Half Year Results

21/02/2018 Archive

BARRATT DEVELOPMENTS PLC

Half year results for the six month period ended 31 December 2017

Strong first half performance

£m unless otherwise stated1,2	Half year ended 31 December 2017	Half year ended 31 December 2016	Change
Total completions (plots)3	7,324	7,180	2.0%
Revenue	1,988.0	1,816.2	9.5%
Profit from operations	355.2	324.0	9.6%
Operating margin (%)	17.9	17.8	0.1 ppts
Profit before tax	342.7	321.0	6.8%
Interim dividend per share (pence)	8.6	7.3	17.8%
ROCE (%)	28.3	27.0	1.3 ppts
Net Cash	165.9	196.7	(15.7%)

Highlights

Strong operational and financial performance driven by good customer demand
The UK’s largest housebuilder with total completions³ for the first half at 7,324 plots
Good growth in profit before tax, up 6.8% to £342.7m with ROCE up by 1.3 ppts to 28.3%
Approved the purchase of £641.2m (2016: £328.2m) of land reflecting confidence in the market, excellent land opportunities and commitment to disciplined volume growth
Continued focus on industry-leading customer satisfaction and build quality demonstrated by winning the 2017 Large Builder NHBC Supreme National Award
New Cambridgeshire division to open, helping to meet high demand for new homes in the region

Current trading

Net private reservations up 6.5% at a very strong 0.82 (2017: 0.77) per active outlet per average week
Total forward sales3 up 2.0% to £3,077.9m as at 18 February 2018 (19 February 2017: £3,018.2m)

Capital Return Plan

Extended Capital Return Plan with ongoing commitment to ordinary dividend cover at 2.5 times and intention to pay special dividends of £175m in November 2018 and £175m in November 2019

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

“With good consumer demand, a healthy forward order book and a robust balance sheet, overall we have had a strong first half and we continue to deliver against our operational and financial objectives.

As the UK’s largest housebuilder, we enter our 60th year increasing our housing output, creating jobs and supporting economic growth across the country.

Having built more than 450,000 homes since 1958, Barratt remains focused on quality, design and industry- leading customer service while delivering homes the country needs.”

Note on forward looking statements

Refer to Glossary for definition of key financial metrics
Unless otherwise stated, all numbers quoted exclude joint ventures
Including JV’s in which the Group has an interest

Certain statements in this document may be forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results to differ materially from those expressed or implied by those statements. Forward looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Accordingly undue reliance should not be placed on forward looking statements.

This announcement contains inside information. The person responsible for arranging for the release of this announcement on behalf of Barratt Developments PLC is Chloé Barnes (Head of Investor Relations).

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 376 7922

International dial in: +44 (0) 207 192 8000

Conference ID: 4073718

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 Jessica White, Chief Financial Officer	01530 278 259
Analyst/investor enquiries Chloé Barnes, Head of 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
Financial reporting calendar
The Group's next scheduled announcement of	financial information is the trading update on 10 May

2018. Please note that, unlike in previous years, Barratt Developments does not intend to provide a trading update between the AGM trading update, scheduled for 17 October 2018, and the announcement of Interim results on 6 February 2019.

Chief Executive’s Statement

Record first half profit

The Group has delivered a strong operational and financial performance in the first half, including an increase in completion volumes and a record first half profit before tax. There is high demand for new housing across the country, supported by attractive market fundamentals.

We remain committed to growing the business whilst maintaining our industry leading standards of quality and customer service. Total completions (including JV’s) for the period were 7,324 plots (2016: 7,180 plots), in-line with our expectations of delivering modest growth in FY18. Our regional business continues to perform exceptionally well, delivering its highest number of completions for a decade.

We remain focussed on operational improvement. Operating margin increased by 0.1 ppts to 17.9% in the half year benefitting from both sites purchased at improved margins and increases in our new product ranges, partly offset by continued headwinds in the high end central London market.

