Vistry Group PLC (VTY) Earnings Call Transcript

Good morning, and welcome to today's Vistry conference call. My name is Seb, and I'll be the operator for your call today. [Operator Instructions] I will now hand you over to Adam Daniels to begin the call. Please go ahead.

Good morning, everyone. Welcome to the call, and thank you for taking the time to join this morning at short notice. For those who don't know me, I am Adam Daniels, the Chief Executive of Vistry. I took over in that role on the 13th of April, but have been with the organization through the last decade, which is allowing me to work at pace in assessing the business and chart a course for us as we move forward. As such, alongside a run-through of the trading statement we have released this morning, I would like to give you some early thoughts and conclusions on the CEO review. We will then open the line for a short Q&A session to which I'm joined this morning by Tim Lawlor, our CFO. Since taking the role, I have been continually reassured by the fundamental strength and quality of the business. Despite clear market headwinds and external uncertainty, alongside consistent external focus on the business, our core KPIs remain extremely strong and robust. We are operating at scale across the country, delivering over 6,000 homes in the first half with more than half of them being affordable. We continue to deliver with great quality, including retaining our highly talented people, delivering strong customer service scores, obtaining very good partner feedback and maintaining an excellent health and safety performance. Alongside this, we continue to build industry-leading relationships with our partners and great relationships with our suppliers and subcontractors. What I have observed during the first 3 months in this role is the business that is absolutely capable of delivering the capital-light, cash generative and profitable outcomes that we expected when we moved across to the partnership strategy with large areas of the business performing well and generating returns we would expect. That said, it is clear that we have taken some missteps during that time, which we are appraising and addressing through my CEO review to ensure we do more of the things that make us a great business and less of the things that currently hold us back. As a group, we are completely committed to the partnership strategy. As we were clear about in May, the greatest near-term focus has been on taking action that will reduce our debt. I'm fundamentally of the view that if we are going to deliver the outcomes we expect from this model, we need to operate with a much lower average net debt than we have in previous years, and I'm very pleased with the progress we are making in that regard. We have been decisive and effective in taking actions to free up capital from inventory, land and other initiatives. The extent of this has been significant and has had a clear impact on the first half profit, but will have an equally significant positive impact on reducing debt in the coming weeks as these convert into cash. I'm also very confident that the refocus on this point and the change in behaviors within the group will deliver sustainable improvement beyond 2026. One of my main takeaways in the early time of my tenure is that too often our capital outflow has become too detached from our capital inflows, which leaves the business exposed to excess cash consumption in periods of market weakness. We have built ahead of our sales rate and therefore, increased WIP, which we are now working hard to reduce and have purchased land that we have hoped to conclude deals on that have not yet transpired. Ensuring that we more closely align these positions as we move forward will ensure we deliver a less capital-intensive business. Our initial initiatives to date have included pricing actions on slower-moving stock, reducing our exposure to higher ASPs, reducing the amount of private WIP and targeted reductions in our land bank. These initiatives are well progressed, which positions the business to achieve a significant improvement in profitability in H2 as well as a stronger cash position. Turning to the H1 outcome. The group expects to deliver a modest profit before taxation of GBP 20 million, excluding the impact of specific actions taken to reduce debt levels and any actions related to CEO review. Cash generation action has resulted in an adverse impact of circa GBP 50 million in H1, including one-off impairments on low or no margin sites. Including the impact of these cash actions, but before the impact of any action relating to CEO review, the group expects to deliver a first half loss before tax of approximately GBP 30 million. As expected, indebtedness was behind the prior year in H1 due to higher land expenditure and lower volumes of part transactions. We have also actively sought to normalize period-end working capital, including payment time scales to our suppliers and subcontractors. And as such, the group's net debt at the 30th of June was GBP 407 million (sic) [ GBP 470 million ] and average daily net debt in H1 was GBP 799 million. Within this figure, land creditors are expected to have reduced by over GBP 100 million (sic) [ GBP 150 million ] during the first half, reflecting a focus to reduce the overall leverage of the business. The majority of the cash benefits from the actions being taken will be felt in H2 due to the lag between the action and cash realization. We expect to deliver a significant reduction in average net debt levels in the second half and cash position of full year in excess of GBP 100 million. I'll talk a little now about the CEO review that we are partway through ahead of a wider update on the 24th of September. We have made good progress with the review, albeit clearly, there are a number of things still to conclude, and so we won't be able to give all of the detail today. We are moving at pace. And while I am excited to deliver the results of that review in September, my early view is that there is a significant opportunity to develop a more focused Vistry with improved profitability, a stronger balance sheet, higher returns on capital and more consistent delivery. As I said, the partnership strategy is the right one for the business but can be delivered more effectively and sustainably in a number of areas. These encompass our operational delivery and capital efficiency together with a firmer commercial approach. Firstly, under operational delivery, we know there is a significant variance in profitability and return on capital across our regions. I believe there is a sizable opportunity for moving to a more focused footprint, allowing