Final Results
Redrow PLC
12 September 2006
Tuesday 12 September 2006
Redrow plc
Preliminary results for the twelve months ended 30 June 2006
Highlights
'A YEAR OF STRATEGIC PROGRESS WITH EXTENDED DIVIDEND COMMITMENT'
• Profit before tax at £120.5m (2004/05: £139.0m)
• Homes operations delivered a stronger second half with turnover up 12% and
operating profit up 2%
• Basic earnings per share at 52.9p (2004/05: 60.7p)
• Dividend per share increased by 20.0% to 13.0p (2004/05: 10.8p) with a
further commitment to increase the dividend by 20% in 2006/07 and 2007/08
• Gearing at 25% (June 2005: 23%) with interest cover of 11.5 times provides
capacity to grow the business
• Current land bank increased by over 20% to 21,000 plots (June 2005:
17,300) representing over four years' supply
• In the first full year Debut has made significant progress with 213
completions, and is on track to deliver 2,000 legal completions per annum by
2010
• Reservations in the first 9 weeks of 2006/07 up over 10% for the core
Signature and In the City range
Robert Jones, Chairman of Redrow plc, said:
'The results reflect a sound financial performance against the backdrop of a
challenging market. The second half achieved good momentum in turnover and
operating profit with increased profits in the Homes operations. During the
last twelve months, we have taken significant steps to position Redrow for
future growth. Our land bank has been further strengthened, Debut is already
delivering incremental growth and we are progressing strategic schemes in mixed
use and regeneration.
The financial performance and our strategic progress gives us confidence for the
future and I am pleased to announce the Board's intention to sustain its
commitment to a 20% annual increase in the dividend for a further two years.'
Enquiries:
Redrow plc
Neil Fitzsimmons, Chief Executive' 0207 404 5959 (12 September)
David Arnold, Group Finance Director 01244 520044 (thereafter)
Brunswick
Patrick Handley / Nina Coad 0207 404 5959
There will be an analyst and investor meeting at 08:45 BST. A live audio webcast
and slide presentation of this event will be available at 08:45 BST on
www.redrowplc.co.uk and www.cantos.com. Participants can also dial-in to hear
the presentation live at 08:45 on +44 (0)20 7138 0836. Playback will be
available online through www.redrowplc.co.uk from 13.00 BST or by phone until
26th September on the following dial-in number: +44 (0) 207806 1970; Passcode
4092784#.
CHAIRMAN'S STATEMENT
Delivering Value
In the year in which Redrow welcomed its 50,000th customer to their new home, I
am pleased to report that we have made significant progress in our strategy to
deliver growth and value to shareholders. Land is the life-blood of our
business and I am encouraged to report that in the last twelve months we have
increased our current land bank by over 20% to 21,000 plots (2005: 17,300
plots). We also continued to develop our forward land bank which represents one
of the cornerstones of our financial returns, thereby strengthening our base to
deliver growth in our core business. We have made considerable progress with
our new Debut product and, in just eighteen months, have achieved planning for
over 1,100 homes as at June 2006. We have secured additional mixed use
opportunities at Bristol and Plymouth to complement our continuing success at
Buckshaw Village, Chorley and have made major progress on the potential mixed
use development at Bishopton, near Glasgow. In Redrow Regeneration, we have
commenced construction on our first project at Barking and have made good
progress on other major projects.
Financial Performance
We entered the last financial year with a strong forward sales position and
this, together with the introduction of Debut, enabled the Group to deliver a
sound financial performance in a more challenging and difficult market. These
results reflect the impact of this market and the profit before tax for the
twelve months to June 2006 was £120.5m compared with £139.0m in the previous
year. Turnover from the Homes' operations increased marginally to £765.5m
(2005: £753.8m). Our growth strategy enabled us to increase legal completions
by 8% to 4,735 (2005: 4,372) which more than offset a reduction in the average
selling price to £161,700 (2005: £172,400). This reduction in average selling
price was due to geographic and product mix particularly within our In the City
developments and the first significant contribution from our open market
affordable Debut product. As we had previously indicated, in this prevailing
market with lower levels of house price inflation, operating margins reduced
within our Homes operations but remained respectable at 17.5% for the year
(2005: 19.6%). Operating profits from the Homes operations at £133.8m compared
with £147.4m in 2005 for the year as a whole, although its performance was
stronger in the second half with operating profits up 2%. Basic earnings per
share in the year were 52.9p (2005: 60.7p).
Our balance sheet remains in a robust position providing us with further
opportunity to continue to invest in our land bank so as to grow our business.
Net debt was £129.8m after increasing the investment in our land bank by a
further £63.4m, with our owned land bank growing to 16,750 plots (2005: 15,800).
Return on capital employed in the year at 22% (2005: 28.7%) remained
significantly ahead of our cost of capital. Gearing was 25% (2005: 23%) and
our interest cover at 11.5 times (2005: 12.2 times) remains strong.
Dividend
In December 2003, the Board of Redrow plc made a commitment to increase the
dividend in the years to June 2004 and June 2005 by 20% per annum. This
underlined the Board's confidence in the quality and strength of the Company.
In September 2004, we extended this commitment for a further year to June 2006,
and we therefore propose to increase the final dividend for the year to June
2006 to 8.7p (2005: 7.2p). This will bring the total dividend for the year to
13.0p (2005: 10.8p), representing a 20% increase, with dividend cover standing
at 4.1 times earnings.
Our strong financial performance and the progress we have made with our growth
strategy provides the Board with the opportunity to continue this progressive
dividend policy. I am therefore pleased to advise that the Board has decided to
increase the dividend by 20% per annum in each of the next two years so that by
November 2008, the dividend will have increased by 2.5 times over a five year
period. In addition, we have decided that in future years, the dividend will be
rebalanced so that the interim and final dividend will be broadly equal thereby
increasing the proportion of dividend paid at the interim stage.
