Barratt Redrow plc (BTRW) Earnings Call Transcript & Summary

Good day, and welcome to the Barratt Developments Trading Update Call. Today's conference is being recorded. At this time, I would like to turn the conference over to David Thomas. Please go ahead, sir.

Thank you, and good morning, everyone, and thank you for joining us on this trading update call. Steven and Mike are as usual with me. I would like to start off by thanking our employees, our subcontractors and our suppliers for both their commitment and enthusiasm in delivering what has been a really excellent performance throughout this period. It truly is a team effort. The housing market has remained strong throughout the period, and we have seen this right across the country. Our sales performance has reflected the strong demand with the sales rate at 0.93, 12% ahead of the 0.8 rate in the same period last year. We have also seen underlying house price inflation with pricing across the country, maintaining or improving on the 7% estimate we reported during the first half of the financial year. You will see that completions in the period at 4,625 were just over 3% ahead of last year. This was very much in line with our plans and reflected the return to more normal seasonality. And our order book is in a great position with 15,821 homes ahead 6.6% on the same point last year with the value of our order book at GBP 4.4 billion, 18.6% ahead of the prior year. While the market and our sales performance have been strong, Zone 2 has our build performance. Our site teams and subcontractors continue to drive improved build-out, helped by increased use of our standard house types and modern methods of construction. In the period, our teams delivered 362 equivalent homes per average week, 12.8% ahead of the 321 homes in the prior year period. As a result, our build output in FY '22 to date equated to 346 equivalent homes per week, up 13.8% and the 304 year-to-date in the prior year. Very importantly, our construction teams are delivering growth and build output without compromising build quality and customer service. This has been demonstrated first, we have ranked #1 amongst the major house builders for the last 12 months on the NHBC's Construction Quality Index. And secondly, we have for the 13th consecutive year, being awarded 5 stars by our customers. This is a unique achievement amongst the national housebuilders. Our sales and build performance puts us in a very strong position to deliver both current year completion guidance and to create a very solid platform for delivering growth in FY '23. Turning now to build cost inflation. We highlighted at the interims, we expect a total build cost inflation of 6% in FY '22. While the build cost inflation outlook is uncertain, we do anticipate it will remain at elevated levels over the coming months with suppliers adopting more dynamic pricing, primarily as a result of energy cost volatility. Our priority remains supply security, and we will continue to work with our supply chain partners to secure good product allocation with improved fixed cost efficiency through the second half weighting of completions and around 7% sales price inflation within our forward order book entering the second half, we continue to expect the net impact of fuel cost inflation and house price inflation to be neutral or positive in the second half. Now moving on to building safety. We have said consistently over the last few years that we do not think that lease holders should pay to remediate cladding. We announced last month that we have pledged to support lease holders by funding the remediation of buildings, which we developed as well as paying the residential property developers' tax. We are now working with the department for leveling up housing and communities to agree the necessary legal documentation and agree a fair approach to remediation, particularly around a robust and independent arbitration process. The subsequent deal announcement on the 13th of April around an additional building safety levy is, however, something which we argue the government should reconsider. We believe that the levy is both unjust and disproportionate. It further punishes the industry, which was not responsible for most of the historical buildings or the related building safety issues. Also, it fails once again to effectively allocate the cost of remediation to those responsible. As you would expect, we are making our views clearer to develop. Our financial position remains very strong with net cash of GBP 0.7 billion at the end of April, and we continue to expect to report net cash at between GBP 1 million and GBP 1.1 million at our 30th of June year-end. Now looking ahead on the outlook. Firstly, reflecting strong trading and our build success. We are on track to deliver our unchanged guidance for FY '22 of between 18,000 and 18,250 total completions. And as a result, we would expect the trading out time for FY '22 to be in line with the Board's expectations. We are also in very good shape with substantial net cash, a very strong forward sales position and an excellent land bank. Our building sales teams are focused on delivering high-quality, sustainable homes and developments, and we are always putting customers at the heart of everything we do. The result will be FY '22 completions ahead of those that we achieved in FY '19 within further planned growth and completions in FY '23 towards our medium-term cargo of 20,000 homes. We clearly recognize that macro uncertainties exist, particularly the impact of the war in Ukraine, rising inflation and interest rates. As an industry, we also faced increased taxation, the ongoing challenges around build cost inflation and the future withdrawal of Help to Buy. However, the overall strength of the housing market, our operational performance shown since the onset of COVID and our strong financial position gives us a platform and flexibility to react to the challenges and opportunities in the remainder of FY '22 and beyond. So overall, a very strong and pleasing performance that positions us well. And we will now be very happy to take your questions. Thank you.

