Final Results

Redrow PLC 12 September 2006 Tuesday 12 September 2006 Redrow plc Preliminary results for the twelve months ended 30 June 2006 Highlights 'A YEAR OF STRATEGIC PROGRESS WITH EXTENDED DIVIDEND COMMITMENT' • Profit before tax at £120.5m (2004/05: £139.0m) • Homes operations delivered a stronger second half with turnover up 12% and operating profit up 2% • Basic earnings per share at 52.9p (2004/05: 60.7p) • Dividend per share increased by 20.0% to 13.0p (2004/05: 10.8p) with a further commitment to increase the dividend by 20% in 2006/07 and 2007/08 • Gearing at 25% (June 2005: 23%) with interest cover of 11.5 times provides capacity to grow the business • Current land bank increased by over 20% to 21,000 plots (June 2005: 17,300) representing over four years' supply • In the first full year Debut has made significant progress with 213 completions, and is on track to deliver 2,000 legal completions per annum by 2010 • Reservations in the first 9 weeks of 2006/07 up over 10% for the core Signature and In the City range Robert Jones, Chairman of Redrow plc, said: 'The results reflect a sound financial performance against the backdrop of a challenging market. The second half achieved good momentum in turnover and operating profit with increased profits in the Homes operations. During the last twelve months, we have taken significant steps to position Redrow for future growth. Our land bank has been further strengthened, Debut is already delivering incremental growth and we are progressing strategic schemes in mixed use and regeneration. The financial performance and our strategic progress gives us confidence for the future and I am pleased to announce the Board's intention to sustain its commitment to a 20% annual increase in the dividend for a further two years.' Enquiries: Redrow plc Neil Fitzsimmons, Chief Executive' 0207 404 5959 (12 September) David Arnold, Group Finance Director 01244 520044 (thereafter) Brunswick Patrick Handley / Nina Coad 0207 404 5959 There will be an analyst and investor meeting at 08:45 BST. A live audio webcast and slide presentation of this event will be available at 08:45 BST on www.redrowplc.co.uk and www.cantos.com. Participants can also dial-in to hear the presentation live at 08:45 on +44 (0)20 7138 0836. Playback will be available online through www.redrowplc.co.uk from 13.00 BST or by phone until 26th September on the following dial-in number: +44 (0) 207806 1970; Passcode 4092784#. CHAIRMAN'S STATEMENT Delivering Value In the year in which Redrow welcomed its 50,000th customer to their new home, I am pleased to report that we have made significant progress in our strategy to deliver growth and value to shareholders. Land is the life-blood of our business and I am encouraged to report that in the last twelve months we have increased our current land bank by over 20% to 21,000 plots (2005: 17,300 plots). We also continued to develop our forward land bank which represents one of the cornerstones of our financial returns, thereby strengthening our base to deliver growth in our core business. We have made considerable progress with our new Debut product and, in just eighteen months, have achieved planning for over 1,100 homes as at June 2006. We have secured additional mixed use opportunities at Bristol and Plymouth to complement our continuing success at Buckshaw Village, Chorley and have made major progress on the potential mixed use development at Bishopton, near Glasgow. In Redrow Regeneration, we have commenced construction on our first project at Barking and have made good progress on other major projects. Financial Performance We entered the last financial year with a strong forward sales position and this, together with the introduction of Debut, enabled the Group to deliver a sound financial performance in a more challenging and difficult market. These results reflect the impact of this market and the profit before tax for the twelve months to June 2006 was £120.5m compared with £139.0m in the previous year. Turnover from the Homes' operations increased marginally to £765.5m (2005: £753.8m). Our growth strategy enabled us to increase legal completions by 8% to 4,735 (2005: 4,372) which more than offset a reduction in the average selling price to £161,700 (2005: £172,400). This reduction in average selling price was due to geographic and product mix particularly within our In the City developments and the first significant contribution from our open market affordable Debut product. As we had previously indicated, in this prevailing market with lower levels of house price inflation, operating margins reduced within our Homes operations but remained respectable at 17.5% for the year (2005: 19.6%). Operating profits from the Homes operations at £133.8m compared with £147.4m in 2005 for the year as a whole, although its performance was stronger in the second half with operating profits up 2%. Basic earnings per share in the year were 52.9p (2005: 60.7p). Our balance sheet remains in a robust position providing us with further opportunity to continue to invest in our land bank so as to grow our business. Net debt was £129.8m after increasing the investment in our land bank by a further £63.4m, with our owned land bank growing to 16,750 plots (2005: 15,800). Return on capital employed in the year at 22% (2005: 28.7%) remained significantly ahead of our cost of capital. Gearing was 25% (2005: 23%) and our interest cover at 11.5 times (2005: 12.2 times) remains strong. Dividend In December 2003, the Board of Redrow plc made a commitment to increase the dividend in the years to June 2004 and June 2005 by 20% per annum. This underlined the Board's confidence in the quality and strength of the Company. In September 2004, we extended this commitment for a further year to June 2006, and we therefore propose to increase the final dividend for the year to June 2006 to 8.7p (2005: 7.2p). This will bring the total dividend for the year to 13.0p (2005: 10.8p), representing a 20% increase, with dividend cover standing at 4.1 times earnings. Our strong financial performance and the progress we have made with our growth strategy provides the Board with the opportunity to continue this progressive dividend policy. I am therefore pleased to advise that the Board has decided to increase the dividend by 20% per annum in each of the next two years so that by November 2008, the dividend will have increased by 2.5 times over a five year period. In addition, we have decided that in future years, the dividend will be rebalanced so that the interim and final dividend will be broadly equal thereby increasing the proportion of dividend paid at the interim stage. People In 2006, Redrow secured the Major Homebuilder of the Year Award from Building Magazine. This award was won through the commitment and dedication of the Redrow Team. This team has risen to the challenges presented