Earnings Call: H2 2015

Oct 2, 2015

Good morning, everyone. Pleased to see you all this morning. Just to open, to say that this will be, sadly for all of you, this will be my last outing as CFO. We announced this morning that Neil Cooper will be joining us on 23rd of November. Steven's particularly excited about this, as he said it's our opportunity to get a decent CFO. I'll begin with an overview of our financial performance, and Steven will then talk about our operational performance. I'll then update you on the group's priorities, our medium-term targets, current trading, and of course, outlook. I'll just start by saying, it has been another year of excellent progress. We saw a good uplift in completions reflecting our strong sales capability and our robust build program. We improved our gross margin by 220 basis points to 19%, and we are well on track for our target for FY 2017 of greater than 20%. We increased our pre-tax profits by 45% to GBP 565 million. Our return on capital employed increased by 440 basis points to 23.9%. Again, very well on track for our target of return on capital employed of at least 25%. We are proposing a record level of cash return to our shareholders, equating to GBP 250 million or 25.1 pence per share. If I move on to the summary revenue drivers. Total completions, including joint ventures, were up by 10.8% to 16,447. Affordable increased to 18%, and that reflected the step up in site openings in the year. On guidance for FY 2016, we expect affordable completions to be around 17%. Total ASP increased by 6.9% to GBP 235,000, with private ASP increasing by 8.7% to GBP 262,500. Looking down the profit and loss, we increased revenue by 19.1% to GBP 3.8 billion. We delivered gross profit of GBP 714 million and a gross margin of 19%, as I said, up 220 basis points. Administration expenses were GBP 137.5 million. The increase is due to slightly higher headcount, underlying inflation, and the increased cost of long-term incentives. On guidance, we expect administration expenses to be around GBP 145 million for FY 2016. We improved operating margin by 40.8% to GBP 576.8 million, with an operating margin of 15.3%. Our share of joint venture profit increased to GBP 45.7 million, and all of that resulted in a pre-tax profit of GBP 565 million, up by 44.8%. If we look now at the joint ventures in a little more detail, completions from joint ventures increased to 848 units. On guidance for FY 2016, we expect to see a further step up in total joint venture completions to around 1,000. On house build, our share of joint venture profits increased to GBP 45.6 million in FY 2015. On guidance for FY 2016, with the step-up in completions, we expect joint venture profits to be around GBP 60 million. The next slide shows the pro forma profitability of the group after adjusting for joint ventures. Taking our share of joint venture revenues and operating profits, the pro forma house build operating margin would be 16% as compared to the reported house building operating margin of 15.4%. Turning to the cash flow, as ever, lots of numbers, and I will highlight a few. Our net cash investment in land increased to GBP 269.8 million. That reflects the step up in land payments as the business grows, and we maintain the land bank depth. On guidance, we expect the total cash spend on land for FY 2016 to be around GBP 1 billion. Of that, around GBP 500 million will relate to land creditors at June 2015 and the balance on other land expenditure. The increase in work in progress is a result of increased site numbers, some significant infrastructure requirements, a stronger forward sold position, and our desire for a smoother delivery of completions during the year. There is more detail on the work in progress in the appendices. Having utilized our brought forward tax losses, we are now paying cash taxes, and tax paid in the year totaled GBP 42.7 million. Our net cash from operating activities was GBP 186.1 million. Moving on through the cash flow, the movement in the net investment in joint ventures is a reduction of GBP 45.3 million, primarily reflecting a GBP 27 million dividend received from our joint ventures, combined with an overall reduction in investment. Dividends paid to shareholders totaled GBP 117.7 million, up from GBP 55.9 million in the prior year. Total cash inflow was GBP 113.4 million, and that produced a year-end cash position of GBP 186.5 million, GBP 73 million up on the prior year. Let's now take a look at how we're working through the legacy assets on the balance sheet. These comprise low or zero margin land contracted pre-2009, the associated work in progress, our equity share assets, and our commercial assets. Together, they totaled GBP 652.8 million at the 30th of June, down by over GBP 300 million on the prior year. We expect these to reduce by a further GBP 200 million in the current year, but the rate of reduction will slow thereafter. This runoff will further enhance the group's gross margin and return on capital employed. To give you a little more detail on the rundown of the old land, this chart shows the old land plots grouped by site size. You can see the significant reduction in plots achieved this year, down by around 3,500 to 7,000. We expect the runoff to make further good progress over the next couple of years, with old plots reducing to around 3,500 by June 2017. We will continue to seek to accelerate the runoff of legacy assets. Just to bring it all together on the land bank, the next slide gives you an update on the position at the 30th of June. 90% of the owned and conditional land bank is now new higher margin land. Across the top, you can see the progression in ASP. The total ASP in the owned land bank is GBP 252,000. This is a good point of reference in terms of ASP guidance for FY 2016. Finally, let me give you some key points of guidance for FY 2016, and I'll highlight a few of these. On volume, we expect around 15,750 completions, excluding joint ventures. Joint venture completions are expected to be around 1,000. On ASP, I expect to see further increases driven by mix and some underlying inflation. Interest cost for the year is expected to be around GBP 55 million. Cash land spend, as I said, will total around GBP 1 billion. We continue to target land creditors at around one-third of the land bank. As I said at the start, FY 2015 has been another year of excellent progress, and it provides us with a very good base for the current year. I'd now like to hand over to Steven. Thank you. Thank you, David, and good morning, everyone. Now for the operational aspects of the business. We've delivered further good progress in FY 2015. Our sales performance has been strong across all regions. We've seen positive momentum on pricing, driven by changes in mix and underlying house price inflation. We've stepped up new site openings, resulting in a significant uplift in completions. We are actively managing our cost base, and inflationary pressures, particularly on bricks and blocks, have moderated. The land market remains attractive, and we continue to secure excellent opportunities. Starting with our sales performance, the group delivered a private sales rate of 0.64 per site per week for the full year. In the second half, all six regions performed consistently well. There was no slowdown ahead of the May general election, and sales rates remained strong through to the year end. Our northern region