Barratt Redrow plc (BTRW) Earnings Call Transcript

Good day, and welcome to Barratt Developments' May Trading Updates Conference Call. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to David Thomas, CEO. Please go ahead.

Thank you, and good morning, everyone. Thanks very much for joining us. So as usual, I have Steven and Mike with me. Just before I begin, I'd just like to take a moment to thank all of our employees, also our subcontractors and our suppliers for their commitment and determination in delivering what's been a very good performance through this period. Back in February, we outlined that the net private reservation rate from the 1st of January to the 29th of January has bounced back to 0.49 per active outlet from 0.3 in the final quarter of 2022. So clearly, that was a strong recovery. I'm very pleased to report today that over the subsequent 12 weeks of trading through to the 23rd of April, activity has improved again with the net private reservation rate at 0.71. When we look at the whole period from the 1st of January to the 23rd of April, the net private reservation rate was 0.65, down 30% on the strong prior year period. Reservation activity in the period has clearly reflected the more challenging backdrop, particularly for first-time buyers, but we have seen resilient demand amongst existing homeowners. Our reservation rate has also been complemented by increased multiunit sales into the private rented sector as well as additional private unit sales to registered social landlords. The net private reservation rate into the private rented sector along with the RSLs equated to a reservation rate of 0.08 in the period. Turning to our sales outlet position. Average outlets in the period were 375, showing a very sharp increase from 326 in the same period last year. This reflected the combination of 21 new site openings in the period as well as the slower sales rate that we're experiencing since the start of the financial year, meaning that sites have stayed open for longer. Our order book remains solid with 11,525 homes and an order book value at just under GBP 3 billion. With the changed market backdrop, our site teams have responded very well to adjusting construction output. We constructed 303 equivalent homes on average per week over the period, down some 16% on the equivalent period in the prior year. And we are continuing to manage construction activity to ensure that we have efficient working capital. Notwithstanding the difficult economic backdrop, our sales and build performance puts us in a very strong position to deliver both current year completion guidance and to create a solid platform for completions in FY '24. Turning now to build cost inflation. We highlighted at the interims that we expect total build cost inflation of around 9% to 10% for FY '23, and this remains unchanged. While the outlook for total build cost inflation next year is uncertain, we currently anticipate the rate of total build cost inflation will slow to around 5% for FY '24. On land approvals, we have remained highly selective with 2 new sites approved and a further 2 sites added through planning amendment. But reflecting sites that are no longer proceeding, we've actually seen a net reduction of 1,125 plots approved in the period. Our financial position remains strong with net cash at GBP 0.6 billion, and we expect to report net cash at around GBP 0.9 billion at our 30th of June year-end. Our GBP 200 million share buyback program is ongoing, and to date, we have purchased 38.6 million shares at a cost of GBP 155 million. Around our commitment to build quality, customer service and sustainability. I would particularly highlight that we've once again been awarded 5 stars in the HBF awards for the 14th successive year, an achievement that is unique. Following the launch in February of our eHome2 concept home at the University of Salford, which is in partnership with Saint-Gobain, this is now moving into a phase of detailed testing under the different climate conditions. Now looking ahead, reflecting the recovery in the reservations through the period, we remain on track to deliver total home completions of between 16,500 and 17,000 homes, including around 750 joint venture home completions. And as a result, we expect trading for FY '23 will be in line with current consensus expectations. Our business remains fundamentally strong, both operationally and financially. We are well placed to navigate the challenges ahead, and we are focused on delivering the high-quality sustainable houses and developments needed across the country, along with delivering excellent service for our customers. Thank you, and we will now be happy to take questions and the operator will turn up the line. Thank you.

[Operator Instructions] We will take the first question from Harry Goad from Berenberg.

