Interim Results for the Half Year to 30 June 2016

Strong performance in all key financial metrics

• 66% increase in profit before tax to £38.2m (H1 2015: £23.0m)
• 36% increase in operating profit to £44.5m (H1 2015: £32.8m)
• 11% increase in revenue to £256.1m (H1 2015: £229.7m)
• 310 basis point improvement in operating margin to 17.4% (H1 2015: 14.3%)
• 38% increase in underlying return on capital employed to 29.5%[1] (H1 2015: 21.4%)
• 12% increase in private sales rate to 0.75 sales per week (H1 2015:  0.67)

Increased and disciplined land investment 

• Investment in land doubled to £80m (H1 2015: £41m)
• Continued success in securing planning consents for our strategic land interests with 44% of plots acquired in the period pulled through from the strategic landbank
• Improvement in embedded gross margin in the consented landbank to 25.5% (31 Dec 2015: 24.3%)

Significant cash generation and reduced gearing

• £89m of free cash flow generated in the period (H1 2015: £74m) prior to land spend of £68m (H1 2015: £61m)
• Reduction in net debt to £124m (31 Dec 2015: £140m)
• 8% increase in net assets to £287m (31 Dec 2015: £266m)

 Forward order book and outlook

• 95% sold for the year compared to 93% last year
• Firmly on track to achieve target operating margin of 18% in 2017
• Underlying confidence in regional housing markets

Chris Endsor, Chief Executive, said:

“Miller Homes has again delivered significant growth, improving all key financial metrics in the first half of 2016.  The 12% increase in our sales rate, together with the launch of new higher margin sites, has led to significant improvements in both operating profit and return on capital employed of 36% and 38% respectively.

Market conditions were buoyant throughout the first half of the year with no discernible impact in the run up to the EU referendum.  This has continued with our sales rate in the second half of the year being over 20% ahead of the same period last year.  It is too early to evaluate fully the implications of the EU referendum decision, although it is evident that regional housing market conditions and sentiment continue to be strong. There remains high underlying demand for quality family homes in our selected regional locations which are outside of London and the South East underpinned by supportive mortgage lenders in a low interest rate environment.  Whilst we will remain vigilant for any negative signs arising from the EU referendum decision, we have no plans currently to alter our substantial land investment programme and are confident in our continued strong future performance.”

Chief Executive’s Review

Overview

These results demonstrate the excellent progress which continues to be made by the business.  It is pleasing to report the strong performance in a number of our key financial metrics, namely:

• sales rates:  0.75 per site/week
• operating margin:  17.4%
• underlying ROCE:  29.5%
• consented landbank embedded gross margin:  25.5%

The most important financial KPIs are operating margin and return on capital employed, in relation to which there is still scope for further improvements driven by our high quality current and strategic landbanks and greater in overhead efficiency measured as a percentage of revenue.

Our strategy, updated in 2015, is based on increasing output through a continued focus on our current strong position in regional markets, delivering predominantly family homes in quality suburban locations.  This will contribute to future profitable growth, improved return on capital, increased free cash flow and a further reduction in debt.  These results demonstrate the strength of the UK regional housing market and also the success of this strategy and its operational execution.   

Market conditions

We experienced buoyant market conditions throughout the period.  We had anticipated a softening in sales rates prior to the EU referendum but this did not materialise and we delivered a private sales rate of 0.75 per site/week for the half year, 12% higher than last year which is set against the context of strong prior year comparatives.  We have enjoyed strong trading conditions across all three operating divisions – Scotland, North and Midlands & Southern. 

Consumer demand was high in all our regional markets, supported by disciplined mortgage lending.  The number and availability of mortgage products suitable for our customers increased during the period with new lenders also entering the market.  Combined with low rates, this has enabled our customers to secure attractive mortgage finance.  In addition to this, the industry continues to benefit from ongoing demand and supply side government support, in the form of Help to Buy and an improved planning system which has seen planning approvals at their highest level since 2008.

Income statement

Revenue for the half year to 30 June 2016 was 11% ahead of 2015 at £256.1m (H1 2015:  £229.7m).  This reflected a combination of a 6% increase in core completions to 1,104 units (H1 2015: 1,040 units), a 1% increase in average selling price (“ASP”) to £221,500 (H1 2015: £218,800) and an increase in land sales and management fees to £11.5m (H1 2015: £2.1m), reflecting the part disposal of a large strategic site. 