us to optimize profitability and improve operational execution. We have done some of this work already, which has proved successful and has allowed us to put our high-quality people in positions to best support the success of the business. This will ensure that the future development activity is focused on specific sites and relationships that are best suited to our business model. It was encouraging that we have already been able to implement an annualized overhead saving of GBP 25 million, and I believe there is more to do as the CEO review progresses. Secondly, on capital efficiency, I see 3 sizable buckets of opportunity, which will contribute to a net cash position through the second half and beyond. On our land bank, we will reshape and reduce land to better align our land ownership with our differentiated partnerships model, which will allow us to generate significant cash opportunities and improve margins by developing more of the mixed-tenure focused sites that we do best. Albeit the land market is subdued for larger sites, there remains a strong market appetite for smaller parcels of land that is well progressed in planning, of which we have plenty. I'm of the view that our own land bank is too large, and we need to reduce this in order to lighten the balance sheet, and we want more land sit in our controls as we move forward so we can better manage the interrelationship between outflow and inflow that I mentioned earlier. We started 2026 with some GBP 600 million unsold private stock, either wholly owned or in JV, which is fundamentally too high for a business of our size, and we have a clear focus on reducing it and maintaining a lower position for the long term to permanently reduce debt requirements. The actions we have taken have already reduced this number by half with around GBP 190 million of this reduction still to flow into the business during H2. Furthermore, we have substantially exited our part exchange portfolio, which historically locked up around GBP 50 million of our capital at any one time. An element of this GBP 50 million upside was secured in H1 with the balance to follow during Q3. We will continue to offer alternative sales products to ensure we maintain our sales rates while reducing our debt position. Finally, on commercial approach, I believe, among other things, we can optimize our returns through refining the mix of our business with smaller, more affordable private houses better suited to our mixed-tenure sites. Going forward, there will be greater flexibility on the mix of private sales on each site, and we will flex the model regionally buying sites in the right locations best suited to our model. So hopefully, this just gives you a flavor of some of the work streams under the review. There is an immense amount of work going on. We are treating 2026 as a transition year to reposition the business to operate with significantly lower financial leverage and healthy profitability going forward. Turning now to trading. After a positive start to the year, it has been well documented that open market conditions deteriorated in the second quarter, reflecting increased uncertainty and lower customer confidence triggered by the Middle East conflict. And while the outcomes of SAHP for individual RPs have remained uncertain in H1, the demand levels, therefore, remain constrained. That said, we have encouragingly been able to complete a number of transactions across the country where the terms meet our commercial requirements. In addition, we are seeing our partners preparing for the award of grant later this year by looking at their development pipelines and continue in detailed discussions with many partners as to how to support their delivery moving forward. We, therefore, believe the near-term prospects for the partner market remain very attractive and registered providers demand should be stimulated by the completion of the grant allocation under the strategic affordable housing program in September. We continue to operate in a challenging trading and uncertain political environment. However, we expect the decisive cash actions taken so far this year and those yet to be taken during the rest of the year, the expected improving partner-funded transaction activity and higher volumes to result in a materially improved H2 performance. As a result, the Board expects that adjusted profit before tax for FY '26 will be in line with the current market consensus of circa GBP 200 million. This forecast excludes any impact from the ongoing CEO review, the findings of which will be detailed on 24th of September in the half-year results. And finally, before I open for Q&A, I would just like to say a few words regarding this morning's news about Tim's departure. We are sad to see Tim go, but Tim has decided to move on to work for a private company outside of the PLC environment. I would like to thank Tim for all his significant contribution to Vistry during his tenure of over 4 years. He has played an important role in the integration of Vistry and Countryside and transition to partnership strategy. He is around until October, and so we will support the balance of the CEO review and will finalize the interim results, so I'm sure we can keep it busy during that time. I personally thank Tim for his support since my appointment I feel that we have made some very good progress in a short time. And I know that whoever succeeds Tim will take on a business in the right shape to deliver moving forward. We have started a search for a replacement, which will be an external appointment to add the relevant experience to the role and the executives and be best placed in order to support me into the future, and we will update further on this in due course. To close, Vistry remains a high-quality business. We are taking important steps now to enable more consistent performance in the future, but the long-term value of the business is undeniable. The demand for housing in this country is growing by the day. The long-term supply deficit has been growing, not declining over the last year and the fundamental undersupply of housing is evident and at the forefront of the national consciousness. 1.3 million people on the housing waiting list, over 175,000 children in temporary accommodation and many more adults and a private housing market that has a huge desire to buy, but needs a more supportive market backdrop to do so. These are all clear indicators of the opportunity that lies ahead. We will ensure over the coming months that we are well placed to play our part in the delivery of that housing for customers and partners alike. So operator, back to you, please, to take the Q&A. Thank you.

