Chief Executive's Statement

 

Overview

 

We have delivered an excellent operational and financial performance in our first half. We have made rapid progress in increasing build activity and home completions after the unprecedented impact of COVID-19 and the first national lockdown in FY20. We are building homes the country needs, supporting and creating jobs, and aiding wider economic growth whilst delivering both operationally and financially for our stakeholders.

 

	H1 FY21	Medium term targets		Progress in the half year
Wholly owned completions	8,699 homes	Disciplined growth in wholly owned home completions towards 20,000 over the medium term, initially reversing COVID-19 disruption through sales and build driven recovery back to FY19 levels	·	On track to deliver between 15,250 and 15,750 wholly owned home completions in FY21
Gross margin	20.6%	Land acquisition at a minimum 23% gross margin and optimising performance	·	Excellent progress towards our margin target with additional momentum given first half home completions Adjusted gross margin up 80 bps to 23.8% (2019: 23.0%)
ROCE	17.8%	Minimum of 25% delivered through improving margin and return to operating framework	·	COVID-19 impact on H2 FY20 continues to dilute ROCE ROCE at 17.8% for 12 months to 31 December 2020 -     down 1,150 bps vs 31 December 2019 at 29.3% -     ahead 220 bps vs 30 June 2020 at 15.6%

 

We are very proud to be the UK's leading national sustainable housebuilder and to consistently lead the industry in both customer service and build quality. We operate across England, Scotland and Wales through our three brands: Barratt Homes, David Wilson Homes and Barratt London. We strive to meet our customers' expectations and we believe that the high quality of our homes and our excellent customer service is fundamental to our ongoing success.

 

We remain committed to playing our part in addressing Britain's housing shortage and our completion recovery reflects this commitment and our growth aspirations. We delivered record half year completions with total completions³ up 9.2% to 9,077. This growth reflected underlying market strength, pent up demand following the initial national lockdown and also demand resulting from the stamp duty holiday and the March 2021 end of Help to Buy for existing homeowners.

 

After the unprecedented challenges arising from COVID-19 in FY20 we are determined to rebuild our completion volumes to those delivered in FY19 as quickly as we can, whilst maintaining our disciplined approach and focus on customer service and quality, and thereafter will return to our medium term target of 20,000 wholly owned completions.

 

Through rebuilding our completion volumes we will recover our build, sales and operating overhead efficiencies and in doing so, unlock the attractive returns available within our high quality land bank. Our new product ranges and their continual refinement continue to underpin our land acquisition at a minimum of 23% gross margin. We also remain focused on driving further improvements in the efficiency of our operations, controlling costs whilst maintaining our focus on quality and customer satisfaction.

 

It is a credit to our construction teams across the country that not only did they deliver an excellent return to build activity from a standing start after the national lockdown, they have also continued to lead the industry on quality. For the sixteenth year in a row, we achieved more NHBC Pride in the Job Quality awards than any other builder.

 

As a result of our successful completion recovery and the underlying strength of our land bank, in the half year we delivered a 80 bps increase in adjusted gross margin to 23.8% (2019: 23.0%) and a 90 bps increase in adjusted operating margin to 20.3% (2019: 19.4%). During the period, as highlighted at the time of our FY20 results, we incurred £26.0m (2019: £nil) of adjusted items associated with the return of CJRS grant income and a charge of £51.0m (2019: £17.8m) associated with legacy properties. We therefore delivered a gross margin of 20.6% (2019: 22.2%) and an operating margin of 17.0% (2019: 18.6%). Profit from operations for the half year was £422.9m (2019: £421.7m).

 

Our ROCE of 17.8% (2019: 29.3%), whilst below our target of a minimum 25% over the medium term, recovered by 220 bps on the 15.6% reported to 30 June 2020. Our ROCE reflected both the depressed level of profitability from the second half of FY20 and the elevated level of work in progress created by the initial national lockdown. In this context we are satisfied with our ROCE performance but remain committed to recovering to our medium term target at the earliest opportunity. The ROCE recovery to date is also pleasing as our revised operating framework, including the significantly reduced level of land creditors, makes its recovery more challenging.

 

We have further strengthened our balance sheet and ended the half year with net cash of £1,106.7m (31 December 2019: £433.8m) and, in line with our operating framework, reduced land creditors of £601.1m (2019: £830.8m) (21.2%; 2019: 27.4% of land bank).

 

The discipline embedded within our operating framework and the financial strength which this has created, evidenced through the challenges created by COVID-19, enables us to keep investing in our business and the future of housebuilding.

 

 

Attractive housing market fundamentals

 

Despite economic uncertainties, the housing market fundamentals remain attractive. There is strong demand for new homes across the country and Government is still targeting the construction of 300,000 new homes each year.

 

For the industry to continue to increase supply it is important that consumers are able to access sustainable mortgage finance.

 

Throughout 2020 we saw a reduction in the number of mortgages and mortgage products available at higher loan to value (LTV), partly as a result of the increased demand for mortgages coming out of the first national lockdown and also reflecting increased activity after the introduction of the stamp duty holiday. Whilst the lending environment is broadly positive, with some signs of increased competition since the start of December, there remains an absence of mortgage lending at higher LTV levels from many of the mainstream lenders, particularly for home buyers unable to access Help to Buy.

 

There has also been an increase in mortgage interest rates outside those attached to Help to Buy home purchases, although they still remain attractive in a longer term context. The health of the housing market, and housebuilders' ability to build homes to meet demand relies on a strong and competitive mortgage market with a wide range of affordable and accessible mortgage options for home buyers. Absent an increase in LTV levels, Help To Buy is likely to become the only way into home ownership for many first time buyers.

