Barratt Developments PLC (LON:BDEV) has announced its annual results for the year ended 30 June 2020.
Commenting on the results David Thomas, Chief Executive of Barratt Developments PLC said:
“While COVID-19 has had a significant impact on our results, our priority has been to keep our people safe, mitigate the effect of the pandemic on our business and be able to emerge from the crisis in a resilient position. Although uncertainties remain, all of our sites are operational, we are seeing very strong consumer demand and our robust financial position means we enter the new financial year with cautious optimism. We are now renewing our focus on our medium term targets, on leading the industry in quality and service and on supporting jobs and economic growth by building the homes the country needs.”
|£m unless otherwise stated1,2,3||Year ended 30 June 2020||Year ended 30 June 2019||Change|
|Total completions (homes)4||12,604||17,856||(29.4%)|
|Gross margin (%)||18.0||22.8||(480bps)|
|Profit from operations||493.4||901.1||(45.2%)|
|Operating margin (%)||14.4||18.9||(450bps)|
|Profit before tax||491.8||909.8||(45.9%)|
|Basic earnings per share (pence)||39.4||73.2||(46.2%)|
|Total dividend per share (pence)||nil||46.4||n/m|
· COVID-19 and the lockdown period significantly reduced completion volumes, increased costs and impacted profit:
- Total COVID-19-related costs of £74.3m, comprising £45.2m of safety costs, non-productive site costs and site-based employee costs and £29.1m related to an expected increase in site durations.
- After COVID-19 costs, adjusted profit from operations was £507.3m (2019: £904.3m) at an adjusted operating margin of 14.8% (2019: 19.0%).
- After adjusted items of £13.9m comprising CJRS grant income of £26.0m (which was repaid in FY21) and legacy properties costs of £39.9m, profit from operations was £493.4m (2019: £901.1m).
· Profit before tax of £491.8m (2019: £909.8m), impacted by the unprecedented disruption to sales and build in our fourth quarter.
· Resilient balance sheet with net cash at 30 June 2020 of £308.2m (2019: £765.7m) and land creditors of £791.9m (2019: £960.7m) equivalent to 25.4% (2019: 31.3%) of the owned land bank, equating to modest total gearing (including land creditors) of 12.3% (2019: 4.9%).
· Continued industry leadership in quality and customer service recognised through a sixteenth consecutive year achieving more NHBC Pride in the Job Awards than any other housebuilder and the eleventh consecutive year of receiving the HBF maximum 5 Star customer satisfaction rating.
· Our commitment to be the country’s leading national sustainable housebuilder demonstrated with new sector-leading carbon reduction targets.
· Net private reservations per active outlet per average week from 1 July through to 23 August have been ahead of the prior year at 0.94 (FY20: 0.68).
· Strong forward sales(4) as at 23 August 2020 with 15,660 homes (25 August 2019: 13,064 homes) and a value of £3,706.5m (25 August 2019: £3,037.5m).
· Health and safety continues to be our number one priority and our production levels continue to improve.
· When the Board believes the time is right, it will implement a dividend policy based on a dividend cover of 2.5 times.
1. Refer to Glossary for definition of key financial metrics
2. Unless otherwise stated, all numbers quoted exclude JVs
3. In addition to the Group using a variety of statutory performance measures it also measures performance using alternative performance measures (APMs). Definitions of the APMs and reconciliations to the equivalent statutory measures are detailed in the Definitions of alternative performance measures and reconciliation to IFRS. Net cash definition in Note 5.1
4. Including JVs in which the Group has an interest
Certain statements in this document may be forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results to differ materially from those expressed or implied by those statements. Forward looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Accordingly undue reliance should not be placed on forward looking statements. Nothing contained in this Annual Report or the Group’s website should be construed as a profit forecast or an invitation to deal in the securities of the Company.
There will be an analyst conference call and webcast at 8.30am today. An archived version of the webcast will also be available on our website during the afternoon of 2 September 2020.
Dial in UK toll free: 0808 109 0700
International dial in: +44 (0) 203 003 2666
The presentation will also be webcast live with the follow on Q&A. Please register and access the webcast using the following link:
Further copies of this announcement can be downloaded from the Barratt Developments PLC corporate website at www.barrattdevelopments.co.uk or by request from the Company Secretary’s office at: Barratt Developments PLC, Barratt House, Cartwright Way, Forest Business Park, Bardon Hill, Coalville, Leicestershire, LE67 1UF.
Before the COVID-19 pandemic, we were delivering strong progress against our medium term targets. The onset of COVID-19 and the subsequent lockdown has caused significant disruption to our business and had a substantial impact on our financial performance. Nevertheless, our business has demonstrated its resilience and operational strength delivering 12,604 high quality new homes (including JVs) across Britain in FY20 (FY19: 17,856 homes).
