Barratt Redrow plc (BTRW) Earnings Call Transcript & Summary

Good day, and welcome to the Barratt Developments Half Year Ended 31st of December 2022 Trading Update Call. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to David Thomas, CEO. Please go ahead.

Thank you, and good morning, everyone. Happy New Year to you all, and thank you for joining us. Steven and Mike are both with me this morning. So just to start in terms of our operational performance, I think you can see that it's been very strong. We've delivered both our new reservations and also our opening forward order book from the start of FY'23. And this is clearly through the amazing efforts of our site teams, our subcontractors and our supply chain partners against what's been a very challenging backdrop. And this has helped us to deliver a near 7% increase in total home completions at 8,626. The political and economic uncertainty in the first quarter of our financial year was clearly compounded by the rapid and material changes in mortgage rates as we moved into the second quarter, which impacted both affordability and consumer confidence. The net result was a material decline of 44% in our private reservation rate to 0.44 across the half year. We have detailed a further breakdown in the appendices for the reservation rate during the 6 months. Our reservation rate also reflected limited availability of homes for early occupation, given the size and the duration to build out our forward order book as well as the conclusion of Help to Buy at the end of October. Against the sharply lower reservation backdrop, we have continued to see house price inflation with pricing and reservations taken in the period, continuing to register year-on-year improvements, notwithstanding an increased use of sales incentives particularly in the second quarter. Our average sales outlets in the half year at 360 were 6.8% ahead of the 337 in the first half of FY'22. The increase in average outlets has reflected both a solid pipeline of new site openings with 52 openings in the half as well as the lower private reservation rate, which has naturally extended the average life of our outlets. Our total order book at 31st of December consisted of 10,511 homes, 29% below the order book at the same point last year and 33% below in value terms at GBP 2.5 billion. Our robust pricing experience to date, though, is clear in the private order book. The private average selling price in our order book at GBP 374,000 is 5.6% ahead of the GBP 354,000 reported at this point last year, and it remains in line with that reported at the 28th of August 2022 at the time of our full year results announcement. Our site teams and subcontractors continue to improve our build output during the first quarter, but then reflecting the lower reservation environment in the second quarter, our site teams began to adjust production levels. As a result, our construction output for the half was 333 equivalent homes per week, just over 2% below the 341 equivalent homes built in the first half in the prior year. Our drive for industry-leading build quality remains and our site teams have delivered our construction output without compromising customer service or build quality. And I'm pleased to report that we continue to [ lead ] the industry on build quality based on the latest NHBC reportable items benchmark for calendar '22. Turning now to the landmark here. We have been increasingly selective in the land opportunities on which we have been prepared to bid, and we continue to apply our minimum 23% gross margin hurdle and 25% return on capital employed. Reflecting the changed market backdrop, we've actually seen negative land approvals in the half year. On a gross basis, we approved 16 sites for just over 3,000 plots, but we saw 22 sites for nearly 3,300 plots were moved as they were no longer proceeded. The result was a 290 plot and 6 site reduction in our land approvals. With the existing strength of our land bank and the uncertainty in the sales market, we continue to expect that land approvals will be substantially below replacement levels in FY'23. Our balance sheet remains very strong with net cash at around GBP 965 million after payment of both the final dividend of GBP 260 million and the share buyback where we have purchased around 100 million of shares in the first half. I'm also pleased to report that we extended our GBP 700 million revolving credit facility by a further 2 years to November 2027. And within this, we introduced sustainability linked performance measures. Finally, before turning to the outlook, I wanted to highlight our recent success with the CDP Sustainability Index, where we have been recognized in the climate change A list for leadership. This places Barratt in a group of just 283 companies globally and is a first for a U.K. housebuilder. Turning now to outlook. Clearly, the outlook for the second half carries significant uncertainties. With consumer confidence and the availability and pricing of mortgages critical to the health of the housing market. However, on the positive, we have seen more mortgage availability at higher loan to values and some reductions in mortgage rates since Christmas. Our full year outcome will depend on how the market evolves in the early months of 2023. Assuming net reservations increased in line with the normal spring trading patterns to around 0.5 homes per active outlet per week, we will remain on track to deliver current consensus total home completions of around 17,500. However, should the usual seasonal improvement not occur and trading remain at levels we've recently experienced, then we would anticipate total home completions for FY'23 will be in a range of 16,000 to 16,500. Notwithstanding these uncertainties with our strong financial position and substantial net cash balances, we remain committed to both the GBP 200 million share buyback program, which will resume following the end of our post period after our interim results announcement in February and also to our ordinary dividend with the stated policy on ordinary dividend cover for FY'23 at two times. Finally, as you would expect, given the level of experience about it, we have a clear strategy for operating the business in these uncertain times. We monitor the market closely on a week-to-week basis, and we can continue to respond promptly and effectively to any changes that we see. Thank you. And I'll now hand over to the operator to open up for questions.

