Barratt Redrow plc (BTRW) Earnings Call Transcript

Hello, and welcome to the Barratt Developments PLC Trading Update Conference Call for the year ended 30th of June 2023. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to David Thomas to begin today's conference. Please go ahead.

Thank you very much, and good morning, everyone, and we appreciate you joining us this morning. I have as normal, Steven and Mike with me. I would like to just begin by thanking our employees, our subcontractors and all of our suppliers for their huge commitment in delivering what is a very strong performance in a challenging year. The housing market has seen significant volatility in FY '23, which is reflected in the reservation rate movements that we have reported throughout the year. For the year, we have achieved a net reservation rate of 0.55, which is down some 32% on FY '22. We have supported this by increasing reservations into the private rental sector and also to registered providers of social housing, and this has contributed 0.1 to the annual reservation rate. We began laying the groundwork for growing sales into PRS back in 2021 when we formed a strategic partnership with Citra Living, part of Lloyds Banking Group. This relationship is now playing an important role in supporting our reservation and build activity in what is clearly a tougher private sales market. Since our last trading update from April 24 through to the year-end, we achieved a private weekly reservation rate of 0.67 relative to 0.7 in the prior year period. This clearly reflects our focus on driving sales. The 0.67 rate included a 0.24 contribution from reservations taken from the private rental sector and registered providers. We will remain focused on driving sales in this market, recognizing that private, affordable and PRS are all key channels. Average sales outlets at 367 were around 11% higher than the 332 in the prior year. This increase arose for 2 reasons. Firstly, the strength of our land bank, particularly its planning status, allowed us to open 104 new sales outlets during the year, only marginally lower than the 118 opened in FY '22. And secondly, the slower private reservation rate which extended the sales activity of several outlets, which we had previously anticipated would close out in the year. For FY '24, we are guiding to a 6% reduction in sales outlets, but it is worth highlighting that we still expect to operate from more sales outlets in FY '24 than we did in both FY '21 and FY '22, which is clearly a reflection of the strength and planning status of our land bank. Total completions of 17,206 reduced by around 4% when compared with FY '22. Our total order book consists of 8,995 homes, down around 34% on FY '22. Our private order book position has been supported by our drive to secure future revenues from the private rental sector and RPs and consisted of 3,884 homes and an order book value of GBP 1.33 billion. Whilst the order book private ASP is down 8.7%, this has been impacted by factors that are detailed in the statement. We estimate that the underlying price decline of our private home reservations to customers is down around 3.5% over the year. We actively managed our build activity to lower levels from the second quarter onwards, responding to what was clearly a slower sales environment. Our weekly build output reduced to 322 equivalent homes per week, 8.5% below the 352 built in FY '22. We've done this without compromising customer service or build quality. We've been awarded 5 stars for our customers for the 14th consecutive year. This is a unique position among the national housebuilders. And last month, we were awarded 96 Pride in the Job awards for site management, more than any other housebuilder for the 19th consecutive year. As we've guided, our build cost inflation was between 9% and 10% in FY '23. And as we indicated in our May update, we expect around 5% total build cost inflation in FY '24. On the land market, our approach remains cautious. And given the strength of our land bank and ongoing uncertainty around sales rates and house prices with only a modest reduction in land value seen to date, our approach look set to continue for the foreseeable future. Pulling all this together, we anticipate delivering adjusted profit before tax in line with current market expectations, which based on the latest Bloomberg data, is a consensus adjusted PBT at around GBP 880 million. Our balance sheet position also remains very strong with net cash at GBP 1.07 billion at the year-end. This morning, we are also reporting full year costs totaling GBP 180 million associated with legacy properties and building safety. GBP 115 million is related to cladding following our signing of the developer remediation contract, and this reflected the increased number of buildings that came into scope as a result and the [indiscernible] building safety unit has done in this area in overall terms. There is then GBP 60 million, which is a GBP 40 million second half charge related to the final buildings looking at the reinforced concrete frame review that we announced back in July 2020. In addition, we've identified 2 further developments where reinforced concrete frame remediation may be required. GBP 5 million has been incurred to date, the position is actively under review, and we've given a total cost indication of GBP 40 million that we will update in September. We remain absolutely committed to playing a key role in leading the industry around sustainability. We completed the construction and started the testing of the eHome2, our concept home developed in conjunction with Saint-Gobain and the University of Salford, and I know that a lot of you have already seen that. This project will help to inform how both Barratt and the wider housebuilding industry can design homes that are genuinely future-proofed, whilst cutting bills for consumers. Sitting alongside that, all of our developments submitted for planning are now establishing a minimum biodiversity net gain of 10%. Our implementation time scale is well ahead of legislation. I mentioned earlier in the year, our recognition in the CDP Climate Change A List for leadership. But whether you look at CDP, ISS, Sustainalytics or NextGeneration, Barratt is a top-ranked national housebuilder, both around our commitments and our actions. So now before I close, just turning to outlook. We clearly recognize that there are significant macroeconomic headwinds. We are focused on areas that we can control, driving sales, controlling costs and being disciplined around the land market. For the coming year, we anticipate total home completions will be between 13,250 and 14,250. And we will continue to adapt as the market evolves over the months ahead. Thank you, and we are now going to move to questions.

