12th Sep 2006 07:01
Redrow PLC12 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 achallenging market. The second half achieved good momentum in turnover andoperating profit with increased profits in the Homes operations. During thelast twelve months, we have taken significant steps to position Redrow forfuture growth. Our land bank has been further strengthened, Debut is alreadydelivering incremental growth and we are progressing strategic schemes in mixeduse and regeneration. The financial performance and our strategic progress gives us confidence for thefuture and I am pleased to announce the Board's intention to sustain itscommitment to a 20% annual increase in the dividend for a further two years." Enquiries: Redrow plcNeil Fitzsimmons, Chief Executive' 0207 404 5959 (12 September)David Arnold, Group Finance Director 01244 520044 (thereafter) BrunswickPatrick Handley / Nina Coad 0207 404 5959 There will be an analyst and investor meeting at 08:45 BST. A live audio webcastand slide presentation of this event will be available at 08:45 BST onwww.redrowplc.co.uk and www.cantos.com. Participants can also dial-in to hearthe presentation live at 08:45 on +44 (0)20 7138 0836. Playback will beavailable online through www.redrowplc.co.uk from 13.00 BST or by phone until26th September on the following dial-in number: +44 (0) 207806 1970; Passcode4092784#. CHAIRMAN'S STATEMENT Delivering Value In the year in which Redrow welcomed its 50,000th customer to their new home, Iam pleased to report that we have made significant progress in our strategy todeliver growth and value to shareholders. Land is the life-blood of ourbusiness and I am encouraged to report that in the last twelve months we haveincreased our current land bank by over 20% to 21,000 plots (2005: 17,300plots). We also continued to develop our forward land bank which represents oneof the cornerstones of our financial returns, thereby strengthening our base todeliver growth in our core business. We have made considerable progress withour new Debut product and, in just eighteen months, have achieved planning forover 1,100 homes as at June 2006. We have secured additional mixed useopportunities at Bristol and Plymouth to complement our continuing success atBuckshaw Village, Chorley and have made major progress on the potential mixeduse development at Bishopton, near Glasgow. In Redrow Regeneration, we havecommenced construction on our first project at Barking and have made goodprogress on other major projects. Financial Performance We entered the last financial year with a strong forward sales position andthis, together with the introduction of Debut, enabled the Group to deliver asound financial performance in a more challenging and difficult market. Theseresults reflect the impact of this market and the profit before tax for thetwelve months to June 2006 was £120.5m compared with £139.0m in the previousyear. Turnover from the Homes' operations increased marginally to £765.5m(2005: £753.8m). Our growth strategy enabled us to increase legal completionsby 8% to 4,735 (2005: 4,372) which more than offset a reduction in the averageselling price to £161,700 (2005: £172,400). This reduction in average sellingprice was due to geographic and product mix particularly within our In the Citydevelopments and the first significant contribution from our open marketaffordable Debut product. As we had previously indicated, in this prevailingmarket with lower levels of house price inflation, operating margins reducedwithin our Homes operations but remained respectable at 17.5% for the year(2005: 19.6%). Operating profits from the Homes operations at £133.8m comparedwith £147.4m in 2005 for the year as a whole, although its performance wasstronger in the second half with operating profits up 2%. Basic earnings pershare in the year were 52.9p (2005: 60.7p). Our balance sheet remains in a robust position providing us with furtheropportunity 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 afurther £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%) remainedsignificantly ahead of our cost of capital. Gearing was 25% (2005: 23%) andour 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 thedividend in the years to June 2004 and June 2005 by 20% per annum. Thisunderlined 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 June2006 to 8.7p (2005: 7.2p). This will bring the total dividend for the year to13.0p (2005: 10.8p), representing a 20% increase, with dividend cover standingat 4.1 times earnings. Our strong financial performance and the progress we have made with our growthstrategy provides the Board with the opportunity to continue this progressivedividend policy. I am therefore pleased to advise that the Board has decided toincrease the dividend by 20% per annum in each of the next two years so that byNovember 2008, the dividend will have increased by 2.5 times over a five yearperiod. In addition, we have decided that in future years, the dividend will berebalanced so that the interim and final dividend will be broadly equal therebyincreasing the proportion of dividend paid at the interim stage. People In 2006, Redrow secured the Major Homebuilder of the Year Award from BuildingMagazine. This award was won through the commitment and dedication of theRedrow 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 theseresults 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 aredelighted to have secured a Gold Award from RoSPA in 2006 to follow the Silverand Bronze awards received in 2005 and 2004 respectively. Outlook In the Spring of 2006, we witnessed a recovery in the housing market