Interim Results - Part One

RNS Number : 0762C

Taylor Wimpey PLC

27 August 2008

 



27 August 2008

Taylor Wimpey plc

Interim Results for the six months to 30 June 2008

Operational Summary

• Very challenging market conditions across the UK, US and Spain

• North American business 'fighting fit' to deal with tough conditions - now applying our experience of the US downturn to the UK market

• Business priorities are cash management and cost reduction, to protect shareholder value, and place the business in a strong position as conditions change 

  • Tight control of investment in land and work in progress

  • Early action taken to reduce overhead costs in the UK. Previously announced closure of 13 of our 39 operating businesses complete by the end of September 

  • Further overhead reductions in North America

• Business integration following merger now complete, synergy savings will be delivered in line with previously announced targets

• Group home completions 8,494 (H1 2007: 4,857, H1 2007 pro-forma:12,228) as the impact of last year's nil premium merger outweighed the deterioration in market conditions 

• The Group remains in full compliance with all of its debt covenants and its liquidity position is currently strong.

• As previously indicated, the Group is likely to breach its existing interest cover covenants when tested for the full year. Constructive discussions with the relevant lenders are ongoing and the Board is of the view that a satisfactory conclusion will be reached.

Financial Summary

	H1 2008	H1 2007
Revenue	£1,894.7m	£1,401.9m
Profit on ordinary activities before finance costs, exceptional items and amortisation of brands	£73.8m	£150.2m
Profit before tax and exceptional items**	£4.3m	£119.8m
(Loss)/profit before tax	£(1,542.0)m	£18.3m
(Loss)/earnings per share	(134.9)p	3.9p
Tangible net worth per share	207.0p	294.6p
Gearing	76.8%	34.1%
Dividend per share	Nil	5.5p

** H1 2008 exceptional items of £1,546 million include:

• Write-down of landbanks in the UK, North America and Spain totalling £690 million

• Write-down of goodwill and intangible assets, including the George Wimpey brand at a total non-cash cost of £816 million

• £40 million restructuring cost primarily relating to the UK Housing business 

Commenting on the results, Norman Askew, Chairman, said:

'The first half of 2008 has been characterised by the very challenging trading conditions in the UK, US and Spain. The Board remains convinced of the fundamental value of the business over the medium and long term and our primary focus is to amend certain of the existing borrowing agreements. To this end, the Group is engaged in constructive dialogue and is not aware of any issues which would prevent these amendments being finalised by the end of this year.'

Pete Redfern, Group Chief Executive, said:

'Our experience of the downturn in the US housing market has enabled us to recognise the early signs of market weakness in the UK and act swiftly to position our UK housing business for a difficult trading environment. Whilst conditions are likely to remain tough in both the UK and the US in the short term, we are maintaining momentum in the UK and we have seen pockets of stabilisation in the US. We believe that both markets continue to be attractive on a longer-term view.'  

-ends-

A presentation to analysts will be made at 09:00 hours on 27 August 2008. This presentation will be broadcast live on www.taylorwimpey.com.

For further information please contact:

Pete Redfern, Group Chief Executive                      James Murgatroyd

Peter Johnson, Group Finance Director                  Faeth Birch

Jonathan Drake, Investor Relations

Taylor Wimpey plc                                               Finsbury

Tel: [phone] on 27 August                 Tel: [phone]

Tel: [phone] thereafter

Notes to editors:

On 3 July 2007, Taylor Woodrow plc and George Wimpey Plc completed their merger to form Taylor Wimpey plc. Taylor Wimpey plc is the UK's largest homebuilder.

Taylor Wimpey plc builds homes in the UK, North America, Spain and Gibraltar. It aims to be the homebuilder of choice for customers, employees, shareholders and communities. Taylor Wimpey also operates in the Construction sector under the Taylor Woodrow brand.

  Interim Management Report

Results for the six months to 30 June 2008

The 2007 comparative information set out in this commentary is based on the statutory accounts. Additional pro forma comparative information is provided in the interim results presentation which is available on the Company's website.

This IMR has been prepared solely to provide additional information to shareholders to assess the Group's strategies and the potential for those strategies to succeed.  The IMR should not be relied on by any other party or for any other purpose.  

