Barratt Redrow plc (BTRW) Earnings Call Transcript

Hello, and welcome to Barratt Redrow plc FY '26 Trading Update. My name is Laura, and I will be your operator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, David Thomas, Chief Executive Officer, to begin today's conference. Thank you.

Good morning, everyone, and thank you for joining us on our FY '26 trading update call. Mike Roberts and John Messenger are with me this morning. As ever, I'd like to start off by thanking all of our employees, our subcontractors and our suppliers for their continued commitment and sheer hard work which has driven this performance. Last month, we achieved 122 NHBC Pride in the Job Awards, more than any other housebuilder, for the 22nd consecutive year, and it is our best result ever. It is this commitment, operational excellence and focus on our build quality and our customers that has underpinned this solid performance. Clearly, the operating environment is challenging, but we've responded proactively to these challenges. We've used [ incentives ] carefully to maintain sales momentum. As a result, we delivered total home completions, 5% ahead of last year, at 17,667, and adjusted PBT in line with market expectations. We have applied rigorous cost control to our cost base, partially offsetting some of the gross margin pressure, and we have reduced our investment in land. This decision around land investment and our actions across the business have delivered a very strong balance sheet position. with year-end net cash of GBP 772 million. As many on the call will be aware, we have consistently evolved our capital allocation policy and returned almost GBP 3.5 billion to shareholders over the last 10 years. Our capital allocation policy is based around maintaining that strong balance sheet while keeping the financial flexibility needed to both invest in growth and meet significant cash commitments over the next few years. The GBP 400 million return announced today is entirely consistent with that flexible but disciplined approach. Like others in the sector, and particularly since the outbreak of the conflict in the Middle East, our shares are trading at a significant discount to tangible net asset value. As a result, our FY '27 capital return of GBP 400 million will be delivered predominantly through share buybacks with a nominal dividend. And looking ahead, we remain committed to returning to shareholders 50% of our earnings, complemented by a minimum GBP 100 million annual share buyback. On that note, I will now hand over to Mike to discuss the operational performance of the business.

Thanks, David, and good morning, everyone. I want to start with reservations. Our overall private reservation rate was GBP 0.64, which compares to GBP 0.63 on an aggregated basis last year. This includes a GBP 0.01 contribution from PRS and multiunit sales, in line with last year. Although following budget uncertainty, we saw significant PRS reservations shift towards the end of the year. Sales incentives to support reservation activity remained at the elevated levels we saw in the second quarter given the outbreak of the conflict in the Middle East. We would expect incentives to stay at this level until consumer sentiment and affordability improves. As David outlined, we delivered 17,667 total home completions in the area, 5% ahead of the aggregated figure in FY '26. Performance was weighted towards the second half consistent with our usual trading patterns and in line with our build scheduling and reservations generated in the second and third quarters. The average selling price for the year was GBP 352,000, an increase of 2.3%. This was driven by increased home size and a higher contribution from our regions with higher average selling prices. We estimate that underlying sales pricing was around 1% lower across the year and our order book at the air and is carrying an underlying ASP decline of 1.4%. This reflects a market where our customers face affordability challenges, political and macroeconomic uncertainty and they are, as a result, cautious and price conscious. In this context, we are pleased that the forward order book is solid with forward sales of GBP 2.8 billion, only slightly down on last year. An average sales outlet numbers at 405 were flat versus the first half and in line with our guidance at the start of the year. We have launched a total of 136 new sales outlets in the year. including our first 12 synergy sales outlets, where performance has been really encouraging, reinforcing our confidence in the benefits of our multi-brand approach. 18 further synergy sites are scheduled to open this year. and we are targeting a further 15 in FY '28. In April, we guided to average sales outlets for FY '20 of between 425 and 435. However, the frustration is slow pace of planning approvals, but coupled with good progress on outlet closures, means we're now expecting average sales outlets of around 415 in FY '27. Turning now to build cost inflation. In April, we guided to build cost inflation for the year of 2% and 3% in the second half. That has played out as expected. And we are likely to experience further build cost pressure in this financial year, particularly on the material side. The scale of our business, enhanced by the Redrow acquisition is helping to mitigate some of the impact. Through our ongoing negotiations with our supply chain partners, we are mitigating increases or building in flexibility for prices to reduce as and when supply and input costs reverse. So against this backdrop, our current assumption is that we could see total build cost inflation of 3% to 4% in FY '27, slightly higher on materials, which could be 4% to 5% but more muted on labor which we expect to be between 2% and 3%. We'll hopefully have a clearer picture and be able to update further information in September. With that, I'll pass back to David.

