Barratt Redrow plc ($BTRW)

Hello, and welcome to the Barratt Redrow plc Third Quarter Trading Update. My name is George. I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'd like to hand the call over to your host today, Mr. David Thomas, CEO, to begin today's conference. Please go ahead, sir.

Thank you, George. Good morning, everyone, and thank you for joining us on this third quarter trading update call. Mike Roberts and John Messenger are here with me this morning. After some opening comments, we will open up for questions as normal. So I would like to, as usual, start by thanking all of our employees, our subcontractors and our suppliers for their continued commitment and sheer hard work, which underpins the resilient performance that we're going to take you through today. While the geopolitical environment has become increasingly uncertain, trading on the ground has held up well. Our overall reservation rate was 6.3% higher than last year with an increase in the underlying private reservation rate of 3%, supported by a higher contribution from PRS and multi-unit sales. Sales incentives continue to support reservation activity and were at levels in line with the half year. Our forward order book is 11% higher, so we are on track to deliver housing volumes in line with guidance of between 17,200 and 17,800 homes, and Mike will give you a bit more flavor on that in a moment. Average sales outlet numbers at 408 were essentially flat on the first half as expected. We were pleased to launch our first 2 synergy sales outlets at Curborough Fields in Lichfield ahead of schedule, and we expect to open a further 6 synergy outlets by the end of June. 22 synergy outlets are scheduled to open in FY '27 and 15 in FY '28. Including organic sales outlet growth, this brings average sales outlets for FY '27 to between 425 and 435, as we highlighted at the interims. I will now pass over to Mike.

Thanks, David, and good morning, everyone. Our sales and build positions are in line with where we'd expect them to be at this stage of the year. And as of today, we only have a handful of sales required, and all of our year-end private units are now roofed. Our build teams are now focusing on delivering the reserved homes, and we're well set to ensure all units are completed in line with our customer handover requirements and quality controls. Given our advanced build position and the limited inflationary pressure on the current year build activity, we are maintaining our FY '26 guidance on build cost inflation. You'll recall that at the interims, we said that we expected total build cost inflation would be around 2% for the year. That comprised 1% for the first half and an estimated 3% for the second half. We do recognize that this will be more challenging going forward. But given the strength of the supply chain and the size of our business, we do feel we're well placed to manage these negotiations as they arise. And on that, we'll provide a further update on this in July. With that, I'll pass back to David.

Thanks very much, Mike. And turning to the Redrow integration progress, this is substantially complete with the final parts of IT integration completing this month. All of the GBP 100 million cost synergies have now been confirmed, and we are on track to achieve an incremental GBP 50 million to our profit and loss account this financial year. There will be a further GBP 30 million from July '26 to get the full GBP 100 million of synergies to the income statement through to the end of December. Turning to land. We are now updating our guidance on land. We have maintained our disciplined approach with 2,465 plots approved for purchase in the period, bringing year-to-date approvals to just over 4,000 plots. This is lower than last year, partly because we are seeing fewer attractive opportunities in the market. But also, as we outlined in February '25, we are moving towards a model of 3.5 years owned and 1 year of controlled land, which remains our longer-term goal. And also, in the current environment, as you will understand, we are being even more selective. As a result, we are now guiding to total land approvals of between 7,000 and 9,000 plots for FY '26. So we expect a reduction in land spend to between GBP 700 million and GBP 800 million from the GBP 800 million to GBP 900 million previously guided. And we would expect that the adjustment in approvals, if ongoing, will have a more significant effect on cash flows for land in FY '27. Our financial position remains strong. We are raising our guidance for the year-end net cash position to between GBP 550 million and GBP 650 million, up from the GBP 400 million to GBP 500 million that we guided in February. This increase reflects both lower cash spend on land as well as the timing of legacy building remediation payments, which are now expected to fall into next year. Turning to the outlook. With a strong order book and good spring trading, our guidance on completions remains unchanged. However, events in the Middle East will create headwinds for our industry with the potential for a more prolonged higher interest rate environment as well as cost pressures. But our group is in a good place. We have 3 complementary brands, an excellent reputation for quality and service and a strong land bank. We are highly disciplined in our capital allocation, our land investment and our cost control, and we are well placed to deliver attractive returns to shareholders. With that, we will now be happy to move to questions.

