Barratt Redrow plc (BTRW) Earnings Call Transcript & Summary

Hello, and welcome to the Barratt Redrow plc Full Year Trading Update Conference Call. Today's call is being recorded. [Operator Instructions] I will now hand you over to David Thomas, Group Chief Executive Officer, to begin today's conference. Please go ahead, sir.

Good morning, everyone, and thank you for joining us on our full year trading update call. Here with me this morning, as usual, I have Mike, our CFO. And first of all, I'd like to start by thanking all of our employees, our subcontractors and our suppliers for their continued commitment and hard work. In February, at our Capital Markets Day, we set out our medium-term guidance and our strategy for getting there. As a reminder, using the strength of our 3 leading brands, our land pipeline and our operational experience and expertise, we are targeting the delivery of 22,000 homes a year from 32 divisions and around 500 outlets. Whilst we have experienced some temporary delays on completions and planning in recent months, we have delivered adjusted profit before tax in line with consensus, and we remain confident in our medium-term targets and in the long-term demand for our high-quality homes. So starting with trading. On private reservation rate, we were comfortably ahead of last year on both a reported and aggregated basis. As guided, we operated from an average of 405 active sales outlets across the year. While the government's national planning reforms are positive, they are yet to come into law, and we have continued to see some planning delays at a local level. As a result, several outlets forecast to open in the fourth quarter of FY '26 have been pushed into the first half of FY '27. So we expect a broadly flat outlet position in FY '26 compared to FY '25. However, these are temporary delays, and we remain confident in our medium-term target of completing 22,000 homes per year across around 500 active sales outlets. We delivered 16,565 homes across the year. 235 homes below our guidance range. This is a short-term timing issue, which does not impact our medium-term guidance and broadly was due to 300 fewer completions than expected of PRS and multiunit sales in London. These homes will be delivered in FY '26. Meanwhile, we are pleased that we have delivered adjusted profit before tax in line with consensus, which is testament to our team's commitment to drive efficiencies and cost synergies. We expect completions in FY '26 will be between 17,200 and 17,800, helped by our order book, which is up over 4% on last year, but tempered by the challenges that I've mentioned in the planning system and the broadly flat sales outlet position. The Redrow integration is progressing well with more than 2/3 of the GBP 100 million cost synergies target already confirmed. Progress is also being made on revenue synergy sites. We have already submitted 16 of the 45 identified incremental outlets for planning approval, 5 of which have already been granted. As demonstrated by these positive outcomes on both cost and revenue synergies, our teams are making rapid and meaningful progress towards our targets. In line with our previous guidance, we expect build cost inflation to be around 1% to 2% in FY '26, inclusive of procurement synergy savings. In FY '25, our charge in relation to adjusted items will be approximately GBP 229 million. Around GBP 102 million of these costs relate to the Redrow transaction itself and the subsequent reorganization and restructuring taking place to unlock cost synergies. We are also recognizing our CMA commitments charge of GBP 29 million. And the remaining GBP 98 million is related to legacy property provision charges, of which there are really 2 key points to draw out. The majority of the provision charge is centered on 2 developments. The first is in our Southern region, where a fire safety issue has been identified in 4 buildings, accounting for GBP 80 million of the provision uplift. The second is related to a large site in London, where action is already being taken and where an uplift in the provision of GBP 18 million is required to complete the remediation. In addition, as we flagged at the half year, we have been reviewing the design of concrete frames at Redrow's legacy properties given our previous experience in this area. This review has resulted in the identification of 5 developments, which are now in scope for investigation. And we have made an adjustment of GBP 106 million net of deferred tax, which under IFRS 3 creates a fair value adjustment at the acquisition date. We are tackling these problems head on. And as ever, our building safety unit is working hard to ensure all effective buildings are assessed and remediated diligently and effectively. We are also very focused on recovering costs from third parties in respect of issues around fire safety and reinforced concrete frames. Our successful Supreme Court case in May this year has clarified the responsibility of companies in the supply chain, and we will seek to recover costs wherever possible. We finished the year with a strong balance sheet and net cash of GBP 772 million. As announced in February, the next tranche of our share buyback program of at least GBP 100 million per annum will commence shortly. Our commitment to industry-leading quality and service has remained at the heart of what we do and is vital with a more challenging market backdrop. Once again, our site managers won more Pride in the Job awards for the highest standards in homebuilding and build quality than any other housebuilder for the 21st consecutive year with 115 awards across the business. And for a 16th year, we have been recognized as a 5-star housebuilder, further extending our unmatched record. So to conclude, despite the shortfall in completion numbers, the financial performance of the business has remained solid, and we start FY '26 in a strong position. We are already seeing benefits from the Redrow acquisition with cost synergies being delivered ahead of schedule, a new divisional structure in place and revenue synergies progressing well. We look forward to the new planning legislation, unlocking permissions at a local level, and we continue to drive growth over the medium term. We lead the industry on customer service and build quality, delivering high-quality developments across our 3 leading brands, which in turn put us in a unique position to rapidly accelerate volume in the medium term. Thank you, and we will now be very happy to take questions.