[Operator Instructions] And we'll take our first question. Please go ahead.

Three questions, if I could, please. First, just around pricing. You made a comment there over in the opening remarks. But if I ask it slightly differently, the private average selling price from the February order book to today, I think, it's about 3% higher. Would you say that's a decent indication of what like-for-like pricing was done in those few months? And when we look at the absolute price in the order book, I think, 368 for the private business, again, is there anything abnormal in that or would you say that's a decent platform has to be thinking about as the start point for FY '23 really given that we at year-end? Second question was around the margin in the second half, just given the comments there around price cost, higher volumes in the second half, is your opinion of where the gross margin in H2 might drop firm slightly versus where we were in early Feb, do you think might be quite close now to the 25% of H1? And then finally, strand outlets. I think 326 to date in the second half, but you're still saying that you think you can be slightly up, I think, year-on-year at June. But just to confirm, that would mean the outlet set, I think, would be around the 360 mark at the end of next month. Is that right? And I guess, if so, what's getting us there?

Okay. I think if I just covered the outlet question very briefly and then perhaps it might picks up in terms of the private average selling price and the margin for the second half. I mean I think the short answer on outlet is yes. So I mean, we've seen some delay in outlets. But overall, for June, we are confident that we'll get back to a slightly improved position on a year-on-year basis. I mean I think just to expand on that slightly, well, 2 points. One, I mean, bear in mind that we're coming off a base of 340 or such outlets. So we're talking about 1 or 2 outlets making a difference in terms of the percentage movements on outlets. So it's kind of fun margins. And then the second point is that we see a healthy supply of outlets coming through in the first half of next year as well. So clearly, you've seen our land approval numbers, if you look over the last couple of years. So we're very confident that we have outlets coming on stream, but we do have to recognize that the rate of sale is way beyond the rate of sale that we would have anticipated even if you went back 6 or 9 months ago. Thanks, Will. So I'll pass over to Mike.

Thanks. So if I take the pricing question first. So when we spoke at the half year, we were flagging that the embedded house price inflation in the order book was just a touch over 7%. I think as we sit here today, it's probably moved forward very slightly from that position, but we're still seeing those levels of house price inflation coming through. When we look at the average selling prices for this year into next, the average selling price on a private basis for this year is going to be in the low 340s. And that's -- it will be similar to that next year. I don't really see that moving significantly. And then just moving on to margins. So we had said at the half year that the margin would be lower in the second half than the first, and that was always as we had planned it to be. And I think that still holds true. So we won't be delivering a 25% margin in the second half as we previously said. But in terms of the dynamics between sales prices and build costs, we are able to cover the big cost inflation in the second half through the house price inflation. And clearly, to the extent that we perform to the upper end of the completions guidance that we've given in that range, we're obviously able to cover some of our fixed costs in a better way. So there is some opportunity in the operating margin if we're able to do that. But really, I think, the key takeaway from today is that we're not really changing guidance on any of those numbers compared to the guidance that we gave at the half year.

[Operator Instructions] And we'll take our next question. Please go ahead.

Aynsley Lammin from Investec. Just 2 for me, please. First of all, just coming back to the building safety, like we, obviously, understand to be pushing back a bit on that, as you've said today. But is there any more kind of indication around what that levy might be in terms of the amount? And also when it gets supplied, will it impact your current existing land bank? Or do you think it's going to be on kind of future applications? So just interest to hear a bit more color around where the government seems to be guiding on that. And then secondly, just curious about the land market, obviously, build cost inflation running at elevated levels, macro risk. Are you seeing any of that feed through into a kind of [ karma ] land market? Is it still very competitive? What's pricing doing in the land market generally?