was particularly strong, reflecting improved market conditions and the benefit of new site openings. London was also very robust on both our non-JVs and JV sites. This was driven by product launches and increased consumer confidence, especially following the stamp duty changes and no mansion tax. Our focus remains on retaining the right balance between value and volume, with our sales rate running at levels we are very comfortable with. Help to Buy remains an important support for the industry, and 31% of our completions utilized the scheme in FY 2015. We saw a modest reduction in investor sales down to 11% of completions. Turning to pricing, the group private ASP on legal completions, excluding joint ventures, was up 8.7% to over GBP 262,000. Underlying pricing, which accounted for around half of the overall increase, was strong across all our regions. In particular, we saw good improvements in East, a trend which has continued into this financial year. Pricing in London during FY 2015 was also robust, with the region seeing positive underlying price increases. The year-on-year decline in private ASP reflect changes in mix, and in particular, a significant contribution from our top-end development, The Courthouse in Westminster in FY 2014. We delivered a significant step-up in site openings in the year, opening 176 new sites compared to 136 in the prior year. This reflects our success in acquiring new land, achieving planning consents, and getting sites into production quickly. We averaged 393 active sites in the year, up 6% from 371 in the prior year. We're currently operating from about 390 active sites, including 16 JVs, and expect to see controlled growth in site numbers in the year of around 3%. In London, we have a balanced portfolio in terms of both product and location, and we continue to perform extremely well, with strong demand across all our developments. On the left, you can see our private reservations in FY 2015 by price bands. 67% had a selling price of GBP 500,000 or less, 28% between GBP 500,000 and GBP 1 million, and 4% were priced between GBP 1 million and GBP 2 million, with just 1% above that. In terms of pounds per square foot, 83% of our completions were priced at GBP 800 or less. In terms of geographic diversity, 11% of our London land bank plots are located in Zone 1, 30% in Zone 2, and 59% in Zones 3 to 5. The London market remains robust. We have a good pipeline of future developments and expect London to have another strong year. Turning to build costs. On materials, our supply chain has performed well. Looking ahead, we've secured our brick and block supply for FY 2016 and are expecting minimal inflationary pressure on build materials overall. On labor, we continue to see pressure on skilled labor supply, with shortages remaining location and trade specific. However, as wage rates have increased over the past 12 months, in particular for bricklayers, we've seen labor come back to the market. We're also increasing the use of off-site manufacturing options, reducing our dependency on labor. For example, we use timber frames in almost 1,000 homes, and we expect this to increase to around 1,300 in FY 2016. We're also using, increasingly, the use of room in the roof solutions, a pre-assembled roof with around 1,200 units expected to use it in FY 2016. So whilst we've seen some pressures on build costs, the areas of greatest pressure remain a relatively small percentage of our total cost base. In FY 2015, we saw total build cost increases limited to 3.5%, and we are expecting a similar increase in the current year. Turning to land. Our strategy is to run a fast asset turn model with a relatively short owned land bank, driving returns and minimizing risk. We continue to target a four-and-a-half-year owned and contracted land bank. All of the land in our owned land bank is consented, and we are on-site getting it into production as quickly as possible. On larger sites, we use both the Barratt and David Wilson brands to drive sales and maximize returns, and we have 76 dual-branded locations in our owned land bank. Our owned land bank is in good shape, and we are planning on all of our budgeted plots for FY 2016 and nearly 90% of plots for FY 2017. We are focused on securing our longer term pipeline out to 2020 and have stepped up the approval of strategic options. We favor options rather than buying pre-owned land without planning, so as to minimize risk and capital lockup, almost meet the group's hurdle rates for strategic land and have an expectation of gaining full planning consent. We assess the viability of these options twice a year and any deemed unviable are written off. We continue to see good availability of excellent land opportunities across all of our operating divisions. Whilst the Southeast remains the most competitive market, we continue to secure prime locations. And our land banks in both our London and southern regions are in good shape. In FY 2015, we secured nearly 17,000 plots across 114 sites and expect to approve around 16,000 to 18,000 this year. Turning to public sector land. Our skill in developing public sector land is a key strength to the group. With the government committed to releasing land for development, this is an excellent land source, especially in the more competitive southeast. In the year, 25% of our completions were from publicly sourced land. We expect this percentage to reduce slightly as we increase the delivery from strategic land. Our financial performance on publicly sourced land is strong, with the gross margin on new completed sites in line with the group hurdle and ROCE significantly higher. The high ROCE reflects the attractive payment terms which are often available. We are well-positioned to maximize opportunities from public land. The bid process is often complex and can require a very different approach from more standard operational land. More deals are awarded on overall credentials and not just on the price bid. We have a specialist team and are a member of the HCA delivery partner panels. We have the capability to deliver large, challenging schemes and have a great track record. In the past 12 months, we have been awarded 70% of the schemes we have submitted bids on. Let me show you some examples of recent public land deals. They are all very different in terms of location, size, and product, but will give you an idea of the quality of the sites we are sourcing. Catford Green, formerly Catford Dog Stadium, was acquired by Barratt London from the GLA through the delivery partner panel. It was a competitive bid process, and we were selected by the Mayor of London's office as a result of our technical capability, the quality of our design, and strong track record of delivery in London. We launched the site in July 2014 and completed over 200 units from the scheme in FY 2015. The gross margin is running ahead of our hurdle rate, with ROCE approaching 40%. This is a David Wilson Homes development in a fantastic location close to Edinburgh City Centre. The land was acquired from the publicly owned Scottish Water. It was a competitive process, and our success in securing the scheme reflected our track record in Edinburgh. It is an excellent site that again has sold well, with margins and returns significantly ahead of hurdle rates. Reflecting the strength of our relationship with Scottish Water and the quality of this development, we have secured the next