The IMR contains certain forward looking statements.  These statements are made by the directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

UK Housing

	H1 2008	H1 2007	Change %	FY 2007
Revenue £m	1,159.6	751.5	54.3%	3,053.8
Operating profit* £m	63.4	105.0	(39.6)%	418.2
Operating margin* %	5.5%	14.0%	(7.7)ppt	13.7%
Exceptional items £m	(1,431.0)	-	-	(47.9)
Home completions	6,317	3,378	87.0%	14,862

* Throughout this commentary 'operating profit' is defined as profit on ordinary activities before finance costs, exceptional items and amortisation of brands.

As anticipated, the UK housing market saw a subdued start to 2008. Sales rates in the early part of the Spring selling season increased week by week, but not at the level that is normally associated with this key trading period. As widely reported, market conditions weakened markedly from mid April onwards, as mortgage availability reduced further and consumer confidence was eroded by negative house price indices and wider economic uncertainty.

Completions grew by 87 per cent to 6,317 (H1 2007: 3,378) as the impact of last year's merger with George Wimpey outweighed the deterioration in market conditions. The proportion of completions accounted for by social housing has increased to 24 per cent in the first half of 2008 from 17 per cent in the equivalent period of 2007. This reflects the more robust nature of the demand for social housing, as well as the ongoing trend towards higher social housing requirements within planning consents. Average selling prices for private homes were £202k (H1 2007: £224k) as a result of the weaker market and also the lower average selling price of the legacy George Wimpey business (H1 2007: £190k). The average selling price for social housing was £108k (H1 2007: £116k).

Revenue increased to £1,159.6 million (H1 2007: £751.5 million). The deterioration in market conditions is clearly reflected in the operating profit* of £63.4 million (H1 2007: £105.0 million). The operating margin* of 5.5 per cent (H1 2007: 14.0 per cent) also reflects a significantly reduced level of overhead recovery.

Cost reduction remains a key focus and we remain on course to deliver an exit rate of £70 million of annualised merger synergies savings in the UK business by the end of 2009. In addition, we have reviewed our business structure in the UK and, as previously announced, we are closing 13 of our 39 regional offices and reducing staffing levels across the business, with the anticipated loss of 900 jobs. We expect this to result in a reduction in overhead costs of approximately £45 million on an annualised basis, in addition to the merger synergies, starting from the fourth quarter of 2008. In addition, we continue to work with our suppliers and subcontractors to identify ways to increase efficiency and reduce cost.

We have actively set sales prices to reflect current market conditions, and market a wide range of incentives to our customers, enabling us to deliver competitive offers on a local basis. The sales rates that we have achieved so far in the third quarter of 2008 are materially ahead of those of the second quarter. 

Cash management is a key focus for the Company. In addition to the suspension of new land commitments, we have further tightened our controls on work in progress. For example, all new site starts are signed off by the Group Chief Executive and new build releases are authorised by our Divisional Managing Directors on a plot by plot basis.

Our landbank of owned, controlled and pipeline plots with planning consent was 77,415 plots at 30 June 2008 (31 December 2007: 91,059). This reduction, largely in pipeline rather than owned plots, reflects the impact of our decision to suspend new land commitments in September 2007. The strength of our land portfolio allows us to continue this policy, which enhances the cash generation of the business. As previously indicated, we have also reviewed in detail the carrying value of our UK land as at the end of June. This has resulted in a provision in the Group accounts of £585.9 million against UK land and work in progress during the first half of 2008 (H1 2007: nil).

North America Housing

	H1 2008	H1 2007	Change %	FY 2007
Revenue £m	362.9	342.5	6.0%	986.8
Operating profit* £m	17.3	47.4	(63.5)%	67.5
Operating margin* %	4.8%	13.8%	(9.0)ppt	6.8%
Exceptional items £m	(76.3)	(101.5)	24.8%	(321.3)
Home completions	2,094	1,376	52.1%	5,197

Market conditions in the US remain weak, although we have seen pockets of stabilisation. Our housing business in Canada, which has not experienced the same levels of house price inflation as the US and UK, has remained relatively stable.