[Operator Instructions] And first, we have a question from Aynsley Lammin from Investec.

Just 2 questions from me, please. First of all, on the planning, just a bit more color, if you could, on what's actually kind of been frustrating there, where the visibility was? Obviously, you targeted getting back to kind of FY '24 sites. And looking forward, when would you expect some of those kind of frustrations and obstacles to lift? Is it legislation being passed? I mean when should we expect the planning to really start to ease on the ground? And then the second question, just on -- I think you say in the statement, you think there's some need for demand side support to ease the constraints of the private homebuyers. Just wondered what you meant by that explicitly? Obviously, you've had the mortgage guarantee scheme be announced recently this week. Any views on that? Do you think that's sufficient? Or do you think the market needs more on the demand side? Just interested to hear your views there.

Aynsley, I'll just cover both of those. So I think in terms of planning, really, the positive thing is, and we've said previously that we see that the planning changes that the government are proposing are very positive through the national planning policy framework and through the planning and infrastructure bill. So these are very, very positive changes. But the reality is that the planning and infrastructure bill is not yet in law and won't be in law until the autumn of this year. So we would then expect there to be a fairly rapid improvement. And I think if you go from a July start in 2024, the autumn is probably a little later than we would have anticipated as we came through 2024. But generally, the direction of travel is positive. For local authorities beyond those legislative changes, they have no real reason to make changes at this point in time. And therefore, we have seen delays in terms of where we expected to receive planning approvals to allow us to then get on site. And as we outlined in the statement this morning, we see that impacting FY '26 in terms of delivery. But clearly, it's a delayed effect into FY '27. In terms of demand side support, look, we've said that there is a case for a government-backed demand side support. But we recognize that, that is the decision of the government. And therefore, two things. First of all, that is largely around affordability. And therefore, there are challenges for the consumer, particularly in areas like London and the Southeast. I think for ourselves, we recognize that there's got to be self-help from the industry, and we previously outlined the offers that we're putting in place for consumers. So for example, deposit match, we continue to look at whether we can do anything from a shared equity point of view, and we push hard for second and subsequent time buyers in terms of our part exchange offer. So we recognize that those offers and incentives are very, very important for us to have for our potential customers.

And we're moving on to a question from Peter Ajose-Adeogun from Morgan Stanley.

I just have 2 questions. The first is just around in terms of the building blocks for FY '26. So you're guiding to roughly flat volumes in FY '26, and then we see house price and build cost inflation offsetting each other. There are puts and takes on earnings into next year. Synergies are positive, but then some costs on national insurance. So can you just help us with the building blocks for FY '26 profit before tax? Is there scope to grow this modestly year-on-year? And then the second question is just around the building safety provisions. So if you could just help to talk in detail about these provision increases and help us to understand if there are other potential costs we need to think about? Maybe in other words, is this a precursor of more to come perhaps? Or what underpins your confidence that this is very discrete to these sites you've identified?

