Earnings Call: H2 2010

Sep 8, 2010

Well, good morning. Actually, we're delighted to see so many of you being able to make it with the tube problems still continuing this morning. So a very warm welcome to our results presentation. The overall theme for our performance over the last 12 months is really encouraging progress. Market conditions have improved, but there is, of course, continuing uncertainty about the economic outlook and mortgage availability. But against that backcloth, we are in a far stronger position. We've recapitalized the business during the year, reduced debt further, and significantly improved the underlying operational performance of the business. At the same time, quality and customer service have been recognized as outstanding by not only our customers, but also leading trade bodies and national newspapers. Going forward, positioning the group for full margin recovery is the overriding priority of the management team. We've made a good start focusing hard on our pricing policy, the efficiency of the business, and ensuring a strong pipeline of new land is available for development. However, as inevitably so with these things, we've still got further progress to make. In a moment, Mark will take you through the detail of our progress and plans on this agenda. But first, let's have David cover the details of our financial performance. Over to you, David. Thank you, Bob. Good morning, everyone. First, an overview. Our revenues were GBP 2.035 billion. As expected, our turnover was down on last year, but we generated GBP 90.1 million of operating profit and an operating margin of 4.4% compared to 1.5% in the prior year. Tangible net asset value per share is 208 pence. Net debt stands at GBP 367 million and gearing at 18%. Following the completion of the placing and rights issue and our relentless focus on improving average selling prices, the financial position of the group is much improved. We remain committed to driving forward the profitability of the group. Let's start with the revenue drivers. Total completions, excluding joint venture completions, were 11,325, down 14% from 13,202. Social mix was 17%, and we anticipate this increasing to around 19% for FY11. Our total average selling price increased by 11% to GBP 174,300. Splitting this out, private ASP increased by 11%, whereas social ASP increased by 12%. Total revenue was down 11%. House building completions accounted for 97% of total revenue. The balance of GBP 61 million being mainly commercial sales, which included GBP 25 million for the sale of Atlantic Quay Five, a commercial property in Glasgow. In the next few slides, let me drill down further into the revenues. Let's start looking at the split of completions between houses and flats. On the left-hand chart, houses represented 60% of total completions, up from 46% in the prior year. On the right-hand chart, you can see that excluding London, the mix of houses rises to 66% compared to 50% in the prior year. Now, looking at the product mix in more detail, you can see the reduction in flats. You can also see that one, two, and small three-bedroom houses represented a much larger part of the mix as we implemented initiatives such as introducing new houses from our Aspirations range to take the place of flats. Looking now at private price segmentation, it shows a marked shift in product selling above GBP 200,000, which increased from 26% to 34% of the sales mix. This was driven by the increase in houses selling at higher ASPs. If we now look at a map of Britain, you can see the six regions that we operate in. The red line represents our north-south divide, which crosses somewhere a little south of Milton Keynes. The five regions outside London are of similar size in terms of completion volumes. 48% of completion volumes and 53% of completion revenue came from the south, including London. Looking at revenue per square feet, you can see that all regions increased this ratio, with East and London significantly ahead. The particularly strong performance in the East was driven by a number of factors, including sales from our large flatted development in Milton Keynes, which was sold to private buyers at an average increase of revenue per square feet of 32% on the prior year, when sales were largely to bulk investors. In London, strong demand in East London and our development at Rochester Row, Pimlico, drove the outperformance. I have included further average square footage information in the appendices. Moving on to the income statement. Gross profit for the year was GBP 184.8 million, compared to GBP 129.4 million in the prior year. The gross margin increased from 5.7% to 9.1%. We have seen both the benefits of replanning sites and reducing build costs flowing into margin. Mark will give you some more color on this shortly. Administrative expenses are GBP 94.7 million, compared to GBP 95.2 million in the prior year. This is slightly better than our guidance, primarily due to ongoing cost controls. On guidance, I expect that for FY 2011, the full year administrative expenses will be around GBP 110 million, reflecting overhead increases related to volume and an increase in incentive payments subject to achieving the required targets. The operating margin was ahead of expectations at 4.4%, up from 1.5% in the prior year, but more importantly, it was 5.9% in the second half, primarily driven by the improved gross margin performance. Continuing down the income statement, net finance costs were GBP 121.6 million, compared to GBP 177.3 million in the prior year. This primarily reflects the benefit of the new equity we raised in September last year, the amended financing arrangements, and a strong free cash flow. There was a GBP 33 million loss before tax and exceptionals for the financial year, with the group making a GBP 15.5 million profit before tax in the second half. The full year exceptional charge of GBP 129.9 million has not increased from the half year and comprised costs associated with the amended financing arrangements of GBP 114.1 million, the disposal of Atlantic Quay of GBP 4.8 million, and other integration costs of GBP 11 million. The tax credit of GBP 44.5 million is in respect of deferred tax. The balance sheet deferred tax asset is now GBP 173 million. The overall loss for the group, post exceptional items, was GBP 118.4 million, compared to a loss of GBP 468.6 million in the prior year. Now looking at the cash flow. There is a lot of detail on this slide, but I will pick out some of the key numbers. Taking account of land and land creditors, there was a GBP 240.7 million inflow from land. To provide you with even more granularity, the numbers are not shown on this slide, cash expenditure on land was GBP 253 million. This comprised expenditure on brought forward land creditors of GBP 155 million and on new land in the period of GBP 98 million. On guidance, we expect full year land cash expenditure to be between GBP 500 million and GBP 550 million, of which around GBP 270 million will be on land creditors brought forward. Back to the cash flow, there was a GBP 62.8 million inflow from the reduction of stock and work in progress and an GBP 8 million outflow of other working capital. This net outflow of GBP 8 million includes an increase in shared equity balances of GBP 49.8 million as a result of the relatively high take-up of products such as HomeBuy Direct, offset by a net increase in trade and other creditors. Total operating cash inflow was GBP 369.8 million. As previously reported, the exceptional finance