I've got 2, please. So first, the interesting comment you made about build cost inflation, you think to about 5% in the next financial year. Can you give us a little bit more color on that in terms of maybe any split what you're seeing between labor, between different building materials, whether there's any subcontract packages, you're actually seeing that are now in sort of deflationary territory? And then secondly, on land, I appreciate there's not much activity there right now. But where do you feel land prices need to move to before they get interesting and then before they make sense again from a residual value perspective?

So if I pick up in terms of land and then I'll pass to Mike and Steven in relation to just some thoughts overall in terms of build cost inflation. I think the key thing really with regard to land is it's not so much about looking at where prices on land should or shouldn't be. I mean that will clearly be a function of where we end up in terms of selling prices, build cost inflation and the rate of sale. I think for me, our withdrawal from the land market as we demonstrated in 2016 with the referendum and again in 2020 with COVID, I think it's much more about the uncertainty and the volatility in the market. So I think the key thing for us to be back in the market is feeling that we're seeing a prolonged period of stability. And when you look at our trading from 1st of January to date, we are starting to build a period of stability, whereas clearly in the final quarter to 2022, the market was just in turmoil, and we were seeing a trading backdrop that we really as an industry, I think, hadn't previously experienced. So I don't think we're trying to call where land prices should be. I think it's much more about saying do we believe that the market has stabilized? If I pass over to Mike initially and just give you some thoughts on headlines on build costs.

Yes, Harry. So the first thing I would say is that the 5% that we're seeing for next year is the sort of early indication. Obviously, there's still quite a lot of buying to do for FY '24. But that's where we see heading at the moment. And also to remember that that's on the top of there's a quite strong inflation that we've seen this year. We still expect inflation for this year to turn to 9% to 10% as we previously said. I think in terms of the balance, labor pricing has been a bit more sticky than materials. Maybe Steven can give a bit of color on the balance.

Okay. Thanks, Mike, and good morning, Harry. Yes, in terms of materials and labor, certainly starting to see some good price reductions on the commodities. Clearly, the supply chain are starting to see the impact of the general construction slowdown. Pricing is certainly less volatile, and there's a lot more stability in the prices being given out. I think we mentioned in our last update that timber prices have gone back substantially, and that's now started to flow through into the likes of components such as roof cassettes, floor joists, flooring components, and we saw the same price reductions typically 8% to 12% in that region. Likewise, sales moved significantly downwards in the last sort of 2, 3 months, and we've seen price reductions typically 8% to 10% on components such as lintels. We're not seeing any great movement yet on freight and blocks, and we feel that we will start to move in the next few months as the energy hedging prices start in line. Price point pressure would be the likes of cement-based products, where we continue to see price stress in that solid impact from roof towers and concrete type of product. And moving on to labor. No significant solid changes on labor, but we are having to see some price movements around early-stage construction such as ground workers and bricklayers from subcontractor packages who are looking to sort of secure longer-term workload at this point in time.

The next question comes from Aynsley Lammin from Investec.

Just 2 questions from me as well. So firstly, I just wondered if you could comment a bit on what you're seeing on pricing and use of sales incentives. Secondly, just been some comment surely seen in the press over the weekend about potentially kind of a help to buy type package come in at some point from the government. Just wonder if you've heard anything there, what your expectations are? And do you think that's needed in the market?

If I start in terms of Help to Buy, and then I'll pass it over to Mike in terms of pricing and sales incentives generally. So I think on help to buy, we've been clear about the backdrop in that the government set out a very clear road map for the tapering and then the termination of the Help to Buy program. And really from 2020, we've been very focused on that tapering and the way that we should run the business in light of no Help to Buy. So I think from our point of view, making sure that we've got a balanced product mix, so across all 3 areas of our business, whether it be Barratt, David Wilson or Barratt London, being able to offer something to every part of the market is very, very important from our perspective. We can see when you look at the market as it trades presently that the first-time buyer is clearly in a much more difficult position from the point of view of affordability. So I think a dual effect, one, the well-flagged termination of the Help to Buy program effectively in October 22, and secondly, clearly the dramatic repercussions from the mini budget at the end of September. So I think the combination of those 2 things has meant to the first-time buyer, this is a very, very challenging market backdrop. So we've seen the commentary around the weekend which you can say is no more than speculation. And we need to really focus on our business on a week-to-week basis and not get distracted by that type of speculation. And no doubt if the government are going to do something, then they will formally announce that in due course. If I pass over to Mike.