And I think Michael will take both of those questions.

Peter, thanks for those. I mean I think on the first point on FY '26, you've actually done quite a good job of outlining the building blocks there. So if we think about volumes, clearly, we've delivered just over 16,500 homes this year. And our guidance for next year is between 17,200 and 17,800. So at the midpoint, that would be an uplift of about 1,000 homes. And really, when you think about that, given flat outlet numbers, and we're not really expecting any change in sales rates in terms of market demand, really that uplift will come partly from the units that we've rolled over that David talked about earlier from FY '25 into FY '26. And we also have the benefit of 12 months of Redrow in our numbers in FY '26 compared to 10 months for the current year. So again, that gives us a bit of an uplift there. So that's the volume side. As you say, on house price inflation, where we've been seeing in the spring underlying house price inflation running at about 1%. I think that has softened slightly as we've come into the end of the year, so probably running slightly below 1% now. And in terms of build cost inflation, our guidance at 1% to 2% is sort of still in place. That's still how we see it coming through. That does include some modest benefits from procurement synergies in the build cost inflation numbers. But to be honest, in FY '26, that is very modest. It's only a few basis points really. But we would expect that, that will broadly play a draw. And then as you rightly say, we expect an incremental GBP 45 million of cost synergies coming through. That will be offset. Obviously, we'll have a full year of Redrow overhead. We'll have the national insurance annualization in that number as well. So you can sort of put those building blocks in place, coming down from volume and take a view on what the profit before tax number will be. And so then moving on to provisions. There are really, I guess, 3 moving parts in what we've announced this morning. But the first point I'd make is that in the overall portfolio that we've previously been provided for, actually, the cost position on that portfolio has been stable through the year. So we haven't seen material movements in that portfolio. And of the sort of 408 buildings that we have within that active portfolio, about 1/3 of those buildings are in the process of closing down the remediation where we've actually been through the process and we're coming out the other end. So I think on the core, we're actually -- we're making good progress, and we have a good handle on the costs there. There are 3 things that have happened in the year that we're discussing this morning. So the first is the development down on the South Coast, where we've had a fire risk assessment done by the building owner during the second half. And that showed us that some remediation work is required at that development of 4 buildings. Now we estimate the cost of that work to be about GBP 80 million. And from the work we've done, we've looked at the build typology, the designers, the contractors and that kind of thing. And we think that the particular characteristics of that development means that there's no wider issue in the portfolio. This is contained in that one development. The second movement is GBP 18 million, which is in relation to a development in South London, where we were already doing remedial work, both for fire safety and reinforced concrete frame. And really, the scope and cost of that development has increased during the half as we progress through the work. So again, I don't think that signals any wider issue in the portfolio that is specific to that development and those buildings that we're working on there. And then the third movement is the reinforced concrete frame provision that we've taken in relation to the Redrow portfolio. Now that's the GBP 150 million provided in the opening balance sheet. And what's happened there is since we acquired the business in October, we've been able to do some very detailed engineering analysis of Redrow buildings that were designed by the same design firm that we know we've had issues with in our portfolio. So we've been doing that work since October. We flagged at the half year that, that was ongoing, and we were doing some investigation. But the nature of the investigation is actually some quite detailed computer modeling and engineering analysis that does take several months to complete. So we've formed a view of that as we've come through the second half. There are 5 developments where we think there is remediation work to be done. And our estimate is based on the initial work that we've been able to do and also our experience on other developments in our own concrete frame portfolio. And we estimate the cost of the works to be GBP 150 million. So we've provided that into the opening balance sheet. So hopefully, that helps you understand the different moving parts in the portfolio and also why we don't believe there is any wider issue on costs in the underlying portfolio. These are specific issues that we think are contained.