costs of GBP 111.1 million comprised the make whole payments to private placement note holders, the interest rate hedging break costs, and the related debt advisory fees. The overall movement in net debt for the period was a reduction of GBP 910 million, which was driven by the equity raise, amendment of our financing arrangements, and the free cash flow. This cash inflow has transformed our balance sheet and allows us to compete more effectively in the land market. Turning now to the balance sheet. I will be going through the details of the land bank shortly. However, the value of the land bank net of land creditors is GBP 1.74 billion and has continued to reduce as cash expenditure on land was curtailed. The overall decrease in the value of the land bank of GBP 144.5 million reflects land additions of GBP 339 million, largely offset by land usage of GBP 477 million in the period. Land creditors increased from GBP 471 million to GBP 567 million. On guidance, we expect land creditors to increase by around GBP 50 million as at June 2011. Stock and work in progress reduced by GBP 63 million to GBP 981.4 million. And unreserved finished stock reduced to 746 units at the 30th of June 2010, a reduction of 76 units since June 2009. For reference, we have a slide in the appendices that provides some more detail on stock and work in progress. Moving on to the land bank. The total number of owned and conditional plots in the land bank has reduced by nearly 5,700. Over the last 12 months to just over 62,300. The owned plots have reduced by nearly 2,600 to around 51,000. The cost of plots acquired in the period was GBP 35,700. Cost of plots charged to the income statement was GBP 41,900. The substantial increase in plot cost through the income statement from GBP 32,100 last year is for three principal reasons. Firstly, a change in the overall mix of plots with a larger percentage of higher ASP plots being sold in FY10. Secondly, there was a lower proportion of impaired plots sold in FY10 compared to FY9. And thirdly, there was a lower proportion of flats. The carrying value of plots in the balance sheet now stands at GBP 43,100. The plots have been adjusted to take account of the significant replanning the group has achieved to date. Looking at the land bank valuation in a little more detail. Total owned land was valued at GBP 2.3 billion as at the 30th of June. As I have outlined before, Barratt has tended to have a higher land plot cost than many peers, as we have traded more on operational land than strategic land. The average future sales price at current prices on all owned sites is GBP 180,000, which is 3% higher than our ASP last year. As previously presented, we have segmented this plot cost by assessing the site ASP. Again, we have looked at sites above and below GBP 200,000 as a proxy for London and the South compared to the rest of Britain. Sites with an ASP below GBP 200,000 have a plot cost of GBP 33,000. On average, these plots will be selling for GBP 150,000. So the plot cost to ASP ratio is 22%. In the same way, for sites with an ASP above GBP 200,000, the plot cost to ASP ratio is 26%. There is a strong correlation between increasing ASP and increasing plot cost to ASP ratio due to the build cost being a lower proportion of the total. The overall ratio of 24% on owned land is a little above our historic norm, but that is to be expected given the reduced selling prices that we have experienced. Also, bear in mind that 12 months ago, the plot cost to ASP ratio for the group was 26%. We then have conditional contracts with around 11,400 plots and a plot cost to ASP ratio of 19%. Finally, 2,600 plots where we have agreed terms with a plot cost to ASP ratio of 23%. You will note that in these latter two cases, the ASPs are significantly higher at GBP 193,000 and GBP 228,000 respectively, reflecting the geographic and product mix. Moving away from land bank and onto the liability side of the balance sheet, there is just a couple of points to highlight. The reduction in net debt to GBP 367 million and a reduction in the net swap liability of GBP 68 million due to the cancellation of interest hedges in the period, offset by an increase due to changes in the interest rate curves. Now onto our amended financing arrangements that I explained last September. Total facilities of GBP 1.6 billion are split: GBP 741 million term, GBP 700 million RCF, and GBP 175 million private placement notes. We have a suite of three covenants that gives us a flexible package, providing scope for growth and downside protection. The cash flow cover allows unlimited time carry forward of any excess cash flow, which can be used for land expenditure. Also, we have an additional accommodation of up to GBP 220 million, which can be used for any business purpose. We have significant headroom on all three covenants. If we now look at the analysis of our interest cost, the total in the year of GBP 121.6 million can be split into the cash cost of GBP 90.7 million and non-cash of GBP 30.9 million. On guidance, we expect the total interest cost in FY11 to be around GBP 105 million, with a cash cost of GBP 75 million. If you are modeling our interest costs, do bear in mind that we have GBP 916 million of fully drawn bank and private placement loans. Let us now look at the profile of net debt and land creditors. If we look over the last four years, you can see that the period end net debt has reduced very significantly from a December 2007 peak of GBP 1.7 billion. Land creditors have been in a range of GBP 450 million to GBP 660 million. We recognize the trade-off between land creditors and net debt, and we manage this relationship very carefully. The gearing based on net debt to net tangible assets is 18%. On guidance, we expect net debt to increase in line with normal seasonal trends by around GBP 200 million from June to December 2010, and then reduce again for June 2011 to around GBP 400 million to GBP 450 million. The year-on-year increase reflecting higher expected cash expenditure on land. Looking at the payment schedule for land creditors, you can see that presently we expect GBP 267 million will be payable in FY11, and the balance will be paid as GBP 142 million in FY12 and GBP 158 million in future years. We monitor the payment profile of land creditors very closely. In closing, we have significantly amended our capital structure, improved our gross margin, and increased our operating performance in the year. The group is in a much stronger position as a result. Thank you, and I'll now hand over to Mark. Well, thanks very much, David, and good morning, everyone. I'm going to start by looking at market trends. I'll review our sales performance over the last year, reiterate our key priorities and show you how we're driving profitability across the group, look at the government funding framework, and finally update you on current trading and outlook. First, let me highlight the group's achievements over the past year. Twelve months ago, we set out our objectives, and we've made real progress against each. Sales rates have increased, and average selling prices were up by 10.9%. Operating margin increased to 4.4% for the full year and up to 5.9% in the second half. Net debt reduced to GBP 367 million, with gearing now at 18%. We've been successful in agreeing terms on new higher margin land, and we'll start to see the impact of this in this financial year. Being the only major house builder to achieve a five-star customer service status is a clear demonstration of just how far we've