Vistry Group PLC (VTY) Earnings Call Transcript

Hello, everyone, and welcome to the Vistry Trading Update. My name is Harry, and I'll be your operator today. [Operator Instructions] I'd now like to turn the call over to Greg Fitzgerald, Chief Executive. Please go ahead.

Thank you. Thank you, Harry. Good morning, everyone, and thank you for joining us. With me today, I've got Tim Lawlor and Susie Bell. And there's certainly a lot to go through, so I get cracking. So it's been another milestone year for Vistry Group with the integration of Countryside and the update to our strategy announced in September last year. I'm pleased to say that the integration has gone very well, and the transition to our new strategy is also making very good progress. We start 2024 fully focused on our high-return asset-light partnerships model with Vistry firmly established as the leading provider of affordable homes in the country. Looking at the year, the group's financial performance is expected to be ahead of guidance, with adjusted profit before tax in line with the prior year reported number of GBP 418.4 million. Total completions were down only 5.4% to 16,124 units with revenue expected to be down circa 10% at around GBP 4 billion. The former partnerships business actually grew completions and grew by about 3.3%. So this is, we feel, a relatively strong performance and reflects the resilience of our unique partnership model with the group significantly outperforming a number of our peers, as can be seen in trading updates during the course of this week, and I'm sure more to come next week. And of course, when we talk about the resilience of our trading model with regards to that, you need a difficult market to explain that. And I think these results -- because last year was undoubtedly a difficult market, these results probably demonstrate that. In the presale market, working with our partners, we have seen good levels of demand from RPs and local authorities throughout the year, with demand from PRS providers notably increasing in quarter 4. We are currently working at 93 RPs and 37 local authorities. And looking ahead, we see good opportunity to increase our delivery to existing partners, as has been the case this year as well as increasing the number of people that we are working with in new partnerships. The open market remains suppressed throughout the year, reflecting higher mortgage rates, cost inflation pressures and general uncertainty. Half 1, open market prices held firm with sales supported by incentives of around 3% to 5%. In the second half, we saw a small price reduction of around 2% with an ongoing use of incentives. Pressure on prices, I have to say, and I'm pleased to say, it seems to be easing in the runup to Christmas and in the first week of this year. On costs, the group has continued to take a very proactive approach to managing costs, working closely with our valued supply chain partners. In half 1, we offset build cost increases of around 5% with the benefits of synergies from the combination of Vistry and Countryside. In the second half, we were appreciated of the productive engagement we have with our supply chain agreeing cost reduction for all existing and future contracts. So just to be clear, we have seen build deflation during the year because of our model. Subcontractors, like no doubt, you guys completely get where we are within our model. And if there is a road and the subcontractors is driving down it and they're looking for work, as they always are, and on the right-hand side of the road, there's a Vistry scheme. And on the left-hand side, there is the scheme of a similar number of units but by a private developer. They are going to be turning right because what they're looking for all the time is certainty. So while we're up there looking for savings, we can say we will be building 100, 500 or 1,000 units. The question comes back with, well, what about market conditions? It doesn't the matter about market additions. We will be building them. We're under contract, and we'll be building as quick as possible. That has enabled us to get some favorable and sizable discounts. Overall, cost savings and synergies have gone a long way to mitigate price reductions and cost increases, and we expect our operating margin for the full year to be at a similar level to map up the combined group in 2022. Vistry works, our timber frame operation has made significant progress this year. We reopened our factory in the East Midlands and have driven standardization through the production process. In the year, we delivered around 2,500 units, which is our planned output and expect output to double in this year heading towards