Thanks very much, Mike. And now to touch briefly on the Redrow integration. We're pleased that operationally, all elements of the Redrow integration have completed all of the GBP 100 million cost synergies have been confirmed. And at GBP 73 million, the benefit to the P&L in FY '26 was slightly ahead of that expected at the interims. There is a further GBP 27 million benefit to come before the end of December 2027 to complete the GBP 100 million per annum synergy. In FY '26, both synergy delivery and the rigorous management of our cost base, something that we highlighted at the interim stage delivered a very positive reduction in our administrative expenses. Turning to adjusted items. We have given details in the statement, but charges are expected to total around GBP 160 million. And the most significant element relates to legacy property provision charges of around GBP 95 million, mainly reflecting additional remediation costs on 2 developments that were already under review as well as recognizing the impact of build cost inflation. Turning to land. We approved just over 3,000 plots for purchase in FY '26. That's well below the 7,000 to 9,000 plots guided to in April. This reflects a very deliberate decision to be even more selective in our land acquisition and also to cancel some prior approvals given the uncertain environment. Land cash spend in the year was also more modest at GBP 625 million compared to guidance of between GBP 700 million and GBP 800 million. This has driven an increase in our year-end cash balances, which at GBP GGB 772 million with some GBP 170 million better than our April guidance. Finally, turning to the outlook. We have navigated difficult markets before, and we see that we are well positioned. Our business model is resilient and flexible. Our balance sheet is strong. We have 3 high-quality and complementary brands, which are performing well, and we expect to deliver total home completions of between 17,700 and 18,200 in FY '27. As we demonstrated this year and with today's announcement, we have a clear focus on optimizing our capital to enhance returns for shareholders. Thank you. And with that, we'll be very happy to take questions.

[Operator Instructions] We'll now take our first Will Jones of Rothschild & Co Redburn.

Three, please, if I could. The first is around trading in your fiscal Q4, whether you could just talk us through how it evolved through the period just given all the various headlines we've had internationally and at home and whether you'd call out anything interesting around buyer types or the regions? Second was just around build cost, good clarity given there for the year ahead, but just hoping to explore the degree of visibility you've got on that, particularly with regard to materials and the extent to which you've been able to agree any increases as energy surcharges as opposed to fixed price increases? And then the last one was just tying up on cash outflows for the year ahead, obviously, lots of detail given, but I just wondered if you had a view on what the land approval number you've guided to plot-wise, might mean for the cash to spend. And therefore, if there's any high-level thinking on the net cash or net debt position a year from now?

Well, thank you very much. And so if I start off, and I'll talk about trading, and then pass to Mike and Mike will pick up in terms of just build costs and some things that we're seeing on build costs and Mike -- sorry, John will pick up in terms of cash into land and other areas. So look, well, on Q4, I'd say there's nothing unusual to report in terms of regions or particular brands or product types. I think it's an ongoing trend where affordability is most challenged in London and the Southeast. And therefore, if we compare London to Scotland or the north of England, unquestionably, London and the Southeast is seeing it more difficult. But that was the same position that we saw up to Q3. The only other point which Mike touched on in the overview is that we did secure multiunit sales in Q4, primarily because I think most people backed away from the market, given all the uncertainty and the run-up to the to the budget towards the end of '25. So we kind of recover that position. And ended up with pretty much the same overall position from [ a ] unit sales and private rental albeit it was a late delivery in Q4. Mike?

Yes. So raw materials, as I said, we've guided to 3% to 4%. We think the material content will be slightly higher than that and less so on the labor. In terms of visibility, you'll be aware, we have sort of ongoing all year round negotiations and conversations with our supply chain and supply chain partners. The deals that we strike are not all at one point. So those sort of revised prices and fixed-term breads revolve through the year. We do feel that there's some headroom in the supply chain. So we're not seeing price increases because of scarcity actually quite the reverse that people are talking to us, particularly with our sort of key differentiator being the size of the combined business in terms of securing their future supply. So we've been able to mitigate some price increases as a result where we've seen sort of exceptionally or not exceptional, but higher levels of inflation due to Middle East conflict and price of oil been fluctuating. We've generally agreed surcharges and we've agreed mechanisms where those will reduce as and when the price of oil drops, and we've done that both with our material supply partners, but also our subcontract supply chain as well where they're heavy users of the likes of diesel and the like. We review the prices by sector. So we're seeing higher pressure on plastics and [ basmati ] products, as you'd expect, [ bolt ] materials less so in many instances that the suppliers have hedged their fuel prices. So I guess that might change if the conflict escalates again put them or we're relatively confident with the forecast that we've got and we keep on going with the conversations we're having with the supply chain.

