Results presentation for full year ended 31 August 2018 - Tuesday 13 November 2018
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Results presentation
for full year ended 31
August 2018
Tuesday 13 November 2018
Retirement living to the full
Agenda
Highlights & current trading John Tonkiss, CEO
Financial performance &
Rowan Baker, CFO
outlook
Summary of new strategy
John Tonkiss, CEO
and progress update
2
John Tonkiss, CEO
Highlights & current
trading
3
Key highlights
2,134 legal completions (FY17: 2,302)
Operational
ASP £300K (FY17: £273K), a 10% increase due to sales mix, Key performance drivers
as well as quality and location of our developments
Volume and operating profit constrained
68 first occupations (FY17: 49) brought to market by:
5* customer satisfaction rating (FY17: 5*) heavy H2 weighting of first
occupations
investment in operating cost base to
Revenue at £671.6m (FY17: £660.9m) support the previous growth strategy
Financial
£67.5m underlying operating profit1 (FY17: £96.2m), in line with continuing economic uncertainty
6 September announcement
slower secondary market, particularly
10% underlying operating margin1 (FY17: 15%) in the South East
Year end net cash of £4.0m (FY17: £30.7m)
Proposing a final dividend of 3.5p per share, making the total
dividend for the year 5.4p per share, in line with prior year (FY17:
5.4p)
1. Underlying operating profit (including underlying operating profit margin and underlying basic earnings per share) and underlying profit before tax are calculated by adding amortisation of brand and exceptional administrative expenses to operating profit and profit before tax respectively
4
Operational update on outgoing strategic initiatives
Development initiative Build initiative Sales initiative
Purpose Reduce development cycle time Reduce build costs and cycle times Improve off-plan sales and sell-out times
Reduce the time taken Drive improvements to the build process, Achieve >50% off-plan reservations and reserve
Target between land exchange and accelerate build timescales, reduce build the remaining units within 12 months of first
build start costs and enhance margins occupation
Land exchange to build start1 Build time, weeks Off-plan reservations, Average months to sell out
(sold out sites in year),
% months
13% reduction
Target 16 months
69 66 50 50 53
62 60 49 31
FY15 build starts Avg. c.23 months
FY16 build starts Avg. c.19 months 18 19 18
FY17 build starts Avg. c.18 months
FY18 build starts Avg. c.18 months
FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18
1 – Standard sites only
We have many of the building blocks in place to deliver our new transformational strategy
5
Ground rents
Positive announcement by Ministry of Housing, Communities and Local Government (MHCLG) proposing to allow
an exemption for the retirement community sector to continue to charge ground rents after they are capped
elsewhere
Consultation paper states that older people should have the choice in how they pay for their retirement housing.
Proposal is to exempt retirement housing from the changes, subject to various conditions including:
– A potential buyer having the choice to either pay a higher sale price at a ground rent of £10 per annum or a
lower sale price with a specified economic ground rent
This is consistent with our new strategy which offers increased choice to our customers
The proposal recognises the unique way the sector uses ground rents to recover much of the construction cost of
the significant communal areas so integral to the retirement living lifestyle
However, it is still a proposal and is subject to further consultation and passage through Parliament
No impact on FY19 numbers and targets will not be adjusted until we have further clarity over the outcome of the
consultation
6
Current trading
Sales lead indicators running moderately ahead of prior year on a per
outlet basis
Forward order book (including legal completions)
Secondary market continues to be challenging, particularly in the South
East - customers continuing to exercise caution due to economic
uncertainty
£141m
1 September
House price inflation remains subdued £174m
FY18
Build cost inflation is at expected 3-4% level, underpinning the Group’s FY19
new strategic priority of build costs reduction £277m
9 November
£267m
Forward order book currently in line with management expectations at
£267m, c.4% behind prior year driven by lower level of sales releases
YTD sales releases
Recent trading impacted as expected by organisational design changes FY18: 17 FY19: 4
within sales function across the last 6 weeks – collective consultation
process now completed
7
Rowan Baker, CFO
Financial performance
8
Headline FY18 results
Key financial metrics FY18 FY17 Change Total legal completions of 2,134 units (FY17: 2,302)
Legal completions 2,134 2,302 (7%) volumes constrained by the heavy H2 weighting of first
occupations and slower secondary market
Average selling price1 £300k £273k +10%
Revenue £671.6m £660.9m +2% Full year revenue of £672m (FY17: £661m)
Gross profit £104.6m £130.7m (20%) supported by 10% improvement in average selling price to
Gross profit margin 15.6% 19.8% (4.2ppts) £300k (FY17: £273k) reflecting improvement in quality and
location of developments
Underlying operating profit2 £67.5m £96.2m (30%)
Margin impacted by:
Underlying operating profit margin2 10.1% 14.6% (4.5ppts)
Underlying profit before tax2 £62.1m £94.1m (34%) sales mix, build cost increases, increased usage of part-
exchange and incentives to counteract subdued market
Statutory profit before tax £58.1m £92.1m (37%) conditions, additional marketing activity to promote the
Underlying basic earnings per share2 9.2p 14.2p (35%) higher level of sales releases and investment in regional