[Operator Instructions] And our first question comes from Rajesh Patki of JPMorgan.

First question is on the operating margin. At the last update, you mentioned around 12% seems to be the right level of expectations for 2024. With an increased focus on bulk sales, do you think that's still possible to achieve and what would be the key moving parts there? And second question is on sort of mortgage rates. Could you help us in understanding [ how ] the mortgage rates of an average [ Barratt ] customer has trended over the last, say, 6 to 9 months and where it currently stands versus October last year?

Okay. Yes. So if -- I think Mike will pick up in terms of operating margin and also bulk sales. I mean the only comment I would make there is that we're giving some guidance about the level of bulk sales that we anticipate in FY '24. So it's clearly still going to be a relatively small proportion of total sales. But just to make that point, in terms of mortgage rates, look, it's a big subject and obviously, there's plenty of data available. But what I would say was that we saw a dramatic and very short-term spiking in mortgage rates post the mini budget in September last year. And we clearly saw a very, very difficult trading period through to December. And then as we move through January and February, we saw that, say, on a 2-year fixed that had gone above 6%, that those rates were moving downwards, and there was a number of steps downwards during January and February. So what we've seen more recently has clearly been the increase in bank rates that has fed back into the mortgage rates. And when you look at, say, a 2-year fixed, you're back at the sort of levels that we saw at the beginning of October last year. And I think the 2-year fixed was reported last week as being at a 15-year high. So that gives you some context. But I think that overall, whilst that clearly impacts the whole market, we would say that the principal impact of that is against the first time buyer, and it's clearly a significant impact against the first time buyer. I'll pass over to Mike.

Yes, Rajesh. So I think if you think about margin for next year, there are probably 3 or 4 moving parts to it. I mean, the first is, if you look at the volume guidance that we've given for the year. At the midpoint, if you strip out the JVs and PRS, that's down 25% from this year. So clearly, there's a drop-through from that in terms of operational gearing. We've given some guidance on how we're seeing pricing in the order book. So on a like-for-like basis, that's down 3.5%. So again, you can throw that forward and think about how pricing will come through. And then we've guided that we're still seeing build cost inflation being reasonably sticky at about 5%. So again, you can play that through. And then to your point on PRS, I mean, I think, as David said, the volume of PRS that we'll do in the guidance is not that significant. We're guiding to about 750 units for the year. And clearly, as you know, they come through at a discount of broadly [ 10% ] in the P&L. So I think when you sort of use those building blocks, that will get you to a margin position for next year. And as David said, we will come back with more granular guidance for FY '24 when we announce results in September.

We're now moving on to our next questioner, which is Aynsley Lammin of Investec.

Two questions for me, I think. Just on the kind of recent trading that you hopefully give that sales rate 0.67. Obviously, if you strip out the PRS, you're down at 0.43. Just wondered kind of how the recent weeks, are we actually as bad as it was back in October, November last year. And obviously, you've mentioned that a bit in that context, but just interested how that's fallen. And then what sales rate on the underlying kind of private sales you assume in your guidance if we took the midpoint, for example, obviously, the forward order book is lower. So what would you need the sales rate to be? And then just secondly, on the pricing and incentives, obviously, it's down 3.5% underlying, but has that been more stable in recent months and now you expect that to fall again? I mean, where -- how much risk do you see on the pricing and incentives given what you just said about mortgage rates and sales rates?