Aynsley, so if I start on the building safety levy and then I'll pass it over to Steven just in terms of an overview for the land market. So I mean just a little bit of color on the building and safety levy. I mean we've touched on it in the statement, and I've touched on it this morning. And as I said, we're making our views on it clear to government. The timing and the quantum isn't clear. But the reality is that when the Secretary state made the announcement on the 13th of April, he referenced GBP 3 billion building safety levy to be generated over a 10-year period. So we think broadly, if that is applied to all residential developments that they may be looking at their annual target of 300,000 homes per annum. And therefore, a broad indication that it could be GBP 1,000 per property. But we've said that we just feel that it is disproportionate. And it's just raising a further levy on the industry rather than actually getting the various actors around the industry who should be paying to pay what they were meant to pay. And if I pass over to Steven.

Yes. Aynsley, yes, in terms of the land market that's very much the same as it was back in February. Good opportunities coming through. It's a highly competitive market. It's not untypical that we would see something like 20 bids for some of the sites we're looking at. Clearly, we're seeing a lot of -- a good proportion of off-market deals come through, which we're able to negotiate with market. And I think another sort of trend tends to be the largest sites typically sort of site floating at these days are sort of 500 to 1,000 plots, which is a function of the planning system. But again, that's a very, very useful for us in terms of dual branding and outlet numbers going forward. As I say, a good market, good progress is being made. We're on track to deliver our guidance of 18,000 to 20,000 approvals in the year. So we're very happy with the way the land market is doing.

And we'll take our next question. Please go ahead.

It's Chris Millington at Numis. A few quick ones, if I could. The first one is just around pricing. And there's been a couple of reports about down valuations ticking up a little bit recently. I don't know if you've experienced the same, but perhaps you could just comment on whether or not there's any pushback on pricing? Second one, just really about mortgage availability and pricing have you noticed any big change there. And perhaps you could also just comment on labor availability. We've obviously talked quite a lot around materials and build costs as a whole, but I'd be interested in your thoughts on where we are on labor availability.

Chris. Sorry, Chris, can I just clarify the second question about mortgage availability and pricing?

Yes. So just really, if you've seen any change in your experience over the last few months. Obviously, we've seen a tick up in base rates, and there's been talk of slightly more restricted landing practices. I'm just wondering if you'd be experienced anything about that.

Yes. Okay. I understand. So if I pick up on loan valuations and mortgage availability and then Steven will pick up in terms of the labor availability. So Chris, I think, the short answer for loan valuations is that we've not seen any changes in the trends. And as you know, the reality for us is that the vast majority of the houses that we sell are subject to a mortgage valuation. And we monitor down valuation trends on our -- by house, by site, by division on a week-to-week basis and have done over a very long period of time. So no, we've not seen any change in the trend. And I saw the recent reports that down valuations were running at a national level at one in 30, which I think when you stand back and look at that figure, well, it doesn't seem to be a particularly dramatic figure compared to what we've seen historically, perhaps in 2009, 1 in 4 properties being loan-to-value. But we do monitor it. We haven't seen any changes in the trends. In terms of mortgage availability, I mean, just 2 sort of headline comments. One, clearly mortgage pricing has moved up to the extent that bank base rates have moved up, and you would expect that to continue to be a trend. But overall availability of higher loan-to-values has improved if you look over the last 12 months. And that is for us a really key point to that, particularly for the Barratt brand, and also to a lesser extent for David Wilson. Our average customer is taking a higher loan-to-value products through the Barratt brand. And therefore, as we've seen the tapering of Help to Buy, we are second-time buyers who dropped out the schemes. Clearly, if the banks want to continue to land, they need to offer higher loan-to-value products. And we're absolutely seeing that support coming to the market, both in terms of variable rate and also increasingly in terms of fixed-rate products, which I think has got a particular appeal to the customer with regard to the present backdrop. So Steven, if I pass on [indiscernible]

Chris, in terms of lever availability, again, no real change. We're pleased. We've got all the labor we need across our sites. We're typically operating with between 20,000 and 21,000 trades across all our sites, which is probably one of the highest levels we've ever operated with and hence, the productivity levels we're talking about are being achieved. I mean, clearly, labor are attracted to well-organized sites with a good [indiscernible] materials, and we've got other [indiscernible] materials on our sites. So that they can see the continuity of workload ahead and they tend to be sticking on the sites. Once they get on the sites, they're happy they've seen lots of work for the next 6, 9, 12 months. I think one of the things we've probably seen slightly different in the last 6 months is we've seen perhaps more of a return of overseas labor into the London and Southeast markets. So that has increased from where it was perhaps 12 months ago. So we monitor -- they, obviously, [indiscernible] content. Clearly in the regions, it's on U.K. level, but London and Southeast has seen a good return from overseas. But all the labor is in place, we need to produce the unit guidance we're getting.

