Financial Review

Financial highlights

The key financial information for the year was as follows:

• Revenue up 26% to £650.5m (2006: £517.6m).
• Underlying profit before tax up 14% to £85.5m(2006: £75.0m).
• Underlying earnings per share up 13% to 46.1p.
• Dividend up 12.5% to 18p (2006: 16p).
• £41m spent on share buy-backs for cancellation and the Employee Benefit Trust (EBT) (2006: £5m).
• Continued significant investment in the business though acquisitions, investment in recruiting new teams and opening new offices.

Acquisitions

During the year we completed a number of acquisitions both in the UK (in aggregate £12m (2006: £21.1m)), and overseas (in aggregate £31.5m (2006: £50.9m)) including:

• On 7 January 2007, the Group acquired the share capital of Hepher Dixon Limited, a leading planning consultancy, for consideration of £5.1m. Goodwill on acquisition of £4.3m has been capitalised. Cash consideration of £2.8m was paid with £2.3m deferred cash consideration due over the next five years.
• On 3 May 2007, the Group acquired the share capital of Christopher Rowland Limited, a residential property agency, for consideration of £4.0m. Goodwill on acquisition of £3.9m has been capitalised. Cash consideration of £2.1m was paid with £1.9m deferred cash consideration due over the next five years.
• On 31 July 2007, the Group acquired Granite Partners LLC, a New York based property investment banking firm, for an initial consideration of US$54.0m, of which 75% was payable upon completion. The remainder is subject to a five year earn-out, such that the total consideration is capped at US$84.6m, dependent on the achievement of certain EBITDA targets over a two year future period. As at the balance sheet date, this remaining 25% has been accounted for as deferred consideration at a discounted amount of £5.8m. Goodwill of £22m and intangible assets of £5.0m have been capitalised.

Taxation

The effective tax rate is 32.6% (2006: 30.3%). The principal reason for the increase in the tax charge is the impact of the fall in the share price below the fair value price at the date of grant of share based options. This has resulted in an additional charge to tax in the income statement of £2.1m (2006: nil).

Earnings per share and dividend

Basic earnings per share from continuing operations fell by 1% to 45.5p (2006: 46.0p). Adjusting for profit on disposals, share based payments, amortisation of intangibles and impairment of goodwill and available-for-sale investments, underlying basic earnings per share rose by 13% to 46.1p (2006: 40.8p).

The Board is recommending a final dividend of 12p (net), making 18p for the full year, a 12.5% increase on last year.

Key performance indicators

The Group uses a number of key performance indicators to measure its performance and highlight the impact of management actions. At Group level, the most visible indicators are revenue growth, underlying profit growth, operating margins, cash generation, earnings per share, growth in assets under management and total shareholder return. The Group continues to review the mix of key performance indicators to measure our performance against strategic objectives, specialising in both financial and non-financial areas.

Financial policies and risk management

The Group has financial risk management policies which cover financial risks considered material to the Group’s operations and results. These policies are reviewed regularly and approved by the Board to ensure compliance and policies that reflect best practice.

Treasury policies and objectives

The Group Treasury policy is designed to reduce the financial risks faced by the Group, which primarily relate to funding and liquidity, interest rate exposure and currency rate exposures. The Group does not engage in trades of a speculative nature. The Group uses derivative financial instruments to hedge certain risk exposures.

The Group’s financial instruments comprise borrowings, cash and liquid resources and various other items such as trade receivables and trade payables that arise directly fromits operations. Further details of financial instruments are provided in
Note 25 of these Report and Accounts.

Interest rate risk

The Group finances its operations through a mixture of retained profits and bank borrowings, at both fixed and floating interest rates.

Liquidity risk

The Group prepares an annual funding plan approved by the Board which sets out the Group’s expected financing requirements for the next 12 months. These requirements will be met with our existing cash balances, loan facilities and expected cash flows for the year.

Foreign currency risk

Our policy is for each business to borrow in local currencies where possible. In particular, we financed the acquisition of Granite Partners LLC in part through a five year US$40m loan. The Group does not actively seek to hedge risks arising from foreign currency transactions due to their non-cash nature and the high costs associated with such hedging.

Net interest

Net finance income is £2.1m (2006: £3.7m). Share buy-backs, investments, acquisitions and lower disposal proceeds led to lower cash balances than in 2006.

Capital and shareholders’ interests

Minority interests

Minority interests increased to £5.9m (2006: £4.3m) and reflects acquisitions and increased profits from Cordea Savills during the year.

Share capital

During the year ended 31 December 2007, 189,000 shares were issued to participants in the Savills Executive Share Option Scheme (2001 Scheme) and 66,041 shares to participants in the Savills Sharesave Scheme. No shares were issued to the QUEST. 3.5m shares were repurchased for cancellation during the year. The total number of ordinary shares in issue at 31 December 2007 was 131.8m (2006: 135.1m).

Cash flow and liquidity

The Group generated cash from operating activities of £102.8m (2006: £76.1m). At the year end, the Group had cash and cash equivalents of £110.7m (2006: £124.1m). At the same time it had borrowings of £33.2m (2006: £19.3m). However, the Group’s cash flow profile is highly seasonal, with significant cash outflows in the second quarter of the year for dividends, taxation and staff bonuses.

The Group retains cash balances throughout the year in a number of subsidiaries. This reflects factors including: fiscal – minimising withholding tax on remittance where future investment is anticipated; commercial – where cash is required to support commercial contracts; regulatory – where our regulated businesses have minimum capital requirements; and where there are minority shareholders. This position remains under review to ensure the Group has the optimal capital structure.

Overall, the Group is run with low financial gearing which the Board believes is appropriate given the transactional nature of many of its revenue streams and its tangible asset base.

Future liquidity

The Group’s existing net cash balances available bank facilities and expected cash flows for the year provide the Group with the resources to fund operating and investment activities. At the year end the Group also had undrawn overdraft facilities of £16.8m (2006: £8.9m). Since the year end, £10m of the overdraft facility has been replaced with a £60m, 18 month, revolving credit facility which has been put in place to provide additional flexibility.

Net assets

Net assets continue to grow with an increase of 5% from 31 December 2006 to £223.6m. Goodwill has increased from £99.9m to £138.7m largely due to the £22m of goodwill capitalised through the acquisition of Granite in July.

Pension scheme

During the year the Company and Trustees undertook a review of the Pension Plan of Savills to ensure that it complied with the Employment Equality (Age) (Amendment No.2) Regulations 2006. From 29 January 2007 the Plan has fulfilled the Pension Act 2004 requirement of having at least one-third Member Nominated Trustees.

The triennial valuation of the Plan as at 5 April 2007 has been completed and the necessary certificates were signed on 29 May 2008. Full details are provided in
Note 10.

Forward-looking statement

In preparing this Review of Operations and Financial Review, whilst we have provided a detailed management commentary on our markets, activities and prospects, all forward-looking statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future.

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