by recent markets. On behalf of the Board, I would like to thank all those in the Redrow Team, including our suppliers and subcontractors, for their contribution to both these results and the progress made across our business over the last twelve months. Health and safety rightly carries a high profile in our activities and we are delighted to have secured a Gold Award from RoSPA in 2006 to follow the Silver and Bronze awards received in 2005 and 2004 respectively. Outlook In the Spring of 2006, we witnessed a recovery in the housing market following eighteen months of weaker demand. We have entered the new financial year with a forward sales position that remains ahead of our historic norm for our core product together with significant forward sales for our Debut product. We are mindful that recent increases in unemployment levels and interest rates could affect customer confidence but sales levels in the early weeks of the new financial year are encouraging. The overall growth within the economy and the commitment of the Redrow Team combined with the quality and effectiveness of our land bank should enable the Group to see continued growth in the level of legal completions in the new financial year both in our core and Debut product ranges. As a consequence we expect 2007 to be a year of further progress for Redrow. The fundamentals for the industry remain sound with requirements for new homes in many regions being increased, particularly in response to the continuous formation of new households and the need to replace the Nation's ageing housing stock. This provides an environment that gives Redrow an opportunity to capitalise on the strategy we have put in place to deliver growth. We recognise the commitment of the Government to increase the number of new homes, in particular through improving the efficiency of the planning system. The latter however continues to be the major issue in terms of meeting the Government's objectives. The quality of our current land bank and the positive advancement of a number of our major forward land sites within the planning system provides us with the capability to increase output in our core product range. Our new Debut product continues to go from strength to strength and we are on track to meet our objective of delivering 2,000 Debut homes per annum by 2010. We continue to derive advantage from mixed use developments and in due course expect to secure benefit from the regeneration opportunities we are pursuing. We have a strategy in place that provides us with the capability to deliver growth and through which we can continue to produce value to shareholders. Robert Jones Chairman CHIEF EXECUTIVE'S REVIEW Introduction Twelve months ago when I took over as Chief Executive, I set out the steps we had taken to position Redrow to meet the short term challenges in the market and the clear strategy we were progressing that would enable us to deliver growth and shareholder value in a market where house price increases were likely to be more modest and in line with earnings growth. The results for the year ended June 2006 reflect the backdrop of the weaker housing market over the eighteen months to December 2005. This resulted in a reduction in profitability from £139.0m to £120.5m. However, our strategy enabled us to increase legal completions and turnover in our Homes operations and partially mitigate the impact on operating margins of the more challenging market. In addition, we have made demonstrable and tangible progress in each of the principal elements of our growth strategy leaving Redrow well positioned to deliver growth and shareholder value into the future. Strategy Twelve months ago we set out our strategy to deliver growth in the medium term. Our objectives are to:- • Grow our core Signature and In the City ranges through our existing company structure. • Deliver incremental profit from our new Debut product that provides open market affordable homes. • Develop the contribution from additional income streams from our mixed use and regeneration activities. At present, our Homes operation has thirteen companies in the UK, which delivered just over 4,500 legal completions of our core product in the year to June 2006. Our core product comprises our Signature and In the City ranges. Over recent years we have expanded our geographical presence and established three new areas of operation in South Midlands at Northampton, West Country at Exeter, and East Midlands at Newark. These were established and investment made to provide us with the capability to increase the output of our core product, in particular of the Signature range. The current Homes structure provides us with the capability of delivering 7,000 units of core product per annum. The South East of England is a geographical region in which we have historically been underweight in terms of market share and therefore represents an important opportunity for Redrow to drive growth. It is a particular focus of Government policy and through our South Midlands, Eastern and Southern companies we have operations placed to gain maximum benefit from the identified growth areas. To reinforce the framework through which we will deliver growth, we have reviewed our management structure. We are now managing our Homes operations through five regions, namely Scotland, Northern, Midlands, Western and Southern. It gives me great pleasure to welcome David Campbell-Kelly into the senior management team as Chairman for the Midlands Region. David has been with Redrow for 12 years, and has been Managing Director of Redrow Homes (Midlands) Limited for 7 years. We continue to expand our Debut initiative across our companies. We commenced developing this innovative and imaginative product providing open market affordable homes primarily for first time buyers as recently as May 2004. In only two years, the product has been taken from concept to reality and in the year to June 2006, 213 Debut customers moved into their new homes. This product has prices as affordable as £50,000. It demonstrates our ability to identify opportunities and respond to issues in the housing market whilst delivering margins and returns on capital in line with our existing business. At 30 June 2006 we had secured in total 10 planning permissions for over 1,100 Debut homes in just 18 months since our first application at Rugby and we are on track to deliver our objective of 2,000 Debut homes per annum by 2010. This will generate incremental profit and value for our shareholders. Redrow recognises the added value that can be gained from mixed use development. These developments provide additional income streams and also unlock major opportunities for our core housebuilding operations. We continue to build on our historic success in mixed use development with current schemes such as Buckshaw Village. We have also secured new opportunities at Bristol and