operational infrastructure
1. Average selling price is calculated as average list price less cash discounts and PX top-ups.
2. Underlying operating profit (including underlying operating profit margin and underlying basic earnings per share) and underlying profit before tax are calculated by adding amortisation of brand and exceptional administrative expenses to operating profit and profit before tax respectively
9
Headline FY18 results
Key financial metrics FY18 FY17 Change ROCE decrease by 6ppts and reduction in capital turn to
Return on capital employed3 (ROCE) 10% 16% (6ppts) 1.0x (FY17: 1.1x) driven by lower profit and increase in
finished stock levels
Capital turn 1.0x 1.1x (0.1x)
Net cash of £4m (FY17: £31m) reflecting management’s
Net cash £4.0m £30.7m (£26.7m)
ongoing focus on disciplined cash management
Tangible gross asset value (TGAV) £692m £646m +£46m
TGAV increase to £692m (FY17: £646m) driven by £157m
Total dividend per share 5.4p 5.4p 0p increase in finished stock (including PX properties)
reflecting 52 first occupations delivered in the second half
of FY18 (FY17: 30)
Proposing a final dividend of 3.5p per share, giving a total
dividend for the year of 5.4p (FY17: 5.4p) reflecting the
Board’s confidence in the Group’s new strategy
3. Return on capital employed (ROCE) is calculated by dividing underlying operating profit for the previous 12 months by the average tangible gross asset value at the beginning and end of the 12 month period. Tangible gross asset value is calculated as net assets excluding goodwill and
intangible assets, excluding net cash
10Operating profit margin bridge
Pricing increase reflecting continued
improvements in quality and locations rather
than house price inflation
This has been offset by:
▪ Land and build cost increases (reflecting
location & specification improvements)
7.2% 7.1%
▪ Build cost inflation c.3-4% p.a.
2.1%
Margin also impacted by:
1.1%
1.1%
0.4% 0.1% ▪ Increased discount and incentive costs to
counteract subdued market conditions
14.6%
10.1%
▪ Additional marketing costs in relation to
TV ad campaign and to promote high
level of sales releases and first
occupations in FY18
FY17 Op. Profit List price Land & Build Build cost Total incentive Sales & Operating costs Other FY18 Op. Profit
margin cost increase inflation costs marketing margin ▪ Increased operating costs reflecting
(location and
specification inflation and continued investment in
improvement) anticipation of planned growth under our
previous strategy
11Balance sheet
£m 31 August 31 August
2018 2017
£m £m Total land bank of 9,797 plots (FY17: 9,967)
Goodwill and intangible assets 67.8 69.3 Lower land value reflects more cautious
approach to land buying as a result of
Fixed assets & investments 2.7 3.0 proposed changes to ground rents
legislation
Land 99.6 148.6 -33% ▪ 54 land exchanges (FY17: 75) and 43
land completions in FY18 (FY17: 58)
Land creditors (56.9) (67.4) -16%
Significantly higher level of first occupations
Sites in the course of construction 290.3 341.2 -15% of 68 (FY17: 49) resulted in a 62% increase
Finished stock 385.9 238.7 +62% in finished stock and a 15% reduction in
sites under construction
PX properties 41.7 31.9 +31%
Total net stock 760.6 693.0 +10%
Net cash 4.0 30.7
Other net assets / liabilities (71.7) (50.3)
Net assets 763.4 745.7
12Part-exchange performance
Part-exchange (PX) usage
Part-exchange proving to be a valuable tool for the business On balance sheet part-exchange usage
335 properties purchased (FY17: 163)
Increased volume of PX transactions: 35% of legal completions (FY17: 27%)
and 302 sold (FY17: 49)
reflecting ongoing subdued secondary market and full year national roll-out of on
balance sheet solution Average buy-in price of 96% of market
value
Saving of c.£6.6m (FY17: c.£1.2m) through use of on balance sheet PX
▪ Average purchase price £283k
compared to use of third party PX with average capital employed of £27.2m
▪ Average loss on sale of £3.1k
On balance sheet PX properties resold in line with target at average of c.13.1
147 properties on balance sheet at
weeks (FY17: c.8.5 weeks) post buy-in, with increase reflecting full year roll-out
year end (FY17: 114)
Tight controls in place to ensure regions do not exceed capital allocation
PX transactions FY18 FY17
753
627 15% 7%
418
20%
464 20%
65%
335 73%
163
FY18 FY17
In-house PX 3rd party PX
13Cashflow – net cash
800 Total land & build
spend £491m
700
£659.1m £111.9m
Enter
cashflow
600
bridge £379.2m
500
400
300
£139.7m
200
100
£15.4m
£10.0m £29.6m
£30.7m
£4.0m
0
Opening net Net revenue Land spend Build spend * Operating Tax & interest Promissory Dividends paid Closing net
cash costs & note debt cash
overheads
* Includes incentive costs, build repairs and other variable cost
14Capital allocation
Optimise operations to deliver strong financial performance
Progress turnaround and set business for steady state production at c.2,100 units p.a.
