Trading Statement

RNS Number : 7557Y

Barratt Developments PLC

10 July 2008

 



Barratt Developments PLC 

Trading update

Highlights

• Full year volumes, margin and debt levels in-line with guidance and consensus

• Further cost saving initiatives implemented, right-sizing the organisation for current market conditions

• Financial structure strengthened, with revised covenant package agreed subject to final documentation, and new £400m facility signed

• Clear strategy in place for working through current challenging market

Mark Clare, Group Chief Executive commented,

'In terms of housing volumes, margins and debt, we have delivered a satisfactory performance in an intensely difficult market. By enhancing our sales capability, reducing our costs, and agreeing a new financial package, we have now substantially improved our competitive position and are better placed to deal with what will be a very challenging period ahead.'

We set out below an update on trading for the year ended 30 June 2008 ahead of our preliminary results announcement scheduled for 10 September 2008.

Revenues

On a statutory basis, total completions increased by 8.3% to 18,588 (2007:17,168). Private completions were 3.3% higher at 14,803 (2007:14,335) and social housing completions rose 33.6% to 3,785 (2007: 2,833).

On a like-for-like basis (1), total completions decreased by 13.8% (2007: 21,569), with a second half performance of 9,532, 12.9% down on the prior year. Private completions were 18.4% lower (2007: 18,131), with social housing completions up by 10.1% (2007: 3,438). Social housing represented 20.4% of total completions in the period (2007: 15.9%).

Average private sales rates in the second half, at 211 per week, were 42.9% below prior year, and 13.5% below the first half.  Despite the substantial reduction in sales, visitor rates per site per week were down only 14.8% in the second half on prior year and up 15% on the first half, reflecting underlying consumer demand. This mismatch between visitor levels and sales, and the level of cancellation rates, which rose to 33.6% for the full year, reflects the acute shortage of mortgage finance.

Selling prices have been under pressure since September 2007, with more notable declines experienced since early April 2008, impacted by restricted mortgage finance availability and declining consumer confidence.  As a result of mix changes within both private and social completions, total average selling prices on a like-for-like basis, increased by 1.4% to £183,400 (2007: £180,800).  Private average selling prices increased by 4.1% to £205,700 (2007: £197,600) and social average selling prices increased by 4.1% to £96,100 (2007: £92,300).  On an underlying basis (excluding the change in product, size and geographic mix), private selling prices decreased by around 5%.

(1) Like-for-like basis assumes that the acquisition of Wilson Bowden was completed upon the first day of the comparative period

Margin

Declining volumes and lower underlying average selling prices have put downward pressure on the operating margin, particularly over the past three months.  For the financial year 2007/08, we expect the operating margin on a like-for-like basis, before impairments, to decline by approximately 1.5%, in-line with market expectations.

Integration of Wilson Bowden

We have delivered in excess of £33m of cost savings from the integration of Wilson Bowden during the period, and we are on track to deliver approximately £60m annualised savings in the new financial year.

Cost reduction programme

The Group has taken significant steps to reduce costs, including the re-negotiation of key sub-contractor rates and the reduction in the cost of major materials.  We also have a programme in place to reduce build costs by improving build processes including changing specifications.  Overall we continue to target a total of £40m of annualised cost savings in 2008/09, with £20m achieved in 2007/08.

In addition, we are closing two divisions, merging a further eight divisions into four (bringing the total number down to 26 from a total of 44 at the time of the acquisition of Wilson Bowden), and reducing costs across the organisation with the anticipated loss of approximately 1,200 jobs.  These initiatives are expected to deliver approximately £40m of annualised cost savings, the majority of which will be delivered in 2008/09.  The cost of implementing these changes is expected to be in the region of £15m, the majority of which will be incurred in the first half of the 2008/09 financial year.

Land

The Group's land bank totalled 78,700 plots at the year-end, of which 86% was owned and 14% was agreed subject to contract.  The Group is only investing in new land to the extent that it is contractually committed to do so. Total land spend for the 12 months to 30 June was approximately £1.0 bn (2007: £1.3bn on a like-for-like basis).  Contractually committed land spend in the 2008/09 financial year will be significantly lower at approximately £600m.

The Group has taken a conservative approach to land acquisition and valuation. It has minimal exposure to large, owned, tranches of strategic land without planning permission, and has limited exposure to high-rise flatted developments outside of London.

The Group has reviewed the year-end carrying value of land and work-in-progress. This has been completed in accordance with normal valuation practices and the relevant accounting standards.

