Barratt Redrow plc (BTRW) Earnings Call Transcript & Summary

Hello, and welcome to the Barratt Developments 2022 Interim Results Call. My name is Josh, and I will be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions]. I will now hand you over to your host, David Thomas, Group Chief Executive, to begin today's conference. Thank you.

Thank you, and good morning, everyone, and welcome to our interim results presentation. I have with me this morning, as ever, Steven, and also for the first time, Mike, our CFO. I'm going to start with an overview of our strong performance in the half and then revisit our medium-term targets. Steven will then take you through our operational performance and cover in more detail our really excellent build performance as well as taking -- talking through build cost inflation and also the opportunities that we see Gladman acquisition delivering. We will then cover off our strong financial performance over the period. And I will then return to review the industry fundamentals, the importance to us of sustainability, our position on building safety and finally, looking at current trading and outlook. So turning first to Slide 3. Given the continued strength of the sales market, our results for the year are clearly going to depend on our build delivery. So it is really pleasing to report our excellent build performance, where beside the well-publicized industry supply chain challenges, we have grown our weekly build output by more than 14% year-over-year. Just as importantly, our site teams have delivered this step up while maintaining our industry-leading position in terms of both build quality and customer service. This excellent build performance and the continued momentum of our sites has resulted in our completion guidance upgrade for FY '22. I would just like to take a moment to express my thanks to our employees and our subcontractors as well as all of our material suppliers, who have helped us to generate such an excellent first half performance and position us so well for half 2 and beyond. We are also pleased to have completed the Gladman acquisition. Steven will cover this in more detail, but we strongly believe that Gladman will be immediately accretive to earnings and will significantly enhance our strategic land credentials and capabilities in the short, medium and long term. Our cash performance has been strong, and we have ended the half with GBP 1.1 billion of net cash, and this is after a significant investment in land and work in progress as well as the payment of the final dividend for FY '21 of GBP 223 million. I'm really delighted to announce the phased reduction in our dividend cover over the coming 3 years, with the cover reducing to 2.25x in FY '22, 2x in FY '23 and ultimately to 1.75x in FY '24. The interim dividend of 11.2p, which is up from 7.5p in the prior year reflects this new policy. Looking now at Slide 4, which details our progress in the half year and our focus for the balance of FY '22. Firstly, looking at home completions. As we guided, these are lower year-on-year, reflecting the return to a more normal seasonal phasing of completions. Our focus on the second half is on delivering the upgraded completion guidance, which will move completions above those delivered in FY '19 when we were pre-pandemic. As you will all recall, we have the infrastructure to grow to 20,000 completions annually, and this remains our medium-term target. Our adjusted gross margin improved by 120 basis points to 25%. Our medium-term target remains unchanged and is centered on securing land at a minimum 23% gross margin. We're really delighted that do all of our actions, and clearly, against the strong market backdrop, we generated a return on capital employed at 26.8% over the last 12 months. This is 910 basis points ahead of the 17.7% generated in 2020 and above our minimum target of 25%. So I'm now going to hand over to Steven, who will take you through more details around our operational performance in the half.

