Barratt Redrow plc (BTRW) Earnings Call Transcript

Good day, and welcome to the Barratt Developments Trading Update. For your information, this call is being recorded. At this time, I would like to turn the conference over to David Thomas, CEO. Please go ahead, sir.

Thank you very much. Good morning, everyone, and thank you for dialing in. As you know today we've announced our trading update for the year ended the 30th of June 2020, and I apologize to all of you that this has been brought forward by a couple of days. But as you will have seen, we have also provided an update on the conclusion of investigations into certain structural issues at a legacy development Citiscape in Croydon. Our team today, myself, Steven and Jessica, are all in different locations, so I will chair the Q&A session. I'd just like to start off by paying tribute to all of our employees who have reacted in an incredibly resilient, flexible and really fantastic way to the challenges that have been posed by COVID-19, both those employees who worked very hard to help us to restart on-site and also those employees who were not able to work during the period of temporary closure, many of whom are inspirational as volunteers in their local communities. The group's very strong progress through to the middle of March was clearly impacted by the COVID-19 lockdown and then the gradual reopening which started on the 11th of May in England and Wales. I'm pleased to say that all our operational sites, including Scotland, are now back in production and operating safely under practices and protocols in line with government, Public Health Authority and the Construction Leadership Council Guidance. All employees, other than those who are still shielding, have now returned to work. We have announced this morning that we will not now participate in the government furlough scheme, and we will return all cash received. If we look at the statement itself and just look at some of the numbers, completions for the year were clearly very significantly down due to the lockdown period. Selling prices have certainly remained resilient, with our average selling price around GBP 280,000, approximately 2% ahead of last year. Our forward sales position is strong, with total forward sales, including joint ventures, almost 25% ahead of last year at GBP 3.25 billion, clearly impacted by the lockdown but also helped by the strength of consumer demand since the market has reopened and clearly a number of affordable housing contracts. Our net private reservations per active outlet have averaged 0.63 over the past 6 weeks, which compares with 0.69 in the same period last year. This sales rate is across all of our sales outlets, whether or not there was any physical sales presence, something which was obviously affected by the timing of sales after the reopening, especially in Scotland and Wales. It's definitely worth highlighting that 73% of the some 14,300 homes in our order book were contractually exchanged as at the 30th of June, which clearly gives us clear visibility for the start of FY '21. In terms of build performance, on our sites that have reopened for 4 or more weeks, we are operating at around 75% of the construction productivity levels prior to the lockdown, and we expect this to continue to improve. Our net cash balance was around GBP 305 million, certainly ahead of our expectations. Since our return to site, our cash position has benefited from completion deliveries coming through during lockdown, and also we've clearly operated very active cash management, both in terms of working capital requirements and also the timing of land payments. We expect payments on land creditors of around GBP 350 million in the first half of FY '21. We remain the industry leader in terms of quality and service. And this year, we were once again awarded HBF 5 Star status for the 11th year in a row, the only major housebuilder with this record. And in June, our sites were awarded 92 NHBC Pride in the Job Awards, more than any other housebuilder for the 16th year in a row. Turning now to our dividend plans. The Board has decided that given the unprecedented impact of COVID-19, that it will not propose to shareholders at the AGM an ordinary dividend in respect of FY '20 or the previously announced special dividend of GBP 175 million in respect of FY '20. Clearly, the Board recognizes the importance of dividends and will give further consideration to future dividend policy in due course. Now moving on to the conclusion of the investigations on Citiscape. As we previously announced, in 2018, we decided to pay for the removal of ACM cladding at Citiscape, a non-standard development designed by a third-party engineer back in 2001. When we took the cladding off the building, we found some structural issues and had engineers carry out a thorough investigation of the building. They found issues with the design of the building's concrete frame and have reported to us that the building needs extensive remedial action. Even though we don't have liability, clearly, customers are our first priority, and so the Board has taken the decision that we will pay for that remedial action. As a responsible developer, we have also asked independent engineers to review any other developments with reinforced concrete frames that were designed by the same engineering group. These reviews haven't found any issues as serious as those at Citiscape, but we have found smaller scale issues that we are in the process of rectifying or have rectified. Based on our current assessments, it is estimated that the total future cost of the required remedial program at Citiscape, the review itself and any remediation required at other buildings will be around GBP 70 million. We are actively seeking to recover costs from third parties; however, there is no certainty regarding the extent of any financial recovery. So to close and looking forward, whilst the economic outlook is unclear, we are clearly in a strong position. We are going to continue to focus on the delivery of performance improvements across our business, and we are going to deliver on our ongoing commitment to build high-quality homes across the country. Thank you, and we'll now be happy to open up the lines for questions.