People
In 2006, Redrow secured the Major Homebuilder of the Year Award from Building
Magazine. This award was won through the commitment and dedication of the
Redrow Team. This team has risen to the challenges presented by recent markets.
On behalf of the Board, I would like to thank all those in the Redrow Team,
including our suppliers and subcontractors, for their contribution to both these
results and the progress made across our business over the last twelve months.
Health and safety rightly carries a high profile in our activities and we are
delighted to have secured a Gold Award from RoSPA in 2006 to follow the Silver
and Bronze awards received in 2005 and 2004 respectively.
Outlook
In the Spring of 2006, we witnessed a recovery in the housing market following
eighteen months of weaker demand. We have entered the new financial year with a
forward sales position that remains ahead of our historic norm for our core
product together with significant forward sales for our Debut product. We are
mindful that recent increases in unemployment levels and interest rates could
affect customer confidence but sales levels in the early weeks of the new
financial year are encouraging. The overall growth within the economy and the
commitment of the Redrow Team combined with the quality and effectiveness of our
land bank should enable the Group to see continued growth in the level of legal
completions in the new financial year both in our core and Debut product ranges.
As a consequence we expect 2007 to be a year of further progress for Redrow.
The fundamentals for the industry remain sound with requirements for new homes
in many regions being increased, particularly in response to the continuous
formation of new households and the need to replace the Nation's ageing housing
stock. This provides an environment that gives Redrow an opportunity to
capitalise on the strategy we have put in place to deliver growth. We recognise
the commitment of the Government to increase the number of new homes, in
particular through improving the efficiency of the planning system. The latter
however continues to be the major issue in terms of meeting the Government's
objectives.
The quality of our current land bank and the positive advancement of a number of
our major forward land sites within the planning system provides us with the
capability to increase output in our core product range. Our new Debut product
continues to go from strength to strength and we are on track to meet our
objective of delivering 2,000 Debut homes per annum by 2010. We continue to
derive advantage from mixed use developments and in due course expect to secure
benefit from the regeneration opportunities we are pursuing. We have a strategy
in place that provides us with the capability to deliver growth and through
which we can continue to produce value to shareholders.
Robert Jones
Chairman
CHIEF EXECUTIVE'S REVIEW
Introduction
Twelve months ago when I took over as Chief Executive, I set out the steps we
had taken to position Redrow to meet the short term challenges in the market and
the clear strategy we were progressing that would enable us to deliver growth
and shareholder value in a market where house price increases were likely to be
more modest and in line with earnings growth.
The results for the year ended June 2006 reflect the backdrop of the weaker
housing market over the eighteen months to December 2005. This resulted in a
reduction in profitability from £139.0m to £120.5m. However, our strategy
enabled us to increase legal completions and turnover in our Homes operations
and partially mitigate the impact on operating margins of the more challenging
market. In addition, we have made demonstrable and tangible progress in each of
the principal elements of our growth strategy leaving Redrow well positioned to
deliver growth and shareholder value into the future.
Strategy
Twelve months ago we set out our strategy to deliver growth in the medium term.
Our objectives are to:-
• Grow our core Signature and In the City ranges through our existing
company structure.
• Deliver incremental profit from our new Debut product that provides open
market affordable homes.
• Develop the contribution from additional income streams from our mixed use
and regeneration activities.
At present, our Homes operation has thirteen companies in the UK, which
delivered just over 4,500 legal completions of our core product in the year to
June 2006. Our core product comprises our Signature and In the City ranges.
Over recent years we have expanded our geographical presence and established
three new areas of operation in South Midlands at Northampton, West Country at
Exeter, and East Midlands at Newark. These were established and investment made
to provide us with the capability to increase the output of our core product, in
particular of the Signature range. The current Homes structure provides us with
the capability of delivering 7,000 units of core product per annum.
The South East of England is a geographical region in which we have historically
been underweight in terms of market share and therefore represents an important
opportunity for Redrow to drive growth. It is a particular focus of Government
policy and through our South Midlands, Eastern and Southern companies we have
operations placed to gain maximum benefit from the identified growth areas. To
reinforce the framework through which we will deliver growth, we have reviewed
our management structure. We are now managing our Homes operations through five
regions, namely Scotland, Northern, Midlands, Western and Southern. It gives me
great pleasure to welcome David Campbell-Kelly into the senior management team
as Chairman for the Midlands Region. David has been with Redrow for 12 years,
and has been Managing Director of Redrow Homes (Midlands) Limited for 7 years.
We continue to expand our Debut initiative across our companies. We commenced
developing this innovative and imaginative product providing open market
affordable homes primarily for first time buyers as recently as May 2004. In
only two years, the product has been taken from concept to reality and in the
year to June 2006, 213 Debut customers moved into their new homes. This product
has prices as affordable as £50,000. It demonstrates our ability to identify
opportunities and respond to issues in the housing market whilst delivering
margins and returns on capital in line with our existing business. At 30 June
2006 we had secured in total 10 planning permissions for over 1,100 Debut homes
in just 18 months since our first application at Rugby and we are on track to
deliver our objective of 2,000 Debut homes per annum by 2010. This will
generate incremental profit and value for our shareholders.
Redrow recognises the added value that can be gained from mixed use development.
These developments provide additional income streams and also unlock major
opportunities for our core housebuilding operations. We continue to build on
our historic success in mixed use development with current schemes such as
Buckshaw Village. We have also secured new opportunities at Bristol and
Plymouth which, as well as providing at least 172,000 sq ft of commercial
development, provide over 1,700 plots for our housing operations. In addition,
we have now made a planning application jointly with BAE Systems for a
development at Bishopton to the west of Glasgow for 2,500 homes, and 1,500,000
sq ft of employment and community development.
To further the benefits we can generate from mixed use development and our
involvement in the South East, we established a specialist regeneration
business. Redrow Regeneration was established in September 2004 to focus on
major projects primarily in London and the South East. These projects involve a
wide cross section of stakeholders with different agendas and expectations.