Thank you, David, and good morning, everyone. Today, I will take you through the usual operational update and then address our build performance, build cost inflation and the Gladman acquisition. Starting now with sales performance on Slide 6. We have delivered an excellent sales rate for the 6 months at 0.79 net private reservations per outlet per week, 2.6% ahead of the 0.77 rate generated in the first half of last year, with sales showing strength throughout the period. Total average sales outlets were lower by 1.5% at 337. The outlet position reflects the strength of sales of the period with a number of sites trading through more rapidly than we expected back in September. Looking to the second half, we now expect total average sales outlets for the year to be broadly in line with the 343 in FY '21. We are planning a significant step-up in site openings during the balance of the year and expect to end the year around 3% ahead of the 358 active sales outlets at the end of FY '21. This will create a solid platform to support reservations in FY '23. Turning now to completions on Slide 7. In the first half, we delivered 8,067 total completions, reflecting a return to the normal seasonal phasing of completions. You will recall, the previous half year was boosted by the high level of completions delayed by the initial lockdown and our drive to meet customer expectations and mortgage of the deadline. On pricing, our private average selling price improved by 2.5%. From our analysis of house types and sites where we can make year-on-year comparisons, we estimate annual house price inflation for our homes was around 5%. Offsetting this was a lower proportion of completions from London and a circa 2% reduction in average house size in our regional business. Our estimate of annual house price inflation at around 5% was also remarkably uniform across the U.K. with only our West region ahead of the group average. Our affordable average selling price increased by 8.1%, reflecting a shift in the geographic mix towards higher-priced locations. The affordable average selling price at just over GBP 157,000 is also a good guide for the year as a whole, reflecting the mix of anticipated completions in the second half. Our total wholly owned average selling price improved by 1.6%, reflecting the higher proportion of affordable homes at 23% of completion mix in the half. Now taking a look at the profile of our home buys on Slide 8. The standout here is that other private sales have grown from 26% to 49% as overall mortgage availability and pricing has continued to improve, whilst the Help to Buy scheme has tapered. The planned tapering of Help to Buy was announced back in August 2017. We have been planning for this change since then with our actions centered on 3 key areas: firstly, careful site selection and bidding controls, this has helped ensure our sites are in locations where affordability is less of an issue with our access to Help to Buy. Secondly, we are focused on making sure our site plotting and house type selection are flexible, enabling us to be agile in reacting to changes in customer demand and affordability. And third, we have invested in training to our sales teams, together with marketing support to ensure our sales advisers are fully equipped to help prospective buyers choose the right home for them and without Help to Buy assistance or within the regional price caps for the first-time buyers. We believe we are well positioned to transition through the phase out of Help to Buy through to March 2023. Now turning to Slide 9 to look at our progress around construction on site. Our teams have done a tremendous job in the first half, delivering an average 341 construction equivalent units per week. You can see here too in the chart, a significant pickup from the 331 equivalent units in the first quarter to 350 in the second. This is ahead of the same quarter in each of the last 3 years. This has been a significant milestone as we drive our build activity to new levels of performance despite the supply chain challenges faced. To give you some context, our build productivity per average build active site in the second quarter was 16% ahead of the same period pre-pandemic in FY '19. There are 4 factors I would like to call out that have helped us deliver this performance. First, the hard work and dedication of our site-based employees and subcontractors working as one team to deliver the high-quality homes that our customers expect. Second, the build efficiency deliberately designed into our standard house types and they're growing share of our build programs. Third, the increase in usage of timber frame construction with its build time as well as our adoption of MMC more generally, reducing labor needs on site. And finally, and particularly this last year has been the support and commitment of our suppliers who are working with our procurement teams have ensured that we have not encountered any significant disruption or building material supplies. All of this, too, has been achieved without compromising build quality and whilst improving our health and safety performance. We aren't prepared to compromise on our build quality and throughout calendar 2021, we consistently ranked first amongst the major housebuilders group in terms of NHBC inspections with the lowest level of reportable items, a key measure of build quality. And on health and safety, after an increasing our injury incident rate in FY '21, I can report that our action plans are now bringing this rate down, reducing to 295 in calendar 2021 from 305 in calendar 2020. We expect further improvements as we move forward. In the period, total completions ran at an average of 310 per week. So we've added around 800 equivalent units to work in progress. This reflected the return to our normal seasonal build and completion profile with the increase in equivalent units at the end of the half, supporting second half completion growth and our revised full year completion guidance. Looking to the second half, we are aiming to improve again our weekly construction equivalents to meet our completions guidance and position ourselves for volume growth in FY '23. Turning now to Slide 10 and build cost inflation. Here, we give you some additional breakdown of our costs on the left. The breakdown is based on delivery of a 23% gross margin, in line with our land acquisition minimum gross margin and a 19% operating margin. Land costs will move, as you would expect, relative to house price inflation, with impacts on build cost inflation and the future home standard impacting the residual land value but land typically creates around 16% of revenues. Infrastructure costs, including demolition, roads and sewer infrastructure and site preparation as well as Section 106 related costs represent around 20% of revenue. And again, this bucket of cost is showing only modest inflationary pressures. Housebuild materials and labor combined represents around 32% of revenue. Around half of this cost is materials where we see significant inflationary pressures. Finally, within total build costs at our site and divisional operating costs at around 9% of revenue. Revenues less land and total build costs take to our 23% minimum gross margin targets on land acquired. On materials, our centralized procurement teams have been crucial in the past year and continue to manage more than 90% of our build materials from foundation level to finishing trades across house types -- good products relying heavily on commodity inputs, for example, timber, steel and plastics have seen price increases of more than 2020. We've also seen significant increases on products that require high energy contents. There are, however, a large number of building products where price increases are modest or minimal, which highlights the huge variation currently faced. We also have our own self-help initiatives, for example, around sustainability. Our waste reduction program is reducing the Group's environmental impact as well as delivering cost reductions. We have price agreements in place for almost all our materials to June 2022, and we remain committed to dealing responsibly and fairly with our suppliers, recognizing the volatility phase. Concluding on materials, there are significant cost inflationary pressures across a range of the building materials using our housebuilding activities, which will move towards double-digit rate of inflation, but these are significantly diluted when you consider their proportion of the total build costs. Now to labor cost. Here cost inflation has been more modest to date, reflecting subcontractor's desire to secure continued work from us, but we do expect some additional pressure through 2022, given the inflationary backdrop across the whole economy. Clearly, we will continue to work hard by efficiency and savings. But bringing this together, we estimate our total build cost inflation for FY '22 will now be circa 6% incorporates in all materials and labor costs across infrastructure, housebuild and our operating costs. Turning now to our land bank on Slide 11. Our land bank in plot terms is growing again after disruption created by the initial lockdown in 2020. We held just under 78,500 plots at the half year, almost 3,000 plots ahead of the same point last year and over 800 plots ahead of the position back in June 2021. Reflecting the recovering in completions, the earned and controlled land bank is now at 5.1 years supply. 75% of our owned land bank or just over 49,600 plots have detailed consent. This has reduced on the position a year ago, reflecting the ongoing challenges in planning. With pandemic-related restrictions now removed, we are more positive that this situation will improve through 2022. New land approvals in the half year was strong with 8,869 plots. Across calendar 2021, we approved 21,301 plots, 38% ahead of our usage in the same period with our land-buying teams across the country delivered an excellent rebuild, which will help drive our growth over the years ahead. We continue to see a very good range of land buy opportunities coming to the market, particularly in the larger sites by our development and planning skills as well as our dual branding capabilities and financial strength creates clear advantages. We continue to expect to approve between 18,000 and 20,000 plots for the purchase in the full year. The availability of land in the current land market along with our enhanced strategic land capability through Gladman supports our fast asset turn model. Turning to Slide 12. I would now like to give you more detail on the Gladman acquisition, which we believe significantly enhances our capabilities and credentials in terms of long-term strategic land. Gladman is a first-class land promotion business, which we have successfully worked with during the last decade. We see 5 key benefits with Gladman joining the group. Firstly, a great land promotion team. Gladman is recognized for its expertise in identifying and securing land, promoting proposed developments through strategic plans and delivering planning concepts to support housebuilding throughout the U.K. As a result, the Gladman teams across the country are highly regarded in the industry and have strong relationships with local planning authorities, land agents, landowners and central government. Second, Gladman holds a portfolio of more than 98,000 potential plots across 406 promotional sites, which offer excellent opportunities with a particular strength in the South and East of England, as you can see here on the map. Third, we see real opportunities for Gladman's expertise in land promotion to be applied to our existing strategic land bank, helping us to unlock the potential of our strategic land bank more rapidly over the coming years. Four, Gladman has historically operated a pure land promotion model. Going forward, with the added development capabilities from Barratt and access to our financial strength, Gladman will be able to accelerate its profitable growth by offering a wider range of opportunities to land owners. And finally, through Gladman's impact, we expect to deliver an additional 500 completions per year from FY '25, driving incremental growth in our core housebuilding activities. And now to summarize in Slide 13. We have delivered an excellent performance in the half year in terms of both our sales performance and our construction activity, where build in the last quarter has moved ahead of the quarter performance seen in the last 3 years. With improved working capital position at the end of the half and the further growth in construction activity in the seasonally stronger second half, we are confident in our ability to deliver our revised completion guidance. Securing the materials we need to build and meet strong housing demand remains our priority today as it has been over the past year. Build cost inflation, the result of this strong demand remains a challenge, but we are continuing to see this offset by the strength of house price growth being secured through reservations. We remain committed to delivering and continuously improving our industry-leading quality and customer service. And finally, we believe that Gladman acquisition brings a significant strategic enhancement to our business. Thank you, everyone. And with that, I will hand over to Mike.