Organic investment subject to market opportunity
Maintain the necessary balance sheet strength with continuing focus on careful cash management
Investment into multi-tenure proof of concept
Maintain ordinary dividend payment level at 5.4p with intention to grow the ordinary dividend cover to around 2x underlying
earnings over the medium-term
Subject to market conditions, intention to return surplus capital to shareholders by way of share buy-back or special
dividends
15Change of auditors and new financial calendar
Audit tender completed in June 2018 in line with ten year statutory requirement
EY appointed as auditors effective from FY19 (current auditors: Deloitte)
New financial calendar Investor relations calendar:
FY19 H1 period end 28 February 23 January 2019 – AGM
FY19 - 14 months
10 April 2019 – Half year results announcement
FY19 H2 period end 31 October
31 October 2019 – Year end
FY20 H1 period end 30 April
7 November 2019 – Full Year trading update
FY20 - 12 months
FY20 H2 period end 31 October 28 January 2020 – Full Year FY19 results announcement
16Outlook FY19
FY19 out-turn (14m to 31 October) remains in line with the Board’s expectations
Group reiterates the expected FY19 savings range announced as part of the new strategy (c.20-30% of the FY21
targeted P&L saving of c.£40m). Impact of savings is mainly at gross profit level
c.2,300 legal completions expected in FY19 due to extended 14 month period
More than 40 first occupations expected in FY19 with all sites currently under construction
FRI sales assumed to go ahead as planned in FY19
Exceptional items:
• c.£2m of exceptional costs have been incurred in FY18 representing mainly third-party advisory fees
• Total exceptional costs of c.£25m are expected across the life of the transformation programme
17New strategy - financial targets FY19 to FY21
Steady state sales and production levels expected (c.2,100 units p.a.) and ASPs expected to remain at c.£300k throughout FY19 to FY21
No HPI assumed within our strategic plan
Build cost inflation expected to continue at 3-4%
Workflow actions expected to result in >£70m reduction in capital employed between FY18 and FY21
15% FY21 ROCE target achievable without the benefit of Freehold Reversionary Interest (FRI) sales from FY20 onwards
– Due to c.50% of FRI loss having been mitigated and further plans to mitigate remaining gap via introduction of other charges
– No revision of targets until full detail of potential ground rent exemption and its impact on our contingency planning is fully understood
The Group reiterates its expected £40m savings target in FY21 as announced within new strategy on 25 September
Phasing of P&L savings,
% of FY21 >£40m target FY19 c.20-30% FY20 c.40-60% FY21 c.100% = >£40m
>15% operating >£90m additional
>15% ROCE by FY21
margin by FY21 cash generated
18John Tonkiss, CEO
Summary of new
strategy and progress
update
19Reminder of strategic timeline – two stages to deliver our business transformation
FY19: Housebuilder
FY19-FY21: Focus on ROCE and margins
Cost saving >£40m in FY21
Optimising our operations for strong financial
FY21 Operating margin >15%
performance…
FY21 ROCE >15%
Cash saving >£90m FY19 to FY21
FY23:
Developer, Manager,
Owner
ROCE >20% by FY23
…leveraging strategic opportunities Increased market
penetration
New revenue streams
Reduced cyclicality
203-year plan to optimise our operations for strong financial performance – update
Transformation and Change Office is operational and headed by Chief Transformation Officer
Aim: Stable monthly flow of land exchanges, build starts, sales First occupations profile
releases and first occupations – fundamental to operational Avg. FY16-FY18 FY19 (%)
1 Workflow realignment efficiency
(%)
Progress: Planning actions completed, incentive scheme
launched, landbank optionality maintained
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Add. 2
mnths
Aim: Rightsizing operational cost base to reflect steady state volumes
2 Rightsizing
Progress:
the business ▪ Formal collective consultation process for reducing footprint from nine to seven regions now completed.
▪ Total headcount reduction resulting in c.£10m of annualised cash saving
Aim: Reorganisation of sales teams and centralisation of marketing
3 Efficient sales and
Progress:
marketing model
▪ New operating model implementation complete by the end of December
▪ Salesforce IT system – to be piloted in December with full roll-out in February
Aim: Utilising standard, more efficient designs and optimising subcontract procurement practices
4 Build cost reduction
Progress: Design efficiency reviews currently being undertaken on all FY20 developments
Further update to be provided at half year results presentation 21Leveraging our strategic opportunities – progress update
Strategic objective: Strategic opportunity: Progress update:
Flexible, future proofed and evolving
with needs products Incubator hub locations identified
1 Flexibility Growth in Management Services
Customer focus groups set up
revenues (management and care fees)
Opportunity = >5% of group revenue Working with potential partners in order
Variety of payment options to further develop proposition
2 Choice On balance sheet trial up to £50m
Incubator approach in progress to
Multi–tenure:
Build to sell and rent/shared Opportunity = transfer to separate develop operation platform and refine
ownership rental fund with potential positive customer proposition
ROCE impact and regular asset
Location for incubator pilots identified
management income streams
Approach to compact, affordable
3 Affordability Streamlined, contemporary and Opportunity = increased market
product defined
compact designs at mass market penetration by introducing lower cost
product offering Full consideration given to design
average prices
parameters and MMC
Target = c.15% of land bank
Potential volumetric schemes identified
Limited capital investment requirement
22Summary & outlook
FY19 out-turn (14m to 31 October) remains in line with the Board’s expectations
Group reiterates the expected FY19 savings range announced as part of the new strategy (c.20-30% of the FY21 targeted P&L
saving of £40m)
Build programmes on track to deliver more than 40 first occupations in FY19 on a smoother trajectory than in previous years
Sales lead indicators running moderately ahead of prior year on a per outlet basis
Secondary market continues to be challenging, particularly in the South East - customers continuing to exercise caution due to
economic uncertainty
House price inflation remains subdued and build cost inflation expected to remain at c.3-4% level
Quality land bank in place at attractive margins
Robust capital structure with continued focus on careful cash management and intention to return surplus cash to shareholders
Proposing a final dividend of 3.5p per share, making the total dividend for the year 5.4p per share, in line with prior year (FY17:
5.4p)
Roll out of new strategy underway with key milestones achieved in accordance with plan – collective consultation for organisational
design workstream now complete
23Questions?