Plymouth which, as well as providing at least 172,000 sq ft of commercial development, provide over 1,700 plots for our housing operations. In addition, we have now made a planning application jointly with BAE Systems for a development at Bishopton to the west of Glasgow for 2,500 homes, and 1,500,000 sq ft of employment and community development. To further the benefits we can generate from mixed use development and our involvement in the South East, we established a specialist regeneration business. Redrow Regeneration was established in September 2004 to focus on major projects primarily in London and the South East. These projects involve a wide cross section of stakeholders with different agendas and expectations. They represent a new element in Redrow's long term approach to securing land for development and will contribute to Group performance in the medium term. However, ahead of expectations, Redrow Regeneration is already on site with its first development at Barking which will deliver 246 new homes as well as significant community benefits and is making good progress on other major opportunities in the South East. Group Performance 2005/06 2004/05 £m £m Turnover 770.1 780.4 Operating profit 132.8 154.0 Profit before tax 120.5 139.0 Basic earnings per share 52.9p 60.7p Turnover was £770.1m compared with £780.4m in the year to June 2005. This reduction in turnover was attributable to a lower level of activity in our mixed use operations with turnover in the Homes business increasing marginally during the year. Operating profit reduced to £132.8m (2005: £154.0m) and this was primarily influenced by lower margins in the Homes operations. In addition, the operating result for 2006 includes a provision of £2m relating to a development on Jersey completed in 1999. Financing costs were £11.5m as compared to £12.6m in 2005 and therefore, principally as a result of the reduction in operating profit, the profit before tax and the basic earnings per share reduced by 13.3% and 12.9% to £120.5m and 52.9p respectively. Homes Operations 2005/06 2004/05 Legal completions 4,735 4,372 Average selling price £161,700 £172,400 £m £m Turnover 765.5 753.8 Gross profit 177.8 189.3 Operating profit 133.8 147.4 Gross margin 23.2% 25.1% Operating margin 17.5% 19.6% The UK housing market remained relatively subdued in the first half of our financial year. We experienced a seasonal upturn in the Autumn of 2005, but overall consumer confidence remained relatively weak with 2005 having transaction levels for England and Wales estimated to be 18% below the levels in the previous year and also below those expected in a normal housing market. The reduction in interest rates in August 2005 did help consumer confidence and in October and November there was a significant increase in mortgage approvals, which carried on into 2006. In addition, the market was assisted by more realistic asking prices for second hand homes and there was an increase in transaction levels in the first half of 2006. National house price indices have also been recording increases in house prices and these factors combined to increase homebuyers' confidence. Against this challenging background, the Homes operations delivered a sound financial and sales performance in the last twelve months. Turnover increased marginally to £765.5m (2005: £753.8m) with operating profit reducing by 9% to £133.8m (2005: £147.4m), primarily due to the reduction in margins from 19.6% to 17.5%. The Homes operations delivered a stronger second half performance in the financial year with turnover up 12% and operating profit up 2% on the corresponding period in the previous year. Turnover reflected an increase of 8% in legal completions to 4,735 (2005: 4,372), which more than offset a 6% reduction in average selling price from £172,400 to £161,700. This was primarily driven by changes in product and geographical mix. We increased the legal completions of Signature product by 9% to 4,027 homes (2005: 3,703) whilst, due to the timing of construction on the major In the City developments, the number of legal completions on these schemes reduced in line with our expectations to 495 (2005: 667). The overall increase in legal completions was supported by the first significant contribution from the new Debut range, with 213 legal completions (2005: 2) representing 4% of total completions. The movement in average selling price was significantly influenced by a reduction in the average selling price of In the City homes, which reduced from £207,400 in the previous year to £160,200. The previous year included legal completions from higher priced units at the Odyssey development in London Docklands whereas in the year to June 2006, legal completions were delivered on developments in Manchester, Birmingham, Cardiff and Sovereign Harbour near Eastbourne. The average selling price for the Signature product at £166,200 (2005: £166,200) was unchanged and the Debut homes had an average selling price of £79,200. In the Northern Region, turnover increased by 4% with legal completions up 2% to 1,876 (2005: 1,832). The average selling price also increased by 2% to £158,800 from £156,000 in the preceding year. The Southern Region delivered 1,394 legal completions (2005: 1,250), an increase of 12% with the average selling price at £163,300 (2005: £196,700). Turnover and average selling price in this region was lower, influenced by the impact of In the City schemes as noted above. In the Western Region, volumes were up 14% to 1,465 legal completions (2005: 1,290) with turnover up 8%. The average selling price was down 5% to £163,800 (2005: £172,200) due to a higher proportion of social housing units. In recent years, we have consistently indicated that the industry was likely to experience an easing in operating margins as the benefit of house price inflation within the land bank unwound and house price increases moderated. Our strategy has been to carry a higher than historic level of forward sales to help protect our operating margins in more competitive markets. This limited the impact on our margins to a decline of only 2.1% from 19.6% to 17.5%. Our sales performance in the year was supported by an increase in the number of outlets and the release of Debut sites into the market. Total reservations increased 13% to 4,529 (2005: 4,006). In the first half of the financial year, sales for the core product were approximately 6% higher than the corresponding period primarily reflecting an increase in outlets. In the second half, we benefited from the improved trading conditions and the rate of sale achieved was much closer to a normal market, with the 6.5% increase in sales of core product being almost equally split between an improved sales rate and an increase in outlets. As we entered 2006/07, within the Homes Operations we held a total of 1,772 sales, which included 235 Debut homes, and forward