So I think on pricing, generally, I think when you look at headline prices, they've actually been relatively stable. So we haven't seen significant reductions in the headline. On incentives, I mean, as we've said, I think a couple of times this year, we've been using incentives to help drive the right sales rate on a site-by-site basis. And obviously, we're moving that week to week and site to site as we see how trading conditions evolve. The incentives in the sort of year-to-date are probably running about 6%, which is broadly consistent, I think, with what we were saying when we were out with half year results a few weeks ago. So it sort of stabilized around that level. And that compares to about 2% in the same point last year. So you can see how that's increased as we try to drive the sales rate. The other number that we look at is where we have the same house pipe available on the same site as we did this time last year a sort of like-for-like sales basis. we've seen average selling prices down about 4% year-on-year. So again, that's consistent with the movement in incentive.

The next question comes from Anthony Manning from Bank of America.

Just a couple of questions for me, if I may. Could you talk a bit more about the bulk sales that you've made? Is this something we should expect going forward? Was there a lot of opportunity out there for you to make those sales? And could you give us a special kind of indication of the margin that they will come at? And again, just a quick one on kind of the outlet position. Obviously, it's kind of gone up with new site openings, but can you give us an indication of where you're likely to end up at the end of the year and what it's looking like for FY '24 as well?

If I just start briefly in terms of bulk sales, and then I'll pass that over to Mike, and Mike will also pick up in terms of outlets. So just briefly, in terms of looking at private rental, I mean we announced early in 2022 that we were going to do more from a private rental perspective. So I think to put it in context, this hasn't just been a response to the events in the final quarter of 2022, it was very clearly set out that we were intending to do more private rental. And that's evolved as we move through 2022 into 2023. So if I pass over to Mike, and he can talk about what we're doing in the margin and so on.

Yes, I think just in terms of the context, the number of units that we've taken in the period less than 500on the total. So just trying to keep it in context. We look at the deals on a case-by-case basis. So there is no sort of average discounters that we're getting discounts on everything between 0 and up to mid-teens percent on headline pricing. And very much it will depend on the circumstances of the site that we're looking at. completion or the number of units that are in the deal. So there's no sort of set pricing on it. Obviously, we make some savings there on marketing costs and so on because they would otherwise have been marketed for private sale. And obviously, the benefit for us is that recurring capital on those units much faster. I think turning to outlets. We reported 375 on average for the period that we're reporting. I think we will sell through a number of outlets as we come into the year end at the end of June. So if you talk about it as a sort of mid-360s to the end of the financial year, that would be the average. for the year. And then into next year, I think out the numbers are actually holding up pretty well, and we're pleased with the pipeline that's coming through. And we've got very little planning risk or ownership risk in FY '24. I think the numbers will be a little bit softer than the mid-360s. so maybe around the 360, 350 mark. But I think that still feels to me like a pretty robust performance on outlet numbers going forward.

The next question comes from Clyde Lewis from Peel Hunt.

Just 2 for me, again, really sort of focused around land. David, I think you referred to sites that you've backed away from doing the period in terms of negotiations. I'm going to be interested to sort of hear the logic around that. Was it just simply the new sales rate versus the margin and that return on capital hurdle what was not going to be passed? Or was it more the margin side of the equation, I suppose? And then probably one for Mike in terms of sort of where current expectations are in terms of total land spend cash-wise going to be for this year?