Handling the COVID-19 crisis
The health and safety of all individuals who work for or with us is of fundamental importance to the Board. Prior to the Prime Minister’s lockdown announcement on 23 March 2020 to try to control the spread of COVID-19, the Board, together with the Senior Management team, acted quickly and decisively to commence the temporary closure of all of our construction sites, sales centres and offices. This was completed by 27 March 2020. Throughout the lockdown period, the Board worked closely with the Senior Management team and held a number of additional virtual Board meetings to ensure that key decisions such as those relating to furloughing, payment of dividends, workforce remuneration and our liquidity were made in a timely manner.
As the lockdown restrictions eased, the Board monitored the phased reopening of our construction sites in England and Wales from 11 May 2020 and in Scotland from 1 June 2020. By 30 June 2020, all of our construction sites were operational and our employees, other than those shielding, had returned to work.
To safeguard the jobs of the c. 85% of employees that we furloughed, we initially participated in the Government’s CJRS. However, given that our financial position has remained resilient, the Board made the decision in July 2020 to return the CJRS funds received of £26.0m.
I would like to take this opportunity to thank the Senior Management team for their tireless commitment to address all of the challenges relating to COVID-19 and the way in which they led our business through this difficult period. It is a testament to their leadership and resilience that our business has emerged in good shape.
It is our employees that deliver our success, and our performance is due to the dedication and ability of our skilled and experienced team. I am especially proud of the way in which our entire workforce adapted to changes in working arrangements as we temporarily closed our construction sites, sales centres and offices, through the lockdown period and their subsequent reopening. All of our employees have risen to the challenges brought by COVID-19 and pulled together to get our business back up and running. I would like to take this opportunity to thank them for the support and commitment that they have shown to our business.
The views of our employees are important to the Board and they are at the heart of our operations. Our Workforce Forum has played a vital role in our engagement with our employees during FY20, and continues to inform our actions and decisions. David Thomas, our Chief Executive, sent weekly updates throughout the lockdown period to all employees to keep them informed on matters such as the reopening of construction sites, sales centres and offices, pay, holiday policy, and health and wellbeing. In addition, our intranet was regularly updated with information on corporate and government policy, and a dedicated COVID-19 email address was established to enable employees (including those on furlough) to ask questions or send in comments or suggestions relating to the impact of COVID-19 on our business. We also undertook a pulse survey following the return to work by all employees, other than those shielding, which showed that employees were very positive about the way in which management had dealt with COVID-19 related matters, particularly in respect of pay and communication.
Safety, Health and Environment
Our SHE team played a vital role throughout the whole lockdown period. They ensured the safe temporary closure of our construction sites, sales centres and offices, and continued to regularly check that our closed construction sites remained safe throughout lockdown. They were also instrumental in the reopening of our construction sites, helping us establish and implement extensive COVID-19 working practices and protocols to enable those returning to site to do so safely and in compliance with the Government’s social distancing measures.
We believe that at the core of quality housebuilding is a commitment to create a positive environmental, social and economic legacy for future generations. This is embedded in our business through our purpose to lead the future of housebuilding by putting our customers at the heart of everything we do. By doing business sustainably we create value for our stakeholders.
Good governance of these activities and connecting social, environmental and economic value across our business leads to better long term decisions. Consequently, in January 2020, we published our science-based targets to show our commitment to reducing carbon emissions, both our direct emissions (scope 1 and 2 by 29% from 2018 levels by 2025) and indirect emissions (scope 3 by 11% from 2018 levels by 2030). We also commenced work during FY20 on our programme to achieve compliance with the recommendations of the TCFD.
I am also pleased to report that we performed well in the key indices FTSE4Good, NextGeneration and in CDP surveys.
To further strengthen the capability of our Group Sustainability team we appointed an experienced Group Sustainability Director who is working with the Executive Committee to determine how we can enhance, both operationally and through increased reporting, our position as the country’s leading sustainable national housebuilder. Engagement with our stakeholders will play a key role in the development of our strategy in this area.
Quality and service
In FY20 we continued to demonstrate our industry leading credentials for quality and service. Through our Leading construction priority, we are committed to excellence in all aspects of our construction operations, and to building the highest quality homes. We achieved a 5 Star rating in the HBF customer satisfaction survey for the 11th year in a row, a record that is unprecedented for a major housebuilder. Our 5 Star rating means that over 90% of our customers would recommend us to their family and friends, and is the leading industry benchmark of quality and service. In addition, our site managers achieved 92 NHBC Pride in the Job Awards for excellence in site management this year, more than any other housebuilder for the 16th year in a row, and our highest number of awards for seven years.
Winning these awards underlines the high standard of work that our site managers and their teams deliver on a daily basis. It also highlights our high standards and quality to our customers.