come in driving up quality. We're now starting to see the significant savings from getting it right first time. We recognize we still have a long way to go to rebuild profitability, but believe that the group is well-positioned to deal with the current market uncertainties. Turning to the market, this chart takes a look at the key indicators: price trends and mortgage approvals. Overall, during our financial year, we saw an improvement in market conditions. September through to December saw a continuation of the strong trends we saw in 2009. In January of this year, we saw a small step down in the level of mortgage approvals, but they have remained stable since then. As expected, house price indices from the Halifax and Nationwide followed a similar pattern again, showing the clear linkage between mortgage approvals and house prices. With stock at low levels, the industry now seems to be universally focused on price optimization. This summer has been typically quiet, but trends have been in line with expectations, and prices have remained firm. Mortgage availability remains key, and while we have seen some improvement in the number of mortgage products available with a higher loan-to-value, their distribution is constrained by strict underwriting and credit scoring. The number of products still remains a fraction of what it used to be. We continue to see the loan-to-values offered on new build at levels below those on second-hand properties, and the loan-to-values on flats step down even farther. This opens up a significant challenge for buyers' deposits. Our objective remains to achieve parity between the new build sector and second-hand. But for the moment, we continue to manage our business within these constraints whilst maintaining a constant dialogue with lenders. Turning to our sales performance in the year. With the internet now our most important sales channel, we have increased web leads by 37% on average during the year. The peaks and troughs reflect specific marketing campaigns. Considerable effort has gone into redesigning our websites and to make changes that reflect changing customer behaviors. Turning to visitors, trends have been very similar to last year. Whilst year-on-year we did not see an uplift, we have seen a higher quality of visitor with higher conversion and lower cancellation rates. Moving to reservations, the average private rate per week per active site was 0.5, up 4.2% on the prior year. Rates were consistently ahead for most of the year, although the first half showed stronger growth than the second. The major variance at December reflects the bulk sales to investors in 2008, targeted at reducing stock and debt levels. This year, we have been focused on driving margin and not volume. If we were to strip out our bulk sales from both years, then net private reservations per active site were up around 19%. Total completions were down, reflecting the significantly reduced number of outlets. There is more detail on outlets in the appendix, and I will show you later how we expect to see this downward trend reverse this year. David has already given you a lot of detail on product mix, but let me take a moment to look at buyer type. Year-on-year, the biggest shift has been from investor sales to shared equity. Investor sales represented just 10% of total completions compared to 25% in the prior year. While shared equity was 27% in the year, up from 11%. This reflects the constraints on mortgage finance and high loan-to-values. In particular, first-time buyers' ability to fund deposits. Of course, a refusal on our part to discount more heavily. Of the circa 3,000 completions from shared equity in the year, 55% were from the original HomeBuy Direct scheme, which as you know, comes to an end this month. 43% were from our own products, Headstart and Dreamstart, with the balance coming from the new Kickstart programs. This year, in the absence of a new HomeBuy Direct scheme, we expect at least 450 to be delivered from the original allocation, up to 500 from Kickstart, with the balance coming from our own schemes. Looking ahead, our key priority remains to drive profitability. As we've said before, our areas of focus are to maximize the prices we achieve, driving volume growth through increasing the number of outlets and not from higher sales rates, improving operational efficiency by continuing to work smarter and not just harder, and finally, targeting land purchases that we expect to deliver attractive returns in the future. Let me look at each of these in a little more detail. Our management teams locally are focused on achieving the maximum value from each and every sale during the year. These efforts have helped us drive the significant uplift in average selling price reported across all regions. Here is an update of the chart we presented in February. It shows the cumulative difference between the price achieved on both reservations and completions versus the expected selling price set in our systems as at the 1st of July 2009. To get the best indication of growth, we have stripped out any inflation assumptions. Total reservations were just over 4% ahead of target prices, whilst completions were around 3.5% ahead. The lag between the two reflects brought forward sales as at the 1st of July 2009, but also the impact of some down valuations. For reservations, the increase against budget has been relatively stable. We saw a strong step up at the beginning of the year, which has been maintained throughout the second half. We will continue to have a very firm grip on what is sold each week by region, by division, and by development. To drive price optimization in the year ahead, we've been working hard to ensure we have the very best products on our new sites. For example, we introduced a new improved housing range for David Wilson in 2009. The benefits include an improved layout, such as larger family kitchens and better equipped bathrooms, as well as changes to the external elevations. This is already adding value. As an example, our Papplewick Lane site in East Midlands was replanned using the new product. With the change in market conditions, the original planned product became unviable. The site opened in March 2010 and has been selling extremely well, exceeding our expectations. Our new standard David Wilson range in Scotland is another example where we have 25 new house types, which have been rated extremely highly through our online customer market research program. Perhaps the most important product range over the last 12 months has been the introduction of our Aspirations product. This was introduced as a direct response to the restricted levels of mortgage lending on flats, resulting in some schemes being no longer viable. It is a small housing range that fits onto the same footprint as our standard flats. It's been used in replanning 49 sites with a total of 1,286 units across the country. The resulting product is much more saleable as it has increased the margin by up to 10% on specific sites. All of this has been backed up by new and more targeted marketing campaigns, and certainly our experience to date is that with the introduction of new products and the opening of new sites, we have achieved better pricing. This year, we are forecasting to open 206 sites across Britain, with 153 sites expected to close. That is an addition of 53 net, taking the June 2011 forecast active sites to around 390. Average active sites for the year are expected to be around 370. Here we have detailed the site openings by region. Perhaps