They represent a new element in Redrow's long term approach to securing land for
development and will contribute to Group performance in the medium term.
However, ahead of expectations, Redrow Regeneration is already on site with its
first development at Barking which will deliver 246 new homes as well as
significant community benefits and is making good progress on other major
opportunities in the South East.
Group Performance
2005/06 2004/05
£m £m
Turnover 770.1 780.4
Operating profit 132.8 154.0
Profit before tax 120.5 139.0
Basic earnings per share 52.9p 60.7p
Turnover was £770.1m compared with £780.4m in the year to June 2005. This
reduction in turnover was attributable to a lower level of activity in our mixed
use operations with turnover in the Homes business increasing marginally during
the year. Operating profit reduced to £132.8m (2005: £154.0m) and this was
primarily influenced by lower margins in the Homes operations. In addition, the
operating result for 2006 includes a provision of £2m relating to a development
on Jersey completed in 1999. Financing costs were £11.5m as compared to £12.6m
in 2005 and therefore, principally as a result of the reduction in operating
profit, the profit before tax and the basic earnings per share reduced by 13.3%
and 12.9% to £120.5m and 52.9p respectively.
Homes Operations
2005/06 2004/05
Legal completions 4,735 4,372
Average selling price £161,700 £172,400
£m £m
Turnover 765.5 753.8
Gross profit 177.8 189.3
Operating profit 133.8 147.4
Gross margin 23.2% 25.1%
Operating margin 17.5% 19.6%
The UK housing market remained relatively subdued in the first half of our
financial year. We experienced a seasonal upturn in the Autumn of 2005, but
overall consumer confidence remained relatively weak with 2005 having
transaction levels for England and Wales estimated to be 18% below the levels in
the previous year and also below those expected in a normal housing market. The
reduction in interest rates in August 2005 did help consumer confidence and in
October and November there was a significant increase in mortgage approvals,
which carried on into 2006. In addition, the market was assisted by more
realistic asking prices for second hand homes and there was an increase in
transaction levels in the first half of 2006. National house price indices have
also been recording increases in house prices and these factors combined to
increase homebuyers' confidence.
Against this challenging background, the Homes operations delivered a sound
financial and sales performance in the last twelve months. Turnover increased
marginally to £765.5m (2005: £753.8m) with operating profit reducing by 9% to
£133.8m (2005: £147.4m), primarily due to the reduction in margins from 19.6% to
17.5%. The Homes operations delivered a stronger second half performance in the
financial year with turnover up 12% and operating profit up 2% on the
corresponding period in the previous year.
Turnover reflected an increase of 8% in legal completions to 4,735 (2005:
4,372), which more than offset a 6% reduction in average selling price from
£172,400 to £161,700. This was primarily driven by changes in product and
geographical mix. We increased the legal completions of Signature product by 9%
to 4,027 homes (2005: 3,703) whilst, due to the timing of construction on the
major In the City developments, the number of legal completions on these schemes
reduced in line with our expectations to 495 (2005: 667). The overall increase
in legal completions was supported by the first significant contribution from
the new Debut range, with 213 legal completions (2005: 2) representing 4% of
total completions.
The movement in average selling price was significantly influenced by a
reduction in the average selling price of In the City homes, which reduced from
£207,400 in the previous year to £160,200. The previous year included legal
completions from higher priced units at the Odyssey development in London
Docklands whereas in the year to June 2006, legal completions were delivered on
developments in Manchester, Birmingham, Cardiff and Sovereign Harbour near
Eastbourne. The average selling price for the Signature product at £166,200
(2005: £166,200) was unchanged and the Debut homes had an average selling price
of £79,200.
In the Northern Region, turnover increased by 4% with legal completions up 2% to
1,876 (2005: 1,832). The average selling price also increased by 2% to £158,800
from £156,000 in the preceding year. The Southern Region delivered 1,394 legal
completions (2005: 1,250), an increase of 12% with the average selling price at
£163,300 (2005: £196,700). Turnover and average selling price in this region
was lower, influenced by the impact of In the City schemes as noted above. In
the Western Region, volumes were up 14% to 1,465 legal completions (2005: 1,290)
with turnover up 8%. The average selling price was down 5% to £163,800 (2005:
£172,200) due to a higher proportion of social housing units.
In recent years, we have consistently indicated that the industry was likely to
experience an easing in operating margins as the benefit of house price
inflation within the land bank unwound and house price increases moderated. Our
strategy has been to carry a higher than historic level of forward sales to help
protect our operating margins in more competitive markets. This limited the
impact on our margins to a decline of only 2.1% from 19.6% to 17.5%.
Our sales performance in the year was supported by an increase in the number of
outlets and the release of Debut sites into the market. Total reservations
increased 13% to 4,529 (2005: 4,006). In the first half of the financial year,
sales for the core product were approximately 6% higher than the corresponding
period primarily reflecting an increase in outlets. In the second half, we
benefited from the improved trading conditions and the rate of sale achieved was
much closer to a normal market, with the 6.5% increase in sales of core product
being almost equally split between an improved sales rate and an increase in
outlets. As we entered 2006/07, within the Homes Operations we held a total of
1,772 sales, which included 235 Debut homes, and forward sales for Signature and
In the City homes represented some 17 weeks, which is ahead of our historic
norms.
Product
Our Signature product range represents our primary offering to our customers.
The range is based upon approximately 50 core housetypes from just over 400 sq
ft up to approximately 3,000 sq ft and they are capable of being elevated to
suit local vernacular to create powerful and interesting street scenes. We
continue the drive to increase the use of these core housetypes to further
improve cost control and efficiency of construction on our sites. In 2005/06,
70% of our Signature legal completions used standard house type designs and we
expect to further increase this proportion in 2006/07 to 80%. The repetition of
building core housetypes enables us to deliver continuing improvement in both
the value engineering of our product and the efficiency of its delivery, thereby
helping mitigate other pressures on our cost base. This is supported by our
central procurement strategy whereby approximately 80% of materials used in our
product are secured under Group arrangements.
