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Taylor Wimpey

Taylor Wimpey returns to a sustainable level of sales and build

Taylor Wimpey plc (LON:TW) has announced its half year results for the period ended 28 June 2020.

Pete Redfern, Chief Executive, commented:

“I am pleased with Taylor Wimpey’s performance during a very challenging time and am proud of the resilience, principled approach and agility that our teams have shown.

Our performance for the first half of 2020 has been impacted by the closing of our sites and sales centres but we have now reopened all sites successfully and safely and have returned to a sustainable level of sales and build. We are delighted that our NHS and care workers discount scheme has been taken up by over 1,200 households to date.

Looking ahead, balance sheet strength, a long order book and our high quality and growing landbank gives us confidence in our ability to navigate the challenges and emerge stronger from the pandemic. While uncertainties remain, we are confident in the underlying fundamentals of the housing market.

I would like to thank all of our employees, subcontractors and suppliers for their exceptional response to the crisis. Their tremendous effort has enabled us to continue to support customers and protect the value of our business, at a time of great uncertainty.”

Group financial highlights

 H1 2020H1 2019ChangeFY 2019
Revenue £m754.61,732.7(56.4)%4,341.3
Operating (loss) / profit* £m(16.1)311.9n/a850.5
Operating margin*(2.1)%18.0%n/a19.6%
(Loss) / profit before tax and exceptional items £m(29.8)299.8n/a821.6
(Loss) / profit before tax £m(39.8)299.8n/a835.9
(Loss) / profit for the period before exceptional items £m(23.2)242.0n/a662.3
(Loss) / profit for the period £m(31.5)242.0n/a673.9
Basic (loss) / earnings per share pence(1.0)7.4n/a20.6
Adjusted basic (loss) / earnings per share pence††(0.7)7.4n/a20.3
Tangible net asset value per share pence102.8102.20.6%100.5
Net cash‡ £m497.3392.026.9% 545.7
Return on net operating assets**16.8%29.4%(12.6)ppt31.4%

UK operational highlights:

· Group completions of 2,771 homes (H1 2019: 6,541) excluding joint ventures, impacted by site closure during Q2 2020

·    Positive sales momentum and customer interest:

o H1 2020 net private sales rate of 0.70 (H1 2019: 1.00). Sales rate of 0.97 prior to shutdown, which reduced to 0.30 during the shutdown

o Sales prices during shutdown consistent with those achieved in Q1 2020

o Outlets increased to 252 at period end (H1 2019 period end: 246 outlets)

o Strong total order book as at 28 June 2020 representing 11,686 homes (30 June 2019: 10,137 homes), up 15%, with a value of £2,904 million (30 June 2019: £2,366 million), up 23%, excluding joint ventures

·   NHS and care workers discount scheme well received with 1,206 homes reserved at w/e 26 July 2020

·    All of our employees have returned to work from furlough and we have returned all furlough subsidies to Government 

·   Improved average Construction Quality Review score to 4.31, in the top quartile of large homebuilders (H1 2019: 4.05)

·    4 out of 5 star rating on Trustpilot and over 90% of customers would recommend us in H1 2020, according to the Home Builders Federation 8-week customer survey

·   Successful equity raise, raising net proceeds of c.£510 million for investment in attractive land opportunities

Financial overview

The COVID-19 pandemic has had a significant impact on production activity and therefore completion levels for the first half of 2020. Our sites and sales centres were closed from 23 March and we returned to site at reduced capacity between 4 May and 29 May. Sales centres reopened between 22 May and 29 June. This has resulted in a material impact on our financial performance. 

Total home completions (excluding joint ventures) decreased by 57.6% to 2,771 (H1 2019: 6,541). Gross profit was £91.0 million (H1 2019: £409.6 million), with a gross profit margin of 12.1% (H1 2019: 23.6%). Group operating profit decreased to a loss of £16.1 million (H1 2019: £311.9 million profit) and an operating margin of (2.1)% (H1 2019: 18.0%) driven by reduced ability to absorb fixed costs on lower completions.

The operating loss includes £39.2 million of costs directly relating to the COVID-19 pandemic. These include £29.9 million of non-productive site overhead costs incurred during the controlled closure and lockdown period which would ordinarily be capitalised to work in progress and expensed as plots legally complete; £4.7 million of additional costs incurred due to extended site durations resulting from reduced productivity levels as we developed our operational processes under the COVID-19 Secure guidelines; and £4.6 million of incremental costs incurred in responding to COVID-19, including costs to meet our health and safety requirements and complying with Government guidelines. This resulted in a loss for the period of £31.5 million.

Cashflow was also significantly impacted by the closure of our sites, with revenues delayed as completions were held back whilst we continued to pay trade and land creditor commitments. We maintained strong cash management and cost discipline throughout the crisis and retained a net cash position prior to our equity raise. We ended the period with net cash of £497.3 million, having raised c.£510 million in net proceeds through an equity raise in June for investment in land opportunities over the next 12 months. Our revolving credit facility was drawn in full as a precaution as we went into the lockdown and has now been fully repaid and remains undrawn. 

UK current trading and outlook

In the nine weeks since our sales centres reopened in England, our sales rate increased from 0.30 (during shutdown) to 0.70 and there has been a 206% increase in appointments booked and a 50% increase in website visits, year on year.