not surprisingly, 62% of the net site additions are expected in the south. In particular, we are very well positioned in London with sites forecast to almost double in the year from 11 to 20. We are committed to driving business growth through increased site openings, but I stress that we will not chase volume to the detriment of price. Therefore, whilst this is our expectation today of site openings, we will continue to shape the business according to overall market conditions. The chart on the left gives you an indication of the profile of site openings during the year. As you can see, there is a greater weighting to the second half. As a result, we expect completions for FY11 to be more second half weighted at about 60% of the total. By product excluding London, 83% is expected to be houses versus 17% flats, highlighting the continued change in mix. Turning to operational performance. Here I have tried to give better visibility of our cost structure and have used a square foot measurement to aid comparison. As you can see, land costs were up significantly year-on-year, reflecting the level of impairment used in the prior year as compared to this year, but also changes in product mix from flats to houses. Total development costs, which include all materials, labor, infrastructure, and Section 106 costs, were down almost 5%. As you will remember, we started our cost savings program back in 2007, so much of the big savings were achieved in prior years. If we look specifically at build costs, so building material and labor, across our standard house types, on average, they have decreased by around 15% peak to trough. We will continue our efforts to reduce costs wherever possible through better sourcing, product innovation, and increased quality. Turning to land buying, our strategy has been to take advantage of attractive land opportunities, but through a very tightly controlled process. Every land proposal must meet our minimum hurdle rate of 20% gross margin and a 25% return on capital employed based on operating margin. More recently, we have upped the margin hurdle rate to reflect our success last year. As at the 30th of June 2010, we had agreed terms on GBP 527 million of land, equating to 96 sites, just over 13,300 plots. Of this, 66% of the value is in the south, and 77% of the product is houses. We will continue to pursue land opportunities where the returns exceed our new hurdle rates, but we do expect the rate of land acquisition to slow given our success over the past year. Here you can see further segmentation of our land bank. Within owned land, there is impaired land, non-impaired land old, and new land, which means that we have purchased it since mid-2009. Across the top of the bars, we have detailed forecast ASP and the expected trading margin by category of land. The one detail we have not given to you before is the margin on the non-impaired old land, which is circa 15%, and we believe this is probably higher than anticipated. But with overall gross margin at around 11% in the second half of FY 2010, we do have confidence in these estimates. Whilst our hurdle rate on new land was set at 20%, the forecast margin on that acquired to date is ahead of that figure. Here we look at the forecast delivery for each segment, a slide I think most of you rated as a firm favorite in February. For the current financial year, we are anticipating around 37% of completions coming from impaired land, 49% from non-impaired old land, and 14% from new. Looking out, we expect the percentage from new land to increase, whilst that from impaired land to significantly reduce. Unidentified land is exactly that. It would be fair to assume that the vast majority will come from new land acquisitions. This is clearly an estimation and carries the usual caveats. However, it is directionally correct and underpins our view that our future profitability is not fundamentally constrained by impaired land or future price inflation. Let me highlight some of the sites we will be opening in the current financial year. They represent a broad range, but importantly, are all from newly acquired land, so forecast margin and return on capital all exceed our hurdle rates. The Limes is a more traditional development in Lindfield, West Sussex. It is a very desirable location, offering village life surrounded by open countryside, but with fast access to London. The development is for 120 units with a mix of product from two-bed coach houses up to four and five-bed detached. The land was purchased in late 2009 with a small upfront payment, and the balance is spread out until mid-2011. The show homes were launched in mid-July, and the sales rate to date has been encouraging. Shard End Urban Village is a regeneration project in Birmingham and is a great example of how our partnering philosophy has been used to create truly mixed use and sustainable communities. Barratt originally selected as a preferred developer in 2008, the downturn caused the scheme to become unviable. Since then, the land cost has been substantially reduced, and we have worked with stakeholders, including Birmingham City Council, to secure a significant level of grant funding. The site will include 191 units comprising two and three-story buildings in a mix of flats and houses. The benefits of the scheme include the provision of much needed regeneration, along with the enhancement of Barratt's reputation with the largest local authority in the country, which will hopefully lead to future public sector land initiatives and partnering arrangements. Lastly, Renaissance is a flagship project to regenerate the heart of Lewisham. It is a great example of our approach in London, where we work closely with the local authorities and public sector agencies to secure land and investment opportunities. Here we are working with landowners and Lewisham Council, and the site will deliver 788 new homes as well as a state-of-the-art leisure center. Located adjacent to Lewisham mainline station and the DLR, it has great transport links and will attract both local buyers and people working in Canary Wharf and the City, which are just minutes away. We are on site now and expect strong sales to start this autumn. We are also continuing to focus on our strategic land position, given its long-term benefits. As at the 30th of June 2010, we had around 60,000 potential units of strategic land coming from 11,000 acres. Our strategic land portfolio is also reaching a greater level of maturity, and we anticipate approximately 15,000 units being consented over the next couple of years. Clearly, we would be purchasing these on a phased basis. We continue to target 25% of our total output being delivered from strategic land in the medium term. Turning to government funding, the spending review is due in October, and there are uncertainties around its impact on funding initiatives and social housing. However, given the high level of contractually committed funding for the short term, we do not expect any material impact in this financial year. Specifically, all of our funding on Kickstart 1 and 2 is secured. We are working closely with government to try and secure a new HomeBuy Direct style funding package. On social grant funding, as a broad rule, approximately 75% of social housing is subject to the grant at an average level of around 25%. For the current year, the significant majority of our grant funding is contracted. Looking ahead, if we do see grant funding significantly cut, we will seek to replan sites and/or renegotiate other Section 106 