We delivered a record first half profit before tax, increasing by 6.8% to £342.7m (2016: £321.0m) for the period, and increased our ROCE by 1.3 ppts to 28.3% (2016: 27.0%).

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

For the 13th consecutive year, we achieved more NHBC Pride in the Job Awards for site management than any other housebuilder. Furthermore, the site manager at our Forest Chase, Leicester development won the National Supreme Award in the Large Builder category. We are the only major housebuilder to be rated five star for customer satisfaction for eight consecutive years and we continue to focus upon quality of design and placemaking across our developments through our Great Places design standard.

We are pleased to announce the opening of a new division in Cambridgeshire. The new division will help Barratt to continue to grow volumes and to meet the high demand for new homes in the region. The Cambridgeshire division will be creating around 50 new jobs over the next three years, with hundreds more supported in the supply chain and through local sub-contractors.

2018 marks Barratt’s 60th anniversary and we are proud to say that since we began in 1958 we have built more than 450,000 homes across the country.

Committed to building more high quality homes

As the UK’s largest housebuilder, we remain committed to building more homes, and to playing our part in addressing industry-wide skills challenges. We are investing further in our award winning apprenticeships and recruiting and training skilled workers from outside of the building industry.

We are also implementing a number of key initiatives in terms of improving efficiency and growing volumes in the future. In addition to building around 1,270 homes during FY17 using timber frames, we have completed trials of light gauge steel frames and large format blocks with positive results. These provide similar benefits to timber frame, such as increased build speed and reducing our reliance on certain traditional construction methods. We continue to trial various new offsite technologies, including offsite concrete garages and offsite ground floor foundation systems. We are also researching and applying smart technologies to better understand the needs of our customers in the future.

Our financial results

The Group has delivered a strong first half performance with good customer demand for high quality new homes supported by a positive market backdrop.

Overall our net private reservation rate was 0.68 (2016: 0.68) per active outlet per week in the half year period, in-line with a strong prior year.

During the period, we operated from an average of 376 outlets (including JV’s) (2016: 374 outlets). We have made good progress on new site openings, launching 93 new outlets (including JV’s) (2016: 83) in the half year. We continue to expect to see average active outlet numbers grow modestly for the full year.

Total completions (including JV’s) were 7,324 units (2016: 7,180 units).

Completions (plots)	2017	2016	Variance
Private	5,715	5,561	2.8%
Affordable	1,229	1,221	0.7%
JV	380	398	(4.5%)
Total (including JV’s)	7,324	7,180	2.0%

Total ASP increased by 6.5% in the period to £281,000 (2016: £263,800). Private ASP increased by 6.1% in the period to £314,600 (2016: £296,400) benefiting from changes in mix as well as some underlying house price inflation. We expect FY18 ASP to be at similar levels to the half year. Outside of London, our private ASP was £301,700 (2016: £286,000). Affordable housing ASP increased in the period by 8.2% to £124,700 (2016: £115,300), due to mix changes.

Our adjusted gross margin was 20.8% (2016: 20.7%) reflecting the benefit from our new product ranges and sites that we have purchased at improved margins, partly offset by the continued headwinds in the high end central London market. After adjusting for the impact of costs associated with legacy commercial properties, we delivered a gross margin of 20.6% (2016: 20.7%) resulting in a gross profit of £410.2m (2016: £375.2m) for the half year.

Operating margin was up 0.1 ppts at 17.9% (2016: 17.8%), with operating profit increasing by £31.2m to £355.2m (2016: £324.0m).

Net finance charges were £6.2m lower than the prior year at £23.2m (2016: £29.4m) and we continue to expect FY18 net finance cost to be around £50m, comprising £15m of cash and £35m of non-cash.

In the half year, the Group’s share of JV profit was £11.3m (2016: £26.3m). We continue to expect to deliver around 750 JV completions in FY18, whilst we now expect JV profit to be slightly lower at around £20m.