Scottish Water site, also in Edinburgh. Finally, Hollygate Park is the former Cotgrave Colliery near Nottingham and is more typical of a large-scale regeneration scheme. The land was secured by our specialist public sector land team working with the local division through a complex bid process. It is another great development. The gross margin is running above hurdle rates, and the ROCE is particularly high at above 60%. Turning to strategic land now. In FY 2015, 17% of total completions were from strategically sourced land, up from 10% in the prior year. We are very much on track to achieve our target of 20% by FY 2017. As of June 30, 2015, our strategic portfolio stood at 71,600 plots across 284 locations. In the year, we approved 11,280 strategic plots across 44 locations, and we converted over 5,200 strategic plots into our controlled land bank across 35 locations, with an average site size of 150 units. Overall, we are seeing a 300 basis point margin uplift on completions sourced from strategic land acquired since 2009. Maintaining the quality and deliverability of our strategic portfolio is key. The chart on the left shows that nearly 70% of our strategic options are on deliverable sites of 250 units or less. These smaller sites will have less complexities surrounding infrastructure and fewer constraints on ownership, and they are likely therefore to achieve planning consent more quickly. On the right, you can see that 4% of the portfolio, equating to 2,700 plots, already has planning in place. A further 44% of our portfolio has achieved an allocation in an adopted or emerging local plan. This gives us confidence these sites will convert into the immediate land bank in a relatively short timeframe. The remainder will be promoted by the group, and we should be particularly successful if the local authority cannot demonstrate a five-year land supply of housing as required by government. Currently, 198 of the 292 local authorities in England do not have an agreed five-year land supply. To conclude, we have made further good progress in terms of operational performance in the year. We are maximizing sales opportunities whilst retaining a good balance between value and volume. We have opened a large number of new sites which are in prime locations and have great product. This will allow us to deliver controlled volume growth and help deliver higher returns for the group. We continue to actively manage our cost base. Our supply chain is working well, and cost pressures on build materials have moderated. We have transformed our operational land bank, and are focused on securing our land supply out to 2020. Thank you, and I will now hand back to David. Thanks, Steven. If I could start by giving you an update on the market, where the fundamentals are very attractive. There is a strong demand for homes across the country, and yet there is still a limited supply of new housing. The government's housing policy is clearly very supportive. In particular, the extension of Help to Buy through to 2020 is a real positive. The lending environment is very supportive, particularly for new build. We have seen increased competition between lenders, and that has resulted in rates on offer to our customers being at very attractive levels. As you heard from Steven, the land market remains very attractive, and there is a great supply of excellent opportunities that we are securing. We continue to see limited competition in the land market from the smaller house builders. The key indicators on the next slide certainly illustrates that these fundamentals are strong. Affordability at 29%, based on mortgage payments as a percentage of monthly income. This is running at very low levels. On borrowing rates, our customers can secure a mortgage with a 5% deposit with Help to Buy, at a rate of just 1.79% with Halifax. Despite a strong uplift in completions from the major house builders, housing supply remains significantly below pre-downturn levels. The latest figures show annual completions of 131,000 for the year to June 2015. On market share, the nationals, being house builders with more than 2,000 completions, have increased output to build more housing and have delivered over half of the completions. Supported by these strong fundamentals, we are performing well. We have made a lot of progress over the last few years to establish our leading operational strengths, and we have done so across all aspects of our business. We build the highest quality homes with an emphasis on design. We've shifted our product mix from flats to family housing to meet consumer demand and reduce risk. Our sales and marketing is industry leading. We have the highest levels of customer service. Our sales rates are at the higher end of the industry, and this supports our fast asset turn model. We have two leading brands, Barratt and David Wilson Homes. This gives us capability to dual brand sites, as Steven mentioned, and it also optimizes returns. We lead on construction expertise, and this not only ensures that we build excellent homes, but it also reduces cost. We leverage our scale on standard product and centralized procurement. Core to all of this is our targeted land buying that Steven has outlined. Our business is in great shape, but we are not complacent. As CEO, I will build on these operational strengths, and we will continue to execute with our disciplined strategy. I will continue to refine the business model, ensuring that we increase efficiency, we become even more profitable, and we optimize returns. Our progress towards delivering our medium-term targets has been very good. I am now focused on areas and opportunities where we can further improve our operational performance. We will deliver controlled volume growth through our 27 divisions, which will leverage on our existing operating structure. This is core to improving our efficiency and profitability. We are committed to ensuring best practice and efficiency across our business, and thereby continually raising the performance bar. On build management, our supply chain is performing well, and I am very pleased with the resilience of our build processes. In particular, given the uplift that we saw in completion volumes in FY 2015. We will continue to focus on getting it right first time. This not only helps to drive high levels of customer service, but it also improves efficiency and minimizes cost. Our land bank is in good shape. Our focus is now on securing our longer-term land supply out to 2020 and beyond. As Steven said, we aim to increase the participation of higher margin strategic land, whilst still delivering a significant proportion of public land. Finally, we believe that we employ the best people in the industry, and we invest in them. That not only ensures that we continue and retain those people, but it also ensures that we attract talent from elsewhere in the industry so we can continue to improve, and this will ensure that we deliver our medium-term targets. Moving on to those targets. These cover gross margin, return on capital employed, our land bank shape, our capital structure, and our cash returns. They provide very clear guidance as to the ongoing direction of travel of the business, and clear parameters within which we will operate. I will update you on each of them. In the year, we increased gross margin to 19%. That is up 220 basis points. The key driver to gross margin improvement has been the