sales for Signature and In the City homes represented some 17 weeks, which is ahead of our historic norms. Product Our Signature product range represents our primary offering to our customers. The range is based upon approximately 50 core housetypes from just over 400 sq ft up to approximately 3,000 sq ft and they are capable of being elevated to suit local vernacular to create powerful and interesting street scenes. We continue the drive to increase the use of these core housetypes to further improve cost control and efficiency of construction on our sites. In 2005/06, 70% of our Signature legal completions used standard house type designs and we expect to further increase this proportion in 2006/07 to 80%. The repetition of building core housetypes enables us to deliver continuing improvement in both the value engineering of our product and the efficiency of its delivery, thereby helping mitigate other pressures on our cost base. This is supported by our central procurement strategy whereby approximately 80% of materials used in our product are secured under Group arrangements. We continue to embrace the principles of improving the design quality of our developments, not only in terms of the individual house but, as importantly, the quality of the environment in which the house is set. This requires detailed attention in the layout of homes on the development to deliver attractive street scenes whilst generating appropriate coverage. We are also paying increased attention to the public realm on developments including greater focus on hard and soft landscaping. This strategy is aimed at delivering a premium home whilst using core product to control our cost base. We have Directors of Design in each Region to promote and embrace this strategy and in our Southern and Midlands Regions we are establishing an Urban Design Centre of Excellence to drive this process. The Government continues to challenge the industry in terms of enhancing the sustainability of our activities. Redrow recognised the importance of sustainable development in its new Debut range aimed at first time buyers. The first three Debut sites all achieved EcoHomes 'excellent' under the 2005 Building Research Establishment (BRE) classification and Willans Green, Rugby, as the highest EcoHomes rated development, secured the only BRE award to a residential developer in 2006. The new Code for Sustainable Development, together with the updated EcoHomes rating classification set by the BRE provide for even higher standards for sustainable development. Our Product Development team are progressing commercial solutions to meet these objectives using our core Signature housetypes and Debut range. Our Product Development team continues to investigate ways in which modern methods of construction can add value to our business. We are working with Framing Solutions, our joint venture company, to secure further efficiencies in the delivery of lightweight steel frame construction. We are now using modern methods of construction on Debut and apartment schemes where benefits for the Group, primarily in terms of speed and quality of construction, can be generated. Despite the increased cost of raw materials, Framing Solutions has reduced its operating loss during the last twelve months from £1.2m to £0.8m, principally through driving efficiency in its operations. Customers We recognise the need to deliver quality in both our product and the level of service to our customers. During the last twelve months we have introduced a third party telephone survey to secure independent feedback on the satisfaction levels of our customers. Over the first six months of the survey, 75% of customers responding indicated they were satisfied, with 80% indicating they would recommend Redrow. The Barker Report challenged the industry to reach targets of 85% in respect of satisfaction and 75% in respect of recommendation. As part of our ongoing focus in delivery of good customer service, an element of all employees' bonus schemes will relate to customer service performance levels. In addition, we support the Home Builders Federation's initiative in customer service and have published the Redrow Customer Service Charter which clearly sets out customer service objectives. Mixed Use and Regeneration Turnover in these activities during the year to June 2006 was £4.6m (2005: £26.6m) with operating profits of £0.7m (2005: £4.5m). This was in line with our expectations with the income generated from existing mixed use developments, in particular Matrix Park at Buckshaw Village offsetting our ongoing investment into the pre-development phases of the major regeneration developments we are progressing. In the previous financial year, the turnover and operating profit included the disposal of our remaining interest in land and work in progress at Western Approach Distribution Park near Bristol. Land Redrow continues to invest in both its current and forward land banks to support the future growth of the operations. The total investment in land increased to £523.0m during the year from £459.6m as at June 2005. We have made significant progress during the last twelve months in growing our current land bank and progressing major sites within our forward land bank. Our current land bank increased by over 20% to 21,000 plots (June 2005: 17,300) with some 8,400 new plots brought into the land bank. The current land bank comprises 16,750 plots (June 2005: 15,800) which are owned with planning, including 250 plots in Redrow Regeneration at Barking. The average plot cost in the Homes land bank was £31,000 (2005: £28,500), and this represented 18.3% of the estimated average selling price relating to those plots (2005: 17.0%). Our average plot cost in relation to average selling price remains one of the lowest in the industry. As we expand our operations in the South of England, we expect an increase in both the average plot cost and plot cost to average selling price ratio. The balance of the current land bank relates to plots held under contract. These increased to 4,250 plots (2005: 1,500) and this reflects our strategy of securing land under contract where we can use our skills in planning and resolving technical issues to add value to the development process. We continue to invest in forward land to secure land at enhanced margins and to provide a source of opportunity for the future. In the last 12 months, nearly 25% of the plots taken into our owned land bank came from our forward land bank. However, it is the significant potential of our forward land bank that continues to provide us with an important element in the capability to grow our business in the medium term. Our forward land bank comprises some 24,700 plots (2005: 22,100), which have at least a realistic prospect of achieving planning for development. In particular, there are a number of major sites which are making significant