24/02/2010 Archive
BARRATT DEVELOPMENTS PLC
Results for the 6 months ended 31 December 2009
Mark Clare, Group Chief Executive of Barratt Developments commented:
“During the last six months, we have improved our trading performance, successfully refinanced the business and invested in new land. The value of our forward order book is now up 27% year on year and with our ongoing focus on optimising selling prices we are expecting to see significant improvements in operating margin in the second half.”
Highlights:
- Total completions (including 25 joint venture completions) for the half year were 5,053 (2008: 6,905). Group revenue was £872.4m (2008: £1,261.8m).
- The average selling price (excluding joint ventures which are equity accounted) increased by 3.5% to
£166,300 (2008: £160,700) largely driven by changes in mix.
- The operating margin before exceptional items was 2.4% (2008: 1.3%). Operating profit before exceptional items was £21.0m (2008: £16.0m1). Operating profit was £5.2m (2008: £497.9m loss1).
- Exceptional items of £129.9m (2008: £513.9m1) primarily related to the Group’s amended financing arrangements, which came into effect following the Placing and the Rights Issue (2008: impairment of inventories and restructuring costs).
- The Group made a loss before tax and exceptional items of £48.5m (2008: £80.6m1), and a loss before tax after exceptional items of £178.4m (2008: £594.5m1).
- Net debt was £605.3m at 31 December 2009 (2008: £1,422.8m), a reduction of £671.6m since 30 June 2009 due to the net proceeds of the Placing and the Rights Issue, the sale of a commercial property and ongoing strong cash management.
- Forward sales at 31 December 2009 were £651.2m (2008: £455.8m) representing 3,995 plots (2008: 3,529 plots). At 21 February 2010 forward sales had increased to £847.4m, which, taken with completions to date, means that the Group has secured around 77% of its full year requirement.
- Since mid-2009 the Group has agreed terms on £358m of land, comprising 74 sites and 9,038 plots, which will deliver attractive margins based on current selling prices.
- For the last 6 weeks the Group has delivered 0.55 private sales per active site per week up 12.2% on the first half of the financial year.
1 The results for the period ended 31 December 2008 have been restated for the change in accounting policy relating to the defined benefit pension scheme as explained in note 3.
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The Interim Management 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 future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.
A presentation will be broadcast live on the Barratt Developments corporate website, www.barrattdevelopments.co.uk, from 8.45am today. A playback facility will be available shortly after the presentation has finished. Those wishing to listen-only to the presentation at 8.45am may dial:
Live dial-in
UK toll free 0800 358 1448
International +44 (0)20 8609 0582
Replay
UK toll free 0800 358 2189
International +44 (0)20 8609 0289
Conference reference 282278#
The presentation slides will be available on the Barratt Developments corporate website, www.barrattdevelopments.co.uk.
The Interim Management Report for the six months ended 31 December 2009 is available from today, 24 February 2010, on the Barratt Developments corporate website, www.barrattdevelopments.co.uk via the following link: www.barrattdevelopments.co.uk/ir/reports/.
Further copies of the announcement can be obtained from the Company Secretary’s office at:
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Barratt Developments PLC, Barratt House, Leicestershire, LE67 1UF. |
Cartwright |
Way, |
Forest Business Park, Bardon Hill, Coalville, |
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For further information please contact: |
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Barratt Developments PLC Mark Clare, Group Chief Executive |
020 7299 4898 |
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David Thomas, Group Finance Director |
020 7299 4896 |
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Susie Bell, Head of Investor Relations |
020 7299 4880 |
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For media enquiries, please contact: |
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Barratt Developments PLC Dan Bridgett, Head of External Affairs |
020 7299 4873 |
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Maitland Liz Morley |
020 7379 5151 |
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Neil Bennett |
Results
During the period, the recovery of the UK new housing market continued in terms of customer demand and pricing, albeit mortgage availability remained restricted, particularly in the higher loan to value segment.
The Group’s operating profit before exceptional items for the first half of its financial year was £21.0m (2008: £16.0m1), a margin of 2.4% (2008: 1.3%). The Group made a loss before tax and exceptional items of £48.5m (2008: £80.6m1). After exceptional items of £129.9m (2008: £513.9m1), primarily related to the amended financing arrangements which came into effect following the Placing and the Rights Issue (2008: impairment of inventories and restructuring costs), the Group’s loss before tax was £178.4m (2008:
£594.5m1).