And from Citi, we now have Ami Galla with our next question.

Just 2 questions from me as well. First one was a follow-up on planning. Can you give us some color as to how many sites or outlets are currently pending planning permissions or are in that sort of bucket where you have seen meaningful delays so we can understand the magnitude of this? The second question was on -- as a follow-up on the outlet point. On the revised assumptions, how many outlets do we plan to now open in FY '26? And the last one was just on the legacy cladding work. Do we have a more clearer time line as to when do we plan to -- when do we complete bulk of the works? Is it in the next 3 years? Or is it a longer tail that we now need to kind of factor in, in terms of the overall completion of this legacy cladding work?

I mean, I think in terms of planning, I mean, I'll pick it up generally in terms of planning outlets. And I'm sure that John can talk to you offline in terms of any more specific numbers. And I'll also just talk briefly about legacy cladding and Mike will pick up in terms of FY '26. So I think in terms of planning outlets, as you know, we've always disclosed our planning approvals over a 6-month or a 12-month period. And if we're running on 400 outlets, we're expecting outlet numbers to rotate on, let's say, roughly a 4-year basis. And therefore, I think it's reasonable to be thinking somewhere in the order of 80 to 100 outlets are in planning at every given point in time. And that may vary in terms of the amount of strategic land that we have coming through. And as you know, over the last few years, we've increased the size of our strategic land portfolio. And therefore, we will probably have a slightly higher weighting of numbers in the planning system at this point in time in terms of outlets. And that is part of the issue that's playing out, as we touched on towards the end of '26, is that there is just a lot of stuff coming through planning, not just for Barratt Redrow, but for the industry generally, there is a lot of stuff coming through planning. In terms of cladding, I mean, Mike's talked about the way we're progressing through the portfolio. And our sense is that a lot of this will play out in terms of getting on to sites, getting work undertaken and cash flows over the next 2 or 3 years. So I think that's the way I would tend to look at it from a cash perspective.

Yes. And just picking up on outlet openings, I mean, I think we're expecting something in the region of [ 130 ] to open during the course of FY '26.

And our next question now comes from Christopher Millington from Deutsche Bank.

First one, I'd just like to ask is just following up on the provision point and just kind of where we are now with regard to provisions for concrete frames. And would all those provisions relate to the one party AECOM, which obviously got notified on that court case, and therefore, you're pursuing recovery. So I'd just like to know kind of how much potential you can recover there. Next one is just about admin costs and the sort of inflationary pressures you're seeing there. And then I'd love to hear a little bit more about London, which you obviously pulled out in the statement as being a little bit weaker than the other markets.

Chris, so if Mike picks up in terms of concrete frames, AECOM and such like and also in terms of the admin costs, and I'll just start off in terms of London. So I think just by way of overview, Chris, I mean, our London business, if you went back 4 or 5 years ago, we were up at around 2,000 completions in London. Our London business is very substantially smaller. And we obviously give the completion numbers on a half year and a full year basis. But the business is substantially smaller than it was previously. So that's kind of the first point. The second point is that London has got challenges around affordability. And we've talked about this previously. That is playing out in terms of substantially reduced first-time buyer numbers within the London business. And that has been the case since the final quarter of 2022 when we saw the sort of short-term change in interest rates. That does not look to be a particularly improving position in terms of that affordability equation in London. So we recognize, as I touched on earlier, that we've got to continue to try to put offers in front of the consumer that make that more attractive. So deposit matching, we've looked a little bit and we launched the product last year of rent before you buy. As I mentioned, we're looking at, is it possible to launch our own shared equity product. So all of these things we are looking at. And then I think the second part of it is that the private rental market, build-to-rent, private rental, while that continues to be a reasonable market in the regional marketplace, again, over the last couple of years in London, that has been a much more challenging market in terms of securing deals and securing deals at sensible prices. And we flagged this time, which I think was just unusual in that we had quite a bit of difficulty closing down international sales. So nothing specific, spread over a large number of buyers, but it was quite a difficult close. But we do expect that the majority of those will come through in first half of FY '26.