 

 

Leadership in quality and customer service

 

We remain committed to playing our part in addressing the housing shortage. We design attractive developments that meet our high quality standards and will enhance local communities for years to come. We aim to continue to increase volumes whilst maintaining our industry-leading quality, and remain committed to investing in the future of housebuilding.

 

We believe our industry leadership in quality and customer service is fundamental to our business resilience and our quality has been externally recognised through a number of awards.

 

The NHBC Pride in the Job Awards recognise excellence in build quality and site management. In June 2020 our site managers were awarded 92 awards, more than any other housebuilder for the 16th consecutive year. In the subsequent Regional NHBC Pride in the Job Awards, Barratt secured seven out of the ten regional awards where we operate, an unprecedented achievement.

 

We are also the only major housebuilder to be awarded the maximum 5 Star rating by our customers in the HBF customer satisfaction survey for 11 years in a row.

 

In December 2020, we were named 'Large Housebuilder of the Year' at The Housebuilder Awards 2020. This is the second year in a row we have won this award and the third time we have secured this title in the last five years.

 

 

Investing in our people and recognising their commitment

 

We are committed to the development of our people, not just because it is the right thing to do, but because it is fundamental to our long-term success. As our industry continues to face a skills shortage, it is important to attract and retain the best people. 

 

Our aim is to create a great place to work founded on an open and honest culture. We engage with our employees on a regular basis so we can understand their issues and concerns and address them. We carry out an annual engagement survey, further surveys throughout the year and consult with our Workforce Forum. Areas that we have consulted on this year include our response to COVID-19 and our enhanced working practices and protocols.

 

We continue to invest for the future and to develop award winning schemes including those for graduates, apprentices and former Armed Forces personnel, alongside our own Degree Apprenticeship in Residential Development and Construction run in conjunction with Sheffield Hallam University. Our development programmes included 473 participants at 31 December 2020 and we have plans to grow these programmes significantly in 2021. We also continue to collaborate with the wider housebuilding industry. We actively participate in the Home Building Skills Partnership, the aims of which include attracting new entrants to the industry, providing the skills for today and the future, and supporting the supply chain in attracting and developing the skills they need to support our industry.

 

We are seeking to build a diverse and inclusive workforce that reflects the communities in which we operate, delivering excellence for our customers by drawing on a broad range of talents, skills and experience. This is embedded in delivering our Diversity and Inclusion Strategy, with identified targets in areas such as gender and ethnicity and an aim to improve in all areas. We also have a successful career development programme for high potential female employees.

 

We are an accredited Living Wage Employer, making us one of the first major housebuilders to receive the accreditation. The real Living Wage is different to the Government's National Minimum and Living Wage, as it is an independently calculated higher hourly rate of pay that is based on the actual cost of living. Receiving this accreditation demonstrates our commitment to our employees as well as our suppliers and subcontractors.

 

Delivering our long term commitment to quality and customer service rests with the effort and dedication of our employees across the country. We believe it is important that we recognise our colleagues' commitment, particularly after the challenges faced over the last year, and that we share the success of the business with the people who make it possible. Reflecting the challenges met and overcome in 2020, and to mark the milestone of completing our 500,000th home in late 2020, an award of 200 shares was made to all employees below managing director level. This is the third year in a row that the Board has recognised our employees' commitment and support in this way, following the special share award in 2019 to mark ten years of HBF 5 Star rating and our 60th anniversary share award in 2018.

 

 

Our financial performance

Half year results

The Group has delivered an excellent first half performance. Overall our sales rate in the period was 11.6% ahead at 0.77 (2019: 0.69) net private reservations per active outlet per week. Our sales rate over the six-month period moderated, as anticipated, with an exceptionally strong sales rate in the first quarter, reflecting both underlying demand strength and pent up demand post the national lockdown, followed by a more normalised sales rate in the second quarter.

 

During the half year, we operated from an average of 342 (2019: 372) active outlets including 8 (2019: 9) JV active sites, a reduction of 8.1% reflecting the delay to site starts created by the initial national lockdown period. We have made good progress on new site openings, launching 63 new outlets³ (2019: 45 outlets) in the half year, ahead of our expectations. New outlet launches in the second half, along with those launched in the first half, are expected to support a stable average sales outlet position for the remainder of this financial year.

 

Total home completions³ were a record level for the half year with 9,077 homes (2019: 8,314 homes) delivered to customers. Completion growth benefited from both the elevated level of working capital carried into the new financial year and our higher forward sales position, created by the initial national lockdown delaying completions.

 

The Group's completion mix was:

 

Completions (units)	H1 FY21	H1 FY20	Change
Private	6,903	6,301	9.6%
Affordable	1,796	1,699	5.7%
Wholly owned	8,699	8,000	8.7%
JV	378	314	20.4%
Total3	9,077	8,314	9.2%

 

As a result of the strong half year completion growth and based on current market conditions and site construction activity, we expect wholly owned completions to be between 15,250 and 15,750 homes in FY21, whilst maintaining our industry leading standards of build quality and customer service. We continue to expect affordable completions to represent c. 20% of our completion volumes this year.

Our private ASP was £319,500 (2019: £312,000) reflecting both a positive regional mix impact as well as low single digit house price inflation. The affordable ASP reduced by 9.2% to £145,300 (2019: £160,000) reflecting the change in geographic mix with a reduced level of affordable units delivered in London. As a result, total ASP was £283,500 (2019: £279,800).

 

We delivered an uplift of 80 bps in adjusted gross margin in the half year. This reflected both low single-digit house price growth and limited build cost inflation, as well as the strength of completion volume growth in the period, driving incremental fixed cost efficiency with each home completion delivering a contribution of c. 32% after land and build costs. As a result, our adjusted gross margin was 23.8% (2019: 23.0%).