Political and economic environment
COVID-19 and the global response to it has damaged the UK economy, and it is likely that there will be an increase in unemployment in the coming months as businesses continue to be impacted. The full extent of the economic impact being caused by COVID-19 is yet to become fully clear, and there remains uncertainty regarding the outcome of the ongoing negotiations regarding the UK leaving the EU.
However, the underlying drivers of the UK housing market remain strong. Home ownership is still the tenure of choice for the majority of people, and this combined with the long term undersupply of new housing means that there remains a good level of underlying demand. The industry has seen encouraging levels of interest and sales as lockdown was eased and sales centres reopened, and we believe that the long term impact of the pandemic on people’s choices and priorities will be an increase in demand for the high quality homes that we provide as consumers look for more space both indoors and outdoors.
The Government recognises the importance of housebuilding in achieving their ‘levelling up’ agenda. The Stamp Duty holiday is an important intervention that will save many of our customers thousands of pounds which they can put towards the deposit for their new home. The proposed reforms to the planning system demonstrate a commitment to speeding up the planning process, offering transparency and certainty to local communities and ensuring we can build the homes the country needs. We also need the planning system to ensure that quality, design and sustainability are at the heart of new development. We hope the forthcoming Future Homes Standard will give the industry the certainty required to invest in building the low carbon homes needed to combat climate change.
Low interest rates continue to keep mortgages at historically affordable levels. However, there has been a reduction in the high LTV lending that many people require to get onto the housing ladder. This has arisen post COVID-19 and reflects a response to a perceived increase in risk and high levels of demand. The restriction and removal of Help to Buy will exacerbate this. It is important that lenders and the Government consider what further options are available to help potential first time buyers who want to purchase their own home.
In order to remain successful, it is important that we create and embed a positive culture throughout our business. The Board is mindful of the need to set the tone from the top. A review of the culture of our business was undertaken during FY20. Our business has a strong culture of ‘doing the right thing’ and taking pride in the work that we do whilst remaining focused on the needs of our customers and other stakeholders. We will continue to develop the culture of our business and make further improvements where there is scope to do so.
The New Code
Last year I highlighted that we had early adopted a number of provisions of the New Code and Guidance on Board Effectiveness issued by the FRC in July 2018. These related to Section 172 of the Act: Duty to promote the long term success of the Company; Stakeholder engagement; Chief Executive pay ratio; malus and clawback and pension contributions. This year we have further developed these disclosures in light of evolving best practice and guidance from our advisers.
I am pleased to confirm that we have fully complied with all of the provisions of the New Code. The requirements of the Code will be described throughout the Governance Report in our Annual Report and Accounts, together with explanations as to how we have complied with these requirements and the various provisions.
Board appointments, succession and evaluation
The Nomination Committee continues to oversee Board appointments and succession of Board members, and assesses the composition of the Board and its Committees annually. No new appointments were made to the Board or any of the Committees during the year.
The Board effectiveness review, which was this year facilitated internally with support from Lintstock, confirmed that the Board currently comprises the appropriate skills and experience to drive our strategy forward. We will continue to assess the composition of the Board and focus on identifying any skills, knowledge or experience that will further strengthen the Board’s capabilities.
Going forward, the Board believes that it is in the best interests of shareholders to have a long term predictable dividend income stream and this is best achieved through an ordinary dividend policy with a defined level of ordinary dividend cover. In addition, it believes that the Company should continue to maintain its disciplined approach both growing completion volumes and investing in attractive land opportunities that meet our hurdle rates whilst reducing gearing. When the Board believes the time is right it will implement a dividend policy based on a dividend cover of 2.5 times.
The Board has previously announced that given the uncertainties caused by the impact of COVID-19, the interim dividend of 9.8 pence per share, equating to c. £100m, would be cancelled, and that it would not propose an ordinary dividend in respect of FY20 or the intended special dividend of £175m in respect of FY20.
The Board continues to recognise the importance of dividends to all its shareholders. The Board however, also feels that given the unprecedented impact of COVID-19 and the importance of a resilient balance sheet, it will no longer propose the FY21 special dividend of £175m which would have been payable in November 2021.
Our 2020 AGM will be held on Wednesday 14 October 2020. We are closely monitoring the ongoing impact of COVID-19, and developments in UK regulation in relation to how AGMs may be held during this period. Further details about the AGM will be provided in the Notice of AGM.
We have an experienced and committed Board who are focused on promoting the success and long term sustainable value of the Group. We will continue to review our composition and ensure that it aligns with our strategy as we move forward.
The last few months of FY20 were unprecedented but our employees have shown great strength and commitment to getting our business restarted. We start FY21 with a continued focus on our operational and financial performance including our medium term targets.