So Chris, let me pick up the other 2 parts of the question. So on concrete frame, I mean, we're making good progress through the rest of the portfolio there. And as I said earlier, in terms of what we previously provided, we're confident in those costs. I think the nature of the concrete framework is that it does take a little bit of time to work through the actual remediation. But in terms of the cost and the scope of work that we're doing, we're confident in the numbers that we have. In terms of AECOM, you'll remember that last year, we announced there was a couple of developments in London that had been designed by a different design engineer where we had work to do. And actually, it's in relation to that engineering firm that we've been investigating the Redrow portfolio. So overall, I think we are comfortable with the position that we currently are in. In terms of overhead inflation, I mean, look, as you say, there is some upward pressure on costs. We've had the national insurance increase come through. We'll annualize that in FY '26. And obviously, we've got the usual levels of salary inflation and so on coming through. We do have the benefit of GBP 45 million of cost synergy benefits coming through as well in FY '26. So overall, we're not expecting the overhead number to significantly increase. And obviously, we're doing everything we can to manage that as we go through the year.

And up next, we have Allison Sun from Bank of America.

Two questions from my side. So can you remind us how big is your presence in the London for the overall portfolio? And the second, I think you just mentioned that you are looking to a possibility of launching your own share equity product. Any more color on that front?

So if I pick those up. So first of all, in terms of how big is London, well, we -- I touched on it before. The largest our London business has ever been has been around 2,000 completions per annum. So we've gone from a position of it being in excess of 10% of our overall completion volumes to being more in a range of kind of 5% to 7%. So substantial reductions in terms of the London business over a period of time. And as I said, I mean, clearly, London, in particular, because of affordability has been a more challenging market. And we made a decision going back probably now 6 or 7 years ago that we would develop primarily in Zone 3 to 6. So in some ways, trying to address that more affordable product in the marketplace. But nonetheless, for a lot of first-time buyers, it's still a challenging backdrop. In terms of shared equity, so we've seen shared equity products launch in the market. One of our peers launched the shared equity product going back 2 or 3 months ago. We're keen if we do it, to try and do something where it's not on our balance sheet. So we're working in conjunction with third parties, which I think is more likely to be the delivery mechanism. And I think it just comes back to that broad category of self-help. I mean we've been clear that we do think that there could be support, particularly in markets where affordability is a greater challenge that there could be a government program of support beyond the mortgage indemnity guarantee. But the reality is we've also got to ensure that we are putting forward everything we can to attract consumers into the market. So therefore, shared equity for first-time buyers, rent before you buy, which is something that we trialed last year, deposit match and then for second-time movers pushing hard on programs like part exchange has all got to be part of the consumer offer.

And we now move on to our next question, which comes from Marcus Cole from UBS.

I've got 2 questions as well. The first one is just on how should we think about the cash flow moving parts in FY '26? And the second one is where do you expect total provisions to close at the end of FY '25?

Yes, let me pick both of those up. So in terms of cash flows, I think we have talked about our land spend this year being something in the order of GBP 850 million, GBP 860 million. I'd expect to see that step up next year to probably about GBP 1 billion or a touch over GBP 1 billion. And in terms of legacy property spend, which is obviously one of the other big moving parts, this year, we will spent probably around GBP 130 million on building safety, and we do expect to spend probably another GBP 100 million on building safety as we come through the year next year. We will be investing money in the ground in terms of infrastructure and WIP as we work towards those outlet openings into FY '27. And so on a net basis, we'd expect something like closing cash of GBP 300 million to GBP 400 million as we come through to the end of next year. And then in terms of the provisions lift, I think we'll give you the number slightly later. The key moving parts on that are, as I say, that we spent GBP 130 million during the course of this year, and you'll see that we're increasing provisions by GBP 229 million in relation to the additional costs that we've announced this morning.