Thank you, Steven, and good morning, everyone. I will now take you through the key aspects of our financial performance. First, a look at our headline numbers on Slide 15. As David and Steven have already mentioned, we're comparing with the unique results in the half year post lockdown. So I've included here both half year '21 and half year '20 comparators to help give more perspective on our interim results. Our revenue was GBP 2.25 billion, just under 10% below last year's first half due to the return to a more typical completion profile and 1% behind half year '20. The adjusted gross profit was GBP 562 million, with the adjusted gross margin at 25%. The adjusted gross margin benefited from net inflation, further profit gains from site transition and reduced site extension costs, moving 120 basis points higher when compared with half year '21. And 200 basis points ahead of our half year '20 results. Adjusted operating profit was GBP 450 million, 11% below half year '21, but 2.4% ahead of the half year '20 results with the adjusted operating margin at 20%. Our half year results have been impacted by adjusted items and more on those in a moment. But at the operating profit level, these costs totaled GBP 15.9 million. As a result, we delivered an operating profit of GBP 434 million at a margin of 19.3%. Profit before tax was GBP 432.6 million, GBP 2.4 million ahead of the previous first half and GBP 9.6 million ahead of half year '20. Adjusted EPS was 35.9p, 11.4% below half year '21 but 1.7% ahead of half year '20. We closed the half year with a very strong net cash position at GBP 1.1 billion. Finally, return on capital rebounded sharply to 26.8% from 17.7% for calendar '20, which was impacted by the original lockdown period. The chart on Slide 16 breaks down the components of our operating margin movement. In half year '21, before the impact of adjusted items, our adjusted operating margin was 20.3%. The chart lays out the details of how this flows through to half year '22, but let me pull out the key headlines. Firstly, lower completion volumes reduced our fixed cost efficiency, reducing margin by 80 basis points. Second, net inflation improved margin by 60 basis points where the impact of sales price inflation ran slightly higher than build cost inflation in the first half. Thirdly, the combined impact of our ongoing margin initiatives such as the continued rollout of standard house types, the refinements of our home design and the impact of new sites coming through together with some mix effects, increased our margin by net 90 basis points. Finally, administrative expenses reduced margin by 100 basis points reflecting increased people costs, the write-down of some software assets and a further reduction in sundry income. We subsequently delivered an adjusted operating margin of 20%. Adjusted items then reduced the margin by 70 basis points to 19.3%. We previously presented a detailed slide on our contribution margin, which is now in the appendices but just to complete the picture, our contribution margin in half year '22 advanced to 34%, 200 basis points ahead of half year '21 and 100 basis points above half year '20. Coming to adjusted items on Slide 17, a relatively straightforward picture here in the half year as all of our adjusted items of GBP 17.4 million relate to building safety in the half. This includes GBP 1.5 million in relation to joint ventures. The majority of costs incurred in the first half related to reinforced concrete frame remedial works where our review is now substantially complete. Our clear and disciplined operating framework is detailed in Slide 18. This framework and the discipline it has installed have served Barratt well and it's being fundamental to both the group's resilience and the speed of our recovery over the last 2 years. The operating framework, except for the dividend cover policy changes announced today is unchanged over the last year, but we've included both the half year '21 and full year '21 comparatives to provide a helpful summary of its evolution. In summary, our land bank is moving back towards our target lens, with the increase since June driven by the lighter than normal phasing of completions in the second half of FY '21. The land creditors are funding a relatively unchanged 22.4% of our land bank and average net cash and year-end net cash are showing year-on-year improvement whilst our total indebtedness surplus of around GBP 450 million is slightly lower as land prices have increased. During the half year, we also took the opportunity to extend our RCF by an additional year with the GBP 700 million facility now maturing in November 2025. And finally, the dividend, whereas David has already flagged, the Board has revised the group's dividend policy moving to a phased reduction in the dividend cover from 2.5x in FY '21 to 1.75x in FY '24 with a 0.25x cover reduction annually from this financial year. We also recognize that the group should operate with a strong and resilient but also capital efficient balance sheet aligned with our operating framework. As such, whether is capital beyond the requirements for investment in the growth of the business, it's the Board's intention to return this to shareholders, either by buyback or special dividend when appropriate to do so. Coming now to the balance sheet. Our gross land bank has increased by GBP 100 million since the year-end and GBP 209 million since December 2020 as a result of the momentum building as land approvals move through to legal process. WIP has grown by GBP 191 million in the period, reflecting a return to a more typical seasonal pattern with build activity ahead of completions in the half. Alongside the return of the full year dividend payment, this has seen our net cash reduced to GBP 1.1 billion, down GBP 186 million on June, and I'll cover this in more detail shortly. Net assets at the 31st of December were GBP 5.6 billion, an advance of 2.5% or GBP 138 million on the June position. Moving on to our cash flow on Slide 20. This chart clearly highlights the shift back to investing for growth, and I'll take you through some of the detail. We invested a net GBP 191 million of cash in WIP in the first half. This reflecting the growth in construction equivalents ahead of completions. Our net land bank is GBP 77 million included GBP 410 million of land spend, whilst land creditor creation was slightly ahead of settlements, both reflecting the growing momentum as increased land approvals moved to legal completion. We now expect land spend in FY '22 to be around GBP 1.1 billion, GBP 100 million above our previous guidance. We made net cash interest and tax payments of GBP 100 million. This is GBP 23 million above the first half of last year's cash outflow, reflecting the step-up in our profitability. The GBP 27 million outflow on other noncash and working capital items, compared to a GBP 91 million inflow in half year '21, reflecting 2 major items. The restart of employee incentive scheme payments approved in FY '21 but paid in September '21 and the utilization of provisions. As a result of these movements, our operating cash inflow for the half year was GBP 55.4 million relative to an GBP 804 million inflow in half year '21, which benefited from the timing of completions following the initial lockdown and a relatively lower land spend. After deducting the final dividend paid in November and other items, the net cash outflow for the half year was GBP 185.7 million. Now to cover some guidance points for FY '22 not covered previously, which are detailed on Slide 21. With respect to total completions, we're now guiding to between 18,000 and 18,250, an advance of 250 units or 1.4% from the previous midpoint guidance. On administrative expenses, we now anticipate a charge of around GBP 240 million for the year, an increase of GBP 10 million on previous guidance, which largely relates to people-related and software costs. We've included a slide in the appendices to help with the movements in administrative expenses from FY '20 through to half year '22. With respect to adjusted items, we continue to estimate the charges of between GBP 40 million and GBP 50 million will be incurred in FY '22 in dealing with building safety costs. Our year-end net cash position is unchanged at between GBP 1 billion and GBP 1.1 billion, but this is after the GBP 250 million outflow with respect to the Gladman acquisition, which completed last Monday. Our year-end net cash position will also remain dependent on land buying and our ability to invest in working capital in line with completions in the balance of the year remaining. And finally, the new Residential Property Developer Tax will impact from the 1st of April 2022, with the 4% RPDT tax rate having a final quarter impact on our tax rate, adding 1% to the FY '22 forecast rate now revised to 20%. Now to summarize on Slide 22. We delivered a strong financial performance in the first half with an increased adjusted gross margin, which we see being sustained through the second half despite the ongoing pressures from build cost inflation. Our strong cash generation and balance sheet strength have enabled both the acquisition of Gladman and the sales reduction in ordinary dividend cover whilst maintaining our year-end net cash guidance. We recognize that as well as being operationally efficient, our balance sheet must balance strength and resilience against capital efficiency. And so the Board will consider further returns to shareholders when it is appropriate to do so. So overall, we're in an excellent position to continue to invest for future disciplined growth whilst also delivering sustainable and progressive dividend returns to our shareholders. Thank you, and I'll now hand back to David.