Totally understand that. Steven, are we seeing any acceleration in the rate of inflation in labor at the moment?

Generally. So, I think that similar across most trades, we've probably seen a bit more in terms of groundwork as the guys are for the foundations in [indiscernible] because there's a lot of foundations to be put in over the next 12, 18 months, so -- but nothing really from what we've seen over the last 12 months.

I think, Chris, as we said in February, that labor inflation overall is much more subdued than the period inflation. And I think that continues down to be the case.

Okay. Chris, thank you very much.

And we'll take our next question. Please go ahead.

Ami Galla from Citi. I've got 2 questions, please. The first one on build cost inflation. Can you give us some color on the product categories where you're seeing more dynamic pricing from suppliers? And at this stage, is there any number that you can give us in terms of how much of the sort of material costs have been fixed for the next 6 months? My second question is just on Help to Buy. If you could give us some color on your exposure in the current reservations.

So if I start with Help to Buy, and then I'll pass over to Mike in terms of the old cost inflation. In terms of Help to Buy, so first of all, as you know, we came from a situation where you look at private completions for the group. We were running at one point between 45% and 50% of private completions were on Help to Buy. And then during 2021, we saw significant tapering of the scheme. So tapering in 2 regards. First of all, second-time bars were no longer eligible for the scheme. And secondly, there was regional price caps introduced around the country. So ranging from close to 190,000 in the north of the country to 600,000 in London from a previous base of 600,000 overall. So that was a very significant hurdle for us to go over. And that meant that as we reported at the half year that private completion levels were dropping down to around 20%, just a shade about 20%. So that's the position that we go into. I mean we see the end of the Help to Buy program is in March '23. But clearly, as we outlined in the statement, we won't be selling right up to March '23. In practice, we will stop selling under the Help to Buy program around 6 months prior to that. And therefore, we'll start to see that tapering coming in at the beginning of the autumn. But when we look at consumer demand and going back to the answer on the previous point from Chris, we're also seeing good mortgage availability, and that gives us a lot of confidence plus the industry launch deposit unlocked last year, and deposit unlock is providing a 95% loan to value for customers and is supported by major banks such as Nationwide, which again adds to our confidence that we can go over that hurdle wealth for [indiscernible]. I'll pass over to Mike in terms of build cost inflation.

Thanks, David. Yes. So I mean in terms of product categories, Ami, it's really focused on those with the higher proportion of energy inputs because of the volatility in energy prices. So if you think of things like steel and obviously, brick sheet, you've seen the brick suppliers talk about what they're doing on pricing. But obviously, with things like fuel costs increasing, then the transport component of all materials has been increasing as well. Looking forward in terms of what's fixed, I mean, we're going through those negotiations with suppliers all the time really. So their ongoing conversations. And we'll be able to talk a little bit more after year-end around what we're seeing in terms of the market for FY '23. But as you would expect, we're in conversations with suppliers all the time at the moment.

And we'll take our next question. Please go ahead.

It's Andy Murphy from Edison. I've got 3 quick ones. Just on the salary review that you introduced. I was wondering if you could talk about your thinking behind the timing of bringing it forward and what level of rise that was. And second part of that, does that just apply to your own employees? Or what is that growth of subcontractors as well? And also around that area, has it and the other elements you introduced that you mentioned had the effect of reducing staff turnover? Second question was about the 20,000 targets. I was wondering if you could give us a little bit of color around what you see as the biggest challenges in the next couple of years to achieve in that. And then finally on Help to Buy, can you talk about whether you expect any sort of extension at any point or whether the government are fixed in terms of not replacing it within anything or whether, in fact, being be achieved with think perhaps there might be -- some of them might reintroduce a bit closer to the next election?