obligations. Of course, new land acquisitions would typically have conditionality around grant funding. On planning, we have full consents for 95% of our current year's volume and 98% if you include outline planning. For the year after, full and outline consents totals 83% of forecast volumes. We are committed to driving localism internally and are working with government to ensure the optimum operating framework. We will also work hard to secure alternative sources of new land. As you know, Barratt was appointed as one of only two national house builders to all three of the HCA's regional delivery partner panels, and there are now over 30 local authorities using the scheme. Last week, we announced that Plymouth Community Homes have selected Barratt for the first phase of regeneration of North Prospect, a project which will generate around 250 new homes and refurbish 60 existing homes. This is one of the first sites to be awarded as part of the delivery partner panel and represents a great achievement for Barratt. We look forward to similar successes across the country in coming months. Turning to current trading, visitor levels are similar to the prior year. Net private reservations per active site are slightly down, but more than anything, this reflects a particularly strong start we had to the prior year. The sales rates we have seen for the year to date have been in line with our expectations, and we have seen no downward pressure on pricing. Forward sales as at the 5th of September were up 22% on the prior year to GBP 847 million. This equates to 5,300 plots, of which 71% are contracted. To outlook, we have delivered a strong performance in the year and are encouraged by the continued market stability, but we remain cautious. Mortgage lending is at an unusually low level, and the overall general economic outlook remains challenging. This year, we are targeting total completions at 5%-10% higher, driven by increasing outlets and not higher sales rates. Our focus continues to be on optimizing pricing rather than pursuing volumes. We expect to see a further shift in product mix, with houses forecast to be at least 65% of total volumes, resulting in a modest increase in average selling prices. Our key priority remains improving group profitability, and I believe we are well-placed to secure further margin growth. Thank you very much, and I'll now hand back to Bob for questions. Thank you, Mark. We have both Steven and Clive with us today sitting in the front row if there's any questions of direct operational activity. Before you ask your question, could you just give your name and your firm, please? The Q&A is being taped. Many thanks. So questions, please. Yes, Harry. Harry Goad at Credit Suisse. Can you talk a little bit about the land market, whether you're seeing asking prices coming back a bit, what the industry is doing on hurdle rates, which regional markets have still got momentum and which haven't, and so on? Yeah, I think the land market has continued to be more challenging in that there are far more people bidding. If you look at specific areas, of course, London is incredibly difficult to buy land in because it is a very tough market, and there is a real shortage of supply. But overall, I think we continue to see a more challenging market. Certainly in terms of the success we had last year, where we faced very little competition, certainly in the early days. What we're tending to find, it is more difficult, for example, to achieve deferred terms. Clearly, we're not prepared to breach our hurdle rates, so we are losing more than perhaps we were originally. And of course, we are seeing in house builders' announcements that more people are now addressing the market. So I think that's our expectation. I think for that reason, and because of the success last year, the idea of increasing our hurdle rates and just taking half a step back keeps the discipline on making sure that we're only investing in first-class land. Yes, ma'am. Sorry, it's coming, it seems, coming out the left-hand side. Right-hand side, sorry. Yes. Glynis Johnson, Deutsche Bank. A couple of questions, if I may. First of all, you talked about how your reservations peaked and troughed according to your campaigns. I wonder if maybe you can give us a little bit of color on what your campaign schedule is, maybe going in September, October. Second of all, in terms of refinancing, given your very strong debt paydown that you've achieved, your term loan, as you call it, your revolving facility now looks very much out of sync in terms of how much interest you pay on the debt you actually have. Has that brought forward the urgency to refinance? Next, you talked about the increased hurdle rates on your land acquisitions, but we're still talking 20% minimum gross margin it appears, so where has the increase actually come? Lastly, just in terms of the Limes, you talked about how the Limes was making a gross margin above the hurdle rate, yet we see a plot cost to ASP of 31%, so maybe you can give us a little bit of detail on that one, too. Thank you. Okay. Right. Well, I'll start with the first one, I guess, David. You'll then take over on refinancing. On the campaign schedule, you know that the standard cycle of any house builder is that there is the autumn and spring selling season. So this week, we've launched our national campaign, which is very much focused on shared equity, focused on first-time buyers, but also part exchange. We are seeing the part exchange market just starting to improve. Of course, there's been a lot of commentary that people are putting their houses up for sale. I think the natural consequence to that is that we are seeing more demand for part exchange. So we're really focusing very heavily on that. That will be local radio, a lot of local campaigns going on with events on sites, but also national media where appropriate. But as you might imagine, a lot of our money has now been spent online, so pay per click, email campaigns, and those sort of activities, which do enable us to drive our visitor levels on a week-by-week basis. In fact, the great thing about online is that you can literally, within two weeks, change the profile of visitors on sites, and we can actually calculate what we need to invest to drive the visitors up with a normal conversion rate, what that means in terms of completions. Because the market is challenging, remains challenging, we will continue to front-end the marketing spend to really get the momentum going into the September season. But we do believe, certainly if you make a comparison with where we were a few years ago, we have far more levers to pull to drive demand to get people to visit our sites. And we know then that the quality of our salespeople and our sites themselves enable us to deliver good conversion rates. Do you want to pick up refinancing, David? Yeah, certainly. Yes, Glynis. Just in terms of refinancing, when we refinanced last year, you recall that we signed our refinancing and drew down in November 2009. Since then, we have traded maybe slightly ahead of our expectations. So no, I do not think that anything to do with the net debt position or term would result in us accelerating any plans to refinance. We clearly have a margin on the term, and we have margin on the RCF facilities, and there is a differential margin on those facilities. We are very comfortable, particularly the margin on the term is attractive to us. Just in terms of refinancing overall, we recognize that the facilities expire in 2012, and we see that