On behalf of the Board, I thank you for the confidence that you have shown in the business during FY20, especially throughout the lockdown period and for your continued support.
1 September 2020
Chief Executive’s Statement
We acted quickly at the outset of the pandemic and, in line with our commitment to health and safety, took the decision to temporarily close all of our construction sites, sales centres and offices by 27 March 2020.
In response to COVID-19, the Board implemented immediate measures to manage the Group’s cost base and cash flows to ensure resilience, including:
· Suspending all land buying activity;
· Ceasing all recruitment activity;
· Postponing non-essential capital expenditure;
· Actively managing cash flows whilst ensuring that we continued to pay our suppliers and sub-contractors on time;
· Cancelling the interim dividend, which was due to be paid on 11 May 2020;
· Furloughing a proportion of our employees at their normal pay; and
· A voluntary 20% reduction in base salary and fees for the Board, the wider Executive and the Regional Managing Director team for the period our sites were closed. In addition, they also agreed to waive any salary or fee increase for FY21.
In addition, in May 2020, the Remuneration Committee agreed with the recommendation of the Executive Directors that there would be no payments to any Director or employee under the FY20 annual bonus scheme.
Following our establishment of extensive COVID-19 working practices and protocols, we gradually restarted our site operations from 11 May 2020 in England and Wales and from 1 June 2020 in Scotland. As a result, all of our construction sites were operational at the end of the financial year and our employees, other than those shielding, had returned to the business.
Through the temporary closure of the business, where around 85% of our employees were placed on furlough, we used the Government’s CJRS. Our employees, other than those shielding, had returned from furlough by 1 July 2020. We are grateful for the support that the Government provided to UK businesses through the CJRS, which allowed us to safeguard the jobs of our c. 6,700 employees during the height of the pandemic. Our financial position remained resilient through year end and accordingly, in early July, the Board decided to repay all furlough funds received.
We have delivered a resilient operational and financial performance this year against the unprecedented impact of the COVID-19 pandemic, and the resulting lockdown on our operations. Prior to the pandemic we were delivering strong progress against our medium term targets, with an operating margin of 18.9% in 2019 (2018: 17.7%) and a ROCE for the 12 months to 31 December 2019 of 29.3% (2018: 29.5%). However, the lockdown period had a significant impact on our financial performance this year. Our business model is resilient, with both operational and financial strength, and we remain dedicated to the delivery of the high quality homes the country needs.
Housing market fundamentals
The Government has a target of 300,000 homes to be built per year by the mid-2020s to meet existing demand. Updates to the NPPF, to ensure that local authorities plan positively for housing and are accountable for under-delivery, provide further support to housing growth. We welcome too the latest White Paper on planning reform and we will play an active part in the consultation process over the coming months.
The lending environment, positive up until the pandemic, has become less certain. Whilst mortgage rates remain attractive, reflecting greater competition in the mortgage market and a broad spread of lenders supporting homebuyers, there has been a material change in LTV lending criteria.
Prior to the pandemic the availability of both 95% LTV lending and the Government’s Help to Buy scheme provided invaluable help for those seeking to get onto the housing ladder. Today there are no mainstream mortgage lenders providing mortgages at 95% LTV for new build homebuyers, increasing the current reliance of purchasers on Help to Buy.
The Government has confirmed that Help to Buy will only continue in its current form until March 2021. Thereafter a new scheme will be in place for two further years, limited to first time buyers with regional price caps. We have been planning for the changes to the Help to Buy scheme in our land acquisition since the new scheme was announced.
Up to March 2020, 272,852 homes had been bought using the scheme, 82% of these by first time buyers, (source: MHCLG, Help to Buy (equity loan scheme) statistics: April 2013 to March 2020).
Although Help to Buy continues for first time buyers through to 31 March 2023, the regional price caps will prove restrictive for many, particularly those looking to purchase new homes in parts of the North and the Midlands where the price caps create significant limitations on the choice of new housing available within the new scheme. During FY20, 46% of our purchasers who used Help to Buy would not qualify for the new Help to Buy scheme, but they would qualify for other mortgage products or be able to use our part-exchange schemes.
Our purpose is to lead the future of housebuilding by putting customers at the heart of everything we do. We are very proud to lead the industry in both build quality and customer service. We are committed to playing our part in addressing the housing shortage and helping to rebuild Britain’s economic activity after the disruption created by COVID-19.
Prior to the lockdown, we were delivering strong progress against our medium term targets including increasing completion volumes whilst maintaining our industry leading quality and service. As at 22 March 2020, we had delivered 10,364 total home completions including 484 joint venture completions, up 9.8% on the prior year equivalent period (2019: 9,437 homes). The lockdown halted construction activity and meant the closure of our sales centres until 21 May 2020 in England, 11 June 2020 in Scotland and 25 June 2020 in Wales. As a result, wholly owned completions declined by 29.7% to 12,034 homes in the year ended 30 June 2020 (2019: 17,111 homes). In addition, we delivered 570 homes through our joint ventures in the year (2019: 745 homes). Total home completions including JVs for the year were therefore 12,604 homes (2019: 17,856 homes).