progress within the planning system. Within our forward land bank, 37% of plots either have achieved planning or are allocated in plans which underlines the quality of our potential sites. We anticipate having ten major sites with applications in progress over the next 18 months providing the potential for over 6,500 plots to enhance our current land bank, contributing to the future growth of our business. New forward land opportunities are being secured to maintain the quality of opportunity for the future. We are paying particular attention to securing new options and agreements in the Southern Region within the key Government growth areas and we have secured new forward land opportunities for over 3,000 plots in this area in the last twelve months. In addition, Redrow Regeneration reinforces our policy of taking a long term approach to sourcing land. Major schemes being progressed by Redrow Regeneration have the capability to deliver over 3,000 homes together with 300,000 sq ft of commercial development in the medium term. Business Development Within the Homes operations, the increase in our current land bank provides us with a solid base to deliver growth in legal completions. As at June 2006, 96% of anticipated output for 2006/07 was from sites owned with planning with the balance expected from sites controlled. We have a forward sales position ahead of our historic norm and expect to further increase our outlets in 2006/07. We therefore anticipate a further increase in Signature legal completions, albeit at a slightly lower growth rate than in 2005/06. The status of build completion on the In the City developments gives us the capability to maintain volumes in 2006/07 at similar levels to last year, although the anticipated change in product mix should result in a higher average selling price. With regard to Debut, we entered the new financial year with 235 forward sales and planning in place for 891 homes. Since then we have secured planning for a further 192 Debut homes. This leaves us well placed to more than double the output of Debut homes in the coming year and, with an undoubted demand for open market affordable new homes, puts us well on track to deliver our objective of 2,000 Debut homes per annum by 2010. We remain of the view there will be some modest house price inflation over the next twelve months and that this, together with our pro-active management of our operational cost base, should be sufficient to largely offset the impact of build cost increases which continue to be affected by higher input costs of raw materials and energy. In addition, we continue to scrutinise our operating cost base and value engineer our product to maximise margins. Looking further ahead, our current and forward land bank provides us with the capability to deliver growth of legal completions from our core product. In the next few years, the income generated from the commercial element of our mixed use developments is expected largely to offset our continued investment in developing our portfolio of projects in Redrow Regeneration. Further profits from our activities at Buckshaw Village will be supported in due course by mixed use schemes at Plymouth and Bristol. We expect contribution from these developments to commence from 2008. Redrow Regeneration is already on site at its first development at Barking where all 246 residential units with a total value approaching £40m have been sold under contract. These should start to be delivered from the summer of 2007 through to Spring 2008. Future Prospects In the medium term there is an undoubted need to increase the supply of new homes in the UK. This is clearly recognised by the focus in Government policy towards the housebuilding industry which we welcome. However, it is important that Government and the industry engages to find solutions to issues particularly in relation to the planning system and the provision of infrastructure to enable development. These solutions need to provide improvements and not impediments to the delivery of an increased number of new homes. In particular, we would encourage Government to embrace the innovative and imaginative solutions being developed by the industry to address the first time buyer market and that support the Government's objectives of increasing home ownership. Consumer confidence plays a significant role in our industry in determining demand and the overall level of activity in the housing market. In 2006, we have to date experienced improved levels of confidence reflected in higher levels of mortgage approvals, modest increases in house prices and increased activity levels in terms of transactions. Reservations in the first 9 weeks of 2006/07 are up over 10% in respect of Signature and In the City homes. Overall, whilst noting the increased levels of unemployment, the strength of the economy as regards growth, which is reflected in numbers of people in employment and indeed the confidence levels of those in employment, is positive for our sector. The recent increase in interest rates by the Bank of England should not in itself be a significant factor influencing demand. However, it is still too early to fully assess the impact of this increase and the effect that associated current expectations of future interest rate movements might have on the market as we move into the Autumn selling season. Redrow has made significant progress over the last twelve months in progressing each element of its strategy to deliver growth in the medium term. The skill base in the Redrow Team, our high quality land bank and product range provide us with the capability to capitalise on the opportunities provided by a stable economic environment and the need to satisfy the requirement for more new homes. We anticipate that 2006/07 will be a year of growth for Redrow and we are confident that we can continue to deliver value for our shareholders into the future. Neil Fitzsimmons Chief Executive GROUP FINANCE DIRECTOR'S REVIEW Turnover and Operating Profit Turnover in the year was £770.1m (2005: £780.4m). Turnover in the Homes business was 2% ahead of the previous year as a result of an 8% increase in legal completions to 4,735 (2005: 4,372) which more than offset a reduction of 6% in the average selling price to £161,700 (2005: £172,400). This reduction in average selling price reflected a change in the product and geographical mix of In the City legal completions compared to last year and the inclusion, for the first time, of a significant number of Debut homes. Turnover in the Group's Mixed Use & Regeneration activities was £4.6m (2005: £26.6m), principally as a result of the disposal of Aspect, an office development in Altrincham, and disposals at Buckshaw Village, near Chorley. Turnover in the previous financial year was higher as it included the sale of our remaining interest at Western Approach Distribution Park near