Vistry Group PLC (VTY) Earnings Call Transcript

Good morning, all, and thank you for joining us for the Vistry trading update conference call. My name is Carli, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to our host, Greg Fitzgerald, Chief Executive, to begin the conference. Please go ahead, Greg.

Thanks, Carli. Okay. Good morning, and thank you for joining us. With me today, I've got Tim Lawlor, Stephen Teagle and Susie Bell. And what I'd like to do is just do a quick, brief introduction and then we'll obviously open up to Q&A. So the group has delivered a strong first half performance, significantly outperforming the broader housebuilding market. Completions were up 8% to 7,750 units. Total sales rate increased to 1.21, the step-up reflecting both strong demand and the transition to a 100% Partnerships model. Forward sales increased to GBP 5.1 billion at the end of June, and that's up the [ grade ] 21% on the prior year and ahead of the GBP 4.9 billion position reported in May. And adjusted operating profit is up 10% on prior year to around GBP 227 million and adjusted profit before tax, up 7% to around GBP 186 million. Overall, we've seen good demand for Partner-funded units, both for affordable and PRS, and we entered into new agreements with 45 different Partners in the half. There continues to be some near-term short-term pressures amongst the traditional housing associations as they invest in their existing stock. But the business, the teams around the group have done exceptionally well to ensure that Vistry remains their Partnerships partner of choice for new housing investment. On the open market, we've seen an improvement in demand compared to half 2 '23. Overall, the market remained relatively constrained as customers are taking their time waiting for greater macro and political certainty and expected rate cuts. Open market sales prices have remained firm with incentives running at around 4%. In the half, 75% of our units were Partner-funded, 25% open market, and we expect a similar mix for the full year. And as the open market recovers, the business will be balanced towards the 65%/35% strategy that we announced last September. We've remained active in the land market and have secured around 8,000 new plots of land and development opportunities for the half. 65% of land plots secured are from the private land market with 35% from public land sources. Our scale and cost efficiency are definitely driving our competitiveness, and we have seen more activity in the land market, I'm pleased to say, over the last couple of months. We are looking forward to working closely with the new government and supporting -- and very supportive of their plans. They have ambitious targets for housing delivery, in particular, affordable housing delivery, and there is no doubt we are uniquely placed to support them. We are encouraged that they are seeking to move quickly, and we are in a very strong position to support this. We've maintained investment in land and development opportunities. We've extended our relationships with a broad range of affordable housing partners. We've increased our timber frame capability and ensured we have capacity for significant growth within our existing operational structure. We also have the benefit of already having grown momentum. Housebuilders can be somewhat like an oil tanker taking time to change direction. And it's definitely, take it from me, a lot easier to accelerate growth when you're already moving forward. Turning to the outlook. The group is well positioned to deliver more than 18,000 units and that's up from 16,118 last year completions, underpinned by our strong first half performance and forward sales position. We are focused on continuing to drive operational and capital efficiency and expect to release capital in the full year '24. We remain confident in achieving our medium-term targets of 40% return on capital employed and GBP 800 million adjusted operating profit. We've returned over GBP 100 million to shareholders in the first half of the year. We bought back 50 million of shares in January and February. We have completed a little over half of the GBP 100 million buyback program commenced in April and hope to complete this before our results at the start of September. And we are absolutely committed to returning GBP 1 billion of capital to shareholders within 3 years through a combination of ordinary and special distributions. So all in all, very, very strong there. And Carli, on that, we're happy to take questions.

[Operator Instructions] So our first question comes from Aynsley Lammin of Investec.

Just 2 for me. Just wondered if you could give a bit more color around the Partnerships, which areas are particularly strong. Where you're seeing the demand from? I know you mentioned some areas are a little bit weaker, but obviously, balance quite good. Just a bit more color there. And then secondly, just on the average net debt, a little bit higher than I was expecting. And just looking into tying that into your comment about release of more capital in FY '24, does that kind of release of capital imply over and above the 2x dividend cover target? And how does that kind of tie in and balance with a slightly higher average net debt? What's driving that net debt in the first half?