The significant progress on our gross margin targets and resulting profitability, as demonstrated by our half year results was understandably, severely impacted by the COVID-19 pandemic. At the half year, we had delivered a profit from operations of £421.7m (H1 FY19: £409.7m) and a profit before tax of £423.0m (H1 FY19: £408.0m).
As well as causing the significant reduction in completion volumes with the associated impact on our profitability this year, COVID-19 has resulted in significant additional costs. During the lockdown period and in preparation for site recommencement we incurred £45.2m of safety costs, non-productive site costs and site-based employee costs and £29.1m related to the expected increase in site durations due to COVID-19. After charging this £74.3m, we made an adjusted profit from operations of £507.3m (2019: £904.3m) at an adjusted operating margin of 14.8% (2019: 19.0%).
In total, we incurred net adjusted items of £13.9m comprising £26.0m of CJRS grant income, which we have repaid since the year end, offset by, as previously announced, £39.9m of costs associated with legacy properties, including Citiscape and the associated review, and developments where cladding has needed to be removed and replaced. After these adjusted items we delivered a profit from operations for the year of £493.4m (2019: £901.1m) at an operating margin of 14.4% (2019: 18.9%).
As a result, we experienced a decline in profit before tax for the year to £491.8m (2019: £909.8m).
The closure of all of our construction sites by 27 March 2020 came at our peak point for work in progress. Prior to the pandemic we had been expecting to achieve completions ahead of the 17,856 homes we achieved last year, and had been investing in work in progress to deliver a substantial number of homes in our fourth quarter. As a result of this and the decrease in our profit for the year, our ROCE, which had grown from 23.9% in FY15 to 29.7% in FY19, reduced to 15.6% in FY20.
Our balance sheet remains strong, with year end net cash of £308.2m (2019: £765.7m), land creditors of £791.9m (2019: £960.7m) and therefore a modest total gearing (including land creditors) of 12.3% (2019: 4.9%). At 30 June 2020 our net tangible assets were £3,933.3m (2019: £3,960.8m).
Throughout the year we have maintained a disciplined approach across our operations and this combined with our strong balance sheet will enable us to keep investing in our business as market conditions become clearer.
The health and safety of our employees, sub-contractors and customers remains a fundamental priority. We have continued to rebuild productivity levels and have seen our production levels continue to improve, benefitting from the return of additional sub-contractors, extended operating hours on many of our sites and from delayed new sites commencing construction. This provides the foundation for increasing volumes following the COVID-19 disruption, whilst maintaining our industry leading quality.
Whilst land buying was temporarily suspended, we remained active in the land market, negotiating attractive fully conditional options. We have now re-entered the market selectively, maintaining our disciplined approach, where we see attractive opportunities.
Our operating framework and appropriate capital structure has served us well over the last three years. The resilience they have created was demonstrated in FY20 given the unprecedented impact of COVID-19. Reflecting the changed economic and trading backdrop we have adjusted our operating framework to reflect our dividend policy, include a new target range for land creditor usage and introduced a target for minimal total indebtedness in the medium term.
We enter FY21 focused on rebuilding both our completion volumes and our financial performance towards our unchanged medium term targets.
|FY20||Areas of focus for FY21||Medium term targets|
|Wholly owned completions||12,034 homes||· Driving site based construction activity|
· Maximising sales for customers who will not qualify under the new Help to Buy scheme
· Wholly owned home completion growth to 14,500 – 15,000 homes in FY21
|· Disciplined growth in wholly owned home completions|
|Gross margin||18.0%||· Rebuilding site based construction activity to improve fixed cost recovery|
· Controlling materials and labour cost inflation
|· Land acquisition at a minimum 23% gross margin and optimising performance|
|ROCE||15.6%||· Tight control of working capital with build release aligned with home completion cash generation|
· Focus on cash with selective land spend beyond land creditor settlements
|· Minimum of 25% delivered through improving margin and return to operating framework|
We are committed to creating a positive environmental, social and economic legacy for future generations. This goes to the core of quality housebuilding – creating high quality homes and communities in great places, and ensuring we provide a positive legacy that helps local communities thrive. Providing confidence to our customers that their homes are designed and built to meet the challenges of the future is vital, and underpins our business.
The protection and enhancement of the resources on which our business relies, our people, the communities in which we operate, our partners and the planet require that we do business sustainably and create value for our stakeholders. Good governance of these activities and connecting social, environmental and economic value across our business leads to better long term decisions.