We continue to embrace the principles of improving the design quality of our
developments, not only in terms of the individual house but, as importantly, the
quality of the environment in which the house is set. This requires detailed
attention in the layout of homes on the development to deliver attractive street
scenes whilst generating appropriate coverage. We are also paying increased
attention to the public realm on developments including greater focus on hard
and soft landscaping. This strategy is aimed at delivering a premium home whilst
using core product to control our cost base. We have Directors of Design in
each Region to promote and embrace this strategy and in our Southern and
Midlands Regions we are establishing an Urban Design Centre of Excellence to
drive this process.
The Government continues to challenge the industry in terms of enhancing the
sustainability of our activities. Redrow recognised the importance of
sustainable development in its new Debut range aimed at first time buyers. The
first three Debut sites all achieved EcoHomes 'excellent' under the 2005
Building Research Establishment (BRE) classification and Willans Green, Rugby,
as the highest EcoHomes rated development, secured the only BRE award to a
residential developer in 2006. The new Code for Sustainable Development,
together with the updated EcoHomes rating classification set by the BRE provide
for even higher standards for sustainable development. Our Product Development
team are progressing commercial solutions to meet these objectives using our
core Signature housetypes and Debut range.
Our Product Development team continues to investigate ways in which modern
methods of construction can add value to our business. We are working with
Framing Solutions, our joint venture company, to secure further efficiencies in
the delivery of lightweight steel frame construction. We are now using modern
methods of construction on Debut and apartment schemes where benefits for the
Group, primarily in terms of speed and quality of construction, can be
generated. Despite the increased cost of raw materials, Framing Solutions has
reduced its operating loss during the last twelve months from £1.2m to £0.8m,
principally through driving efficiency in its operations.
Customers
We recognise the need to deliver quality in both our product and the level of
service to our customers. During the last twelve months we have introduced a
third party telephone survey to secure independent feedback on the satisfaction
levels of our customers. Over the first six months of the survey, 75% of
customers responding indicated they were satisfied, with 80% indicating they
would recommend Redrow. The Barker Report challenged the industry to reach
targets of 85% in respect of satisfaction and 75% in respect of recommendation.
As part of our ongoing focus in delivery of good customer service, an element of
all employees' bonus schemes will relate to customer service performance levels.
In addition, we support the Home Builders Federation's initiative in customer
service and have published the Redrow Customer Service Charter which clearly
sets out customer service objectives.
Mixed Use and Regeneration
Turnover in these activities during the year to June 2006 was £4.6m (2005:
£26.6m) with operating profits of £0.7m (2005: £4.5m). This was in line with
our expectations with the income generated from existing mixed use developments,
in particular Matrix Park at Buckshaw Village offsetting our ongoing investment
into the pre-development phases of the major regeneration developments we are
progressing. In the previous financial year, the turnover and operating profit
included the disposal of our remaining interest in land and work in progress at
Western Approach Distribution Park near Bristol.
Land
Redrow continues to invest in both its current and forward land banks to support
the future growth of the operations. The total investment in land increased to
£523.0m during the year from £459.6m as at June 2005.
We have made significant progress during the last twelve months in growing our
current land bank and progressing major sites within our forward land bank. Our
current land bank increased by over 20% to 21,000 plots (June 2005: 17,300) with
some 8,400 new plots brought into the land bank. The current land bank
comprises 16,750 plots (June 2005: 15,800) which are owned with planning,
including 250 plots in Redrow Regeneration at Barking. The average plot cost in
the Homes land bank was £31,000 (2005: £28,500), and this represented 18.3% of
the estimated average selling price relating to those plots (2005: 17.0%). Our
average plot cost in relation to average selling price remains one of the lowest
in the industry. As we expand our operations in the South of England, we expect
an increase in both the average plot cost and plot cost to average selling price
ratio.
The balance of the current land bank relates to plots held under contract.
These increased to 4,250 plots (2005: 1,500) and this reflects our strategy of
securing land under contract where we can use our skills in planning and
resolving technical issues to add value to the development process.
We continue to invest in forward land to secure land at enhanced margins and to
provide a source of opportunity for the future. In the last 12 months, nearly
25% of the plots taken into our owned land bank came from our forward land bank.
However, it is the significant potential of our forward land bank that continues
to provide us with an important element in the capability to grow our business
in the medium term. Our forward land bank comprises some 24,700 plots (2005:
22,100), which have at least a realistic prospect of achieving planning for
development. In particular, there are a number of major sites which are making
significant progress within the planning system. Within our forward land bank,
37% of plots either have achieved planning or are allocated in plans which
underlines the quality of our potential sites. We anticipate having ten major
sites with applications in progress over the next 18 months providing the
potential for over 6,500 plots to enhance our current land bank, contributing to
the future growth of our business.
New forward land opportunities are being secured to maintain the quality of
opportunity for the future. We are paying particular attention to securing new
options and agreements in the Southern Region within the key Government growth
areas and we have secured new forward land opportunities for over 3,000 plots in
this area in the last twelve months. In addition, Redrow Regeneration
reinforces our policy of taking a long term approach to sourcing land. Major
schemes being progressed by Redrow Regeneration have the capability to deliver
over 3,000 homes together with 300,000 sq ft of commercial development in the
medium term.
Business Development
Within the Homes operations, the increase in our current land bank provides us
with a solid base to deliver growth in legal completions. As at June 2006, 96%
of anticipated output for 2006/07 was from sites owned with planning with the
balance expected from sites controlled. We have a forward sales position ahead
of our historic norm and expect to further increase our outlets in 2006/07. We
therefore anticipate a further increase in Signature legal completions, albeit
at a slightly lower growth rate than in 2005/06. The status of build completion
on the In the City developments gives us the capability to maintain volumes in
2006/07 at similar levels to last year, although the anticipated change in
product mix should result in a higher average selling price.