 

Based on our full year completions guidance, with wholly owned completions in the second half expected to be between 19% and 25% lower than our first half, our second half is expected to see some reversal of the cost efficiency experienced in the first half.

 

In line with our commitment to put customers first and reflecting the Board decision to repay CJRS grant income received during the first national lockdown, adjusted item costs of £79.1m (2019: £17.8m) were recognised through cost of sales in the period. This resulted in a reported gross margin of 20.6% (2019: 22.2%).

 

We have sought to minimise cost growth in our administrative expenses with limited underlying inflationary costs. Costs have increased from that experienced in the second half of FY20 due to director and employee incentive schemes, which were cancelled or did not vest in the second half due to the pandemic, as well as a reduced level of sundry income. Administrative costs in the half year were £94.3m (2019: £83.9m). We now expect net administrative expenses for FY21 will be around £200m.

 

Adjusted operating profit increased by £65.7m to £505.2m (2019: £439.5m) as a result of our increased completion delivery, the improvement in adjusted gross margin and tight control of administrative expenses in the period.

 

The improvement in adjusted operating margin reflected a number of factors:

·      Regional trading: our margin initiatives continue to drive underlying improvement, including the continued transition to sites using our new and continually refined standard house types, increasing margin by 60bps;

·      Site extension costs: reflecting an extension in site durations, the charge across our completions created an 80 bps negative margin impact;

·      Net impact of build cost relative to selling prices: low single-digit house price inflation, offset by limited build cost inflation produced a 100 bps positive margin improvement;

·      Sales mix and other items: other factors, including a change in sales mix and the withdrawal from Central London, resulted in a 50 bps improvement to margin; and

·      Administrative expenses: the change in administrative expenses resulted in a 40 bps negative margin impact, reflecting additional costs accrued in respect of performance incentive schemes as well as reduced sundry income.

 

Our adjusted operating margin, as a result, increased by 90 bps to 20.3% (2019: 19.4%). After adjusted items, the reported operating margin for the half year was 17.0% (2019: 18.6%).

 

Net finance charges were in line with the prior period at £14.8m (2019: £14.1m). The cash finance charge was £4.9m (2019: £3.1m) with non-cash charges of £9.9m (2019: £11.0m). We continue to expect FY21 net finance costs to be around £30m, ‎comprising £10m of cash and £20m of non-cash charges.

 

In the half year, the Group's share of JV profit was £22.1m (2019: £15.4m). We continue to expect to deliver around 650 JV completions in FY21.

 

Profit before tax increased by 1.7% to £430.2m (2019: £423.0m) and the Group recognised £81.2m of tax charges at an effective rate of 18.9% (2019: 18.4%). Basic earnings per share increased by 1.5% to 34.3 pence per share (2019: 33.8 pence per share).

 

Adjusted items

There were two adjusted items recognised during the half year, being costs associated with legacy properties and the reversal of grant income received under the CJRS in FY20.

    

Cost associated with legacy properties: the Group incurred an additional £56.3m (2019: £17.8m) of costs in the half year in relation to legacy properties, and a credit of £5.3m in relation to legacy properties in joint ventures.

The largest component of charges in the period related to Citiscape and the associated review, announced in July 2020, which is now substantially complete and has not identified any other buildings with issues as severe as those present at Citiscape. Detailed reviews are ongoing and, in line with our commitment to put our customers first we will ensure that the costs associated with any remedial works from these reviews are not borne by leaseholders.

Additionally, with the evolving Government advice on fire safety for multi-storey buildings, we continue to work with building owners and management companies on the assessment of buildings we have constructed. We have borne the cost of some remedial works at a small number of developments where we have a legal liability to do so or where relevant build issues have been identified.

We recognise that the complex issues surrounding fire safety guidance have caused distress for affected homeowners, and that a long term industry-wide solution is required. We understand that the Government is considering various options to provide this long term solution and we will continue to work with Government as we have done to date being founding signatories to the Building Safety Charter and active members of the Early Adopters Group, which is committed to protect life by putting safety first ahead of all other building priorities.

 

CJRS grant income: The Board decided on 5 July 2020 to repay all furlough funds received during the first national lockdown. With the decision to repay CJRS funds taken after the year end, we have recognised the reversal of the total grant income of £26.0m received in FY20 as an adjusted item in H1 FY21.

Capital structure and operating framework

We continue to maintain an appropriate capital structure reflecting our disciplined operating framework to ensure our balance sheet strength. Our capital structure remains centred on shareholders' funds and land creditors funding the longer term requirements of the business with term loans and bank debt funding shorter term requirements for working capital.

 

In order to maintain a resilient balance sheet, our operating framework is to hold average net cash over the financial year and to be cash positive at year end. We have achieved a half year total indebtedness (net cash and land creditors combined) surplus of £505.6m (31 December 2019: total indebtedness of £397.0m).

 

Our net cash balance of £1,106.7m (31 December 2019: £433.8m), reflected the strength of underlying operating cash generation, the reversal of elevated working capital investment carried at 30 June 2020, the decision not to pay dividends in respect of FY20 partially offset by significant land creditor payments. We now expect year end net cash of between £700 - £750m as a result of improved trading but reflecting too, increased land and working capital investment in the second half to support our growth plans beyond FY21, as well as the payment of the interim dividend. Average net cash in FY21 is now expected to be approximately £700m.