[Operator Instructions] Our very first question this morning is coming from Aynsley Lammin coming from Investec.

Just 2 questions from me, please. First of all, obviously, reservations held up. Just interested to hear whether you pushed incentives more, anything around that area that kind of supported the reservations. And then, I guess, just on more recent trading, what's the feel and signs on things like inquiries, cancellation rates, footfall? Are you already seeing the kind of high mortgage rates in the market and maybe a -- the dent in confidence impacting anything there? And then, the second question on build cost inflation. Just interested if energy costs remain where they were and you start to get that coming through. When does that actually impact? I mean, how much of a lag is there given you've presumably got some contracts that you've kind of fixed at the beginning of this year? I'm just interested how you see that coming through.

If I pick up both of those, I mean, I think in terms of reservations, we've just not seen any change in terms of our reservation trends. I mean, as you know, we gave a current trading position when we did the half year results in February, and we provided, I think, around 5 weeks of current trading at that point in time. And if anything, we've just seen a slight strengthening of that position. It's not been noticeably better or worse at the beginning or at the end of that period. I think in terms of customer sentiment beyond the reservations, which clearly are encouraging, I would say there's more questions being asked about mortgages and mortgage rates. And as has been well documented, there has been a lot of changes in mortgage products and mortgage rates, but it's clearly not to date impacting customer sentiment, inquiries or reservation levels. I think, in terms of build cost inflation, I know everyone is very eager as we are to understand what the potential impact in relation to build cost inflation. But I think we have got to set it in context that the events in the Middle East have only been going on for a relatively short period of time. There are 3 main areas that we would be affected on in terms of cost. I mean, first of all, just transportation to site. Secondly, that we are a high user of diesel, both ourselves and our supply chain on site. And thirdly, there are energy costs within the supply chain, particularly for production of certain materials. But we're confident, as Mike touched on in terms of our build cost estimates to June '26, in line with our previous guidance. And we will talk to our supply chain on a case-by-case basis. And we should be able to provide a little more color in July. But clearly, in July, it will not be a certain position in terms of build cost inflation for the year to June '27. So we'll just have to continue to see how things evolve, both in terms of particularly the oil prices and the overall geopolitical position.

Just maybe one follow-up. Have you seen any of the manufacturers yet, whether it's bricks or plasterboard or concrete, actually ask for higher prices? Or is it just more delivery charges at this point?

I would say it's more about delivery charges at this point. But the reality is clearly, the supply chain -- the different suppliers are impacted in different ways. We had our annual supply chain conference last week. So we would have probably representatives from around about 180 of our supply chain. So there's no question that they are seeing cost pressures. But I think we've got to see how prolonged those cost pressures become.

Next question is here from Charlie Campbell of Stifel.

I think Aynsley has like nicked the obvious ones, but just to sort of push you a bit more on pricing and a couple of questions on that really. I mean, just wondering if people -- if your sales guys on the ground are reporting people driving a harder bargain. And as a kind of corollary to that, intrigued that you've sort of seen a strengthening, if anything, of the build-to-rent and the other bulk and you would have thought those would be most price sensitive. So I just wondered if there's anything more to say about that jump in reservations from the bulk side.