[Operator Instructions] Our first question comes from Aynsley Lammin with Investec.

Two for me. I just wondered if you could give a bit more detail around the kind of nature of the possible one-off impacts on the strategic view. I mean, is it land asset write-downs, change in accounting policy? What should we expect in terms of what's driving those one-off impacts? And then the second question, just on the banks. I don't think I ever saw anything in the statement just regarding kind of how the banks see things, how you see the risk around banking covenants and maybe a bit more color and context around that, that would be great.

It's Tim here. So I'll take those 2 questions. So in terms of the content of the CEO review and the impacts. It could come in multiple areas, and I don't want to be too specific at this stage of exactly what those impacts will be. But as you say, there could be some -- as we review some site strategies, that might mean that we need to look at the margins of those sites going forward, particularly if we're accelerating or taking a different sales strategy on those sites. There will be some margin impacts, potentially some land bank impact if we are changing the mix on sites. There could also be some costs around the restructuring as we look at how we might organize differently. And then as you say, there could be some accounting policy tweaks. I don't think anything too substantial, but just some reviews on accounting policies to ensure that we've got accounting that best aligns with the commercial behaviors that we're trying to drive out of the business. That's probably all we can say at this stage, and we'll give full detail on that with our results in September. On the second question on the banks, we've got really positive relationships with the banks. Adam has been around and we met all of the banks in our banking syndicate over the course of the last couple of months. And they're very supportive, of course, wanting to stay close to the business. So we're keeping them close to all of our developments, and we'll keep them very closely aligned as we go through the CEO review process. In terms of our future plans, we are talking with them about what we might do about the refinancing or otherwise of our GBP 900 million of facilities. They're not due until April 2028, and we've got options about either a full refinancing or amending and extending by a year to give us more time. So various options under consideration. But generally, the banking discussions are all very positive.

Sorry, just one follow-up, if I could, on that. In terms of the kind of potential impact from the CEO review and if H2 trading is a bit weaker than hoped for, I mean, what's the risk of a breach of banking covenants? Is that a high risk or something that you're fairly comfortable that you can avoid?

Well, I think the first thing is that we've got significant headroom. The covenant that is most of interest there is our interest cover ratio, where we've got significant profit headroom, probably over GBP 100 million of profit headroom based on our latest forecast. And then the interest cover ratio is based on adjusted EBITDA, so it excludes exceptional and nonrecurring items. And we need to work through during the course of the summer, the nature of those CEO review adjustments, but we'd expect that the sizable one-off nature -- one-off adjustments would be considered nonrecurring or exceptional so would fall outside the covenants. But again, we'll work through with the banks to make sure and the auditors to make sure that we are monitoring that as we go. But no expectations of a covenant breach as a result of any CEO review actions.

Next question is from Glynis Johnson with Jefferies.

Yes, cognizant of time. So just one question. You committed to the partnership strategy. What gives you the confidence that, that actually is the right strategy? And within that, you talked in your statement about large areas making good returns. What are those areas? Are they regional? Are they certain site mixes? Is it regeneration rather than greenfield? What are the elements that are making good returns where you think actually the business should be focusing in on?