[Operator Instructions] We will now take our first question from...

Sorry, did you say Will Jones. It didn't sound real clear. Sorry, I didn't hear the introduction, apologies, I didn't thought it was me. Apologies. A few questions, if I could, please. Yes. The first on just digging into, I guess, the recent sales rate experience, if we could, that 6 weeks you referred to. Would it be fair to assume that, that's been improved across the course of the 6 months -- of the 6 weeks or did it start reasonably firm and remain at that level? Just any understanding, I guess, of the more recent period within that, if possible. And presumably, again, within that sales rate, there's probably quite a big difference between Scotland and England. So again, presumably England performing better than Scotland, just given obvious differences around timing. The second was then just around site numbers. Given issues, I guess, around planning departments and land buying and other such stuff, we can see that your sites are 348 active today. Any indication on how that may evolve through the rest of the year from here, please, just given those issues. And when we put it together, we've got obviously lower sites, a much stronger order book, uncertainties over sales, but would the base case expectation be for a useful volume recovery in 2021? I appreciate you won't give us any guidance on that yet, but would that be fair from a directional perspective? And then just while I'm on the top line, perhaps with regard to the ASP, within the private order book, it looks like that GBP 320,000 is the private ASP, which is up 2% to 3% versus this time last year. I thought it might be fading all else equal at London, some of the London stuff becomes less influential, but it looks like it's -- perhaps you could just help us understand that reasonably firm pricing picture?

Okay. Will, okay, what I'll do -- if I start off in terms of the first 2 questions and then I'll ask Jessica to pick up in terms of the ASP and what's happening in terms of private. I mean, I think, Will, and I know that this is a predictable answer, but having given sales data for a 6-week period, which is clearly a relatively short period, I'm not going to give a lot more analysis on that on a week-by-week basis. What I would say though is that the 6-week period is clearly heavily affected by the fact that we were in restart on all of our sites. And as you flagged, Scotland and Wales came into that at a very late stage, particularly Scotland. I know you all know that Scotland normally would lead the way. But in this unusual case, Scotland were slightly behind. So I think the overall trends, I would say, have been reasonably consistent when you look at what sites have been open and what sites have not been open. And I think you've seen that kind of useful coming through from -- right move coming through from [ Zone 2 ] in terms of a buoyancy regarding the overall market. I think we've just got to flag some note of caution in that, clearly, the market was closed for a period of time and there has to be some pent-up demand. So we've got to see how these sales rates evolve over the next 8 to 10 weeks. In terms of site numbers, I mean, generally, as you know, we were on a trend-free March where we were looking to very slightly grow site numbers and to see volume increases coming from a very slightly growing site number pattern. We clearly had land agreements in place that would allow us to grow the business and to grow site numbers. But as we've said very clearly in April and again today, we are very firmly out of the land market at this point in time. And therefore, we would expect to see some tailing in terms of site numbers. Nonetheless, we clearly would expect to see volume growth on a year-on-year basis of a reasonable scale. Can I pass over to Jessica for the ASP?

Will, when you're looking at the private forward order book, I mean, it's simply down to the mix of product and geographical mix of product within the order book that we've got currently. We have seen slightly higher percentage of our completions that have come through post lockdown from Help to Buy purchases. But really, it's just about geographical mix and the mix of products there. So nothing significantly changed.

We will now take our next question.

This is Arnaud Lehmann from Bank of America. I guess a couple of questions. Firstly, could you give us an indication of the number of completions for June? And related to that, in your statement, you mentioned the building rates around 75%, but also that you expect it to improve. At which point would you expect to get towards 100% back to 2019 levels of building rates? And my next question is related to your cash position, the net cash GBP 300-something million at the end of June. So a bit better, as you mentioned, in terms of cash delivery. Could you explain how you delivered it? And also looking forward, if we combine probably slower level of completion in the first half and the GBP 350 million of loan creditors, would you expect your net cash position to decline in the coming months?

