Barratt Redrow plc (BTRW) Earnings Call Transcript & Summary

Good day and welcome to today's Barratt Redrow plc Third Quarter Trading Update Conference Call, hosted by David Thomas, Group Chief Executive Officer; Steven Boyes, Deputy Group Chief Executive Officer and Chief Operating Officer; and Mike Scott, Group Chief Financial Officer. [Operator Instructions] And now it is my pleasure to hand the call over to David Thomas, Group Chief Executive Officer. Please go ahead, sir.

Thank you. And good morning, everyone. Thanks very much for joining us on this, our Third Quarter Trading Update Call. So as usual, Steven and Mike are here with me this morning. And after some opening comments from me, we will then be happy to move on to questions. So first of all, I would like to start off by thanking all of our employees, our subcontractors and our suppliers for their continued commitment and hard work which clearly underpins the solid performance that I'm going to take you through today. I'm really pleased with the progress that we've made on the integration of Redrow into the group. And our colleagues are working together closely as we deliver the cost and revenue synergies that we've previously set out. Moving on to trading. The new homes market has been stable throughout the period, helped by a more competitive mortgage environment. Our private reservation rate of 0.62, excluding PRS and other multiunit sales, was slightly ahead of last year on an aggregated basis. Performance was broadly consistent across the period. And we've not seen any material impact from the end of the stamp duty holiday. Including PRS and other multiunit sales, our overall reservation rate was 3% lower than last year, reflecting the timing of transactions and their relatively lumpy nature. As we outlined in February, we still expect to increase our overall participation in the PRS market in the medium term. We operated from an average of 419 outlets in the quarter, which was lower than last year as we had previously guided. We expect to see outlet openings through the remainder of this year and into FY '26 as we grow to our medium-term target of 475 to 525 outlets. Reservation activity from affordable housing providers remained subdued, but our private order book was up by 3% in the quarter. This increase reflected modest underlying sales price inflation, a lower proportion of PRS units within the order book and site mix benefits. Consistent with our previous guidance, we expect total build cost inflation will be broadly flat for the year to the 29th of June. Whilst the outlook for build cost inflation is less certain for FY '26, we currently anticipate this to be between 1% and 2%. And we are working closely with our supply chain partners to secure sustainable and competitive pricing and to realize the synergy benefits of the enlarged business. On the Redrow integration progress, our divisional office rationalization is progressing to plan. Integration activities across head office functions are also progressing well, and the migration of Redrow on to Barratt systems is set to begin shortly. Our procurement teams are also building momentum as we initially harmonize buying terms and then work to ensure our purchasing scale is optimized to unlock the synergies. As a result of these activities, we are making good progress towards our cost synergy target of GBP 100 million per annum. Pleasingly too, on revenue synergies, we have already submitted planning applications on 9 of the 45 incremental sales outlets being targeted, with a significant number in the pipeline for the balance of FY '25. Our financial position remains strong. The share buyback announced in February is ongoing. And as previously guided, we continue to expect to report net cash of between GBP 500 million and GBP 600 million at the year-end. Now turning to the outlook. We continue to expect to deliver FY '25 total completions at between 16,800 and 17,200 homes, including around 600 joint venture completions. Whilst macroeconomic activity has -- or uncertainty has increased, we remain encouraged by the government's ongoing commitment to increasing housebuilding activity and proposed supply-side support. As we outlined at our capital markets update, we look forward to the future with confidence as we leverage our 3 differentiated brands and our strong land bank. Together with our commitment to quality, service and sustainability; and our position as a partner of choice, this means that we are well positioned to grow the business to deliver 22,000 home completions in the medium term. Thank you. And we will now be happy to move on to questions.

[Operator Instructions] So the first question is from Zaim Beekawa from JPMorgan.

Just a few on my side. One would be just on the incentives level where we are now. And I think you mentioned at the start -- but just confirming, no material impacts from the stamp duty land changes there. And then second question would be on, as we've seen from the Labour government enacting GBP 2 billion of investment in social and affordable homes, and more to come post the spending review, and -- maybe you can talk about sort of your expectations. Or what would be on your wish list then?