Thank you very much, Mike. And I'm sure we'd all agree that given Mike has just been with us for 8 weeks, but that was a very strong debut. So Steven and Mike have highlighted through their presentations that we clearly have a very strong business, and that is at the core of our investment proposition. And I would just like to pick out some of these attributes on Slide 24. We aim to operate with one of the shortest land banks in the industry. This enhances our return on capital employed and also reduces our risk profile. We have a strong and highly experienced build and sales team. The combination of our build and sales capability is industry-leading. Finally, we continue to lead the industry on sustainability. It is central to everything we do, and we understand its critical importance for both our business operations and for all of our stakeholders. These attributes placed Barratt in a very strong position to grow volumes, optimize our margins and generate strong, sustainable returns for our shareholders through more capital growth and dividends. And today, following the Board's decision to begin a phased reduction in our dividend cover, we will be returning an increasing proportion of our financial returns to our shareholders as an ordinary dividend. Now turning to the market on Slide 25. 2021 clearly demonstrated the robust fundamentals of the market with the strong demand for new homes right across the country and throughout the year. The government continues to target 300,000 new build homes annually to address years of undersupply and government housing supply policies remain supportive. As Steven highlighted, the land market remains attractive. There is a great range of land buying opportunities continuing to come to the market. Whilst Help to Buy remains scheduled for phase out in March 2023, we now have the deposit unlock available across all of our sales outlets. There is greater mortgage market competition, and we will continue to work with mortgage lenders to find solutions to help first-time buyers enter homeownership. Mortgage interest rates remain very attractive and affordable in a longer-term context. Turning now to sustainability on Slide 26. We are focused on ensuring our building sustainable framework is embedded throughout the group's operations with everyone considering the sustainability impact of everyday decisions and actions. This focus will help us to make us a more efficient business, reduced operating costs and also build resilience for the future. Waste adoption is a very clear area we are targeting improvements. This delivers benefits both through reduced materials used and also cost saves. Diesel consumption, the largest component of our operating machines is another major area of focus. And also, we are shifting all of our operations, both site and office space across to renewable electricity tariffs. The external benchmarking of our progress also continues to show strong improvement. Our annual CDP results show further progress in 2021, where we maintained our leadership level in climate added leadership level status in forests and improved our water score from B- to B. Very pleasingly, we remained Sustainable Housebuilder of the Year at the December Householder Awards. Turning now to our people, which remain our most important asset. I want to highlight a couple of the bullets here. First, access to private medical insurance at all levels of the business. This was an important issue raised in our annual employee engagement survey. And I am very proud that we have been able to respond and put in place cover for all of our employees. And second, our people are committed to supporting good causes close to their hearts. And as you can see, we have embraced that further extending volunteering leave. Finally, we were really pleased to be recognized in the latest Glassdoor's Best Places to Work 2022 survey, where we ranked 30, and we were the only housebuilder in the top 50. Being recognized for our prudentials as a leading employer and for investing in our people is vital given the heightened competition for skills across the industry. Now moving on to Slide 27. I have mentioned the Z house project before, but we saw the launch of the completed Z House in October. This has been a key milestone with the Z House, as the first 0 carbon house developed by a major housebuilder that goes beyond the requirements of the future home standard. The house showcases the most cutting-edge products available and has been a fantastic collaborative effort involving more than 40 of our industry partners, both from within house building, but also from the technology and sustainability sectors. The Z House is an important step on our journey to zero carbon homes from 2030 and has engaged interest from stakeholders across the housing market. The Z House is a key part of our development plans as we work to find commercial solutions, which will allow us to build high-quality zero carbon homes at scale, which our customers will love, which will meet the U.K.'s clear sustainable housing needs. Now turning to our position around building safety on Slide 28. Our first principle has been and remains that these holders should not have to pay for necessary remediation to fix building safety issues. Over the past 4 years, the government's evolving guidance across more than 25 guidance notes has clearly created uncertainty for all stakeholders of building safety. Since the Grenfell tragedy, we have carried out reviews of our multi-occupancy multistory buildings over 11 meters. Where we own buildings and remediation work is required, we have carried it out or are carrying out at no expense to leaseholders. And at that point, we have contractually committed to these works, we have made necessary provisions in our financial statements. We have set aside around GBP 220 million across all legacy properties to date, and we will provide further amounts as required going forward. Where. Where we do not own buildings, we are working with the interested parties to confirm any remedial work is required as a result of the original design or construction. And if so, the extent of that work. We formalized our activity in 2021 under a dedicated building safety unit, which reports directly to the Board and which has brought additional expertise and resources to our review. As you can see in our announcement, there are 206 buildings over 11 meters, still under review by our Building Safety unit. There is no certainty that work will be required at each of those buildings, and we will continue to update the market as necessary. Following the January 10 announcement from the Secretary of State and subsequent correspondence from DLUHC. We are engaging with DLUHC both directly and through the HBF as we have done throughout the last 4.5 years. Much of the DLUHC position we agree with notably, the withdrawal of the Consolidated Advice Note as well as the department's aim to create a common sense approach and proportionate solutions to safety looking forward. Now to bring you up to date on current trading summarized here on Slide 29. The new calendar year and our second half has had a very strong start. Our private sales rate per outlet per week through to the 30th of January has been at 0.9 which is 16.9% ahead of the equivalent period last year and more than 8% ahead of the strong start in 2020. This has been coupled with a short-term dip in average outlet numbers. Overall, this resulted in a net private reservation rate per week of 291, 10.2% ahead of the prior year period and just 1% for all the very strong start seen in January 2020. Our forward sales position has further strengthened to GBP 4.1 billion. This is a record level for the group and is 20% ahead of the order book at this point last year and 36% ahead of the equivalent position at the start of February 2020. As Steven mentioned earlier, we are very confident in our ability to deliver our planned output growth. Build activity through January confirms this confidence in delivering our upgraded guidance on completions for the full year. To conclude on Slide 30. Thanks to our -- the efforts of our teams across the country, we have delivered an excellent performance in the first half, both operationally and financially. Our dividend policy has been revised with the Board seeking to ensure our shareholders receive an attractive and progressive ordinary dividend. Our position in the strategic land market and our capabilities in terms of land have been enhanced significantly with the acquisition of Gladman. Looking ahead, we recognize that there are economic uncertainties, most notably around interest rates and inflation, but the housing industry has strong fundamentals, which have been clearly evident over the past year. We are in a strong financial position with substantial net cash, a strong balance sheet and a record forward sales position. Each of these is helping to underpin our plans to grow our build activity and to deliver our upgrade to completions in FY '22 and then onwards towards our medium-term target of 20,000 high-quality home completions a year. Thank you. And I will now hand back to the conference coordinator, and we will be very happy to open up for questions.

[Operator Instructions] Our first question comes from the line of Rajesh Patki from JPMorgan.

I've got 2 questions, please. The first one is on operating margins. After having delivered 20% in the first half, you seem confident to be able to offset build cost inflation for the second half. If you could provide some color on how you're looking at the evolution of margins over the next 2 years given the intake gross margin is still at 23%? And secondly, on the shareholder returns, you've mentioned that you plan to return surplus cash to shareholders beyond the investment requirement that is. Can you provide what level of total indebtedness would you consider as a threshold for this?

Okay. So just to take 2 questions, first of all, I'll just kick off a little in terms of margins and then pass across to Mike, and then I'll pick up in terms of shareholder returns. So first of all, in terms of shareholder returns, I mean, I think we've been very clear that we recognize the importance of our predictable ordinary dividend stream for our shareholders. And we have set out this morning a substantially enhanced ordinary dividend stream, which we're very pleased to do, taking cover for FY '24 down to 1.75. So that's first stage. And then secondly, as Mike covered in the presentation, the Board have been very clear that if we see when we look at our growth plans within the business, that we have surplus cash, then we will come back to that when it is appropriate to do so. In terms of cash levels in the business, we've set out previously that we don't want to operate with overall levels of net indebtedness. So we do recognize the offset between cash and land creditors. And I think that is set out very clearly within our operating framework. In terms of margins, if I do the really easy bit and then pass to Mike, just to say that you're absolutely right that we have said that we are in taking land at a 23% gross margin. And all things being equal with no inflation, that will equate true to an operating margin at around 19% to 20%. But I know that Mike will talk you through in terms of what we see the outlook as for FY '22.

Thanks, David. So I mean as we said in the statement, we've seen the exit rate on build cost inflation running higher as we left half 1. So we expect inflation for the full year to run at around 6%. And we were exiting the half at probably near 7%. We think that will be covered by the house price inflation that we've got in the order book, and we've been covering that fully over the past few months as those sales have come through. So we think that will play a draw and we think 25% gross margin is good for the remainder of this year. And then Rajesh into '23, as you asked, I think at this stage, we're not moving anyone's expectations for margin in '23 based on the environment that we see.

Our next question comes from the line of Will Jones from Redburn.