Profit before tax increased by 6.8% to £342.7m (2016: £321.0m) and the Group recognised £69.5m of tax charges at an effective rate of 20.3% (2016: 19.1%). Basic earnings per share increased by 4.6% to 27.1 pence per share (2016: 25.9 pence per share).

The key dimensions underpinning delivery of our strategy

Our strategic objectives remain clear – to continue to grow our business, while driving further operational improvements through the business, with a particular focus on margin, and to continue to deliver attractive cash returns. We remain committed to these objectives whilst ensuring we remain industry-leading in terms of build quality and customer service.

Land and planning

The land market remains attractive and we continue to secure excellent opportunities. In the period we approved the purchase of £641.2m (2016: £328.2m) of land, equating to 51 sites (2016: 39 sites) and 13,263 plots (2016: 5,262 plots). This is higher than historic levels but it reflects some exceptional land opportunities and underpins our volume growth aspirations. As a result we expect to approve more than 20,000 plots for purchase in FY18 as a whole. Reflecting the excellent land opportunities we have seen, we now expect the land cash spend for FY18 to be higher than previously expected at £1.1bn.

Whilst our land bank is slightly above target, our operating framework remains in place and we aim to hold around 4.5 years owned and controlled land bank. As at 31 December 2017, in-line with the prior year, we achieved a 5.0 (2016: 4.9) year land supply including 3.8 (2016: 3.4) years owned land.

Our land bank	31 December 2017	31 December 2016
Owned and unconditional land bank (plots)	64,542	52,976
Conditionally contracted land bank (plots)	19,075	24,120
Total owned and controlled land bank (plots)	83,617	77,096
Number of years’ supply	5.0	4.9
JV’s owned and controlled land bank (plots)	5,329	4,911
Strategic land (acres)	11,806	11,405
Land bank carrying value	£3,229.0m	£2,801.3m

Our divisional teams focus on building relationships to secure good land opportunities where people aspire to live. Our success in buying land is based on the extensive local knowledge of these teams and the strong relationships we have 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. During the half year period 28% of our completions (2016: 24%) were on strategically sourced land, and we continue to target 30% of completions from strategic land in the medium term.

The Group maintains 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 2017 represented 37% (2016: 34%) 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% at 30 June 2018.

Reflecting our success with planning over the past 12 months we are very well positioned, with 97% of expected FY19 completions (2016: 97% of FY18 completions) having outline or full planning consent.

Improving efficiency and reducing costs

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. The new housing ranges are planned for 304 sites across the country and we currently have 150 sites under construction. There were 269 units across all of our new ranges completed in the first half year. The further planned rollout of the new product ranges will increasingly benefit margin in the second half of the year and FY19.

We have also focused on improving margins through further standardisation of our layouts, ceasing the advance sale of show homes and the five year warranty, and through business process simplification.

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 FY18, and around a third fixed for FY19.

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 FY18 will be c. 3-4% and similar for FY19. We carefully control our administrative cost base and expect administrative expenses to be around £150m for FY18 (2017: £132.8m).

Maintaining an appropriate capital structure

Net cash as at 31 December 2017 was £165.9m (2016: £196.7m). Whilst this is lower than last year it reflects a greater investment in land and work in progress to deliver the Group’s build programme and the higher payment of £347.9m (2016: £248.3m) of dividends in November 2017.

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 bank debt and private placement notes funding shorter term requirements for working capital.

We expect to operate a neutral cash position on average over FY18, and expect a net cash position at each financial year end. We continue to expect net cash of around £500m as at 30 June 2018.

Health and safety

Health and safety will always be the non-negotiable number one priority for the Group and 'Keeping people safe' is a core business principle. We are continually focussed on improving our processes and procedures and challenging unsafe attitudes and behaviours. We continue to develop our already established approach to safety and recognise that health requires equal focus, to ensure workers do not suffer long term issues associated with their work activities. We continue to strive for improved standards and the prevention of injury and ill health. In-line with the industry we are seeing pressures in this area and we continue to focus on driving improvements. In the 12 months to 31 December 2017, our reportable injury incidence rate was 403 (2016: 369) per 100,000 workers.

