Half Year Results

BARRATT DEVELOPMENTS PLC

Half Yearly Financial Report for the six months ended 31 December 2015

Strong performance in the half

• Completion volumes¹ increased by 9.4%
• Land market remains attractive with £559m (10,967 plots) of land approved for purchase
• ROCE2 increased by 3.9 percentage points to 25.5% for the 12 months ended 31 December 2015
• Continued focus on Customer Satisfaction – HBF Five Star Customer Satisfaction Award for the 6^th consecutive year
• Build Excellence – 81 NHBC Pride in the Job Awards in 2015, more than any other housebuilder for the 11^th year in a row

	Half year ended 31 December 2015	Half year ended 31 December 2014	Change
Total completions (including JVs)3	7,626	6,971	9.4%
Revenue	£1,875.5m	£1,576.3m	19.0%
Gross margin4	18.6%	17.4%	1.2 ppts
Profit from operations	£301.8m	£224.1m	34.7%
Operating margin5	16.1%	14.2%	1.9 ppts
Profit before tax	£295.0m	£210.2m	40.3%
Basic earnings per share	23.9p	17.0p	40.6%
Interim dividend per share	6.0p	4.8p	25.0%
ROCE	25.5%	21.6%	3.9 ppts

Current Trading and Outlook

• Strong start to the second half with 260 (2015: 279) net private reservations per week at a rate of 0.71 (2015: 0.71) net private reservations per active site per week
• Total forward sales including JVs as at 21 February 2016 up by 13.4% to £2,579.5m (22 February 2015: £2,275.3m)
• Group now expected to have a net cash balance in excess of £250m as at 30 June 2016
• Interim dividend payment of 6.0 pence per share (2015: 4.8 pence per share)
• Capital Return Plan expected to return a total of 67.8 pence per share over the two year period to November 2017⁶

Commenting on the results David Thomas, Chief Executive of Barratt Developments PLC said:

“In line with our strategy, we have stepped up the number of completions in the first half and we did this in a disciplined way, both financially and operationally, without compromising on the quality of the homes we’re building.

“In the past five years we have increased our annual output by more than 53%, built more than 71,700¹ homes and approved the investment of over £4.4 billion in new land for housing. The market remains strong as a result of improved mortgage availability and Government support for first time buyers and we will continue to grow in a way that delivers for the needs of homebuyers and shareholders alike.”

1. Includes joint venture (‘JVs’) completions in which the Group has an interest
2. Return on capital employed (‘ROCE’) is calculated as earnings before interest, tax, operating charges relating to the defined benefit pension scheme and operating exceptional items for the 12 months to December divided by average net assets adjusted for goodwill and intangibles, tax, cash, loans and borrowings, retirement benefit assets/obligations and derivative financial instruments
3. Unless otherwise stated all numbers exclude joint ventures
4. Gross margin is gross profit divided by revenue
5. Operating margin is profit from operations divided by revenue
6. All final dividends and the special cash payment programme are subject to shareholder approval

The Half Yearly Financial Report contains certain forward-looking statements about the future outlook for the Group. Although the Directors believe that these statements are based on reasonable assumptions, any such statements should be treated with caution as the future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

There will be an analyst and investor meeting at 9.00am today at Deutsche Bank, 1 Great Winchester Street, London, EC2N 2DB. The meeting will be broadcast live on the Barratt Developments corporate website, www.barrattdevelopments.co.uk. A listen only function will also be available.

Please dial:

UK: 0800 694 0257

International: +44 (0) 1452 555 566

Conference ID: 31517021#

The Half Yearly Financial Report for the six month period ended 31 December 2015 is available from today, 24 February 2016, on the Barratt Developments corporate website, www.barrattdevelopments.co.uk via the following address: www.barrattdevelopments.co.uk/barratt/en/investor/results

Further copies of the announcement can be obtained from the Company Secretary’s office at:

Barratt Developments PLC, Barratt House, Cartwright Way, Forest Business Park, Bardon Hill, Coalville, Leicestershire, LE67 1UF.