Whilst there remains a high degree of uncertainty in the short term from both the impact of COVID-19, particularly on employment, as well as the UK’s exit from the European Union, demand has remained robust and our customers have continued to want to progress their home purchases. Despite the uncertainty, mortgage finance has continued to be available and we welcome the positive lending signals from the banks. The decrease in the Bank of England base rate to a new historic low in March continues to support affordability.

As at 26 July 2020, we were c.97% forward sold for private completions for 2020 (2019 equivalent period: 87%), with very limited availability of homes for customers to move into in 2020. This gives us significant confidence for this year’s completions, although reduced availability is likely to mean that sales rates remain below normal until construction catches up.

Forward indicators remain strong and our order book has increased in both value and number of homes. We are focused on building our order book for 2021. Our total order book value stands at £3,022 million (2019 equivalent period: £2,516 million), excluding joint ventures as at  26 July 2020. This order book represents 12,014  homes (2019 equivalent period: 10,558).

Cancellation numbers have remained low throughout H1 2020. The cancellation rate for H1 2020 was 21% (H1 2019: 14%), representing 0.8% per week of the private order book (H1 2019: 0.9%). Cancellation rates peaked in the weeks immediately after we restarted construction, as customers’ completion dates moved, but have now started to reduce week on week.

Our 2020 completions will be materially impacted by the closure of sites in March, which means Q4 completions will largely move into  Q1 2021. We are now operating safely at c.80% production capacity and expect to deliver around 40% less completions in 2020, compared to 2019. This will have a significant impact on revenues and margins in 2020 and will have some  knock on impact on 2021 delivery. We expect to end 2020 in a net cash position in the range of £550 million to £750 million, dependent on the timing of land purchases.

Our priority has been to protect the business in the short term while ensuring we position ourselves to take advantage of opportunities which will strengthen the business for the future and increase shareholder returns. This includes significant investment in land, given the short term opportunity, and investing in and opening new sales outlets, which we expect to continue to grow in the medium term. We have secured and approved 26 new sites in the weeks since returning to the land market, with strong financial metrics despite a weighting towards smaller sites. Opportunities and the pipeline remain at a high level. We will continue to focus on driving down cost while running the business in the right way for the longer term. We expect to emerge from this period of uncertainty in a strong competitive position and expect to recommence ordinary dividend payments in 2021 (2020 final). We will review the special dividend in 2021 for payment in 2022.

Alternative performance measures and other key performance indicators

* Operating profit or loss is defined as profit or loss on ordinary activities before net finance costs, exceptional items and tax, after share of results of joint ventures.

* Operating margin is defined as operating profit or loss divided by revenue.

** Return on net operating assets (RONOA) is defined as rolling 12 months operating profit or loss divided by the average of the opening and closing net operating assets of the 12 month period, which is defined as net assets less net cash, excluding net taxation balances and accrued dividends.

*** Return on capital employed is defined as rolling 12 months operating profit or loss divided by the average capital employed calculated on a monthly basis over the period.

**** Operating cash flow is defined as cash generated by operations (which is before income taxes paid, interest paid and payments related to exceptional charges).

 Tangible net assets per share is defined as net assets before any accrued dividends excluding goodwill and intangible assets divided by the number of ordinary shares in issue at the end of the period.

†† Adjusted basic earnings per share represents earnings attributed to the shareholders of the parent, excluding exceptional items and tax on exceptional items, divided by the weighted average number of shares in issue during the period.

* Net operating asset turn is defined as 12 months rolling total revenue divided by the average of opening and closing net operating assets of the 12 month period .

†** WIP turn is defined as total revenue divided by the average of opening and closing work in progress for the 12 month period.

†*** The Injury Incidence Rate (IIR) is defined as the number of incidents per 100,000 employees and contractors, calculated on a rolling 12 month basis, where the number of employees and contractors is calculated using a monthly average over the same period.

‡ Net cash is defined as total cash less total financing.

‡‡ Cash conversion is defined as operating cash flow divided by operating profit or loss on a rolling 12 month basis.

‡‡‡ Contribution margin is defined as revenue less direct build costs, less gross land costs and less direct selling expenses. Contribution margin excludes the impact of supplier rebates, land provision utilisation and discounting of deferred land commitments.

‡‡‡‡ Adjusted gearing is defined as adjusted net debt divided by net assets. Adjusted net debt is defined as net cash less land creditors.

A reconciliation of alternative performance measures to statutory measures is disclosed in note 17 of the financial statements.

A presentation to investors and analysts will be hosted by Chief Executive Pete Redfern and Group Finance Director Chris Carney via conference call at 9:00am on Wednesday 29 July 2020. This presentation will be webcast live on our website: www.taylorwimpey.co.uk/corporate 

An archived version of the webcast will be available on our website in the afternoon of 29 July 2020.

COVID-19 overview

During the first half of 2020 the UK housing market was materially impacted by the UK-wide lockdown in response to the COVID-19 pandemic. Our first priority has been the health and safety of our customers, employees, subcontractors and suppliers and we took an early decision in March to temporarily close all show homes, sales centres and construction sites to enable us to put in place detailed COVID-19 Secure health and safety protocols. We started the phased reopening of our construction sites on 4 May in England and Wales and on 22 May in Scotland and are now open on all construction sites and operating at c.80% build capacity. All sales centres and show homes are open for pre-booked appointments only. Our small Spanish business underwent a short period of shutdown and changes to working protocols that impacted first half completions. Our Spanish business is now fully open, although the second homes market remains slow.