followingeighteen months of weaker demand. We have entered the new financial year with aforward sales position that remains ahead of our historic norm for our coreproduct together with significant forward sales for our Debut product. We aremindful that recent increases in unemployment levels and interest rates couldaffect customer confidence but sales levels in the early weeks of the newfinancial year are encouraging. The overall growth within the economy and thecommitment of the Redrow Team combined with the quality and effectiveness of ourland bank should enable the Group to see continued growth in the level of legalcompletions 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 homesin many regions being increased, particularly in response to the continuousformation of new households and the need to replace the Nation's ageing housingstock. This provides an environment that gives Redrow an opportunity tocapitalise on the strategy we have put in place to deliver growth. We recognisethe commitment of the Government to increase the number of new homes, inparticular through improving the efficiency of the planning system. The latterhowever continues to be the major issue in terms of meeting the Government'sobjectives. The quality of our current land bank and the positive advancement of a number ofour major forward land sites within the planning system provides us with thecapability to increase output in our core product range. Our new Debut productcontinues to go from strength to strength and we are on track to meet ourobjective of delivering 2,000 Debut homes per annum by 2010. We continue toderive advantage from mixed use developments and in due course expect to securebenefit from the regeneration opportunities we are pursuing. We have a strategyin place that provides us with the capability to deliver growth and throughwhich 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 wehad taken to position Redrow to meet the short term challenges in the market andthe clear strategy we were progressing that would enable us to deliver growthand shareholder value in a market where house price increases were likely to bemore modest and in line with earnings growth. The results for the year ended June 2006 reflect the backdrop of the weakerhousing market over the eighteen months to December 2005. This resulted in areduction in profitability from £139.0m to £120.5m. However, our strategyenabled us to increase legal completions and turnover in our Homes operationsand partially mitigate the impact on operating margins of the more challengingmarket. In addition, we have made demonstrable and tangible progress in each ofthe principal elements of our growth strategy leaving Redrow well positioned todeliver 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, whichdelivered just over 4,500 legal completions of our core product in the year toJune 2006. Our core product comprises our Signature and In the City ranges. Over recent years we have expanded our geographical presence and establishedthree new areas of operation in South Midlands at Northampton, West Country atExeter, and East Midlands at Newark. These were established and investment madeto provide us with the capability to increase the output of our core product, inparticular of the Signature range. The current Homes structure provides us withthe capability of delivering 7,000 units of core product per annum. The South East of England is a geographical region in which we have historicallybeen underweight in terms of market share and therefore represents an importantopportunity for Redrow to drive growth. It is a particular focus of Governmentpolicy and through our South Midlands, Eastern and Southern companies we haveoperations placed to gain maximum benefit from the identified growth areas. Toreinforce the framework through which we will deliver growth, we have reviewedour management structure. We are now managing our Homes operations through fiveregions, namely Scotland, Northern, Midlands, Western and Southern. It gives megreat pleasure to welcome David Campbell-Kelly into the senior management teamas 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 commenceddeveloping this innovative and imaginative product providing open marketaffordable homes primarily for first time buyers as recently as May 2004. Inonly two years, the product has been taken from concept to reality and in theyear to June 2006, 213 Debut customers moved into their new homes. This producthas prices as affordable as £50,000. It demonstrates our ability to identifyopportunities and respond to issues in the housing market whilst deliveringmargins and returns on capital in line with our existing business. At 30 June2006 we had secured in total 10 planning permissions for over 1,100 Debut homesin just 18 months since our first application at Rugby and we are on track todeliver our objective of 2,000 Debut homes per annum by 2010. This willgenerate 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 majoropportunities for our core housebuilding operations. We continue to build onour historic success in mixed use development with current schemes such asBuckshaw Village. We have also secured new opportunities at Bristol andPlymouth which, as well as providing at least 172,000 sq ft of commercialdevelopment, provide over 1,700 plots for our housing operations. In addition,we have now made a planning application jointly with BAE Systems for adevelopment at Bishopton to the west of Glasgow for 2,500 homes, and 1,500,000sq ft of employment and community development. To further the benefits we can generate from mixed use development