From keeping people safe and healthy to ensuring sustainable and responsible sourcing, our Sustainability Framework 2020+ ensures we continually progress the sustainability focus areas that matter most to our stakeholders. Each of these areas has set targets and KPIs, with a member of the Board accountable for specific actions to ensure delivery.
We have also put in place new sector leading targets:
· Earlier this year we became the first national housebuilder to publish science-based targets for reducing carbon emissions, and the new net zero goal extends this sustainability roadmap further;
· Commitment to purchase 100% of our operational electricity from renewable sources by 2025;
· Committed to delivering low carbon homes for customers, we have set a target to ensure new standard housetype designs will be net zero carbon in use from 2030; and
· By 2040 we will become a net zero greenhouse gas emissions business across all of our direct operations.
Sustainability is embedded in our business through our purpose to lead the future of housebuilding by putting our customers at the heart of everything we do. This is delivered through our strategic priorities of customer first, great places, leading construction and investing in our people, and our principles of keeping people safe, being a trusted partner, building strong community relationships, safeguarding the environment and ensuring the financial health of our business.
Customer first: Leadership in quality and service
We have a long term commitment to quality and customer service and we believe our industry leadership in these areas is fundamental to maintaining the strength and resilience of our business. This enduring commitment to quality and customer service has been evidenced through external benchmarking. We are the only major housebuilder to be awarded the maximum 5 Star rating by our customers in the HBF customer satisfaction survey for 11 years in a row and our customer satisfaction rating is consistently above 90%.
Great places: We remain committed to building more high quality homes
We remain committed to playing our part in addressing the housing shortage. We design attractive developments that meet our high quality standards and through effective place making, will enhance local communities for years to come. 93 of our sites have received Built for Life accreditations, 23 of which were rated outstanding.
Leading construction: Construction excellence and modern methods of construction
We seek to achieve excellence across all aspects of construction. Our people take pride in what they do and this helps us put customers first by delivering industry leading quality homes. This commitment has once again been recognised through the NHBC Pride in the Job Awards where in June 2020 our site managers were awarded 92 awards, more than any other housebuilder for the 16th consecutive year.
We are also committed to increasing the number of homes we build using MMC to increase efficiency and to help mitigate the challenges posed by the shortage of skilled workers within the industry. We continue to develop, trial and implement MMC. In 2020 we constructed 2,652 homes (21% of our home completions) using MMC including timber frame, large format block and offsite manufactured ground floor solutions and roof cassettes. Our target is to use MMC in the construction of 25% of our homes by 2025.
Timber frame construction is a sustainable, low energy method of build and is assembled in factories to high standards. Over the last three years, we have built 6,035 homes using timber frame, the majority in Scotland. We are also increasing its use across England and Wales. Last year, we acquired Oregon, a UK manufacturer of timber frames. Oregon, which was already one of our key timber frame suppliers providing high quality products and excellent customer service, has continued to expand and has opened an additional factory as we look to expand further our use of timber frame.
Investing in our people
Our employees have reacted in a resilient and adaptable way during the challenges posed by COVID-19, both those who worked hard to get us ready to restart on site, and those who were not able to work during the period of temporary closure, many of whom were inspirational as volunteers in their local communities. I would like to take this opportunity to thank them for the support and commitment that they have shown to our business. We were pleased to be able to support all of our employees throughout our period of hibernation on their normal pay.
We are building a diverse and inclusive workforce that reflects the communities in which we operate, delivering excellence for our customers by drawing on a broad range of talents, skills and experience.
We are investing for the future and continue to develop award winning schemes including those for graduates, apprentices and former Armed Forces personnel, alongside our own Degree Apprenticeship in Residential Development and Construction run in conjunction with Sheffield Hallam University.
We also continue to collaborate with the wider housebuilding industry. We actively participate in the Home Building Skills Partnership, which aims to attract new entrants to the industry, provide the skills for today and the future, and support the supply chain in developing the skills they need to support our industry.
We seek to create a great place to work founded on an open and honest culture. We engage with our employees on a regular basis so we can understand their issues and concerns and address them. We carry out an annual engagement survey, further surveys throughout the year and consult with our Workforce Forum. The feedback received is used to drive continual improvements. Employee engagement remains a key measure of our success and we are pleased to have maintained UK upper quartile performance in our engagement survey for the seventh consecutive year.
We value everyone for who they are and the unique contribution they bring. We seek to represent the communities in which we operate and we know that a diverse team means a stronger business, is better for our customers and makes us a more attractive employer. Through our Diversity and Inclusion strategy we remain committed to creating an inclusive environment for everyone. We have identified targets for gender and ethnicity representation, our leaders have completed Diversity and Inclusion training and all of our employees complete mandatory diversity e-learning as part of their induction. We have expanded our career development program for female leaders and are committed to supporting underrepresented groups, to ensure everyone reaches their potential.