24Appendices
25Financial statements: Statement of comprehensive income
2018 2017
£m £m
Continuing operations
For the year ended 31 August 2018 Revenue 671.6 660.9
Cost of sales (567.0) (530.2)
Gross profit 104.6 130.7
Other operating income 11.3 8.9
Administrative expenses (44.0) (38.8)
Other operating expenses (8.4) (6.6)
Operating profit 63.5 94.2
Amortisation of brand (2.0) (2.0)
Exceptional administrative expenses (2.0) -
Underlying operating profit 1 67.5 96.2
Underlying operating profit margin 10.1% 14.6%
Finance income 0.4 1.6
Finance expense (5.8) (3.7)
Profit before tax 58.1 92.1
Income tax expense (11.6) (17.7)
Profit for the year from continuing operations and total comprehensive income 46.5 74.4
Profit attributable to:
Owners of the Company 46.2 74.2
Non-controlling interest 0.3 0.2
46.5 74.4
1. Underlying operating profit (including underlying operating profit margin and underlying basic earnings per share) and underlying profit before tax are
calculated by adding amortisation of brand and exceptional administrative expenses to operating profit and profit before tax respectively.
26Financial statements: Statement of financial position
2018 2017
£m £m
Assets
Non-current assets
As at 31 August 2018 Goodwill
Intangible assets
41.7
26.1
41.7
27.6
Property, plant & equipment 2.1 2.4
Investments in joint ventures 0.4 0.4
Investment properties 0.2 0.2
Trade and other receivables 27.8 32.1
Total non-current assets 98.3 104.4
Current assets
Inventories 817.5 760.4
Trade and other receivables 22.4 9.5
Cash and cash equivalents 57.0 40.7
Total current assets 896.9 810.6
Total assets 995.2 915.0
Equity and liabilities
Capital and Reserves
Share capital 43.0 43.0
Share premium 101.6 101.6
Retained earnings 617.5 600.1
Equity attributable to owners of the Company 762.1 744.7
Non-controlling interests 1.3 1.0
Total equity 763.4 745.7
Current liabilities
Trade and other payables 114.9 85.4
UK corporation tax 6.5 6.7
Land payables 56.9 67.4
Total current liabilities 178.3 159.5
Non-current liabilities
Long-term borrowings 51.4 8.0
Deferred tax liability 2.1 1.8
Total liabilities 231.8 169.3
Total equity and liabilities 995.2 915.0
27Financial statements: Consolidation cash flow statement
Restated
For the year ended 31 August 2018 2018 2017
£m £m
Net cash flow from operating activities 14.8 7.5
Investing activities
Purchases of property, plant and equipment (0.8) (0.7)
Purchases of intangible assets (1.1) (0.4)
Proceeds from sale of property, plant and equipment - 0.1
Net cash used in investing activities (1.9) (1.0)
Financing activities
Issue of long-term borrowings 250.0 202.0
Repayment of long-term borrowings (217.0) 258.3
Dividends paid (29.6) (28.5)
Net cash from/(used in) financing activities 3.4 (84.8)
Net increase/(decrease) in cash and cash equivalents 16.3 (78.3)
Cash and cash equivalents at beginning of year 40.7 119.0
Cash and cash equivalents at end of year 57.0 40.7
28Stock holding analysis
2017 2018
Sites Units Sites Units
Owned sites
Land held for development 30 1,287 18 756
With detailed planning consent 29 1,257 17 728
Awaiting detailed planning consent 1 30 1 28
Sites in the course of construction 1 64 2,699 49 2,042
Pre sales releases 49 2,017 33 1,370
Post sales release 15 682 16 672
Finished stock 107 1,139 119 1,779
Total owned sites 201 5,125 186 4,577
Exchanged sites
Landbank - plots
With detailed planning consent 26 908 23 1,040
Awaiting detailed planning consent 93 3,934 97 4,180
Total exchanged sites 119 4,842 120 5,220 Total 9,967 Total 9,797
Total land bank 320 9,967 306 9,797
Terms agreed, awaiting exchange 28 1,355 47 2,158
Total 348 11,322 353 11,955 1,139
1,779
2017 2018
Workflow milestones
2,699
Sites Units Sites Units 2,042
Land exchanges 75 3,164 54 2,413
Planning consents 64 2,473 37 1,636
Land completions 58 2,372 43 1,659 1,287 756
Build starts 66 2,784 53 2,081
Sales releases 52 2,127 69 2,740
First occupations 49 1,925 68 2,766 6,129
5,976
Inventory holding (£m)
4,842 5,220
FY17 FY18
Land held for development 148.6 99.6
Sites in the course of construction 341.2 290.3
Finished stock 238.7 385.9
Part-exchange properties 31.9 41.7
Total 760.4 817.5 31 August 2017 31 August 2018
Legal completions (unit numbers) FY17 FY18
Current year first occupations 1,173 1,315
Prior year first occupations and earlier 1,129 819
Controlled land Owned land Sites under construction Finished stock
Total 2,302 2,134
1
Does not include sites under construction at the pre-foundation stage.