We have benefited from our investments in IT, training and development which allowed us to continue to support customers through this time and protect and grow our order book, at a time of great uncertainty. Our communication to, and support of subcontractors through our Pay It Forward scheme, as well as weekly updates to suppliers and subcontractors has helped the process of returning to work on Taylor Wimpey sites and strengthened those relationships.

The pandemic has materially reduced the level of competition for land and created a disconnect in the land market, resulting in significant short term opportunities to acquire land from a broad range of sources at attractive returns.

On 17 June 2020 we announced an opportunity-led equity raise where we raised net proceeds of c.£510 million to take advantage of these near term opportunities. Our strong balance sheet and net cash position have given us choices and have meant that we have been able to maintain our strategy in addition to tightly controlling cash. These investments, which are continuing to meet our returns criteria, will support sustainable future growth and deliver long term value to shareholders.

Operational review

Taylor Wimpey plc is a customer-focused residential developer building and delivering homes and communities across the UK and in Spain.

Our operational review is for the UK only as the majority of metrics do not apply to our Spanish business. A short summary of the Spanish business follows. The financial analysis is presented at Group level, which includes Spain, unless otherwise indicated.

Joint ventures are excluded from the operational review and Group financial review, unless stated otherwise.

Our key performance indicators (KPIs)

Our KPIs target and measure improvement across the five key areas of our strategy and tie into remuneration across a number of levels in the business.

Table 1: KPIs

UKH1 2020H1 2019ChangeFY 2019
Customers and communities at the heart of our strategy
Customer satisfaction 8-week score’Would you recommend?’91%89% 2.0ppt89%
Customer satisfaction 9-month score’Would you recommend?’76%77% (1.0)ppt77%
Build quality: getting it right first time
Construction Quality Review (average score / 6)4.314.05 6.4%4.13
Average reportable items per inspection0.260.28(7.1)%0.28
Optimising our strong landbank
Land cost as % of ASP on approvals20.1%21.2% (1.1)ppt16.2%
Landbank yearsc.6.5c.5.1 27.5%c.4.8
% of completions from strategically sourced land55% 58%(3)ppt56%
Becoming the employer of choice
Employee turnover % (voluntary) rolling 12 months11.1%12.9% (1.8)ppt12.9%
Number of people recruited into early talent programmes: graduates, management trainees and site management trainees rolling 12 months98152 (35.5)%116
Directly employed key trades including trade apprentices1,11082135.2%1,169
Health and Safety Injury Incidence Rate (per 100,000 employees and contractors) rolling 12 months***130241 (46.1)%156
Best in class efficient engine room
Net private sales rate per outlet per week0.701.00 (30.0)%0.96
Private legal completions per outlet8.818.8 (53.2)%48.2
Order book value £m2,9042,366 22.7%2,176
Order book volume – no. of homes11,68610,137 15.3%9,725

N.B. The 8-week ‘would you recommend’ score for H1 2020 relates to customers who legally completed between October 2019 and March 2020 with the comparator relating to the same period 12 months prior. The 9-month ‘would you recommend’ score for H1 2020 relates to customers who legally completed between October 2018 and March 2019, with the comparator relating to the same period 12 months prior.

Sales, completions and pricing

Total home completions (excluding joint ventures) decreased by 58% to 2,713 (H1 2019: 6,432) including 637 affordable homes (H1 2019: 1,594), equating to 23.5% of total completions (H1 2019: 24.8%). The reduction in completions is the result of the closure of construction sites and the gradual scaling up and adjusting to new COVID-19 Secure principles.

Our net private sales rate for the first half of the year was 0.70 homes per outlet per week (H1 2019: 1.00). Cancellation numbers have remained low throughout H1 2020. The cancellation rate for H1 2020 was 21% (H1 2019: 14%), representing 0.8% per week of the private order book (H1 2019: 0.9%). Average selling prices on private completions increased by 2.0% to £307k (H1 2019: £301k). Our total average selling price increased by 3.1% to £269k (H1 2019: £261k), with a slightly larger mix from our Southern businesses.

Table 2: Year to date sales data

 Pre-shutdownWeeks 1-13During shutdownWeeks 14-21Post shutdownWeeks 22-30
Average outlets240231243
Net private sales rate per outlet per week0.970.300.70
Cancellation rate (private)15%29%30%
Cancellations / week as % of private order book0.8%0.5%1.1%
Order book units10,91711,15212,014
Order book value £m2,6882,7573,022
% of order book exchanged69%70%67%

N.B. All outlets were physically shut down during weeks 14-21 but 231 average outlets remained open digitally

In recognition of the incredible work our nation’s care workers have done throughout the crisis, we launched a new discount scheme for NHS staff, care workers and the emergency services offering a 5% discount, applied to homes reserved in 2020 to complete in 2020 and 2021. This initiative has been well received with 1,206 homes reserved under this scheme as at week ending 26 July 2020.

We have a wide range of products from one-bedroom apartments to five-bedroom homes. First time buyers accounted for 50% of total sales in the first half of 2020 (H1 2019: 38%). Investor sales continued to be at a very low level at 3% (H1 2019: 5%).

During the first half of 2020 approximately 50% of total customer sales used the Help to Buy scheme (H1 2019: c.40%) of which 77% were first time buyers (H1 2019: 76%).