For further information please contact: 

Barratt Developments PLC
Neil Cooper, Chief Financial Officer	020 7299 4862
Abi Genis, Investor Relations Manager	020 7299 4895
For media enquiries, please contact:
Barratt Developments PLC
Patrick Law, Group Corporate Affairs Director	020 7299 4892
Maitland
James Devas	020 7379 5151

Chief Executive’s Statement

Overview

The Group has delivered a strong first half performance, with year on year improvements across our key financial metrics.

Our completion volumes were 7,626 (including JVs), an increase of 9.4% representing a significant step towards rebalancing the business between first and second half delivery.

Profit before tax increased by 40.3% to £295.0m, gross margin improved by 1.2 percentage points to 18.6% and operating margin improved by 1.9 percentage points to 16.1%. ROCE for the 12 months to 31 December 2015 was up by 3.9 percentage points to 25.5% showing in part the results of our actions to improve returns, as well as being boosted by a high level of completions (including JVs) in the calendar year of 17,102 (2014: 15,614), with a strong delivery from the second half of FY15 and the first half of FY16 as we drive for more completions in the first half of each year.

Our performance has been driven by our targeted land buying and effective planning, outstanding design, and construction excellence and efficiency, backed by innovative sales and marketing and industry leading customer experience. The delivery of the HBF 5 Star Customer Satisfaction Award for the 6^th consecutive year helps to demonstrate this track record of successful execution.

We have achieved this by working as a team and I would like to thank all of our employees for their enthusiasm, outright hard work and determination to succeed. We are continuing to drive for great customer service and outstanding product quality and this is positively differentiating our consumer offer.

Our medium term targets remain a minimum gross margin of 20% and a minimum ROCE of 25% by FY17. We have also strengthened our balance sheet, ending the half year with net cash of £24.2m (31 December 2014: net debt of £134.2m).

The Board is pleased to announce an interim dividend of 6.0 pence per share (2015: 4.8 pence per share). We continue to expect to deliver attractive future cash returns of £678m to shareholders over the two year period to November 2017.

Housing policy

The UK Government recognises the need to build more homes as evidenced by its policies to improve land availability, planning and support for buyers. We were pleased to see the extension of the Help to Buy (Equity Loan) programme through to 2021 as well as the increase from 1 February 2016 in the Government’s Equity Loan to 40% in London. Both changes will be important for our customers, particularly in helping buyers into the market. We remain supportive of the Government’s Starter Homes Scheme, which is aimed at providing 200,000 homes for first time buyers by 2020.

The housing market

The housing market remained positive during the period with housing transactions in the year to December 2015 increasing by 0.5% over the previous twelve month period, albeit this remains well below peak, representing around 76% of the 2007 figure⁷. External indices showed house price inflation moderated in the period, with market house price inflation of around 4.5% in the six months8 ended 31 December 2015.

The number of first time buyer completions in the housing market has remained high, just 0.5% below the eight year high in 2014⁹ supported by favourable economic conditions and ongoing Government support.

Lending to buyers in the new build sector has continued to strengthen as competition amongst lenders remains strong. We continue to work with a wide set of lenders through our approved brokers to ensure that our customers have access to a wide range of mortgage products.

1. Source: HMRC seasonally adjusted UK Property Transactions Count, December 2015
2. Source: Halifax House Price Inflation Index, December 2015 (Issued 4 February 2016)
3. Source: Halifax First Time Buyer Review, January 2016

Increasing our housing supply

With housing demand remaining strong, we have continued to invest, in a disciplined way, to increase housing production, with over £4.4bn approved for the purchase of 82,800 plots of land over the last five years. There remains a long term housing shortage of all tenures that can only be addressed through additional supply; we are committed to playing a leading role in addressing this issue without compromising our operational or financial strength.

Additionally, over the last five years we have built more than 71,700 homes (including JVs) of which over 13,400 were affordable homes (including JVs) sold to Registered Providers and we have invested in employees, including 880 new apprentices, trainees, graduates and undergraduates to further expand our skilled workforce, enabling further delivery of supply.

Our financial results

Total completions (including JVs) were up by 9.4% in the period to 7,626 units (2014: 6,971 units).