So Andy, and if I take the Help to Buy and talk about the salary review and maybe Steven could just talk about the kind of main pillars that we have in terms of our growth towards 20,000 completions. And just give you some color on that around how we're going to do that and some of the challenges. I think, first of all, in terms of the Help to Buy extension, I think, a very simple answer in that we do not expect the Help to Buy program to be extended and we do not expect the government to introduce any retirement program. And I think that, that's the best way for us to operate. And if anything else happens, it will clearly be a positive, but that's the way that we are operating. And as I said in the previous question, I think, we've given a lot of confidence by the way we transitioned in 2021 and by the banks [indiscernible] land and clearly the ongoing consumer demand that we're seeing. In terms of the salary review -- I mean, I think it's something that we want to highlight. I mean we do see that clearly, our employees are absolutely keen. If you look at our business priorities, we set that out very clearly within our business priorities. And we have consistently sought to put in place an overall package for our employees that is attractive. So bringing forward the salary increase from the 1st of July to the 1st of April was just a response to what we see as being challenges around inflation and cost of living for our employees. The level of review was at 5%. And we have said that we expect in 2023 to regard to a normal review cycle to go in July review cycle. It was only for employees, not for subcontractors and subcontractors would just be an ongoing set of negotiations, as Steven touched on, with ground workers and the other tax fees of subcontractors. In terms of turnover, and no different to, I think, in any industry, I've not seen any different trends in that. During 2020, we saw extraordinarily low levels of turnover, really running for pretty much 12 months from the onset of the pandemic. So the industry, and we would have been no different, would have gone from turnover that was the order of 15% to 20% per annum down to turnover that was in the order of 5% to 10% per annum. So certainly, in my time with the group, we've never seen time over a 5% to 10% level. So I think what we've experienced in 2021 running into '22 has been a bit of catch-up where people are looking at for promotions. And if they're not going to get the promotion of the existing company, they're going to look to move. But we've certainly seen some reduction in turnover levels in terms of the trend of turnover levels, which you look over the last quarter or 6 months. But that was not the driver in terms of the salary review. The driver was very much about cost of [indiscernible]. Steven?

Yes. Yes, Andy. In terms of growing the business, we've clearly been planning to grow the business for a number of years. We've got a lot of things in place. For example, in 2016, we redesigned our product. We simplified it. We brought in greater levels of standardization, and that is really paying big dividends to us at the moment. Hence, the productivity. And another aspect of that in terms of pillars is we've increased our levels of MMC. In 2019, we acquired Oregon, and that, again, is making a big benefit to the business. And the Oregon and timber frame production has increased, and we're increasing towards 25% and then on to 30% going forward. And more recently, the Gladman acquisition has sort of helped in terms of we'll continue to produce additional land for the group as well as our own strategic land bank. So the divisions are structured. We've got a lot of divisions produced in 750 even up to 800 units. We've got the network of divisions to deliver for 20,000 units over the next few years. And we're well on cost to achieve that. So we're quite happy with the way we've structured the business, simplified products, increased higher levels of MMC. We've also added a widened product range in both Barratt and David Wilson. So we've got 2 superb product and brands, which have a full market offering, which will give us that incremental growth going forward.

We will take our next question. Please go ahead.

It's Clyde at Peel Hunt. I think I've got 2, if I may, or 2 sort of areas. One, I suppose was whether you've seen any regional differences or sort of variances between demand for bigger or smaller properties over the last few months? Any sort of changes worthy of commenting. And the other one was around, obviously, the sales rate. I mean, it's a big number, 0.93 as you said, David, it's comfortably up on last year. How are you thinking about that? And obviously, it ties in with the construction rate, obviously, your ability to buy and replace the land. Have you really debated that, I suppose, in-house decision to slow that rate down by pushing prices a bit harder, which would, obviously, impact margins, but also impact the sales rate and possibly change that volume number slightly as well.