our capacity of around 7,000 units [indiscernible] operating as 1 business with 6 divisions and 26 regions. Within this structure, we have the capacity to significantly step up our output to 20,000 units per annum and beyond. The transitioning of our housebuilding land bank to our partnership model is also well underway, and we were pleased to announce our agreement with Leaf Living and Sage in November for the presale of over 2,800 units, which is, if not the largest deal ever done in that area, definitely one of the largest. As expected, we saw a significant reduction in net debt from the half year position with year-end debt at around GBP 90 million, but average net debt was in line with guidance through the year at about GBP 450 million. Turning now to the outlook. There is still a lot of uncertainty out there, and there is a lot for us to do, but we are definitely seeing some encouraging signs, both at the back end of 2023 and at the start of this year. The group has a very strong forward sales position, up 12% on the prior year at GBP 4.5 billion, positioning us well to deliver a step-up in total completions in this year. In the presell market, we continue to see good demand from RPs and local authorities and are securing new partnerships that meet our target hurdle rates. As said, the PRS market continues to pick up. In all my 43 years of experience in the housebuilding sector, there were 2 things for sure. As interest rates go up, it's harder to sell houses. As interest rates come down, it's easier to sell houses -- it's not easy, but easier. I mean it's early days, but this is what we are starting to see, and we expect to see this trend to continue through 2024. Importantly, there is really positive momentum in the political arena about the need to solve Britain's embarrassing housing crisis. Commentary about the shortage of housing and levels of home business and the cost to local authorities of this is everywhere, and I'm confident that the stimulation of house building will be one of the biggest, if not the biggest, elements of debate in the general election. Affordable and PRS will be -- housing will be right at the top of the agenda. In my view, the government will have to put more money into housing and Vistry is by far and away the best place to work with the government to deliver on their aims. We increased our level of Homes England grant funding in the second half and are spending it faster than we thought. This is all a positive for increasing affordable housing supply and addressing the country's desperate housing crisis. And I'll reiterate again, we're the only private developer that gets grant from Homes England. We had a one-off adjustment to our margins arising in 2023 as a result of our changing strategy, which we announced in September. This gave rise to a GBP 40 million reduction in adjusted profit before tax as disclosed in October. We are comfortable that consensus estimates going forward reflect the revised margins for the business and there are no further adjustments of this nature required going forward. We will give full year guidance with our full year results announcement in March. We also announced a number of board changes this morning, and I would like to take a moment to discuss these. The last 12 months have seen an unprecedented change within the organization, including a major acquisition and that's off the back of the previous major acquisition 2 years earlier, a subsequent integration and the announcement of an ambitious new strategy. The Board, too, has seen a large number of changes in this time. So firstly, I would like to thank Ralph Findlay on behalf of the Board for his significant contribution to Vistry over the last 9 years. Regarding my appointment as Executive Chairman and Chief Executive Officer, the Board acknowledges. Of course, this is not a conventional move and does not align with the corporate governance code. It believes, however, it is in the best interest of all stakeholders and is aimed at providing continuity and maintaining momentum in the execution of the group strategy and the delivery of its medium-term targets. Furthermore, the Board has started a search for an experienced Senior Independent Director, alongside a number of other board appointments, and we hope to have everyone in place by the time of our AGM in May. So to conclude, I am very excited about Vistry's future and fully committed to executing our focused partnership strategy. Working alongside my excellent management team, I'm looking forward to ensuring we achieve our medium-term targets and deliver outstanding returns for our shareholders. That's me done. Harry, we will now take questions.