 

Whilst we continue to defer payment for some land purchases to meet land vendor aspirations and drive a higher ROCE, we are in line with our operating framework level. As at 31 December 2020 land creditors totalled £601.1m (31 December 2019: £830.8m) and equated to 21.2% (31 December 2019: 27.4%) of the owned land bank. Land creditors falling due within the next 12 months totalled £333.6m at 31 December 2020.

 

Our operating framework, revised with our FY20 results, remains unchanged looking forward and progress over both the last six and twelve month periods is shown below:

 

	Operating framework	Position at 31 December vs 30 June 2020	Position at 31 December  2019
Land bankA	c. 3.5 years owned and c. 1.0 year controlled	5.0 years owned and 0.9 years controlled (2020: 5.7 years owned and 1.0 year controlled)	3.7 years owned and 0.9 years controlled
Land creditors	Reduce usage to 15 - 25% of the land bank over medium term	21.2% (2020: 25.4%)	2019: 27.4%
Net cash	Modest average net cash over the financial year	£548m over six months ending 31 December 2020 (£348m over twelve months ending 30 June 2020)	£458m over six months ending 31 December 2019
	Year end net cash	£1,106.7m (2020: £308.2m)	£433.8m
Total indebtedness (net cash and land creditors)	Minimal year end total indebtedness in the medium term	Total net surplus of £505.6m (2020: Total indebtedness of £483.7m)	Total indebtedness of £397.0m
Treasury	Appropriate financing facilities	£700m RCF extended to November 2024 £200m USPP maturing 2027	£700m RCF extended to November 2024 £200m USPP maturing 2027
Dividend policy	2.5x dividend cover	FY21 interim dividend proposed of 7.5p  (No FY20 dividend)	No FY20 interim dividend

 

A. Land supply is calculated as total owned (owned land and land subject to unconditional contracts) and controlled (land subject to conditional contracts) land bank plots divided by wholly owned completions in the last 12 months

 

Net tangible assets were £4,298.2m and £4.22 per share, (2019: £3,941.5m and £3.87p per share) of which land, net of land creditors, and work in progress, totalled £3,835.2m and £3.77 per share (2019: £4,005.8m and £3.93p per share).

 

 

The key dimensions underpinning delivery of our strategy

 

Land and planning

Our land bank is the foundation of our future operational and financial performance. Throughout the period, we have focussed on optimising our existing land bank to balance site duration and our build and sales capacity across our portfolio. This has included:

 

·      Introducing, where appropriate, additional dual branding with both the Barratt and David Wilson product ranges and sales offices, to ensure the most efficient use of our land bank;

 

·      Reviewing house type designs in response to changing market trends and continuous customer feedback; and

 

·      Re-planning sites to ensure we optimise both selling areas and adopt our most popular and most efficient house types to deliver both the most advantageous use of space and the most attractive street scenes for our customers.

  

Following our return to the land market, in August 2020, we have been disciplined and selective in our land purchasing and have approved £254.0m (2019: £406.1m) of operational land for purchase, which equates to 5,635 plots (2019: 9,242 plots) on 35 (2019: 44) new sites in attractive geographical locations that meet our hurdle rates. For FY21 we expect to approve between 14,000 and 16,000 plots of operational land (2019: 9,441) with this returning to more normal levels of between 18,000 and 20,000 plots in FY22.

 

We are now seeing a greater range of land buying opportunities come to market and have a good pipeline of offers accepted on additional sites. We spent around £320m on land during the half year and continue to expect to invest c. £850m on land in FY21, in line with previous guidance.

 

We continue to target a regionally balanced land portfolio with a supply of owned land of c. 3.5 years and a further c. 1.0 year of controlled land. Our target of a shorter than sector average land bank recognises our focus on ROCE and our fast build and sell model. Reflecting the impact of the national lockdown on completions in H2 FY20 and despite the recovery delivered in the first half, we remain above this target with 5.9 years land supply comprising 5.0 years owned land and 0.9 years of controlled land, with the owned land bank including land with both outline and detailed planning consents.

 

Our land bank at 31 December comprised:

 

Our land bank	31 December 2020	31 December 2019
Plots with detailed planning consent	54,079	51,929
Plots with outline planning consent	9,846	13,462
Plots with resolution to grant and other	235	337
Owned and unconditional land bank (plots)	64,160	65,728
Conditionally contracted land bank (plots)	11,450	15,118
Total owned and controlled land bank (plots)	75,610	80,846
Number of years' supply (A)	5.9	4.6
JVs owned and controlled land bank (plots)	5,010	5,656
Strategic land (acres)	13,232	12,988
Land bank carrying value	£2,836.7m	£3,036.3m

 

A. Land supply is calculated as total owned (owned land and land subject to unconditional contracts) and controlled (land subject to conditional contracts) land bank plots divided by wholly owned completions in the last 12 months

 

At 31 December 2020, the ASP of plots in our owned land bank was £275k (2019: £277k).

 

During the half year we delivered 2,149 (2019: 1,942) completions from strategically sourced land, and we converted 1,106 plots (2019: 2,421 plots) of strategic land into our owned and controlled land bank. Around 29% of our strategic land is allocated or included in draft in local plans. We continue to target 30% of completions from strategic land in the medium term, which we believe is an appropriate level for our business.

 

The vast majority of our owned and unconditional land bank plots have detailed planning consent and the deliverability of these plots supports sales outlet numbers both now and into the future. We are well positioned for our next financial year, with almost all of our expected FY22 completions (2019: 98% of FY21 completions) having outline or detailed planning consent.

 

 

 

Rebuilding site based construction activity

The potential of our land bank can only be unlocked through an efficient build process and we are pleased with the way our business has rebuilt activity from the complete shutdown which was required during the first national lockdown in March 2020. It is a testament to the strength and commitment of our construction teams, our sub-contractors, many of whom have worked with Barratt for many years, and our supply chain partners that we have recovered our site based construction activity.