Charlie, I mean, maybe if I start just in terms of pricing and incentives, and Mike can maybe just pick that up, the main point I would make on pricing and incentives is that we said on incentives, there's no change from what we saw at the half year. So we're not feeding in a higher level of incentive to maintain reservations, I mean, to be very clear. But then, you've got to remember that we've got a portfolio of more than 400 sites. And inevitably, it is about the geography, and it's site by site within the geography. But Mike can talk a little bit more about that. In terms of multi-unit, particularly build-to-rent or PRS, we said back in '25 that we felt running somewhere in the order of 5% to 10% of our reservations through channels was good for us. And we -- our commentary since then really has been that we have seen pricing being quite difficult, pricing that we wouldn't necessarily want to pursue. So my sense is that there's probably a little bit more appetite in the market, where people see that the private rental market is an attractive market to operate in. We can provide a portfolio across the country. And so everything that we've done year-to-date has been relatively limited in size, but we do continue to look at opportunities to be able to expand that business within the overall portfolio. So still believing that 5% to 10% of reservations is achievable even in the current market. Mike, do you want to pick up on pricing generally?

Yes. I probably start with -- to answer your question directly, we're not seeing that people are trying to drive harder bargain in terms of the purchase process. I think it's key to remember that we have a pretty structured sales process, where we're trying to match customers to houses and their requirements. And I guess within that discussion, we talk about their needs and affordability. And as part of that discussion, we feel we control the negotiation around incentives available. And on a site-by-site basis, we look at the incentives that we offer, and that's relative to individual sales rates from the site and current build stages available plot. So we feel the incentives are very much in our control in terms of what we offer and what we're prepared to provide to facilitate the sale. So it's not really part of a negotiation so to speak from a customer point of view.

We'll now move to Clyde Lewis calling from Peel Hunt.

David, Mike, and John, I'm sure, is there in the background as well. I've got a few, if I may, please, David. Just in terms of, I suppose, the land market, and I understand, you're sort of moving to that 3.5 to 4-year sort of land bank target. But are land prices not changing yet? Are they still sort of remaining stubbornly high and not really taking into account the sort of high levels of incentives and sort of difficult market?

Okay. Clyde, I think the reality is that one of the things that we've shown in our presentations over the last few years has been the Savills land price index. And I think that shows that there's not been any substantial change in pricing. I think there's 2 things, as we look forward. Look, there's the macro event that is very obvious in terms of the Middle East. And then secondly, I think that there is a lot of land that is going to come through planning if you look over the next 18 months, 2 years. We outlined in February that we have more than 100 strategic sites in the planning process. So that is unprecedented levels of land for our business in the planning process. Clearly, it will take time. It's not all going to arrive in the near term, but that might be against a more normal level of 20 or 30 applications. And I think you'll see that reflected across the industry. So if a large amount of land is going to appear, then you would assume that there's plenty of land supply, and that may play into land prices in the future is the first thing. The second thing, just in terms of the market, I mean, we are trying to just bring in our land bank over a period of time. We're not doing it in a rushed way, and we've been very clear that we do want to shrink the length of the land bank. If you look at the current market, well, we all know that we need to understand reservation rates, we need to understand selling prices and we need to understand build costs. And that all looks quite tricky at this point. So I think generally, from our point of view, we see that there is a need to just slow down and be ever more selective about land intake.

I suppose as sort of a regular update on Help to Buy chatter, the sort of government making any noises at all about sort of considering it more closely at all?

I mean, I think the short answer, Clyde, would be no, not that the government are talking to the industry about. I mean, we've been very clear, particularly over the last couple of years that we do feel that some support from government is important in the market, particularly for first-time buyers. We've also been very clear that if there is a support program in the market that the housebuilders should pay for the support program, as we did when there was a support product launched in 2012 and the housebuilders paid prior to the launch of Help to Buy. So I think we're not asking for something for nothing. But I think when you look at affordability, particularly for first-time buyers, and then, you look at certain geographies such as London and the Southeast, it's massively challenging. And hence, you're seeing dramatic reductions in transaction level, again, particularly in the London market.

My last one was really around -- I think I'm certainly surprised you haven't sort of seen any slower levels of activity in terms of sort of new reservations and the interest that was from house purchases. Do you think that's because there is still a sizable cohort that are -- have got their mortgage in principle from before the time that rates started to increase? Or do you think there are other factors going on that people have actually sort of been sitting there waiting to sort of get involved and they're looking at the affordability sort of squeeze that's happening and thinking this is just going to be short term, and therefore, I'm happy to crack on?