With regard to Debut, we entered the new financial year with 235 forward sales
and planning in place for 891 homes. Since then we have secured planning for a
further 192 Debut homes. This leaves us well placed to more than double the
output of Debut homes in the coming year and, with an undoubted demand for open
market affordable new homes, puts us well on track to deliver our objective of
2,000 Debut homes per annum by 2010.
We remain of the view there will be some modest house price inflation over the
next twelve months and that this, together with our pro-active management of our
operational cost base, should be sufficient to largely offset the impact of
build cost increases which continue to be affected by higher input costs of raw
materials and energy. In addition, we continue to scrutinise our operating cost
base and value engineer our product to maximise margins. Looking further ahead,
our current and forward land bank provides us with the capability to deliver
growth of legal completions from our core product.
In the next few years, the income generated from the commercial element of our
mixed use developments is expected largely to offset our continued investment in
developing our portfolio of projects in Redrow Regeneration. Further profits
from our activities at Buckshaw Village will be supported in due course by mixed
use schemes at Plymouth and Bristol. We expect contribution from these
developments to commence from 2008. Redrow Regeneration is already on site at
its first development at Barking where all 246 residential units with a total
value approaching £40m have been sold under contract. These should start to be
delivered from the summer of 2007 through to Spring 2008.
Future Prospects
In the medium term there is an undoubted need to increase the supply of new
homes in the UK. This is clearly recognised by the focus in Government policy
towards the housebuilding industry which we welcome. However, it is important
that Government and the industry engages to find solutions to issues
particularly in relation to the planning system and the provision of
infrastructure to enable development. These solutions need to provide
improvements and not impediments to the delivery of an increased number of new
homes. In particular, we would encourage Government to embrace the innovative
and imaginative solutions being developed by the industry to address the first
time buyer market and that support the Government's objectives of increasing
home ownership.
Consumer confidence plays a significant role in our industry in determining
demand and the overall level of activity in the housing market. In 2006, we
have to date experienced improved levels of confidence reflected in higher
levels of mortgage approvals, modest increases in house prices and increased
activity levels in terms of transactions. Reservations in the first 9 weeks of
2006/07 are up over 10% in respect of Signature and In the City homes.
Overall, whilst noting the increased levels of unemployment, the strength of the
economy as regards growth, which is reflected in numbers of people in employment
and indeed the confidence levels of those in employment, is positive for our
sector. The recent increase in interest rates by the Bank of England should not
in itself be a significant factor influencing demand. However, it is still too
early to fully assess the impact of this increase and the effect that associated
current expectations of future interest rate movements might have on the market
as we move into the Autumn selling season.
Redrow has made significant progress over the last twelve months in progressing
each element of its strategy to deliver growth in the medium term. The skill
base in the Redrow Team, our high quality land bank and product range provide us
with the capability to capitalise on the opportunities provided by a stable
economic environment and the need to satisfy the requirement for more new homes.
We anticipate that 2006/07 will be a year of growth for Redrow and we are
confident that we can continue to deliver value for our shareholders into the
future.
Neil Fitzsimmons
Chief Executive
GROUP FINANCE DIRECTOR'S REVIEW
Turnover and Operating Profit
Turnover in the year was £770.1m (2005: £780.4m). Turnover in the Homes
business was 2% ahead of the previous year as a result of an 8% increase in
legal completions to 4,735 (2005: 4,372) which more than offset a reduction of
6% in the average selling price to £161,700 (2005: £172,400). This reduction in
average selling price reflected a change in the product and geographical mix of
In the City legal completions compared to last year and the inclusion, for the
first time, of a significant number of Debut homes.
Turnover in the Group's Mixed Use & Regeneration activities was £4.6m (2005:
£26.6m), principally as a result of the disposal of Aspect, an office
development in Altrincham, and disposals at Buckshaw Village, near Chorley.
Turnover in the previous financial year was higher as it included the sale of
our remaining interest at Western Approach Distribution Park near Bristol.
As a consequence of the anticipated, and previously flagged reduction in
operating margins, operating profit in the Homes business decreased by 9% to
£133.8m (2005: £147.4m). The reduction in operating margin to 17.5% (2005:
19.6%) reflected the combined effect of the more competitive selling
environment, together with the continued unwinding of the beneficial impact of
the higher than normal sales price inflation of recent years within the existing
land bank.
Mixed Use & Regeneration activities generated an operating profit of £0.7m
(2005: £4.5m), including Redrow's share of the operating loss of The Waterford
Park Company Ltd, the joint venture company established to pursue the potential
redevelopment opportunity at Watford Junction railway station.
Redrow's share of the operating loss of Framing Solutions, its 50:50 joint
venture with Corus, was in line with expectations at £0.8m (2005: £1.2m) and
showed an improvement on the prior year. This reduction in the operating loss
was as a result of continuing operational improvements and an increase in
turnover.
As a result of an issue on a development in Jersey which was built on behalf of
Redrow and was construction complete in 1999, the Group has made a provision of
£2.0m. After taking appropriate professional advice, it is the Board's view that
a significant proportion of this sum should be recoverable by the Group in due
course. However, a provision has been made in line with the requirements of IAS
37 until recovery of such monies is achieved.
Operating profit after the provision in respect of Jersey and including Redrow's
share of its joint ventures' operating losses was therefore £131.7m (2005:
£150.7m).
Under the equity method of accounting for joint ventures under IAS 31, results
from such entities must be reflected as a separate item on the income statement
after financing costs and tax. Operating profit on this basis, once the
operating loss of £1.1m in respect of joint ventures is deducted, is £132.8m
(2005: £154.0m) as shown on the face of the income statement.