Okay. I think Mike will pick up in terms of the incentive levels. And if I pick up in terms of stamp duty and affordable housing: So I think we've said that we've not seen any material impact from the end of the stamp duty holiday. And I think that's very consistent with what we said back in February, that generally at Barratt Redrow or within the housebuilding industry, there doesn't tend to be a lot of stock availability. So when it was confirmed at the budget in November that the stamp duty holiday was still going to come to an end at the end of March, I think most of the activity around that would have been in the secondhand market rather than the new build market, so no real impact there. And in terms of affordable homes, well, I think we'll just -- to make 2 points. I mean, one, the government have been very clear that they want more homes of all tenures to be built. So whether that be private, private rental or affordable homes within the Section 106 program, so we would expect all tenures to increase as we move forward. In terms of affordable homes in particular, the housing associations are looking for a settlement that is certainly at or above the rate of inflation. And they're also looking for a settlement that would be beyond the 5-year horizon, so we would clearly support that and understand the need for the housing associations to receive that, but we will just need to wait and see what the government says with regard to the settlement.

Zaim, just on incentive levels, I think, pretty consistent with what we said in February, to be honest, so still around the 6% mark. Customers are still very deal focused when they come on to site, so the incentive levels have been a little bit sticky through the quarter; and similar to what we were saying in February, if you look at sort of underlying pricing -- underlying house price inflation -- probably running around the 1% mark on a like-for-like home basis. So again that's all pretty similar to where we've been trending through the last few months.

We'll then now move to our next question, from Clyde Lewis from Peel Hunt.

I think I've got 2, if I may, 1 probably on the sort of government's attitude, I suppose, to supporting demand rather than supply. David, I think you talked about again the supply-side sort of help that the government have come through. Do you think they've got to a point where they actually think they need to do something to help demand side? I mean obviously you've talked about stamp duty holiday ending. I mean right now there's nothing supporting the demand side, so I'm just wondering on your take on that. And the second one was really around cancellation rates and whether you've seen any sort of noticeable change on that side; and also within that, I suppose, some question around sort of mortgage appraisals, again whether you've noticed any sort of different pattern. You talked about sort of mortgages becoming more competitive, in terms of the products that are out there, so I'm just wondering whether you've seen any sort of tweak to how the banks are approaching sort of mortgage sort of requests from customers.

If I pick those up. I mean, just first of all, in terms of the sort of backdrop of cancellation rates, as you know, we clearly monitor cancellations. We monitor down valuations. We get evidence coming through of mortgage refusals. And I will say that, that is just an unchanged landscape. The cancellation position has been stable. In terms of down valuations, they're kind of at record-low levels. So very, very low levels in terms of down valuations. And we don't see any issues in terms of mortgage approvals. In terms of the government on the demand side, demand-side stimulus. I think we've been clear and, I think, quite consistent that we can clearly see benefits of demand-side stimulus. I mean, if you are a first-time buyer, then there is clearly a kind of generational inequality in terms of your access to a government product. There has been government support in the market for first-time buyers over a very long period of time. And there is no effective support in the market for first-time buyers. So we've been clear about that. We also think that it's not unreasonable that -- if the government put in place that type of scheme, that the housebuilders should pay to access the scheme. That would be no different from new buy, which the housebuilders launched in conjunction with government back in 2012 and the housebuilders paid for access to that scheme. So I think the first-time buyers in certain parts of the country have clearly very significant challenges around affordability. In terms of the government's view of that, ultimately the government's view of that will be determined as to whether [ they do or don't ] launch demand-side support. So that's a question for them to answer. Thanks, Clyde.

Our next question is from Charlie Campbell from Stifel.

A couple of questions. So just to sort of follow up as well: comments on the build cost inflation of 1% or 2% for FY '26. Do you think there's any benefit from changes in commodity prices, energy prices, maybe goods coming out of the Far East sort of since the tariff changes that might impact that as well? And then a second question, just on mortgages again. And I know this is sort of obviously very new news but Lloyds changing kind of stress tests. What sort of impact do you think that might have on mortgage availability going forward?