Okay. I think maybe if I just pick up on both of those points. So first of all in terms of recent trading, I mean, we've said in the statement that at headline level, it was 0.67. And the underlying private rate, i.e., adjusting for PRS and sales to registered providers is at 0.43. In terms of volatility around that, well, clearly, there's been weekly variations around that, but I don't think it's the case that it's substantially weakened as we move towards the end of the year. But there is no question, as I touched on earlier, that the movements in the bank base rate have impacted that, but the overall position is 0.43. And when you compare that to pre-December, I mean, we traded through for pretty much a 12-week period at around about 0.3 on private sales. So whilst 0.43 is not an attractive rate, it is clearly very substantially better than we saw in the 12 weeks through to December. In terms of pricing, we're seeing for our business and across the market that there are more incentives out in the market. We are running different offers in the marketplace. For example, we have an offer that is applicable to the NHS and to other blue light services, and we also have an offer to more general customers in terms of first time buyers, second time movers. So we have recently increased those incentive levels. And typically, those incentive levels would be up to 5% as a cash incentive and then maybe 1% or 2% for other incentives. So we've said that overall pricing is down by around 3.5%. And you would sense that from where we are here, there will be more pressure in terms of incentives as we move through certainly the first half of the -- our financial year.

Great. And just on the sounds like if you take your midpoint for the completion guidance for FY '24, what's that assuming for the underlying private sales rates versus the kind of 0.43 you've seen since April comparison?

Yes. So it's probably slightly ahead of that, Aynsley. I think if you look at the -- the range is sort of mid to upper 0.4s across that guidance range. So at the upper end, it would be sort of touching 0.5s, so slightly ahead of what we've seen in the last few weeks. And obviously, it remains to be seen how we will trade through the next few months. So we'll obviously keep that under review. But the range we've given, if you think of it as sort of mid- to upper 0.4s.

And we're now moving on to Chris Millington of Numis.

Just a few for me, please. Firstly, I just wonder if you could break down the cost inflation components you're thinking about when talking around that 5% for 2024, perhaps just between labor, materials and anything standing out in particular? Second one is just around what you plan to do with your build rate in '24 versus '23? You obviously brought it down quite materially in '23. I presume there's another big reduction during '24. And then the final one I've got is just really whether you've had any engagement with government more recently. Obviously, there's a bit of talk around -- there's is some sort of Help to Buy type scheme in spring. I'm just wondering if they've evolved their thinking on that and perhaps planning as it got any better as well. That's all.

Okay. Chris, first of all, perhaps if Mike and Steven may want to comment -- pick up in terms of the cost inflation and the split between labor and materials. And then Steven can just talk about build. But we've clearly given guidance on completion volumes, and we're also going to be adjusting build [indiscernible] in that direction. In terms of government, if I just pick that up briefly. So I would say that there has been quite a lot of engagement with government at different levels. So both from ourselves and from the HBF and clearly [ other ] housebuilders are engaged with government. That has probably been focused primarily around planning. And as a subset of that around neutrality, I mean, those are the 2 really big areas that there's been discussion over the last certainly quarter. I think the discussion in terms of Help to Buy and any replacement for Help to Buy, I would say that there has been no discussion regarding that, and it's not something that we anticipate taking place. I mean we see the private sales rates are very challenged. But equally, the Help to Buy program, it was clearly set out as to how the Help to Buy program would be exited. And the timing, it's easy with hindsight, but the timing has clearly been very unfortunate that as we've exited Help to Buy, we've seen a very substantial step-up in terms of mortgage costs. But I would assume the government will look at that, but we're not anticipating anything. On planning, there has been some suggestion that we may see some movement, which will unlock some of the issues to do with nutrient neutrality, which clearly have become very substantial, not just for housebuilding, in fairness, but really for any development of any type, whether it be commercial or residential, is causing very substantial issues in terms of the planning system. I'll pass over to Mike.

Yes. So I mean, Chris, just thinking about the sort of components of inflation for this year, we've talked about 9% to 10%. And that sort of broke down is probably nearer 14% for materials and about 6% for labor. I think as we move into next year, broadly speaking, we're expecting both of those to half. So materials to be running around 7% and labor to come down around 3%, and that's how we blend out to 5%. I mean we are seeing, particularly on the energy-related materials, cost reductions coming through. But to be honest, it's a bit stickier than we'd expected, probably, to be honest, would have expected to guide below 5% when we were talking back at Christmas. But we see it being [ 5% ] for next year. Maybe, Steven can give [indiscernible].