Okay. Clyde, if I just pick up both of those in. In terms of regional differences, we -- I said in the overview, we said in the statement that these strong trends we've reseen across the country. If you look at the regional profile, I would say that as a generalization over the last 2 or 3 years, we've seen a slightly softer original profile in terms of landing in the Southeast. So not necessarily so much in terms of demand, but probably a little on demand and certainly on pricing. We haven't seen the pricing improvements. But clearly, we have seen the pricing improvements previously. So it's largely a question of timing. So I think the only thing I would call out in terms of the last 6 months has probably been a little bit of a pickup in terms of interest in apartments and interest in London, which I think in the initial stages of COVID, you people were seeing all that interest has kind of dined away. It's not quite calling the end of apartments in London, but there was certainly some comment down that line. So we have seen some pickup. And I think that's just reflected when you look at travel numbers and you look at office numbers and you just see that there's a lot more people back in the office. And so I think that's something that I would pick up as a trend. Again, not really a pricing trend, more of a volume trend. In terms of the trade between volume and value, I mean, look, the analyze the challenge of every business. So we debate that on a week-to-week basis. All of our management teams will debate that on a week-to-week basis. And there clearly is an optimum point. We -- as you know, we're a price taker in the secondhand market, and we are subject to value issues as we touched on earlier, on all of the houses that we sell. But we will try to nudge prices forward, but we also need to maintain the rates of sale, and we're continually trying to balance that on a week-to-week and moment basis.

Okay. And any differences in terms of bigger properties versus smaller ones at all? Or no real discernible differences?

No. I think what I would say, Clyde, is that, again, you've seen all the commentary. I think there is a world of difference between what people are searching for online and what people are actually buying because ultimately, that comes down to a question of affordability and what people can afford to buy. So general trends that you've seen reported on [indiscernible], people searching for larger properties, larger gardens, people searching for properties in [indiscernible], I think at one point [indiscernible] was the #1 search of [indiscernible]. But I mean that's a world of difference between what transactions are taking place. And we saw circling that if there was a move to more of a regional living as opposed to urban central living, I mean, we don't see incredibly well positioned for that. But equally, we've got a strong presence in terms of our London business. And I think it's like that we have that overall product balance. And so far, I think that's the right kind of positioning to be in.

We'll take our next question. Please go ahead.

Just one question from me. Just in terms of thinking about sort of current indicators, I suppose. And are you hearing any sort of signs of nervousness at all from sales staff on the ground as people sort of worry about and I suppose, cost of living mortgage rates? And also, is that translating at all into maybe kind of Internet search is just sort of dying away a bit as is people reappraise their priorities and the current climate? Just wondering if you're seeing any signs of any slowing at all in any of those.

Charlie, I think, just on cost of living. I mean we can all see that there are some real challenges in terms of inflation, energy prices, cost of living, a real squeeze on incomes. And I would say that, for example, we do see that in terms of feedback from our employees. And as we touched on other, I think, it was a real driver for us moving our salary increase and accelerating it by 3 months and also putting to a salary increase at a level that we wouldn't anticipated certainly even 6 months ago or certainly not problems to those, so a higher salary increase and come forward. When you look at consumer behaviors in terms of housing, I would say no, that isn't something that is really playing into consumer behaviors at this point in time. But we do recognize, I touched on in the overview that whether it's inflation or whether it's interest rates, these are all things that can dampen consumer enthusiasm for housing. But as the market has demonstrated over the last couple of years, I think, the fundamentals are very strong. There is a strong demand for housing and there is a lack of housing availability. So you can see that in the stock numbers, whether it be new build stock or whether it be the availability of secondhand houses, and therefore, that is creating that tension in terms of both volume and pricing on housing.

We'll take our next question. Please go ahead.

This is John Fraser-Andrews, HSBC. So 2 for me, please. Can I be heard? I'm just not sure, actually. I think I might be...

Yes, John, we can hear your way and clear.

Okay. So first one for me is the construction equivalent units to achieve the near 5,000 or 4,000, 8,000 completions that you need to the top end of guidance. What kind of equivalent unit number do you need for the last 2 months? So that's the first one. And then the second question is given where you're estimating the net cash to land at the year-end given that as much greater visibility on building safety outgoings and you're in a strong position on land, do you see you're in a position to pay a surplus capital return after the year-end for '22?

John, thank you. So Steven will pick up in terms of the construction equivalent units, and Mike will pick up in terms of capital return. Steven?