and ourinvolvement in the South East, we established a specialist regenerationbusiness. Redrow Regeneration was established in September 2004 to focus onmajor projects primarily in London and the South East. These projects involve awide cross section of stakeholders with different agendas and expectations.They represent a new element in Redrow's long term approach to securing land fordevelopment and will contribute to Group performance in the medium term.However, ahead of expectations, Redrow Regeneration is already on site with itsfirst development at Barking which will deliver 246 new homes as well assignificant community benefits and is making good progress on other majoropportunities in the South East. Group Performance 2005/06 2004/05 £m £mTurnover 770.1 780.4Operating profit 132.8 154.0Profit before tax 120.5 139.0Basic earnings per share 52.9p 60.7p Turnover was £770.1m compared with £780.4m in the year to June 2005. Thisreduction in turnover was attributable to a lower level of activity in our mixeduse operations with turnover in the Homes business increasing marginally duringthe year. Operating profit reduced to £132.8m (2005: £154.0m) and this wasprimarily influenced by lower margins in the Homes operations. In addition, theoperating result for 2006 includes a provision of £2m relating to a developmenton Jersey completed in 1999. Financing costs were £11.5m as compared to £12.6min 2005 and therefore, principally as a result of the reduction in operatingprofit, 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 2004/05Legal completions 4,735 4,372Average selling price £161,700 £172,400 £m £mTurnover 765.5 753.8Gross profit 177.8 189.3Operating profit 133.8 147.4Gross margin 23.2% 25.1%Operating margin 17.5% 19.6% The UK housing market remained relatively subdued in the first half of ourfinancial year. We experienced a seasonal upturn in the Autumn of 2005, butoverall consumer confidence remained relatively weak with 2005 havingtransaction levels for England and Wales estimated to be 18% below the levels inthe previous year and also below those expected in a normal housing market. Thereduction in interest rates in August 2005 did help consumer confidence and inOctober and November there was a significant increase in mortgage approvals,which carried on into 2006. In addition, the market was assisted by morerealistic asking prices for second hand homes and there was an increase intransaction levels in the first half of 2006. National house price indices havealso been recording increases in house prices and these factors combined toincrease homebuyers' confidence. Against this challenging background, the Homes operations delivered a soundfinancial and sales performance in the last twelve months. Turnover increasedmarginally 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% to17.5%. The Homes operations delivered a stronger second half performance in thefinancial year with turnover up 12% and operating profit up 2% on thecorresponding 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 andgeographical 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 themajor In the City developments, the number of legal completions on these schemesreduced in line with our expectations to 495 (2005: 667). The overall increasein legal completions was supported by the first significant contribution fromthe new Debut range, with 213 legal completions (2005: 2) representing 4% oftotal completions. The movement in average selling price was significantly influenced by areduction 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 legalcompletions from higher priced units at the Odyssey development in LondonDocklands whereas in the year to June 2006, legal completions were delivered ondevelopments in Manchester, Birmingham, Cardiff and Sovereign Harbour nearEastbourne. The average selling price for the Signature product at £166,200(2005: £166,200) was unchanged and the Debut homes had an average selling priceof £79,200. In the Northern Region, turnover increased by 4% with legal completions up 2% to1,876 (2005: 1,832). The average selling price also increased by 2% to £158,800from £156,000 in the preceding year. The Southern Region delivered 1,394 legalcompletions (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 regionwas lower, influenced by the impact of In the City schemes as noted above. Inthe 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 toexperience an easing in operating margins as the benefit of house priceinflation within the land bank unwound and house price increases moderated. Ourstrategy has been to carry a higher than historic level of forward sales to helpprotect our operating margins in more competitive markets. This limited theimpact 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 ofoutlets and the release of Debut sites into the market. Total reservationsincreased 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 correspondingperiod primarily reflecting an increase in outlets. In the second half, webenefited from the improved trading conditions and the rate of sale achieved wasmuch closer to a normal market, with the 6.5% increase in sales of core productbeing almost equally split between an improved sales rate and an increase inoutlets. As we entered 2006/07, within the Homes Operations we held a total of1,772 sales, which included 235 Debut homes, and forward sales for Signature andIn the City homes represented some 17 weeks, which is ahead of our historicnorms. 