Chris, in terms of materials, we've seen some good decreases coming through over the last few months. I think last update, we mentioned timber prices have started dropped still -- dropped at manufacturing level, that's now sort of hitting some of the components like lintels and garage [ started ] seeing reductions on steel components. But more recently, we've seen some good reductions coming through on bricks, which should sort of haven't moved down until recently. I think one of the factors that affecting some of our suppliers is energy hedging, some of the hedging [indiscernible] end of this year. So until we see some of that hedging unwind, we will see further price reduction. So we'd expect more price reductions at the end of the year and into '24. But we've certainly seen a lot more price stability from prior suppliers, 6 to 12 months period have been offered at this point in time. In terms of content, we're getting a lot of pressure on cement. That doesn't seem to be coming down at the moment, cement and concrete products both, we're guiding to 5%. As Mike said, we've roughly half in the level of inflation we saw last year on both materials and labor. You've mentioned productivity. I think last year, we were able to demonstrate -- we were able to adapt our [ construction ] levels to align with the slower market backdrop. I think we started at quarter 1 last year, building something like 365 EUs per week. But with the downturn in September, we moved it down to [indiscernible]. And then we sort of averaging 333 for the half and then 310 in the second half to give us an average of 322 EUs for the year. With a further backdrop, then we feel we're able to adapt our construction and [ productivity ] levels to achieve and match the sales rate we need to achieve.

So just for clarification, thank you for that, Steve, would you expect that circa 20% reduction year-over-year? Or do you think you're going to have to have a little bit more finished stock on the ground just to help sales?

Yes. We [ work to strict ] disciplines in terms of work in progress on our sites in terms of the number of stock and the number of unsold units [ beyond roof ], and we will be applying those disciplines there. I mean some sites, who will need a bit more stock. But generally, we're in a pretty good shape with the right level of [indiscernible] and advanced units. So there isn't a great deal of change needed.

Christopher, that sort of stock correction if it -- that's the right term. I think it's really taking place in FY '23 because in FY '22, we were very, very short of stock [indiscernible] that was, I think, a feature for the whole industry, but I think that's largely corrected in FY '23.

And next, we have Will Jones of Redburn.

Three, if I could, please. The first, on price and the first part of that question is just technical, and I think you talked about the potential for more -- the likelihood of more incentives [indiscernible] but my understanding was [indiscernible] ASP anyway from a lender perspective. So have you maxed out on what that can be? And therefore, if there is an adjustment, it's more gross price as opposed to incentive? And just really any comments on the tactical interplays those of price and volume, your volume guidance for the year ahead is based on a sub 0.5, I think, or up to 0.5, but not more view on sales rate, including some bulk sale effect. You're not pushing it to say, the 0.6 or attempting to push it to 0.6 that you've kind of previously talked about. So does that give you a bit more scope of the margin to play value over volume? Or will the market be the market you need to follow? Second one was just around cladding and just if you could maybe give us a bit more insight into what led to that increase in the building count of roughly 50. I think my understanding from the half year commentary was that, that had looked reasonably secure. And then just any moving parts around the cash flow for us to think about for the year to June '24? It would be great.

Okay. Will, so if I just pick up in terms of pricing and pricing and volume and then Mike will pick up on cladding and cash flows. So just in terms of incentives, I mean, the interrelationship with mortgages, as you say, is that we can provide incentives of a cash, cash incentives up to 5%. And then we can provide some additional noncash [ incentives, say ] typically up 1%. So for example, the provision of [indiscernible]. What we've seen happen during the year has been that as we came through a very difficult calendar Q4, we saw incentive step up [ certainly for us ] to 5% cash. But then as Q1 was clearly trading better, incentive levels step down a little, so perhaps more like 3-year headline level for cash. So we're now back up at that full 5% incentive. So not adjusting gross price as such. But you're absolutely right that beyond that, that would then be adjustments in terms of gross price. I think in terms of guidance, we're trying to give our -- we see as being a realistic guidance given the market. And I referred in my opening comments about volatility, we have seen some dramatic volatility quarter-by-quarter during the year. So if we're guiding, as Mike said, in a sort of mid- to high 4s, 0.4-something, I think that's seems to us to be quite conservative guidance. And we will push hard to drive revenue. I mean I think it's absolutely key that we drive revenues. And therefore, the different channels that we can push revenue, whether it be private -- PRS, working more closely with the registered landlords, all of those areas were push very hard on. So volume is -- it is important. I mean we have good capacity. We have plenty of outlets and therefore, driving that volume through the business is important. Mike?