we have a requirement to refinance in the second quarter of 2011 in advance of the annual report and accounts to June 2011. Just on the gross margin, as Mark mentioned, we have recently increased the hurdle rates, but that was at the beginning of FY 2011, so it commenced really effectively 1st of July, where we moved the hurdle rates up. And as Mark said, that relates to gross margin, not specifically relating to return on capital. I think on the Limes, the plot cost to ASP ratio at 31%, that is not inconsistent with what I have said in terms of there being a strong correlation between the plot cost and increasing ASP values. On the Limes, there is not significant additional costs in terms of remediation costs, for example, and it absolutely is achieving the required hurdle rates. Just to reinforce that. Clearly, as an average, the focus on plot costs, we all understand it. What these three examples do show you is that you can come up with any number you like, depending on the site. If you have a greenfield site with very limited costs associated with bringing it to life with a high ASP and relatively low social, you are going to get a high plot cost. Whereas if you are talking about urban regeneration, most of the land costs will be the leisure center, for example. They are very different. I think as an example, these show us just how variable it can be. The key thing is the hurdle rates, and the discipline on hurdle rates is what enables us to buy it right rather than just looking at plot costs. Any other questions? Got one up here. Thanks, Wendy. Good morning. It is Mark Haigh from Merrill's here. Three unrelated questions, actually. Firstly, if you look at that slide on strategic land, there is obviously a big jump up in your forecast conversion rate over the next couple of years. I am just curious where the 15,000 is coming from. Are we talking about a couple of very large sites there, for example? Secondly, I am presuming the investor buyer market, that sort of 10%, that is basically all in London. Finally, if you look at the reservation rates, particularly over the past, I suppose since the 1st of July, is there much variation regionally? Are you seeing a greater sort of north-south variation in that reservation rate? Okay. On strategic land, historically our land has been quite lumpy. You're right, you tend to get big approvals coming through. What we've done over the last couple of years is really try and focus on perhaps shorter term strategic land, I know that's a strange way of describing it, and also potentially smaller sites. We will start to see, I think, more of a flow coming through in outlets. There is no doubt that what we're now seeing is the maturity of, if you like, the historic land coming through, which is quite lumpy. Which is why what we will tend to do is to buy that over a period of time or potentially trade it out. I mean, what we obviously can do, is sell part of that into the open market and then sort of recycle that, and we get some benefit from that. But the focus continues, and we've spent the last 12 months focusing on rebuilding the strategic land team because we do think it's important going forward. But they have had some particularly good successes in terms of getting planning through. And when you look at the backdrop of planning and all the concerns about localism, I think it suggests that we are still making good progress there. That might change going forward, but I do think that we've upped our capability to make sure that we continue to make progress. I think on investor buyers, I mean, mostly they're cash buyers. I mean, clearly the buy-to-let mortgages have largely disappeared. And yes, London is still the strongest market, but places like Edinburgh, for example, you would still see investor buyers, but it is primarily in those sort of locations. In terms of reservation rates, I would say that geographically, are we seeing a north-south divide? Actually, we're seeing a reasonably consistent performance right across the piece. I think if we look at last year, there was definitely a shift from north to south. But I think, as we stand with only 10 weeks of data, I would say that it's pretty even across the piece at this moment. Thank you. Okay. Clyde Lewis, Citigroup. Four if I may. One I think is a very simple one. Just what happened at the end of June in terms of reservations? You do not seem to have done anything. That was the first one. Second one, I think probably for David, in terms of the amount of land impairment usage that went through the P&L last year. Thirdly, in terms of what I would call sort of buyer help, one of your peers has obviously come up with, I feel like a 90% loan-to-value type mortgage product. Where are your thoughts on that? This is Bovis. This is Bovis, yeah. The Bovis Barclays JLT deal. Yep. Also sort of just give us a little bit of an indication as to what you think might happen in the commercial business in the coming year. Okay. End of June, same at the end of December actually, what you will see is a big focus on delivering the completions that we have already contracted to deliver, and not as much focus on sales. Sales always dies off at the end of December and the end of June. Of course, what you also do is you cancel out. A lot of the cancellations tend to come from that period because you get to the end of June, and if you haven't completed, you cancel it out. Some of them come back. So you get that distortion always at the half years, and it's no more than that. Obviously, when we talk about reservation rates and cancellation rates, they are the average for the period, so they take full account of that sort of natural drop-off. I will cover the other two and then go back to David for impairment. In terms of buyer help, we have looked very carefully at the JLT scheme. In fact, we were talking to them for quite some time. As far as we are concerned, it is not attractive against the shared equity products that we offer today. But that's not to say that it couldn't become attractive if the terms change going forward. So that's something that we keep an open mind to. We are looking at a number of alternatives to sort of try and bridge that gap between the loan that the lenders will make of, let's say 75%, 80% and 90%. There are a number of other schemes coming forward. I think the problem is time. These things will take time to come through. But I think as an alternative to assuming the lenders will come back to the market, and a continuation of HomeBuy Direct and utilization of shared equity, we do accept that there are other products, the older mortgage insurance guarantee. I think those will come back, but I think it's going to be a slow burn. But that's the first example, which is a positive. Now let's see whether we can encourage other examples that perhaps work better for us. I think in terms of the commercial business, a lot of the focus is on, as you might imagine, extracting value from the current asset base. They have had a very good year because we signed a couple of big design and build contracts, which have delivered some real value. They are working very closely with the house building business, and we have one scheme in Basildon where we have effectively got a joint preferred developer position on both residential and redeveloping the town center. There is another scheme like that which we are into the final stage of. They have worked very hard at trying to help us liberate value from the housing piece by, for example, talking to the supermarkets, and we have