Thank you. So we've done a lot of work since April 13. So we started the review. We've got some external help in doing that, and that's allowed us to review in detail a very large number of sites across the group. And what gives me confidence in the strategy is that a large proportion of those sites are delivering returns in line with our expectations that we previously talked about. And so that gives me good strong reassurance that those -- as those schemes are delivering those returns, we can do that across a wider footprint if we change some behaviors and we change some decisions as we move forward. The returns where we're seeing strong returns are focused for a number of different reasons. So there is some regional differences, particularly as the market has been subdued, the North and Midlands has performed more strongly than those sites for the South. So there's some regional differences in some of that performance. But I think a lot of it is down to site mix and the execution of the types of sites that we buy, the mix of which we put on those sites and therefore, the delivery of those sites return. So I think it's a combined picture between geography and site mix that is differentiated between successful sites that fit our model and perhaps those that have been less successful.

Sorry, just a follow-up. So what sites have been more successful? Is it the ones that have more additionality, more forward sold? Is it ones that have more private? Is that how we -- is that the difference between what's successful and what isn't?

No. So I think as we review the mix positions, the variability of the mix is one determining factor. Another factor, for example, is how we pay for land. So if we pay a lot of land upfront and then we've traded through the scheme, clear those sites tie up more capital and deliver lower returns on capital. And so that will be another element of either performing or performing. So I don't think it's as simple as saying that it's all about the mix or it's all about the geography. The partnership model is sophisticated and you have to execute it in a sophisticated way. In large, the sites that have performed better have been a mix in line with our previous assumptions, so around 30% to 40% of private with the balance being additionality. They've been in locations that support private sales and additionality and they've been areas where we've been able to pay for the land alongside our capital inflows. So we've more closely kept together those capital outflows, capital inflows I mentioned earlier. So there are some themes that I think we're working better. I wouldn't say the determining factor between regeneration and greenfield, I wouldn't say determining factor that you subscribe for all, but there are some of the themes that mean that we can see the better performing sites versus the less successful sites. The other point I made in what I said earlier is where we focused on lower ASPs, more affordable private housing to sit alongside our mixed-tenure product, that has worked better than when we are focused on higher ASPs. So I think that is a theme that will continue.

Next question is from Chris Millington with Deutsche Bank. Chris, we can't hear you. Can you please check if your line is on mute.

Yes. So I just wanted to ask on the capital structure and whether you think there's any justification for Vistry running a more levered position than the traditional housebuilders, given we have seen quite a lot of volatility in recent years. So that's one. And the second one is whether you think there'll be any diseconomies of scale on build as you slow the business down, given that was one of the reasons put forward by your predecessor, how you were getting better build rates than peers.

I'll pick up the second question first, Chris, if that's okay. So just on scale of build, that's more of a site-by-site benefit than it is a more wide benefit. So clearly, the overall volume supports the business, but no matter what the volume is still a business of scale. So we're still going to be able to drive those better returns by having that scale across the business. The benefit of the pace and scale is on a site-by-site basis. So if I give you an example of a 400-unit scheme, we pre-sell 60% of that scheme, so over half, 200-odd plots. When we are talking to our supply chain and subcontractors and making that site efficient, we are be able to concentrate on building those plots of pace alongside an element of private, which is a very different approach to a standard housebuilding site. So the efficiencies you gain from going at pace in that way, the pricing of the supply chain, the pricing of subcontractors, the leanness of the prelims, et cetera, is on a site-by-site basis, not just on a sort of national -- what your volumes are. So we'll continue with those sort of focuses and we'll continue to deliver that presold at pace, which gives us a good element of efficiency. Tim, I don't know if you want to pick up the first question, please?

Sure. So capital structure is one of the things that we're looking at as part of the CEO review process from which we want to understand what our balance sheet options are. So for now, I think we can clearly state that we're looking to reduce our average daily debt, but it's premature to be talking about exactly what that level is. So we'll give more information in September. But to second the question, to give you a sense on, I guess, our thinking. The first is that with our partnerships model, we should have greater certainty of income. And we should also -- once we have a stable platform and certainty going forward, we should have more visibility and confidence in our cash flow profile during the course of the year. And our focus is going to be very much on the average debt or the debt profile during the course of the year rather than the traditional view of what we've got levered at December 31 and June 30. I think what that means is the partnerships model should allow for greater leverage than traditional housebuilders where there's greater uncertainty of those income streams and there's more volatility in the market. We also need to look at the cost of debt, and we need to look at the appetite of lenders to lend to us for the business model that -- or the business that Adam will lay out at the end of September. So summary to all of that is I think we can be more levered than the traditional house builder, but the precise level of leverage that we're aiming for is too early to articulate at this stage.