29Optimising our operations for strong financial performance
Stable monthly flow of land exchanges, build starts, sales releases and
first occupations – fundamental to operational efficiency
1 Workflow realignment
Rightsizing operational cost base to reflect steady state volumes
Rightsizing
2
the business
Reorganisation of sales teams and centralisation of marketing
Efficient sales and
3
marketing model
Utilising standard, more efficient designs and optimising >£40m
subcontract procurement practices P&L savings
4 Build cost reduction in FY21
30FY19 to FY21 – delivering improved ROCE and margins
P&L Guidance with assumed steady state volume ROCE
Share of expected >15% by FY21
FY21 P&L savings Area of impact
Workflow No P&L impact Inventory
1
realignment >2% ROCE Operating margin
>15% by FY21
Rightsizing
2 20-30% Gross profit &
the business
Admin expenses
Efficient sales and
Total P&L saving FY21
3
marketing model
10-20% Gross profit ≥ £40m
Build cost
4
reduction
50-60% Gross profit
Total cumulative cash
Total saving ≥ £40m saving FY19-FY21
>£90m 31Phasing of savings through 3 year transformation program
Realisation of P&L impact
FY19 FY20 FY21
Workflow Continue with
Realign future workflow Full benefit
realignment existing build
Rightsize the
business Rightsizing Full benefit
Efficient sales Revised
Salesforce
and marketing operating Full benefit
rollout
model model
Design compliance
Full benefit
Build cost Improve design
reduction and materials
Redesigning and re-engineering the way we build
Phasing of P&L
savings, % of c.20-30% c.40-60% c.100% = >£40m
FY21 >£40m target
321 Workflow realignment
Uneven workflow and continued pursuit of growth strategy impacted results: Inefficient use
▪ Bias towards quantity rather than quality of land purchases of resources
▪ Planning mindset focused on first time consents
▪ Tendency to accelerate activity to deliver volumes Margin dilution
Average rate of first occupations Expected rate of first occupations
FY16 – FY18, % FY21, %
Steady volume at c. 2,100 units
53 29
25
3,000 unit sales target 23 23
23
17
7
Q1 Q2 Q3 Q4 Q1 FY21 Q2 FY21 Q3 FY21 Q4 FY21
331 Workflow realignment
Fundamental shift in mindset and business practices
Finished stock, units
…from growth to profitability…
across all elements of the business model:
1,779
▪ Reduce the number of units in development over the next three years 1,100
– Optimise balance sheet by matching production levels with sales rates and
reducing finished stock levels FY18 Actual FY21 Target
▪ Stable monthly flow of build starts and first occupations supported by
conditional land acquisition subject to planning and commercial viability
– Less pressure on our suppliers and employees to deliver in peaks
▪ Incentive scheme designed to deliver smoothed workflow >4 years
▪ Benefits from decoupling year end from the peak holiday season to landbank
31 October 2019 supply1
Focus on optimised ROCE and margins 1 - calculated based on FY18 legal completions of 2,134 units
342 Rightsizing the business
Historical set up with focus on growth: Regional footprint:
▪ Nine geographical regions, each targeting 400+ units across their entire footprint
▪ Standardised management structures across all regions with significant
operational autonomy
9 7
Regions Regions optimised
across the UK on priority areas
Rightsize the business to deliver workflow with optimal efficiency while
positioned to scale for growth
▪ Formal consultation process commenced for reducing footprint from nine to Share of expected >£40m savings FY21
seven regions
– Focus on more densely populated areas Rightsizing
the business
▪ Optimally resourcing each region in line with their steady state volume
▪ Aligning support functions to adjusted volume and footprint
▪ Strengthening group oversight and control in key areas including sales and Build cost
marketing and commercial reduction
Sales model
reorganisation
353 Efficient sales and marketing model
Current model:
▪ Decentralised marketing function
▪ On-site sales teams resourced for growth
▪ Outdated sales progression IT system
Enhanced sales effectiveness and efficiency through improved
Salesforce IT system and new sales and marketing operating model
Strategic levers Share of expected >£40m savings FY21
1 Roll out of ▪ Standardised sales processes
Salesforce CRM ▪ Leveraging customer insight & analytics Rightsizing
platform the business
▪ Enhanced personalised customer
2 Deliver an improved website experience
and content management ▪ Improved marketing effectiveness and
system reduced cost per lead Build cost
reduction
3 Optimise sales operating model and centralised marketing function Sales model
to achieve streamlined sales staffing model and consistent, efficient reorganisation
marketing activities
364 Build cost reduction
Focus on speed & acceleration to drive growth increased build costs
▪ Overly complex designs, with high aesthetic specification
▪ Reliance on established subcontractors to expedite construction
▪ Limited coordination of national subcontractors
Achieve more standardised and efficient designs, deploy more cost effective
building solutions and streamline procurement practices
Share of expected >£40m savings FY21
Key initiatives
Design efficiency through standard designs and spec guidelines and Rightsizing
introduction of compact design solutions the business
Value engineering - prelim standardisation and optimising of technical specs
(e.g. foundations, balconies, wall structures)
Build cost Sales model
Procurement initiatives through increased framework agreements and reorganisation
stronger competitive tendering processes reduction
374 Build cost reduction – Cambourne case study
Design efficiency review Cambourne plans, before and after
Methodology
▪ 15 schemes were reviewed and identified three key design parameters:
– Quantity of building articulation to primary and secondary frontages
– Net to gross floor area ratio
Ground Floor
– Apartment area over group standard
▪ These parameters highlighted clear areas of inefficiency
First Floor
Application: Cambourne development Estimated impact of Cambourne
redesign, £000