As at 28 June 2020, our order book represented 11,686 homes (30 June 2019: 10,137 homes) increasing in value by 23% to £2,904 million (30 June 2019: £2,366 million), excluding joint ventures. The Central London order book was 279 homes (30 June 2019: 188 homes), at a value of £279 million (30 June 2019: £154 million). Our affordable order book stood at 5,119 homes at the period end (30 June 2019: 4,474 homes).

During the first half of 2020 we opened 39 new outlets (H1 2019: 53).

Customers

We have continued to support our customers during this period and have focused on how to provide reassurance and make the homebuying process easier for them, during a challenging time. One of the biggest challenges of delivering for our customers this year will be meeting and managing their expectations for completion dates, some of which have moved significantly because of site closures.

We have enhanced our digital offering to enable customers to complete their entire homebuying journey remotely, from registering their interest through to completion of purchase. We have also introduced a new series of digital tours so our Sales Executives can complete digital viewings, which we will continue to expand.

In monitoring our progress, we continue to asses a broad range of measures on quality and service. In 2019 we also introduced the NHBC Construction Quality Review (CQR) score as a new KPI. In H1 2020 we scored an average of 4.31 (H1 2019: 4.05) from a possible score of six, making us a top quartile major housebuilder. We aim to improve this further by ensuring our quality assurance processes are embedded at every stage of build and our target is to maintain a rating of at least four in each regional business.

We are pleased that we are operating at above 90% customer satisfaction, the level recognised as being a five-star builder according to the Home Builders Federation (HBF) 8-week customer survey, achieving a score of 91% for the first half of 2020. We also encourage customers to leave reviews on Trustpilot. We currently have a 4 out of 5 star rating with a TrustScore of 4.0 out of 5.

Land

Our short term landbank stood at c.77k plots, as at 28 June 2020 (31 December 2019: c.76k plots). We completed fewer than usual land transactions in the first half reflecting our decision to put land acquisition on hold in March until recommencing activity in the second quarter. These acquisitions also reflect our focus, outlined at the full year results, on acquiring smaller site sizes. As a result, we approved 5,167 plots during the first half of 2020  (H1 2019: 5,846) at an average contribution margin‡‡‡ of 28.5% and return on capital employed*** of 34.8%, with an average size of 258 plots.

Our strategic land pipeline stood at c.138k potential plots as at 28 June 2020 (31 December 2019: c.140k potential plots). During the first six months of 2020 we converted a further 2,501 plots from the strategic pipeline to the short term landbank (H1 2019: 4,165 plots). In the period, 55% of our completions were sourced from the strategic pipeline (H1 2019: 58%).

The average cost of land as a proportion of average selling price within the short term owned landbank remains low at 14.8% (H1 2019: 15.3%). The estimated average selling price in the short term owned landbank in H1 2020 was £288k (H1 2019: £284k).

We prioritise engaging with local communities as part of the planning and construction process and strive to make a positive impact in the wider community and have looked for more innovative ways of doing this during this period. We continued to progress planning through the shutdown period and were pleased to have achieved the UK’s first significant planning permission remotely. In the first half of 2020, through our planning obligations, we have contributed over £92 million to the local communities in which we build (H1 2019: £196 million). This provides vital local infrastructure, affordable homes, public transport and education facilities.

Increased land opportunities

Our high-quality landbank remains a key competitive advantage and value driver and we are  adding further high quality land at attractive prices to benefit shareholder returns.  

The land market continues to be attractive for buyers with capital and liquidity, who can offer certainty and the ability to execute. Through the second quarter we saw an increased level of deals returning to market, with other buyers unable or unwilling to continue to complete on their previously agreed terms. We intend to use the proceeds of our recently completed equity raise to take advantage of these short term opportunities, in addition to our planned land expenditure, over the next 6-12 months.

Our new purchases include conservative assumptions on selling rates and reflect increased costs in relation to potential changes as a result of new environmental legislation.

Since we recommenced land activity in the second quarter, we have approved or contracted 26 land deals at a total cost of £346 million. These sites have an average return on capital of c.35% and an average operating margin above our medium term target of c.21-22%. The sites represent 6,165 plots in good locations broadly spread across our three divisions with an average site size of 237 plots, reflecting our focus on increasing the proportion of smaller sites in our mix. Smaller sites typically offer a higher return on capital but lower operating margins than larger sites, so it is pleasing that we have been able to advance this strategy at margins above our target range.

The number of new opportunities is continuing to improve and our total pipeline now stands at over 80 sites and almost 30,000 plots under discussion and consideration.

Employees

With 24 regional businesses across the country, we are a significant local employer, employing on average 6,024 people (H1 2019: 5,613) directly, with thousands more working with us through subcontractors and suppliers.

Our employees have shown great commitment and flexibility throughout this period enabling us to maintain strong relationships with our customers and protect the order book, and safely restart operations on our sites. All of our employees have returned to work from furlough and we have now returned the furlough subsidies to the Government.

Our employees have been engaged throughout the crisis and we believe their dedication will ensure we are able to respond quickly to any opportunities we see. Our rolling 12 months voluntary employee turnover rate remained low at 11.1% (H1 2019: 12.9%) with no redundancies made as a result of COVID-19.  

We have 1,110 directly employed key tradespeople, including apprentices, as at 28 June 2020, a 35% increase year on year. In the 12 months to 28 June 2020, we recruited 98 people into our early talent management schemes  (H1 2019 12 months rolling: 152), to meet our business requirement and reflecting our low employee turnover.