Investing in our people

We are committed to the development of our people in order to drive our success. A shortage of skilled workers in our sector means that attracting and retaining the best people is an important priority for the business. We are building 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 investing for the future and continue to develop award winning schemes including those for graduates, apprentices, and former Armed Forces personnel. Our Armed Forces Transition programme recently won Best Talent Development programme at the 2017 Training Journal Awards.

We also continue to collaborate with the wider Housebuilding industry. We actively participate in the Home Building Skills Partnership the aims of which include attracting new entrants to the industry, providing the skills for today and the future, and supporting the supply chain in attracting and developing the skills they need to support our industry.

To support our diversity and inclusion strategy we have reviewed and improved our family friendly policies and also enhanced our industry leading maternity and paternity benefits. Over 200 of our Senior Management have recently attended diversity and inclusion training and our divisions are creating local action plans.

Board changes

Tessa Bamford has notified the Board of her intention to step down from her position as a Non-Executive Director of the Company with effect from 30 June 2018, after nine years of distinguished service. Tessa has made an invaluable contribution to the Board during her tenure, and the Board are sorry to see her leave.

As announced on 2 October 2017, Sharon White joined the Board as a Non-Executive Director on 1 January 2018. Sharon White is currently the Chief Executive of Ofcom. She has over 25 years' experience in the public sector and Government, having held roles at the British Embassy in Washington, the No 10 Policy Unit, and the World Bank. Sharon has also worked in the Department for International Development, the Department of Work and Pensions, HM Treasury and the Ministry of Justice.

Capital Return Plan

In February 2017, the Board announced that, given the significant operational and financial improvements the Group has made over the last few years, it would improve and extend the existing dividend plan announced in September 2014. As a result, the Group moved the level of ordinary dividend cover from three times to two and a half times, and thereby increased the dividend payout ratio.

When market conditions allow, ordinary dividends will be supplemented with the payment of special dividends. As previously announced the Board intends to pay a special dividend of £175m in November 2018. Additionally, demonstrating the Board’s confidence in the business going forward it proposes to pay a further special dividend of £175m in November 2019.

For the five years to November 2019 total dividend payments are expected to be around £1.9bn based on current analyst estimates.

Capital Return Plan^A	Ordinary dividend £m	Special dividend £m	Total £m	Total pence per share
Total paid^B	580.6	399.7	980.3	97.5
Year to November 2018	262.0 C, D	175.0	437.0	43.2D
Year to November 2019	275.1 C, D	175.0	450.1	44.5D
Total proposed payment	537.1C, D	350.0	887.1	87.7D
Total	1,117.7	749.7	1,867.4	185.2

All future ordinary and special dividends are subject to shareholder approval
Comprises total dividend payments for FY15-FY17
Based on Reuters consensus estimates of earnings per share of 64.7p for FY18 and 68.0p for FY19 as at 15 February 2018 and applying a two and a half times dividend cover in-line with announced policy
Based upon 31 December 2017 share capital of 1,011,532,123 shares for proposed payments

In accordance with this policy, the Board is pleased to announce an interim dividend of 8.6 pence per share (2017: 7.3 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 18 May 2018 to all shareholders on the register on Friday 20 April 2018.

Current trading and outlook

The sales performance across the Group in the second half to date has been very strong, with net private reservations per average week of 309 (2017: 290), resulting in average net private reservations per active outlet per average week of 0.82 (2017: 0.77).

Our total forward sales (including JV’s) as at 18 February 2018 were up 2.0% on the strong prior year at a

£3,077.9m.