We will extend today's Q&A session by a short period. And our next question comes from Clyde Lewis with Peel Hunt.

I've got a couple of questions, if I may as well. Adam, on the SAHP program and the timing of that, obviously, we're going to have a new face in # 10, and he certainly seems to be talking about a bigger focus on social rent. Are you worried that there could be a delay in terms of allocations and consequently, projects being sort of signed up to by the registered providers over the balance of this year and that it kicks into '27 at all? That was the first one. The second one was really around incentive levels. And obviously, you pushed very hard to move some of that slow-moving stock. Do you think you've now got to a point where those incentive levels across the group start to drift lower?

Yes. Thank you. So on SAHP, the sort of process for the SAHP being worked through is well progressed. So they've had their bids in, they've done some clarification work, and then they're working through quarter 3 to confirm to partners the values that they get. And when that would arrive, which is due to happen in September, noise we continue to hear is that they're on track for that date in September. And I think we've got to understand that the RPs have made progress already on readying for that funding. So they've got their pipeline ready. They've started to do some of the groundwork. So it will be a very, very big shift if suddenly we move completely away from that. Is there a chance that the balance of that SAHP, maybe some of the future funding is reshaped because of perhaps a move towards more social rent, who knows. But a lot of what is to come is known. We've not seen any policy. We've not seen any sort of definitive. We've seen some opinions and some views. So my opinion at the moment is that the timescale is tracking to the September date that we previously anticipated. And that's what we hope will happen during quarter 3. So I think that's where we are on SAHP. We're certainly seeing the sort of noise and movement from the partners getting ready for that day in any case, in my view. On incentive levels, yes, pretty strong in the first half. We expect to see them winding down through the second half. Clearly, the market conditions are underwhelming. So we will have to continue to keep that under review. But the expectation is that, that will wind down through the second half and become more normalized.

Our next question comes from Cedar Ekblom with Morgan Stanley.

Cedar, Morgan Stanley. Just 2 questions. First, I just wanted to ask around what the business might look like in the future. While I appreciate we get more details in September, when I read the statement land purchases and selling land, would it be fair to assume we are probably looking at a lower capital employed position, but with a lower margin if private units are a much smaller part of the business. So potentially a higher return on capital but on a much smaller book value? Maybe in other words, Vistry is a much smaller business in future, but more profitable business? And then the second question is just around to get from net debt to around GBP 100 million of net cash, you talked about some of those levers. Could you help us understand perhaps the expected contribution from each lever so we can better assess the execution risk around the different mechanisms?

Okay. So I'll take the first question and probably pass to Tim for the second question. So just on what it might look like in the future, I think I would use the words much smaller business, et cetera. I think there is a chance you're looking at a leaner, smaller, more efficient business as we move forward. Clearly, we'll not finally conclude all that during quarter 3. And in relation to margin, I still think private sales is a big core part of the business and a core part of that mixed-tenure model. I think the challenge is we want to try and make that private sales more reliable. So a shift to a focus on smaller ASPs, more affordable private products will make that private element of our business more reliable as we move forward, which will support returns. So I don't think it will be an offset of driving for more ROCE and less profit. I think we'll be looking to improve returns by focusing in the areas that we do best. But I think that a more efficient business as we move forward is probably one of the end goals. And on cash bridge, Tim, on to you, please.

Yes. So I think there's 3 chunks really to drive us from the half-year net debt of GBP 470 million to over GBP 100 million of cash at year-end. The first is that we're expecting a highly profitable second half of the year, which will be cash generative. The second part is the WIP release. So we talked in the update about how we have significantly reduced the unsold private homes WIP and a lot of that cash comes through in the second half of the year. So it's sold in the first half, but it completes in the second half. So that's part of the cash story. And we'll be looking at other areas of WIP as well in the second half of the year. And then the third is the wind down of the land bank. So the reduced spend on land will take another couple of hundred million out of land in the second half of the year, slightly offset by the fact that we do expect our land creditors to continue to come down in the second half of the year. So actually, we're expecting land creditors to be over GBP 150 million down at the half-year within -- and we're expecting a further GBP 100 million reduction in the second half of the year. So yes, the combination of those 3 sort of similarly weighted numbers, land, WIP and profit are the key drivers of that cash improvement.