Bristol. As a consequence of the anticipated, and previously flagged reduction in operating margins, operating profit in the Homes business decreased by 9% to £133.8m (2005: £147.4m). The reduction in operating margin to 17.5% (2005: 19.6%) reflected the combined effect of the more competitive selling environment, together with the continued unwinding of the beneficial impact of the higher than normal sales price inflation of recent years within the existing land bank. Mixed Use & Regeneration activities generated an operating profit of £0.7m (2005: £4.5m), including Redrow's share of the operating loss of The Waterford Park Company Ltd, the joint venture company established to pursue the potential redevelopment opportunity at Watford Junction railway station. Redrow's share of the operating loss of Framing Solutions, its 50:50 joint venture with Corus, was in line with expectations at £0.8m (2005: £1.2m) and showed an improvement on the prior year. This reduction in the operating loss was as a result of continuing operational improvements and an increase in turnover. As a result of an issue on a development in Jersey which was built on behalf of Redrow and was construction complete in 1999, the Group has made a provision of £2.0m. After taking appropriate professional advice, it is the Board's view that a significant proportion of this sum should be recoverable by the Group in due course. However, a provision has been made in line with the requirements of IAS 37 until recovery of such monies is achieved. Operating profit after the provision in respect of Jersey and including Redrow's share of its joint ventures' operating losses was therefore £131.7m (2005: £150.7m). Under the equity method of accounting for joint ventures under IAS 31, results from such entities must be reflected as a separate item on the income statement after financing costs and tax. Operating profit on this basis, once the operating loss of £1.1m in respect of joint ventures is deducted, is £132.8m (2005: £154.0m) as shown on the face of the income statement. Finance Costs The Group's net financing costs were £11.5m (2005: £12.6m), which were covered 11.5 times by operating profits. In accordance with IAS 39, deferred payments arising from land creditors are held at discounted present value, hence recognising a financing element on the deferred settlement terms. The value of the discount is expensed through net financing costs and amounted to £3.0m in the year (2005: £2.5m). Underlying bank interest costs of £8.6m were £1.2m lower than the previous financial year. Share of Joint Ventures As noted above, we are required to present the results of joint ventures on the income statement after interest and tax. Framing Solutions and Waterford Park delivered a loss attributable to Redrow after interest and tax of £0.8m (2005: £2.4m), a £1.6m improvement. The previous year included significant option and pre-development expenditure in respect of Waterford Park. Profit before tax and earnings per share Redrow delivered a profit before tax of £120.5m (2005: £139.0m). Basic earnings per share were 52.9p (2005: 60.7p). Taxation The Group's effective tax rate was 30.2% (2005: 30.6%) during the year and it is currently anticipated to remain at a similar level in the next financial year. Dividend In line with the Board's previous commitment and subject to approval at the Annual General Meeting on 7 November 2006, a final dividend of 8.7p per share will be paid on 17 November 2006, representing an overall increase in the full year dividend of 20% to 13.0p (2005: 10.8p). Dividend cover remained strong, with the full year dividend per share 4.1 times covered by basic earnings per share (2005: 5.6 times). Balance Sheet Net assets per share increased by 13% to 322.0p over the period (2005: 284.3p). Net assets at 30 June 2006 were £513.8m (2005: £452.5m). Capital employed grew by £87.9m to £643.6m and reflected continued investment into our land bank. In the Homes' business, land held for development increased by £62.9m to £522.5m, representing 16,500 plots owned with planning as at 30 June 2006 (2005: 15,800 plots). Costs incurred in connection with the acquisition and promotion of the Group's forward land bank, a contributor to 25% of the net plots acquired during the year, are provided for when incurred and the provision only released once planning permission is obtained and the land acquired. Work in progress in Homes increased by £19.1m to £295.6m (2005: £276.5m). As anticipated, work in progress on In the City schemes increased over the last twelve months and accounted for roughly half of this growth. As at June 2006, work in progress on In the City schemes totalled £52.8m (2005: £43.8m). The Group's exposure to this element of its business remains carefully managed given the relatively high level of capital employed that is required on such schemes prior to legal completions being achieved. Work in progress on Signature and Debut developments increased by £10.1m, reflecting continued investment into the level of product available on site. Our investment in showhomes also increased by £3.2m to £14.2m to provide our customers with greater opportunities to view our product, a factor that is particularly important in a more competitive marketplace. Part exchange does not feature as a central component in the Group's marketing proposition. At the year-end, working capital invested in part exchange properties was £6.6m representing 39 properties (2005: £7.1m and 37 properties). The level of stock in the Group's Mixed Use & Regeneration activities increased by £3.9m to £10.7m primarily reflecting the commencement of construction on our first Redrow Regeneration project at Barking. Land creditors of £78.3m remained at a similar level to the position a year earlier (2005: £78.8m). Return on capital employed for the financial year, measured by using the average of opening and closing capital employed, stood at 22.0% (2005: 28.7%) with return on equity at 23.5% (2005: 30.7%). The exceptionally high levels of return on capital employed and return on equity achieved in the last few years were very much a function of the strong gains in house prices experienced during that period. Nevertheless, return on capital employed remains a very important financial metric for Redrow. Whilst a pre tax measure of financial performance for the business, it nevertheless acts as a simple focus to ensure that our overall post tax returns exceed our estimated weighted average cost of capital of approximately 8.5%. Whilst continued investment into land and work in progress as part of our clearly set out growth strategy may result in an increase in capital employed and gearing, our objective remains to deliver returns which comfortably exceed our cost of capital. Cash Flow The cash generated from operations was £38.7m despite additional investment of £88.6m into land and