The review has been carried out on a site-by-site basis, using valuations incorporating forecast sales rates, and average selling prices that reflect current and anticipated trading conditions. Particular attention has been directed towards large, more complex sites, apartment blocks outside London, sites with low sales rates, and sites where upfront investment is relatively high. Whilst assumptions are site specific, on a broad portfolio basis, a decline of approximately 10% has been incorporated (note: this reflects a c. 5% decline already experienced in the latter part of 2007/8 and an anticipated c. 5% further decline in 2008/09). The review indicates that the Group will incur a pre-tax write-down in the value of land and work-in-progress of approximately £85m for the financial year ended 30 June 2008.

We are currently assessing, for the limited number of larger, more capital intensive sites included in the review above, whether it may be more appropriate to realise cash through the sale of the assets, rather than developing them through to completion.  Should we decide to realise cash more quickly, then additional pre-tax provisions of approximately £50m at 30 June 2008 would be required.

Wilson Bowden Developments

We are progressing the potential disposal of assets from the Wilson Bowden Developments portfolio with a cash value of around £200m. We hope to be able to move the majority of these through to completion over the next 6 to 12 months.

We anticipate that there may be a requirement for land write-downs of approximately £30m in relation to Wilson Bowden Developments for the financial year ended 30 June 2008 (in addition to the amounts noted above).

Borrowings

Group net borrowings for the full year were lower than expectations at approximately £1.66 bn, a reduction of approximately £80m from 31 December 2007.

The Group continues to operate within its committed facilities and its current banking covenants. However, it is possible to anticipate market conditions where this may not continue to be the case, when those covenants fall to be tested in the future. As a result, we have agreed (subject to final documentation), a restructuring of our covenant package with our banks and private placement note providers well in advance, as an appropriate, prudent response to current market conditions. Specifically, under this agreement, the interest cover covenant is replaced with a cashflow covenant and the gearing and minimum tangible net worth covenants are relaxed.

In addition, we have signed a new three year £400m facility as announced on 14 May, and have reached agreement (subject to final documentation) to extend our existing £400m revolving credit facility to July 2011.  As previously indicated, £400m of the existing acquisition facility is expected to be redeemed shortly.

As a result of the agreements referred to above, we have put in place a more appropriate capital structure for the Group in light of current market conditions.

Dividend

The Board has decided that no final dividend for 2007/8 will be paid. The total dividend paid for the year ended 30 June 2008 will therefore be 12.23 pence per share, being the interim dividend paid in May. Looking ahead, in the light of the current challenging market conditions and consequential financial constraints, and our strategy to maximise cash, the Board will keep the dividend policy under review. We will update the market in due course.

Outlook

It is now widely recognised that the UK housing market experienced a significant downturn from early April. This has significantly impacted the forward sales of the Group which totalled £0.7 bn, of which £539m was contracted, at 1 July 2008 (2007: £1.41 bn on a like-for-like basis, of which £866m was contracted).

Given these challenging market conditions the Group's strategy is to focus on operating as effectively and efficiently as possible, leveraging its acknowledged sales and marketing skills which have been further enhanced over the last nine months, whilst ensuring we remain well positioned to benefit from any market upturn.

Specifically, we will de-leverage the business over the near-term, maximising cash realisation, whilst continuing to manage the balance between volume and margin delivery on a site-by-site basis.

We will reduce investment levels to reflect current market demand by reducing work-in-progress and stock levels, whilst severely constraining investment in new land.  We will target further cost reduction whilst continuing to invest in the Group's highly effective sales capabilities.

With the new financing package now in place, and the focus on de-leveraging the business, we believe we now have the structure to enable us to deliver through today's challenging market.

Although housing production is expected to reach its lowest levels for more than 50 years, we continue to believe that in the longer term, the imbalance between supply and demand will drive future growth for the UK housebuilding industry, and more stable pricing.

- ends -

For further information please contact:

Barratt Developments PLC
Mark Clare, Group Chief Executive
Mark Pain, Group Finance Director
For analyst/investor enquiries, please contact:
Barratt Development PLC
Susie Bell, Acting Head of Investor Relations	020 7299 4880
For media enquiries, please contact:
Barratt Development PLC
Dan Bridgett, Head of External Affairs	020 7299 4873
The Maitland Consultancy
Liz Morley	020 7379 5151
Neil Bennett

 

END

 

 

TSTDGGMNKGDGRZG