Half Year Results

BARRATT DEVELOPMENTS PLC

Half Year results for the six month period ended 31 December 2016

Strong half year for the Group, well on track for the full year

	Half year ended 31 December 2016	Half year ended 31 December 2015	Change
Total completions1 (plots)	7,180	7,626	(5.8%)
Revenue (£m)	1,816.2	1,875.5	(3.2%)
Gross margin2 (%)	20.7	18.6	2.1 ppts
Profit from operations (£m)	324.0	301.8	7.4%
Operating margin3 (%)	17.8	16.1	1.7 ppts
Profit before tax (£m)	321.0	295.0	8.8%
Interim dividend per share (pence)	7.3	6.0	21.7%
ROCE4 (%)	27.0	25.5	1.5 ppts
Net Cash5 (£m)	196.7	24.2	712.8%

Highlights

• Completions outside of London at highest level for nine years; London completions were in line with planned build programme, with significant uplift expected on wholly owned sites in the second half
• Half year profit before tax for the period of £321.0m, up 8.8%
• ROCE increased by 1.5 ppts to 27.0%, reflecting our fast build and sell model
• Maintained industry-leading customer satisfaction and build quality

Current Trading

• Completion growth expected in the second half with record total forward sales (including JV’s) as at 19 February 2017 up 17.0% at £3,018.2m
• Net private reservations per active outlet per average week of 0.77 (2016: 0.76)

Capital Return Plan

• Improved and extended Capital Return Plan with ordinary dividend cover re-set at 2.5 times and special dividends of £175m in November 2017 and November 2018

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

“As we reported in the January trading update, we have delivered another very strong first half performance, pre-tax profits were up nearly 9% and completions outside of London at their highest level in nine years.

Whilst we have increased volumes across the UK by 55% in the last five financial years, we have maintained our commitment to build quality and customer service and we are the only major housebuilder with the HBF 5 Star Customer Satisfaction Award.

With a record forward order book, strong consumer demand and a positive lending backdrop, we remain confident in our outlook for the full year. Our confidence in the business going forward is reflected in the improved and extended Capital Return Plan.”

1. Includes joint venture (‘JV’) completions in which the Group has an interest
2. Gross margin is calculated as gross profit divided by revenue
3. Operating margin is calculated as profit from operations divided by revenue
4. 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, divided by average net assets adjusted for goodwill and intangibles, tax, cash, loans and borrowings, retirement benefit assets/obligations and derivative financial instruments
5. Net cash / debt is defined as cash and cash equivalents, bank overdrafts, interest bearing borrowings and foreign exchange swaps

There will be an analyst and investor meeting at 9.00am today at Deutsche Bank, 1 Great Winchester Street, London, EC2N 2DB. The presentation will be broadcast live on the Barratt Developments corporate website, www.barrattdevelopments.co.uk, from 9.00am today. A playback facility will be available shortly after the presentation has finished.

A listen only function will also be available.

Dial in: 0800 358 6377

International dial in: +44 (0) 330 336 9105

Access code: 7318349

Further copies of this announcement can be downloaded from the Barratt Developments corporate website www.barrattdevelopments.co.uk or by request 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
David Thomas, Chief Executive	020 7299 4896
Analyst/investor enquiries
Chloé Barnes, Investor Relations	020 7299 4895
Media enquiries
Tim Collins, Head of Corporate Communications	020 7299 4874
Derek Harris, Head of Public Relations	020 7299 4873
Brunswick
Jonathan Glass/Wendel Verbeek	020 7404 5959

Chief Executive’s Statement

Strong half year for the Group

The Group has delivered an excellent first half performance, with year on year improvements across our key financial metrics. The fundamentals of the market remain robust, with strong demand supported by good mortgage availability and Help to Buy. Government policy remains supportive and we welcome the recent publication of the housing white paper, which will allow a full debate on addressing the country’s housing needs.

Profit before tax increased by 8.8% to £321.0m (2015: £295.0m) for the period, gross margin improved by 2.1 percentage points to 20.7% and operating margin improved by 1.7 percentage points to 17.8%. ROCE to 31 December 2016 increased by 1.5 percentage points to 27.0% benefiting from further reductions in legacy assets coupled with the business continuing to drive our fast build and sell model.