some opportunities there. But also looking at the commercial land bank we have and seeing whether we can get more residential in there. There are some good examples where we have been able to deliver that. Bottom line is it's not going to make a big difference to the group in terms of its overall performance, but it is actually adding value, I think, right across the chain, which I think is the important thing at the moment. It's working quite hard. Just on land impairment, we've obviously said that the original impairment was GBP 583 million. As at June 2010, we have around GBP 270 million of impairment remaining. In terms of utilization, perhaps around GBP 70 million of utilization over the 12 months. So the run rate of utilization has slowed significantly. Two over here. Thank you. Alastair Stewart from Investec. Two questions, please. On slide 37, you break out the build cost per square foot. It works out at about 65%. I can't remember if you broke it out on the same basis in H1, but was there much variation between H1 and H2 in terms of build cost to selling price? The second question is, on the sites with deferred payments, how much leeway do you have to walk away if volumes dry up long-term and/or prices weaken? What's the sort of pick up or shut up type clauses with land vendors? Is there much variation in that? I think on the build cost point, I think we've reached a level of stability, we would say. We've pushed labor material costs down very dramatically. We did that very quickly. I would say that, I don't have the numbers specifically, but I would say that the ratios are probably pretty constant to first half, second half. We continue to benchmark our 25 divisions for standard house types, and where they're out of line, they continue to get help to sort of come back in line. They're still tweaking around the edges. I think probably the biggest opportunity now is around replans. More perhaps on Section 106 is certainly if we have challenges on particular sites. Actually, the quality piece is making a material difference as well. When times are tough, you really focus on the detail. We have identified quite substantial savings, which are now coming through the P&L about getting it right first time and making sure our suppliers get it right first time. The rework costs historically, I think have been quite high in an industry that's been racing to deliver. We've got a lot of costs out there. I think in terms of walking away from sites, it'll depend on the contractual position, as you know. Some sites will have an ability for us to walk away. It's often related to the sort of planning that we get, obviously. Most of the stuff, as you know, we buy is conditional on planning. If there are issues around planning, then we have the option to walk away. Obviously, some of them we are contracted, and we're on the site, and we're off and running. I think the only option there is to go back to the local authority and to the planners and say, "This market isn't working for us. We now need to change the site." I think that's really the approach. I don't think I can give you a specific on what can you walk away from and what couldn't you. On that basis, I know that you can walk away based on planning issues. On market issues, is there much leeway if the market just tanks and doesn't pick up for a long time? Do you have to pay up? It will depend on the contract. Some of them, we have the ability to walk away. I would say that probably more than 50%, where we have a contractual commitment, I think the conditionality is really around planning rather than anything else. Sure. There is one up front, Tina. Chris Millington from Numis. Just two, if I may. The first one is just around shared equity, given HomeBuy Direct starting to come to an end. Really just a bit of detail there. First of all, what the current balance sheet value is net, what it was gross upon taking the reservations. Also, is there a level which you would regard as a peak level in your balance sheet so you do not actually get too much capital tied up in a non-performing asset? Then secondly, if I may, just to get some detail of a usual timing for the autumn pickup in sales. Clearly, last year was not a representative year. Can you just give us some feel as to what you would usually see there and what the quantum usually is? Okay. I will do the third one first, and then I think David can come back on the other two. We would normally expect the pickup to be sort of second week of September. Clearly, the timing of this meeting is not great because we cannot really give you any insight. The only minor insight you can give is that Scotland comes back earlier, so you can see a little bit of a movement. You cannot come up with a trend based on one or two weeks. We would normally expect, I guess, a 10%-15% in a good market uplift. That is the sort of level that we would be hoping to see. Obviously, we cannot report on what is going to happen till it happens. On shared equity, the balance sheet position as at June 10 is that we have a net investment in shared equity of GBP 136 million. As I just covered briefly in the presentation, that's up by around GBP 50 million from June 2009. The gross value on shared equity, round about GBP 215 million. Clearly, as you would expect, there is some movement on those underlying balances. Clearly, people move house, shared equity balances are redeemed. In terms of mortgage availability and the interrelationship with HomeBuy Direct and Kickstart, we are prepared to invest a similar amount in our balance sheet in the year to June 11. We'll clearly continue to look at what's happening in terms of mortgage availability and where we should go in the year to June 12. I think that for us, it's clearly a question of weighing up the utilization of that as a sales incentive and any risks associated with the carrying value. But given that it is so heavily provided compared to the gross value, I think we're comfortable there's a minimal risk associated with the carrying value, and therefore we're prepared to continue to invest. I mean, because the reality is we're not a lender, and therefore, as a principle, this is not something we'd want to do forever. So back to the point, we are looking at other schemes that come along, and if there are alternatives to shared equity that we think are better, more effective for us, then that's where we'll be going. A lot of focus on that. But I think as David says, at the moment, we've got to continue to provide the support so we can deliver the sort of performance we're expecting. Is there a final question? Sorry. Okay. That was good. We'll start with you, Mark. Then we'll go to Mark Inter. Yes. Mark Stockdale. I've got three, if I may. First, on Slide 48, you've obviously given us your forward order book, and it's 159K ASP in there. As ever, just interested what you're seeing as your likely ASP because obviously you've got social in there. You've got a bit more houses coming through. You've got more geography, i.e. what X percent up on the 174 are you actually looking at? Secondly, just going back to the strategic land. What's the gross margin target that you aim for in strategic land? I obviously assume that it's above the 20, but I presume you would hope to get even better on that. I wonder if you'd just go into where actually the variances you can pull through if you do it well. My third one was, within the land bank in the year just ended, can you tell me if there was any gains in volume numbers of plots through replanning? How many