[Operator Instructions] Our first question of the day is from the line of Chris Millington of Numis.

A few of -- firstly, could just talk about land. You've obviously been a bit more active than the others so I appreciate that you obviously approach this differently. But how have you found land pricing and the ability to kind of hit your hurdle rate? And perhaps just an additional one on that is just how you're set for planning for 2024? The other ones are a bit more straightforward. So just expectations on -- sorry, let's go one at a time then. No problem.

Yes. I'll do that one first. And so we've got 90%, which is a very strong position of all the land we required for this year and 80% of everything we require with regards to planning. So planning undoubtedly remains incredibly difficult. But that said, we're not really that affected by the nutrient issues around the country. That's a lot of judgment. So we're in a very good place starting the year with 80% everything we need for planning and 90% of all the land. The land market is soft, and we've taken advantage of that with our new models through the year to buy 13,000 or so plots, and we're getting them very much on our terms, which includes very favorable deferred payment terms. And we don't see that changing for the next -- for the first half of this year at the very least, Chris.

That's helpful. Next one is a little bit more straightforward. So just curious about the scale of the build cost savings you think you achieved towards the back end of the year. Greg, you mentioned some material moves there.

Yes. I'd rather not, Chris, other than to say they're large, but I think that's commercially sensitive. If you look at the number of units that we just done 16,000, I suspect if you're a subcontractor or you're a supplier who don't really worry about whether you're selling a house to Mr. and Mrs. Smith or passing it on to a PRS local authority or Housing Association, I suspect we will be the largest house builder in the country. And we have certainly taken advantage of that. And when you can say to a supplier and/or a subcontractor, whether they're a bricklayer or a ground worker, here you go, we're definitely going to do this. And not only that, we want to do it as quickly as we absolutely can, we are getting some eye-watering savings coming through. Yes, this is as much as I want to say on that, Chris.

Understood. Last one then from me guys, please, is just how you see the average net debt trending through '24? You've obviously got this target to delever over the next few years. I mean, are we going to see much progress in '24 on average?

Chris, this is Tim. Yes, we expect to see the average net debt start to trend down during '24. We said already, as you know, that we are targeting getting to a net cash position at the end of '24 and confident that we are slightly ahead of expectations at the end of '23. So a better position to go into '24.

Our next question today is from the line of Aynsley Lammin of Investec.

Two for me. Obviously, you've seen good demand still from the kind of RPs and the PRS side. I just wondered if you could provide a bit more color what's driving that, particularly on the PRS. Is that still at good margins, good pricing? So a bit more color on what's driving that good demand. And then secondly, I just wondered if you had the land creditor balance as at end of the year?

Okay. Do you want to take the land creditor one first, Tim?

Yes. We don't have a land creditor number yet, and I wouldn't want to disclose balance sheet details. It's still too early in the close process, online creditor. So we'll have to defer to the results in March for that.

Okay. And thanks for that answer, Tim. And then with regards to PRS, yes, I mean, the appetite for PRS has grown through the year that we're finding that the PRS providers are looking at the market as I am at the first moment in time, which I think is encouraging. I'm sure the housing market will not go flying off the handle, but I think it will gradually improve as interest rates come down and certainly over inflation comes down during the course of this year. So we are achieving. We achieved the hurdle rates we required on the deal we announced in October with Leaf and Sage and we fully expect that to continue. But we have done an enormous amount of deals through the year. And we will continue to do that as we go through 2024. If it's helpful to you, I would be -- I'm going to be tougher on approvals with regards to discount levels today than I would have been a month ago. Whether that's right or wrong, we'll see, but that's where I am with my confidence in the market.

Our next question is from the line of Gregor Kuglitsch of UBS.

I've got a question on the margins. Just working backwards from what you said. I think we're kind of implying a 12% operating margin, if I'm not mistaken. You said GBP 4 billion of revenues. And I guess, I don't know if you had GBP 65 million of interest expense or something like that [indiscernible]. So that's question one, whether that's correct. And then maybe your comment that your comfortable consensus factors in the sort of the new margin level. Is that what you're talking about 12% that you think you could kind of hold that? And then maybe related to that, I know you're not formally guiding, but are you basically suggesting you're kind of comfortable with people at 440, so a bit of a step up to '24 versus '23, I guess it's early days. And then maybe a third question on -- so you couldn't answer the land creditor a bit. But in terms of the provisions on fire safety, how much has that been cashed out? And I guess, what's your expectation for that going forward?

Okay. Well, I'll take the build safety one, but Tim will take the rest, yes. We're very comfortable with the provision for build safety and have been for some time. We never included in our build safety provision for getting -- or recuperating any of the money back from contractors, subcontractors, and warranty providers, et cetera, et cetera. And we're starting to see that come back. So yes, we are comfortable and have been for some time with the provision and are making, I would say, very good progress in line with the pledge that we gave to the government with regards to remediating the 300 or so buildings that we have to look at. On the other points, Tim, do you want to take those?