	18 February 2018		19 February 2017		Variance (£m)
	£m	Plots	£m	Plots	%
Private	1,965.7	5,852	1,945.8	5,579	1.0
Affordable	857.4	6,588	769.8	6,187	11.4
Wholly owned	2,823.1	12,440	2,715.6	11,766	4.0
JV	254.8	845	302.6	965	(15.8)
Total	3,077.9	13,285	3,018.2	12,731	2.0

The Group has had a strong start to our financial year and the outlook for the full year is in line with the Board’s expectations. We continue to expect to grow volumes modestly whilst ensuring we maintain our industry leading standards of quality and service. We are delivering margin improvements through land acquisition and operational efficiencies but recognise that the continued headwinds in the high end central London market may dilute some of these percentage margin improvements as we trade out of these schemes over the next couple of years.

The Board’s confidence in the Group’s operational and financial performance is reflected by the proposed FY19 special dividend.

David Thomas

Chief Executive 20 February 2018

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, either separately or in combination, have a material impact on the Group’s performance over the remaining six months of the financial year and could cause actual results and shareholder returns to differ materially from expected and historical results.

Reputational risk could potentially arise from a number of sources including external and internal influences relating to the housebuilding sector which when combined or over a period of time could create a new principal risk. The Group actively manages the impact of reputational risk by carefully assessing the potential impact of all the principal risks and implementing mitigation actions to minimise those risks.

The Group is committed to safeguarding the environment in which it operates and assesses climate change risks as set out in our Climate Change Policy online and our annual submission to the Carbon Disclosure Project.

The Directors do not consider 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 2017.

Further details of the Group’s principal risks and mitigation of the risks outlined below can be found on pages

42 to 43 of the Annual Report and Accounts for the year ended 30 June 2017, 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, 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 and time taken to obtain planning approval affects the housing market and generally the regulatory requirements.

Construction and new technologies

Failure to identify and achieve key construction milestones, due to factors including the impact of adverse weather conditions, 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, causing potential reputational damage, criminal prosecution and civil litigation, delays in construction or increased costs.

Information technology (‘IT’)

Failure of the Group’s IT systems in particular those relating to surveying and valuation, could adversely impact the performance of the Group.

Condensed Consolidated Income Statement

for the half year ended 31 December 2017 (unaudited)

Continuing operations	Notes	Half year ended 31 December 2017 £m	Half year ended 31 December 2016 £m	Year ended 30 June 2017 (audited) £m
Revenue	2.1	1,988.0	1,816.2	4,650.2
Cost of sales		(1,577.8)	(1,441.0)	(3,718.2)
Gross profit		410.2	375.2	932.0
Analysed as:
Adjusted gross profit		413.2	375.2	940.8
Cost associated with legacy commercial assets		(3.0)	-	(8.8)
Administrative expenses		(55.0)	(51.2)	(132.8)
Profit from operations	2.1	355.2	324.0	799.2
Analysed as:
Adjusted operating profit		358.2	324.0	808.0
Cost associated with legacy commercial assets		(3.0)	-	(8.8)
Finance income	5.2	1.7	1.8	2.9
Finance costs	5.2	(24.9)	(31.2)	(62.6)
Net finance costs	5.2	(23.2)	(29.4)	(59.7)
Share of post-tax profit from joint ventures		11.3	26.3	25.4
Share of post-tax (loss)/profit from associates		(0.6)	0.1	0.2
Profit before tax		342.7	321.0	765.1
Analysed as:
Adjusted profit before tax		345.7	321.0	773.9
Cost associated with legacy commercial assets		(3.0)	-	(8.8)
Tax	2.4	(69.5)	(61.4)	(149.1)
Profit for the period		273.2	259.6	616.0
Profit for the period attributable to the owners of the Company		273.3	259.7	615.8
(Loss)/profit for the period attributable to non-controlling interests		(0.1)	(0.1)	0.2
Earnings per share from continuing operations
Basic	2.2	27.1p	25.9p	61.3p
Diluted	2.2	26.8p	25.6p	60.7p

The notes in sections 1 to 6 form an integral part of these condensed consolidated half yearly financial statements.

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