Okay. I'll pass to Stephen for the affordable question and Tim will obviously take the average net debt. But on your point about capital release, when we originally announced GBP 1 billion back in September, we thought over the next 3 years, broadly GBP 650 million of that GBP 1 billion would come from our straightforward capital policy, that [ release ] policy, which is about GBP 650 million. The remainder, GBP 350 million, would be specials as we go through the legacy land bank within housebuilding and release that money. We're well on with that, and more will be announced on that when we do our half year results announcement in September. So we'll see how we go on that. But Tim, do you want to, first of all, take the debt question?

Yes. Sure, sure. Yes, so first of all, the average net debt for the first half of the year, around GBP 490 million, was about GBP 50 million lower than the second half of last year. So we saw net debt trending up during the course of last year as we discussed the results. We said last year's full year average net debt was about GBP 460 million, and we're expecting that this year's numbers will be a similar level to last year. So debt is coming down. We started the year with opening debt GBP 200 million higher than we started last year's period. So that's moving in the right direction. But full year will be about GBP 450 million.

And Stephen, on the order?

Yes, you're quite right. The capacity amongst Partners is more variable than it used to be because of the pressures particularly weighing on traditional housing associations' balance sheets in order to reinvest in their stock. So it's really pleasing that we've managed to work with a platform of 45 Partners over these 6 months. That does include a significant number of those traditional housing associations. And that is the key to this, it's about being selective. And also the fact that if you were a housing association and your capacity is being cut by 25% in terms of new investment in housing, that doesn't weigh on Vistry, that's far more likely to result in a reduction in some opportunistic schemes that come through from other Partners. So that's allowed us to sustain our approach. In fact, we've worked with 4 new traditional housing associations over that period. We've worked with new PRS for profit and local authorities. So it's been a good mix in terms of the demand that we've seen during the 6 months. But there is no doubt we have worked harder with our conversations with our Partners in order to work with those Partners who have investment programs in an ongoing delivery momentum.

And just before we move on, and Aynsley, if I could just maybe add a bit more color to the debt situation. So don't forget, in September, we announced the new strategy to grow Partnerships. So the world changed for our Housebuilding business. And what we've seen since September to the end of last year, and indeed, particularly in the first 4 or 5 months of this year is that integration and Housebuilding haven't got it right completely all of the time. More often not they have, but sometimes there's been a little bit of slippage with cash. We've got -- but that said, at the end of the period, i.e., 30 of June, our debt was lower than we forecasted at the start of the year. It was lower than this time last year. Also, that's off the back of starting the year with, I think, it's GBP 207 million worth of debt higher than it was at the start of the first half of 2023. So we are delighted where we are with cash or debt at the end of the period. But nevertheless, it's been a hard slog through January, February, March, April and May, particularly, as you would expect with uncertain market conditions, uncertain political activity plus an integration job and that's been huge off the back of the integration of Countryside as well. But as we ended the year going into -- ended the half year, sorry, going into the first -- second half of this year, we're in a great position. And the GBP 323 million of debt also isn't a direct comparable to this time last year because we have a circa GBP 40 million better from a housing association to pay us, and they will pay us in April. And we didn't -- sorry, in August, and we didn't have that last year. So last year's number GBP 329 million compares to GBP 323 million, although the GBP 323 million includes a debtor, which wasn't around this time last year. So we're in great shape as we go into the second half, but there have been some difficulties, as you'd expect, with an integration in January, February, March, April and May.

Our next question comes from Charlie Campbell of Stifel.

A couple of questions really, one sort of detail and one sort of bigger picture. The detail question, I just wondered if you could share the revenue for the first half just to help our models. And then secondly, you talked about integration and moving from a pure housebuilding to Partnership model. Just wondering how the site managers are sort of coping with the change in, so I suppose, pace of build would be the biggest change that the site managers have to cope with. We're all aware of how important those people are to Housebuilding operations. I'm just wondering, yes, how they move from a slow build to a fast build sort of model and how they could do that.