I think 2 or 3 for me, if I could, please. The first is just really exploring volume aspirations, I suppose, we headed to '23. Can we assume that despite the higher base that you're likely to achieve in '22, this previous commentary of 3% to 5%, perhaps the lower end of that range, but that's still the aspiration per year despite the better 2022 performance. And I guess within that, kind of some questions are -- can you give us some feel as to what you need or like to have as equivalent units as you begin a new financial year in light of that strong build performance. And clearly, the site numbers are going to be a big component to getting there. I think the guidance is roughly implying up to 370 by June, 325, obviously, in the early part of this year. And clearly, you're selling very strongly. But that may well continue for the next number of months. So when you think about the double-digit percentage uplift in sites, you're effectively guiding to by June, again, just any help around your confidence would be great. And then perhaps just returning to site safety if possible, which you may not be able to get to detail on, but just wondered if you might be able to split your challenges to date between above and below 18 meters if possible. And then within the 206 buildings you've identified is under review, how many of those have been provided against. And sorry, last one is just when you mentioned that you're helping building owners with their work to what extent are you -- have you seen those building owners come back in recent weeks and so well, I'm afraid, given government advice for the latest moves in government that might be great. You need to lead this rather than help with, I suppose.

Will, I mean I've got about 7 questions in there, Will. So I've written a little spider diagram of all the questions. Look, I'm just going to try and work my way through this. And I think that what I'll do is pass off to Steven in terms of just thoughts on equivalent units and pass off to Mike in terms of site numbers. But if we start off with volume, and then I'll pass off, and then I'll come back and deal with our safety and building owners. So just in terms of volume aspirations, we've said that our next target really is to get to 20,000 completions. And we've set out that we believe that our existing infrastructure, we have the capacity to get to 20,000 completions. So broadly looking at probably something like 1,800, 2,000 completions coming through London and then the balance of the completions coming through our regional network. And we're very confident we've got that capacity there. You touched on previously our guidance of 3% to 5%. I think we would certainly be at the low end of that because we don't need to be anywhere apart from at the end of it at this point in time. So if I pass over to Steven in terms of equivalent units and then he can pass across to Mike in terms of site numbers.

Okay. Thanks, David. In terms of equivalent units and productivity, we've been very pleased with the progress we've made in the first half. As you can see, our first half average of equivalent units was about 341 per week. We saw that increase throughout the first half. So you see in Q2, we averaged 350 per week. And bearing in mind, Q2 is pretty distributive quarter with the Christmas, New Year period in that period. So again, Q2 was a good performance. We are hitting 16% ahead of pre-pandemic levels in that quarter. And some of the weeks, October, November, we were hitting around about 400 equivalent units per week. Coming back after the New Year, the business has sort of grown rapidly again in terms of equivalent unit production, and we're already sort of seeing close to sort of up to 300 stores, 400 per week and we're hitting the next sort of 5, 6 months, traditionally, our most productive periods of the year. We've got total focus in terms of production. Every week, we're measuring the equivalents we're seeing. So typically, we would see between 3,000 and 3,500 stage movements per week. And as you know, we have 9 stages per house. So again, coming back to sort of the 370 to 400. We've got the materials we need to deliver that production. So we're pretty confident for H2, we'll be able to achieve the numbers we're forecasting, and that gives us a good platform for next year as well.

And then just picking up on selling outlets there, Will. So we expect to move up from an average of 338 in the first half up to sort of 355, 356 in the second -- and then for next year, the average will move up again to sort of 380 to 390 range, probably at the slightly top end of our range on average book for next year.

Will, okay. Just back to me on the all 2. If I just pick up the last one first, which is straightforward. I mean the short answer is no. We have an ongoing dialogue with buildings -- building owners, managing agents. I wouldn't say we've seeing any particular step up in that. But I think we have to put that in context that the latter from the Secretary of State was 30 days ago. So I mean, it's relatively early days the issues to do with building safety and clearly stemming from rental has been around for 4.5 years. So we're talking about a 30-day period in that. In terms of our costs associated with buildings and we've said -- you said in the statement, 206 buildings. No, we're not going to provide a split of that in terms of buildings below 18 meters and buildings above 18 meters. Clearly, all the buildings are above 11 meters. I think in terms of cost, I think this is a very important point that -- if you look at what the Secretary of State and the department are saying is that they want to introduce a proportionate assessment of risk. And I think we would all understand that buildings above 18 meters could have more inherent risk than buildings below 18 meters. So I think most of the focus has been on buildings above 18 meters and most of the cost has been associated with buildings above 18 meters. When we look at the 11- to 18-meter category for Barratt or for the industry, these are typically brick-built buildings. So typically, traditional construction methodologies and relatively limited use of cladding solutions whereas above18 meters cladding solutions would tend to be more prevalent, particularly for buildings that have been built over the last 20 years.

Our next question comes from the line of Aynsley Lammin from Investec.

Just 2 from me, please. First of all, I just wondered if you would comment a bit more on kind of what you're seeing and expecting house price inflation momentum? Obviously, you had a good start to the year. Demand remains strong, which would you be expecting to push prices up again during the kind of into the spring selling season? And then secondly, just on the land market, interested here a bit more color maybe, is it still very competitive? Or is it getting a bit more sensible out there. And on the planning front, are you still facing quite a lot of challenges. Anecdotally, we're hearing that there's some challenges and risks around getting land through the planning system. So any thoughts there will be interesting as well.

Okay. Aynsley, so if I just talk initially in terms of house prices in the land market, and then I'll pass more to Steven. I mean I think Steven will be able to give you more color in terms of our approach with regard to house prices, which is clearly an ongoing position. And I'll also be able to give you more color about what we're seeing in terms of planning in the land market generally. But I mean, first of all, on house prices, I mean, I think we've got good visibility in the statement in terms of what we are seeing. So we've said that -- in the first half, our overall blended experience for the business, clearly across a lot of geographies were around 5%. We've seen a step-up of that, as Mike referred to in terms of what we're seeing within the forward order book at more like 7%. So I think that's kind of fairly clear. It is a strong pricing market. I mean if you look at it on a year-on-year basis, it's a strong market. Steven, would you like to maybe just talk about how we kind of adjust the deal with pricing?

Yes. Aynsley, in terms of pricing, we tend to sort of typically say perhaps I have 8 to 10 units on release at point in time per site. Every time we release a unit to sell, we revisit the pricing and look to increase the price at that point in time. So it's a constant review. And we're seeing very good price increases across the country. So very positive.

In terms of the land market, Steve has touched on it. I think we spent quite a bit of time back in September, talking about the land market. So the reality is, it is a very strong market. There's a huge number of planning consents that will have come through where sites are now being brought forward for sale to house builders and other developers. So we are seeing plenty of bidding activity. And I think that Steven outlined in the presentation that we have been very successful. If you look at our calendar year position in terms of calendar '21, we've heard a fantastic intake of land. Steven kind of fully touched on and explained the position regarding Gladman, but I think that just strengthens our position within the land market in the short, medium and long term. In terms of planning, I'll pass to Steven. But I would say that we absolutely recognize that the local authorities have been very, very stretched. And the operating COVID environment has been very, very challenging for the local authorities. But Steven, just in terms of your thoughts regarding planning?

In terms of planning, I mean, I guess, we've always operated in a difficult environment and it's something we're pretty used to dealing with. A number of our larger sites, we would enter into planning performance agreements, which put the local authority under an obligation to perform, and we do a number of planning performance agreements. I think the overriding view though is that we are operating in a very positive planning environment where the government sentiment is very favorable towards housebuilding and we are seeing our planning consents come through. So we've got our funding is in place for the current year, and we're well positioned for next year, too. So very, very...

Okay, great. Just one follow-up, Steve, while you're there. Did I hear right that you said the full year ASP would be in line with the first half? Or was that just the private? I didn't hear that properly.

Yes, I don't think that was. That we can say that.

We'll be actually -- potentially, so we'll be nudging up the ASP slightly in the second half. Mainly that's on the mix effect between private and affordable to the others.

Our next question comes from the line of Glynis Johnson from Jefferies.