increased contribution from new higher margin land. With 76% of completions in FY 2015 from new land, we have made a lot of progress, but there is still further to go. Other positive margin drivers are the flow-through from mix and from house price inflation, and also margin lift on strategic land. Our target of a minimum gross margin of 20% is in line with our land acquisition hurdle rate. That's a level that I not only see as being achievable, but also sustainable given market conditions. We will see some constraints on margin expansion. Overage agreements, for example, where we will share some of the upside with landowners. Build cost inflation will also be a drag on margin. But we've demonstrated, and again, Steven has outlined this morning, that we feel we do have good controls around build cost inflation. Turning now to return on capital employed. I'm very pleased with the group's progress on ROCE. We've increased this by 440 basis points to 23.9%. Our target of at least 25% is again in line with our minimum land acquisition hurdle rates. As I highlighted earlier, our remaining legacy assets on the balance sheet stand at just over GBP 650 million. At nearly 18% of net assets, they remain a significant drag on our ROCE performance. As we see these assets run off and profitability continue to improve, we are very confident of achieving our ROCE target and driving it beyond the 25% level. I want to now update you on the performance of our new land to date. On the 142 sites, or nearly 10,000 plots that we have completed since 2009, we've achieved a gross margin of 21% and a return on capital employed of 38%. This shows the performance of the underlying new business. On capital structure, we are maintaining our disciplined approach. We continue to target land creditors at around one-third of the owned land bank. I am committed to continue to return the balance sheet to a minimal net cash position at the financial year-end. We expect to see some further reduction in average net debt, which was around GBP 350 million in FY 2015. We continue to target an average of around GBP 250 million, and we expect to make progress towards this in FY 2016. Let's now have a look at the capital return plan. On the ordinary dividend, we have a three times cover policy, and we have proposed a final dividend of 10.3 pence. Our first special cash payment of GBP 100 million will be made in November this year. This will take the total dividend payment for the year to 25.1 pence. That's up from a total of 10.3 pence last year. The three special cash payments will total GBP 400 million as a return to shareholders. Based on consensus forecasts, that gives a total cash return of GBP 987 million over a three-year period. So let me now bring you right up to date on current trading. It's been a strong start to the financial year. Our sales rate per site, per week for the first 10 weeks averaged 0.68. That's up 9.7% on last year. In terms of site numbers, we're currently operating from 390 active sites, up from 382 in the prior year. This results in average net private reservations per week at 257 for the first 10 weeks. That's up by 14.7% on last year. Pricing has remained very robust and we continue to see some underlying house price inflation. Our forward sales position is very strong. Including our joint ventures, it stands at GBP 2.3 billion. That's up 32% on the prior year, and we're now 86% sold for the first half. So what does this all add up to? In short, we are very positive on outlook. Consumer demand for new homes remains strong, and the mortgage lending environment is positive. The land market is attractive, and we continue to secure excellent opportunities. We are working hard to manage our cost base, and we are very focused on our efficiency and profitability. We are seeing some cost inflation, but build material costs have certainly moderated. All of this gives us good confidence in progress for FY 2016, and that we are very much on track to achieve the group's medium-term targets, whilst also delivering our capital return plan. As I said at the start, the fundamentals are very attractive. Thank you, and Steven and I will now be happy to take questions. I think on questions, it's the normal format. If you could give your name and your firm. No more than eight questions each. Harry. Yeah. Thank you. It's Harry from Credit Suisse. David or Steven, I guess a question around your negotiations with land vendors, particularly around land creditor agreements. Do you sense there's any, I guess, bargaining power on that side that is getting a bit tighter? Are you having to give away any more in those sort of negotiations, when you're thinking about the land creditor agreements? Thank you. Okay. Just one question. Maybe if I start and Steven can give a little bit more color. We've flagged over the last two or three years that London and the Southeast have been particularly competitive land markets with a number of bidders. I would say in London and the Southeast, we found it more difficult to secure land creditors. But with the exception of public land, where very typically we have seen deferred payment terms on public land. Steven, do you want to? Yeah. I concur with that, David. Certainly the larger sites that are probably 100 units, you'd be able to secure deferred terms. I think a lot of vendors have been realistic. There is a fair amount of land coming out into the market. There isn't a short supply. NPPF is working from our perspective, so that is sort of helping to keep land prices static and vendors reasonable in terms of requirements. As David says, most of the DPP type sites come with deferred terms as standard as part of the transaction. So that's the situation, Harry. Good. Thanks, Harry. We'll take the next question from Clyde. I'm going to avoid John at the front because John is doing some very, very big calculations. We're not going to ask him, allow him to ask a question. He's probably filling in his expenses, his taxi claim, I suspect. I think I've got five or six, but I'll maybe keep it to four. Maybe within the statement, I've missed an average debt number, but if there wasn't one, could you let us know what it was for last year? Steven, probably one for you in terms of product development and spec changes. Are you doing anything to the range at all at the moment? You haven't mentioned that today, so I just wanted to check on that front. You've touched on the deferred consideration from government-based land. Can you give us some idea as to where the GM stands on the government land, whether it's above or below your group averages? You've also flagged up the WIP changes. Are you trying to improve the, I suppose, the lack of seasonality or the big peaks in June and December in terms of completions? Can you just give us an idea as to how far gone you are with that process, and what implications it is going to have in terms of the WIP going forward, and whether there's further changes that might happen on that front? Okay. Thanks. Thank you. As you indicated, Stephen will talk about the product and the spec changes. He can also talk about the general trends in terms of gross margin on government land. If I do the two easy ones, the average in the year on net debt was GBP 350 million, and we are hoping to head towards around GBP 250 million for FY 2017. In terms of WIP changes, I touched on the WIP changes in the presentation on the cash