# McCarthy & Stone plc Results in line with expectations

- Link: https://www.directorstalkinterviews.com/mccarthy-stone-plc-results-in-line-with-expectations/412797526
- Published: 2019-11-07T08:00:48+00:00
- Author: Giles Arbor

**McCarthy & Stone**, (LON: MCS) the UK’s leading developer and manager of retirement
communities, has issued an update on its progress with key strategic initiatives
together with a trading update for the 14 month financial year ended 31st October
2019, ahead of reporting its annual results on 28 January 2020. All comparatives
are to the 12 month financial year ended 31st August 2018 unless otherwise stated.

**Trading update**

· Full year revenue is expected to be c.£720m (2018: £672m) supported by a c.3% 
increase in average selling price1 to c.£308k (2018: £300k) and total legal completions
of 2,3012 units (2018: 2,1342).

· Underlying operating profit3 for the 14 month period is expected to be within 
the current analyst forecast range of c.£64m to c.£71m (2018 underlying operating
profit: £67.5m).

· Underlying trading conditions remained challenging during the period due to the
impact of ongoing political and economic uncertainty on the secondary housing market.
Additional uncertainty over potential stamp duty changes dented transaction levels,
particularly in the South East, resulting in higher discount and incentive levels
compared to the prior year. These tougher market conditions are expected to continue
throughout the new financial year.

· Following a successful trial, the Group’s new rental offering is gaining momentum,
achieving recent net reservation rates of c.7 per week and with its new multi-tenure
options now available across over 70 developments nationally. The Group delivered
101 rental transactions during the gradual roll out period together with a further
21 ‘rent to buy’ and 47 shared ownership transactions. The associated uplift to 
market value of the rental assets has been recognised in the Group’s balance sheet
and underlying operating profit.

· The Board approved an increase in the Group’s in-house part-exchange capacity 
to 15% of TNAV4 (previously 10%). This continues to be a key tool in converting 
reservations to sales more quickly and cost effectively. Strict part-exchange controls
have been maintained and properties have been resold in line with the Group’s pricing
and timeline targets at an average period of c.12.5 weeks (2018: c.13.1 weeks).

· Year end net cash5 is expected to be c.£24m (2018: net cash of £4m) notwithstanding
the increased level of in-house part-exchange transactions and the seed portfolio
of rental properties currently held on the balance sheet prior to onward sale to
a strategic rental partner.

· The Group maintained its industry-leading levels of customer satisfaction and 
remains the only developer of any size or type to receive the full Five Star rating
from the HBF for 14 consecutive years.

**Strategy update**

**Stage 1 FY19-FY21: Optimisation of operations**

The Group’s main priority this year was to start delivering on its three-year programme
of business optimisation with focus on delivering 15% ROCE6, 15% operating profit
margin7 by FY21 and cumulative cash savings of >£90m across the life of the plan.
This strategy remains on track and is expected to deliver c.£40m cost saving which
will be weighted towards delivery in FY21 due to its focus on build cost savings.
The Group’s strategy is being delivered through four key workstreams – workflow 
realignment, rightsizing the business, establishing an efficient sales and marketing
model and delivering build cost reductions.

In line with the Group’s strategy to smooth its workflow and legal completions delivery,
the Group delivered 53 high-quality first occupations (2018: 68), 38 planning consents(
2018: 37), 34 land exchanges (2018: 54) and 40 build starts (2018: 53) during the
year. The Group is now focusing on increasing land optionality to ensure that the
business is well positioned to respond when market conditions improve.

Year-end finished stock levels reduced to c.1,650 (2018: 1,785) and are expected
to reduce further by the end of FY20 given the lower level of planned FY20 first
occupations (c.37) (2019: 53) and the increased focus on selling down recently released
finished inventory (c.90% of stock is under 2 years old). This is expected to underpin
a strong cash position by the end of the year in line with our strategic plan. The
Board will continue to review the Group’s capital allocation policy on a regular
basis.

The Group has substantially completed its work to rightsize the business and optimise
its operational cost base to deliver steady state volumes, resulting in an annualised
cash saving of >c.£10m. Additional steps to optimise its operating business in line
with the Group’s strategy are being announced today which will drive increased focus
on the customer by bringing sales and services closer together and reframing the
development part of the business to deliver increased value in our development pipeline.
This realignment will consolidate our seven regional businesses into four larger
development divisions and will help strengthen the Group’s oversight as well as 
reducing costs further.

Additional headcount savings of c.£2m have been achieved as part of our strategy
to optimise the Group’s sales operating model and the Group’s focus in FY20 now 
turns to improving off-plan sales and reducing incentive costs via strategic use
of part-exchange and shared ownership models. These key initiatives will be supported
by the Group’s new Salesforce CRM system which has now been rolled out across all
regions, further marketing investment and the recent launch of an improved new website.

The build cost reduction initiative is also progressing well with key savings already
embedded in construction budgets for FY20 sites and specific plans are now in place
to deliver an average improvement of c.£10k p/u across our FY21 schemes. This activity
is expected to deliver more than half of the proposed c.£40m cost saving in FY21.