Help to Buy remains highly attractive to customers buying new build homes and 32% (2014: 33%) of our total completions utilised the scheme. Whilst we recognise that there has been some slowing at the top end of the London market, 74% of our London properties, including JVs, reserved in the calendar year were priced at or below £600,000. Overall our net private reservation rate was 0.66 (2014: 0.58) per active site per week in the half year.

Completions (units)	2015	2014	Variance
Private	5,993	5,563	7.7%
Affordable	1,114	1,149	(3.0%)
JV	519	259	100.4%
Total	7,626	6,971	9.4%

We have been working towards a more balanced delivery profile between half years in terms of completion volumes, and given first half completion numbers, we now expect to be around our target of 45% of completions in the first half (2014: 42%). We continue to target 16,750 completions (including 1,000 JV completions) for FY16.

In the half year, we operated from an average of 386 active sites (including JVs) (2014: 384). We have made good progress on new site openings, launching 63 (2014: 96) new developments (including JVs) in the first half.

Whilst delivering increased completion volumes we also remain focused on achieving the best possible prices for the homes we sell. Total average selling price (‘ASP’) increased by 10.9% in the period to £254,200 (2014: £229,200). Private ASP increased by 11.0% in the period to £281,100 (2014: £253,200) predominantly from changes in mix. Affordable housing ASP was £109,200 (2014: £113,000).

Our gross margin was 18.6%, up 1.2 percentage points in the period reflecting amongst other things a higher proportion of completions from newer higher margin land and mix changes. We delivered a gross profit of £348.4m (2014: £274.7m) in the period.

Operating profit increased by £77.7m to £301.8m (2014: £224.1m). Operating margin was up by 1.9 percentage points to 16.1% (2014: 14.2%) reflecting our increased gross margin and a contribution from operational efficiencies, benefiting from volume growth, and increased levels of other income.

Net finance charges were in line with the prior year at £29.8m (2014: £29.7m).

In the half year, the Group’s share of JV profit was £22.9m (2014: £15.6m). We continue to make good progress in developing our JV portfolio and continue to expect to deliver JV profit of around £60m for FY16. Profit before tax increased by 40.3% to £295.0m (2014: £210.2m) and the Group recognised £56.1m of corporation tax charges at an effective rate of 19.0% (2014: effective tax rate of 20.4%). Basic earnings per share increased by 40.6% to 23.9 pence per share (2014: 17.0 pence per share).

Our strategic objectives

Our strategic objectives remain clear – maintain disciplined growth, deliver on our targets for key financial metrics (minimum ROCE of 25% and gross margin of 20% by 2017) and continue to deliver attractive cash returns. We have made good progress against these objectives during the half year.

Key dimensions of our strategy delivery

In addition to the contribution from favourable market conditions, the increase in our profitability has benefited from our successful land investment strategy and from improvements in margin.

Land and planning

A key enabler of the growth of our business in recent years has been our land investment strategy. Since 2009 we have approved the investment of £5.3bn in land for new homes and this has boosted profit and led to increased completion volumes.

The land market remains attractive from an investment perspective and we continue to secure excellent opportunities that meet or exceed our minimum hurdle rates of 20% gross margin and 25% ROCE¹⁰. In the period, we approved the purchase of £558.7m (2014: £373.1m) of land, equating to 54 sites (2014: 53 sites) and 10,967 plots (2014: 7,242 plots). We expect to approve c. 18,000 plots for purchase in FY16.

We continue to target a regionally balanced land portfolio with a supply of owned land of c. 3.5 years and a further c. 1.0 year of controlled land. Our target is for a shorter than sector average land bank reflecting our focus on ROCE and a rapid asset turn. At 31 December 2015 we achieved this target with a 4.5 years land supply (excluding JVs) comprising 3.3 years owned land and 1.2 years controlled land, with the owned land bank including land with both outline and detailed planning consents.