Design changes (spatial efficiency only):
Build cost savings 230
▪ Floor area was reduced by 375msq Second Floor
▪ Increased efficiency of the communal Additional revenue 610
areas resulted in additional 3 apartments
Additional profit 840
▪ Primary façade articulation was reduced
by 5%, and secondary façade articulation
Site margin increase 4.4% Third Floor
was reduced by 8%
Redesign subject to local authority
consultation and detailed design work
38Strategic timeline – Two stages to deliver our business transformation
FY19: Housebuilder
FY21: Focus on ROCE and margins
Cost saving >£40m in FY21
Optimising our operations for strong financial FY21 Operating margin >15%
performance… FY21 ROCE >15%
Cash saving >£90m FY19 to FY21
FY23:
Developer, Manager,
Owner
ROCE >20% by FY23
…leveraging strategic opportunities Increased market
penetration
New revenue streams
Reduced cyclicality
39We are not just a housebuilder, we create retirement communities … (1/2)
Sales and
Land Planning and design Construction
marketing
Targeting different land Significant High-quality construction Industry leading trusted
planning & design expertise brand
▪ Centrally located, brownfield ▪ Specialist in-house planning ▪ Full national capability ▪ Trusted brand – 40 years
sites team ▪ Industry- leading quality experience
▪ Close to amenities, c.1 acre ▪ Strong reputation with local performance ▪ Dedicated customer service
▪ Fragmented competitive authorities ▪ Experienced subcontractors teams
landscape ▪ Increased government and established supply chain
▪ Land acquisition conditionality recognition of benefits of our ▪ Repeatable build process
▪ High density parking & products ▪ Customer-focused build
amenity space ▪ Limited on-site affordable
housing requirements
40We are not just a housebuilder, we create retirement communities … (2/2)
…through well established Management Services supporting our developments since 2010
Dedicated in-house House and Estate Provides added peace of Ongoing service quality
management services team Management teams mind for customers underpins McCarthy & Stone
undertake day-to-day running brand
of developments
▪ Social events
▪ Care support and services ▪ Achieving ‘Good’ or
‘Outstanding’ CQC ratings in
▪ Safety and security 100% of registered Retirement
Living Plus developments in
FY18
16,900 Across 379 60,900 meals per 31,000 hours of care
homeowners developments month and support per month
41Enriching the quality of life of our customers and their families
93.5% 83% 96%
C. 9/10 33,500
Almost nine out of 10 More than 93% of our 83% of our customers 96% of our 33,500 social events
of our homeowners homeowners would said they experienced homeowners said they were held in our
said their new property recommend us a sense of community feel safe and secure managed properties
improved their quality to a friend2 in their new property, in their new property4 over the last 12
of life1 compared to 51% of months5
older people in general3
‘I just love it here. I’ve never ‘My life is so much easier
‘My flat has outside space and
looked back…always chat to since we moved here. We can ‘My home is everything I’d
I potter in the garden most
people about how great the relax knowing that everything ever dreamt it would be’
days’
development is.’ is taken care of.’
We have a strong service platform to build on
1 Survey of homeowners by the NHBC and HBF (2016); 2 Survey of new homeowners by the NHBC and HBF (2017); 3 Homeowner survey (2017) and research by Demos (2016); 4 Homeowner survey (2017); 5 Internal figures (2018)
42Customer research informed our strategic plan
Key principles to
Analysis we have done Our customers value
underpin our proposition
Approach: Surveys, focus Independence- like proximity to transportation, privacy
groups, one-to-one and own outdoor space
interviews, direct customer ▪ 91% of our customers have good access to local amenities and facilities
feedback, and non-take-up
research Support- during life transitions, including social activities and healthcare
▪ 92% of our customers feel their House and Estate Manager is
▪ Surveyed 4,200
approachable and listens to their issues; they value 24-hour support
Flexibility
homeowners in July 2017,
representing 51% of Convenience- customers value features that are easy to use and enhance
homeowners who lived with their lifestyle and safety
us for >18 months ▪ 94% of our customers now feel their new property is easy to maintain
Choice
▪ HBF new home customer ▪ Customers move into our properties because of home maintenance (52%),
satisfaction survey of 1,457 futureproofing (50%) and pre-existing health conditions (36%)
of our customers, March Community- "I don't want to be isolated, if you are older and you don't have
2018 good health, the community is vital“ Affordability
▪ c.7/10 customers have made new friends and socialise more
▪ c.8/10 customers take part in organised events within our developments
Affordability- 1 in 5 list purchase price as primary reason for not purchasing
and 1 in 10 are concerned about service costs; half would consider renting
We have asked our customers and we can do so much more for them
SOURCE: McCarthy & Stone Homeowner Survey, 2017 | Non-take up research, 2017; HBF new home customer satisfaction survey, 2018 43Evolving the business model to meet the changing needs of our customers
Where are we today: Strategic objective:
Flexible, future proofed and evolving
with needs
Inflexible product, services 1 Flexibility
and payment options
Variety of payment options
Single tenure: 2 Choice Multi–tenure:
Build to sell Build to sell and rent/shared ownership
Complex design at high ASP 3 Affordability Streamlined, contemporary and
compact designs at mass market
average prices
441 FLEXIBILITY – Management Services offering that responds to evolving customer needs
Business model adapted to flexible Integrated technology enabled New offerings ensuring full support
needs services and inclusive of the community
▪ Shift Management Services to ▪ Expanded care offering based on
customer-facing business hub-and-spoke delivery model (e.g.