Yes. Great question, Charlie. Tim will come back to your revenue question. But on the site managers, and I refer to them as king of the castles, so they are the most important constituent in the industry because they have the toughest job controlling a lot of subcontractors who don't work for us directly. So if I ask somebody to do something, if they work for me, they'd probably do it. Sometimes they don't, but mostly, they do. But of course, if the site manager asks something to be done generally, they want to build the wall over there and the site manager wants to build the wall over here, then it's a completely different skill. Now how would they cope? Well, we've got -- first of all, we've got absolutely great site managers, and we've had that for a long period of time. But what I can tell you is a site manager, and I've spoken to pretty much all of them, would much rather build quickly than slowly. What they hate is what's going on in the housebuilding world at the present moment in time and that is stop/start. And what you get with stop/start is they've got a great bunch of subcontractors on their site. Those companies will remain on that site. But quite often if you stop, your really good dry liner and your good painter you've worked with for years leaves to go to another site because you've put the site on hold and you never get them back. So our site managers are coping well and they like to build and they like to build quickly, and it takes away all that uncertainty. Once they get a good team on site, that good team on site will stay there and that makes their job dramatically more straightforward. So our model, if you speak to site managers is absolutely what they want to do. What they don't want is to stop, start, stop, start. So they enjoy building quickly. Tim, on the revenue point?

Yes. My answer is a bit shorter. Revenues are a bit shy of GBP 2 billion, that's growth of a little over 10%.

And of course, the other thing -- sorry, I want to say on them build is we're obviously moving to timber frame as well, which makes life a fair bit easier for site managers and really helps with the speed. And we've dramatically increased the capability of our timber frame manufacturing facilities. So a long answer there for me, Charlie, and quite a short one from Tim.

Our next question is from Will Jones of Redburn Atlantic.

Just a comment from me, please. Just wondering maybe if you could reflect on what we've learned in and around the election. To what extent do you think the event impacted demand or not ahead of it? And what scope is there for some degree of rebound after? And perhaps saw the policy news we've had around it, what would your kind of summary view be of that? And do you have an expectation or not that there's any assistance coming on the demand side, particularly really affordable housing? And then second one really just coming back to cash and debt, and I think it's roughly GBP 400 million of free cash flow that's needed in the second half to get to year-end stock cash. Just could you maybe broadly talk about the levers that help you get there? And I think back the full year, there was a suggestion that the buyback might be up in September, but just wondering maybe if the cash slippage in the first half perhaps pushed that back somewhat or not?

Okay. Tim will take your latter question. I'll do the first one and maybe with some help from Stephen, though. So when we first announced the strategy back in September, I was very hopeful at that particular time that we would get a labor government because I think that will absolutely, in hindsight, make the timing of that announcement unbelievably good. That obviously became stronger when you looked at the polls going through January, February, March right up to the landslide win they've had. So overall, our labor victory is very good news, I would suggest, for Housebuilding and it's incredibly good news for Vistry with our new strategy. And the main bit of good news for Housebuilding is, of course, on the planning side. But there's more to it and a real desire to build houses quickly and more -- a bigger proportion affordable from the labor party. On the actual market itself, when the announcement of -- in May came that the election was going to be in July, we looked around at the exec team, and first of all, we all thought, well, that's great news for the full year and great news in the medium term, but that's going to make our lives really difficult for June in getting to where we need to get to for the half year with purdah and everything else. We completed on 3 and/or 4 deals last week and there's couple more to come in this week. So the half year was very difficult because of the election. I would actually say that what normally happens in the private housing market -- so the affordable market was difficult in the month because everyone was waiting to see what actually happens. Hence, we've had a few completions in the first week or two of the second half of the year. On the private market, I think we've been selling units broadly in line with the other housebuilders. And in my 42 years' experience, what normally happens -- I've either had a year-end or a half year in June and what normally happens in June is the market comes back a bit in June from April and May. One, because people start going on holiday, so it's not a bad market, June, but not as strong as it was if it is in the spring. But the main reason it comes back is because pretty much all house builders out there who have a June or December period end, which is the majority of them, all the sales teams, excuse my French, have their head up their a** trying to do conversions, i.e., go on reservations to exchanges and taking new reservations becomes the second part of their job. So we generally see a dip in private reservations in June. After that, the uncertainty then caused by general election, I was actually delighted that our sales in the first week of July and June, private sales, this is, actually held up to where they were in April and May. So no better, no worse. But I would generally see that as encouraging. And I think the general mood of the country, we'll see how it all goes on the private market. We'll see some encouraging movements in private sales as we go into the second half of the year with a stable government with a large majority there. And I think that's particularly helped by Rachel Reeves' speech yesterday. So they seem to be in early days of sticking to what they said during the election campaign, and we're encouraged by that. So I would say private market, I think, will improve during the second half of the year. Not great guns, but I think it will. And I think the affordable market with the certainty and stability of the government will actually improve as well. And when you look at our sales rate, which was up to 1.21 for the overall year, it actually increased to, [ not a million miles ], up 2 per week in the last couple of months of May and June. So the market seems to be moving in the right direction for us. On the second part of the question, Tim?