Employee communication and engagement has been vital in this period. We have introduced a new series of ‘pulse’ employee surveys to regularly gain feedback from our employees on key matters. 98% of our employees said they feel positive about how the Company supported them whilst on furlough and 97% are comfortable with the arrangements the Company has put in place to protect their safety.

With the business fully open, and all employees returned to work, Executive Director salaries and Non Executive Director fees will return to normal from the beginning of August.

We are delighted that TheJobCrowd have recognised us as one of the country’s best places to work for Graduates and Apprentices in 2020/21. Based on employee feedback, we were ranked first among property and housebuilding companies for Apprentices, and second for Graduates. We were also pleased to have been named in the top 50 places to work in the UK for 2020 by Glassdoor, as voted for by employees, for the third consecutive year.

Suppliers, subcontractors and partners

The health and safety of individuals on our sites will always be our number one priority. Our Injury Incidence Rate (IIR) for reportable injuries per 100,000 employees and contractors was 130 on a rolling 12 months basis to 28 June 2020 (2019 equivalent period: 241). 

Our strong culture and processes have assisted in implementing the Taylor Wimpey COVID-19 Code of Conduct and we continue to receive good feedback from both our employees and subcontractors. Our Pay It Forward scheme has been welcomed, and replicated, by our subcontractors and has had a positive impact on getting our sites back up and running efficiently.

Our employees’ dedication to local communities has been demonstrated throughout the COVID-19 crisis, donating and making vital PPE for care homes, volunteering for the NHS and within their communities and raising funds for charities.

Build costs

We have been reassured by the availability of both labour and material as we have returned to sites. We remain focused on cost and increased discipline. Our central procurement team is targeting improvements in visibility and availability of material selection that will help avoid material shortages and help mitigate future price increases.

As set out earlier, as a result of COVID-19 we had non-productive and incremental costs in the period which increased build costs. However, as production capacity is now at 80% and improving, we would expect non-productive and incremental costs to gradually reduce over the balance of the year.   

We achieved an annual return on net operating assets for the Group of 16.8% in the first half of 2020 (H1 2019: 29.4%). The annual return on net operating assets for the UK business was 16.4% in the first half of 2020 (H1 2019: 29.2%). Our UK net operating asset turn* was 1.08 times (H1 2019: 1.42 times).

Dividends

In order to conserve cash and increase flexibility at the outset of the pandemic we took the decision to cancel the 2020 final dividend of 3.80 pence per share (c.£125 million) which was due to be paid on 15 May 2020, and the planned special dividend payment of 10.99 pence per share (c.£360 million), which was due to be paid on 10 July 2020. Although our Ordinary Dividend Policy has been the subject of prudent and comprehensive stress testing against various downside scenarios, including a 20% reduction in prices and a 30% reduction in volumes, and is payable through a normal downturn, the COVID-19 pandemic represents a highly unusual set of circumstances. We expect to resume the payment of an ordinary dividend in 2021 (2020 final) and will review the special dividend in 2021 for payment in 2022.

Spain

As in the UK, our Spanish business has faced market disruption during the COVID-19 pandemic. Our construction sites were closed for a relatively short period of between two and three weeks in March, whilst we installed health and safety measures, but are now up and running and operating efficiently.

There has been a more prolonged impact on sales activity given COVID-19 limitations on travel. This has impacted our international customer base, with new reservations mainly comprising Spanish nationals and existing residents in Spain purchasing holiday homes. 

We completed 58 homes in the first half of 2020 (H1 2019: 109) at an average selling price of €407k (H1 2019: €434k), with prices reflecting mix impacts. Gross margin increased to 27.0% (H1 2019: 25.3%). The business delivered an operating profit of £3.5 million for the first half of 2020 (H1 2019: £8.1 million), reflecting the lower completions, and an operating profit margin of 17.2% (H1 2019: 19.7%). 

Our total order book as at 28 June 2020 was 209 homes (30 June 2019: 312 homes). The total plots in the landbank stood at 2,791 (31 December 2019: 2,841), with net operating assets at £98.6 million (31 December 2019: £78.1 million). We have not seen a material impact on cancellations, and we have continued to complete on properties as expected. We continue to invest in work in progress to deliver our strong order book.

Group financial review of operations

The Group uses Alternative Performance Measures (APMs) as key financial performance indicators to assess underlying performance of the Group. The APMs used are widely used industry measures and form the measurement basis of the key strategic KPIs (return on net operating assets, operating margin and cash conversion‡‡). A portion of executive remuneration is also directly linked to some of the APMs. Definitions and reconciliations to the equivalent statutory measures are included in note 17 of the financial statements.

Income statement

Group revenue decreased by 56.4% to £754.6 million in the first half of 2020 (H1 2019: £1,732.7 million), reflecting the unprecedented impact of COVID-19 on the Group. UK volumes excluding JVs decreased by 57.8% to 2,713 completions (H1 2019: 6,432) with UK average selling prices up 3.1% to £269k (H1 2019: £261k). Average selling prices on private completions increased by 2.0% to £307k (H1 2019: £301k) in the UK, due to larger average plot sizes, and an increased proportion of completions from our Southern businesses compared with 2019.

During the period we have identified and expensed £39.2 million of costs relating to the COVID-19 pandemic, with £38.3 million charged to gross profit and £0.9 million to overheads. These costs include unproductive site overhead costs incurred during the controlled closure and lockdown period which would ordinarily be capitalised to WIP and expensed as plots legally complete of £29.9 million; additional costs incurred by the business due to extended site durations resulting from the reduced productivity levels as we develop our operational processes under the COVID-19 Secure guidelines totalling £4.7 million; and incremental costs incurred by the business in responding to COVID-19, including to meet our health and safety requirements and complying with Government guidelines, of £4.6 million.