preparing food centrally and served
▪ Change charging model into all- at nearby sites)
inclusive management fee model ▪ Quality of life
(with flexible payment methods) – Sleep quality sensors, remote ▪ Opening our development for
monitoring wider community use generating
▪ New tiered offering: – Activity detection sensors
additional revenue
– Machine learning and AI
– Bronze / Silver / Gold ▪ New partnerships (e.g. fitness
▪ Convenience
– Pay-as-you-go option for add-ons – Home automation control centres, NHS partnerships)
– Medication control sensors
▪ Community
– Video communication
– Community challenges
▪ Safety
– Fall awareness sensors
– Security cameras
451 FLEXIBILITY – All-inclusive management fee and flexible ways of paying for services
New, flexible ways to pay for services
A Pay monthly/annually ▪ Customer feedback shows the peace
▪ Similar to current payment methods, the customer has the option to be of mind given by a fixed-fee model is
billed monthly or annually for their management fees highly valued, and preferred to variable
model
B Deferred fees ▪ Allows Management Services to
▪ Possibility of paying management fees as an equity release to the become a fully fledged profit centre
customer’s property, up to a certain maximum
▪ Upon sale, the equity released is paid to McCarthy & Stone
C Hybrid fees
▪ Partial payment of management fees on an annual/monthly basis
▪ Remainder to be transferred into equity release on the property
462 CHOICE - Choice of ownership through multi-tenure options
SHARED
OWNERSHIP OWNERSHIP RENTAL
▪ Current offering ▪ Customer acquires a share of the long ▪ Requires lowest capital outlay and
▪ Customer acquires an apartment or a leasehold (>50%) and pays monthly transaction costs
bungalow on leasehold/ freehold basis rental on the remainder ▪ Provides customers with choice on
Customer and passes property on as inheritance ▪ Customer can increase the share they disposal of existing property and move
proposition ▪ Customer benefits from property price own, reducing the rent dates
increase and has flexibility to sell at any ▪ Customer benefits from their share of ▪ Enables high equity release upon sale
time any increase in property price with the of property/ retain current property
flexibility to sell at any time ▪ Reduces hassle of resale by heirs
▪ Expand affordability levels of customers ▪ Enter the rental market
McCarthy & ▪
Stone
Offer customers high equity release ▪ McCarthy & Stone retains part interest
▪ Widens addressable market in properties and sells to investors,
proposition ▪ Option for customers to trade up becoming an asset holder
▪ N/A – current offering ▪ Initial partnership with Heylo for ▪ Partnership with Places for People (PfP)
Existing/ affordable offering in place in FY17 and FY18
future pilots ▪ Own shared ownership offering to be ▪ Own rental offering to be piloted in
piloted Q1 2019 H1 2019
Full-scale ▪ N/A – core model ▪ Target of 10% of new RL and RLP ▪ Target of 10% of new RL and 20% RLP
plan developments by FY21 developments by FY21
473 AFFORDABILITY – Broadening market appeal by making our products more affordable
Apartment optimised for Volumetric MMC2 applicable, ▪ Desirable apartments
open plan living (depth reducing costs (modules are ▪ Reduced build time
ensures full depth daylight1) fully transportable)
▪ Higher quality finish and
New, more construction
affordable, ▪ Repeatable components (All
contemporary apartments use a common kit of
living solutions parts)
Reduced ASP
increasing the
size of potential
addressable
market
Achieved
through
optimised
apartment
designs
1 Concept in planning and fire and H&S safety assessment is to be done | 2 modern methods of construction
SOURCE: Base imagery supplied by ShedKM 483 AFFORDABILITY – Classic apartment vs. compact model specifications
Size:
▪ 2 bed compact flats are on average 16%
smaller than classic
Classic
Two bed 72.1m2 ▪ 1 bed compact flats are on average 12%
smaller than classic
Layout:
▪ No en-suite bathroom
Compact ▪ Single bed sized second bedroom
Two bed 62.7m2
▪ Living space remains similar in size to
classic specification
493 AFFORDABILITY – Opportunity for systemised development approach Signature Designs Bolt on components Customer options Different building types A rigorous approach to Standard components can be Easy management of A modular approach could be standardisation will lead to a ‘bolted’ to modules extending customer options, e.g., a extended to bungalow or high quality McCarthy & to additional rooms or walk in wardrobe, twin room/ ‘cottage’ design Stone signature design storage double room SOURCE: Base imagery supplied by ShedKM 50
Evolving the business model to deliver improved financial returns
Strategic objective: Opportunity:
Flexible, future proofed and
Inflexible product, evolving with needs
services and 1 Flexibility Growth in Management Services
payment options revenues (management and care fees)
Opportunity = >5% of group revenue
Variety of payment options
2 Choice Multi–tenure: Opportunity = transfer to separate rental
Single tenure: fund with potential positive ROCE impact
Build to sell and rent/shared
Build to sell and regular asset management income
ownership
streams
Opportunity = Increased market
Streamlined, contemporary and
Complex design at 3 Affordability penetration by introducing lower cost
compact designs at mass market