[Operator Instructions] We will take the first question from Chris Millington from Numis.

Just got a few as usual, please. First one is just on that sales rate point of 0.5%, you mentioned about spring. I'm just wondering when last did you do a sales rate similar to that sort of level? That's the first one. Second one is just about the incentive scheme you've been rolling out. Perhaps you could just give us a feel as to kind of how you're targeting that? Has it driven any footfall and just kind of what the customer reaction has been? And then just a quick one on the outlook for build cost inflation. We've obviously seen some quite big moves in commodity prices and I presume labor is getting a bit easier. So just like your impression on that as well, please.

Chris, Happy New Year again to you. So just in terms of sales rates and the incentive schemes, if I pick up those two, and perhaps Steven and also Mike might want to just discuss in terms of build cost and our experience there, both in terms of labor and material. So yes, look, in terms of sales rates, Chris, and I understand you've got to go back some time to see sales rates at a level of 0.5. But if you look at our experience, 2009 to 2013, so really the period post the financial crisis prior to the launch of Help to Buy. We saw sales rates on average run at about 0.5. Some years were a little lower, some years a little higher. But across that 5-year period, that was the kind of sales level. And I think we're very clear in the statement this morning that we do see that there's a range of outcomes. And our most recent sales experience has been at 0.3. In terms of the incentive schemes, our incentive schemes are broadly focusing on an offer for consumers where we're contributing towards mortgage costs or contributing towards cost of living. And those are providing offers in the range of 4% to 5% in terms of the reduction against the headline price. We've got a key offer out there in terms of key workers. So focused on NHS and other key workers. It's a scheme that we've run historically and was very successful when we ran it previously. But I would have to say that when you look at the sales rate at 0.3, that the take-up to date has not been strong. And so the reality is we've got to see how that evolves as we move into the first quarter of FY '23. And hence, why we've outlined which if we carry on at 0.3, this is where we're going to be. And if we step up to 0.5, this is where we're going to be.

David, just on that, has it driven any more footfall? I appreciate the point on reservations.

Yes. I would say that overall footfall levels have been good. I mean, if you're benchmarking footfall, we expected to use the two bases of one in the prior year and secondly against 2019. And I would say that when you look at it against the 2019 benchmark, footfall has been good. It's clearly been down on the prior year. But the challenge is very much one of conversion. It's about people having the confidence to actually sign up for that home purchase. And that's been particularly emphasized in terms of first-time buyers. So we'd say that the bars that have really gone from the market have been the first-time buyers who have been most concerned about the changes in mortgage rate. And perhaps we just haven't seen these types of mortgage rates historically, which more second-time buyers may have had an experience of higher rates, similar to rates that we saw back in 2005, '06, '07. Okay. If I pass over to Steven and Mike.

Chris, Happy New Year. In terms of build cost increases, starting with materials, we're still seeing inflationary pressures on many commodities, although the pace and scale of those increases have started to reduce. The vast majority of our material is about 85% of them are fixed until June, the other deals at view yet. In terms of pricing, what we were seeing previously was that a lot of the deals were being rolled followed on a month-by-month basis. we're now seeing greater price stability. We sold our suppliers offering 6 to 12 months fixed prices, clearly. Energy costs still been a sort of a factor. Although a lot of the suppliers that are indicating that hasn't been the issue that they expected it to be. So some of the commodities with high-pressure content are starting to come back a little bit now. We are starting to see some price deflation on raw materials, in particular, I think I've mentioned in previous calls that we've seen timber coming back. And I think now we've had 6 consecutive months of timber price reduction. So timber is now back to sort of 2020 pre-pandemic levels. And as I said, brick, steel and plastics, which were previously a source of high inflation that were stabilized. So clearly, we've got good relationships with our supply chain. We're in regular contact with them and monitoring the situation. In terms of labor, against similar situation, we had a lot of pressure previously on groundworkers and bricklaying crews, but we've seen them starting to sort of come back and reflect that traders and subcontractors are not trying to secure up workload out into the future.

The only thing I'd add to that, Chris, is that given how far out we are for the year, we're not really changing our view of build cost inflation for the full year. So I still expect that to be sort of 9% to 10% for the full year as we've previously guided.

The next question comes from Aynsley Lammin from Investec.