From JPMorgan, we now have Zaim Beekawa with our next question.

Just 2 on my side. One would be on incentives. Can you just remind us where we are now? And what would you need to see in the market to reduce this from current levels? And then secondly, on landfill taxes, there's been some news flow on this recently. Kind of any view that you have or preliminary impacts that could mean for the business?

Yes, fine. I mean I think if -- I'll pick up both of those. I mean I think in terms of incentives, we've said before that we're running at a level probably a little above 6% in terms of incentives levels. I mean there are restrictions on incentive levels in terms of the council and mortgage lender guidelines. So therefore, generally, 5% is the restriction in terms of cash incentives, 1% to 2% on noncash incentives. So beyond 6% on any particular development, then though we tend to need to be a movement in headline prices and a sort of reset either up or down in relation to headline prices. I would say that incentive backdrop has been fairly stable. But against that, first quarter was a little better than second quarter in terms of the calendar year, but reasonably stable in terms of incentives. In terms of landfill taxes, I know that there's been a lot of publicity about that over the last couple of days. So I think we've said before, and I'm sure everyone understands that sending things to landfill is not seem to be a good thing. And we've published previously that around 3% of all of our waste will go to landfill. I think the government are looking to try to effectively penalize people for sending things to landfill. There's a consultation out presently. And I think the implementation plan is as we move towards sort of 2030 and beyond. So we'll obviously respond to that consultation. But the overall point being that we do understand that sending less to landfills seem to be a positive thing. And therefore, in certain cases, industries need to change practices, and we'll just keep that position under review.

[Operator Instructions] And we now take a question from Charlie Campbell from Stifel.

A couple of questions left for me, if I can. So the first one is on mortgages. Clearly some of the rules around availability are changing. Just wondering if you've seen any effects of that yet or whether that's sort of too early. And then land availability, I just sort of wondered what is the situation for buying land at the moment, seeing good availability and how is pricing evolving on that land?

Yes, if I put those up, I mean, I would say that mortgages and the sort of different rules around mortgages that we have seen a gradual change or gradual relaxing to rules. I don't think any of these rule changes individually are significant. But the reality is that collectively, they are freeing up mortgage availability and whether it be on higher loan-to-value levels or freeing up another lending criteria, clearly, we see it as being positive. Now we obviously recognize there's got to be a balance. We don't want mortgage lending. Nobody wants mortgage lending to get to the position where there aren't controls in place. So I think it's got to be a balance. But all of those changes are positive and will clearly help the overall market backdrop. In the same way, the government program in terms of the mortgage indemnity program, I mean, clearly, that helps. But I think you can see from the numbers that, that's not a game changer. That is just a very mild positive in terms of the way it contributes to the marketplace, primarily because of pricing and affordability. It's -- to have a game changer, you've got to have something that's very different from a pricing and an affordability perspective. In terms of land availability, I would just describe it as good. You've seen our approval numbers. We published them again this morning. So we've got strong approval numbers in FY '25. And in FY '24, we weren't in the market for the whole year. So the reality is across what is effectively an 18-month period, we're very, very pleased with our land intake. I think that the only thing that I would call out in our land intake has been that we are more focused on larger sites, so particularly sites where we can triple brand and therefore, bringing in sites that are 750,000 units. We've undertaken a number of those transactions during the year, firstly. And then secondly, as we previously announced, we did a deal in Scotland to buy a block of land in Scotland, which we think positions our business in Scotland very well, but that has obviously enhanced numbers during the year.

And as there are currently no further questions in the queue, I would now like to hand the call back to you, Mr. Thomas, for any additional or closing remarks.

Yes. Thank you very much. Thank you, everyone, for dialing in, and we will be back with full year results on the 17th of September. And we will also see you around during the course of today if anyone's got any follow-up questions. Thank you very much.

Thank you for joining today's call. Ladies and gentlemen, you may now disconnect.