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 sqft up to approximately 3,000 sq ft and they are capable of being elevated tosuit local vernacular to create powerful and interesting street scenes. Wecontinue the drive to increase the use of these core housetypes to furtherimprove cost control and efficiency of construction on our sites. In 2005/06,70% of our Signature legal completions used standard house type designs and weexpect to further increase this proportion in 2006/07 to 80%. The repetition ofbuilding core housetypes enables us to deliver continuing improvement in boththe value engineering of our product and the efficiency of its delivery, therebyhelping mitigate other pressures on our cost base. This is supported by ourcentral procurement strategy whereby approximately 80% of materials used in ourproduct are secured under Group arrangements. We continue to embrace the principles of improving the design quality of ourdevelopments, not only in terms of the individual house but, as importantly, thequality of the environment in which the house is set. This requires detailedattention in the layout of homes on the development to deliver attractive streetscenes whilst generating appropriate coverage. We are also paying increasedattention to the public realm on developments including greater focus on hardand soft landscaping. This strategy is aimed at delivering a premium home whilstusing core product to control our cost base. We have Directors of Design ineach Region to promote and embrace this strategy and in our Southern andMidlands Regions we are establishing an Urban Design Centre of Excellence todrive this process. The Government continues to challenge the industry in terms of enhancing thesustainability of our activities. Redrow recognised the importance ofsustainable development in its new Debut range aimed at first time buyers. Thefirst three Debut sites all achieved EcoHomes 'excellent' under the 2005Building Research Establishment (BRE) classification and Willans Green, Rugby,as the highest EcoHomes rated development, secured the only BRE award to aresidential developer in 2006. The new Code for Sustainable Development,together with the updated EcoHomes rating classification set by the BRE providefor even higher standards for sustainable development. Our Product Developmentteam are progressing commercial solutions to meet these objectives using ourcore Signature housetypes and Debut range. Our Product Development team continues to investigate ways in which modernmethods of construction can add value to our business. We are working withFraming Solutions, our joint venture company, to secure further efficiencies inthe delivery of lightweight steel frame construction. We are now using modernmethods of construction on Debut and apartment schemes where benefits for theGroup, primarily in terms of speed and quality of construction, can begenerated. Despite the increased cost of raw materials, Framing Solutions hasreduced 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 ofservice to our customers. During the last twelve months we have introduced athird party telephone survey to secure independent feedback on the satisfactionlevels of our customers. Over the first six months of the survey, 75% ofcustomers responding indicated they were satisfied, with 80% indicating theywould recommend Redrow. The Barker Report challenged the industry to reachtargets 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 ofall employees' bonus schemes will relate to customer service performance levels. In addition, we support the Home Builders Federation's initiative in customerservice and have published the Redrow Customer Service Charter which clearlysets 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 withour expectations with the income generated from existing mixed use developments,in particular Matrix Park at Buckshaw Village offsetting our ongoing investmentinto the pre-development phases of the major regeneration developments we areprogressing. In the previous financial year, the turnover and operating profitincluded the disposal of our remaining interest in land and work in progress atWestern Approach Distribution Park near Bristol. Land Redrow continues to invest in both its current and forward land banks to supportthe 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 ourcurrent land bank and progressing major sites within our forward land bank. Ourcurrent land bank increased by over 20% to 21,000 plots (June 2005: 17,300) withsome 8,400 new plots brought into the land bank. The current land bankcomprises 16,750 plots (June 2005: 15,800) which are owned with planning,including 250 plots in Redrow Regeneration at Barking. The average plot cost inthe Homes land bank was £31,000 (2005: £28,500), and this represented 18.3% ofthe estimated average selling price relating to those plots (2005: 17.0%). Ouraverage plot cost in relation to average selling price remains one of the lowestin the industry. As we expand our operations in the South of England, we expectan increase in both the average plot cost and plot cost to average selling priceratio. 