Will, so let me pick up on cladding first. So 2 moving parts really in the new buildings. So the first is, as you know, we signed the contract with government back in March. And there was an obligation on us under that contract to write to all of the building owners for buildings that we've built over the past 30 years, and that was buildings over 11 meters in height. And really, we've been more focused, I guess, on the over 18-meter buildings up to that point. So there was a step-up when we contracted the owners with buildings coming in. And then the second piece is really the remediation standard. So when we've been assessing buildings previously, we've been looking at EWS1 certificates. And the contract that we signed, we moved that to using the PAS 9980 framework for assessing buildings. And there were a handful of buildings that held EWS1s that under PAS 9980 came into scope to require remediation. So they were really the 2 moving parts. And I think just on the on the costs more generally on cladding. We are now at a place where we're about to start remediating a good number of buildings. And we're also in a tender process, some form of tender process covering about 60% of the costs in the provision. So we are getting a better view of how much we think it will cost to fix the buildings. And so you'd hope as we move forward and go through time, those estimates are being refined and made more accurate. So that's on cladding. And then on the cash flow, we'll give more granular guidance on cash when we come back in September. There are probably a couple of moving parts to call out. So on land, even although we haven't been approving land, we're committed to about GBP 500 million of spend as we go into this year. And then we've obviously given guidance on the level of dividends and so on. The second moving part really then on just thinking about the provisions. So on concrete frame, we're carrying about GBP 100 million of provisions. I'd expect roughly half of that to crystallize during the coming year. And then on cladding more generally, we're carrying about GBP 540 million. And again, I could see potentially up to GBP 100 million of that coming through this year as we get on to the remediation of those buildings, and we've got some payments to make to deal lock at some stage as we've talked about before. So there's a couple of reasonable building blocks out, but I'll come back with more granular guidance as to how to think about it in September.

And too early to say around what may happen to with point-to-point I imagine.

Well, a little bit. I mean we're obviously -- we're guiding on the sales volume. And as Steven said, we'll be matching the build rate to that sales rate. So we're obviously, we're tightly controlling what happens to what. And so yes, you're right. It's probably a little bit early to say until we really understand how the market is evolving through the next few months.

And from Morgan Stanley, we have Cedar Ekblom with our next question.

A couple of questions from me. The first one on planning, if you got approvals to bring sites to market that are stuck in the planning system, would you even build them in the current environment? I'm just trying to understand how material change in planning would be in the near term, even if it's potentially a nice positive in the longer term. Secondly, when we get a volume recovery, can you talk about how quickly you can increase your build rates and increase outlets, just to understand the cadence of potential volume growth at the right point? And then finally, on fixed costs, could you remind us what the whole number is for the group? And how much of that is in the gross profit line? That would be really helpful in terms of understanding operating leverage.

So if I pick up initial planning, and then I'll just pass across to Steven. And then I'll cover in terms of sort of volume and speed of recovery. And then Mike will pick up in terms of the fixed costs and so on. So look, I think if you come to planning, Steven will cover the specifics. But the reality is we are in a really good position for planning for FY '24. And so from our point of view, I think that's key is we don't see that we have planning risk for FY '24. Clearly, we will have planning risk for FY '25 inevitably. But against the existing sites, I would say that planning risk would be relatively low. And clearly, our land intake is not substantial. If you look at changes to planning. So for example, if the position with nutrient neutrality was unlocked. My sense is that those sites would become available reasonably quickly because I think a lot of those sites have already got an outlined consent. And having received an outlined consent, they've been refused when they've been in for a detailed consent. So they are already kind of within the planning system. More generally in terms of planning, I would say it will take time for the system to start operating again. But Steven can talk a little more about our position in terms of FY '24 and planning generally. In terms of a market pickup, so 2 things. I know which are both very obvious, but I think worth setting out. So we've always talked about the ratio between the number of plots that we have and the number of active sites that we have. And towards that, that is a very, very important ratio. If you've got lots and lots of sites that are very big, you might only have 1 active outlet or 2 active outlets, but you've got 1,000 or 1,500 plots. So outlets is what allows you to respond to a recovery. And therefore, we've done a lot of work over the last few years really in terms of dual branding sites, swapping sites with other housebuilders, really trying to make sure that our land bank is as active as possible. So we feel that even with our guidance of being down 6%. As I said, we've still got a lot of sites out there. We have at least as many sites as we had in FY '22. And then the second part of volume recovery is capacity, and we are doing everything that we can to try to maintain our capacity. We recognize that in a very challenging market, there are pressures on costs. We're managing costs. We have our recruitment fees in place. We've seen significant reductions in our head count. But we also recognize that if we shut down capacity or indeed if our supply chain shuts down capacity, our ability to recover quickly is substantially constrained. And so I see that as being one of our biggest challenges presently given the kind of sales numbers that we're seeing is to maintain this balance between managing the cost structure and retaining capacity. Steven, do you want to talk a little bit more about...