We are now an accredited Living Wage Employer, making us one of the first major housebuilders to receive the accreditation. The real Living Wage is different to the Government’s National Minimum and Living Wage, as it is an independently calculated higher hourly rate of pay that is based on the actual cost of living. Receiving this accreditation demonstrates our commitment to our employees as well as our suppliers and sub-contractors.
Keeping people safe
A fundamental priority is to provide a safe working environment for all our employees and sub-contractors. We are committed to achieving the highest industry health and safety standard and the wellbeing of our people is paramount to us.
Prior to COVID-19, increased activity levels across the industry in terms of site openings and production volumes combined with shortages of skilled employees and sub-contractors contributed to an increased risk of accidents on sites.
Following the outbreak of COVID-19 the risk profile of our sites was fundamentally reassessed, particularly around the demands for social distancing. Our sites are operating safely with COVID-19 working practices and protocols that have been established in line with the latest guidance from Government, Public Health Authorities and the Construction Leadership Council. This includes changes to signage, site welfare facilities and compounds, site access and walkways. We have also enhanced our induction, training and support for our employees and sub-contractors in response to COVID-19. We have received an Assurance Statement from the British Safety Council certifying that our COVID-19 workplace safety, health and environmental arrangements are in accordance with current guidance and best practice, demonstrating our commitment to providing a safe and healthy workplace.
We have stringent standards and a continuous focus on health and safety throughout our business. In line with the industry we are seeing pressures in this area but we continue to seek to reduce the number of injuries occurring. We are committed to improving our processes and procedures and challenging unsafe behaviours. We also continue to focus on ensuring workers do not suffer long term issues associated with their work activities and are looking at ways we can further improve standards. In the year ended 30 June 2020, our reportable injury incidence rate was 256 (2019: 297) per 100,000 workers and our Health and Safety SHE audit compliance rate was 96% (2019: 96%).
Safeguarding the environment
Reducing carbon emissions
We recognise the contribution we can make to the UK’s reduction of carbon emissions and in May 2019 we signed a letter alongside 127 other businesses, investors and business networks calling for the Government to accept the Committee on Climate Change’s proposed target and make Britain net zero carbon by 2050.
In January 2020 the Board approved our own new challenging science-based carbon reduction targets. In our own operations we will aim to reduce carbon emissions by 29% from FY18 to FY25, through measures like reducing diesel used by generators on site, amending our vehicle policies and implementing energy efficiency opportunities across our offices, sites, sales centres and show homes. During the year our carbon intensity measure increased by 9.7% mainly as a result of delays created between our construction activities and home completions.
In addition, we are focused on the measureable steps that we can take to reduce both the embodied carbon in our supply chain and in-use carbon from our homes, including increasing the use of timber frame in home construction, which is a sustainable technology. We have set a target to reduce indirect carbon emissions by 11% from our supply chain and our homes by 2030. Partnerships with our suppliers and sub-contractors are key to the delivery of our goals and we continue to engage with them in respect of this. In July this year we launched a Sustainability Capability Matrix with our suppliers, enabling our category managers to work with our suppliers and together drive progress against our sustainability priorities.
We are working with Innovate UK on AIMCH, a research project to compare issues such as embodied carbon in homes and the generation of waste between offsite and traditional build methods. We are actively looking at how we can meet the Future Homes Standard and design homes which are not connected to the gas grid.
Biodiversity and water
We are aiming to create a net positive impact for ecology and biodiversity across all developments we are progressing through planning from 2020. We hold a strategic partnership with the RSPB and released wildlife friendly show home garden guidance in July 2019. This mandates newly designed show home gardens to reach at least ‘Bronze Level’ standard against RSPB criteria.
We have also published our ‘Approach to Water’, which explains the ways in which the business is mitigating the risks from flooding and freshwater scarcity both to our business and to the communities in which we operate.
We continue to focus on waste and resource efficiencies and take practical steps in our operations to reduce waste.
We have disappointingly seen a further rise in waste intensity of 18% in FY20 (FY19: 8% increase). This is an 8.6% increase compared to the baseline in FY15 and puts our longer term target for waste reduction at risk. We have undertaken a review and identified that onsite segregation can be improved. We have commenced a back to basics campaign in order to reinforce monitoring and tracking of waste reduction actions across our sites.
As part of our efforts to analyse and understand the root causes of waste, we also conducted a survey of 72 suppliers to investigate the extent and types of single use plastic packaging on site, identifying opportunities to reduce it through further collaboration.