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 ofsecuring land under contract where we can use our skills in planning andresolving technical issues to add value to the development process. We continue to invest in forward land to secure land at enhanced margins and toprovide a source of opportunity for the future. In the last 12 months, nearly25% 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 continuesto provide us with an important element in the capability to grow our businessin 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 fordevelopment. In particular, there are a number of major sites which are makingsignificant progress within the planning system. Within our forward land bank,37% of plots either have achieved planning or are allocated in plans whichunderlines the quality of our potential sites. We anticipate having ten majorsites with applications in progress over the next 18 months providing thepotential for over 6,500 plots to enhance our current land bank, contributing tothe future growth of our business. New forward land opportunities are being secured to maintain the quality ofopportunity for the future. We are paying particular attention to securing newoptions and agreements in the Southern Region within the key Government growthareas and we have secured new forward land opportunities for over 3,000 plots inthis area in the last twelve months. In addition, Redrow Regenerationreinforces our policy of taking a long term approach to sourcing land. Majorschemes being progressed by Redrow Regeneration have the capability to deliverover 3,000 homes together with 300,000 sq ft of commercial development in themedium term. Business Development Within the Homes operations, the increase in our current land bank provides uswith 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 thebalance expected from sites controlled. We have a forward sales position aheadof our historic norm and expect to further increase our outlets in 2006/07. Wetherefore anticipate a further increase in Signature legal completions, albeitat a slightly lower growth rate than in 2005/06. The status of build completionon the In the City developments gives us the capability to maintain volumes in2006/07 at similar levels to last year, although the anticipated change inproduct mix should result in a higher average selling price. With regard to Debut, we entered the new financial year with 235 forward salesand planning in place for 891 homes. Since then we have secured planning for afurther 192 Debut homes. This leaves us well placed to more than double theoutput of Debut homes in the coming year and, with an undoubted demand for openmarket affordable new homes, puts us well on track to deliver our objective of2,000 Debut homes per annum by 2010. We remain of the view there will be some modest house price inflation over thenext twelve months and that this, together with our pro-active management of ouroperational cost base, should be sufficient to largely offset the impact ofbuild cost increases which continue to be affected by higher input costs of rawmaterials and energy. In addition, we continue to scrutinise our operating costbase and value engineer our product to maximise margins. Looking further ahead,our current and forward land bank provides us with the capability to delivergrowth of legal completions from our core product. In the next few years, the income generated from the commercial element of ourmixed use developments is expected largely to offset our continued investment indeveloping our portfolio of projects in Redrow Regeneration. Further profitsfrom our activities at Buckshaw Village will be supported in due course by mixeduse schemes at Plymouth and Bristol. We expect contribution from thesedevelopments to commence from 2008. Redrow Regeneration is already on site atits first development at Barking where all 246 residential units with a totalvalue approaching £40m have been sold under contract. These should start to bedelivered 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 newhomes in the UK. This is clearly recognised by the focus in Government policytowards the housebuilding industry which we welcome. However, it is importantthat Government and the industry engages to find solutions to issuesparticularly in relation to the planning system and the provision ofinfrastructure to enable development. These solutions need to provideimprovements and not impediments to the delivery of an increased number of newhomes. In particular, we would encourage Government to embrace the innovativeand imaginative solutions being developed by the industry to address the firsttime buyer market and that support the Government's objectives of increasinghome ownership. Consumer confidence plays a significant role in our industry in determiningdemand and the overall level of activity in the housing market. In 2006, wehave to date experienced improved levels of confidence reflected in higherlevels of mortgage approvals, modest increases in house prices and increasedactivity levels in terms of transactions. Reservations in the first 9 weeks of2006/07 are up over 10% in respect of Signature and In the City homes. Overall, whilst noting the increased levels of unemployment, the strength of theeconomy as regards growth, which is reflected in numbers of people in employmentand indeed the confidence levels of those in employment, is positive for oursector. The recent increase in interest rates by the Bank of England should notin itself be a significant factor influencing demand. However, it is still tooearly to fully assess the impact of this increase and the effect that associatedcurrent expectations of future interest rate movements might have on the marketas we move into the Autumn selling season. Redrow has made significant progress over the last twelve months in progressingeach element of its strategy to deliver growth in the medium term. The skillbase in the Redrow Team, our high quality land bank and product range provide uswith the capability to capitalise on the opportunities provided by a stableeconomic 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 areconfident that we can continue to deliver value for our shareholders into thefuture. 