Completions (including JV’s) outside of London are at the highest level for nine years at 6,813 (2015: 6,784). Total completions (including JV’s) for the period were 7,180 (2015: 7,626). Our regional sales performance has been very strong particularly in Scotland, the North of England, the North West and the West Midlands. Completions in London were lower at 367 (2015: 842) in line with the Group’s planned build programme. The Group expects a significant increase in completions on wholly owned sites in London in the second half.

In London, for homes with higher selling price points, we have supplemented our private sales with other sales agreements: a build and sale agreement on a bespoke development of 39 apartments for a total value of £47m, completion of a 54 apartment sale at our JV sites in Fulham and Aldgate and in January we exchanged on a build and sale agreement for 118 apartments at our Nine Elms JV site.

We continue to drive efficiencies across all key aspects of our business and improving our operating margin is a key priority for the Group.

Our focus remains on delivering high quality homes alongside good operational and financial performance and attractive shareholder returns.

Capital Return Plan

The Board recognises an ongoing dividend stream as an important component of total shareholder return, alongside capital appreciation. Given the significant operational and financial improvements the Group has made over the last few years, the Board believes it is now appropriate that the Group returns a higher proportion of earnings through its ordinary dividend. Therefore, going forward the Board proposes to re-set the level of ordinary dividend cover from 3 times to 2.5 times.

When market conditions allow, ordinary dividends will be supplemented with the payment of special dividends. The Board proposes to pay special dividends of £175m in November 2017 and November 2018.

For the four years to November 2018 total dividend payments are expected to be around £1.4bn based on current analyst estimates.

Capital Return PlanA	Ordinary dividend £m	Special dividend £m	Total £m	Total pence per share
Year to November 2015	150.6	100.0	250.6	25.1
Year to November 2016	183.7	124.7	308.4	30.7
Year to November 2017	220.5 B, C	175.0	395.5	39.3C
Year to November 2018	227.5 B, C	175.0	402.5	40.0C
Total	782.3	574.7	1,357.0	135.1

1. All future ordinary and special dividends are subject to shareholder approval
2. Based on Reuters consensus estimates of earnings per share of 54.7p for FY17 and 56.4p for FY18 as at 17 February 2017 and applying a two and a half times dividend cover in line with the announced policy
3. Based upon 31 December 2016 share capital of 1,006,940,985 shares for proposed payments

In accordance with the new policy, the Board is pleased to announce an interim dividend of 7.3 pence per share (2016: 6.0 pence per share). This dividend represents one-third of the expected ordinary dividend for the financial year, based on the full year dividend being covered 2.5 times by current consensus earnings.

The interim dividend will be paid on Friday 19 May 2017 to all shareholders on the register on Friday 21 April 2017.

Committed to building more high quality homes

As the demand for housing remains strong, we have continued our disciplined investment to increase housing production, with £5.0bn approved for the purchase of over 94,000 plots of land over the last five years.

Additionally, over the last five years we have built more than 77,100 homes (including JV’s) of which more than 13,800 were affordable homes (including JV’s) sold to registered providers. We have invested in our employees, including 152 new apprentices, trainees, graduates and undergraduates in the period to further expand our skilled workforce, securing future delivery of supply of high quality homes.

Barratt’s commitment to quality through excellence in design, build and industry-leading customer service allows us to differentiate ourselves from our competition. This commitment makes us the only national housebuilder with a HBF 5 Star Customer Satisfaction rating – awarded for the 7th consecutive year. The next largest housebuilder with a 5 Star rating builds fewer than 3,000 homes a year.

Last year we won more NHBC Pride in the Job Awards for site management than any other housebuilder for the 12th year in a row. We have also won more Building for Life Awards for excellence in design than any other housebuilder.

There remains a long term housing shortage of all tenures that can be addressed through additional supply in the right locations. We are committed to playing a leading role in addressing this issue.

Our financial results

The Group has delivered a strong first half performance supported by healthy market conditions driving robust consumer demand.

Overall our net private reservation rate was 0.68 (2015: 0.66) per active outlet per week in the half year period.