work in progress. Net debt increased by £26.6m to £129.8m (2005: £103.2m) and gearing, calculated as the proportion of net debt to shareholders' funds, increased only slightly to 25% (2005: 23%). Treasury Management It is Redrow's policy to fund itself through an appropriate mix of debt and equity and growth has historically been financed through a combination of retained profits and bank funding. When appropriate, we will seek to purchase land on deferred terms and in these cases, the vendor may retain a legal charge over the land to which the transaction related or be provided with a guarantee to support future payments. Treasury management is conducted centrally with the focus being upon liquidity and interest rate risks. Redrow operates wholly within the UK and foreign exchange risk is not material. Group policy determines that liquidity risk is managed through the review of regularly prepared cash forecasts and the maintenance of sufficient committed banking facilities to meet both anticipated requirements and also to provide a prudent level of headroom. As at June 2006, the Group had committed funding of £300m provided by way of a syndicated loan facility which matures in November 2009. In addition, we have further uncommitted bank facilities totalling £60m which provide overdraft and money market loans which assist in cash management. Day to day cash management is achieved by each company operating its own bank account with bank accounts managed at a Group level under a set off arrangement. Within the Board's interest rate risk management framework, interest rates and cash flow forecasts are constantly monitored to ensure that the level of hedging remains appropriate. The policy prohibits any trading in derivative financial instruments and requires any hedging activity to use simple risk management products, such as interest rate swaps. The notional level of debt protected by interest rate swaps as at 30 June 2006 was £62.5m and this compares with the Group's year-end net debt of £129.8m. These swaps had an average remaining life of 2.1 years at a fixed average interest rate of 4.7% before borrowing margins are added. The net debt position of the Group during the year is heavily influenced by the timing of land purchases and the profile of legal completions. In the year ended June 2006, average net debt was approximately £167m. Pensions The Group believes that pension provision is one of the most important benefits made available to its employees and provides both defined benefit and defined contribution pensions. The defined benefit section of the pension scheme was closed to new members generally in October 2001 following the introduction of a defined contribution section. The defined contribution section represents an excellent employee benefit, with monthly paid members of the defined contribution scheme contributing 5% of pensionable salary whilst Redrow makes age dependent contributions ranging from 5% to 12.5%. Weekly paid members contribute 3% of pensionable salary with a matching contribution of 3% from Redrow. During the year, the scheme actuary concluded the formal triennial valuation of the defined benefit section as at 1 July 2005. Defined benefit pension schemes generally have been under pressure from a combination of increased member longevity estimates, reduced investment returns and falling long term interest rates. These factors contributed to the triennial actuarial valuation showing a past service deficit of £11.5m at 1 July 2005 compared to £2.2m at the 1 January 2003 valuation. As a result of the changes in assumptions and following due consideration of how best to address the on-going cost of future service and past service deficit, the decision was taken to increase both employer and member contribution rates for the defined benefit section from 1 July 2006. Member contribution rates have increased from 6.0% to 10.0% (from 8.0% to 13.3% for Executive members) with the employer contribution rising from 12.0% to 16.0% (from 16.0% to 21.3% in respect of Executive members). Defined benefit section members who preferred not to bear the increased contribution had the opportunity to join either a new Career Average Earnings ('CARE') section or the existing defined contribution section of Redrow's pension scheme instead. In the event, take up for the proposed CARE section was so low that the offer was withdrawn with almost all defined benefit members choosing to remain within this section. In order to address the past service funding deficit, Redrow agreed to make a special contribution of £11.0m. £3.0m of this special contribution was paid in June 2006 with the balance paid in July 2006. The Company, together with the Trustees, continues to monitor closely the financial position of the defined benefit section of the pension scheme closely. As regards the Group's 2006/07 income statement, no significant adverse movement is anticipated in the Group's annual pension charge in respect of the defined benefit section. Financial Reporting This is the first year that the Group has presented its full year consolidated financial statements under International Financial Reporting Standards ('IFRS') rather than UK GAAP. All prior year comparatives have been restated and a full reconciliation of the 2005 income statement and balance sheet was provided in the interim financial statements. As part of our transition process to IFRS, the Group published its 'Transition to International Financial Reporting Standards' document in November 2005 which included a summary of principal impacts together with restated financial information for the year ended 30 June 2005. The adoption of International Financial Reporting Standards has no impact on the Group's strategy or its ability to deliver shareholder value into the future. David Arnold Group Finance Director Consolidated Income Statement 12 months ended 30 June 2006 2005 Note £m £m Revenue 2 770.1 780.4 Cost of sales (592.0) (583.7) Gross profit 178.1 196.7 Administrative expenses (45.3) (42.7) Operating profit before financing costs 2 132.8 154.0 Financial income 0.6 0.8 Financial expenses (12.1) (13.4) Net financing costs 2 (11.5) (12.6) Share of loss of joint ventures after interest and taxation 2 (0.8) (2.4) Profit before tax 2 120.5 139.0 Income tax expense 3 (36.4) (42.5) Profit for the period 84.1 96.5 Earnings per share Basic earnings per share 5 52.9p 60.7p Diluted earnings per share 5 52.7p 60.5p Consolidated Balance Sheet As at 30 June 2006 2005 Note £m £m Assets Intangible assets 0.4 0.2 Plant, property and equipment 23.8 24.1 Investments 2.4 2.6 Deferred tax assets 5.0 8.1 Derivative financial instruments 0.2 - Trade and other receivables 0.8 0.5 Total non-current assets 32.6 35.5 Inventories 6 849.6 761.0 Trade and other receivables 25.5 12.2 Derivative financial instruments 0.2 0.3 Cash and cash equivalents 8 24.5 23.7 Total