Yes, John. I think the easiest way to explain what we need to do for the sort of earning 10 so weeks in terms of production weeks after the years. If you look at the first half, we produced another shift through and follow-on EUs who we serve far in the second half, which is our most productive period of the year, we've averaged 262 EUs per week. That takes into account January, which is also a bit of a solid slow start back up to Christmas and a bit of a land open on production and takes into account could look weeks have raised to where there's a higher proportion of holidays. Typically, we've been producing over 400 houses for meeting the last sort of 6, 10 weeks other than the South East period. So production is exactly where we need it to be. There's only a relatively small proportion of that which is what we would term as being collectible production for the full year. And all the sites are geared up, they're all units for the full year are a pretty advanced stage of construction. And we don't see any issues in living the production we need to deliver the guidance we're forecasting.

So John, if I just pick up on returns then. So probably a few points to make. The first, obviously, we changed our dividend policy at the half year to reduce cover to 1.75x by FY '24. And that equates to, broadly speaking, about a GBP 250 million increase in our capital returns over that period. The second is, clearly, we've made the commitment on building safety up GBP 350 million to GBP 400 million, which again, that's a substantial commitment in terms of cash that the business is making. And then thirdly, don't forget that we've also got -- by year-end, we'll have about GBP 0.5 billion of land creditors still on the balance sheet. So we're looking at all of those things in the round. As we said at the half year, and our position hasn't changed, the Board reviewed capital returns regularly, and if we think it's appropriate to make a change, then we would do so. But I think we do that from a position that we've already made substantial commitments. I think the other thing is in terms of the land market, we still see lots of attractive opportunities to deploy cash into land. We're, obviously, able to secure a slightly better pricing on that land if we pay on upfront rather than deferring cash over the years. And there are still lots of very good opportunities in the market that we want to take advantage of to help prime that growth as we move towards 20,000 homes. So in the round, I don't think our position on that has changed since we spoke a few weeks ago there.

And we'll take our next question.

It's Gregor Kuglitsch from UBS. Maybe a few questions. Just actually a follow-up there. Did you just say that you thought land creditors would end at GBP 500 million by the year-end? Just like it's a rather low number. The second question is perhaps on gross margin. So I think you're sort of saying you're going to be, I don't know, between 24%, 25%. Do you expect that to essentially unwind everything else equal back to the sort of 23% level that you're buying at? Appreciating that there's obviously lots of moving parts. But just to give us an idea what the direction of travel is given there are probably positive price cost that we are currently observing. And then maybe finally, you alluded in the statement you talked about Gladman going well. Can you just sort of give us an update where we are there, integration, land pull-through, the profit that you expect from that business now that you've had it under ownership for a few months?

Okay, Gregor. Just a point of form, Gregor. I'm not sure that you can create a question just off the answer from a previous question. So - -but I will get Mike to answer that, but I should land creditor shortly. And Mike will also pick up the point with regard to gross margins. But if Steven starts by just in terms of an overview on Gladman.

Yes. Okay. Yes, in terms of Gladman, we're really pleased with the way things have gone so far. We're only 3 months into the integration process but it's running the exact as per plan. In terms of how things are going, well, the plan was to convert a number of promotion agreements into either preemptions or options and in some cases, 3 old purchases, and we've secured a number of agreements to progress with that and exactly as per our plan. So we're very happy with the way things are going. And we expect to give more of an update full year in terms of progress [indiscernible].

So Gregor, just picking up on the other 2 points. I mean my GBP 0.5 billion comment earlier was using some very judicious rounding. So you're right, it's going to be a touch higher than that at the year-end, but that will come through in due course. It will be within the guided range in terms of the overall percentages that we give. In terms of gross margins, I mean, as I said, I think, a couple of times earlier, we'll probably come back and talk a little bit more about the dynamics of house price and bill cost inflation after our year-end. So I don't want to sort of give too much forward guidance on that at this stage. We're not sort of changing any numbers as a result of the statement today. I mean, clearly, if we're buying land to 23%, then over time, you would expect the gross margins to trend in that direction. And as we said at the half, we do expect the gross margin in the second half to be lower than in the first. So in the round, that's the direction of travel in the short term. And as I say, we'll come back with a little bit more color on what you can expect next year and beyond at the year-end.

It appears there are no additional questions at this time.

Okay. Excellent. Thank you very much for dialing in. Thank you very much for the questions, and we will return to talk to you again in July. Thank you.

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