During the period, we operated from an average of 374 outlets (including JV’s) (2015: 386). We have made good progress on new site openings, launching 83 new developments (including JV’s) (2015: 63) in the half year. We expect to see average outlet numbers remain broadly flat for the full year when compared against the prior year.

Total completions (including JV’s) were 7,180 units (2015: 7,626).

Completions (plots)	2016	2015	Variance
Private	5,561	5,993	(7.2%)
Affordable	1,221	1,114	9.6%
JV	398	519	(23.3%)
Total	7,180	7,626	(5.8%)

Total average selling price (‘ASP’) increased by 3.8% in the period to £263,800 (2015: £254,200). Private ASP increased by 5.4% in the period to £296,400 (2015: £281,100) benefiting from changes in mix as well as some underlying house price inflation.

Affordable housing ASP similarly increased in the period by 5.6% to £115,300 (2015: £109,200).

Our gross margin was 20.7%, up 2.1 percentage points in the period reflecting, amongst other things, new sites coming through at higher margins, mix changes and some underlying inflation. We delivered a gross profit of £375.2m (2015: £348.4m) in the half year.

Operating profit increased by £22.2m to £324.0m (2015: £301.8m). Operating margin was up by 1.7 percentage points to 17.8% (2015: 16.1%), reflecting our increased gross margin, offset by reduced levels of other income.

Net finance charges were broadly in line with the prior year at £29.4m (2015: £29.8m). We expect FY176 net finance cost to be around £65m, comprising £25m of cash and £40m of non-cash.

In the half year, the Group’s share of JV profit was £26.3m (2015: £22.9m). We continue to expect to deliver JV profit of around £45m for FY17. Profit before tax increased by 8.8% to £321.0m (2015: £295.0m) and the Group recognised £61.4m of tax charges at an effective rate of 19.1% (2015: 19.0%). Basic earnings per share increased by 8.4% to 25.9 pence per share (2015: 23.9 pence per share).

Delivery of 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 the end of FY17) and continue to deliver attractive cash returns. We have made good progress against these objectives during the half year and remain focused to deliver in the second half.

Land and planning

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% site ROCE7. In the period we approved the purchase of £328.2m (2015: £558.7m) of land, equating to 39 sites (2015: 54 sites) and 5,262 plots (2015: 10,967 plots). Whilst this is lower than historical levels for the period, it reflects our caution immediately following the EU referendum. However, we continue to expect to approve c. 15,000 plots for purchase in FY17 as a whole and remain on track to achieve our targeted land bank of at least 4.5 years owned and controlled land by the year end.

The Group continues to maintain a balanced capital structure with land and long term work in progress funded by shareholders’ funds and land creditors. Land creditors as at 31 December 2016 represented 34% (2015: 36%) 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 between 30% and 35% in the medium term.

We continue to target a regionally balanced land portfolio with a supply of owned land of at least 3.5 years and a further 1.0 year of controlled land. Our target is for a shorter than sector average land bank reflecting our focus on ROCE and our fast build and sell model. As at 31 December 2016 we achieved a 4.9 years land supply (excluding JV’s) including 3.4 years owned land with both outline and detailed planning consents.

Our land bank	31 December 2016	31 December 2015
Owned and unconditional land bank (plots)	52,976	52,007
Conditionally contracted land bank (plots)	24,120	19,949
Total owned and controlled land bank (plots)	77,096	71,956
Number of years’ supply8	4.9	4.5
JV’s owned and controlled land bank (plots)	4,911	6,124
Strategic land (acres)	11,400	11,500
Land bank carrying value	£2,801.3m	£2,860.1m

1. FY is financial year ending 30 June
2. 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
3. Based upon completions in the 12 months ended 31 December

The transformation of our land bank from lower margin land acquired pre 2009 to more recently acquired higher margin land is well progressed. As at 31 December 2016, 94% (2015: 92%) of our owned and controlled land is land acquired post 2009. On the 269 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. 36%, demonstrating sustained delivery above our hurdle rates on this more recently acquired land. We continue to reduce the absolute value of our lower margin legacy assets. The total book value is down 42% to £315.8m as at 31 December 2016 (2015: £544.4m).