 

As a result, construction activity, in the first half was slightly ahead of planned output, with an average of 298 equivalent homes, including JV's constructed each week. We enter the second half with a reduced level of work in progress carried forward at 31 December 2020 compared with the position at 30 June 2020 and, as a result, a greater reliance on construction activity in the half year ahead.

 

Our long standing commitment to quality is the focus of our teams across our business. Through the year to 31 December 2020 and measured against the major housebuilders, constructing more than 1,000 homes annually, our sites have secured:

·      The lowest Reportable Items per NHBC inspection; and

·      The lowest Builder Responsible Items per NHBC completed home inspection.

 

These external benchmarks complement the quality recognised through the NHBC Pride in the Job Awards for site management. In June 2020 our site managers were awarded 92 awards, more than any other housebuilder for the 16^th consecutive year. In the subsequent Regional NHBC Pride in the Job Awards, in Autumn 2020, Barratt secured seven out of the ten regional awards where we operate, an unprecedented achievement for us.

 

We remain committed to increasing the number of homes we build using MMC to increase efficiency and to help mitigate the challenges posed by the shortage of skilled workers within the industry. We continue to develop, trial and implement MMC. In the first half we built and sold 18.4% of homes using timber frame or large format block (2019: 17.6%). We remain on track with our target to use MMC to build 25% of our homes by 2025.

 

Improving efficiency and reducing costs

Improving the efficiency of our operations and controlling costs, whilst maintaining our focus on quality and customer satisfaction, remains a key focus for the Group, enhancing our margin and improving our operational and financial resilience.

 

Our new housetype ranges, which are subject to continuous refinement, maintain our high standards of design whilst being faster to build, helping us to reduce build cost and waste and are more suitable for MMC.

 

Through our sales teams and regular home buyer surveys we also continue to monitor changing home buyer priorities and requirements, particularly with respect to working from home and other lifestyle changes, which may have an enduring impact on home buyer preferences following the pandemic.

 

We delivered 5,376 completions (2019: 4,491 completions) from these ranges across the country in the half year. Of our outlets, 83% (2019: 76%) have the new product ranges and we expect to deliver around 10,000 completions from these ranges in FY21.

 

Over the next few years, we expect that c. 90% of our outlets will be suitable for our new product ranges equating to c. 85% of our completions. Our continually refined house type ranges cover all segments of our market providing us with the flexibility to replan sites to suit market conditions and meet changing consumer demands should the need arise.

 

We also continue to make further refinements to our housing ranges in response to the changing costs of certain trades and materials, without affecting our quality or design standards. As part of our continuous review process, we have introduced improvements to some of our standard house types, which reduce the amount of brickwork required and optimise internal floor plans, to achieve more usable living space from the same house footprint and increase profitability.

 

We have a robust and carefully managed supply chain with more than 90% of the housebuild materials sourced by our centralised procurement function being manufactured or assembled in the UK.

 

We have fixed price agreements in place for almost all of these materials to June 2021 and 37% are fixed until December 2021. We continue to anticipate inflation of between 1% and 2% in FY21. We also continue to see limited pressure on skilled labour supply given the impact of COVID-19 with any shortages being location and trade specific.

 

Health and safety

 

Our fundamental priority is to provide a safe working environment for all of our employees and sub-contractors. We are committed to achieving the highest industry health and safety standard and the wellbeing of our people is paramount to us.

 

We are committed to improving our processes and procedures, challenging unsafe behaviours and looking at ways we can further improve standards. We therefore welcome that in the 12 months to 31 December 2020, our reportable injury incidence rate reduced to 305 (2019: 330) per 100,000 workers and our Health and Safety SHE audit compliance rate was 96% (12 months to 31 December 2019: 96%).

 

Following the outbreak of COVID-19 we fundamentally reassessed site risks, particularly around social distancing. This resulted in our industry-leading and British Safety Council accredited COVID-secure policies and protocols, which are fully embedded across our business and underscore our priority to keep our employees, sub-contractors, suppliers and customers safe. We continue to manage the operational challenges created by COVID-19 across our business including providing flexibility for those with childcare responsibilities and supporting our clinically extremely vulnerable employees who are unable to work from home. 

 

Under the latest regulations to address the recent increase in coronavirus infections, we are able to continue site based construction across Britain. Our sales offices continue to operate on an appointment basis in England and Scotland but have been required to close in Wales.

 

Sustainability

 

Our aim is to maintain our position as the leading national sustainable housebuilder, connecting social, environmental and economic value through our commitment to sustainability, creating a strong and resilient business for the future and delivering long term value for our stakeholders.

As previously announced, based on our stakeholders' views we adopted a number of the UN Sustainable Development Goals, after researching their relevance to the UK, our sector, and how they link to what matters most to our stakeholders, and our priorities and principles. We will report on our progress on these in our Annual Report and Accounts for the year ended 30 June 2021.  

In recognition of the transparency of our sustainability disclosures, in 2020 we achieved our highest results for our CDP submissions and we were the only housebuilder to have improved our scores from the previous year in all three disclosures. This year, we scored A- in the 'Climate' category and moved into the leadership level, B for the 'Forest' category and B- for the 'Water' category, which we submitted voluntarily for the first time.

Reducing carbon emissions

We recognise the contribution we can make to the UK's net zero by 2050 target which is why we were the first national housebuilder to publish science-based carbon reduction targets and subsequently had them officially approved by the Science Based Targets Initiative.