flow. We have put the balance sheet into the appendices, just to cut down the amount of information in the presentation. What you will see on WIP is first of all, WIP has gone up substantially, and we see that as being primarily because of us providing a more even split in terms of completions. We do not see there being more WIP increase as a result of that. I think the second point is that you will also see that trade creditors has also gone up very substantially. So there is some offset in terms of cash flow. Stephen, you had a couple you wanted to add too? Yeah. Product spec changes. I suppose you have to bear in mind the Barratt and David Wilson ranges were introduced 2010, 2011. They have only started coming through in big numbers in the last two or three years, so they are still pretty new products on the market. We keep refining those house types. We keep looking at the specs to make sure it is appropriate with what customers are looking for. The big thing for us going forward is the scrapping of the Code for Sustainable Homes. So that will make a big impact on newer sites coming through. It was due to come in 2016. It has now been deferred by government. So that is a big impact. Again, on the house types, there is a bit more opportunity to perhaps build a bit more two-and-a-half story from where we were previously. We were building a lot of two story. We have developed some more two-and-a-half story house types to maximize on the site optimization. Gross margin, as I mentioned in my presentation, government land meets our hurdle rates. ROCE tends to be much higher. You have to remember on government land, we have total visibility of the margin. It is part of the submission. Book margin is marked alongside a lot of other things. So typically a government scheme would mark against quality of design, training programs, community engagement, legacy, and commercial terms. Each of those elements sometimes carries different weights, but it is not just on price. So very often you can be successful in winning a site from government without necessarily being the highest price. So that is the key to remember. Good. Gregor, thank you. On the phone. Gregor from UBS. I have got three questions. One is a simple one on the interest line. I think you are heading towards GBP 250. I think your guidance for cash interest is still GBP 27. I think there is still some legacy swaps and things like that. Is that something you are going to sort out to bring the interest expense on the average debt to a, I think implies obviously north of around 10%, which is quite high. That is the first question. The second question is just you have given a couple of examples of new land acquisitions. Obviously, some of the returns there were very high, 40, 60, I think were the sort of numbers. Can you give us an average for the past year in terms of the return on capital that you think you have acquired? Then the third question, which I think is a perennial one, which is one on optimal size of Barratt. I think you have just done 16,500 units, which is obviously relatively large. Where do you see the sort of optimal size? Is there a point where you sort of say, operationally it does not really make sense to grow the business anymore? Thank you. Okay. Right. I am going to have a go at all of those. Just in terms of interest. On the interest rate swaps, we have got historic interest rate swaps. The nominal value is around GBP 137 million. We continue to look at that as to whether it makes sense to cancel the swaps early. But we feel that really in terms of utilization of cash, we are better to utilize the lack of the cash on land spend and the sort of net present value returns of canceling the swaps are not attractive. They are likely to continue to run through the P&L through to maturity. There is a little more information in the appendices in terms of the swap cost. In terms of new land acquisition and the average for new land acquisition in terms of return on capital employed, that I can confirm that is above 25%, Gregor. But we wouldn't give any more color in terms of land intake on the land acquisition. In terms of optimal size, I think we were very clear when we set out our medium-term targets and our capital return plan that we didn't want to get drawn on what we felt was the maximum number of units for the business. We don't feel that that is appropriate. What we've said is that we've got 27 divisions. We can deliver controlled volume growth from those 27 divisions, and we've guided on volume growth for the current year. Going forward, we would expect volume growth over the next two or three years to be in the order of 3% to 5%. So, that's kind of our view on volume. Thank you. Thanks. Will Jones from Redburn. Three as well, if I could, please. Firstly, can you help us understand the volume guidance for this year a little better? It looks like just under 2% growth for the year, but clearly sites, sales rates, order book are all moving quite sharply in your favor. Are you going to deliberately hold back the sales rates per site per week from this point forward, or just grow the order book potentially at the end of the year if the current market remains good? Second, just around inflation. I think you mentioned 4% to 5% roughly was the like-for-like inflation impact to the P&L within the nine average selling price growth last year. Where are you trending kind of month on month at the moment in terms of the run rate inflation, and how do you see the P&L contribution for this year? Then just going back to the slide around new land completions, the gross margin of 21 on the sites to date. Would that number have been higher just for the stuff you completed last year? Is that 21 a blend of stuff that was lower initially and is maybe about 22 or higher just in the last year? Because I would have thought that 21 might start to look slightly higher at this point, and I doubt you can quantify it, but is there any impact you can draw out of the overage effect in limiting that number potentially? Thanks. Okay. I will, again, have a go at all three of these. If I just take first of all in terms of volume guidance. Over the last few years, what we have done at this point in the year is we have set out a view on volume guidance for our P&L and also the joint venture P&L. I think if you look back historically at the volume guidance that we have given at the beginning of the year, I think within small percentages, it has been pretty accurate. When we look at the current year, we are saying 15,750 through our P&L and 1,000 through the joint ventures. We recognize that in terms of build, as Steven has touched on, there are some headwinds on build, particularly with regard to labor availability. I think we are always going to take a fairly cautious view in terms of volume in September as to how things will move through to the year to June 2016. Again, if you look back at what we said at September 2014, we ended up being pretty close to where the outturn was for the year to June 2015. What we will be doing, and we did last year, is we will be working hard to push the legacy sites faster. That is something that we will clearly update on during the year in terms of progress. In terms of inflation, we said that the overall movement on ASP, it is around 50% underlying inflation and 50% mix. There has been some moderation of selling price inflation, which you have seen in terms of the