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 Homesbusiness was 2% ahead of the previous year as a result of an 8% increase inlegal completions to 4,735 (2005: 4,372) which more than offset a reduction of6% in the average selling price to £161,700 (2005: £172,400). This reduction inaverage selling price reflected a change in the product and geographical mix ofIn the City legal completions compared to last year and the inclusion, for thefirst 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 officedevelopment in Altrincham, and disposals at Buckshaw Village, near Chorley.Turnover in the previous financial year was higher as it included the sale ofour remaining interest at Western Approach Distribution Park near Bristol. As a consequence of the anticipated, and previously flagged reduction inoperating 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 sellingenvironment, together with the continued unwinding of the beneficial impact ofthe higher than normal sales price inflation of recent years within the existingland 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 WaterfordPark Company Ltd, the joint venture company established to pursue the potentialredevelopment opportunity at Watford Junction railway station. Redrow's share of the operating loss of Framing Solutions, its 50:50 jointventure with Corus, was in line with expectations at £0.8m (2005: £1.2m) andshowed an improvement on the prior year. This reduction in the operating losswas as a result of continuing operational improvements and an increase inturnover. As a result of an issue on a development in Jersey which was built on behalf ofRedrow 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 thata significant proportion of this sum should be recoverable by the Group in duecourse. However, a provision has been made in line with the requirements of IAS37 until recovery of such monies is achieved. Operating profit after the provision in respect of Jersey and including Redrow'sshare 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, resultsfrom such entities must be reflected as a separate item on the income statementafter financing costs and tax. Operating profit on this basis, once theoperating 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 covered11.5 times by operating profits. In accordance with IAS 39, deferred paymentsarising from land creditors are held at discounted present value, hencerecognising a financing element on the deferred settlement terms. The value ofthe discount is expensed through net financing costs and amounted to £3.0m inthe year (2005: £2.5m). Underlying bank interest costs of £8.6m were £1.2m lowerthan the previous financial year. Share of Joint Ventures As noted above, we are required to present the results of joint ventures on theincome statement after interest and tax. Framing Solutions and Waterford Parkdelivered 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 andpre-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 earningsper 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 iscurrently 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 theAnnual General Meeting on 7 November 2006, a final dividend of 8.7p per sharewill be paid on 17 November 2006, representing an overall increase in the fullyear 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 pershare (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 investmentinto our land bank. In the Homes' business, land held for development increasedby £62.9m to £522.5m, representing 16,500 plots owned with planning as at 30June 2006 (2005: 15,800 plots). Costs incurred in connection with theacquisition 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 andthe provision only released once planning permission is obtained and the landacquired. Work in progress in Homes increased by £19.1m to £295.6m (2005: £276.5m). Asanticipated, work in progress on In the City schemes increased over the lasttwelve 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). TheGroup's exposure to this element of its business remains carefully managed giventhe relatively high level of capital employed that is required on such schemesprior to legal completions being achieved. Work in progress on Signature andDebut developments increased by £10.1m, reflecting continued investment into thelevel of product available on site. Our investment in showhomes also increasedby £3.2m to £14.2m to provide our customers with greater opportunities to viewour product, a factor that is particularly important in a more competitivemarketplace. Part exchange does not feature as a central component in the Group's marketingproposition. At the year-end, working capital invested in part exchangeproperties was £6.6m representing 39 properties (2005: £7.1m and 37 properties). The level of stock in the Group's Mixed Use & Regeneration activities increasedby £3.9m to £10.7m primarily reflecting the commencement of construction on ourfirst Redrow Regeneration project at Barking. Land creditors of £78.3m remained at a similar level to the position a yearearlier (2005: £78.8m). Return on capital employed for the financial year, measured by using the averageof opening and closing capital employed, stood at 22.0% (2005: 28.7%) withreturn on equity at 23.5% (2005: 30.7%). The exceptionally high levels ofreturn on capital employed and return on equity achieved in the last few yearswere very much a function of the strong gains in house prices experienced duringthat period. Nevertheless, return on capital employed remains a very importantfinancial metric for Redrow. Whilst a pre tax measure of financial performancefor the business, it