land sales you did in terms of plots? Thank you. Okay. I'll do the strategic land piece, I think, and perhaps David, you can come back specifically on ASP projections. Yeah for this year and the land bank. On strategic land, yes, the same hurdle rates apply. Otherwise, it wouldn't work. You'll appreciate where the land is optioned or we've got an agreement to promote, then we would expect to get the land at below market value. That's where the kicker is and why we believe in the long term, there are a couple of percentage points of margin that some of our competitors have benefited from historically, and therefore, we would like to access that. That, if you like, is the pure financial basis. I guess the other piece that's important to me is that accessing the land markets, competing for land, we know that when the market starts to recover more fully, and house builders start to push quite hard on the land market, land prices will start to go quite fast. I think for us, it's about having access to the strategic land market, rather than just relying on having to run very, very fast in the operational land market. For that reason, 12 months ago, we said, "Look, we've really got to position ourselves well for strategic land as we come out of this current period." As I say, I think we've now got to that point where we say we've got the horsepower now to deliver what we want in the future. Just, in terms of forward order book and the ASP, we have said in the statement that the movements in terms of mix. We're expecting houses to represent around 65% of the total mix, and that will drive some modest improvement in terms of ASP. I think the other reference point was that I put up on the land bank slide that the ASP embedded in the land bank at current prices is GBP 180,000. We're coming off a base of GBP 174,000. I think it's kind of somewhere between those numbers. In terms of plot movements, I think the short answer is that the net effect of replanning and land sales is only around 70 plots. Thank you. Thank you. Watch your desk there. Gentleman in front. Thanks. It is John Messenger from RBS. It is just one, actually, if I could. Slide 37, which was the slide on operational efficiency, and then the one looking at the balance sheet, land bank composition, which was a couple of slides on 39. Can I just confirm, David, in terms of definitions here, that obviously, if we take the operational efficiency slide, you have got a margin there, which is the basic house building trading profit margin of about 12.65. Is that margin that is reported on that slide the one that we can compare with the margin that is implied on the land bank delivery slide? As in, just to understand, because one of them, the definition underneath is kind of. Well, it looks to me like it is site gross margin pre-site overhead, the first one. Pre-site gross margin pre-selling overhead. Yeah. Is the second one, the next one, basic trading margin, it is pre-selling admin and finance cost. Does that mean that the one on the land bank is taking some account of kind of the overheads that run through with your project manager, et cetera? Or are they comparable, ultimately? Yeah, I think they are comparable, yes. They are. The delta between that and the site gross margins, when we see the 12.65, think of the groups 9.1 reported, that 350 bips is really what we are talking about there is that site-based costs that are- That should be- running costs sales and marketing costs coming through against the sites. Brilliant. And site management or whatever. The site management costs should be in the trading margin. Yeah, should be both. Brilliant. Great. Lovely. Thank you. Okay. Great job. Kevin. Go ahead. Hello, Kevin Cammack at Cenkos. Sorry, I've got three, but two of them are just clarification. Sorry, I sort of missed some of the explanation of why the admin costs were jumping up this year. Just, again, I wonder if you could just go through that. Secondly, I can't remember, in terms of the forward order book, did you quantify how much of that is actually in social products? I assume that's quite a bit higher against you've given that forecasted percentage in the first half, so I assume that's higher. Just lastly, given what you've said about the site opening program and the comparatively low level of stock, could you give some sort of steer on non-land working capital movement? Which I assume is going to be an outflow if those openings go ahead. Yeah. You mean in terms of, for each site, there is a level of working capital upon them? I mean, yes. Clearly, as we increase the sites, then we'd expect to see some additional working capital coming through. But it's obviously only the incremental new sites. I think it's probably fair to say that on most of the new sites we're opening, the levels of working capital are relatively low. So we are focused, certainly a lot of the new land, they've got low upfront costs, so we tended to focus much more on that. I mean, examples like Lewisham, of course, wouldn't be in that category because that has got a high upfront cost. But that will certainly add something to working capital. But that's obviously the strategy that we said we would pursue when we raised the extra equity, focus on land and bringing through some new sites. In brief terms, are we talking, I don't know, sub GBP 20 million or sub GBP 50 million, or? Certainly sub GBP 50 million. I would have thought it would be between the two, I would have thought. Yeah. Admin costs, Charles? Yeah. Just in terms of admin costs. Okay, so admin costs in FY 2010, a little less than GBP 95 million. The guidance I gave this morning is that admin costs for FY 2011 could be up to GBP 110 million. There are two main components of that. One is in relation to increasing the admin costs as a result of increases in volume and the number of sites that we will be operating. There are clearly some direct costs associated with that. We obviously have some underlying inflation in terms of salary increase, which has been put through a level of around 2%. Then the third point was in relation to incentive payments, where if the performance targets are met, and I stress if the performance targets are met, then there would be some increase in the incentive payments. The private social mix is on the bottom of the slide, if I've got the right question. Your private's 46% of that figure, of the GBP 850 million, and the social is 54%. Just in actual unit terms, are the private development numbers in the forward order book actually up on a year ago or down? I don't know if you've got that number, David. Yeah, I've got it up. Sorry. Just bear with us. We are looking it up. Yeah. Yeah, I think I have got it. Yeah. They are pretty much the same as last year. Okay. Private is pretty much the same, and social has gone up. Okay. Well, thank you very much indeed. I think if you look at our performance through the board's eyes, we are very happy. In fact, very pleased with the way the executive have managed through this recession. They have balanced the ring-fenced investments that are essential to the future of the business with cost management. And we, as a board, are very comfortable with the way our executive team have executed. Looking ahead, Barratt is a stronger business. It is well-positioned with some great brands. And I think the demonstrable agility of this business through this recession enables us to deliver better results going forward, no matter what the economy or the politicians throw at us. So thanks very much indeed. Thank you.