Finance Costs
The Group's net financing costs were £11.5m (2005: £12.6m), which were covered
11.5 times by operating profits. In accordance with IAS 39, deferred payments
arising from land creditors are held at discounted present value, hence
recognising a financing element on the deferred settlement terms. The value of
the discount is expensed through net financing costs and amounted to £3.0m in
the year (2005: £2.5m). Underlying bank interest costs of £8.6m were £1.2m lower
than the previous financial year.
Share of Joint Ventures
As noted above, we are required to present the results of joint ventures on the
income statement after interest and tax. Framing Solutions and Waterford Park
delivered a loss attributable to Redrow after interest and tax of £0.8m (2005:
£2.4m), a £1.6m improvement. The previous year included significant option and
pre-development expenditure in respect of Waterford Park.
Profit before tax and earnings per share
Redrow delivered a profit before tax of £120.5m (2005: £139.0m). Basic earnings
per share were 52.9p (2005: 60.7p).
Taxation
The Group's effective tax rate was 30.2% (2005: 30.6%) during the year and it is
currently anticipated to remain at a similar level in the next financial year.
Dividend
In line with the Board's previous commitment and subject to approval at the
Annual General Meeting on 7 November 2006, a final dividend of 8.7p per share
will be paid on 17 November 2006, representing an overall increase in the full
year dividend of 20% to 13.0p (2005: 10.8p). Dividend cover remained strong,
with the full year dividend per share 4.1 times covered by basic earnings per
share (2005: 5.6 times).
Balance Sheet
Net assets per share increased by 13% to 322.0p over the period (2005: 284.3p).
Net assets at 30 June 2006 were £513.8m (2005: £452.5m).
Capital employed grew by £87.9m to £643.6m and reflected continued investment
into our land bank. In the Homes' business, land held for development increased
by £62.9m to £522.5m, representing 16,500 plots owned with planning as at 30
June 2006 (2005: 15,800 plots). Costs incurred in connection with the
acquisition and promotion of the Group's forward land bank, a contributor to 25%
of the net plots acquired during the year, are provided for when incurred and
the provision only released once planning permission is obtained and the land
acquired.
Work in progress in Homes increased by £19.1m to £295.6m (2005: £276.5m). As
anticipated, work in progress on In the City schemes increased over the last
twelve months and accounted for roughly half of this growth. As at June 2006,
work in progress on In the City schemes totalled £52.8m (2005: £43.8m). The
Group's exposure to this element of its business remains carefully managed given
the relatively high level of capital employed that is required on such schemes
prior to legal completions being achieved. Work in progress on Signature and
Debut developments increased by £10.1m, reflecting continued investment into the
level of product available on site. Our investment in showhomes also increased
by £3.2m to £14.2m to provide our customers with greater opportunities to view
our product, a factor that is particularly important in a more competitive
marketplace.
Part exchange does not feature as a central component in the Group's marketing
proposition. At the year-end, working capital invested in part exchange
properties was £6.6m representing 39 properties (2005: £7.1m and 37 properties).
The level of stock in the Group's Mixed Use & Regeneration activities increased
by £3.9m to £10.7m primarily reflecting the commencement of construction on our
first Redrow Regeneration project at Barking.
Land creditors of £78.3m remained at a similar level to the position a year
earlier (2005: £78.8m).
Return on capital employed for the financial year, measured by using the average
of opening and closing capital employed, stood at 22.0% (2005: 28.7%) with
return on equity at 23.5% (2005: 30.7%). The exceptionally high levels of
return on capital employed and return on equity achieved in the last few years
were very much a function of the strong gains in house prices experienced during
that period. Nevertheless, return on capital employed remains a very important
financial metric for Redrow. Whilst a pre tax measure of financial performance
for the business, it nevertheless acts as a simple focus to ensure that our
overall post tax returns exceed our estimated weighted average cost of capital
of approximately 8.5%. Whilst continued investment into land and work in
progress as part of our clearly set out growth strategy may result in an
increase in capital employed and gearing, our objective remains to deliver
returns which comfortably exceed our cost of capital.
Cash Flow
The cash generated from operations was £38.7m despite additional investment of
£88.6m into land and work in progress. Net debt increased by £26.6m to £129.8m
(2005: £103.2m) and gearing, calculated as the proportion of net debt to
shareholders' funds, increased only slightly to 25% (2005: 23%).
Treasury Management
It is Redrow's policy to fund itself through an appropriate mix of debt and
equity and growth has historically been financed through a combination of
retained profits and bank funding. When appropriate, we will seek to purchase
land on deferred terms and in these cases, the vendor may retain a legal charge
over the land to which the transaction related or be provided with a guarantee
to support future payments.
Treasury management is conducted centrally with the focus being upon liquidity
and interest rate risks. Redrow operates wholly within the UK and foreign
exchange risk is not material.
Group policy determines that liquidity risk is managed through the review of
regularly prepared cash forecasts and the maintenance of sufficient committed
banking facilities to meet both anticipated requirements and also to provide a
prudent level of headroom. As at June 2006, the Group had committed funding
of £300m provided by way of a syndicated loan facility which matures in November
2009. In addition, we have further uncommitted bank facilities totalling £60m
which provide overdraft and money market loans which assist in cash management.
Day to day cash management is achieved by each company operating its own bank
account with bank accounts managed at a Group level under a set off arrangement.
Within the Board's interest rate risk management framework, interest rates and
cash flow forecasts are constantly monitored to ensure that the level of hedging
remains appropriate. The policy prohibits any trading in derivative financial
instruments and requires any hedging activity to use simple risk management
products, such as interest rate swaps.
The notional level of debt protected by interest rate swaps as at 30 June 2006
was £62.5m and this compares with the Group's year-end net debt of £129.8m.
These swaps had an average remaining life of 2.1 years at a fixed average
interest rate of 4.7% before borrowing margins are added.
The net debt position of the Group during the year is heavily influenced by the
timing of land purchases and the profile of legal completions. In the year
ended June 2006, average net debt was approximately £167m.