Cost of sales reduced to £663.6 million (H1 2019 £1,323.1 million) in the period as the total cost of land, build and direct selling expenses reduced, reflecting the reduction in completions.

Group gross profit of £91.0 million (H1 2019: £409.6 million) decreased by 77.8% and includes the impact of COVID-19 related costs, as discussed above, as well as fixed build and direct selling costs which are absorbed across fewer completions. A positive contribution from previously written down inventory of £0.7 million was included (H1 2019: £3.6 million).

During the period, completions from joint ventures were 35 (H1 2019: 66),  as a result of delays due to site closures. The total order book value of joint ventures as at 28 June 2020 was £90 million (30 June 2019: £54 million), representing 183 homes (30 June 2019: 133). Our share of results of joint ventures in the period was a loss of £1.8 million (H1 2019: loss of £0.2 million).

As a result of the decrease in volumes and additional costs in relation to COVID-19 the Group operating profit decreased to a loss of £16.1 million (H1 2019: £311.9 million profit) and an operating margin of (2.1)% (H1 2019: 18.0%).

Loss on ordinary activities before finance costs was £24.3 million (H1 2019: £312.1 million profit), reflecting the impact of reduced volumes and the exceptional costs incurred of £10.0 million (H1 2019: no exceptional charge).

Net finance costs for the period were £13.7 million (H1 2019: £12.1 million). The increase was due to the interest payable on the revolving credit facility that was fully drawn for part of the period and repaid prior to period end. This was partially offset by a decrease in the interest charge on the defined benefit pension scheme. In addition, changes in foreign exchange rates in the period resulted in a small foreign exchange gain compared with a small loss in the comparative period.

Loss before tax and exceptional items for the period was £29.8 million (H1 2019: £299.8 million profit). The pre-exceptional tax credit was £6.6 million (H1 2019: £57.8 million charge) with an effective tax rate of 22.1% (H1 2019: 19.3%). The effective tax rate includes a £1.3 million credit (H1 2019: nil) arising from the remeasurement of the Group’s UK deferred tax assets at 19.0% following the changes to the corporation tax rates enacted by the UK Government. This resulted in a loss before exceptional items, for the half year of £23.2 million (H1 2019: £242.0 million profit).

The Group discloses material financial impacts arising from events which are one-off or unusual in nature as exceptional items. Having reviewed ongoing works to replace Aluminium Composite Material (ACM) cladding on a small number of legacy buildings a further £10.0 million has been provided for expected costs to complete the works.

Loss before tax for the period was £39.8 million (H1 2019: £299.8 million profit) after the exceptional charge of £10.0 million (H1 2019: no exceptional charges in the period). Loss after tax for the period was £31.5 million (H1 2019: £242.0 million profit).

Basic loss per share was 1.0 pence (H1 2019: 7.4 pence earnings per share). The adjusted basic loss per share was 0.7 pence (H1 2019: 7.4 pence earnings per share).

Balance sheet

Net operating assets increased over the course of the period by £443.6 million to £3,243.8 million at 28 June 2020 (31 December 2019: £2,800.2 million). Inventories have increased by £347.4 million reflecting an increase in the first half in work in progress of £277.0 million, as completions were delayed due to closure of our sites and an increase in land of £70.4 million. Land creditors decreased by £98.6 million following repayments made in the period and the temporary pause in new land acquisitions in response to the COVID-19 uncertainties. Return on net operating assets was 16.8% (H1 2019: 29.4%). Group net operating asset turn was 1.08 times (H1 2019: 1.42 times, FY 2019: 1.60 times).

Average work in progress per UK outlet at 28 June 2020 increased by 13.8% to £6.6 million (31 December 2019: £5.8 million) and UK work in progress turn†** decreased to 2.05 times (30 June 2019: 2.66) as a result of the impact of delayed legal completions.

As at the balance sheet date, the Group held certain land and work in progress that had previously been written down by £70.1 million (31 December 2019: £68.6 million) to a net realisable value of £64.0 million as development continues (31 December 2019: £59.3 million). The balance of written down land and work in progress in the UK was £42.7 million (31 December 2019: £39.0 million), following the associated write-down of £29.7 million (31 December 2019: £30.5 million). The overall increase in the provision since the prior year end being due to foreign exchange movements in the balance held by the Spanish operations.

As at 28 June 2020, the UK short term landbank comprised 77,338 plots, with a net book value of £2.4 billion. Short term owned land comprised £2.3 billion (31 December 2019: £2.3 billion), representing 54,201 plots (31 December 2019: 54,641). The controlled short term landbank represented 23,137 plots (31 December 2019: 20,971). The value of long term owned land increased to £189 million (31 December 2019: £97 million), representing 35,628 plots (31 December 2019: 33,329), with a further total controlled strategic pipeline of 102,161 plots (31 December 2019: 106,895). Total potential revenue in the owned and controlled landbank increased to £54 billion in the period (31 December 2019: £53 billion), reflecting the overall mix of opportunities in the short term landbank and strategic pipeline.

As at 28 June 2020, in the UK, 89% of the short term owned and controlled landbank was purchased after 2009, 58% of which was sourced through our strategic pipeline. This results in a land cost to average selling price in the short term owned landbank of 14.8% (31 December 2019: 14.9%).