Well, Clyde, there's probably a lot of parts to that. But I think the starting point, which you touched on, is that when you look at the affordability equation, the affordability position has improved if you look over the last 12 months. So lower wage inflation, less house price increases, and we have seen reductions in mortgage rates. Secondly, yes, I mean, people who are in market and who have reserved over the last, say, 6, 8 weeks would have likely had a mortgage offer in principle. So they were very much in the market. And I think also that you can see that people may want to lock into current rates, not being clear about where rates are going to go. So I think all of that plays into it. And I think it really just comes down to us having a longer time to look at how this plays out. I'm sure for lots of different reasons, everyone would hope that the conflict can be resolved, and we can see a bit more stability. But the reality is we've just got to keep monitoring that position and keep monitoring our reservations on a week-to-week basis.

Our next question is coming from Zaim Beekawa of JPMorgan.

The first is just to come back on build cost inflation. I appreciate a lot of uncertainty in the market, but maybe you could speak about kind of what's different this time versus the previous time we saw build cost spike up materially. I think we're coming from different build rates across the industry. And then secondly, just a follow-up on the bulk sales. Did you say that you're having to do sort of discount a little bit more than usual to get these across the line at the moment?

Yes. I mean, first of all, if I just cover the second point first, no, absolutely not. We're not doing deeper discounts to get bulk sales across the line. I mean, I think we're very, very clear about the economics of it. And there are levels that we're very happy to transact on. And we have done some large deals, if you look over the last 2 or 3 years, across a wide geographic range of our portfolio. But we're very clear about the values that we need to achieve, and we're certainly not taking deeper discounts to achieve that. So I think that's not the case. The build cost, look, it's kind of -- trying to put a step back, but I would say that we saw a dramatic spike in build costs at really the start of the war in Ukraine. And I think that the first most notable thing, I think, would be, first of all, those spikes were bigger than the spikes we've seen here in terms of oil prices, energy costs, et cetera. And secondly, the industry was much busier than it is now. So in '21-'22, the industry was heading towards 250,000 completions, whereas if you look at commentary maybe we're heading below 200,000 completions. So there is definitely more capacity in the industry. And clearly, that has to be helpful in terms of the way that build costs and build cost inflation evolves. And again, all of our supply chain is not affected in the same way. So some products have a very high energy content in production. And I think we're very, very familiar with the different components of the production costs for our materials. So we feel that we're well placed to navigate our way through that. We're obviously a very big business. We're buying a lot of building materials from the supply chain. So overall, I would say the starting point, as of now, looks slightly better than the starting point looked at the start of the war in Ukraine because we haven't seen the big spikes and the industry is not as busy as it was.

We'll now move to Rebecca Parker calling from Goldman.

I just wanted to ask on the outlet opening program. If you did see sales rates slow into 2027, how would you be thinking about that? And then secondly, I just wanted to ask on underlying pricing within the market and how you're seeing that play out across the country? Any geographical differences to call out there? I know you mentioned that London was a bit of a weak market.

Rebecca, sorry, just on the first question, can I just ask you to repeat just what it is you were referring to going into 2027? I just didn't quite catch that.

If sales rates slowed into 2027, if you would be thinking differently about that outlet opening program?

Okay. Yes, I understand. Okay. So Mike will pick up in terms of pricing and what we're seeing across the country and so on. In terms of the outlet opening program, I mean, our lead times are obviously quite substantial in terms of us approving land for purchase on a subject to planning basis and then obtaining planning. So really, when you look at the outlet numbers for FY '27, I think we have a high degree of confidence that those outlet numbers will be delivered. And there isn't a huge amount of optionality around that. Clearly, the vast majority of the sites we're already operating on. We're coming off an average of 408, and we're saying that we're moving up to a midpoint of around about 430. So the reality is what happens from here isn't going to have a big impact on that outlet count. I think it's much more about the outlet count as we move into FY '28. So we clearly are more cautious about essentially securing further outlets at this point in time. Now, we'll obviously keep that under review, and we'll update the market in July and update the market in September. But what we're referring to is approvals just now where we're backing the approvals down from 10,000 to 12,000 down to 7,000 to 9,000. That is largely what will fuel the FY '28 outlet count. So it really depends on what we approve essentially between now and probably September-October time, which will play into the FY '28 outlet count.