We remain well positioned to benefit from Government’s continuing drive to release public land with our strong track record in partnering and JV’s with the public sector, as well as our leading design and sustainability credentials. We are a member of the Homes and Communities Agency Delivery Partner Panel 2 (on all four regions) and the Greater London Authority London Development Panel.

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 period ended 31 December 2016, 1,407 plots (2015: 1,542 plots) were transferred from strategic land to our owned land bank. During the half year period 24% of our completions (2015: 22%) were on strategically sourced land, and we expect around 24% 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 FY18 completions (2015: 97% of FY17 completions) having outline or full planning consent.

Improving operating margin

In 2016 the Group undertook a fundamental review of our Barratt and David Wilson housing ranges. The outcome was a reduction in the number of houses in the range which will increase standardisation, simplify construction and reduce build costs whilst maintaining our high standards of design and quality.

We have a carefully managed supply chain which has proved to be very resilient. We have effectively sourced the 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 FY17 with more than 40% fixed for FY18.

On labour, we continue to see some pressure on skilled labour supply with shortages remaining location and trade specific. However, whilst labour costs are still rising, the rate of increase is moderating.

We are also seeking to increase construction efficiency and reduce demand on labour through the use of alternative build options such as timber frames, large format block and light gauge steel frames.

We expect that overall build cost inflation for FY17 will be c. 2-3% and in FY18 we expect this to be c. 3-4%.

Maintaining appropriate financial structure

Net cash as at 31 December 2016 was £196.7m (2015: £24.2m). The cash outflow from our net cash position of £592.0m as at 30 June 2016 reflects normal seasonal trends, investment in land and work in progress to deliver the Group’s build programme and the payment of £248.3m of dividends in November.

The Group continues to maintain an appropriate financial structure with shareholders’ funds and land creditors funding the longer term requirements of the business and with term loans and bank debt funding shorter term requirements for working capital. In December we further strengthened working capital capacity by amending and extending our existing revolving credit facility, removing the £150m stepdown in facility size previously due in December 2017 and extending our £700m facility to December 2021.

We expect to operate an annual average net debt in the range of £150m to £200m and expect a net cash position at each financial year end. We anticipate net cash in the range of £350m to £400m as at 30 June 2017.

Our Strategic Priorities

Within our business we remain focused on our strategic priorities. Each of these priorities has a work plan to drive improvements across the business and they support a set of principles which underpin all of our operations.

Health and safety

Health and safety continues to be a non-negotiable number one priority for the Group and 'Keeping people safe' is a core business principle. We are driving our 'Five Steps to Safety' initiative, which is aimed at improving engagement with our workforce and challenging unsafe attitudes and behaviours. Skill shortages and volume demands continue to put pressure on our performance in this area but we continue to strive for improved standards and the prevention of injury and ill health. In the 12 months to 31 December 2016 our reportable injury incidence rate was 369 (2015: 331), for FY16 the rate was 385 per 100,000 workers.

Customer first

We place customers at the heart of everything we do with their satisfaction being a key performance indicator at all levels of management.

We are the only major national housebuilder to be awarded a HBF 5 Star status rating for seven consecutive years, with over 90% of customers being prepared to recommend us to their friends and family.

We are continuing to improve the quality and efficiency of the ways in which we support customers through the sales process. During the half year period we have launched a range of construction and customer service initiatives to further improve the high quality of our homes. We have also developed a joint training course with the NHBC and delivered this to all Customer Care employees to increase their knowledge and capability.

We have invested in a significant piece of research to better understand customer expectations and needs throughout the customer journey and this insight is now being used to refine our policies and procedures and also to inform the development of our digital capability.

Great places

A key focus of the business continues to be securing the right land in the right place to enable the building of outstanding places to live. Our success in buying land is based on the extensive local knowledge or our land teams and the building of strong relationships with landowners combined with detailed assessments of local market conditions.

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

We continue to focus upon design and all of our developments are reviewed against our ‘Great places’ design standard at the pre-application stage. ‘Great places’ enables us to meet Building For Life 12, the industry standard for the design of new housing developments.

Leading construction

We put customer satisfaction at the heart of our construction processes with a focus upon getting it right first time which also drives operating efficiencies in our build process and reduces remedial costs.