Pensions
The Group believes that pension provision is one of the most important benefits
made available to its employees and provides both defined benefit and defined
contribution pensions. The defined benefit section of the pension scheme was
closed to new members generally in October 2001 following the introduction of a
defined contribution section. The defined contribution section represents an
excellent employee benefit, with monthly paid members of the defined
contribution scheme contributing 5% of pensionable salary whilst Redrow makes
age dependent contributions ranging from 5% to 12.5%. Weekly paid members
contribute 3% of pensionable salary with a matching contribution of 3% from
Redrow.
During the year, the scheme actuary concluded the formal triennial valuation of
the defined benefit section as at 1 July 2005. Defined benefit pension schemes
generally have been under pressure from a combination of increased member
longevity estimates, reduced investment returns and falling long term interest
rates. These factors contributed to the triennial actuarial valuation showing a
past service deficit of £11.5m at 1 July 2005 compared to £2.2m at the 1 January
2003 valuation.
As a result of the changes in assumptions and following due consideration of how
best to address the on-going cost of future service and past service deficit,
the decision was taken to increase both employer and member contribution rates
for the defined benefit section from 1 July 2006. Member contribution rates
have increased from 6.0% to 10.0% (from 8.0% to 13.3% for Executive members)
with the employer contribution rising from 12.0% to 16.0% (from 16.0% to 21.3%
in respect of Executive members). Defined benefit section members who preferred
not to bear the increased contribution had the opportunity to join either a new
Career Average Earnings ('CARE') section or the existing defined contribution
section of Redrow's pension scheme instead. In the event, take up for the
proposed CARE section was so low that the offer was withdrawn with almost all
defined benefit members choosing to remain within this section.
In order to address the past service funding deficit, Redrow agreed to make a
special contribution of £11.0m. £3.0m of this special contribution was paid in
June 2006 with the balance paid in July 2006. The Company, together with the
Trustees, continues to monitor closely the financial position of the defined
benefit section of the pension scheme closely. As regards the Group's 2006/07
income statement, no significant adverse movement is anticipated in the Group's
annual pension charge in respect of the defined benefit section.
Financial Reporting
This is the first year that the Group has presented its full year consolidated
financial statements under International Financial Reporting Standards ('IFRS')
rather than UK GAAP. All prior year comparatives have been restated and a full
reconciliation of the 2005 income statement and balance sheet was provided in
the interim financial statements.
As part of our transition process to IFRS, the Group published its 'Transition
to International Financial Reporting Standards' document in November 2005 which
included a summary of principal impacts together with restated financial
information for the year ended 30 June 2005.
The adoption of International Financial Reporting Standards has no impact on the
Group's strategy or its ability to deliver shareholder value into the future.
David Arnold
Group Finance Director
Consolidated Income Statement
12 months ended
30 June
2006 2005
Note £m £m
Revenue 2 770.1 780.4
Cost of sales (592.0) (583.7)
Gross profit 178.1 196.7
Administrative expenses (45.3) (42.7)
Operating profit before financing costs 2 132.8 154.0
Financial income 0.6 0.8
Financial expenses (12.1) (13.4)
Net financing costs 2 (11.5) (12.6)
Share of loss of joint ventures after
interest and taxation 2 (0.8) (2.4)
Profit before tax 2 120.5 139.0
Income tax expense 3 (36.4) (42.5)
Profit for the period 84.1 96.5
Earnings per share
Basic earnings per share 5 52.9p 60.7p
Diluted earnings per share 5 52.7p 60.5p
Consolidated Balance Sheet
As at
30 June
2006 2005
Note £m £m
Assets
Intangible assets 0.4 0.2
Plant, property and equipment 23.8 24.1
Investments 2.4 2.6
Deferred tax assets 5.0 8.1
Derivative financial instruments 0.2 -
Trade and other receivables 0.8 0.5
Total non-current assets 32.6 35.5
Inventories 6 849.6 761.0
Trade and other receivables 25.5 12.2
Derivative financial instruments 0.2 0.3
Cash and cash equivalents 8 24.5 23.7
Total current assets 899.8 797.2
Total assets 932.4 832.7
Equity
Issued capital 16.0 15.9
Share premium 56.2 54.2
Hedge reserve 0.3 (0.1)
Other reserves 7.9 7.9
Retained earnings 433.4 374.6
Total equity 513.8 452.5
Liabilities
Bank loans 8 131.5 103.8
Trade and other payables 7 41.9 47.2
Deferred tax liabilities 1.6 1.8
Retirement benefit obligations 8.6 7.9
Long-term provisions 4.4 2.1
Total non-current liabilities 188.0 162.8
Bank overdrafts and loans 8 22.8 23.1
Trade and other payables 185.6 170.1
Derivative financial instruments - 0.5
Current income tax liabilities 22.2 23.7
Total current liabilities 230.6 217.4
Total liabilities 418.6 380.2
Total equity and liabilities 932.4 832.7
Consolidated Cash Flow Statement
12 months ended
30 June
2006 2005
Note £m £m
Cash flow from operating activities
Operating profit before financing costs 132.8 154.0
Depreciation and amortisation 2.3 2.1
Adjustment for non-cash items (7.4) (3.3)
Operating profit before changes in working capital and
provisions 127.7 152.8
Increase in trade and other receivables (13.6) (1.3)
Increase in inventories (88.6) (65.8)
Increase in trade and other payables 10.2 13.8