Our land bank	31 December 2015	31 December 2014
Owned and unconditional land bank (plots)	52,007	50,444
Conditionally contracted land bank (plots)	19,949	18,503
Owned and controlled land bank (plots)	71,956	68,947
Number of years’ supply based upon completions in the 12 months ended 31 December	4.5 (excluding JVs)	4.6 (excluding JVs)
JVs owned and controlled land bank (plots)	6,124	6,904
Strategic land (acres)	11,492	10,952
Potential delivery from strategic land (plots)	74,600	70,600
Land bank carrying value	£2,860.1m	£2,631.5m

The transformation of our land bank from older, lower margin land to more recently acquired higher margin land is well progressed. As at 31 December 2015, 92% (31 December 2014: 87%) of our owned and controlled land is higher margin, newer land. On the 181 sites that we have acquired and completed since 2009 we have achieved an average gross margin of c. 21%, and an average site ROCE of c. 39%, demonstrating sustained delivery above our hurdle rates on this more recently acquired land.

Whilst maintaining a first class operational land bank, we remain focused on securing a longer term land pipeline through the acquisition of strategic land options. In the half year 1,542 plots (2014: 2,179 plots) were transferred from strategic land to our owned land bank. 22% of our completions (2014: 16%) during the half year were on strategically sourced land, and we remain on track to deliver our target of c. 20% of completions to be delivered from strategic land in FY17.

Reflecting our success with planning over the past 12 months we are very well positioned, with 97% of expected FY17 completions (2014: 97% of FY16 completions) having outline or full planning consent.

1. Site ROCE on land acquisition is calculated as site operating profit (site trading profit less sales overheads less allocated administrative overheads) divided by average investment in site land, work in progress and equity share.

Improving efficiency and reducing costs

Improving the efficiency of our operations and controlling costs continues to be a high priority for the Group, as it will further enhance margin. We are focused relentlessly on improving efficiency through business simplificiation including further standardisation of our product range and through driving process efficiency across key aspects of our business, with wide-ranging reviews underway, for example in the areas of commercial, sales and marketing.

We have a robust and carefully managed supply chain with 90% of our house build materials sourced through our centralised procurement function. We have effectively sourced the raw materials required to underpin our controlled volume growth and the cost of all of our centrally procured materials is now fixed until the end of FY16.

Whilst we have seen an increase in the supply of skilled subcontractors over the past year, there remains an industry shortage in the UK, with increases in labour costs remaining the largest driver of overall build cost inflation. We are well placed with the necessary labour to meet our operational and quality requirements. We are also seeking to increase efficiency through the use of timber frame on around 6% of our plots during FY16 and through the use of alternative off-site manufacturing options, including closed panel roof solutions.

We continue to expect that overall build cost inflation for FY16 will be c. 3% to 4%.

Maintaining an appropriate capital structure

Net cash as at 31 December 2015 was £24.2m (31 December 2014: net debt £134.2m). The cash outflow from our net cash position of £186.5m as at 30 June 2015 reflects normal seasonal trends, ongoing costs of the Group’s build programme, and the payment of £203.1m of dividends. We now expect that the Group will have net cash as at 30 June 2016 in excess of £250m following the disposal of the majority of our shared equity available for sale assets in February 2016 for a cash consideration of £82.9m.

The Group continues to maintain a balanced capital structure with land and long-term work in progress funded by shareholders’ funds and land creditors. The selective use of land creditors improves ROCE and at 31 December 2015 represented 36% (2014: 35%) of our owned land bank. We continue to secure attractive deferred payment terms on land and expect land creditors as a proportion of the owned land bank to be around one-third at 30 June 2016.

Dividend

The Board is pleased to announce an interim dividend of 6.0 pence per share (2015: 4.8 pence per share). This dividend represents one-third of the expected dividend for the financial year, based upon the full year dividend being covered three times by current consensus earnings in line with our three times dividend cover policy. It will be paid on Friday 20 May 2016 to all shareholders on the register on Friday 29 April 2016.

Our Capital Return Plan combines the ordinary dividend together with a special cash payment programme. Under the special cash payment programme we anticipate proposing a special cash payment of £125m proposed with our FY16 results payable in November 2016, and a special cash payment of £175m proposed with our FY17 results payable in November 2017.

We therefore expect to return around £678m of cash through ordinary dividends and special cash payments to our shareholders over the two years to November 2017, which equates to a total of 67.8 pence per share.