Yes. So yes, so good cash then. So our year-end expectations remain unchanged that we're going to finish the year with a cash -- net cash position. I would say on cash, there were no major surprises really in the first half of the year. As Greg and I explained to everyone, the higher -- slightly higher-than-expected average cash in the first half of the year -- or average debt in the first half of the year was largely due to some timing, some slippage as we're learning how to get deals done in the Partnerships world. So a slight slippage in terms of the timing within the period, but that was caught up by the half year. So the half year position was ahead of where we expected to be at the half year at the start of the year. So moving into the second half of the year, why does that net debt position of GBP 323 million turn into net cash? Well, this is due to the ongoing profile of the business where roughly somewhere between 40%, 45% is done in the first half of the year and 55% to 60% in the second half of the year. What that means is that you end up with quite a significant buildup of WIP at the half year as we build houses out for delivery in the second half. So that WIP profile will be similar to last year, and that's where the cash will come from in the second half as we turn that WIP into completions. There's also various capital release initiatives as we continue to look at accelerating the disposal of Housebuilding land bank. So [ coming on ] by year-end net cash, what does that mean for distributions? Well, the first thing is that we need to complete our existing share buyback program, which is going well. We've completed GBP 51 million at the half year. I think we're at GBP 55 million as of last night with a view to complete that GBP 100 million buyback in time of the results on September 5, at which point we will talk about the ordinary distribution. And there's no reason, nothing to suggest that we should move away from the policy that we announced last year of 2x cover. And we'll also look at the opportunity for special. And as we'll do consistently, we will evaluate this at each Board meeting, see where we are. It will be some combination of looking at alternative investment sources: do we need to put more cash into land or any other area of the business, looking at the timing and the cash flows for the remainder of the year and our longer-term view. So we'll come back with decisions that are made at the start at September's Board with on results announcement on September 5.

Our next question comes from Gregor Kuglitsch of UBS.

I had 3, if I may. So wanted to check on the sort of your point on the mix. You said this year it will be 75% Partner-funded, 25% private. And then obviously, we'll -- I mean, I guess you said you want to revert back to 65/35. I want to understand to what extent there's a margin impact from that. In other words, if we go back to a more private SKU, does that help your margin? Or do you sort of equalize it anyway, sort of like…

Gregor, I'll answer that one now. So that won't impact on the margin.

Okay. So basically, it shouldn't matter for the margin.

It might impact on ASP and revenue, but it won't impact on margin.

Okay. And then sorry to dwell on the debt trajectory, maybe you could just share with us what the land creditor situation is, where we are? And then perhaps as we kind of cycle this year, you're sort of saying you'll be net cash by the year-end. I guess the question is how quickly does that average debt fall into next year? I mean I know it's sort of crystal ball at this stage, but how quickly -- what would you be sort of your best guess, how quickly that can fall into '25 versus the GBP 450 million that you're flagging for this year?