The Group’s adjusted basic loss per share was 4.9p (2008: 10.3p1,2). The Group’s loss per share was
18.9p (2008: 80.9p1,2).
The Group’s half year net debt was £605.3m (2008: £1,422.8m), a reduction of £671.6m since 30 June 2009 reflecting the net proceeds of the Group’s Placing and Rights Issue, disposal of a commercial property and ongoing strong cash management.
The Board is committed to improving the profitability and strengthening the financial position of the Group whilst continuing to invest in its existing land bank as well as new sites. In this context, and in accordance with the restrictions under the Group’s financing arrangements3, the Board is not paying an interim dividend (2008: nil).
Driving business performance
The Group has significantly improved its financial position through the Placing and the Rights Issue which was successfully completed in November and which allowed the Group to reduce its levels of debt. With further reductions in debt achieved through the disposal of a commercial property and operational initiatives, the Group is now in a stronger position to develop existing sites and to take advantage of land purchasing opportunities as they arise.
The current focus for the Group is improving profitability through the management of the balance between price and volume as well as through operational efficiency. The Group has identified a number of immediate priorities to drive its business performance including:
- Using the scale of the Group’s operations to enhance efficiency and to reduce the costs of construction.
- Maximising the value achieved for the Group’s products through pricing discipline, sales and marketing capability, focusing on quality and ensuring the right product mix on site.
- Enhancing the margin from the Group’s existing land bank whilst continuing to invest in land opportunities which will generate improved margins and in the Group’s strategic land capabilities.
Significant progress on these priorities is being made. For example, consumer marketing has been enhanced with the launch of new features for its customer-facing websites and internet strategies to drive traffic. On land, a total of 119 sites have been replanned since July 2008 and a number of potentially higher margin land opportunities have been secured. In addition, in January 2010, the Group was selected by the Homes and Communities Agency as one of their delivery partners in all regions of the country.
1 The results for the period ended 31 December 2008 have been restated for the change in accounting policy relating to the defined benefit pension scheme as explained in note 3.
2 The number of shares in issue has been revised to reflect the Rights Issue as required by IAS 33 ‘Earnings per Share’.
3 The terms of the Group’s amended financing arrangements restrict payment of dividends and prohibit any dividend being declared
in respect of the financial year ending 30 June 2010. Thereafter, no restriction on dividends will apply under the Group’s amended financing arrangements.
In the first six months of the financial year the Group operated across an average of 420 sites, down 22.1% on the same period last year. Active sites, those from which the Group is currently selling, averaged 368 over the half year (2008: 469). During the half year, the Group has opened 52 sites and as at 31 December 2009 it was operating from 364 active sites (2008: 428) and 407 total sites (2008: 497).
The Group averaged 180 net private reservations per week (2008: 211) during the first half, which was
0.49 net private reservations per active site per week (2008: 0.45), up 8.9% on the equivalent period in the prior year. The cancellation rate for the first half was 17.8% compared to 27.8% in the prior year.
Total housebuilding completions (including joint ventures) for the first half were 5,053 (2008: 6,905) included in this were private completions of 4,381 (2008: 5,997) at an average selling price (‘ASP’) of £173,200 (2008:
£170,100), social completions of 647 (2008: 908) at an ASP of £119,000 (2008: £98,600) and joint venture completions of 25 (2008: nil) at an ASP of £265,600. The Group ASP excluding joint venture completions was
£166,300 (2008: £160,700).
Overall 60.2% of the Group’s first half completions (excluding joint ventures) were houses (2008: 46.5%). Outside central London, houses accounted for 64.7% (2008: 50.4%) of completions (excluding joint ventures). Sales to investors, including non s.106 sales to Housing Associations, formed 11.7% (2008: 28.7%) of the Group’s completions (excluding joint ventures).
The Group has been pleased with consumer demand for the Government's HomeBuy Direct Scheme (‘HBD’). The Group’s original allocation was for 3,018 units. During the first half of the financial year the Group completed 754 sales under the scheme and had a further 454 reserved or exchanged. In February 2010 the Group received confirmation from the Homes and Communities Agency that it had secured, through Kickstart 1, additional funding of £35.7m across 17 developments. In addition, the Group has applied for a further £28.3m of Kickstart 2 funding, across 24 developments.
Housebuilding operations delivered an operating margin before exceptional items of 2.7% (2008: 1.1%). The higher margin reflects the focus of the housebuilding business upon rebuilding its profitability. Before exceptional items, the operating profit was £22.8m (2008: £12.3m1). After exceptional items, the operating profit was £11.8m (2008: £435.7m loss1).