Completions grew by 52 per cent to 2,094 (H1 2007: 1,376) reflecting the contribution of the legacy Morrison Homes business. The average selling price of our completions in North America was £166k (H1 2007: £229k), reflecting both the ongoing weakness in market conditions in the US reducing the overall average square footages and the mix effect of the lower average selling price of the legacy Morrison Homes business (H1 2007: £148k).

Revenue increased to £362.9 million (H1 2007: £342.5 million). The ongoing weakness in the US housing market is reflected in the operating profit* of £17.3 million (H1 2007: £47.4 million) and the operating margin* of 4.8 per cent (H1 2007: 13.8 per cent).

We continue to identify and deliver cost savings across our business in North America. In addition to an expected £20 million exit rate of annualised merger synergies savings by the end of 2009, we have a number of purchasing initiatives underway which will have a beneficial impact on future build costs.

We were extremely cautious with regard to land buying in the US throughout 2007 and this policy has continued into 2008. As a result, our owned and controlled landbank at 30 June 2008 of 36,786 plots was below the 40,603 plots reported as at 31 December 2007. Whilst we have recorded additional land and work in progress write downs in the US of £70.8 million during the first half of 2008, we believe that there is a low risk of further write downs.

Our key cash management focus remains the tight control of work in progress, where we have achieved a significant reduction in the number of unsold completed homes to 364 homes at 30 June 2008 from 908 homes at the end of 2007.

Spain & Gibraltar Housing

	H1 2008	H1 2007	Change %	FY 2007
Revenue £m	26.4	30.0	(12.0)%	64.4
Operating profit* £m	0.3	2.0	(85.0)%	2.2
Operating margin* %	0.1%	6.7%	(6.6)ppt	3.4%
Exceptional items £m	(33.3)	-	-	(6.3)
Home completions	83	103	(19.4)%	212

The housing market in Spain remains weak on the mainland, although the market in Mallorca is more stable. This is reflected in the reduction in the level of home completions to 83 for the first half of 2008 (H1 2007: 103) although mix changes resulted in an increase in the average selling price to £310k (H1 2007: £284k).

Revenue decreased to £26.4 million (H1 2007: £30.0 million), operating profit* was £0.3 million (H1 2007: £2.0 million) and the operating margin* was 0.1 per cent (H1 2007: 6.7 per cent). We have recorded land and work in progress write downs in Spain of £33.3 million during the first half of 2008.

We have plans in place to exit our business in Gibraltar, which we expect to be complete during 2009.

Taylor Woodrow Construction

Our Construction business has grown its first half revenues by 24 per cent to £345.8 million (H1 2007: £277.9 million). Operating profit* was £0.9 million (H1 2007: £2.7 million) reflecting provisions taken against the Ghana road building business. The order book stood at £1,028 million (H1 2007: £1,163 million) reflecting selective tendering in an increasingly competitive commercial building market.

Exceptional Items

As indicated in our Trading Statement on 2 July 2008, and noted above, we have taken provisions in the Group accounts against our land and work in progress in the UK, US and Spain. In the UK, these provisions total £585.9 million reflecting the need to reduce pricing in order to maintain satisfactory sales rates in the current weak market conditions. In the US, we have taken a provision of £70.8 million, primarily against our assets in California. We have provided £33.3 million in our Spanish business. Whilst we believe that these provisions represent a prudent view of the current position, if we see a further marked deterioration in our markets it may be necessary to increase the level of provisions in the future.

The restructuring of our UK Housing operations, which reduces the number of operating businesses from 39 to 26, accounted for the majority of an exceptional cost of £40.2 million. We expect to achieve annualised savings of £45 million per annum as a result of these actions.

We have also taken the decision to write off the entire value of our intangible assets, which includes goodwill and the George Wimpey brand at a total non-cash cost of £816.1 million. This is a result of the weak trading conditions that we are experiencing in each of our major markets.

