline’ land, pending an implementable DPP; iii) strategic long-term land which we have an interest in, which may often have the benefit of a positive planning status in approved or emerging local plans.National Planning Policy Framework (‘NPPF’)The NPPF sets out the government’s planning policies for England and how these are expected to be applied. It provides a framework within which local people and their accountable councils can produce their own distinctive local and neighbourhood plans, which reflect the needs and priorities of their communities.National House Building Council ('NHBC')The NHBC is the leading warranty insurance provider and body responsible for setting standards of construction for UK housebuilding for new and newly converted homes.Annual Report and Accounts 2016 PipelinePlots which are either owned or contracted, often conditionally, pending an implementable detailed planning permission.Bellway p.l.c. 107GlossaryPlanning PermissionAffordable HousingUsually granted by the local planning authority, this permission allows a plot of land to be built on, change its use or, for an existing building, be redeveloped or altered. Permission is either ‘outline’ when detailed plans are still to be approved, or ‘detailed’ when detailed plans have been approved.Social rented and intermediate housing provided to specified eligible households whose needs are not met by the market, at a cost low enough for them to afford, determined with regard to local incomes and local house prices.Return on Capital Employed (‘ROCE’)Average Selling PriceCalculated as pre-exceptional operating profit, divided by average capital employed. Capital employed is equity and net bank debt.Calculated by dividing the total price of homes sold by the number of homes sold.BrownfieldLand which has been previously used for other purposes.Cancellation RateThe rate at which customers withdraw from a house purchase after paying the reservation fee, but before contracts are exchanged, usually due to difficulties in obtaining mortgage finance. Reservation fees are refunded in accordance with the Consumer Code for Home Builders.Earnings per Share (‘EPS’)Profit attributable to ordinary equity shareholders divided by the weighted average number of ordinary shares in issue during the financial year excluding the weighted average number of ordinary shares held by the Bellway Employee Trust (1992) which are treated as cancelled.Home Builders Federation ('HBF')The HBF is an industry body, representing the home building industry in England and Wales. It represents member interests on a national and regional level to create the best possible environment in which to deliver new homes.Help to BuyThe Help to Buy equity loan scheme is a government scheme which provides equity loans to both first-time buyers and home movers on newly constructed homes worth up to £600,000 in England. Buyers have to contribute at least 5% of the property price as a deposit and obtain a mortgage of up to 75% and the government provides a loan for up to 20% of the price.The Help to Buy mortgage guarantee scheme helps people to buy a home worth up to £600,000 in the UK with a 5% deposit to obtain a 95% mortgage. The government gives a guarantee to the lender of up to 15% of the value of the property.Land BankSocial HousingHousing that is let at low rents and on a secure basis to people in housing need. It is generally provided by councils and not-for-profit organisations such as housing associations.Glossary continued108 Bellway p.l.c. Annual Report and Accounts 2016OTHER INFORMATIONReturn on EquityProfit after tax as a percentage of opening and closing net assets.RIDDORRIDDOR refers to the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013. The regulations require an employer to report any absence by an employee of seven days or more caused by an accident at work to the Health and Safety Executive.Section 106 Planning AgreementsThese are legally-binding agreements or planning obligations entered into between a landowner and a local planning authority, under section 106 of the Town and Country Planning Act 1990. These agreements are a way of delivering or addressing matters that are necessary to make a development acceptable in planning terms. They are increasingly used to support the provision of services and infrastructure, such as highways, recreational facilities, education, health and affordable housing.Site/phaseA site is a concise area of land on which homes are being constructed. Larger sites may be divided into a number of phases which are developed at different times.Share dealing serviceThe Company’s registrars, Capita Asset Services, provide a share dealing service to existing shareholders to buy or sell the Company’s shares. Online and telephone dealing facilities provide an easy to access and simple to use service.For further information on this service, or to buy or sell shares, please contact www.capitadeal.com for online dealing, or telephone 0871 664 0454 for telephone dealing.Please note that the directors of the Company are not seeking to encourage shareholders to either buy or sell their shares in the Company. Shareholders in any doubt as to what action to take are recommended to seek financial advice from an independent financial adviser, authorised under the terms of the Financial Services and Markets Act 2000.Discount to shareholdersThe following discount arrangement is currently available to shareholders.Should you intend to purchase a new Bellway home, you will be entitled to a discount of £2,000 per £25,000, or pro-rata on part thereof, of the purchase price provided that:(a) you have been the registered holder of at least 2,000 ordinary shares for a minimum period of 12 months prior to the reservation of your newhome; and(b) you inform our sales representative on the relevant site when reserving your property that you are claiming shareholder discount.This discount arrangement is only available to shareholders on the Company’s Register of Members. Employees of investing companies or members of investing institutions would not therefore be eligible. Underlying beneficial shareholders would be entitled to benefit from the arrangements by providing proof of ownership.For further details please contact the Group General Counsel and Company Secretary, Bellway p.l.c., Seaton Burn House, Dudley Lane, Seaton Burn, Newcastle upon Tyne NE13 6BE, telephone 0191 217 0717 or e-mail investor.relations@bellway.co.uk.Beneficial owners of shares with ‘Information Rights’Beneficial owners of shares who have been nominated by the registered holder of those shares to receive information rights under section 146 of the Companies Act 2006 are required to direct all communications to the registered holder of their shares rather than to the Company’s registrar or to the Company directly.Corporate responsibility reportingFurther reporting on the Company’s corporate responsibility activities is available to view on our website at www.bellway.co.uk/corporate-responsibility.Shareholder InformationAnnual Report and Accounts 2016 Bellway p.l.c. 109Ordinary shareholders by size of holding at 31 July 2016Holdings SharesNumber % Holding %0 – 2,0002,001 – 10,00010,001 – 50,00050,001 and over2,016 69.33 1,146,376 0.93419 14.41 1,821,852 1.49212 7.29 5,001,281 4.08261 8.97 114,716,477 93.50Total 2,908 100.00 122,685,986 100.00Dividend Re-Investment Plan (‘DRIP’)Shareholders may agree to participate in the Company’s DRIP to receive dividends in the form of shares in Bellway p.l.c. instead of in cash. The DRIP is provided by Capita Asset Services, a trading name of Capita IRG Trustees Limited which is authorised and regulated by the Financial Conduct Authority. For more information please call 0871 664 0381 (calls to this number cost 10p per minute plus network extras) or, if calling from overseas, +44 20 8639 3402. Lines are open from 9.00 am to 5.30 pm on Monday to Friday (excluding bank holidays). Alternatively you can e-mail shares@capita.co.uk or log on to www.capitashareportal.com.Non-sterling bank accountIf you live outside the UK, or have a non-sterling bank account, Capita can provide you with a service that will convert your sterling dividend into your local currency and send you the funds by currency draft, or pay them straight into your overseas bank account. You can register for this service on the Share Portal (by clicking on ‘your dividend options’ and following the on-screen instructions) or by contacting the Customer Support Centre. For further information e-mail ips@capita.co.uk or call 0871 664 0385 (UK calls cost 10p per minute plus network extras) or, from overseas, call +44 20 8639 3405. Lines are open from 9.00 am to 5.30 pm on Monday to Friday (excluding bank holidays).Group General Counsel and Company Secretary and Registered OfficeSimon ScougallBellway p.l.c. Seaton Burn House Dudley Lane Seaton Burn Newcastle upon Tyne NE13 6BE Registered number 1372603Registrars and Transfer OfficeCapita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TUFinancial AdviserN M Rothschild & Sons LimitedStockbrokersCitigroup Global Markets Limited Numis Securities LimitedBankersBarclays Bank PLC Lloyds Banking Group plc Royal Bank of Scotland Group plcAuditorKPMG LLP110 Bellway p.l.c. Annual Report and Accounts 2016OTHER INFORMATIONAdvisers and Company SecretaryAnnual Report and Accounts 2016 Bellway p.l.c. 111Financial CalendarAnnouncement of results and ordinary dividendsHalf year MarchFull year OctoberOrdinary share dividend paymentsInterim JulyFinal JanuaryAnnual Report posted to shareholders NovemberFinal ordinary dividend – ex-dividend date 1 December 2016Final ordinary dividend – record date 2 December 2016AGM and trading update 13 December 2016DRIP election date for final (15/16) dividend 17 December 2016Final ordinary dividend – payment date 11 January 2017112 Bellway p.l.c. Annual Report and Accounts 2016OTHER INFORMATIONNotes Designed and produced by Radley Yeldar www.ry.com Bellway p.l.c. are committed to caring for the environment and looking for sustainable ways to minimise our impact on it.Printed by L&S Printing Company Ltd who are certified to ISO 14001 environmental management system.Printed using vegetable oil based inks.This report is printed on Chorus Lux Silk which contains material sourced from responsibly managed forests, certified in accordance with the FSC(r) (Forest Stewardship Council).FSC® – Forest Stewardship Council. This ensures that there is an audited chain of custody from the tree in the well-managed forest through to the finished document in the printing factory.ISO 14001. A pattern of control for an environmental management system against which an organisation can be accredited by a third party®www.fsc.orgMIX Paper fromresponsible sourcesFSC® C014531 s l ll l l l i i ii i ii i .. .. .. Bellway p.l.c. Seaton Burn House, Dudley Lane, Seaton Burn, Newcastle upon Tyne NE13 6BETel: (0191) 217 0717 Fax: (0191) 236 6230 DX: 711760 Seaton Burn www.bellway.co.ukBuilding Homes, Building Value 

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