Our site managers continue to lead the industry. In 2016, 80 NHBC Pride in the Job awards were won on our sites. This was the 12th year in succession that our site managers and the Group have won more of these awards than any other housebuilder.

We are implementing a number of key initiatives in terms of improving efficiency. In addition to building around 1,300 homes during FY17 using timber frames we have completed trials of light gauge steel frames and large format block which give the business additional options with similar benefits as timber frame ensuring we are future proofing our business. We continue to trial various offsite technologies and innovative products and we are investing in research into smart technologies.

Investing in our people

We are committed to the development of our people in order to drive our success. A shortage of skilled workers means that attracting and retaining the best people is an important priority for the business. We aim to have a diverse and inclusive workforce that reflects the communities in which we operate, delivering excellence for our customers by drawing on a broad range of talents, skills and experience.

We are committed to investing in the future and continue to develop our ‘Future Talent’ strategy, recruiting graduates, apprentices and paid interns into our business.

We also continue to support the wider industry focus on addressing the skills shortage with the HBF, the Construction Industry Training Board and many schools and universities.

Board changes

Mark Rolfe, after more than eight years of distinguished service, stepped down from the Board on 15 November 2016. Jock Lennox, who joined the Board on 1 July 2016, took over as Chair of the Audit Committee and Richard Akers, who joined the Board on 2 April 2012, took over as Senior Independent Director.

As announced on 19 January 2017, Neil Cooper, Chief Financial Officer, left the Group by mutual agreement, effective immediately. The Board have launched a search for a new Chief Financial Officer and a further announcement will be made in due course. David Thomas, who previously held the role of Barratt CFO for six years until July 2015, has reassumed temporary responsibility for the finance function supported by both Philip Schumacher and John Flynn, the Group Financial Controller and Housebuilding Financial Controller respectively. Deputy CEO and Chief Operating Officer, Steven Boyes, will continue to support David with his ongoing executive responsibilities.

The Nomination Committee, as part of its annual review of committee memberships, assessed the composition of Nomination Committees within the FTSE 100. In the majority the Chief Executive was not a member of the Committee and consequently David Thomas, Chief Executive, agreed to step down as a member of the Nomination Committee effective from 21 February 2017. Going forward, the Nomination Committee will comprise of the Chairman and each of the Non-Executive Directors.

Current trading and outlook

The sales performance across the Group in the second half to date has been strong, with net private reservations per average week of 290 (2016: 280), resulting in average net private reservations per active outlet per average week of 0.77 (2016: 0.76).

Our total forward sales (including JV’s) as at 19 February 2017 were up 17.0% on the strong prior year at a record £3,018.2m.

	19 February 2017		21 February 2016		Variance (£m)
	£m	Plots	£m	Plots	%
Private	1,945.8	5,579	1,564.1	5,169	24.4
Affordable	769.8	6,187	523.4	4,448	47.1
Wholly owned	2,715.6	11,766	2,087.5	9,617	30.1
JV	302.6	965	492.0	1,369	(38.5)
Total	3,018.2	12,731	2,579.5	10,986	17.0

The Group is confident it will deliver on its full year volume guidance. We expect to achieve modest volume growth in wholly owned completions and deliver c. 700 JV completions in FY17, helped by a strong delivery in London in the second half.

We are also on track to achieve our target ROCE of 25%, and remain focused on the delivery of a 20% gross margin for FY17, notwithstanding that the high-end London market presents some headwinds in this regard.

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.

Note on forward looking statements

The Half Year results contain 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.

This announcement contains inside information.

David Thomas
Chief Executive
21 February 2017

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 to have changed since the publication of the Annual Report and Accounts for the year ended 30 June 2016.

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, interest rates, competitor pricing, falls in house prices or land values, may lead to a fall in the demand or price achieved 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 from 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 consortia arrangements and/or commercial developments, are complex and capital intensive and changes may negatively impact upon cash flows or returns.

Safety, health and environmental

Health and safety or environmental breaches can result in injuries to employees, sub-contractors 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.

Further details of the Group’s principal risks and mitigation of the risks outlined above can be found on pages 41 to 45 of the Annual Report and Accounts for the year ended 30 June 2016, which is available at www.barrattdevelopments.co.uk.