Charlie, thank you very much. If I pick up on mortgages. And then I think I'll ask both Steven and Mike to comment in relation to build cost inflation. And I think what Steven can do is maybe just give you some flavor in terms of our sourcing, where as you know, the majority of our sourcing is from the U.K. And then Mike can talk about the kind of 1% to 2% in terms of our guidance position.

Yes.

I think -- in terms of mortgages, I think the reality is, Charlie, that any freeing up in relation to mortgage lending is clearly a positive in terms of consumer demand position. We recognize that there's got to be discipline around mortgage lending. And if you look at where the market is now from a lending point of view compared to where the market was 15-plus years ago, I think you would say it's a very, very disciplined market. There is very, very clear governance and guidelines around the way that the banks lend. And the stress testing regime was put in place for a reason. I think, as bank base rates have moved up substantially from where they were 3 years ago, say, you can understand that some of these stress tests need to be looked at in terms of the way that they're applied in the market. So there's been different announcements over the last 18 months, and all of them will help in terms of the availability of mortgage products for the customer. And Steven, would you like to just talk about sourcing?

Yes, yes, certainly, David, yes. Charlie, in terms of material sourcing, if you put it into context, Charlie, that -- about 90% of our materials are manufactured or assembled in the U.K., which is a pretty high proportion. And within that, there's about 30% of the product [ at an ] overseas content. So an example of that would be our kitchen units are clearly manufactured in the U.K., predominantly from U.K. material, but the items such as [ drawer and those hinges ], handles are imported. So as I said, 30% of that would be imported. In terms of our main imports, that's mainly appliances, [ garage doors ], things like that, which come in from Germany generally. If you look into the Far East, China and Asia, we import very, very little, things like bathroom taps, [ door furniture ], handles, stuff like that. I think maybe one area where we may see some movement would be around PV. A lot of the PVs come in from China, so there may be some sort of reductions in PV going forward, but predominantly, as I said, vast majority of our materials are U.K. sourced, manufactured; minimal imports in terms of items; but some overseas content, where there's very little movement we see. Over to Mike.

I think, Charlie, the only thing I'd add to that is just in terms of the overall shape of the inflation. Again, labor inflation is probably running ahead of materials, so we're seeing things like the national insurance increase come through in the supply chain and so on. So within that 1% to 2%, the labor would be sort of towards the upper end of that range, and materials probably to the lower end, if that makes sense.

Yes, yes.

Our next question comes from Marcus Cole from UBS.

I've got 2 questions as well. I just wondered in terms of -- since the planning policy changes, has there been any noticeable difference in terms of the time it's taking to actually receive detailed planning permission? And then in terms of the second one, I just noticed that, where the swap rate has reduced over recent weeks given U.S. tariffs and this morning's U.K. inflation print -- I just wondered what -- your latest thoughts on what mortgage rate do you think is needed before we start to see house prices inflecting.

Marcus, thanks. I mean I think -- if I pick up both of those. I mean, just in terms of the planning policy changes, as you know, the backdrop has been that, since July '24, the government have been crystal clear about the direction of travel on planning. That was outlined in letters to the local authorities from the Deputy Prime Minister back in July. However, the production of the bill, in terms of the planning and the infrastructure bill, and the passing of that bill into an act clearly takes time. And we're now at the stage where that's going to go through the House of Commons and then the House of Lords, so the legislative policy backdrop has not changed. I would say overall there is a more positive sentiment to planning. And the government have underlined that at a national level with decisions around airports, around the Lower Thames Crossing and so on, but in terms of any material change to the planning environment, I would say no. But clearly we would expect that, that material change will come when the act comes into law. In terms of mortgage rates overall, look. I mean I think it's not just about mortgage rates. I mean we had a very, very strong environment for housebuilding and housebuilding demand back in 2006, 2007, where base rates were at higher levels than they are now. I think it's much more about the overall affordability equation. So where we're seeing modest increases in house prices, we're seeing quite significant salary inflation and we're seeing a reduction in the bank base rate. Then that is a positive recipe in terms of demand, so as we move through '25, we are expecting to see further base rate reductions. And whilst some of that is in the forward yield curves, the forward forecasts, I think, for the consumer, the actual change in base rates is very, very important. I think that really adds the confidence that we are heading in the right direction rather than just the thought that we might be heading in the right direction. Thanks, Marcus.