national statistics. We would not comment just on the last 10 weeks. I would not get that granular. In terms of the new land, that is something that we have updated on. We published those new land statistics in terms of land acquired since 2009. I think that is probably the fifth or sixth time that we published it. You can see that we did publish one set of figures where the gross margin was 20. Implicitly, some of the gross margin coming through later has been higher than 20. As I have said before, we think 21 compared to 20 is good. That is a good beat in terms of gross margin. I do not think we are going to intake land at 20 and be publishing numbers way above that in a relatively short timeframe. Okay, we will go to Glynis next. Thank you. Glynis Johnson, Deutsche Bank. I have four, if I may. The first one, just in terms of the selling rate of your London joint ventures took quite a step down second half on first half. I am just wondering, in slide page 56, you give the expected completion timetables of your London joint ventures. What selling rate is that factoring in? Is it factoring in the average for last year? Is it factoring in the second half? Also, when I look at those two joint venture slides in terms of expected completion times, it looks like 2017 is fairly similar to 2016. Should we assume that GBP 60 million of profit guidance for joint ventures you have given us for full year 2016 also is applicable to full year 2017? Then just in terms of the investors coming down to 11% of your completions, do you feel that's because of the change that was put through in the budget, or is it just that was what was happening already and what came through in the budget, you haven't seen the effect of as yet? And then lastly, probably a cheeky one, actually. Some of your peers have given us a bridge in terms of margin development by each of the different drivers, house price inflation, less build cost inflation, the change in terms of provisioned land and so on. Particularly, I'm thinking about in terms of your own margin progression. What is the important element? Is it in terms of that runoff land becoming a lesser proportion? Is it more about just more equal build through the year and better utilizing actually the assets that you have? Okay. Thanks, Glynis. Right. I'd quite like to pass something to Steven, but let me start. In terms of London joint ventures, I think the short answer is that we'd be comfortable if you were taking GBP 60 million for FY 2016 and applying GBP 60 million to FY 2017. Clearly, where we end up on FY 2017 will depend, to some extent, on the outturn for 2016. The assumptions that would be made in the appendices in terms of the delivery profile is just going to be average rates of sale. The delivery profile, I think, is just to give an indication, and we've provided that over the last couple of years, that FY 2016 and 2017 will be fairly big years of delivery, and you're seeing that in terms of the step up of profitability. In terms of the investor sales, that is very much about direction of travel prior to the budget announcement. The budget announcement is limiting higher rate tax relief, and it's coming in on transitional rules through until 2017. So we see that there is some headwind, but it is going to be quite limited. When you actually start to look at investor sales and look at the proportion of investor sales that are cash only, for example, or the proportion of investor sales that have got very little leverage on them, or where people have retired and their marginal tax rate is low, there's a lot of places where people will not be affected by the changes per se. In terms of the bridge, the margin bridge, I will put that to Neil, that he needs to get his act together. There's obviously some moving parts. We said in the presentation that there is some more benefit to come in terms of the mix shift, but the mix shift from old to new land, we are obviously getting towards the end of that, and really by June 2017, we will be largely through that. So we've provided some details regarding where we are in terms of selling price inflation and also in relation to build cost inflation. But I don't think the mix part of it is a big driver. Okay, Charlie. Charlie, don't pass it across to John, okay? The calculator is still going. It is Charlie Campbell from Liberum. Just two from me. The margin in the JV came down in 2015 against 2014. I am just wondering what the drivers of that were. Secondly, on strategic land, you are making a virtue of the small sites in strategic land, whereas maybe others are getting onto larger sites. Is the discount inherent in that smaller? Do you get a smaller discount on small sites than you would on bigger sites? Okay. If I do the first question in terms of the margin in the JV, then Steven will pick up on strategic land. On the margin in the JV, it really is just site specific. We have clearly got a relatively small number of joint venture sites, whether they be in London or out of London. As we see more completions come from a particular site and less from another, it will increase or reduce the mix. So it is very site specific. Principal driver of that will be when we bought the site and to some extent the lag between when we bought it and when we are selling it in relation to house price inflation. Stephen? Yeah, on strategic, just by way of background. We are targeting the smaller 150, 250 unit sites as part of the NPPF. We see there is a big opportunity to target that size site, which we can see as a bolt-on to existing communities rather than a 5,000 unit urban extension, new settlement. Because of that, it is likely to go through planning much quicker. You do not have the major infrastructure, new bridges over motorways, and schools to build. So it is more about tacking 150, 250 unit sites onto existing communities. The discount tends to be relative to the planning status rather than the size. So we would expect to get a similar discount to open market value on a strategic site of 250 units as opposed to one of 1,500 to 2,000 units. So it is a similar discount level. Okay. John? Yeah, morning. John Belt from Barclays. Three from me, if I can. You've given us the pro forma operating margin, including the JVs on slide 6. Just wonder whether you might give us the pro forma gross margin as well. Secondly, timber frame, 1,000 units in 2015 growing reasonably rapidly. Just wondering how many of those, in very broad terms, were in Scotland, and whether the growth is spread evenly. Then thirdly, finally, I'm slightly surprised that you haven't raised your gross margin target for 2017, given where it is already, given the pace of growth, more strategic, less impaired, et cetera. Should we see that now as a conservative number, or are there any other factors and features to consider that we may have missed? Okay. If Stephen picks up the question about the timber frame. But if I start off in terms of the operating margin. We had a look at the targets in terms of both gross margin and return on capital employed. The targets that we set in September 2014 were put in place for the period through to June 2017. I think the key point is that we said that we are seeking to exceed a gross margin of 20% and to exceed our return on capital employed 25%. I think we felt that it just wasn't appropriate for us to be kind of tinkering around with those targets. We said that our land acquisition hurdles