I have 3 like Will. I'm going to phrase it. The first one actually -- or the first 2 actually are pushing on similar to the last question. The land market, you referenced larger sites having more opportunities -- you can argue that's been the case for a couple of years now. I'm just wondering if there's been any nuances in terms of those larger sites giving better opportunities than previous. And then just in terms of the mixed impact on selling price, you changed the sites, the product to adapt to Help to Buy and clearly, that's gone very well. But if you can just give us a little bit of help in terms of what mix effect that might bring. I'm not just thinking this year, but I'm thinking next year and maybe the year after. And then the last question is really just trying to delve a little bit more into the fire safety. I just want to make sure I understand what numbers we've been given. The 206 buildings under review, does that include the buildings where you've already agreed remediation? And what I'm trying to work out is that 206 buildings on review, are there any provisions being taken for those buildings yet? And when do you think you will have clarity on what the costs will be?

So if I deal with the fire safety in the buildings, I'll come back to that in a moment. In terms of the land market and in relation to large sites, I'll pass that across to Steven and Steven can give you some flavor on that. In terms of mix impact, I mean my broad answer on that, Glynis, would be not really. I mean if you're looking out in the medium term in terms of mix, we've given some details regarding the product mix split for the 6-month period. But I think whether you're looking at a 6-month period or a 12-month period, there's no material changes in either geography or product mix split. The only mix change that I would say was a significant change for the business. If you're looking at it over the last 3 to 5 years has been -- we've been very clear that we're no longer operating in Central London that clearly has an impact in terms of the ASP looking at the trailing position. In terms of the buildings, just before I pass over to Steven. So yes, to be absolutely clear, the 206 buildings are buildings that are under review and the 206 buildings will have costs that have been provided associated with those buildings. So that is the entirety of the buildings where we have either identified that there are requirements to spend money or there is a review ongoing to establish if money is required to be spent. As I touched on earlier, Glynis, when we look at lower-rise buildings, we don't see significant amounts of expenditure or significant numbers of buildings under review. So I would say the principal focus for the review has been buildings at 18 meters plus. And I think that's generally been in the position for the market.

In terms of larger sites, Glynis, yes, we are actually seeing a higher proportion of larger sites coming through, a number of sites in the sort of 500 to 1,000 unit category. From our point of view, that's positive because clearly, there's a lot less competition for those sort of sites. On the other side of the 150 to 200 unit sites, we're typically seeing maybe 20 bps for those sort of opportunities whereas when you start getting to the 500 to 1,000 category, clearly, there's a lot less. That size is ideally suited to Barrow where we're able to dual brand and put on the Barratt and David Wilson range and we have a complete portfolio of housing range, ranging from the 2 beds to the 5 beds -- so we're pretty pleased with those sort of opportunities which we're going through. There's a pretty good pipeline of land. I'm looking at my sort of land list in the next sort of few months, we're looking at sort of 128 base for about 44,000 plots where we are available on the market. So there's plenty of availability, good opportunities on there.

Our next question comes from the line of Chris Millington from Numis.

A few if I could, please. First one is just really about the desire to further vertical integration following the acquisition of Oregon and Gladman. Is there any other areas you'd like to cover off? Second one just really about your choice of reducing dividend cover rather than obviously going through a more kind of special framework or equally a share buyback. Perhaps you can just chat around that. And then the final one, again, sorry to revert that to fire safety just understanding when you're going to recognize these provisions because you're kind of flagging provisions for the second half, so you must have some idea of the cost but you're not incurring those provisions yet. Can you just let us know kind of what triggers you to provide for these and kind of when that's likely to be recognized?

Yes, Chris. So I think I'm just going to have a toll to all of those. If we just take for our safety and provisioning, I hope we've been quite clear about that. We said back in September at the time of our full year results that we anticipated in the current year that we would have costs coming through the adjusted items line somewhere in the order of GBP 40 million. I mean, we specified it at that time. In the half year, we have GBP 15 million that has come through. So broadly, we've got a GBP 25 million to come. In terms of when we provide, we provide according with the accounting rules, I mean, when there is a legal commitment in place, then we're making those provisions. And that's something that we obviously look at on an ongoing basis. I think the only thing I would say, Chris, and it's not -- I think we would all accept it's not a perfect science. But the reality is it has been a rapidly changing backdrop. I think we referred to the guidance notes that have been issued from government over a long period of time. So this has not been a uniform backdrop, and we've had to adjust to that on an ongoing basis. And inevitably, things will change over time. But I think we've provided good visibility on what we have provided and what we expect to come through in the current year. In terms of vertical integration, I mean, the short answer is we have no further acquisitions planned. And we made a very conscious decision that we wanted to secure supply for timber frame housing. We see timber frame as being key to our future plans in terms of being able to take more activity off-site and into factories and also in terms of the broader sustainability agenda. And therefore, in '19, we bought the Oregon business. It gave us a lot of expertise and it gave a development platform to produce the frames. In terms of Gladman, this is -- we can say there is a really good strategic opportunity for the group to add it into our portfolio. But we don't have anything further planned at all in terms of vertical integration. And in terms of the dividend cover, I mean, Mike, I touched on this, and I touched on it earlier. But just to say that we recognize the importance of the ordinary dividend stream. And the key focus for the Board in terms of this announcement is to be very clear about our commitment to that ordinary dividend stream. So reducing cover -- the rationale, I think, is clear and moving that through to 1.75 cover for FY '24. So I think the ordinary stream is clear. And as Mike said in his presentation, that we will keep the position under review in terms of surplus cash. And when it is appropriate to do so, we'll come back and look at any distribution method for that surplus cash.

Our next question comes from the line of Andy Murphy from Edison Research.

David, Steven, Mike, it really is kind of one question that revolves around sustainability and the Z House. I was just interested to note, I think it's a very important issue that you're addressing. And I'm delighted to see that you're pushing further forward from the future home standard. I am just wondering whether you could talk a little bit around the additional costs for this kind of house on a like-for-like basis versus where you're at the moment, perhaps on a unit basis? And whether you think over a period of time, that additional cost will come down because of advances in costs and volumes, et cetera. And I thought the highlight today is, when do you think you'll be able to -- are you likely to push out and pushes in homes across the whole output by 2030 and what arguably before that?

Yes. Andy, -- so if I start, and then Steven can talk a little more about it. But I would say, first of all, that we've said that we are committed to producing zero carbon homes across the group for 2030. I think when you look at it in the round, it is unlikely that at scale, it will be pre-2030. I totally understand that there are lots of drivers that would like it to be before 2030. But equally, I think when you start to look at what is required, the key thing is the production in terms of supply chain. The Z House, as I touched on in the presentation, a collaboration with 40 suppliers, some really amazing technologies that are already available, and Steven will talk about that in a moment. But just to say that when I joined the business, going back, which was a long time ago now. That -- the reality is that at that time, we were transitioning for Code Level 4 and Code Level 6 was coming up in terms of the code for sustainable homes. And -- we were looking at costs that were being estimated for Code Level 4 transition at about GBP 4,500 of a house. And Steven will correct me, but I think we made the transition at about GBP 800. And the reality is that the key thing which you touched on, Andy, is about production at scale. So if you take the obvious component presently, the big cost component is our heat pump, whether it be ground source or air source. Comparing that to a gas boiler is just simply not for comparison. I mean the reality is we've got 26 million homes in the U.K. There's a huge number of them are powered by gas boilers. All of our new properties have gas boilers. But we believe that the production capability is there for heat pumps. And therefore, when demand rises, the production capability will kick in and the unit cost will fall substantially. The other area we've seen this happen with has been solar panels. So originally a very expensive technology where the costs were reduced from afterward. Steven, do you want to add?