Allison Sun from Bank of America.

Just one question from my side. So following up on the cost inflation 1% to 2% in 2026. Do we have a sense that the housing price growth might be higher than that level, based on the pricing you have seen in the order book right now?

Yes. So just coming back to what I said earlier, Allison, I think, if we look -- we have a measure which looks at the same house type on the same development year-on-year. So it's the closest we can come to a like-for-like measure. It probably covers about 1/3 of the portfolio, so it's not everything. And that measure is running at roughly 1% year-on-year, but obviously, within the structure of the P&L, 1% of house price inflation would be enough to cover broadly 2% of build cost inflation. So that's how we see it playing through at the moment.

And our next question is from Ami Galla from Citi.

Just a few questions from me. The first one was just coming back to current trading and in terms of the sort of site visits and website traffic trends that you're seeing. Can you give us some color on the profile of buyers that you're seeing into this year? Has it at all changed into the sort of spring trading at all? And the second question I had was on the land market, if you give us -- can give us some color as what are you seeing on land availability and as well as the competition in the land market. And the last one was on London mix. There's been a couple of sort of snippets in the press around some appetite of looking at London land. Can you give us a color as to where does London stand within the sort of current mix? And how are you seeing that market, one, on the land side; as well as maybe on the demand profile?

So if I pick up in terms of current trading and also London. And then Steven can just talk about the land market. We've published numbers this morning on land, in terms of our land approvals, but Steven can talk a bit about what we're seeing in the land market. So look. In terms of current trading, I mean, I would say overall there's no noticeable change in relation to trends, as we moved into -- moved through the first quarter, in terms of buyer types. Generally what I would say on buyer types is what we've seen over the last couple of years is that the increase in interest rates and the general uncertainty particularly affects for different reasons the first-time buyer and the downsizer. So all of our brands will clearly have first-time buyers and they will have downsizers, but Barratt, I would particularly -- Barratt Homes, particularly call out in terms of first-time buyers. And inevitably there has been less first-time buyers in the market. And we've documented that through our updates over the last couple of years. And then if you look at downsizers: Redrow would have seen a high proportion of downsizers coming through 2022. And I think, for the downsizers, for different reasons, they can choose to sit tight in their existing property. So my sense is that both of those are seeing an improving position from what we saw during, say, 2023, but nonetheless, they are still relatively subdued parts of the market. In terms of London, just before I pass over to Steven on land. So on London, we are very, very positive in terms of the London market. We've operated in the London market for 40 years. There is 9.5 million people in Greater London, and we see that the opportunities in the market are very significant. If you went back to around about 2017: We said that really we saw that our operation in London would mainly be about Zones 3 to 6; that we wouldn't look at development particularly in Zone 1 and 2. And that is still very much our position. We have been active in the London market and we see that we have a very strong pipeline of sites coming through in London. We've said previously that we are in a preferred partner status with TfL for the -- in the West London partnership. And that gives us access to a number of TfL sites, some really, really fantastic opportunities that are already coming through into the market. And affordability in London, we recognize, is a challenge. And London, particularly in the first-time buyer market, has been much more subdued in the last couple of years, but when we look forward over the next 3 to 5 years, we unquestionably see growth coming from our London business. Steven?