are a minimum of 20% gross margin and 25% return on capital, and we've always said that we're going to drive hard to get there quicker. So that was really kind of where we ended up with on the targets. In terms of the pro forma gross margin, we haven't given that. Clearly, we can give that in the future, but I think the answer is it would just be higher because we would see a gross margin coming through from the joint ventures, which would typically be higher, both at a gross and at an operating level. Is that because they're skewed towards London? Correct. Yeah, absolutely. Stephen? Yeah. On the timber frame, a couple of points to make. Yeah, the vast majority of that timber frame, probably 50-60% would be in Scotland. We have switched the Scotland production to timber frame. Having said that, the other 40-50% would be around other parts of the group. Our Southampton division, for example, is using a lot of timber frame. But I think more importantly, the other thing to take into account, we are using a lot of the room in roof structures I mentioned, which is effectively, you take the house up to eaves in brickwork and blockwork, and then put a prefabricated timber roof and gables on, and we're using that nationally. That is cutting out a lot of the brickwork labor, because bricklayers don't like going up to the top of the house to do the eaves and cut every brick along the roof edge. So we're using a lot of that nationally. Thanks. Chris? Chris Millington, Numis. Just wanted to ask, one, about the sites which completed post-downturn, the new sites, and whether or not there's a disproportionate exposure of public sector land in there, given the high ROCE. Second one is, I just wonder if you could update us where you are on the build program, perhaps looking at what KPIs you touch on there. And the final one really is just about London. I'm just wondering if you could just give us a bit of a feel for the kind of zonal performance post year-end. You've given us some useful stats on price per square foot, et cetera, but just wondered about what the current trading experience is. Chris, could you just clarify the second question? The second question was about the build program, just kind of where you are relative to last year in terms of what stage of build, whether it be completed units, semi-completed units, et cetera. Okay, fine. Stephen will take the question on the build program. In terms of the analysis of the sites that we've completed since 2009, I think we're in the fifth or sixth time that we've published that. We're now with a portfolio of around 10,000 plots. I think it's fairly representative. I don't think there's any public sector land or anything that's particularly weighting that. What we've seen, I think the last three times that we've published it, we've had a return on capital employed of 38 and gross margin of 21. So it's kind of reasonably stable in terms of the delivery. The third question, just in terms of zonal performance, and Steven highlighted in London that our land portfolio is quite limited in terms of Zone 1. You know our portfolio in terms of sites that we've talked about over the last couple of years, that we don't have a lot in the center of Zone 1. We've got some activity on the edges. We've also seen very strong trading trends in London over the last 10, 12 weeks. We wouldn't clearly publish detail on a site-by-site basis. But when you look at it, whether it's in Catford, Croydon, Nine Elms, we've seen strong sales trends. So there's nothing unusual. We're clearly reading lots about high-end London, but we're not really in high-end London, and we're seeing some very good sales trends in the sites that we are in. Steven? Yeah. Okay. On build, I'm not exactly sure what you're after, Chris, but hopefully this might sort of satisfy you. From a build point of view, all the sites that are producing units was in FY 2016 are now in progress, which is probably the first time we've been in that position. What our key priority this year is to try and get a smoother build program instead of the sort of peaks and troughs of doing far too much in May and November, December, which then puts massive pressure on our labor supply. We're trying to push a much smoother build program through. We feel we're in a pretty good position to be able to achieve that, as I say, because we're on all the sites producing for FY 2016. We're very much restricted by labor availability. We've got sufficient labor at the moment for our requirements. But nine months to go, it is a concern. But we have calls every week with the regional managing directors and divisional businesses to keep an eye on their build progress. And after 10 weeks, we're on program. Basically your unit- Exactly of construction would be at least in line with your hopeful volume growth. Absolutely. Yeah. Understood. Okay, we will go for John now. John Messenger, Redburn. It is only two, I promise you. One is actually just following on from Chris's question there in that when you look at kind of working capital and what the group is carrying, and this is maybe about the smoothing point, Steve, but if I look at what it did over the year, your working capital is up. This is with ex-land, so up 15%. But if I strip out all the legacy stuff, it was up 38, and you put about GBP 300 million in terms of the step-up in that kind of core, fresh for return activity. Given the volume guidance relative to that 38% jump, and okay, yeah, we can blend it with the historic dowry as well. Is that just a function of, look, you need more at the start of the year, given this whole issue of pressure on the build programs and getting a smoother profile? Is that GBP 100 million lower average debt almost part of that reflection, as in you will be lower because you are starting with a significantly higher level of WIP than might have otherwise been the case to make sure you can deliver? Second question was, on local authorities, you mentioned 198, Steve, as the sort of those without the five-year plan. If we dig behind that, how many of those look? Is it a significantly lower number when you think about how many L.A.s still haven't got five years by virtue of what you, Persimmon, and Taylor Wimpey have successfully got by way of forward supply so that they can turn around now and say, "Actually, we've now given planning consent, unfortunately under duress, on X number of plots, therefore we've already got our five years by default." Thanks. Okay. Thanks, John. If I cover the first one in terms of the working capital, then Steven can talk about local authority. Just on the working capital, I think first of all, we do need to split it into two elements. You're quite right in terms of the investment in working capital, but I think we need to split it into two elements. We clearly are growing the land bank slightly. We're holding the land creditor position fairly constant. But as volumes grow, we've got more absolute levels of land as we maintain cover at 3.5. So that's one element of working capital investment. I think the second element of it is when you look at the gross work in progress. And I touched on the gross work in progress, which is up substantially on a year-on-year basis. Without going into too much detail, we have got certain sites where we've taken on additional infrastructure. So we put the infrastructure in, a couple of bridges and so on, and it will take time for us to run off