Capital Return Plan A	Ordinary dividend £m	Special cash payment £m	Total £m	Total pence per share
Proposed payment
Year to November 2016	180 B, C	125	305	30.5 C
Year to November 2017	198 B, C	175	373	37.3 C
Total proposed payment	378 B, C	300	678	67.8 C

A All final dividends and the special cash payment programme are subject to shareholder approval.

B Based on Reuters consensus estimates of earnings per share of 54.1p for FY16 and 59.5p for FY17 as at 19 February 2016 and applying a three times dividend cover in line with previously announced policy.

C Based upon 31 December 2015 share capital of 1,002,277,333 shares for proposed payments.

Our priorities

We believe that a strongly performing business benefits from a focus on its wider priorities: Customer First, Great Places, Leading Construction and Investing in our People.

Each of these priorities has a work plan to drive improvements across the business and they are supported by a set of principles and financial discipline which underpins all of our operations.

Customer First

We place customers at the heart of our business by building outstanding homes and anticipating the changing needs of home buyers.

We are the only major national housebuilder to achieve the HBF 5 Star Customer Satisfaction rating for six consecutive years, with over 90% of customers being prepared to recommend us to a friend.

We are continuing to improve the quality and efficiency of the way in which we deal with customers through the sales process. During the period we have invested in our customer service systems to speed up and improve the efficiency of our service.

We worked with suppliers, customers and industry experts to produce the ‘Future Home Report’ to inform design direction in terms of customer trends and preferences. As well as carefully defining customer segments and their design preferences, our project with The Architects’ Journal to select new house design features to meet these requirements concluded in the period.

Great Places

A key focus of the organisation continues to be building relationships with landowners to ensure that we can acquire the right land and then create outstanding places to live. Our objective is to be the partner of choice for landowners by demonstrating our ability to achieve planning permission and create value.

During the period we made significant progress in terms of securing the right operational land, continued to successfully deliver completions from public sector land, and increased investment in longer term strategic sites.

We are now using the Design Council/CABE Building for Life process extensively and are winning more design awards than any other major housebuilder. We have now achieved Building for Life awards on 31 sites.

Leading Construction

We continue to be focused on a ‘right first time’ approach as the most efficient way of operating across all aspects of our building processes with a continuous focus on improving build quality which will reduce remedial costs and improve customer satisfaction.

We are implementing a number of key initiatives in terms of increasing efficiency, for example we expect to build over a thousand timber frame homes in FY16.

Our site managers continue to lead the industry and in 2015 we won 81 NHBC Pride in the Job awards. This was the 11th year in succession that our site managers have won more of these awards than any other housebuilder.

Investing in our People

The building and construction industry continues to face a shortage of skilled workers and attracting and retaining the best people is an important priority for the business. We aim to have a diverse workforce that reflects the communities in which we operate, delivering excellence for our customers and business by drawing on a broad range of talents, skills and experience.

We have continued with our graduate and apprentice programmes and our largest ever intake of future talent has started with the business. In addition, we are training 79 employees through our Foundation Degree Programme with Sheffield Hallam University.

We continue to support the wider industry focus on addressing the skills shortage.

Health and safety

Increased activity levels across the industry in terms of site openings and production volumes combined with shortages of skilled staff has contributed to an increased risk of accidents on sites. However, in the twelve months to 31 December 2015 our reportable incident rate has reduced with 331 (2014: 428) reportable incidents per 100,000 employees. We remain focused on continuing to enhance health and safety performance across our business.

Post balance sheet event

On 5 February 2015, we sold available for sale financial assets arising from equity share programmes for home buyers held on the balance sheet at a fair value of £85.4m for a cash consideration of £82.9m. These proceeds will be used to reduce borrowing levels in the first instance. This leaves the Group holding around £5.0m of available for sale financial assets at current fair values.

Board changes

After eight years’ service, Mark Rolfe has notified the Board of his intention to step down from his positions as a Non-Executive Director, Senior Independent Director and Chairman of the Audit Committee with effect from the conclusion of the Company’s forthcoming Annual General Meeting in November 2016.