Just two from me, please. I wondered if you could just give a bit more color on the mortgage market. I mean, in terms of kind of -- are you seeing the bigger lenders actually cut rates and by how much if they are as we go into the spring selling season, maybe just a bit more color around that kind of appetite to lend and how that kind of qualification for affordability is stacking up now compared to maybe where it was in October, November last year. And then secondly, I just wondered if there are any kind of regional or price point differences you're seeing? Or is it kind of pretty much across the board in terms of those sales rate trends?

Happy New Year, again. Yes, if I just pick up in terms of regional and cover that. I mean what Mike can talk to you in terms of the mortgage market. All I would say on the mortgage market is that there's been a number of announcements since the 1st of January in terms of rate improvements. So clearly, that's going to be a positive start in terms of 2023, but Michael covered that. In terms of regional basis, no, there's nothing I would really call out. The reality is that relative to where we were 3 months ago, relative to where we were 6 months ago, all the markets have seen significant reductions in the reservation rates. As you can see in our update, the way that the reservation rates have evolved, we've provided a 3 segment breakdown in terms of the reservation rate. And I think that's been pretty universal. The only thing I would call out, just to give a little bit of color as to say that Scotland will never have the transition from Help to Buy that England and Wales we're having because Scotland never had the Help to Buy experience. So while Scotland have had all the other challenges that England and Wales have faced, they haven't faced the help by transition. So net for Scotland is probably been a less difficult 6-month period. And then secondly, again, a very small part in overall terms of our business, but worth mentioning that the Welsh government have announced a 2-year extension of Help to Buy. So Wales had Help to Buy -- the Help to Buy program is going to expire in line with England, but the Welsh government announced before Christmas that they were going to extend that for a 2-year period. So we put Scotland and Wales in a slightly different position to [indiscernible].

So on mortgage, I think the market is still quite competitive. I mean we saw Halifax and Skipton have come back in with 95% loan-to-value products over the last few months. And we are seeing the sort of spreads reducing and rates coming down accordingly. So we look at sort of benchmark 85% LTV and they're now available below 5%, which is between 100 bps or more down on where they were a few months ago. So I think there is good competition there. Clearly, the lending appetite still seems to do that from lenders. And the other way that's manifested itself for us is just when we look at sort of down valuations and pressure from the servers. We're not seeing abnormally high levels of down valuations either. So I think the lending appetite and the broader credit environment is in a good place.

The next question comes from [ Will James ] from [ Barrus ].

Yes, three, if I could, please. First is just around, I guess, all things priced. So just to confirm, it seems like you haven't had any change to gross prices in the kind of calendar [ towards ] quarter. But really just thinking ahead what would be -- what the tactics from there forward? And what would be the trigger for that starting to change? Do you think -- the second was just around land and the reference to canceled deals in the 6 months. Have they exited with relatively or either any penalties there? And how should we think about cash land spend and therefore, net cash for the group across the rest of the year? And then just tying up on the scenarios you've given the 0.5, would that be a 6-month rate of 0.5 or just a spring rate of 0.5. And again, just with order book in mind, is there a minimum level you would like the order book to be at on the private units come June?

Okay. So we'll go -- I'll just sort of walk my way through those. But Mike will pick up in terms of the sales rate, what we're expecting in terms of sales rate is 0.5 spring [indiscernible] or is it for the whole of the second half. But I think you can see, I'll just say at a headline level, you can see in terms of the reservation rate, and the effect on total completions, i.e., whether we're at 0.3 or 0.5, there isn't a huge difference, which is also reflective of the fact that we are very substantially forward sold. But Mike will talk more through that. In terms of pricing, look, I think the way that the pricing is evolving is that we were running as a business with incentives that would have been somewhere in the order of 2% to 3%. So that was probably a typical incentive level running through FY'21 or FY'22, and we'll be at the low end of that range. And incentives are expanding and will expand. And I think reasonably incentives can expand up to 5%, 6%. Because of the cessation of Help to Buy, you couldn't combine Help to Buy with Part Exchange. So we will definitely see more Part Exchange business. So Part Exchange tends to be a relatively expensive incentive, perhaps running at that 6% of a level. Beyond that level of 5% to 6%, everyone then needs to look to headline price. I think for two reasons: one, because the way the mortgage market operates, there's only certain levels of incentives that are acceptable to the banks and the mortgage providers. And secondly, because I think for the consumer, if you were saying -- just exaggerate for a fact, the headline price is 100, but you can buy it for 80, there then becomes just a lack of credibility about the headline prices. I would say adjustments to headline prices in the final quarter of '22 have been very, very limited. But I would expect that there will be more adjustment to headline prices as we move through the first half of '23. Because as we've touched on in the -- recent on the call, clearly, a rate of sale of 0.3 is not where the industry wants to be sitting and therefore, one would assume that price will be part of that mechanism. In terms of -- just on land, no, we've not incurred any penalties. And it wouldn't really be our intention to get into that situation. These are deals where we either were not contracted or we were contracted in a way that it wasn't a bind in a contractual position. And I think also just to expand on the land approvals, and although I think we would all accept with hindsight that the challenges in July and August were relatively limited. We did feel that in July and August, there were some challenges around the market, but we were still in the land market and approving land. And therefore, when you look at the approval levels of '16, the bulk of those approvals would have sat in the first quarter of the half year with [ overall ] very limited number of approvals in the second quarter. And equally, the cancellations we predominantly sit in the second quarter. So therefore, as we move into land for our Q3 and our Q4, then I would expect at this point in time that those numbers will be very, very muted because really we don't see anything compelling to draw us back into the land market at this point in time. And if I pass over to Mike just on the rate of sale.