Thank you, and good morning. So what I'll do is I'll pick up in terms of the third question just with regard to net cash and just give a general overview on that and then I'd ask Jessica just to give -- just an indication in terms of private and affordable completions in June in terms of completion numbers and Steven will also be able to talk about are kind of drive for improved productivity. But I think we've all got to bear in mind that this drive for improved productivity is against the backdrop where our #1 priority is to keep people safe on site. So if I start off in terms of net cash, I mean, I think that the reality is that the net cash position has improved for 2 main reasons. One is we've been able to bring more completions through than perhaps we anticipated, if you go back to April, when clearly, the market was completely locked down, and Jessica will touch on the completion numbers in a moment. And then secondly, we have been able to defer out some land payments into FY '21, primarily the deferral of land creditors that were due to have been paid in the period to June '20. And we've indicated in the statement that land creditor payments up to December will be about GBP 350 million of land creditor payments. Now I think when you look at the evolution of net cash going forward, we clearly have the ability to be hugely cash generative. We have a lot of completions that are in the forward order book that are due to come through for completion in the next 6 months. And what we've got to do is we've got to balance that against our desire to invest in land and to invest in work in progress. Clearly, we want to get back into the land market as soon as possible, but we feel that we need more visibility regarding some of the key ingredients, rate of sale, selling prices and build costs before we can feel confident to get back into the land market. So the reality is that there's a big delta as to where the cash could be for December depending on land and work-in-progress investment. But the underlying position for the business is clearly one that is significantly cash generative. If I could pass back to Jessica briefly in terms of completions, and then Jessica will pass on to Steven to talk about productivity.

Arnaud, in terms of completion volumes in the post lockdown period, so that's the last 6 weeks, the majority of which is obviously June, we've delivered 705 completions, of which 578 were private and 127 were affordable. And Steven, shall I pass to you in terms of productivity?

Yes. Yes, so in terms of productivity, we've been encouraged by the construction activity levels we're currently achieving, slightly better than we probably expected. Yet, you need to bear in mind, we returned to sites in England on the 11th of May, Scotland in the beginning of June. The first 2 weeks was about putting in place the social distancing measures and reconfiguring our sites, and then we started on the construction, clearly. The sites were initially restricted to no more than 25 trades on-site until we were satisfied our health and safety arrangements were working. As David said, our top priority being the health and the safety of our employees and customers. We've now lifted those restrictions. We're seeing good improvements in productivity week-on-week. Clearly, the focus on construction has been about completing firms already started for our customers. On the sites that have been open for 4 weeks and achieving production for 4 weeks, we're currently achieving about 75% of the pre-lockdown levels in terms of productivity. We feel the recent changes to social distancing measures will help. We're starting to get a lot more subcontractors on our site. There was an initial reluctance for some of the subcontractors to bring back some of their trades onto site until we could see good continuity and a good pipeline of work ahead, but that's really improved now. But I think one of the big things we're seeing is that a number of our sites are now taking advantage of extended working hours, longer days and weekend working, all helping to improve our productivity. And we're expecting to get back towards the productivity levels we were achieving pre-lockdown probably in the next sort of 4 to 6 weeks is where we sort of see things going on the basis that we continue to see the ongoing week-on-week improvements. So I hope that helps.

We will take our next question.

This is Gavin Jago from Barclays. A few if I could, please. The first one is just around build cost data. I think you kind of -- you alluded to a moment ago as you wait and see where things land. But is there any sense at the moment kind of where, I guess, spot rate is and obviously you'll be coming into a period, we're going to be renegotiating contracts for next year. Just to get a sense of any idea where build cost might be landing over the next 12 months. Also in the statement, the -- I saw a line about the extra cost of operating. And clearly, though, I guess, the last few months has been exceptional. But can you give us an idea, please, of maybe the extent of those costs and whether they're going to be permanent going forward? Just to get an idea of any extra fixed cost within the group for the coming year. And then finally, just on the order book if you could, please. Just looking at that 73%, is there a -- can you provide a split between what's affordable and what's private in terms of the exchange? You've obviously got over 8,000 units of affordable in there. Will it be weighted to those so you've got the exchanges in place?

Gavin. So in terms of the questions, I mean, looking first of all at build costs and efficiencies, I mean, I'll give you a brief comment and then pass over to Steven in relation to build costs and potential efficiencies or movements in relation to that. The exceptional costs, certainly, Jessica will cover the exceptional costs and also at least give you a broad indication in terms of the affordable and private split in relation to what is exchanged. I mean what I would say on build costs, just as a starting point, is clearly, a distinction between labor and materials. I think at this point in time that there's nothing major to call out on labor. I mean we're also bringing labor back on to site. It's a progressive thing, but we would expect all labor to be back on site in the same way as all of our employees are back on site. One factor on build cost will be oil prices. But if I pass over to Steven, and then Steven will pass over to Jessica to answer the other 2 questions.