Increase in employee benefits and provisions 3.0 -
Cash generated from operations 38.7 99.5
Interest paid (8.9) (10.6)
Tax paid (34.7) (39.8)
Net cash from operating activities (4.9) 49.1
Cash flows from investing activities
Acquisition of plant, property and equipment (2.2) (5.4)
Proceeds from sale of plant and equipment - 1.4
Interest received 0.5 0.8
Payments to joint ventures (0.6) (3.1)
Net cash from investing activities (2.3) (6.3)
Cash flows from financing activities
Increase in/(repayment of) bank borrowings 27.5 (0.5)
Issue costs of bank borrowings - (0.8)
Purchase of own shares (2.9) (0.7)
Dividends paid (18.4) (15.2)
Proceeds from issue of share capital 2.1 1.0
Net cash from financing activities 8.3 (16.2)
Increase in net cash and cash equivalents 1.1 26.6
Net cash and cash equivalents at the beginning of the period 0.6 (26.0)
Net cash and cash equivalents at the end of the period 8 1.7 0.6
Consolidated Statement of Recognised Income and Expense
12 months ended
30 June
2006 2005
£m £m
Effective portion of changes in fair value of interest rate cash
flow hedges 0.6 (1.6)
Deferred tax on change in fair value of interest rate cash flow
hedges (0.2) 0.5
Actuarial (losses)/gains on defined benefit pension scheme (2.8) 0.7
Deferred tax on actuarial (losses)/gains taken directly to equity 0.8 (0.2)
Net expense recognised directly in equity (1.6) (0.6)
Profit for the period 84.1 96.5
Total recognised income and expense for the period 82.5 95.9
Reconciliation of Movements in Consolidated Equity
12 months ended
30 June
2006 2005
£m £m
Profit for the period 84.1 96.5
Dividends on equity shares (18.4) (15.2)
Other recognised income and expense relating to the period (net) (1.6) (0.6)
Shares issued 2.1 1.0
Movement in LTSIP/SAYE (4.9) 0.1
Net increase in equity 61.3 81.8
Opening equity 452.5 370.7
Closing equity 513.8 452.5
NOTES
1. Basis of Preparation
The above results and the accompanying notes do not constitute statutory
accounts within the meaning of Section 240 of the Companies Act 1985. They are
taken from the full accounts which have received an unqualified report by the
Auditors and will be filed with the Registrar of Companies.
2. Segmental Information
2a) Income Statement
12 months ended
2006 2005
£m £m
Revenue
Homes 765.5 753.8
Mixed Use & Regeneration 4.6 26.6
770.1 780.4
Profit before tax
Homes 133.8 147.4
Mixed Use & Regeneration 0.7 4.5
Framing Solutions - operating loss (0.8) (1.2)
133.7 150.7
Jersey provision (2.0) -
131.7 150.7
Add back share of joint venture operating losses 1.1 3.3
Operating profit before financing costs 132.8 154.0
Net financing costs (11.5) (12.6)
121.3 141.4
Share of loss of joint ventures after interest and
taxation (0.8) (2.4)
Profit before tax 120.5 139.0
Segmental Information continued
2b) Balance Sheet
As at
30 June
2006 2005
£m £m
Segment assets
Homes 884.9 790.8
Mixed Use & Regeneration 23.0 17.1
Framing Solutions - share of joint venture 1.6 1.6
909.5 809.5
Elimination of inter-segment items (1.6) (0.5)
907.9 809.0
Cash and cash equivalents 24.5 23.7
Consolidated total assets 932.4 832.7
Segment liabilities
Homes 254.8 249.3
Mixed Use & Regeneration 11.1 4.5
265.9 253.8
Elimination of inter-segment items (1.6) (0.5)
264.3 253.3
Borrowings 154.3 126.9
Consolidated total liabilities 418.6 380.2
Total equity 513.8 452.5
3. Income Tax Expense
12 months ended
2006 2005
£m £m
Current year
UK Corporation Tax at 30% (2005: 30%) 33.2 43.6
Over provision in respect of prior year (0.2) (0.2)
33.0 43.4
Deferred tax
Origination and reversal of temporary differences 3.4 (0.9)
36.4 42.5
Reconciliation of tax expense for the year
Tax on total profits @ 30% (2005: 30%) 36.2 41.7
Over provision in respect of prior year (0.2) (0.2)
Tax effect of share of losses in joint ventures 0.3 1.0
Expenses not deductible for tax purposes net of 0.2 0.3
rolled over capital gains
Short term temporary differences (0.1) (0.3)
36.4 42.5
4. Dividends
The final dividend of 8.7p will be recommended to shareholders for
approval at the Annual General Meeting on 7 November 2006. This dividend will
be paid on 17 November 2006 to shareholders whose names are on the Register of
Members at close of business on 22 September 2006. The shares will become
ex-dividend on 20 September 2006. This dividend, when added to the interim,
makes a total dividend for the year of 13.0p (2005: 10.8p).
5. Earnings Per Share
The calculation of the basic earnings per share of 52.9p (2005:
60.7p) is based on Group profit for the period of £84.1m (2005: £96.5m) and on
the weighted average number of 10p ordinary shares in issue of 159.1m (2005:
158.9m). The average reflects an adjustment in respect of surplus shares held
in trust under the Redrow Long Term Share Incentive Plan.
Diluted earnings per share has been calculated based on the weighted
average number of 10p ordinary shares in issue of 159.5m (2005: 159.4m).
6. Inventories
As at
30 June
2006 2005
£m £m
Land for development 523.0 459.6
Work in progress 312.4 290.4
Stock of showhomes 14.2 11.0
849.6 761.0
7. Amounts Due in Respect of Development Land
As at
30 June
2006 2005
£m £m
Due within one year 36.4 31.6
Due in more than one year 41.9 47.2
78.3 78.8
8. Analysis of Net Debt
As at
30 June
2006 2005
£m £m
Cash and cash equivalents 24.5 23.7
Bank overdrafts and loans (22.8) (23.1)
Net cash and cash equivalents 1.7 0.6
Bank loans (131.5) (103.8)
Net debt (129.8) (103.2)
9. Annual General Meeting
The Annual General Meeting of Redrow plc will be held at St. David's
Park Hotel, St. David's Park, Flintshire on 7 November 2006, commencing at 12.00
noon. A copy of this statement is available for inspection at the registered
office.
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