Yes. So more specifically on the fire safety in terms of numbers, we talked about sort of GBP 30 million-ish of cash going out in the second half of the year, and we're expecting somewhere around high GBP 50 million, GBP 60 million of cash out next year. In terms of the margins...

This year, Tim.

Yes. So I'm sitting '23 world here. So...

[indiscernible] we need to come up where we're at.

Thanks, Greg, much appreciate it. Yes, just to be clear, FY '24 of high GBP 50 million to GBP 60 million. FY '23, second half, around GBP 30 million of cash went out. In terms of the margins, you're right, Gregor, we're talking around 12% for FY '23, holding up at that sort of level in '24. There may be a slight reduction in margin as the mix develops towards the more partnership business. So maybe we're talking about between 11% and 12% in '24. We'll come back with more specifics on that when we get to March. In terms of the consensus piece, consensus is quite difficult because there's a big way into numbers, and I think quite a few perhaps not the ones in the quarter, haven't updated their numbers recently. But the sort of range that we're looking at is from anywhere -- Bloomberg was saying 423 for this year. Two others saying low 430. So I think sort of high 420s is sort of the consensus number, and we're not looking to move people from that today.

Our next question today is from the line of Clyde Lewis of Peel Hunt.

I think I've got 3. So I'll do them one at a time, I think. Greg, you talked about your sort of view that you're going to be a bit firmer around sort of discount levels on the bulk sales. Are you at the point where also on private sales that maybe you're starting to think about cutting incentive levels as well?

Yes. We're already seeing that in the -- I'd say, from the beginning of December, particularly during the course of last week and what we're expecting this week. I think headline prices, I'm very confident of saying are currently stable. And yes, we will be looking at the incentive levels that we are giving away. Still very early days, but interest levels, reservation levels over Christmas and during the course of this first week are not too bad at all. And yes, we're looking at interest rates helping that situation, Clyde. I mean we've seen some -- you have definitely seen some substantial falls in the 2-year and 5-year interest rate terms.

Yes, yes, yes. The second one is on land and not about how much you've been buying, but more about where have you been buying it from in terms of the sources, again, given the focus now in Partnership Housing and the deals you're doing with the allies and the housing associations in particular. How is that source of land changing? .

It's not really, I mean, because we've been doing this for a while. So it's through land agent promoters, which is from private landowners, but we also -- a great source of land for us is Homes England, where we are -- and we're not the only one, of course, but where we are in a framework over a 5-year period. And you have to be on that framework to actually bid for the land. So we've got an excellent team that -- and it's not just price with regards to housing and there are other factors to take into consideration as well, which plays to our strengths. So the makeup of the land is Homes England and then the same as other housebuilder, sorry. What I would say, Clyde, if look at -- particularly since the acquisition of Countryside, the average size of site that we are looking at has moved dramatically now. So whereas a scheme of 1,000 or 2,000 units would have been seen as unusually high for us as we were in 2022, that's becoming far more of the norm now. So the average size of site that we are buying is absolutely going up. What I would say for that, though, is that if you're a pure housebuilder would mean you would be -- your land portfolio would be quite high because, as you know, Clyde, no matter how big the site is, you're only going to go through it as quickly as you can then sell but with our model, of course, and the way we're looking at presale. If we were buying 1,000 unit site now, we would be absolutely at least 500, hopefully, 650 of those would be presold and we would be looking at numerous phases and we'll be looking at driving through that site at a far greater rate than a pure housebuilder, which would have included us prior to the change in strategy. So the only change, I would say, for us on land is basically the average size of site we're buying is larger.

Okay. Perfect. And that sort of brings me on the third question around sort of big contracts. I mean, obviously, the Sage and Leaf Living are one you announced in November, I think, wasn't it? But have you got any more big deals like that, that are due to come through in the next 6 months?