So on the sales rates and any change on pricing, I suppose pricing, as you'd imagine, is pretty flat. So we're not seeing any movement. So we're not seeing any significant changes across the country. So it's just generally flat across the whole country from where we were and with what we reported at H1. In terms of sales rates, we have seen an increase, as we've noted in Q3, which has probably seen a similar sort of increase to what we normally expect this time of the year. And every region has shown a similar sort of increase and step up from H1 performance. So absolutely no movement between different geographic areas of the business. And so the incentive levels remain pretty constant from H1 through to Q3 across all regions. So pretty much a steady increase across the country in terms of sale rate, but the same across all geographic regions.

[Operator Instructions] We'll now go to Allison Sun calling from Bank of America.

I have a few questions. So first is maybe following Rebecca's question, if the volume is going to, let's say, not be as great as you would expect in '27, are you guys ready to give out more incentives or not? And second question is on the build cost inflation. I'm curious to know if you have thought what's the worst-case scenario could be? Like how high could those material costs could go up in '27? And then my last question is, do you think you have a good pricing power when negotiating with those subcontractors? Because what I heard is some key energy-intensive materials, probably the price is already up 15%, 20%. If they do come up with a very high price increase, do you think you have ability to keep it lower?

Okay. Thank you. I mean, I think if I run through them. Look, I think when you go through our portfolio and you look at our 400 sites, I mean, like any business, we are trading volume and price every single week, how is the site selling, to what extent we need to adjust incentives up or down. So we're running incentives, just say, at an overall level of 6%, 6.5%. The reality is some of our sites will be running incentives at 3% and some of them will be running them above 6% or 6%, 6.5%. So it will vary by site. The second stage is that in some cases, we need to either increase or reduce gross prices, and we'll always be monitoring the gross price position as well. Where a home is sold subject to mortgage, there are rules from the mortgage lenders about levels of incentives. So you can't just keep paying off incentives. You've ultimately got to go to reduce gross pricing. So we'll carry on monitoring that week by week. But I think the good news is that so far, we've not seen anything that's required us to make changes to our incentive program from where we were in the first half of the year. In terms of material cost, I'm not going to give numbers. I mean, I think there's no point in getting on to that trend. We've given guidance for FY '26. When we're in a position to give guidance for FY '27, we will do that, and we'll be working hard to try to give some outline guidance at least for July. But we've got to sit down and talk to the supply chain. I think you can look back -- I made reference earlier to the Ukraine, the war in Ukraine. And the reality is there's plenty of published data about the way building material costs moved in light of that. And whilst it won't be an exact correlation, it clearly has a strong correlation to oil prices and energy price -- general gas and gas and oil prices. In terms of the supply chain, we feel we're in a very good position with our supply chain partners. I mean, we believe that we deliver what we say we're going to deliver. And so for our supply chain, I think it's very, very important that we are signaling outlet growth for FY '27. So we're going to be building and selling more from more outlets, which is a positive. And in terms of our scale, we have more scale than anyone else in the marketplace. So that is helpful if -- as I touched on earlier, if the industry is a long way below capacity, and we were doing 250,000 homes in 2022, so if we're at 200,000 or sub-200,000, there clearly is a lack of demand for the supply chain. And if we are a big part of that demand equation, then that has to be helpful. But equally, we understand that we need a strong supply chain. And so we can't simply say, well, we're absolutely refusing any increases because in that situation, then businesses become nonviable. I think because of the fact that it's kind of global crisis rather than specific to the U.K., there isn't really going to be the opportunity for imports. That would often be an opportunity for us if capacity was close to peak levels, then most of our materials can be imported, albeit that is clearly more expensive. But that isn't going to avoid the issue. I mean, all manufacturers in Europe are going to be seeing the same cost pressures.