Yes. Actually sort of talk around -- sorry, the journey. So as you know, from June '22 and June '23, we're moving to 31% improvement from 2013 building regulations. What does that mean for us in terms of cost. It's gone at about 300 to 500 square foot have build cost and the sort of items we're putting in there is extra insulation in the cavities, some heat recovery technology in terms of the gas boilers. At this stage, you're not putting SRC pumps, other than in terms of technologies photovoltaics on the roof. The next stage comes in around 2025, where we move up 75% to 80% from current regulations. And really, the major change there is the removal of gas boilers and installation of SRC pumps. We've already got our supply chain developed. And in fact, we've got a number of sites around the U.K. where we're actually trialing those technologies at full size. Costs for that are probably currently around about another sort of GBP 4,000, GBP 5,000 a unit. But as David says, we'd expect to see those costs reduce over time just as we've seen the photovoltaics and solar type technologies reduce during that period of time. In terms of the Z House, which we have built in Manchester, at The University of Salford [indiscernible], that goes way beyond what we're looking at in 2025, and that gives you a 125% improvement in performance. And clearly, that's what we'll be looking at in 2030. I think the cost for that at this point in time is sort of largely irrelevant because we see those costs will come down substantially. We're trialing a lot of new technologies in there. I think just about thermal, it's about health and well-being, water consumption and lots of other things. So we've got our sort of journey planned with our procurement teams are engaging with our supply chain, and we're pretty confident that we at the solutions at lowest cost possible at that point in time.

Our next question comes from the line of Arnaud Lehmann from Bank of America.

I guess, probably 3 questions on my side, if I may. Firstly, I wanted to come back on Gladman. The deal seems to make strategic sense, but you're paying GBP 250 million for it, for business, which I think you said normalized profit, GBP 19 million or GBP 20 million. So it's not cheap and it's more expensive than Barratt own valuation. I appreciate there is probably upside to your volumes that you mentioned. But could you come back and explain how you justify the valuation, please? That would be helpful. And my second question and third, which are related is on Help to Buy and affordability. When I look at Slide 47 in your appendix around mortgage affordability, it looks fine, I guess, which is a bit surprising considering the house price inflation we have seen in the system and you expect that to continue. Now we're also expecting mortgage rates to increase plus Help to Buy coming to an end. I guess you've addressed it to some extent by changing your mix. But do you think you're doing enough considering the expected deterioration in affordability that we could see in the coming quarters. And lastly, just following up on Help to Buy, I think you said 20% of your sales mix. So quite a big reduction. And it's surprising to see such a reduction considering that the scheme might be coming to an end, and therefore, I would expect increase or people trying to benefit from it before it ends? Or does that reflect your proactive strategy to take your customers away from it?

Okay. So I think on Gladman, if I just talk about kind of the 3 principal levers, I mean, Steven has obviously outlined in the presentation the rationale, but I'll talk about the 3 principal financial levers. And then Mike will talk a little more about some of the financial side of it. And then let me just cover affordability and Help to Buy, and then I'll come back to Gladman. So just very briefly on affordability. As you say, we set the chart out in the presentation. I mean that is a long-running series analysis in terms of affordability. I think it's a fundamentally important analysis in the market when you look at what's happened to affordability over the last 30 or 40 years. So that is absolute key. I know it's stating the obvious, but there are many parts to that. One is house prices; two, is interest rates; and three, is salaries. And clearly, in general, people are paying something like 30% of their income to a mortgage. So clearly, if salary inflation comes in market, that substantially enhances affordability. Secondly, interest rates are low. And even when interest rates rise, they will still be low relative to historic norms. So I think you can see on the chart when you model it out that there is protection against affordability. The second point on Help to Buy just to say that with Help to Buy, we've seen a big transition going back to the early part of last year, where all second-time buyers dropped out of the program. So the government's view was understandably that they didn't want to continue to provide the support program for second-time buyers. And therefore, the program is now only for first-time buyers. And that has brought the program down from above 40% down to, as you say, around 20%. And the next transition will be the cessation of the scheme in March '23. But as I touched on in my presentation, we're seeing more and mortgages coming into the market, offering higher loan to value, and we have a specific product deposit unlocked, which is supported already by some of the major banks. So that should provide some support. In terms of Gladman, I just touched on the first element, and Mike will expand on it. So the first element, which Michael will expand on is just to say, look, we're buying a business that is a land promoter, not a land owner. That business, as we set out, has more than 400 promotional contracts and there is clearly very significant value in those contracts, which Michael will touch on. Secondly, we believe that the expertise of the Gladman team will help to enhance our existing strategic land proposition, and there will clearly be value in that. Steven sets out that we have a significant strategic land bank ourselves and their expertise can assist with regard to that. And then thirdly, we believe that we can secure contracts, land contracts from the Gladman business. Gladman will continue to sell land in the open market, but we believe that we can secure more contracts than we would have done with it sitting outside the group, and that will allow us to grow our completion volumes and clearly 500 completions as an indication for FY '25 substantially enhances the financial returns for the acquisition. Mike?

So I'll just expand on that a little bit. So as David says, we will have some opportunity to grow the existing Gladman business. And as you say, Arnaud, the last 3 years, it's averaged about GBP 20 million of EBIT. So we've seen that stream growing over time. And then from 2025, obviously, the 500 units will contribute an additional earnings stream to that as well. But if you just step back from it a little bit, and so the portfolio we've acquired is about 406 developments. And Gladman typically has a success rate of roughly 70% on achieving plan. So that should mean that about 280 sites, for example, can crystallize through. And when you look at the way the fee structure work, the average fee is about GBP 2 million on an individual site. So you've got line of sight that to GBP 560 million of fee income coming through over the next period of time as well. So when you take all those things together, I think the valuation does stack up. And if you look at the sort of return on investment that we see coming through is clearly ahead of our cost of capital in the mid- to high teens. So I think we're very comfortable with the position on that.

And just as a follow-up, you -- there's no concern that your peers, the like of Taylor Wimpey, Bellway, Persimmon et cetera, assuming are doing business with Gladman are not going to say, well, maybe I don't want to give business to Barratt and I will find somebody else or your confident that the client base can be maintained?

I think generally, we would say that we'd be confident that the client base can be maintained. I mean every company will obviously make their own decisions. And if people have access to land elsewhere, then they may choose to source land elsewhere. But all that will do from our point of view, is enhance the contracts that are potentially available for us. So it's kind of a win-win.

Our next question comes from the line of Shane Carberry from Goodbody. Shane, is your line on mute ? Okay, it looks like we have no answer from Shane. So the next question will come from Ami Galla from Citi.

Just one follow-up from me. Really on the gross margin. When I kind of look at the moving parts with the contributors of gross margin for H1, there was about 70 basis points coming from site transition. Now your guidance for FY '22 is quite clear. But I wanted to understand, to what extent does this sit on top of the 23% intake margin moving forward? And is that sort of a net gain that we should consider even into the forward years of '24 and '25?

I'll pass that one straight to Mike.

Thank you very much. I think, yes, that transition costs there will come through. They are factor than the into the intake margin because that's the hurdle that we've set for acquiring land in a very disciplined way. So I wouldn't read that as an increment on the medium-term guidance for margins.

Our next question comes from Clyde Lewis from Peel Hunt.