Yes. So thanks, David. Yes. As David said, there's no real sort of pressure on labor. In terms of materials, currently 95% of our pricing is fixed for H1 and 60% for H2. We've entered a strategy of retaining flexibility over the coming period in terms of pricing, and we feel that we'll be in a position to take advantage of any price movement on products related to oil pricing, energy, transportation costs in particular. So that's a deliberate strategy we're driving. But at the moment, there's no real issues, and we would expect to take advantage of any cost reductions that come through and flow through in the market. We previously talked about hotspots around timber in the cost, but that's certainly eased. And as I said, no real issues at the moment. I'll pass over to Jessica.

Gavin. Okay. I didn't know if you hear me there for a second. All right. So just -- so in terms of exceptional items, obviously, as you'll appreciate, given the disruption caused by COVID, there were clearly exceptional items coming through from the site lockdown and the closure period and the restart. For example, I would highlight the cost of all our sites and base personnel that they would normally be going to work in progress because they will be creating an asset with enduring benefits and i.e., the stock that we're going to sell. But clearly, for the lockdown period, they were unable to do that, and that will be an exceptional cost in terms of the P&L account. So a number of costs there. We're not expecting any material impairment costs coming through exceptional. As we've highlighted in the statement, we're seeing pricing at -- through current levels. And therefore, we're not expecting to see anything of that regard. And then in terms of ongoing, I think the key additional potential impact from COVID is extended duration from sites. And clearly, we have had a period of lockdown and then we've had a period of lower levels of productivity, although we're building that as Steven has been through. But obviously, that will extend the durations that we are off site and we have a fixed running cost in terms of site personnel, and our fixed set of cost on-site that will be pushed out. And obviously, that will have an extended cost from that. Just in terms of our order book that's contracted, in terms of the private order book, you're looking at around 45% to 50% that would be contracted there.

We will now take our next question.

I think it's me. You can never hear the actual name. But I think it's me. It's Gregor Kuglitsch from UBS. So can I just go back to the comments? And David, you were mentioning you expect kind of a volume recovery in '21. I guess it kind of goes without saying disruption in H2. But if you could give us some sense of directionality, I mean, obviously, we have a reference point with the 25% productivity, which you expect to improve versus demand. So any kind of help to anchor what do you think is realistic, obviously, assuming kind of no second lockdown of any sort? That's first question. Second question is, I obviously, appreciate it's a bit difficult with the additional running costs. I think Jessica just mentioned a few points there. Can you give us some kind of sense how to quantify those buckets in terms of -- I think you mentioned to the additional -- basically the lack of capitalization in the fourth quarter and then I suppose the additional duration on site. And any other kind of health-related fixed costs that you're now incurring or that you previously hadn't incurred? And then maybe a question on your attitude towards London. So you've seen one of your peers has essentially decided to withdraw. If you could just sort of review your position and what the strategy is where you are in the business.

Gregor, what I'll do is, if I just talk about London and I'll make some comment about volume, but I think you understand that we're not going to put guidance out there in terms of volume for FY '21, and then I'll pass to Jessica who will talk about the costs. I mean I'm not sure what more Jessica can say. But clearly, we said we don't expect material impairment, but there are obviously costs to be aggregated in relation to the period to June '20. So on London, look, we are very positive in terms of our London business. I mean you've got to put it in context that we had substantially repositioned our London business from being very significant in Zone 1 and Zone 2 to be primarily focused on Zone 3 to 6, and that's been a repositioning which has taken place over the last 3 or 4 years. So I think we've said some time ago that we hadn't bought any land in Zone 1 and edge of Zone 2 since, I think, from memory, around about 2014, 2015. So that's been a repositioning. And we're now big sites in Hayes, Harrow, as examples, we're seeing good demand trends, Hounslow being in our site. And so I think we're positive. The price points are materially lower and a lot of the homes are captured within the Help to Buy program and therefore, we're positive in terms of London. In terms of volume, I mean, look, the reality is, Gregor, you're absolutely right. But clearly, we've got to expect a significant bend. But the best I'm going to give you is somewhere between FY '19 and FY '20. So clearly, we would expect a significant percentage bounce. As you said, where we've got what would appear to be good demand trends, a good forward order book. And I think Steven is confident that we can increase the productivity up above 75% as we move forward over the next 2 or 3 months. So all of that will point to a significant recovery from FY '20 levels. And if I pass back to Jessica who will just take on that question again in terms of exceptionals and maybe some disaggregation of the costs.