In our own operations we are targeting a reduction in carbon emissions of 29% from FY18 to FY25 and reduce indirect carbon emissions by 24% per m² including from our supply chain and our homes in use by 2030.

We have also committed to purchase 100% of our operational electricity from renewable sources by 2025. Just over half of the electricity we purchase for our offices and construction sites is already from renewables and achieving the new 100% target will help us reduce emissions further.

Taking these commitments further, in June 2020, we announced that by 2040 we will be a net zero emissions business covering all of our direct operations. We are identifying the solutions to achieving these reductions, for example, by reducing our red diesel use, maximising our purchase of electricity from renewable tariffs and engaging our supply chain.

We have committed to delivering low carbon homes for our customers and have set a new target to ensure all housetypes will be zero carbon from 2030. This will be achieved through better insulation, more efficient services and new low carbon technology.

These targets and our constant commitment to lead the industry in both quality and sustainability means that our customers will live in high quality, low carbon, energy efficient homes which have a lower impact on our environment and are cheaper to run.

Research and innovation continues to be a priority for the business. In November 2020, we officially launched our Energy House 2.0 house project with Salford University, a leading project to test the technology needed to deliver a step change in delivering low carbon homes and places. 

We are continuing to work with Innovate UK on AIMCH, a research project to compare issues such as embodied carbon in homes and the generation of waste between offsite and traditional build methods. We are actively looking at how we can meet the now confirmed requirements of the Future Homes Standard and design homes that will no longer be connected to the gas grid.

Biodiversity

We are continuing to create a net positive impact for ecology and biodiversity across all new developments that we have progressed through planning from 2020 onwards and have strengthened our strategic partnership with the RSPB, mandating all new showhome gardens to achieve at least a 'Bronze' level against RSPB criteria. We have also continued to provide support for our customers and employees on how to continue to give nature a home even throughout the COVID-19 lockdown period.

Immediate sustainability priorities

 

Waste and diesel

In response to the increase in waste intensity figures reported at the end of FY20 a new operational waste strategy has been put in place, with continuous scrutiny of the progress against site-level improvement plans and identification of where further actions are required.

Red diesel, which makes up close to 60% of our operational carbon emissions is also an immediate priority. We are using newly available telematics reports from our plant hire companies to establish issues such as idling time, and working to identify the solutions. We continue to work with suppliers of low carbon construction tools and fuels for new opportunities.

Employee engagement

Communication and advocacy from our employees have been identified as key pillars of our sustainability strategy. To promote awareness and educate colleagues on how they can live more sustainably in their own lives, particularly when homeworking due to COVID-19, in October we launched a unique Barratt eco-calculator. We intend to continue with rolling engagement initiatives and activities.

Refreshing our framework

Our current sustainability framework is strong, however given the importance of this area both for our customers and wider society, we have begun work to refresh it. This has involved a thorough review of current and emerging legislation, investor expectations, emerging social trends and business requirements.

By incorporating these into the refreshed framework, we will ensure that we are driving the most important actions for the business in key ESG areas, thereby creating value for our stakeholders and reinforcing our position as the leading national sustainable housebuilder.

 

Charitable giving

 

We are committed to creating a positive legacy in the communities in which we live and work and we aim to be industry leading in our approach to charitable giving and social responsibility. We believe it is important to support charitable causes both locally and nationally and we actively promote charitable giving and volunteering amongst our employees. In FY20 we raised and donated £4.4m (FY19: £2.9m) for charitable causes.

 

We want our charitable giving to grow which is why we have launched the Barratt Developments PLC Charitable Foundation. The Barratt Foundation has been established as an umbrella body for all of the work that the Group as a whole does in supporting local and national charities across the country. It will improve the way in which we work in our communities and how we help those in need. 

 

The Foundation has adopted a general charitable purpose, which means that it is able to donate to a wide variety of charities within the UK. The intention however is to focus on making donations to charities that specialise in promoting social inclusion, promoting physical and mental health, helping the environment and nature and education.

 

The Foundation will enhance and improve our charitable giving on a local and national basis but it will also support our divisions and individual employees in their fundraising efforts. It will also administer the Barratt & David Wilson Community Fund through which each of our divisions and Group support functions give £1,000 a month to charities local to them or their sites. The Community Fund was launched in January 2019 and has already donated more than £550,000 to local charities and organisations to support and improve communities and leave a positive legacy in the areas in which we work.

 

To mark the launch of the new Barratt Foundation, and to celebrate the construction of our 500,000^th home, we  committed to donate £500,000 split between ten charities. The charities were chosen by our workforce forum and the Barratt Foundation trustees and then employees voted to decide how the funding was allocated.

 

Over the last calendar year, helping charities has been more important than ever as many have had their funding substantially reduced during the COVID-19 pandemic. Because of this we have continued to help a wide range of charities with additional donations, including donating to St Mungo's for emergency homelessness support and to The Big Issue Emergency Appeal.

 

This is in addition to our Big Barratt NHS Thank You, under which we provide a deposit contribution to NHS workers trying to get onto the property ladder. To date the NHS Thank You has funded over £21.7m of deposit contributions and we recently extended the scheme for six months.

 

 

 

Dividend resumed

 

After what has been an unprecedented and challenging period, our business has demonstrated its operational strength and financial resilience. Our disciplined operating framework and the speed of management decision making and actions, both at the start of the pandemic and thereafter, have delivered both a rapid and robust recovery and a further strengthened balance sheet.

 

The Board, in light of this performance, and whilst recognising uncertainties remain ahead, is delighted to declare an interim dividend of 7.5 pence per share (2019: nil). The interim dividend will be paid on Monday 10 May 2021 to all shareholders on the register on Friday 16 April 2021.