nevertheless acts as a simple focus to ensure that ouroverall post tax returns exceed our estimated weighted average cost of capitalof approximately 8.5%. Whilst continued investment into land and work inprogress as part of our clearly set out growth strategy may result in anincrease in capital employed and gearing, our objective remains to deliverreturns 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 toshareholders' funds, increased only slightly to 25% (2005: 23%). Treasury Management It is Redrow's policy to fund itself through an appropriate mix of debt andequity and growth has historically been financed through a combination ofretained profits and bank funding. When appropriate, we will seek to purchaseland on deferred terms and in these cases, the vendor may retain a legal chargeover the land to which the transaction related or be provided with a guaranteeto support future payments. Treasury management is conducted centrally with the focus being upon liquidityand interest rate risks. Redrow operates wholly within the UK and foreignexchange risk is not material. Group policy determines that liquidity risk is managed through the review ofregularly prepared cash forecasts and the maintenance of sufficient committedbanking facilities to meet both anticipated requirements and also to provide aprudent level of headroom. As at June 2006, the Group had committed fundingof £300m provided by way of a syndicated loan facility which matures in November2009. In addition, we have further uncommitted bank facilities totalling £60mwhich provide overdraft and money market loans which assist in cash management.Day to day cash management is achieved by each company operating its own bankaccount with bank accounts managed at a Group level under a set off arrangement. Within the Board's interest rate risk management framework, interest rates andcash flow forecasts are constantly monitored to ensure that the level of hedgingremains appropriate. The policy prohibits any trading in derivative financialinstruments and requires any hedging activity to use simple risk managementproducts, such as interest rate swaps. The notional level of debt protected by interest rate swaps as at 30 June 2006was £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 averageinterest rate of 4.7% before borrowing margins are added. The net debt position of the Group during the year is heavily influenced by thetiming of land purchases and the profile of legal completions. In the yearended June 2006, average net debt was approximately £167m. Pensions The Group believes that pension provision is one of the most important benefitsmade available to its employees and provides both defined benefit and definedcontribution pensions. The defined benefit section of the pension scheme wasclosed to new members generally in October 2001 following the introduction of adefined contribution section. The defined contribution section represents anexcellent employee benefit, with monthly paid members of the definedcontribution scheme contributing 5% of pensionable salary whilst Redrow makesage dependent contributions ranging from 5% to 12.5%. Weekly paid memberscontribute 3% of pensionable salary with a matching contribution of 3% fromRedrow. During the year, the scheme actuary concluded the formal triennial valuation ofthe defined benefit section as at 1 July 2005. Defined benefit pension schemesgenerally have been under pressure from a combination of increased memberlongevity estimates, reduced investment returns and falling long term interestrates. These factors contributed to the triennial actuarial valuation showing apast service deficit of £11.5m at 1 July 2005 compared to £2.2m at the 1 January2003 valuation. As a result of the changes in assumptions and following due consideration of howbest to address the on-going cost of future service and past service deficit,the decision was taken to increase both employer and member contribution ratesfor the defined benefit section from 1 July 2006. Member contribution rateshave 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 preferrednot to bear the increased contribution had the opportunity to join either a newCareer Average Earnings ("CARE") section or the existing defined contributionsection of Redrow's pension scheme instead. In the event, take up for theproposed CARE section was so low that the offer was withdrawn with almost alldefined benefit members choosing to remain within this section. In order to address the past service funding deficit, Redrow agreed to make aspecial contribution of £11.0m. £3.0m of this special contribution was paid inJune 2006 with the balance paid in July 2006. The Company, together with theTrustees, continues to monitor closely the financial position of the definedbenefit section of the pension scheme closely. As regards the Group's 2006/07income statement, no significant adverse movement is anticipated in the Group'sannual pension charge in respect of the defined benefit section. Financial Reporting This is the first year that the Group has presented its full year consolidatedfinancial statements under International Financial Reporting Standards ("IFRS")rather than UK GAAP. All prior year comparatives have been restated and a fullreconciliation of the 2005 income statement and balance sheet was provided inthe interim financial statements. As part of our transition process to IFRS, the Group published its "Transitionto International Financial Reporting Standards" document in November 2005 whichincluded a summary of principal impacts together with restated financialinformation for the year ended 30 June 2005. The