Yes, just finishing off on the land point on net spend. So I would just separate the approvals picture from the cash spend. So we're still expecting to spend about GBP 900 million on land in this year, which largely comes from a land creditor commitments that we had coming into the year and then approvals from last year that are feeding through still. And then our net cash guidance, I think we've said previously GBP 800 million net cash expected for the end of the year. I think it's like there could be a touch ahead of that. So if you sort of thought of that it was GBP 800 million to GBP 900 million now, that's probably reasonable at this stage. And then just on the selling rates, the 0.5 to deliver the consensus number essentially is a sustained rate through the third quarter and to the early part of the fourth quarter. Clearly, we need to leave ourselves a bit of time between resonation and getting the customer through the convincing process into the property. So it's not assuming that it goes right to the end of the year, but that 0.5 would need to be sustained into Q4. And then clearly, in the last couple of months, we'd be building the order book for next year. So that's how we've got to those numbers.

The next question comes from Emily Biddulph from Barclays.

I've got three questions, please. Firstly, on valuations. Are you seeing any sort of uptick on those yet. And I think in Q1, you were talking about sort of running at one in 25 or one in 30 versus I think you said sort of one in 5 in back times, and we see a move on that yet. Secondly, on those lead indicators, are you seeing any sort of change in quality of sort of customers or needs or sort of anything that looks sort of particularly different? Or conversely, you're building up sort of quite a big bank of potential interest. It just hasn't been able or sort of kind of willing to convert to actual sales. And then thirdly, obviously, there's no PBT guidance in here or there's no sort of PBT flex where you've given us that flex on completions. Should we just think about that as sort of dropping through at the normal sort of 32% contribution margin as a sort of starting point, presumably, there's not much that you can do on cost in the short-term. But as we sort of -- if you assume that sort of actually plays out sort of how do you start looking at the cost base into next year?

First of all, good morning, Happy New Year. So Mike will pick up in terms of the down valuations. And if I just talk initially about customers and what we're seeing in terms of trends and maybe just a little bit of our thoughts in terms of actions that we can take and so on. And then Mike will pick up in terms of PBT and costs and so on. So I think, first of all, as we've sort of touched on I think it's set out in the statement on a new [ pending decision ], we have a -- some period where we've traded at 0.3. So whilst we recognize that 0.3 is clearly a very challenging rate of sale. There has been some stability around that. And prior to that, we've clearly seen rates of sales drop dramatically. So we're seeing that as being a small positive that we haven't continued to see that rate of sale fall away. It isn't entirely because of -- but I think it is largely related to the exit of the first time bar from the market. Partly that's because of mortgage availability and mortgage pricing on typically the first-time buyer wants high loan-to-value and attractive pricing. I think it's also because of all the kind of scare stories that has been in terms of should people be buying houses? House prices are going to fall 20%, 25%. None of these things are things that first-time buyers want to hear. And therefore, that's been a big factor. In terms of consumer interest in the market, and you can look at the announcement from Rightmove in terms of Boxing Day activity, all-time record levels of Boxing Day activity. I don't think the consumer appetite to buy a home is in any way diminished. If you look at the servings in terms of people's desire to own a home, that is undiminished. But clearly, they've been slightly flatted in terms of the present economic or financial backdrop, the quality of leads we see as being pretty good. I don't think we're getting people turning up in our sales offices who don't have an appetite to buy, but it's just getting them through that process and through the conversion process. So I understand that December is just a month and January is a month. But I think the reality is people get a bit of time to reflect over Christmas. So we are very hopeful that as we move through January and February that we will see improved levels of activity. And as you know, we're back to the market again in early February with half year results. So we'll have January trading at that point in time. And we'll also be able to report on the extent to which we're seeing better conversion through January. Mike?

