Barratt Redrow plc (BTRW) Earnings Call Transcript

Hello, and welcome to the Barratt Developments Plc FY '24 Trading Update Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]. I will now hand you over to your host, John Messenger, Group Investor Relations Director, to begin today's conference. Thank you.

Thank you, Laura, and hi, good morning, everyone. I think everyone on the call will know the drill by now, but we are still operating under the rules of the takeover code until the Redrow transaction is concluded. So David, Steven and Mike will look to answer your questions as fully as possible today, but they may not be able to where they are forward-looking related to guidance or to the CMA inquiry in terms of questions asked. With that in mind, I will hand over to David. Thanks, everyone.

John, thank you very much, and good morning, everyone. Thanks for joining us. As you would expect, we have Steven and Mike with me this morning and clearly, John as well. So as normal, I would just like to start off by really offering my thanks to our employees, our subcontractors and our suppliers for really their fantastic contribution in helping us to deliver such a strong operational performance. Then we move on to look at some of the information starting with the reservation rate. And we clearly recognize that reservation rates have remained sensitive to the background in terms of mortgage availability and affordability for potential home buyers. We achieved a net reservation rate of 0.58%, so 5.5% ahead of the 0.55% delivered in FY '23. We have seen first-time buyer activity stabilize and showing a little recovery. So first-time buyers representing 27% of private reservations, up from 25% in FY '23. Also for existing homeowners, the use of part exchange increased up to 16% of private reservations. But pleasingly, our unsold part exchange stock has actually reduced on a year-on-year basis. Average sales outlets at 346 were 5.7% lower than the 367 in the prior year. And that's just reflecting the fact that we're seeing sales outlets coming to a close, where previously sales outlets had been extended because of lower reservation rates. Then if we look at the effect of reduced land buying activity during 2022 and 2023, as well as the outlets closing as I just mentioned, we expect average sales outlets will reduce by around 9% in FY '25. But importantly, we expect them to return to FY '24 levels during FY '26. Our order book continued to adjust during the year with a total order book consisting of 7,239 homes, down 19.5% on the order book at the end of FY '23, but down just 14% in value terms at GBP 1.9 billion. And the private ASP in our year-end order book, excluding PRS and affordable reservations is down 2.2%. As normal, throughout the year, our construction teams have not, in any way, compromised on customer service or build quality. We've been awarded 5 star by our customers now for the 15th consecutive year. And clearly, this is a unique achievement amongst the national housebuilders. And last month, we were awarded 89 Pride in the Job Awards for site management, more than any other housebuilder, for the 20th consecutive year. Moving on to build cost inflation. As we outlined at our interims, our total build cost inflation has come in as expected at around 5% for FY '24. And we currently anticipate that build cost inflation will be broadly flat for FY '25. Bringing all this together, we expect adjusted profit before tax for FY '24 will be slightly ahead of our previous expectations, and our balance sheet position remains very strong with net cash at approximately GBP 865 million at the year-end. This morning, we have reported additional adjusted item charges totaling GBP 192 million for the full year. These are associated with legacy properties and building safety as well as a GBP 23 million incurred in charge in relation to the Redrow transaction fees. We took a first half adjusted item of GBP 61.9 million. And this, you will remember, covered an increase in contingency based on the latest information received in relation to our obligations to refund expenditure incurred by the government's Building Safety Fund as well as remediation costs for atypical buildings within our portfolio. The second half charge of GBP 130 million in relation to legacy properties relates to developments we have previously identified and disclosed as requiring remediation. Just a couple of other key points to highlight from our statement. We remain absolutely committed to leading the industry in sustainability. The eHome2, our concept home up in Salford is providing real-world data on how the house is performing. And our group design and technical team are using this performance data to help them to deliver the most attractive and sustainable homes for customers under the future homes standard. We have also maintained our position in the CDP’s Global Climate Change A List for Leadership. We are one of fewer than 365 companies worldwide. Turning now to the land market, where our position has moved quite significantly over the last 6 months. Our disciplined approach to land approvals continued during the year, and we did see an increase in the number of sites being brought to the market for sale, particularly through the final quarter. As a result, we approved 58 new sites, equating to 12,439 plots in the year, with future land spend anticipated of GBP 647 million. Our cash land spend in FY '24 on new land and settling land creditors reduced to GBP 680 million from GBP 823 million in FY '23. This is clearly a reflection of the limited land approvals in FY '23 and early FY '24. However, with the acceleration in land approvals during the final quarter of FY '24, we expect cash land spend will show a significant increase in FY '25. Finally, on outlook. To recap, despite what has clearly been a challenging year, we believe that our strong operational performance has helped us to deliver slightly ahead of our previous expectations in FY '24. We welcome the government's urgency and focus on housebuilding and their intention to reform the planning system, as these are key to both unlocking economic growth and tackling the chronic undersupply of new homes of all tenures that the country needs. Whilst the macro backdrop remains challenging, particularly around market sensitivity to mortgage pricing and availability, and we have lower average sales outlets, we anticipate total home completions will be between 13,000 and 13,500 homes in FY '25, including around 600 completions for joint ventures. We will use our robust financial position, our solid forward order book, and our reputation for great homes and customer service to allow us to respond as the market evolves over the months ahead. Steven, Mike, and I will now be very happy to take your questions. Thank you.