 

The Board continues to target a full year dividend based on a dividend cover of 2.5 times full year earnings.

 

Current trading and outlook

 

We have had a solid start to our second half with 264 net private reservations per average week (2020: 294; 2019: 284) and operated from an average of 343 outlets (2020: 355; 2019: 385). This resulted in a net private reservations per active outlet per average week of 0.77 (2020: 0.83; 2019: 0.74). The reduction in part reflects the limited product availability for home completions this financial year, given the strength of our forward order book and our focus on delivering the high quality homes and service our home purchasers expect.

 

We are over 95% forward sold for this financial year. Our total forward sales³ as at 31 January 2021 were 14,289 homes (2 February 2020: 13,043 homes; 3 February 2019: 13,194 homes) at a value of £3,425.8m (2 February 2020: £3,027.1m; 3 February 2019: £3,021.0m) and comprised:

 

	1 February 2021		2 February 2020		Variance %
	£m	Homes	£m	Homes	£m	Homes
Private	1,933.6	5,769	1,593.7	4,984	21.3	15.8
Affordable	1,242.4	7,746	1,118.7	7,127	11.1	8.7
Wholly owned	3,176.0	13,515	2,712.4	12,111	17.1	11.6
JV	249.8	774	314.7	932	(20.6)	(17.0)
Total	3,425.8	14,289	3,027.1	13,043	13.2	9.6

 

	Current Year		Prior Year		Variance %
	Private	Total	Private	Total	Private	Total
31 December	5,104	13,588	3,997	11,885	27.7	14.3
Reservations	1,169	1,330	1,385	1,641	(16.0)	(19.0)
Completions	(504)	(629)	(398)	(483)	26.6	30.2
31 Jan / 2 Feb	5,769	14,289	4,984	13,043	15.8	9.6

 

The business is in a strong position with substantial net cash, a well-capitalised balance sheet, a healthy forward sales position, a continued focus on delivery of operational improvements across our business and an ongoing commitment to deliver high quality homes across the country. Nevertheless, we are mindful of the continued economic uncertainties arising from COVID-19 and the UK's new trading arrangement with the EU, together with the end of the stamp duty holiday and the changes to Help to Buy at the end of March.

 

As we said in January, based on current market conditions and site construction activity, we continue to expect wholly owned completions to be between 15,250 and 15,750 homes in FY21, whilst ensuring we maintain our industry leading standards of quality and service. We expect a lower level of completions in our second half relative to our first half reflecting the reduced level of work in progress carried forward at December 2020 compared to June 2020 and, as a result, a greater reliance on construction activity in the half year ahead. In addition we continue to expect to deliver around 650 home completions from our joint ventures.

 

We are focused on rebuilding our completion volumes to our medium term target and current capacity of 20,000 homes. This, coupled with our land acquisition in recent years at a minimum 23% gross margin and our ongoing focus on operating efficiencies, support our continued target of a minimum 25% ROCE in the medium term.

 

The Board will continue to monitor the market and wider economy but believes that our operating performance and further strengthened financial position provide us with the resilience and flexibility to react to changes in the operating environment in both FY21 and beyond and the outlook for the full year remains in line with the Board's expectations.

 

David Thomas

Chief Executive

3 February 2021
 

Principal risks and uncertainties

The Group's financial and operational performance and reputation is subject to a number of potential risks and uncertainties, which could, either separately or in combination, have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results and shareholder returns to differ materially from expected and historical results.

 

COVID-19 presents a risk to the health and safety of our employees, sub-contractors and customers. The Group prioritises health and safety and has embedded COVID-19 working practices and protocols in line with the latest guidance from the Government, Public Health Authorities and the Construction Leadership Council.

 

In addition, the pandemic has heightened the Group's other principal risks. It has required the Group to quickly adapt to a new working environment, involving changes to construction methods and IT systems, coupled with economic uncertainty and challenges for our supply chain. After careful consideration, the Board has included the risk of a significant unexpected event affecting multiple locations, such as a further pandemic or the failure of national infrastructure as a new principal risk in the half year.

 

Government advice on fire safety for multi-storey buildings continues to evolve and there are likely to be further changes to the legislation and regulation of current guidance. All of our buildings, including the cladding used, were signed off by approved inspectors as compliant with the relevant Building Regulations at the time of completion. In light of the current guidance we continue to work with building owners and management companies to review our legacy developments. We have provided for the cost of assisting with remedial work identified at a limited number of legacy properties where we have a legal liability to do so or where relevant build issues have been identified. The amounts provided reflect the current best estimate of the extent and future costs of work required, however these estimates may be updated as work progresses or if Government legislation and regulation further evolves.

 

The consequences of the withdrawal of the UK from the EU on the economic environment and the availability of raw materials, subcontractors and suppliers remains uncertain. The Board continues to monitor changes in these risks and to take appropriate action.

 

Climate change presents an ever increasing focus for both the Government and wider society. For our business, the risk from climate change presents itself in a number of principal areas. Transition risks and opportunities are those relating to actions the business takes as a result of policy, legal and technological changes to meet the challenge of operating in a lower carbon economy. These include the risks to construction from the use of new technology and materials aimed at reducing carbon emissions. These risk areas are embedded within the Group's risk management process in a number of areas, including, Construction, Availability of raw materials, sub-contractors and suppliers and Government planning and regulation. Physical risks and opportunities relate to the effects of changing climate on assets and supply chain disruption, which can impact on the comfortable heating of homes and the ability of developments to withstand extreme weather events such as heavy rainfall. Following the Government response to the Future Homes Standard consultation in January 2021 the Board has elevated climate change to a principal risk. The Future Homes Standard will require new homes to be 31% more energy efficient from 2021, to achieve a 75%-80% reduction in carbon emissions and be zero carbon ready by 2025. As part of this, from 2025, gas boilers will be prohibited in new homes.