The provisions against our land and work in progress in the UK will generate a tax credit and we anticipate receiving a cash repayment of around £90 million relating to tax paid in 2007 by the end of 2009 at the latest. In the US and Spain, tax benefits will be dependent on the sale of the land and WIP as well as the levels of future profitability. There is no tax relief available on the impairment of goodwill on consolidation. 

Risks and Uncertainties

As with any business, Taylor Wimpey faces a number of risks and uncertainties in the course of its day to day operations. By effectively identifying and managing these risks, we are able to improve our returns, thereby adding value for shareholders.  

As detailed below, we are in discussions with the relevant lenders on amendments to certain of our existing borrowing agreements. Although constructive discussions are ongoing, the principal risk for the second half of 2008 is that this process is not concluded satisfactorily.

Other principal risks and uncertainties facing the Company are outlined on page 19 of our Annual Report and Accounts 2007, which is available from www.taylorwimpey.com. These risks remain relevant for the second half of 2008 and comprise: economic and market environment; land purchasing; availability of sub-contractors; site safety; construction process; and government regulations.

Review of capital requirements

Our liquidity position is currently strong. Group net debt on 30 June 2008 was £1.7 billion, with a further £0.8 billion of undrawn committed facilities of which £0.6 billion was available for utilisation under our existing covenants. In addition, there are only £0.1 billion of borrowings which mature before December 2011. Based on our current order book, and the effect of management actions in relation to land and WIP spend, we anticipate strong cash flow generation in the second half of 2008 enabling us to reduce net debt by the year end.

We remain in full compliance with the financial covenants within all of our borrowing agreements. However, as previously announced, without amending the terms of certain of these agreements we are likely to breach the interest cover covenants when tested for the full year. We have therefore proactively engaged in discussions with representatives of the relevant debt providers to amend certain of our existing borrowing agreements. We are focussed on giving ourselves the flexibility to navigate through the market downturn and strengthen our position for a market recovery.

Constructive discussions are ongoing and we are not aware of any issues which would prevent these amendments being finalised before the end of this year. We will provide shareholders with further information on the progress of discussions as appropriate.

Pensions

Actuarial valuations of both of the Company's main pension schemes, the Taylor Woodrow Group Pension & Life Assurance Fund (TWGP&LAF) and the George Wimpey Staff Pension Scheme (GWSPS), have been completed during the first half of the year. The results of these valuations are a deficit of £162.5 million relating to the TWGP&LAF (previous deficit £64.6 million) and a deficit of £215.0 million relating to the GWSPS (previous deficit £148.0 million). The IAS19 valuation, which appears on the Company's balance sheet is £216.2 million at 30 June 2008 and is based on the same assumptions used at the 2007 year end (31 December 2007: £219.1 million).

The Company's deficit reduction payments in respect of the TWGP&LAF remain unchanged at £20 million per annum. The deficit reduction payments to the GWSPS, which were made at the rate of £15 million per annum during the first half of the year, increased to a rate of £25 million per annum in July 2008. In addition, a one-off deficit reduction payment of £5 million in respect of the GWSPS was made in July 2008.

Related Party Transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed within the financial statements or related notes. Transactions between the Group and its joint ventures are as follows:

The Group purchased land from joint ventures for £7.3m during the six months to 30 June 2008 (six months to 30 June 2007: £8.0m; year to 31 December 2007: £21.4m).

Dividends

As previously announced, the Board does not feel it appropriate given current trading conditions to propose an interim dividend for 2008. We will review our future dividend policy at the end of the year in the light of the prevailing market conditions.

Outlook

The Board remains convinced of the fundamental value of the business over the medium and long term.

The current operating environment in the UK housing market remains very challenging and we do not anticipate any recovery in the short term. Whilst margins in the second half are likely to be significantly affected by pricing pressure, our focus on cash management, cost reduction and sales rates is enabling us to maintain momentum in these tough conditions.

Overall, while our US housing markets remain weak, although more stable than in 2007. However, we do not anticipate any material recovery until 2009 at the earliest.

We believe that both the UK and North American housing markets remain attractive in the medium and long-term due to the positive demographic trends in both markets, constrained land supply in the UK and the ability, in an improved market, to increase volumes profitably in the US.

 

END

 

 

IR SEIEFMSASELA