The increase in legal completions reflects improved market conditions over the last 12 months with private completions increasing by 8% to 925 units (H1 2015: 854 units).  Affordable housing completions in the period were 179 units (H1 2015: 186).  We continue to utilise the Help to Buy schemes in both England and Scotland, and combined they represented 32% (H1 2015: 34%) of private completions.  Sales to first time buyers were 37% (H1 2015: 33%) of private completions and we continue to have a very low exposure to the investor market at 5% of private completions (H1 2015:  4%). 

The ASP of £221,500 represents a private ASP of £243,600 (H1 2015: £243,300) and an affordable housing ASP of £107,600 (H1 2015: £106,200).  The marginal increase in private ASP was despite a 2% fall in the average unit size driven by an increase in completions from several legacy apartment developments.  The private ASP is anticipated to increase in the second half of 2016 due to a greater weighting of completions from sites in southern England and lower volumes from legacy sites.

Gross profit increased by 30% to £64.1m (H1 2015: £49.4m).  Gross margin in the six months ended 30 June 2016 was 25.0% (H1 2015: 21.5%), a 350 basis point increase.  This largely reflects the favourable impact of more recently acquired land and the continual decline of lower margin legacy land.  Legal completions from legacy land represented 20% (H1 2015: 24%) of overall completions.  Legacy plots continue to reduce in significance and now only represent 6% of the owned landbank (31 Dec 2015:  11%).

Overheads increased by 15% to £19.4m (H1 2015: £16.9m).  As a percentage of revenue, overheads for the period were 7.6% (H1 2015: 7.4%). Due to the timing of overhead increases and a greater weighting of completions in the second half year, the full year overhead absorption percentage is expected to be lower than last year.

Operating profit has increased by 36% to £44.5m (H1 2015: £32.8m).  Operating margin stands at 17.4% (H1 2015: 14.3%) and we are on target to achieve our 2017 target of 18%.

Net financing costs fell by 36% to £6.3m (H1 2015: £9.8m).  This reflected the prior year write off of un-amortised arrangement fees on the previous bank facility combined with lower debt levels in the current period. 

Balance sheet

Capital employed increased to £410.7m (31 Dec 2015:  £406.6m).  This was driven by a £43.9m increase in inventories to £485.7m (31 Dec 2015:  £441.8m) which was partly funded by an increase in land creditors to £73.6m (31 Dec 2015:  £60.3m).

Underlying ROCE increased to 29.5% (31 Dec 2015: 27.5%) reflecting both increased profitability and capital efficiency. 

During the period, we invested significantly in new land and acquired 1,969 plots with an average embedded margin of 26.2%.  As at 30 June 2016, there are 6,955 plots (31 Dec 2015:  6,341 plots) in the owned landbank with an embedded margin of 25.6% (31 Dec 2015:  23.7%).  The inclusion of controlled sites with the benefit of at least an outline planning consent, takes the consented landbank to 12,372 plots (31 Dec 2015: 11,600 plots).

Available for sale assets, which represent the investment in shared equity loans initiated between 2008 and 2012, fell by £3.1m to £31.1m (31 Dec 2015:  £34.2m) reflecting loan redemptions totalling £4.9m in the period, a £0.8m gain arising on these redemptions and a £1.0m unwind of the fair value discount. 

The deferred tax asset which principally relates to historic tax losses fell to £59.7m (31 Dec 2015:  £65.0m).  The movement in the period reflected the utilisation of losses (£7.6m) offset by a £2.3m increase associated with the defined benefit pension liability.

Retirement benefit obligations represent the defined benefit pension scheme which was closed to new entrants in 1997 and to future accrual in 2010.  The deficit increased to £40.5m (31 Dec 2015:  £29.7m) despite company contributions of £2m in the period.  The scheme’s assets and liabilities were adversely impacted by declines in bond yields in the period.  The investment strategy is being reviewed with a view to reducing volatility by increasing the scheme’s liability hedge ratio.

Net debt fell to £123.6m (31 Dec 2015:  £140.2m) notwithstanding an increase in land spend during the period.  The core debt figure at the period end was £95.5m resulting in significant headroom in the £210m bank facility which is committed through to 2020. 

Current trading and outlook

Sales performance since the half year and the EU referendum has continued to outperform the equivalent prior year period with the private sales rate being over 20% ahead.  This suggests an underlying confidence in our regional housing markets.  Our order book for the second half of 2016 stands at £275m, 24% ahead of last year and we are well positioned for significant improvements in our full year results. 

We are encouraged by the resilience of trading and will continue to operate in a disciplined manner both in our land buying activity and production control.  

Chris Endsor