1 Average selling price is calculated as average list price less cash discounts,
stamp duty land tax, part-exchange top-ups and fair value adjustments

2 Including a bulk sale of 113 units (2018: 68 units). The FY19 transaction is a
sale and lease back of sales offices and show flats to Waverstone LLP, where McCarthy&
Stone is a non-controlling member.

3 Underlying operating profit is calculated by adding amortisation of brand and 
exceptional items to operating profit

4 Tangible net asset value (TNAV) is calculated as net assets excluding goodwill
and intangible assets

5 Calculated as cash and cash equivalents less total borrowings

6 Return on capital employed (ROCE) is calculated by dividing underlying operating
profit by the average tangible gross asset value at the beginning and end of the
period. Tangible gross asset value is calculated as TNAV less net debt

7 Calculated as underlying operating profit divided by revenue for the year

**Stage 2 FY19-FY23: Leveraging strategic opportunities**

During the period, the Group has also made good progress with its three long-term
strategic initiatives to provide customers with increased Choice, Flexibility and
Affordability and leverage the long-term opportunities in this sector.

**Choice**

· The Group has made excellent progress with its multi-tenure offering, giving our
customers a choice of ownership, with a professional rental team now in place. This
has been rolled out to more than 70 developments nationally following successful
trials in the spring that confirmed strong demand for rental across both the Retirement
Living and Retirement Living PLUS products.

· Good progress has been made in building a ‘seed investment portfolio’ of >100 
rentals with attractive gross rental yields8 of c.6%-8%. The Group has mandated 
Rothschilds & Co to secure high-quality third-party capital partners to co-invest
in the Group’s retirement rental strategy and to create a portfolio of scale up 
to an asset value of c.£300m with strong yields and low occupancy churn focused 
entirely on the hugely underserved retirement living sector. The Group has now received
preliminary expressions of interest from potential investors and will update the
market further as part of its full year results announcement on 28 January 2020.

· Following this successful roll out and ramp up in H2 FY19, the Group now expects
an increased proportion of its 2,100 targeted volumes to come from its new rental
offering during FY20.

**Flexibility**

· YourLife Management Services Limited, which manages the Group’s Retirement Living
PLUS developments, became a wholly-owned subsidiary of the Group in the year. This
means that all services provided in these developments will now be delivered directly
by McCarthy & Stone, making it one of the largest operators in the housing with 
care sector. The Group continues to offer and test new services across its developments
whilst also expanding its care offering into its Retirement Living developments 
and increasing catering options.

· This represents the first milestone towards the Group’s target of generating >
5% of Group revenue from management services revenues by providing flexible, future
proofed services that evolve with our customers’ needs.

**Affordability**

· The Group has been working with potential partners in the volumetric and panelised
development industry to progress its plans to develop a new and more contemporary
product with a more efficient layout utilising Modern Methods of Construction (MMC)
to accelerate construction times, improve build quality further, reduce costs and
ultimately lower average selling prices to help maintain the Group’s mass market
appeal.

· The Group’s first development to be built using MMC is set to start construction
during FY20.

8 Annual gross rental revenue as a percentage of the balance sheet value of the 
rental property

**Outlook**

The Group’s new strategy has driven a solid trading performance in a difficult market.
These challenging market conditions, created by the continued political and economic
uncertainty, are now expected to continue throughout the new financial year. The
impact is expected to be evident in the Group’s underlying operating margin through
an ongoing need for increased levels of part-exchange and a lower mix of sales from
the South East. We expect this to be partially mitigated, however, by the decisive
actions management have taken in executing the Group’s new strategy, particularly
the increased opportunity for multi-tenure, which has made a positive start and 
is expected to become a more substantial part of the Group’s overall volumes in 
FY20 and beyond.

Focus will continue on optimising financial performance as the Group’s new strategy
develops throughout FY20, with the majority of benefits coming from build cost reductions
which will result in an improved operating margin in FY21.

> **John Tonkiss, McCarthy & Stone Chief Executive Officer, commented:**
> “While the long-term demand for our products and services remains strong, we have
> continued to experience challenging conditions in the secondary housing market
> resulting from the ongoing political and economic uncertainty. The medium-term
> economic outlook will depend on how the UK’s EU withdrawal is delivered, but our
> new strategy has positioned us well to deliver a solid trading performance in 
> a difficult market and respond positively when trading conditions improve.
> “We have a strong balance sheet, a continued focus on delivery of operational 
> improvements across our business and an ongoing commitment to deliver high-quality
> developments and Five Star customer satisfaction.
> “We are also making exciting progress across our key strategic initiatives as 
> set out last September, particularly rental, where our initial pilots have confirmed
> strong demand for renting in later life. This is a hugely positive step for the
> business as it enables our business model to become more resilient and ensures
> that we are in a strong position to capitalise on future market recovery.
> “We are committed to finding a high-quality strategic capital partner to co-invest
> with us in this hugely underserved retirement rental space in order to develop
> our vision of creating even deeper and longer lasting relationships with our customers.”

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