high ASP product offering
average prices
Target = c.15% of land bank
Limited capital investment requirement
51Focus on our core RL and RLP product offering
To be discontinued
Retirement Living (RL) Retirement Living Plus (RLP) Lifestyle Living (LL)
Olivier Place, Wilton Liberty House, Raynes Park Azaleas, Poole
▪ 40 unit (on average) developments, ▪ Larger, more adapted apartments ▪ Similar to a mainstream dwelling
Offering type with 1 or 2 bed solutions ▪ High level of services and care ▪ Limited amount of services
▪ Basic level of services offered ▪ High proportion of communal spaces provided
Average age1 79 83 73
Current share of
total revenues/ 71% / 67% 26% / 31% 3% / 2%
total site margins
▪ Prioritise two product lines (RL and RLP) ▪ Build out existing land bank
Product strategy
▪ Incorporate bungalows from LL ▪ Discontinue product line and
▪ Provide customer flexibility and choice through product innovations transfer bungalows to RL and
RLP
1 as of FY11-FY18 H1 52Delivery through an extension of our existing capabilities
Approach to rollout:
FY19 FY20 FY21
Benefits £
Incubate Rollout realisation
Innovate Prototype
▪ Customer involvement at every stage through insight and feedback
▪ Appropriate project management and change support
▪ Leveraging new Salesforce CRM platform
▪ Developing strategic partnerships for services and funding
53Solid business with great potential
▪ Place of choice for retirement
▪ High quality affordable accommodation
▪ Flexible service proposition Creating retirement
communities to enrich
▪ Choice of tenure
the quality of life
▪ Long-term strong customer relationships
for our customers
▪ Efficient, lean and flexible Developer, Manager and their families
and Owner of retirement communities
▪ Committed to long term value creation
for our shareholders
54Disclaimer
This document has been prepared by McCarthy & Stone plc solely for use at a presentation in relation to its FY18 full year results. The information in this document, which
does not purport to be comprehensive, is for information only and has not been independently verified. Neither McCarthy & Stone plc, its affiliates or any of their respective
directors, officers, employees, advisers or agents accepts any responsibility or liability whatsoever for/or makes any representation or warranty, express or implied, as to,
and no reliance should be placed on, the fairness, accuracy, completeness or correctness of this information or opinions contained herein or for any loss howsoever arising
from any use of this document or its contents. In particular, but without prejudice to the generality of the foregoing, no representation or warranty is given as to the
achievement or reasonableness of any future strategy, projections, targets, estimates or forecasts contained in this document.
Certain statements contained in this document are, or may be deemed to be, statements of future plans, targets and expectations and other forward looking statements that
are based on management‘s current intentions, beliefs, expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual
results, performance or events to differ materially from those expressed or implied in such statements. Forward-looking statements are not guarantees of future
performance and the actual results of operations, financial condition and liquidity, and the development of the industry in which McCarthy & Stone plc operates, may differ
materially from those made in or suggested by the forward-looking statements set out in this document. As a result, you are cautioned not to place any undue reliance on
such forward-looking statements.
To the extent available, the industry and market data contained in this document has come from official or third party sources. There is no guarantee of the accuracy or
completeness of such data. In addition, certain of the industry and market data comes from McCarthy & Stone plc’s own internal research and estimates. While McCarthy &
Stone plc believes that such research and estimates are reasonable, they, and their underlying methodology and assumptions, have not been verified by any independent
source. Accordingly, undue reliance should not be placed on any of the industry or market data contained in this document.
The information and opinions in this document (including forward-looking statements) are provided as at the date of this document and are subject to change without notice.
McCarthy & Stone plc expressly disclaims any obligation to update or revise any information or opinions in this document.
This document does not constitute an offer or invitation to purchase or subscribe for any shares and neither it nor any part of it shall form the basis of or be relied upon in
connection with any contract or commitment whatsoever. Nor does this document purport to give legal, tax or financial advice.
You are not to construe the content of this presentation as investment, legal or tax advice and you should make your own evaluation of McCarthy & Stone plc and the
market. If you are in any doubt about the contents of this presentation or the action you should take, you should consult a person authorised under the Financial Services
and Markets Act 2000 (as amended) (or if you are a person outside the UK, otherwise duly qualified in your jurisdiction).
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