Thanks, David. In terms of land, we're seeing pretty good availability. That's evidenced by the approvals we've had year-to-date of something like 15,300 plots across 82 sites. So a pretty strong performance. We've got good visibility of a number of excellent opportunities on the horizon. Generally I'd say the sites that have been held back for the last 2 years, [ in the back, it was a bit subdued ], have been flowing through in the last 6 months, so hence there's been a good flow of land availability, but in addition to that, there are more consented sites coming through on the horizon. We monitor the planning applications being submitted. So there's a lot of new planning applications in the planning system that we expect to come through in the next 12 months. And sites that were previously stuck with some of the nutrient neutrality issues seem to be now have been resolved, so there's again better availability in those areas. In terms of dynamics, clearly we're rigorously applying our hurdle rates. And then there is a trend for larger sites coming through. There's a lot of sites around the 500, 600 units mark which are ideal for Barratt Redrow on the basis of 3 brands. And we think there's definitely better terms available on those sort of sites and see there are sites at 100 to 150 units where you were seeing much more competition from the SMEs. And the only other thing I'd say in terms of land going forward, we've got a pretty good visibility in terms of our own strategic land and -- flowing through. We have something like 17 approvals, so far, this year. And we've got something like another 60 applications currently under determination which we expect to be coming through in the next sort of 6 to 9 months. So land availability, from our point of view, is good; some large sites which are ideally suited to Barratt Redrow, so very positive.

Thanks, Steven. Thank you, Ami.

And our next question is from Rajesh Patki from Barclays.

I've got 2 questions, please. First one is on the private order book which is lower than last year on a units basis. Do you see that as a cause for worry, or is it just a tougher comparison base? And also if you could add any color on the mix and underlying pricing in it. And secondly, just to come back on build cost inflation of 1% to 2% for next year. Sorry about that, but this includes procurement synergies, I believe, so could you help understanding the gross figure there?

Thanks very much. I think I'll pass both of them over to Mike, in terms of both parts of the question.

Yes. No, that's fine. So first of all, on the order book, I think that's really a function of the lower outlet numbers. As we guided, outlet numbers on average will be lower this year. So the sort of trough point was just around Christmas. So that's fed into the order book given the sales rate that we've achieved, so I don't think anything that we're worried about there. I think that's trending in line with where we would have expected it to be given the guidance. And on pricing, well, I mean, I think we talked a bit earlier about the underlying pricing that we're seeing across the book. I think, within the order book, there's a bit of mix going on there in terms of the sort of North-South mix and so on that affects pricing, but if you look at pricing on an underlying basis, we would see that as being up around 1% on our like-for-like measure. And then just to the second part. Sorry. I didn't catch all of the question, but I think you were asking how much procurement synergy was in our build cost inflation assumptions. The reality is a little bit but not a huge amount because we haven't realized all of the procurement synergies yet. As we were saying in February, they take a while to negotiate with suppliers and get into our agreements. And then obviously it takes a little bit longer than that to be seen in the P&L. So not a huge amount. There's a little bit in that assumption, but generally most of that, I would say, is just underlying costs that we're seeing.

And our next question is from Shane Carberry from Goodbody.

Just one for me, just to go back around incentive levels again just given how consistent, I guess, the sales rate has been now for a sustainable period. When do you start thinking about tweaking that? Do you need to see the sales rates move along a little bit more? Or is it the kind of underlying HPI that you need to see tick up slightly more before you'd think about tweaking that?

Yes -- Shane, it's Mike here. I think, I mean, it's a fair point. And as I said, I think the customer mindset is that, when they're coming on to site, they want to talk about a deal. They've -- I have been seeing that over the past couple of years. So we are moving prices, but the way we're doing it really at the moment is through gross pricing. So that's what's contributing to the underlying HPI. And then we're dealing off a slightly higher gross price, if that makes sense. So clearly, as -- if we think demand is firming up and we're seeing sales rates increasing from where they are, then clearly we would like to try and reduce the incentive levels over time, but I think the customer position is still -- it's kind of stable. It's not strong enough to be in that position yet, but we have been able to generate good levels of demand with the pricing and incentive mix that we have. But it's obviously something that we keep under review literally week to week on all of our sites.

[Operator Instructions] There are no further questions at this time. With this, I'd like to hand the call back over to David Thomas for any additional or closing remarks. Over to you, sir.

Thank you. And yes, just once again, thank you very much for dialing in. Thank you for your questions. And we will be back in July for a further update after the full year has closed. Thank you.

This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.