[Operator Instructions] We will now take our first question from Aynsley Lammin of Investec.

Just wondered on the site numbers, I guess. How much of that is just the kind of sites closed in normally across the business to maybe position yourself ahead of the potential Redrow deal? And just on the kind of recent trading, I guess, a bit more color around, I think you said you still use incentives, what house prices are doing generally across the country? Did you see any slowdown into the election? And your expectations for the second half would be helpful.

Yes. Aynsley, hi, good morning. I mean, if I pick those up, so first of all, I mean, any change in relation to site numbers has no bearing in relation to the proposed acquisition of Redrow. I think what we're seeing is just 2 effects. One is that when you look at the site approval numbers for the second half of FY '23 and the first half of FY '24, we basically approved net zero sites. So that's the first thing. And then the second thing is that clearly, sites that we did have are now coming to an end. But as I outlined in the overview and is in the statement, we've had a really good period of approvals over the last 6 months. And we see that we have good momentum in the market. Hence, we're flagging all those site numbers will dip in FY '25. We expect them to fully recover in FY '26. And then just in terms of the market overall, I mean, as you know, Aynsley, we always seek to avoid kind of disaggregating reported periods. But just to touch on a few, Aynsley, first of all, we've said in the release that we think that prices are down around about 2%. Now that's not necessarily all mix adjusted, but that's some sort of indication in terms of what we've seen in the market. And I think that will be fully consistent with what we're seeing in terms of the national stats. Incentive levels. We've previously said that incentive levels are running up to be around 6%. I don't think we've seen any great change in terms of incentive levels. And then in the run-up to the election, I mean, I think inevitably, people have been focused on the election. And so there's been a little bit of slowdown. I think we're struggling to disaggregate that from the election and from everyone watching the football. But there's been a little bit of slowdown, but nothing major to call out.

Just one quick follow-up. You say, you expect profits to be mostly ahead of your expectations. I think consensus PBT is around GBP 360 million, GBP 357 million. I mean, is that kind of consistent with your expectations, the consensus number?

Aynsley, hi, it Mike here. Unfortunately, that's what we're not going to answer this morning given what we said in the statement just because we're in the sort of takeover, the offer period. Sorry, but you'll have to wait until September to know.

And we will now take our next question from Will Jones of Redburn Atlantic.

Maybe 3 from me, please, just exploring the moving parts for June 25. Obviously, you've given us a volume view. Could you help us with the sales rate assumption, broadly speaking, that underpins that? And just big picture, what you would want and expect the order book to be this time next year? And just certainly, the medium-term position versus following year completions? Second one was around margin for the year ahead. I'm not sure if you can give a view on that at this stage, but clearly, we'd expect some drag from volume, but with build costs flat, do you think there's a chance of a price cost positive? And are there any other kind of cost actions on the core business? And then just around the net cash, I suppose, just if you could help us with regard to fire safety spend year ahead versus that GBP 865 million base, I think.

Okay, Will. Hi, good morning. So I'll deal with the first 2, and then Michael will talk about sort of net cash and cash spend and so on. I think in terms of the sales rate, I mean, I've got to be reasonably careful about the way we talk through that. But what I would say is we're expecting something similar. So we've obviously reported a sales rate that is slightly up in FY '24 compared to FY '23. I think that's a reasonable starting point in terms of looking at FY '25. In terms of the order book, we don't feel that we're under lots of pressure to increase the order book. I mean, clearly, when the market was very strong, we were more forward sold. So I don't think we'd be looking at something completely different in terms of the order book on a unit basis as we move through to the end of FY '25 compared to '24. And then in terms of margin, to save Mike making the point again, is that this is something that we've been told that we just can't go towards at all in terms of that forward guidance. So I feel like we're ducking it. Normally, we may have to take on any questions, but I think we've got to come back on the question in September. Mike?

Yes, so let me just pick up on cash. So in terms of moving parts, broadly, just only 2/3rds of that revolving credit facility number will be paid out in FY '25. So I think just shy of GBP 300 million. In terms of safety, I mean, we are making good progress on remediation. We've seen good number of sites actually underway now. So I expect the spend on building safety to be probably around GBP 80 million to GBP 100 million for FY '25, which is a similar level to what we spent in FY '24. And overall, in cash, we obviously still have the cash balance. We're very focused on maintaining the strength of the balance sheet, because it gives us the flexibility to operate in the market, and we've obviously been very active on land in the second half. But overall, our policy on that hasn't really changed, which is that we're very focused on growing the business and using that cash to buy land and take advantage of the flexibility where we can.

I guess just on that land point, presumably, you're happy the step-up in activity in the last 6 months has kind of beat the hurdles of the business as still the market corrected as you heard.

Yes. I mean, as you know, we've got a very disciplined approach to land, and we don't bring any land into the business that's under hurdle rates, because we want to maintain that discipline. So yes, we've absolutely been focused on that. And as we come through that, the market has been very competitive, but we've been holding the teams sort of feet to the fire on it and making sure that they maintain that discipline.