 

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

 

Save as set out above, the Directors do not consider the process of risk management and the principal risks and uncertainties to have changed since the publication of the Annual Report and Accounts for the year ended 30 June 2020.

 

Further details of the Group's principal risks and mitigation of the risks outlined below can be found on pages 71 to 78 of the Annual Report and Accounts for the year ended 30 June 2020, which is available at www.barrattdevelopments.co.uk.

 

Principal Risks

Economic environment, including housing demand and mortgage availability

Changes in the UK and European macroeconomic environments, may lead to falling demand or tightened mortgage availability, on which the majority of our customers are reliant, reducing the affordability of our homes.

Land availability

The inability to secure sufficient consented land and strategic land options at appropriate cost and quality in the right locations which enhance communities.

Government regulation and planning policy

Changes in the regulatory environment affect the conditions and time taken to obtain planning approval and technical requirements including Building Regulations, increasing the challenge of providing quality homes where they are most needed.

Joint ventures and consortia

The Group can facilitate large or complex developments through joint ventures or consortia arrangements, allowing the provision of housing in particular areas of need by sharing risk and capital requirements.

Construction

Failure to achieve excellence in construction, through delays from adverse conditions, a failure to identify cost overruns promptly, design and construction defects, and deviation from environmental standards.

Availability of raw materials, sub-contractors and suppliers

Shortages or increased costs of materials and skilled labour, the failure of a key supplier or the inability to secure supplies on appropriate credit terms.

Safety, health and environment

Health and safety or environmental breaches can result in incidents affecting employees, sub-contractors and site visitors and undermine the creation of a great place to work.

Attracting and retaining high calibre employees

Failure to recruit and/or retain the best people so that both our employees and the business can benefit from the available development opportunities.

Availability of finance and working capital

Unavailability of sufficient borrowing and surety facilities to settle liabilities, manage working capital, respond to changes in the economic environment, and take advantage of appropriate land buying and operational opportunities to deliver strategic priorities.

IT

The Group continues to integrate its IT systems to enhance control and drive efficiency. The failure of any of these systems, in particular those relating to customer information, surveying and valuation, could restrict the Group's operations and disrupt progress in its strategic priorities. Failure to comply with data regulations could also incur significant financial penalties and reputational damage.

Significant nationwide unexpected event affecting multiple locations

A significant unexpected event, such as the COVID-19 pandemic or the failure of national infrastructure, could have a material impact on our business.

Climate change

Climate change presents risks from both transition risks and physical risks. Transition risks relate to actions the business takes as a result of policy, legal and technological changes to meet the challenge of operating in a lower carbon economy. These include the risks to construction from the use of new technology and materials aimed at reducing carbon emissions. Physical risks relate to the effects of changing climate on assets and supply chain disruption, which can impact on the comfortable heating of homes and the ability of developments to withstand extreme weather events such as heavy rainfall.

Emerging Risk

Social trends

Social developments drive changes in customers' expectations of the service they receive, the ways in which they communicate with the Group, and the manner in which the Group engages with its stakeholders.

 

 

Condensed Consolidated Income Statement

for the half year ended 31 December 2020 (unaudited)

 

Continuing operations	Notes	Half year ended     31 December 2020   £m	Half year ended     31 December 2019   £m	Year ended        30 June  2020 (audited) £m
Revenue	2.1	2,494.7	2,266.2	3,419.2
Cost of sales		(1,980.8)	(1,762.5)	(2,804.9)
Gross profit		513.9	503.7	614.3
Analysed as:
Adjusted gross profit		593.0	521.5	631.4
Cost associated with legacy properties	2.2	(56.3)	(17.8)	(39.9)
CJRS grant (repaid)/income	2.2	(22.8)	-	22.8
Administrative expenses	2.3	(94.3)	(83.9)	(124.5)
Part-exchange income		131.8	200.9	327.5
Part-exchange expenses		(128.5)	(199.0)	(323.9)
Profit from operations	2.3	422.9	421.7	493.4
Analysed as:
Adjusted operating profit		505.2	439.5	507.3
Cost associated with legacy properties	2.2	(56.3)	(17.8)	(39.9)
CJRS grant (repaid)/income	2.2	(26.0)	-	26.0
Finance income	5.2	0.7	3.2	5.1
Finance costs	5.2	(15.5)	(17.3)	(35.0)
Net finance costs	5.2	(14.8)	(14.1)	(29.9)
Share of post-tax profit from joint ventures		22.1	15.4	28.3
Analysed as:
Adjusted share of post-tax profit from joint ventures		16.8	15.4	28.3
Credit associated with legacy properties	2.2	5.3	-	-
Profit before tax		430.2	423.0	491.8
Analysed as:
Adjusted profit before tax		507.2	440.8	505.7
Cost associated with legacy properties	2.2	(51.0)	(17.8)	(39.9)
CJRS grant (repaid)/income	2.2	(26.0)	-	26.0
Tax	2.6	(81.2)	(77.7)	(89.1)
Profit for the period		349.0	345.3	402.7
Profit for the period attributable to the owners of the Company		348.8	342.7	399.7
Profit for the period attributable to non-controlling interests		0.2	2.6	3.0
Earnings per share from continuing operations
Basic	2.4	34.3p	33.8p	39.4p
Diluted	2.4	33.9p	33.3p	38.9p

The notes in sections 1 to 6 form an integral part of these Condensed Consolidated Half Yearly Financial Statements.