As at 31 December 2009, forward sales for the Group were up by 43% to £651.2m (2008: £455.8m) of which £471.1m (72%) were contracted (2008: £360.2m (79%)).
Commercial operations
Commercial revenue of £27.7m (2008: £139.5m) included £25.0m (2008: £125.4m) related to the ongoing asset disposal programme from the Wilson Bowden Developments portfolio. The Group’s commercial operations made a loss from operations before exceptional items of £1.8m (2008: £3.7m profit). After exceptional items of £4.8m (2008: £65.9m), the loss from operations was £6.6m (2008: £62.2m).
In November, the Group disposed of Atlantic Quay 5, a commercial property in Glasgow, for £25.0m. The Board concluded that although this disposal would result in an exceptional charge of £4.8m, it represented an attractive offer given the alternative local rental market outlook and the opportunity it provided to re- invest the proceeds in land acquisitions. This completes the planned sale of legacy assets from the Wilson Bowden Developments portfolio for a total of around £200m.
Exceptional items
As previously reported, the Group incurred exceptional items in the first half of £129.9m (2008: £513.9m1). This primarily reflects the exceptional items relating to the amendments to and prepayments of indebtedness under the Group's financing arrangements and the impairment on Atlantic Quay 5 (2008: impairment of inventories and restructuring costs). There were no other land impairment charges as at 31 December 2009.
The Group is investing in land where it can deliver attractive returns. From mid-2009 when the Group re- entered the land market up to mid-February 2010, it has agreed terms on £358m of land purchases, the majority of which it will acquire on the basis of deferred payment. This comprises 9,038 plots across 74 sites with an average plot cost to average selling price ratio of 20%, which will deliver attractive margins based on current selling prices.
Total cash expenditure on land in the first half was £124m (2008: £141m). The Group anticipates that total cash expenditure for the year will be between £300m and £350m (2009: £263.7m). At 31 December 2009, the Group’s owned land bank stood at 50,990 plots (2008: 60,586 plots) with an additional 13,429 plots (2008: 11,614 plots) under conditional contracts, giving a total of 64,419 plots (2008: 72,200 plots).
Balance sheet
The net assets of the Group increased by £584.1m to £2,915.7m between 30 June and 31 December 2009. Significant balance sheet movements include:
- Group net debt reduced by £671.6m to £605.3m reflecting the prepayments made following completion of the Group’s Placing and Rights Issue, sale of Atlantic Quay 5 and ongoing focus upon strong cash management.
- Land holdings reduced by £95.5m to £2,357.7m. This decrease reflects land additions of £120m offset by land usage. There has been no further charge to Group profits from housebuilding impairments during the half year (2008: £431.5m).
- Work in progress reduced by £48.5m to £995.7m. The Group continues to manage its work in progress carefully and at 31 December 2009 the Group had 691 unreserved completed units (30 June 2009: 822).
- Available for sale financial assets increased by £18.2m to £104.7m reflecting the 754 HomeBuy Direct completions and the 616 completions which used the Group’s own similar product during the half year.
- Net swap liabilities reduced by £21.8m to £35.5m mainly due to the cancellation of interest rate and foreign exchange rate swaps following the prepayments made and consequential reduction in borrowings after completion of the Group’s Placing and Rights Issue.
- Deferred tax assets increased by £43.6m to £170.9m due to losses that will be carried forward to offset the tax liabilities arising from future profits.
Borrowings and cash flow
Group net debt at 31 December 2009 was £605.3m (2008: £1,422.8m) and based upon anticipated levels of land expenditure is expected to reduce to between £520m and £570m by 30 June 2010.
The Group’s net finance charge before exceptional items in the first half was £68.9m (2008: £94.6m). After exceptional finance costs of £114.1m that relate to the amended financing arrangements, which came into effect following the Placing and the Rights Issue, the Group’s net finance charge was £183.0m (2008:
£94.6m). The Group expects that its full year net finance charge before exceptional items will be around
£118m (2009: £177.3m).
Capital structure
On 23 September 2009 the Company announced a fully underwritten Placing and Rights Issue, raising gross proceeds of £720.5m, and certain amendments to the terms of its financing arrangements, which would come into effect following completion of the Placing and the Rights Issue. The equity issue was completed on 4 November 2009 and the amended financing arrangements came into effect on 16 November 2009. The Placing and the Rights Issue, together with the amended financing arrangements, have significantly strengthened the position of the Group and are expected to enable the Group to take advantage of land acquisition opportunities that may arise in a recovering market.