adoption of International Financial Reporting Standards has no impact on theGroup'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 2 770.1 780.4Cost 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 0.8Financial expenses (12.1) (13.4)Net financing costs 2 (11.5) (12.6) Share of loss of joint ventures afterinterest 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 shareBasic earnings per share 5 52.9p 60.7pDiluted earnings per share 5 52.7p 60.5p Consolidated Balance Sheet As at 30 June 2006 2005 Note £m £mAssetsIntangible assets 0.4 0.2Plant, property and equipment 23.8 24.1Investments 2.4 2.6Deferred tax assets 5.0 8.1Derivative financial instruments 0.2 -Trade and other receivables 0.8 0.5Total non-current assets 32.6 35.5 Inventories 6 849.6 761.0Trade and other receivables 25.5 12.2Derivative financial instruments 0.2 0.3Cash and cash equivalents 8 24.5 23.7Total current assets 899.8 797.2 Total assets 932.4 832.7 EquityIssued capital 16.0 15.9Share premium 56.2 54.2Hedge reserve 0.3 (0.1)Other reserves 7.9 7.9Retained earnings 433.4 374.6Total equity 513.8 452.5 LiabilitiesBank loans 8 131.5 103.8Trade and other payables 7 41.9 47.2Deferred tax liabilities 1.6 1.8Retirement benefit obligations 8.6 7.9Long-term provisions 4.4 2.1Total non-current liabilities 188.0 162.8 Bank overdrafts and loans 8 22.8 23.1Trade and other payables 185.6 170.1Derivative financial instruments - 0.5Current income tax liabilities 22.2 23.7Total 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 £mCash flow from operating activitiesOperating profit before financing costs 132.8 154.0Depreciation and amortisation 2.3 2.1Adjustment for non-cash items (7.4) (3.3)Operating profit before changes in working capital andprovisions 127.7 152.8Increase in trade and other receivables (13.6) (1.3)Increase in inventories (88.6) (65.8)Increase in trade and other payables 10.2 13.8Increase 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 activitiesAcquisition of plant, property and equipment (2.2) (5.4)Proceeds from sale of plant and equipment - 1.4Interest received 0.5 0.8Payments to joint ventures (0.6) (3.1)Net cash from investing activities (2.3) (6.3) Cash flows from financing activitiesIncrease 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 1.0Net cash from financing activities 8.3 (16.2) Increase in net cash and cash equivalents 1.1 26.6Net 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 cashflow hedges 0.6 (1.6)Deferred tax on change in fair value of interest rate cash flowhedges (0.2) 0.5Actuarial (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 96.5Dividends 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 1.0Movement in LTSIP/SAYE (4.9) 0.1Net increase in equity 61.3 81.8Opening equity 452.5 370.7Closing equity 513.8 452.5 NOTES 1. Basis of Preparation The above results and the accompanying notes do not constitute statutoryaccounts within the meaning of Section 240 of the Companies Act 1985. They aretaken from the full accounts which have received an unqualified report by theAuditors and will be filed with the Registrar of Companies. 2. Segmental Information 2a) Income Statement 12 months ended 2006 2005 £m £mRevenue 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 £mSegment assetsHomes 884.9 790.8Mixed Use & Regeneration 23.0 17.1Framing Solutions - share of joint venture 1.6 1.6 909.5 809.5Elimination of inter-segment items (1.6) (0.5) 907.9 809.0Cash and cash equivalents 24.5 23.7Consolidated total assets 932.4 832.7 Segment liabilitiesHomes 254.8 249.3Mixed Use & Regeneration 11.1 4.5 265.9 253.8Elimination of inter-segment items (1.6) (0.5) 264.3 253.3Borrowings 154.3 126.9Consolidated total liabilities 418.6 380.2Total equity 513.8 452.5 3. Income Tax Expense 12 months ended 2006 2005 £m £mCurrent yearUK Corporation Tax at 30% (2005: 30%) 33.2 43.6Over provision in respect of prior year (0.2) (0.2) 33.0 43.4Deferred taxOrigination and reversal of temporary differences 3.4 (0.9) 36.4 42.5 Reconciliation of tax expense for the yearTax on total profits @ 30% (2005: 30%) 36.2 41.7Over provision in respect of prior year (0.2) (0.2)Tax effect of share of losses in joint ventures 0.3 1.0Expenses not deductible for tax purposes net of 0.2 0.3rolled over capital gainsShort term temporary differences (0.1) (0.3) 36.4 42.5 4. Dividends The final dividend of 8.7p will be recommended to shareholders forapproval at the Annual General Meeting on 7 November 2006. This dividend willbe paid on 17 November 2006 to shareholders whose names are on the Register ofMembers at close of business on 22 September 2006. The shares will becomeex-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 onthe 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 heldin trust under the Redrow Long Term Share Incentive Plan. Diluted earnings per share has been calculated based on the weightedaverage number of 10p ordinary shares in issue of 159.5m (2005: 159.4m). 6. Inventories As at 30 June 2006 2005 £m £mLand for development 523.0 459.6Work in progress 312.4 290.4Stock 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 £mDue within one year 36.4 31.6Due 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 £mCash and cash equivalents 24.5 23.7Bank overdrafts and loans (22.8) (23.1)Net cash and cash equivalents 1.7 0.6Bank 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'sPark Hotel, St. David's Park, Flintshire on 7 November 2006, commencing at 12.00noon. A copy of this statement is available for inspection at the registeredoffice. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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