And then just yes, coming back, Will, on the question around land and commitments around the approvals. Two things to [ flag ], one you've seen already that GBP 330 million is our estimate in terms of land credits, the outflows for the year and that is effectively backed on a locked in. On top of that, when we look at what is in the approvals hopper, effectively, those broadly between GBP 220 million and GBP 250 million is the kind of broad feel in terms of that number. Obviously, as the year evolves, that may change. But certainly, as we sit here today in terms of committed spend, we're in that kind of scale, that order of GBP 220 million to GBP 250 million.

We'll now take our next question from Harry Goad of Berenberg.

Can you just talk a little bit about the landmark [ appreciate ] the sort of need to [indiscernible] to invest is lower.

Harry, sorry. Sorry, you're not coming through clearly so..

Can you this any better?

That's a little bit better. So go slow.

Okay. Just on the land [ arkit ] please notwithstanding that you need or the to invest that. Can you talk about what you're seeing in terms of opportunities and particularly pricing in our very interesting deals out there if you did want to do it...

Yes. So, thank you very much. So yes, I think if we go back to February, one of the things that we were seeing in February is that we have an enormous amount of our own applications in for planning. I think the whole industry anticipates that the changes coming from the legislation that was passed in December, and the revised National Planning Policy Framework, which has not yet been published, but has been scheduled to be published this week would result in a big change in the planning backdrop. And I think we've said previously that the legislation was delayed. The first half of the year was definitely impacted at a local level where there was local elections. And the planning policy framework has not yet been published. But nonetheless, applications have gone in. So we would expect that the availability of land will alter substantially as we move through the second half of '26 and into '27. So we don't see any shortage of opportunity in terms of land with planning. I think it's more about the uncertainty of rates of sale. And also, as Mike just talked about the uncertainty of build costs in terms of us building up the viability position.

And we'll now take our next question from Zaim Beekawa of JPMorgan.

The first is just on the incentives. I think you mentioned that it sort of moved higher due to the budget related uncertainty but it feels like we could be in that scenario. Again, we have some statin help to buy [ rumors ] you worried about incentives potentially going higher again? Second one is just a bit of help reconciling land approvals going from around [ 22,500 ] to 3,000, but land spend just moving down from GBP 860 million to around EUR 600 million. And then finally, on build cost inflation, sorry to come back on this, but any view on how that's split between calendar year '26 and '27. So are you expecting a big step-up in H2 versus that 3% to 4% average?

Thanks very much for those questions. So I think if I just pick up in terms of the incentive position and John will then talk about the cash land spend [ Vitaland ] approvals and also John can pick up in terms of the phasing of the headline on build cost inflation. I think it's important to build cost inflation just to talk about the split in terms of labor and materials, which John will do. So look, I think it was well documented last year that the way information about the budget linked into the market from probably July, August time was enormously unhelpful, particularly regarding stamp duty potential changes to stamp duty. As you touched on the possibility of demand side support and also discussions about taxation around property. So we would just reinforce the fact that, that kind of leakage and speculation is enormously unhelpful for the market. But we'll just need to see how that plays out. There is already a discussion in the media about the potential of there being demand-side support introduced, which clearly net-net, we would see as being the right thing to do and a big positive for the market, but the speculation around it is not going to encourage people to be transacting. So we've got to recognize there is potentially a delay effect in relation to those discussions.