Land creditors decreased to £630.6 million (31 December 2019: £729.2 million) and, combined with net cash, resulted in a lower adjusted gearing‡‡‡‡ of 3.5% (31 December 2019: 5.5%). Included within the land creditor balance is £53.3 million of UK land overage commitments (31 December 2019: £56.4 million). £286.8 million of Group land creditors are expected to be paid within 12 months and £343.8 million thereafter.

Provisions increased to £129.6 million (31 December 2019: £128.4 million) as the £10.0 million increase in the Aluminium Composite Material (ACM) cladding replacement provision was largely offset by utilisation as claims were made and processed through the ground rent assistance scheme and costs were incurred on work performed to replace ACM cladding.

Our net deferred tax asset of £37.4 million (31 December 2019: £29.8 million) relates to our pension deficit, employee share schemes and the temporary differences of our Spanish business, including brought forward trading losses.

Net assets at 28 June 2020 stood at £3,755.2 million (30 June 2019: £3,007.6 million, 31 December 2019: £3,307.8 million).

Pensions

As previously announced, further to our 31 December 2016 triennial valuation, we agreed a recovery plan with the Trustee to December 2020. This included a contribution mechanism, tested quarterly, such that should the Taylor Wimpey Pension Scheme (TWPS) become fully funded on the Technical Provisions funding basis, further contributions would be suspended and only recommence if the funding level fell below 96%.

The quarterly funding test for 31 December 2018 showed that the TWPS funding level had fallen to 94%, as a result the Group recommenced regular contributions from January 2019. By the end of 31 December 2019, the funding level had improved to 97%. However, along with many other UK pension schemes, the funding level has fallen during the first half of 2020 as a result of the economic volatility arising from the COVID-19 pandemic. During April 2020 and in response to the site shutdowns, we agreed with the Trustee a temporary suspension of the agreed contributions for three months between April and June. These suspended contributions will instead be paid between January 2021 and March 2021.

The most recent funding test at 28 June 2020 showed a deficit of £217 million and a funding level of 92%. As a result, regular contributions will continue. The Group continues to provide a contribution for Scheme expenses and also makes contributions via the Pension Funding Partnership. Total Scheme contributions and expenses are expected to be £37.1 million in 2020 (2019: £47.1 million), assuming the TWPS remains less than 100% funded. Following the deferment of contributions, contributions of £10.8 million, including expenses, are expected to be paid between January 2021 and March 2021.

Retirement benefit obligations of £114.7 million at 28 June 2020 (31 December 2019: £85.0 million) comprise a defined benefit pension liability of £114.2 million (31 December 2019: £84.5 million) and a post-retirement healthcare liability of £0.5 million (31 December 2019: £0.5 million).

The Group continues to work closely with the Trustee in managing pension risks, including management of interest rate, inflation and longevity risks. The Company and Trustee are currently discussing the results of the triennial valuation at 31 December 2019. The valuation and any recovery plan are due to be agreed by 31 March 2021 in line with requirements.

The underlying volatility of the TWPS remains low due to the c.£200 million buy-in completed in 2014 (covering c.10% of the liabilities), combined with c.90% liability hedging against interest rates and inflation risk exposure on the Scheme’s long term, ‘self-sufficiency’ basis.

Cash flow

Net cash decreased to £497.3 million at 28 June 2020 from £545.7 million at 31 December 2019, primarily as a result of a net cash outflow from operating activities of £523.7 million and an increase in investments in joint ventures of £23.7 million being predominantly offset by net proceeds from the issuance of shares in June 2020 of c.£510.1 million.

The main driver of the net cash outflow from operating activities in the first half of 2020 was an increase in land and work in progress working capital of £423.8 million as we settled land creditor obligations, continued investment in land and the number of completions decreased. During the period there was also an overall decrease in payables as payments were made during the time that our construction sites were closed but they were not replaced at the same rate due to the lower levels of construction activity.

When the Group initially shut its sites in late March 2020 it took the prudent step of fully drawing down the previously unutilised £550 million revolving credit facility. Once construction had restarted under new operating protocols the facility was fully repaid before the end of the current period.

In the 12 months to 28 June 2020 we converted 46.5% of operating profit into operating cash flow**** (H1 2019 rolling 12 months: 71.3%). 

Financing structure

At 28 June 2020 our committed borrowing facilities were £654.5 million which comprises €100 million loan notes due June 2023, €15 million loan maturing December 2021 and an undrawn £550 million revolving credit facility maturing February 2025. Average net cash for the period was £241.5 million (30 June 2019: £290.6 million; 31 December 2019: £157.0 million). At the start of 2020 we extended the term of the £550 million revolving credit facility by a further year to 2025, resulting in an average maturity of the committed borrowing facilities of 4.3 years. 

Dividends

In order to conserve cash and increase flexibility at the outset of the pandemic we took the decision to cancel the 2020 final dividend of 3.80 pence per share (c.£125 million) which was due to be paid on 15 May 2020 and the planned special dividend payment of 10.99 pence per share (c.£360 million) which was due to be paid on 10 July 2020. Although our Ordinary Dividend Policy has been the subject of prudent and comprehensive stress testing against various downside scenarios, including a 20% reduction in prices and a 30% reduction in volumes, and is payable through a normal downturn, the COVID-19 pandemic represents a highly unusual set of circumstances. We expect to resume the payment of an ordinary dividend in 2021 (2020 final) and will review the special dividend in 2021 for payment in 2022.