So just picking up on in valuations. I think it's important to remember the backdrop there, if you look at over the past year, is the PAN valuations have been running at historically very low level, below sort of 3%, which is unusually low. I think we've seen a little bit of normalization over the past few months. So picking up sort of 4% to slightly more than 4% of reservations. But I mean in context, that is pretty normal. So we're not seeing anything that's worrying us from that point of view at the moment. And then just on PBT, I mean, it's only a trading statement, so we're not really talking about profit margins today. But I think, as you say, it's a real term, if you look at the contribution margin that we've talked about, I think 32% is a reasonable rule of thumb number, then you can flex out through the P&L on the volume number that you choose. And as you said, the cost base is relatively fixed over the next 6 months. There's not much what we can do to change that over the next 6 months. So I think that's the reasonable way of looking at it.

I think just to add in terms of cost. But we -- we're also very clear about the steps that the business took back in 2008. And we did implement certain steps around the time of the referendum and again, around the time of COVID. So the reality is that we're all waiting, enacting that in terms of what we've seen since September. So I think the real big step for the business is whether we're in or out of one market, and I think we've clearly demonstrated during the first half that we've been very much out of the land market. And as we touched on in the statement, we've said that we've frozen any recruitment into the business. So I think we're very aware of the levers that we can pull. But I think it's right that we should see how the market is settling. And it has been such a volatile market since September. So as I touched on a moment ago, I think we feel that we're now starting to see some stability. We've hopefully hit the floor. And therefore, it's a question of what do we see building through the first quarter in terms of reservation trends and then we can start looking at further measures that may be at par.

The next question comes from Clyde Lewis from Peel Hunt.

Happy New Year as well. I think I've just got a couple left, I think, now. David, I'd be interested to hear about what's happening, I suppose, in terms of the housing associations and their demand for affordable housing and whether they've backed off at all in the market? And also whether you're seeing sort of any bulk buyer interest sort of started to creep back in a people marking only down and trying to buy lumps off you at the cheaper prices? And the second one was, I suppose, around the cancellation rates. And clearly, it's a net figure in terms of that reservation number. But how is that sort of gross versus net number sort of evolved? Have cancellation rates stabilized a little bit in the last couple of months? Or are they still at fairly elevated levels.

Okay. Well, I'm just going to try to walk through those and then Mike may have to resume on cancellation rates. But just in terms of HAs, I mean I think the HAs in overall terms for the HA sector, they have bought quite a few challenges. So around the level of rent settlement that they've been able to achieve. So I think they've been capped at 7%. And we've clearly got some rapidly rising costs as all businesses have got. So I would say, as a generalization that the HA's appetite for private development is diminished. And therefore, their activity in the land market, I would say, along with most housebuilders has diminished. In terms of our 106 requirements, I think it's quite a mixed picture. So I think we are seeing some of the HAs who are concerned about the intake of more 106 and the pricing on that. But I would say for us, overall, that hasn't been a significant factor. We've had some HAs who've not wanted to proceed. But then we've always found another HA who does want to proceed. So it hasn't become a significant issue for the market at all. In terms of bulk buyer interest, again, I think it's a good point in that a very, very different backdrop to 2008. So for two main reasons. I think, one, the house builders are not as such just running for cash. And I think that was a driver in a way it was that discounted levels were quite quickly very high. So product being discounted by 10%, 15%, 20% was not unusual. Apartments potentially being discounted to the even higher amounts, which brought in the bulk bars. But then the second point being that I think the whole domain of the private landlord is a very, very different backdrop. So people coming in to buy product portfolios, I think has been much less a future of the market over the last 5-plus years as we've seen these tax changes be enacted for the private landlord. And then on cancellation rates, and I'll pass over to Mike is, I mean, as you said, it is a net figure. I'm always quite keen not to get too drawn into it. But I would say in absolute terms, the levels of cancellations on a year-on-year basis are up by maybe 200, 200 and some units on a year-on-year basis. So it's not a significant difference on an absolute basis. Mike, do you want to expand on that?

Yes. No, I think that's right. I mean it's -- at a point if you look at the sort of cancellation rate per -- let a week, it's actually flat year-on-year. So if you just look at it week to week as gross reservations have come down, the sort of cancellation rate in week has obviously increased, but that's just in the math. But I don't think we're seeing anything that you wouldn't expect. And as I say, if you step back from it, the level of cancellation activity, if you like, is actually pretty flat year-on-year. But obviously, in the maths, the rate increases because gross reservations have come down.

We will now take the next question from Ami Galla from Citigroup.