Gregor. I think as you can appreciate that we're only 6 days past the close of our financial year, and there are a number of complicated accounting areas that we need to work through with rigor and go through the -- with the auditors before we can provide a finalized exceptional number. I've been very clear on impairment that given the pricing levels, we're not expecting anything significant in terms of London work in progress. And just to give a little bit more color around effectively what you would call nonproductive costs from our personnel who wouldn't be able to work during the period, we've announced today that we'll be paying the furlough grant, which amounts to around GBP 27 million. And we've previously said that we furloughed around 85% of our workforce for a period of time and our total monthly running costs, which you can get from last year's annual report and account around GBP 430 million in terms of stock costs. So that gets to about GBP 40 million a month. So I think that gives you a little bit of color because effectively, we had the lockdown period from March through to the start of May.

We will now take our next question.

It's John Fraser-Andrews from HSBC. 2 for me, please. The first is around the forward order book and that GBP 3.25 billion. So what typically is that in terms of delivery of that? Are there any restrictions on delivering that after 6 months? And perhaps you could give a feel on how you might see that falling into the first and second half. So that's the first one, please. And the second is on land. One of your sort of national volume competitors clearly taking a very positive stance on the land market. I hear what you say, David earlier, but perhaps you could tell us what you're seeing in the land market in recent weeks.

John, I mean, on the forward order book, I'll pass to Jessica in relation to that. Clearly, 2 very different moving parts there in terms of private and affordable, but Jessica can talk about sort of broad delivery profiles. In terms of land, I mean, we've said that we paused activity in the land market apart from land auctions. We're obviously staying very close to the market. We're talking to landowners and land agents, and we're clearly anticipating that we will be back in the market reasonably soon. I think when you look at the fundamentals and go back to prior to March, we have seen unprecedented levels of land come through the planning system over the last 2 or 3 years. So plots approved on an annual basis at levels that have not been seen previously in the market. So a very, very good market to buy land, plenty of availability. Those fundamentals have not altered. There is not suddenly a shortage of land as a result of COVID-19. So what we want to do is we just want to make sure that when we're valuing land that we have got confidence in the components that are essential. So house prices, build costs and rate of sale being probably the 3 most fundamental components. So we're just going to take our time and continue to look closely at that market. But as you know, we would normally be out in the market spending in excess of GBP 1 billion a year on land and clearly, we're keen to get back in the market. And when we determine that the time is right, then we will obviously move back into the market at that point. Jessica, can I pass over to you in terms of the forward order book?

John, when looking at the forward order book, the best thing to do with is to split it into the 2 component parts. So the private forward order book tends to have a shorter duration. You're looking at, generally, reservations in the 6- to 12-month window because of mortgage offers and mortgage availability there. The affordable ones can be longer duration because [ bridge to ] providers tend to contract at the start of the site for delivery across the site. So that can spread over a number of years.

We will now take our next question.

It's Glynis here from Jefferies. And just 2, if I may, given some of the questions been asked so far. The first one, just I wonder if you can just talk about what we've been reading in the papers over the weekend in terms of stamp duty potential holiday potentially from autumn and how we may have to think about how that will impact your business? And then just as a little bit of clarification. We've been talking about the nonproductive plots, and they've been references exceptional. Are you going to take those furlough in costs that you're paying as exceptional? Or are they going to come as the ongoing within the ongoing business? Just a quick clarification about where they're going to come from an accounting perspective.

Okay. So if I talk about stamp duty and Jessica will talk about the costs in terms of productive and nonproductive and how we deal with them from an accounting point of view. Yes. I mean, I think with the stamp duty holiday, I mean, I think most people will be aware that we have seen stamp duty holidays previously. The nature of the stamp duty holiday really being a call to action. So I don't think that anyone would say that the absence of stamp duty per se will make someone to buy a house. But I think what we do recognize is that a stamp duty holiday can make people accelerate their plans to fit into the window of the stamp duty holiday. I think stimulus on the demand side, whether it be through a stamp duty holiday or through perhaps a mechanism like Help to Buy and the potential extension of Help to Buy, I think these would be positive measures to reinforce the demand side of the equation. I have to say that I was surprised to see discussion about the stamp duty holiday. It seems to me that it's slightly counterintuitive to say that you're going to create something that's a call to action and then it come out into the market and people are then not sure about whether they should or shouldn't be buying a property because as the stamp duty holiday coming or is it not coming. So I think that delivery is unfortunate, but overall, a stamp duty holiday well-timed when the housebuilders are back at fuller levels of production, I think, would be very positive. If I pass over to Jessica in terms of the productive cost.