As you said, Mike will pick up in terms of the land spend. I think quite first in terms of land, I would say that, as you know, we've always been very focused on the depth of our land bank that effectively the number of years cover that we have. And we've tried to operate on ratios at around 3.5% of own land and 1 year of conditional supply. So I think the first driver for us in terms of stepping away from the land market is that because sales dropped so dramatically in the final quarter, reservation rate of 0.3. Clearly, the implied land bank lengthened dramatically. Now we said in February that we're always going to have some divisions that have got more land and some divisions that have got less planned. And so even with that implied lengthening out to a 6- or 7-year land bank, we have some divisions that are short of land and we try to look to supplement their land banks where possible. So I think the length of the land bank was the primary driver as to why we would step away. I think the second driver would be largely around where the sites are particularly large. And therefore, you're making assumptions across 400 or 500 units in terms of pricing, on selling, pricing on build and rate of sale. And those assumptions just looked unjustifiable given what we have seen in terms of rates of sale. So I think that's very much why we would step away. And as I touched on earlier, as we see, first of all, a quicker rate of sale, and we've come from 0.3 to a 12-week period a pure private rates of sale at 0.6-something plus private rental. So I think that's clearly a big, big forward step in terms of rates of sale. So that's positive. And then secondly, it's about stability. Can we continue to see similar rates of sale as we move through the next 6 weeks, the next 12 weeks? And that is what will encourage us to take steps back into the land market.

Just on the spend. We spent about GBP 660 million in the year-to-date. There's about another GBP 250 million to go. So we'll be in line with the guidance that we gave of around GBP 900 million for the full year. And that will leave us with a line of credits every year-end of about GBP 400 million. So that's the position there.

We will now take the next question from Emily Biddulph from Barclays.

I hope you're all well. I've got 2 questions, please. Firstly, just coming back on the comments on rate of sale there. Can you remind us what you would usually expect sort of normal seasonality to be? So sort of the Q1 sales rates are where they are sort of what would be the sort of balance of sales rate through the rest of the year in a normal year. just sort of conscious that comps have been strong post COVID and normal seasonality hasn't sort of played out in the same way. So conversely, is there an argument that in a low-volume market, we shouldn't be extrapolating that sort of historic seasonality and maybe things are a bit stronger than that? And then secondly, like if that's sort of how sort of sales rates do play out from here, yes, can I ask on the outlet. Is that how you expect outlook to play out for the balance of the year? Is that what we should be assuming?

I think we're all well, thank you very much. If I just sort of start generally in terms of rate of sale and I can just touch on outlets, which Mike has already touched on. But Mike will then pick up on rate of sale and seasonality. So I mean, the first comment I made Emily would be that I think it is very, very difficult just to term what is normal. I think if you start to go back and look at 10-year averages and 20-year averages, you can clearly calculate numbers and see what's happened on a 10- or a 20-year basis. But the reality is if you look over the last 4 or 5 years, we've seen some very unusual patterns. I would say as a general rule that we had seen more and more activity happening in the market during January and February. So we've said previously that we were putting marketing spend in really from Boxing Day in quite significant amounts and seeing stronger market activity. So the spring selling season in terms of the uplift has become much more muted over the last few years. But if I pass to Mike, and I'm sure he will expand on that, and also any further comments on outlets.

Yes. Thanks, David. I mean, I think, Emily, we are sort of in actual same demand is still strong as we've come through Easter and into the sort of peak of the spring selling season. We reported 0.71 for the last 12 weeks today. And obviously, there is a little bit of PRS we saw within that. And when you look between the period that we're reporting at the end of our financial year at the end of June, I think the typical effect of seasonality would be about 10% to 15% on the sales rate. So you would expect to see that 0.71 come down to more like sort of 0.6-ish. But again, as David said, the last couple of years haven't been like that, and that past doesn't necessarily go to the future, I guess. And then as I said earlier, by the end of the year, we'll be seeing adequate numbers down in the sort of 360 is on average for '23, and that will be the rate that we go into next year. So again, you can read that rate through then on the outlook numbers going forward.