I've got a couple if I can, David. One, on the forward order book. Obviously, a big increase. The question, I suppose, is how big is too big in terms of that forward order book? And the second one I had was really around -- obviously, we've had a lot of questions around the cladding and the repair cost. And you clearly flagged that your view of sort of cost of fixed buildings below 18 meters are not going to be that high. So how comfortable are you with that GBP 4 billion number that the government put out there as their estimate for fixing buildings below 18 meters?

So I'll take those. I mean I think on the forward order book, if I sort off and I'll pass across to Steven. But look, I think the reality on the forward order book is that we're harder than we've seen. We've said it's a record forward order book. We're more forward sold than we've been. But I think we're happy to bank that, and we recognize that our challenges about build and the forward order will probably normalize over time. But Steven can give you some views on where we would normally expect to be and kind of process where we are now. But we're certainly happy with that position. So I think in terms of the government's estimates, Well, I mean, clearly, we are not looking at the market. I mean my focus is on what we are doing a matter. And I think that's quite right. And we've said, look, we've got a little over 200 buildings that we're focused on. We have a building safety unit within the business where we have a significant number of people working full time within our Building Safety unit. And the building safety unit reports directly through to the Board. And we've got to focus on our own buildings. So GBP 4 billion is not what we are focused on. We're just absolutely focused on sourcing our own buildings out and dealing with that. The HBF are engaging on behalf of the industry. And of course, they have asked government to explain that estimate. But we'll leave the HBF to work through that with government.

Yes. Clyde, In terms of the forward order book, I mean from my point of view, obviously, it's very positive. What is key on the order book is that we do to protect the customer journey, we don't sell grass. We're selling units that are in progress. So the units have to be started and being built and going up. And I think there's a schedule in the statement that gives the sort of the detail around the private and the affordable content. We've taken a lot of units out in the next 6 months. Those units are sort of in progress. And once we start building the units, we put them up for sale. And there's also a lot of affordable in there. And in a lot of cases, affordable is tied into Section 106 agreement pricing. So you may as well take the orders now and get them contracted and secured. So it's a very positive situation. So favorably, the end of January order book situation was about 15,700 units, [ 75,00 ] are affordable, which are secured and contracted.

So should we -- I mean, as your site numbers grow now through the next 12, 18 months, should we expect you think about forward order book to grow with that site count? Or are you going to sort of try and sort of tweak backwards the -- I suppose, the number of months forward that you would look to sell a unit?

I think you would expect that there would be some normalization of the forward sale position because the reality is that we are a record highs in terms of both the value of the forward order book and the extent to which we are forward sold. So -- and that's really come from the challenges around build and build delivery. And clearly, as you know, we obviously had a complete high hiatus build in 2020. So very strong demand challenges around build. That creates a position on the forward order book. And therefore, you would expect that, that will normalize over time rather than just simply increase from where it is.

Okay. And one other follow-up. I mean Andy asked about sort of Z Housing. The question I had was, I suppose, around your experiences from Z House hopefully you're still working through a lot of that. But has that sort of really changed or increased the amount of MMC that you think you're going to want to do in the next 2 to 4 years

I think the reception to the Z House, I don't think it would be hard to say that reception has been quite extraordinary. So whether you look at central government or whether you look at mortgage lenders or valuers, I mean, we are arranging business to the Z house. We're holding an online event for the Z House this week with mortgage lenders and valuers. There's a huge interest. I think when you look at the bank's position, the banks are incredibly focused on how they can improve their lending credentials in terms of sustainability. So just simply looking at the EPC ratings. And if you know everything we build is either B- or A-rated, but the U.K. average is B-rated. So clearly, as the banks lend to the secondhand market, on average, they're lending to B, and therefore, there's a huge interest in the banks in terms of how homes but both secondhand and new build can be produced on a more energy-efficient basis. So I think we've been just blown away with the level of interest in terms of the whole Z House concept. Steven?

Yes. I mean that Z House has been a great sort of situation, as David mentioned earlier, with policy partners. And the key thing isn't just about energy. It's a lot of key areas for the industry. We're looking at carbon reduction, embodied carbon, biodiversity, water usage, health and well-being. So all these areas are tackled in the Z House. And we've arranged for a full report to be produced, which were made public in due course of the learnings from Z house. We've put some mature students in to sort of get a feel for how it works, air quality testing. So there's a lot of learnings that are going to come out of this project, which as I say, we're doing with the University of Salford and we will be taking up forward. And as I say, it's been absolutely outstanding the interest in the learning from this.

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

I've got a couple of questions left. Obviously, a lot have been asked already, but just maybe 2 points of clarification. Mike, did I hear you say you thought gross margins will hold at 25% for the year? I don't know if that was my correct understanding. And I guess the sort of if that is true, that you're buying land at 23% and I appreciate there's obviously house price inflation in the mix. Are you kind of suggesting that over time, I guess, everything else equal, that gross margin will trend down. And then maybe second question is on volume. So you obviously have an unchanged 20,000 unit ambition, which, I guess, I don't know, maybe it's a couple of years, 2, 3 years out. But then you're also saying Gladman adds 500 into the equation. So I guess the question is, are you sort of saying, well, actually, there's really not that much to change in terms of volumes since Gladman gets you there rather than actually increasing the operational capacity of the business?

Okay. Gregor, if I go first on volume, and I'll pass margin back to Mike. But my immediate feeling on the margin question is the answer is no. But nonetheless, on volume, we've said over some period of time now, Gregor, that we want to get to 20,000 completions. And I think we would have originally said that when we were down at 16,000, 17,000 completions. So that's been an ambition for some time, and that was interrupted by the pandemic. In terms of our aspirations, we want to grow the business up to 20,000 completions, and we would expect to grow the business beyond 20,000 completions. We recognize that the capacity presently is around 20,000. And therefore, we need more ability to output completion. So that would be primarily coming through 2 areas. One is build technique, and Steven touched on the fact that we are being able to increase build equivalents through more use of modern methods of construction through more use of timber frame. And then the second area would be expanding our divisional network. So both of those areas are clearly open to us. MMC is very much ongoing. We're continually reviewing the ability to expand our divisional network. And as you quite rightly said, we're flagging that we think Gladman can give us 500 completions albeit out in FY '25. So that's really the answer on volume. And I'm now going to cut to Mike just to come back on this point about will gross margin be 25% in the second half of the year, which I feel the answer is no.

So you've got the answer to that question, Gregor. I mean, in the medium term, we're not changing the guidance of the hurdle rates, which, as you say, has a minimum of 23%. And the way you have strategic land in the mix, clearly, it's a little bit higher than that, a couple of percentage points higher than that anyway. But we'll keep that under review.

Okay. So just to be clear then, you did 25% in H1 right? I think correct -- with a 34% contribution margin and obviously, while your guidance implies a step-up in volume, so that actually makes a higher gross margin delivery easier. So can you just explain to us sort of what was particularly in the first half that doesn't repeat in the second half that would imply a step down or normalization, whatever you want to call it.

So there are a couple of things in there. I mean there's clearly -- there's the mix effect around the country between half 1 and half 2. We're not saying that margin is going to step back materially from 25% in half 2. But the proportion of land costs coming through as the mix changes between private and affordable is different as well in the second half.

I will hand back over to the speakers for any concluding remarks.

Okay. Excellent. Well, look, just like to say, thank you very much for the questions. We're very pleased to be able to update in terms of our half year results, where we believe it's a strong performance, and we're also pleased to be able to update and announce in terms of our enhanced ordinary dividend distribution. So thanks very much, and we'll talk to you again next time.

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