that investment. Secondly, we've got some more sites that we're opening, so year on year, we have more sites. Then thirdly, as you say, we are flattening the build program. And I think we're being reasonably successful in terms of flattening the build program. Any cost of carry on the work in progress is definitely outweighed by the benefits. And I think generally for the house building industry, if we can flatten the build program, we will take a lot of pressure off in terms of labor, and therefore we won't see such big increases in terms of labor cost. But to some extent, perhaps in the last six months, we've seen a little bit of pressure come off in terms of labor, certainly in some parts of the country. Steven? Yeah, on the local authority five-year plan, I guess what we're seeing, John, is that a bit like local authorities on the hamster wheels, so to speak, that this rolling five-year plan, and no sooner have they got the plan nearly there, they've moved on another year, and they find out they're not up to speed. We're a bit disappointed to see local authorities and 65% of local authorities don't have a five-year plan. Hence the government announcement that if they don't have a plan by 2017, they will start to intervene. So there isn't sufficient progress, but it's a great opportunity for ourselves to promote land in our land banks, our strategic land banks, to get it through. I think the interesting thing also is that over the last two or three weeks, there's been some interesting appeal decisions that have indicated that the five-year land bank is no longer a ceiling, and there are local authorities who have a five-year land supply. The sites aren't in the local plan. They've had an appeal on those sites, and the government have allowed those sites, and they have cited that a five-year land plan is not a ceiling, and they've approved the sites on the basis that it brings social and economic benefits to the area. So that's an interesting emerging trend we're seeing coming through from government appeal inspectors. Right. Kevin? Kevin, can I ask you this? I've just got two questions which are on strategy and I suppose putting on the new CEO hat as much as anything else. Bearing in mind the improvements obviously that have been and still being made to the balance sheet. The two strategy things I'd ask you, do you feel any differently today when you look at the return in the last two years specifically that have come out of the JVs in terms of the gross margin, and I presume that the return on capital. Do you feel any more inclined to, going forward, to take more ownership of the, not the existing JVs, but any future schemes of that nature that come through? Secondly, given the comments Frankly, every house builder has made this year about the continuing attractiveness of the land market, the benign nature of it, et cetera. Is it in your thinking that you may go beyond the 3.5 very short-term, 4.5 mid-term forward target on land on the basis that you might be in a golden period of when you can fill the land bank up? First of all, overall in terms of strategy, this is about a continuation of a strategy that Mark, Steven, and I set out over the last five or six years. Right. There isn't going to be some big change in strategic direction. If you look at the joint ventures, I think we've talked before that the best illustration on joint ventures is that the first joint venture we signed in London, which was the tower at Aldgate. When we signed that tower in 2010, the gross development value on the tower was GBP 110 million. Now, I think we sold it through for a lot more than GBP 110 million. But we wouldn't contemplate a joint venture in London with a gross development value of GBP 110 million today. Nine Elms, we signed the joint venture with a gross development value of about GBP 450 million in 2013. I think that it's about scale and it's about the risk profile for the group in terms of joint ventures in London, or it's about being able to access land where the landowner only wants to develop the site through joint venture. And that, I think, is becoming an increasing trend in the market, where the landowner wants to participate more in the upside, not just in London but also out of London. So that allows us to acquire land, and therefore we're prepared to joint venture if it's economically worthwhile, both inside and outside London, to allow us to acquire land. In terms of our strategy regarding land acquisition and the parameters around which we are operating the balance sheet, we're very committed to a relatively short land bank. I think when you look at our net investment in land, I.E. gross land bank at 3.5 years, one-third land creditors. I think in terms of cash paid of any of the major house builders, we're operating the shortest land bank. It's our intention to continue to operate a short land bank, fast asset turn, high return on capital model. I think that's something that for the business, it's always been in our DNA to do that, and we've demonstrated historically that we can generate very high return on capital through that methodology. I think also that we have to differentiate ourselves, that if all house builders are following the same strategy, for an investor, it's very difficult. I think it's important that we provide some clear differentiation. Okay. Just supplementary to that then. In practical terms and without reverting to, well, we just increase the hurdle rate sort of thing. If there's such an abundance of land and you're in effect constraining yourself to the forward position, what practical process do you go through to reject heaven knows how many opportunities might come? How do you actually decide which division gets the money, which particular sites are more attractive? Because one assumes that you must be rejecting as many as you bid for, I would have thought. Well, I think that again, really a continuation of a process that we put in place in 2009. Since 2009, the executive have approved every land acquisition. Every site acquired has been approved by Mark previously, myself, and Steven during that period of time. That's the first thing. The second thing is that the regional managing directors who report through to Steven are also very selective. They're clearly knocking sites out at an early stage. I think when you look at the overall parameters, the first one, in summary, is about operational. We have repositioned the business in the last six years to build more houses, less flats. That's been a big journey for Barratt. We came from 55% flats. It's been a huge change for us. The divisions are much more looking for housing sites with a limited input in terms of flatted content. Then they're looking for sites that they're very confident will sell. That tends to be sites that are more prime, which Steven's touched on this morning and we've touched on historically. We think there are really fantastic sites that have come through the government land release program. We understand, again, in terms of differentiation, we're very glad that some of our competitors don't really participate in government land. But we see it as being a great opportunity to acquire sites, where you've got schools, hospitals, and so on that are giving you really great housing sites. I think that's part of the selection process in terms of the capital allocation. Okay. Okay, I think that's all the questions. Thank you very much.