Quality, service and the environment
During the half year ended 31 December 2009, the Group continued to make good progress in improving customer service and the Group’s most recent customer surveys confirmed that 96% of customers would recommend us to a friend (2008: 91%).
The quality of the Group’s construction team continues to be recognised. Following the Group’s 2008 success in the National House Building Council ‘Pride in The Job’ quality awards, in 2009 the Group won an industry leading 76 awards (2008: 73).
Work has now started on Hanham Hall, as part of the Homes and Communities Agency’s Carbon Challenge, that will deliver around 195 of the most environmentally advanced houses ever to be built in the UK by a volume housebuilder. The Group’s objective is to find the most cost effective and customer acceptable solutions to environmental requirements.
Current trading and outlook
The Group’s focus continues to be driving profitability primarily through achieving full value for its products and therefore the Board remains confident of the Group’s prospects for the full year.
Over the last six weeks the Group achieved average net private reservations per active site per week of
0.55 against 0.53 in 2009. Overall these reservations have been achieved at prices above budgeted prices. As at 21 February 2010, forward sales for the Group were up by 27% to £847.4m (2008: £667.5m) of which £545.1m (64%) were contracted (2008: £431.5m (65%)).
The Group now believes it can achieve the optimal balance between margin and volume with a full year completions target of around 11,500 units, with average selling prices increasing by 8 to 10 percent year on year, mainly as a result of the mix change with more houses and less flats being sold. This will contribute to a significant improvement in operating margin in the second half compared to the first half. Further recovery in the UK new housing market will depend on improvement in the general economic conditions and in the availability of higher loan to value mortgages.
Mark Clare
Group Chief Executive 23 February 2010
The Group’s financial and operational performance is subject to a number of risks. The Board seeks to ensure that appropriate processes are put in place to manage, monitor and mitigate these risks which are identified in the table below. The Group recognises that the management of risk is fundamental to the achievement of Group targets. As such all tiers of management are involved in this process.
Principal risks of the Group include, but are not limited to:
Risk Mitigation
Market
Response to changes in the macroeconomic environment including unemployment, buyer confidence, availability of mortgage finance for purchasers, interest rates and the impact of competitor pricing.
A weekly review is undertaken of key trading indicators, including reservations, sales rates, visitor levels, levels of incentives, competitor activity and cash flow projections and where appropriate management action is taken.
The Group seeks to provide mortgage providers with complete transparency regarding house purchase prices alongside any discounts or other incentives in order that they have appropriate information upon which to base their lending decision.
The Group works with key mortgage lenders to ensure that products are appropriate wherever possible for its customers.
Design and construction defects may lead to cost overruns including remedial costs, and may reduce selling prices and adversely impact the Group’s reputation.
The Group has a comprehensive approach to quality, service and customer care encapsulated in the ‘Forward through Quality’ initiative and customer care code of practice.
Liquidity
Availability of sufficient borrowing facilities to enable the servicing of liabilities as they fall due.
The Group actively maintains a mixture of long-term and medium-term committed facilities that are designed to ensure that it has sufficient available funds for operations.
The Group’s borrowings are typically cyclical throughout the financial year and peak in April and May and October and November of each year, as these are the points in the year when the Group has the highest working capital requirements. Accordingly, the Group maintains sufficient headroom to cover these requirements. On a normal operating basis the Group has a policy of maintaining headroom of £250m of available committed facilities.
The Group has in place a comprehensive detailed regular forecasting process encompassing profitability, working capital and cash flow that is fully embedded in the business. These forecasts are further stress tested at a Group level on a regular basis to ensure that adequate headroom within facilities and banking covenants is maintained.
Inability to obtain surety bonds. The Group actively maintains a number of surety
facilities that are designed to ensure that it has sufficient bonds available. The Group has a comprehensive detailed regular forecasting process for surety bond requirements.
Risk Mitigation
Inability of the Group to refinance its facilities as they fall due.
The Group has a policy that the maturity of its committed facilities and private placement notes in aggregate is at least two years on average with a target of three years.
Inability of the Group to comply with its borrowing covenants.
On 22 September 2009 the Company entered into agreements with its bank lenders and private placement noteholders to amend the terms of its existing financing arrangements including revised borrowing covenants. These amendments became effective on 16 November 2009.
The Group is in compliance with its borrowing covenants and at the date of approval of the condensed consolidated half yearly financial statements, the Group’s internal forecasts indicate that it will remain in compliance with these covenants for the foreseeable future being at least twelve months from the date of signing the condensed consolidated half yearly financial statements.