We are committed to creating a positive legacy in the communities in which we live and work and we aim to be industry leading in our approach to charitable giving and social responsibility. We believe it is important to support charitable causes both locally and nationally and we actively promote charitable giving and volunteering amongst our employees. In FY20 we raised and donated £4.4m (FY19: £2.9m) for charitable causes.
COVID-19 has made it all the more important to do what we can to support our communities. We have donated £100,000 to NHS Charities Together directly and an additional £50,000 to NHS Charities Together through The Sun’s Who Cares Wins campaign, as well as, £25,000 to The Big Issue to support vendors who were unable to sell the magazine during the lockdown. In the early stages of the pandemic, we also donated 5,000 medical standard facemasks to the NHS and all 400 of our defibrillators to St John Ambulance and St Andrew’s First Aid. This is in addition to our Big Barratt NHS Thank You, under which we provide a deposit contribution to NHS workers trying to get onto the property ladder. To date the NHS Thank You has funded over £10.0m of deposit contributions.
The Group has also entered into new partnerships with a number of charities this year. In September 2019, we signed up to a three year £1m partnership agreement with Outward Bound Trust. The Trust uses outdoor adventure programmes to help young people access nature and build resilience and self-belief. Our partnership will help around 2,400 children, while 82 of our employees will get the opportunity to act as mentors on Outward Bound courses. We also entered into a three year partnership with HighGround to help fund horticultural therapy services for injured service personnel and became the official sponsors of the Whizz Kidz Kidz Board, a group of young wheelchair users who meet to discuss and develop recommendations around the issues facing disabled young people. These partnerships build on our existing partnerships with St Mungo’s, a homelessness charity, The Royal British Legion Industries (RBLI) helping build a Centenary Village for ex-servicemen and women, as well as our long term commitment to the RSPB to improve the sustainability of our developments, enhancing and improving habitats and supporting wildlife.
Two of the Group’s five principles are ‘Being a trusted partner’ and ‘Building strong community relationships’ and we are committed to partnering with local organisations to support and improve communities and leave a positive legacy in the areas in which we work. Through the Barratt & David Wilson Community Fund this year we have supported a range of different causes, from new equipment for a local sports club to playgroups at a children’s hospice, and from support groups for cancer sufferers to library buses for local schools. A number of our divisions also supported the fight against COVID-19, donating to Meals for the NHS and St John Ambulance.
We recognise the importance of dividends to our shareholders. Going forward, we believe that it is in the best interests of shareholders to have a long term predictable dividend income stream, through an ordinary dividend policy with a defined level of ordinary dividend cover. When the Board believes the time is right it will implement a dividend policy based on a dividend cover of 2.5 times.
Current trading and outlook
We are focused on rebuilding our completion volumes to our medium term target and capacity of 20,000 homes. We have acquired land in recent years at a minimum 23% gross margin, and through our continued focus on operating efficiencies and the rebuilding of completion volumes, we continue to target a minimum 25% ROCE in the medium term.
The sales performance across all regions in the new financial year to date has been encouraging, with net private reservations per average week of 314 (FY20: 250), resulting in net private reservations per active outlet per average week of 0.94 (FY20: 0.68). We have also seen a substantial increase in home completion volumes in the eight weeks to 23 August 2020, which were up 62.4% compared to the prior period at 1,439 homes including JVs (25 August 2019: 886 homes including JVs). The increased activity levels are being stimulated by a combination of pent-up demand, the Stamp Duty holiday and an understanding that Help to Buy will only be available to first time buyers and regional home price caps will exist from April 2021.
Our total forward sales, including JVs, as at 23 August 2020 stood at 15,660 homes (25 August 2019: 13,064 homes) at a value of £3,706.5m (25 August 2019: £3,037.5m).
We are pleased that since the start of the new financial year we have seen our production increase, constructing the equivalent of 347 homes in the week ending 23 August 2020 and we are on track to deliver our planned output.
Based on current market conditions, construction activity levels and assuming no further lockdowns, we expect to grow wholly owned completions to between 14,500 and 15,000 homes in FY21, and in addition around 650 completions from our joint ventures, whilst ensuring we maintain our industry leading standards of quality and service.
Whilst there continues to be economic and political uncertainty, the Group is in a strong position. We have a substantial net cash balance, a well-capitalised balance sheet, a healthy forward sales position, a continued focus on delivery of operational improvements across our business and an ongoing commitment to deliver high quality homes across the country. We have therefore now re-entered the land market selectively, maintaining our disciplined approach, where we see attractive opportunities.
Our experienced Board remains focused on taking the actions necessary to safeguard the operational and financial strength of the business whilst our first priority remains the health and safety of our employees, sub-contractors and customers.
Barratt Development’s Board will continue to monitor the market and economy and believes that our strong financial position provides us with the resilience and flexibility to react to changes in the operating environment in FY21 and beyond.
1 September 2020