The Board is pleased to announce that it has agreed to appoint Jock Lennox as a Non-Executive Director with effect from 1 July 2016. Jock will also become a member of the Audit, Remuneration and Nomination Committees on the same date and will succeed Mark as the Chairman of the Audit Committee in November 2016.

Details of who will succeed Mark as the Senior Independent Director of the Company will be announced in due course.

Current trading and outlook

The sales performance across the Group in the second half to date has been strong, with net private reservations per week of 260 (2015: 279), resulting in average net private reservations per active site per week of 0.71 (2015: 0.71).

Our total forward sales (including JVs) as at 21 February 2016 were up 13.4% on the strong prior year.

	21 February 2016		22 February 2015		Variance (£m)
	£m	Plots	£m	Plots	%
Private	1,564.1	5,169	1,377.5	5,239	13.5
Affordable	523.4	4,448	439.6	3,914	19.1
Sub total	2,087.5	9,617	1,817.1	9,153	14.9
JV	492.0	1,369	458.2	1,587	7.4
Total	2,579.5	10,986	2,275.3	10,740	13.4

We remain confident in our outlook for the full year as we continue to execute our strategies: aimed at ensuring disciplined growth, improving key financial metrics through a focus on efficiency and the continued delivery of attractive cash returns.

David Thomas
Chief Executive
23 February 2016

Principal risks and uncertainties

The Group’s financial and operational performance and reputation is subject to a number of potential risks and uncertainties, which could have a material impact on the Group’s performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results. The Directors do not consider that the process of risk management and the principal risks and uncertainties have changed since the publication of the Annual Report and Accounts for the year ended 30 June 2015. A detailed explanation of the relevance to the Group’s strategy and mitigation of the risks outlined below can be found on pages 40 to 45 of the Annual Report and Accounts for the year ended 30 June 2015, which is available at www.barrattdevelopments.co.uk.

Economic environment, including housing demand and mortgage availability

Changes in the UK and European macroeconomic environments, including but not limited to unemployment, flat or negative economic growth, buyer confidence, availability of mortgage finance particularly for higher loan to values including Government backed schemes, the ability of purchasers to repay equity share loans, interest rates, competitor pricing, falls in house prices or land values, may lead to a fall in the demand for houses, which in turn could result in impairments of the Group’s inventories, goodwill and intangible assets.

Land purchasing

The ability to secure sufficient consented land and strategic land options at appropriate cost and quality to provide profitable growth.

Liquidity

Unavailability of sufficient borrowing facilities to enable the servicing of liabilities (including pension funding) and the inability to refinance facilities as they fall due, obtain surety bonds, or comply with borrowing covenants. Furthermore, there are risks to management of working capital such as conditional contracts, build costs, joint ventures and the cash flows related to them.

Attracting and retaining high calibre employees

Inability to recruit and/or retain employees with appropriate skill sets or sufficient numbers of such employees.

Availability of raw materials, subcontractors and suppliers

Shortages or increased costs of materials and skilled labour, the failure of a key supplier or the inability to secure supplies upon appropriate credit terms could increase costs and delay construction.

Government regulation and planning policy

Inability to adhere to the increasingly stringent and complex regulatory environment, including planning and technical requirements affecting the housing market and regulatory requirements more generally.

Construction and new technologies

Failure to identify and achieve key construction milestones, due to factors including the impact of adverse weather conditions, the failure to identify cost overruns promptly, design and construction defects, and exposure to environmental liabilities which could delay construction, increase costs, reduce selling prices and result in litigation and uninsured losses. There are also risks associated with climate change and the use of new technology in the build process e.g. materials related to carbon reduction.

Joint ventures and consortia

Large development projects, some of which involve joint ventures or consortium arrangements and/or commercial developments, are complex and capital intensive and changes may negatively impact upon cash flows or returns.

Health and safety

Health and safety breaches can result in injuries to employees, subcontractors and site visitors, delays in construction or increased costs, reputational damage, criminal prosecution and civil litigation.

Information technology (‘IT’)

Failure of the Group’s IT systems, (whether due to cyber attacks or other causes) in particular those relating to surveying and valuation, could adversely impact the performance of the Group.