Yes. Zaim, just on the first one in terms of the land spend and the profile, the key thing to flag here is that we have, obviously, in the process, we approved land but then it sits there effectively as a -- in a holding [ open ]. And then we will go through to subject to planning -- the planning consents, and that would typically then trigger the purchase of the land. We'll obviously break out in September, how many plots were actually purchased in the year, but the approval process is in advance of that. So effectively, as our approval slow down, that will ultimately then flow through into the land spend that you actually see going through the cash flow statement and hitting our balance sheet. So it's purely around the timing of that. And obviously, we have the 3,029 plots. They are sitting there as approvals they will create that slower land spend. And as I mentioned earlier on the question, we're talking about GBP 220 million to GBP 250 million of committed land spend on top of the land creditors. So there will likely be a sharp slowdown as we move through into FY '27 from FY '26. In terms of build cost inflation, to David's point, a couple of things to flag we look, clearly, we're flagging within build costs, which are about 60% of sales. You have broadly 60% materials, 40% is labor. So when we look at the labor content, we're flagging 2% to 3% inflation. And given the backdrop of capacity in the industry and a likely slowing particularly on the smaller developers, then we think actually that labor cost inflation has probably gotten ability to be a little lower. If we look at the material side between 4% and 5% again, a lot of the supply chain is running at less capacity utilization than they would like. And that's why we've had success in terms of building in deflators as well as escalators based around energy and input costs. because I think the supply chain is keen to drive volume at some point, at least particularly conscious of how much cost inflation in the industry is born over the last 5 years. So those are the ingredients in there. I think from the point of view of how that build cost will evolve through into our numbers in FY '27, A lot of this will depend on when we actually agree terms through September, October, but we would probably like to see more of that inflation feeding in the second half but pretty much in the way we value our land and looking at our land bank embedded margins, once we know about a cost increase, we reflect that in our valuations, and that starts to come through in the margins as we report on the same. So overall, putting slightly more build cost inflation in the second half, but it won't be that significant because we recognize it as we move forward and as we agreed terms with suppliers.

We will now take our next question from Chris Millington of Deutsche Bank.

A few again, as we'll keep the theme going. First one then is about the sustainability of shareholder returns, really, guys. The GBP 400 million is probably going to be more than 100% of net income next year. And I appreciate lower land spend helps. But if you do have to move back into the land market at a more replacement rate, do you think you can continue paying that? Number 2 is really just about the outlets impact of this lower land spend as we move beyond '27. Is it likely to be a little bit more severe than the reduction you put through today for FY '27. And the final one, it relates to something you just talked about there, David, about how to buy and I just wanted to know whether or not you've had any discussions with the government and kind of what you feel the probability of a return of the scheme would be?

Chris, thank you. If I pick up on shareholder returns and on help to buy. So I think on shareholder returns. I said in the overview that over the last 10 years, we've returned around GBP 3.5 billion in terms of shareholder returns. So I understand that there's been clearly variable levels of profitability during that period of time. But clearly, that's a significant average annual run rate in terms of shareholder returns. So the GBP 400 million that we've announced this morning, I mean, we're very clearly saying that, that GBP 400 million is in excess of how we're guiding on a go-forward basis. We're guiding on a go-forward basis on returning on a 2x cover basis for earnings plus GBP 100 million, which is where we were previously. So we see that there is an additional return of GBP 100 million to GBP 120 million within that GBP 400 million. And I think that's kind of clearly set out within the statement. We're very conscious, as John has touched on already about the other cash flow outflows that we have. So land credit is clearly is a trading liability, but it's unquestionably a liability. And then we also have the building safety liabilities. So we're very conscious that these are significant outflows, and we're managing that in terms of the way that we're looking at shareholder returns. In terms of Help to Buy, I mean, I think, Chris, the short answer is, of course, we've talked to government. We've talked to the previous government. We've talked to this government we'll talk to the new government that forms shortly. And we've been very clear that it is unusual in the market for there to be no demand-side support. If you go back over the last 30 years, the vast majority of years, there has been demand side support, particularly focused on first-time buyers and recognizing that property prices, generally, property prices are high, and there are particular challenges around affordability for first-time buyers. So we will, obviously, again, make that point to the new government, as we have done previously. I think the old point that's key is that the industry has always said that we would pay for a scheme. We have previously paid in relation to government demand side support schemes. So we've never had a problem with paying, but we believe that the existence of a scheme is fundamentally important. If we are going to collectively deliver the homes that the country needs.

So in terms of outlets, Chris, obviously, for the current year, the guidance there to GBP 405 million. If we look at '27 moving into we would still expect to make progress on sales outlets. If you think about the time frame from land approvals through to opening a sales outlet, you're talking typically 24 months. So any slowdown partly, we'll be looking at clearly what we can do to drive additional sales out of the existing portfolio. And then it will be the impact will be more about FY '29 if there is a more extended period where we're not purchasing sites for additional sales outlets. But other things stand '27 and '28, we still expect to 18 progress.