current assets 899.8 797.2 Total assets 932.4 832.7 Equity Issued capital 16.0 15.9 Share premium 56.2 54.2 Hedge reserve 0.3 (0.1) Other reserves 7.9 7.9 Retained earnings 433.4 374.6 Total equity 513.8 452.5 Liabilities Bank loans 8 131.5 103.8 Trade and other payables 7 41.9 47.2 Deferred tax liabilities 1.6 1.8 Retirement benefit obligations 8.6 7.9 Long-term provisions 4.4 2.1 Total non-current liabilities 188.0 162.8 Bank overdrafts and loans 8 22.8 23.1 Trade and other payables 185.6 170.1 Derivative financial instruments - 0.5 Current income tax liabilities 22.2 23.7 Total current liabilities 230.6 217.4 Total liabilities 418.6 380.2 Total equity and liabilities 932.4 832.7 Consolidated Cash Flow Statement 12 months ended 30 June 2006 2005 Note £m £m Cash flow from operating activities Operating profit before financing costs 132.8 154.0 Depreciation and amortisation 2.3 2.1 Adjustment for non-cash items (7.4) (3.3) Operating profit before changes in working capital and provisions 127.7 152.8 Increase in trade and other receivables (13.6) (1.3) Increase in inventories (88.6) (65.8) Increase in trade and other payables 10.2 13.8 Increase in employee benefits and provisions 3.0 - Cash generated from operations 38.7 99.5 Interest paid (8.9) (10.6) Tax paid (34.7) (39.8) Net cash from operating activities (4.9) 49.1 Cash flows from investing activities Acquisition of plant, property and equipment (2.2) (5.4) Proceeds from sale of plant and equipment - 1.4 Interest received 0.5 0.8 Payments to joint ventures (0.6) (3.1) Net cash from investing activities (2.3) (6.3) Cash flows from financing activities Increase in/(repayment of) bank borrowings 27.5 (0.5) Issue costs of bank borrowings - (0.8) Purchase of own shares (2.9) (0.7) Dividends paid (18.4) (15.2) Proceeds from issue of share capital 2.1 1.0 Net cash from financing activities 8.3 (16.2) Increase in net cash and cash equivalents 1.1 26.6 Net cash and cash equivalents at the beginning of the period 0.6 (26.0) Net cash and cash equivalents at the end of the period 8 1.7 0.6 Consolidated Statement of Recognised Income and Expense 12 months ended 30 June 2006 2005 £m £m Effective portion of changes in fair value of interest rate cash flow hedges 0.6 (1.6) Deferred tax on change in fair value of interest rate cash flow hedges (0.2) 0.5 Actuarial (losses)/gains on defined benefit pension scheme (2.8) 0.7 Deferred tax on actuarial (losses)/gains taken directly to equity 0.8 (0.2) Net expense recognised directly in equity (1.6) (0.6) Profit for the period 84.1 96.5 Total recognised income and expense for the period 82.5 95.9 Reconciliation of Movements in Consolidated Equity 12 months ended 30 June 2006 2005 £m £m Profit for the period 84.1 96.5 Dividends on equity shares (18.4) (15.2) Other recognised income and expense relating to the period (net) (1.6) (0.6) Shares issued 2.1 1.0 Movement in LTSIP/SAYE (4.9) 0.1 Net increase in equity 61.3 81.8 Opening equity 452.5 370.7 Closing equity 513.8 452.5 NOTES 1. Basis of Preparation The above results and the accompanying notes do not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. They are taken from the full accounts which have received an unqualified report by the Auditors and will be filed with the Registrar of Companies. 2. Segmental Information 2a) Income Statement 12 months ended 2006 2005 £m £m Revenue Homes 765.5 753.8 Mixed Use & Regeneration 4.6 26.6 770.1 780.4 Profit before tax Homes 133.8 147.4 Mixed Use & Regeneration 0.7 4.5 Framing Solutions - operating loss (0.8) (1.2) 133.7 150.7 Jersey provision (2.0) - 131.7 150.7 Add back share of joint venture operating losses 1.1 3.3 Operating profit before financing costs 132.8 154.0 Net financing costs (11.5) (12.6) 121.3 141.4 Share of loss of joint ventures after interest and taxation (0.8) (2.4) Profit before tax 120.5 139.0 Segmental Information continued 2b) Balance Sheet As at 30 June 2006 2005 £m £m Segment assets Homes 884.9 790.8 Mixed Use & Regeneration 23.0 17.1 Framing Solutions - share of joint venture 1.6 1.6 909.5 809.5 Elimination of inter-segment items (1.6) (0.5) 907.9 809.0 Cash and cash equivalents 24.5 23.7 Consolidated total assets 932.4 832.7 Segment liabilities Homes 254.8 249.3 Mixed Use & Regeneration 11.1 4.5 265.9 253.8 Elimination of inter-segment items (1.6) (0.5) 264.3 253.3 Borrowings 154.3 126.9 Consolidated total liabilities 418.6 380.2 Total equity 513.8 452.5 3. Income Tax Expense 12 months ended 2006 2005 £m £m Current year UK Corporation Tax at 30% (2005: 30%) 33.2 43.6 Over provision in respect of prior year (0.2) (0.2) 33.0 43.4 Deferred tax Origination and reversal of temporary differences 3.4 (0.9) 36.4 42.5 Reconciliation of tax expense for the year Tax on total profits @ 30% (2005: 30%) 36.2 41.7 Over provision in respect of prior year (0.2) (0.2) Tax effect of share of losses in joint ventures 0.3 1.0 Expenses not deductible for tax purposes net of 0.2 0.3 rolled over capital gains Short term temporary differences (0.1) (0.3) 36.4 42.5 4. Dividends The final dividend of 8.7p will be recommended to shareholders for approval at the Annual General Meeting on 7 November 2006. This dividend will be paid on 17 November 2006 to shareholders whose names are on the Register of Members at close of business on 22 September 2006. The shares will become ex-dividend on 20 September 2006. This dividend, when added to the interim, makes a total dividend for the year of 13.0p (2005: 10.8p). 5. Earnings Per Share The calculation of the basic earnings per share of 52.9p (2005: 60.7p) is based on Group profit for the period of £84.1m (2005: £96.5m) and on the weighted average number of 10p ordinary shares in issue of 159.1m (2005: 158.9m). The average reflects an adjustment in respect of surplus shares held in trust under the Redrow Long Term Share Incentive Plan. Diluted earnings per share has been calculated based on the weighted average number of 10p ordinary shares in issue of 159.5m (2005: 159.4m). 6. Inventories As at 30 June 2006 2005 £m £m Land for development 523.0 459.6 Work in progress 312.4 290.4 Stock of showhomes 14.2 11.0 849.6 761.0 7. Amounts Due in Respect of Development Land As at 30 June 2006 2005 £m £m Due within one year 36.4 31.6 Due in more than one year 41.9 47.2 78.3 78.8 8. Analysis of Net Debt As at 30 June 2006 2005 £m £m Cash and cash equivalents 24.5 23.7 Bank overdrafts and loans (22.8) (23.1) Net cash and cash equivalents 1.7 0.6 Bank loans (131.5) (103.8) Net debt (129.8) (103.2) 9. Annual General Meeting The Annual General Meeting of Redrow plc will be held at St. David's Park Hotel, St. David's Park, Flintshire on 7 November 2006, commencing at 12.00 noon. A copy of this statement is available for inspection at the registered office. This information is provided by RNS The company news service from the London Stock Exchange

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