Going concern

The Directors remain of the view that the Group’s financing arrangements and balance sheet strength provide both the necessary facilities and covenant headroom to enable the Group to conduct its business for at least the next 12 months. Accordingly, the consolidated financial statements are prepared on a going concern basis, see note 1 of the financial statements for further details of the assessment performed.

Principal Risks and uncertainties 

As with any business, Taylor Wimpey’s operational performance and ability to achieve its strategic objectives are subject to several potential risks and uncertainties. The Board takes a proactive approach to the management of these and regularly reviews both internal and external factors to identify and assess their impact on the business. These risks and uncertainties are then managed through effective mitigating controls and the development of action plans, with the continual monitoring of progress against agreed KPIs as an integral part of the business process and core activities.

The Board assesses and monitors the Principal Risks of the business regularly. Set out in the Group’s Annual Report and Accounts for the year ended 31 December 2019 were details of the Principal Risks and uncertainties for the Group and the key mitigating activities used to address them at that time.

A global health pandemic was previously identified as one of our Emerging Risks but the speed with which it materialised and the direct and indirect impact it had on the business, during such a short period, has demonstrated the fundamental importance of having a robust risk management process in place.

The Group implemented a number of measures to ensure the health and safety of our employees, customers and suppliers. This included closure of our construction sites and sales centres, and creation of a COVID-19 working group to provide guidance, support and direction to all our employees and our customers, suppliers and contractor base at the onset of the pandemic, throughout the lockdown phase and during the re-mobilisation of the business. We have engaged with the Government and sector specific bodies to develop COVID-19 working protocols that meet the Government guidance. To assist the wider sector, we have made these available to other housebuilders. The Group will continue to monitor Government  guidance carefully, including the impact of localised lockdowns, and where needed adapt its operational protocols and processes to safeguard our employees and customers. We are pleased with how resilient we have demonstrated ourselves to be and we remain optimistic about being able to effectively manage this risk and its continued impact on our business operations.

The Board’s latest risk assessment has considered both the specific consequences of COVID-19 and its effect on the underlying Principal Risks managed by the business.

We have not established a new Principal Risk for the COVID-19 pandemic; instead, due to its pervasive nature, we recognise the impact it has had and will continue to have on our entire risk landscape. It has impacted the inherent nature of five of our existing Principal Risks, as reflected in the table below. However, due to the additional mitigating actions that have been implemented, there is no fundamental change to the overall residual assessment of our Principal Risks. We will continue to closely monitor the situation over the coming period and will take any required action to maintain control over the impact. Additionally, a new key risk has been added into our operational risk framework to reflect the impact of possible site closures, should Government guidance change on either a localised or national level.

Principal RiskPotential Impact from COVID-19
Impact of the market environment on mortgage availability and housing demandThe macro-economic impact of COVID-19 could reduce mortgage affordability and therefore impact on demand for housing as-     uncertainty and unemployment affect customer confidence-     constraints on mortgage availability, or higher costs of mortgage funding 
Material costs and availability of subcontractorsDisruptions to the supply chain stability and to suppliers / subcontractors.
Ability to attract and retain high-calibre employeesWe have retained a stable workforce during the pandemic with staff attrition rates lower than normal. Due to this we have seen no loss of talent and therefore the need to attract new staff has diminished. This is viewed as a short term effect with the expectation of a more ‘normal’ pattern resuming in the future.
Quality and reputationCOVID-19 increases the risk of reputational damage if we are not recognised to be doing the right thing for our employees, customers and suppliers.
Site and product safetyThere is an increased inherent risk from any personal interaction given the nature of COVID-19, in particular as lockdown measures are eased.

Further details of the Group’s Principal Risks and the mitigations in place are outlined on pages 48 to 52 of the 2019 Annual Report and Accounts, published in March 2020, which is available at www.taylorwimpey.co.uk. These are summarised below, in no order of significance, and we believe that they continue to be the Principal Risks to the business, with appropriate ongoing mitigations and monitoring in place.

·    Government policy and planning regulations

·    Impact of the market environment on mortgage availability and housing demand

·    Material costs and availability of subcontractors

·    Ability to attract and retain high-calibre employees

·    Land purchasing

·    Quality and reputation

·    Site and product safety

Finally, as an organisation, we continue to recognise the risks associated with leaving the EU. The Board views these potential risks as an integral part of our Principal Risks rather than as separate standalone risks. We have identified a potential impact on our supply chain, labour force and overall economic market impacting mortgage availability and demand. We continue to monitor the progress of the negotiations and with this our assessment of the likely impact together with mitigations.

Cautionary note concerning forward looking statements

This announcement includes statements that are, or may be deemed to be, ‘forward-looking statements’. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms ‘believes’, ‘estimates’, ‘plans’, ‘projects’, ‘anticipates’ or ‘expects’. Such statements are based on current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results expressed or implied in these forward-looking statements.

Accordingly, there are or will be important factors that could cause Taylor Wimpey Plc’s actual results to differ materially from those indicated in these statements. Persons receiving this announcement should not place reliance on forward-looking statements. Forward-looking statements speak only as of the date they are made and, except as required by applicable law or regulation, Taylor Wimpey Plc undertakes no obligation to update these forward-looking statements. Nothing in this statement should be construed as a profit forecast.

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