We'll now move to Christopher Millington of Deutsche Bank.

Sorry, you probably thought you were all done, but a few left from me, guys. I hope you're all well. Just love to hear a bit more about how the affordable housing market is faring at the moment. I'd also welcome your thoughts on if we are going to see a slightly lower growth profile on volumes and maybe below where your targets are, do you think there's scope to do more on costs over and above what you've done through the synergy targets? And the last one, it's maybe not the forum for this, but I'm going to ask it anyway, is capital allocation. We've obviously seen a big, big movement in the share price. You're still quite weighted to dividends versus share buybacks. Do you think that's the appropriate capital allocation policy? And maybe you could weave in there, if we do throw off a bit of extra cash because of lower land spend, would that alter your thinking at all? And sorry for the...

Yes. No, that's fine, Chris. I was just saying Chris hasn't asked the question, I'm sure he's going to come on soon. Just -- if I just touch on capital allocation, I mean, the reality is our capital allocation is always under review from the Board. As you know, Chris, if you look over 10 years, we've shown that we have a lot of flexibility in terms of our capital allocation policies. We absolutely recognize the way that the share price has reduced. But equally, we recognize that having a strong balance sheet and having cash on the balance sheet is an important position to be in as opposed to not having cash on the balance sheet and having debt. So the Board will continue to look at that. And the next opportunity for any further guidance regarding that will be really in September update. We are running a GBP 100 million share buyback program. We're actively buying in the market on a day-to-day basis. And obviously, we have our published dividend policy. So we'll keep all of that under review. I think that in relation to cost reduction, of course, clearly, there isn't a business in the world that can say we absolutely can't reduce our costs. Of course, we can reduce our costs. I think that the combination with Redrow has allowed us to take very significant cost synergies out, which have only been accessible through that combination, would not have been accessible easily on a stand-alone basis. So whether it be our central overheads or whether it be looking at our divisional network, we always look at that. But the reality is that this is not the time for making short-term decisions. We've got to see how the market plays out. That's an absolute key thing. And then what we should be doing is just stepping back and saying, okay, let's look at the amount of land that we're bringing in. As the key example in terms of original guidance, I think at GBP 800 million to GBP 900 million of cash outflow. I mean, that is the big cash outflow number, and we are obviously looking at that. And then in terms of the affordable housing market, so I'd say generally, the affordable housing market is in a much better position that there's clearly been an above inflation settlement. The position in terms of rent convergence looks as though it's going to be resolved favorably for the housing association. And the funding is in place. Now, there are probably some comments, which I know some of our peers have made that the funding is very back-end loaded in terms of FY '26, FY '27. But the reality is that funding is now coming through, you can apply for the funding. So I think the HA position is materially better than it was, say, 12 months ago.

Do you think, David, there's any scope for higher affordable to offset lower price if we do see that trend happen with this backdrop?

Yes. I mean, certainly, if you look at the government's ambitions in terms of affordable housing, particularly affordable rental, I think there's plenty of scope for there to be more affordable housing delivered into the marketplace. I mean, it will largely depend on what the funding model is and the extent to which there is grant funding available beyond the 106 to deliver more affordable housing. So that's very much a matter for -- in practice, both central and local government.

As we have no further questions, Mr. Thomas, I turn the call back over to you for any additional or closing remarks. Thank you.

Yes, that's great. So I mean, just to say thank you very much, and thank you for the questions. And we will be back on the 15th of July with a pre-close trading update. Thank you.

Thank you, sir. Ladies and gentlemen, that will conclude today's call. We thank for your attendance. You may now disconnect. Have a good day, and goodbye.