People
Ability of the Group to attract, retain and develop a sufficiently skilled and experienced workforce.
The Group has a comprehensive Human Resources policy in place which includes apprentice schemes, a Graduate Recruitment Programme, succession planning and training schemes tailored to each discipline. The Group has set itself the target of having a fully CSCS carded and qualified workforce by 30 June 2010.
Underfunding of the Group’s obligations in respect of the defined benefit pension scheme.
An actuarial valuation is conducted every three years. The Group reviews this and considers what additional contributions are necessary to make good this shortfall.
To limit the risk further, with effect from 30 June 2009, the scheme ceased to offer future accrual of defined benefit pensions for current employees and the link between accrued benefits and future salary increases was removed.
Subcontractors and suppliers
Shortages or increased costs of materials and skilled labour could increase costs and delay construction.
The Group adopts a professional approach to site management and seeks to partner with its supply chain.
Failure of a key supplier or inability to secure supplies upon appropriate credit terms.
The Group has a policy of having multiple suppliers for both labour contracts and material supplies and contingency plans should key suppliers fail.
Risk Mitigation
Land
Securing sufficient land of appropriate size and quality to provide profitable growth subject to the available borrowing facilities.
Each division produces a detailed site-by-site monthly analysis of the amount of land currently owned, committed and identified. These are consolidated for regular review at Board level. In addition, each operating division holds weekly land meetings.
Every land acquisition is subject to a formal appraisal procedure and is required to achieve an overall Group defined hurdle rate of return.
The timing of conditional land purchase contracts becoming unconditional is uncertain. Unexpected changes in contract status may result in additional cash outflow for the Group.
Each division has a site-by-site detailed short-term and medium-term forecasting process including sensitivity scenarios.
Falls in house prices or land values or a failure of the housing market to recover could lead to further impairments of the Group’s inventories, goodwill and intangible assets.
The Group’s internal systems clearly identify the impact of sales price changes on the margin achievable.
Biannual asset impairment reviews are performed.
The market for land can be illiquid and therefore it may be difficult to sell or trade land if required. Where land is sold, there is a risk that the proceeds may not be received from the counterparty.
The Group’s internal forecasting process is able to identify the impact of these sensitivities explicitly.
Government regulation
Changes in Government policy towards the housebuilding industry.
The Group consults with the UK Government both directly and through industry bodies to highlight potential issues.
The housebuilding industry is subject to extensive and complex regulations and an increasingly stringent regulatory environment including planning and technical requirements.
The Group has considerable in-house technical and planning expertise devoted to complying with regulations and achieving implementable planning consents.
Consequence of changes in tax legislation. The Group has adopted a low risk strategy to tax
planning and potential and actual changes in tax legislation are monitored by both industry experienced in-house finance teams and external tax advisers.
Construction
Failure to identify and achieve key construction milestones, including the impact of adverse weather conditions, could delay construction or increase costs.
The Group’s weekly reporting identifies the number of properties at key stages of construction. Projected construction rates are evaluated as part of the monthly forecasting cycle.
Large development projects, including commercial developments are complex and capital intensive and changes may negatively impact upon cash flows or returns.
Development projects, including returns and cash flows, are monitored regularly by divisional management teams.
Risk Mitigation
Failure to identify cost overruns promptly. The total costs on every site in progress are evaluated
at least quarterly and reviewed by the divisional management teams.
Cost reduction measures may adversely affect the Group’s business or its ability to respond to future improvements in market conditions.
In parallel to reducing costs during the downturn a Main Board level committee has developed a ‘Planning for Recovery’ programme.
Exposure to environmental liabilities and consideration of the impact of construction schemes upon the environment and social surroundings.
The Group regularly monitors a number of environmental impact indicators. The results of this appear in the Group’s Corporate Social Responsibility Report.
Litigation and uninsured losses. The Group has an in-house legal department and
consults with external lawyers as appropriate. The Group maintains insurance cover for all main risks of the Group.
Health and safety
Health and safety. The Group has a dedicated health and safety audit department which is independent of the management of the operating divisions.
IT
Failure of the Group’s IT systems, in particular those relating to surveying and valuation, could adversely impact the performance of the Group.
The Group has a fully tested disaster recovery programme in place.
Details of the Group’s management of liquidity risk, market risk, credit risk and capital risk in relation to financial instruments are provided in note 14 on pages 34 to 37.