MJ Gleeson plc (GLE) Earnings Call Transcript & Summary

Brilliant. So good morning, and welcome again to the London Stock Exchange for the Gleeson results for the year to 30th of June 2022. And thank you all of you attending in-person, and indeed, thank you and welcome to those watching online. It is, of course, just a week today that we all learned of the passing of Her Late Majesty, the Queen, and I do wish to record on behalf of both myself and all colleagues at Gleeson, our sincere condolences to Royal family at this time of national mourning. Turning to the presentation. Myself and Stefan, as usual, take you through the results, and there will be an opportunity for questions and answers at the end of the presentation from both those in the room and online. Today, in the room, we've got Mark Knight, Chief Executive of Gleeson Homes; and Graham Prothero, Chief Executive Designate of MJ Gleeson. And so those of you who are around, please do speak to them afterwards should you so wish. So turning to our results. Gleeson has had a truly record performance, and we have done that despite the obvious challenges in the last 2.5 years. We achieved our medium-term target set 5 years ago of doubling Gleeson Homes' output from 1,000 homes a year in 2017 to 2,000 homes a year by 2022. And that's also been complemented this year by strong out turn for Gleeson Land. Our resilient business model has delivered strong growth, and Stefan will take you through some of the detail in a minute. But the headlines that we've delivered group revenues, up 29% at GBP 373 million. Homes operating profit, up 37% to GBP 51 million. Land operating profit is GBP 11 million, and our resultant profit before tax, up 33% to GBP 55.5 million. Demand for our homes continues, and that's driven by the structural undersupply of quality low-cost homes and the strong structural demand significantly outstripping supply. The low price of our homes, the low cost to buy, coupled with the low running costs for our homes gives us a really strong competitive advantage compared to the rest of the sector. With regards to energy builds, Gleeson home is typically costs around half to heat than a traditional secondhand equivalent. And we remain well placed to attract customers that seek value with our low cost and affordability being cited by the vast majority of our customers is delighted by at Gleeson Homes. Despite house price inflation across the market, our homes remain truly affordable for those on the National Living Wage, and a couple on the National Living Wage can buy a home on any of our 87 sites. Regards to building safety, since the half year, we have signed the building safety pledge. And because of the liability period extending from 15 years to 30 years and bringing to scope medium-rise buildings, we've now fully provided GBP 12.9 million against potential liabilities. In terms of the outlook, we remain positive. Demand for our homes is at the same level we saw 12 months ago. And in Gleeson Land, the demand for consented land remains strong, and indeed, we expect further profitable growth this year. And finally, further to obviously, the announcement of myself stepping down at the end of December. Graham, who is here today, is firmly on track to join us on the 1st of January 2023. And given the change in Chief Executive, our plan is to set out our new medium-term targets during the first half of 2023 once Graham has had sufficient time in the new role. I will now pass over to Stefan to take you through the financial numbers and section on sustainability.

Thank you, James. So James has stolen my thunder a little bit on our outstanding results, but I have no shame in repeating them. We did book a building safety provision this year of GBP 12.9 million. All of the results I present here are before that exceptional item. So as James said, we've had a record year. We've had a very, very good year. Profit before tax was up 33% at GBP 55.5 million. EPS, up 34% at 78.1p. Our cash balance has remained quite strong, and our return on capital employed increased 400 basis points to 25.4% as a result of the very strong result in the year, strong profit performance and our strong working capital discipline. Now I'll take you through the divisional profits in a little more detail on the next 4 pages, but to highlight a few items. Against prior year, Gleeson Homes profits were up 37% to GBP 51.2 million. I should highlight that compared to the last full year pre-COVID, which was 2019, Gleeson Homes profits are up 70%, 7-0 percent. Gleeson Land delivered a very strong result with profit of GBP 11.1 million, exactly the same as the prior year. And as a result, once again, profit before tax, GBP 55.5 million, that's up 33%. Now turning to Gleeson Homes. So it was the demand for Gleeson Homes' high-quality, low-cost homes that allowed us to deliver on our 5-year pledge to double home volumes to 2,000 units. Volumes, therefore, were up 10.4% on prior year. I should highlight that prior year volumes in the first half were flattered, and therefore, the full year were flattered by the carryover of sales from Q4, the previous year, which was, if you remember, the first COVID lockdown and the shutdown in the industry. The second half of the prior year, therefore, is the first clean period for you to compare volumes, too. If you compare our second half volumes with second half of the prior year, volumes were up 24%. On selling prices, we continued to close the price gap that we've talked about before with underlying selling prices increasing by 11.8%. And with the benefit of mix, that meant the average selling price was up 14.7% on the year. Gross margins were up 50 basis points at -- sorry, gross profit was up 28% on the year to GBP 96.9 million, and gross margins were up 50 basis points to 29.0%. Per home sold, gross profit increased 16% to just under GBP 48,000, an increase of almost GBP 7,000 profit per home sold -- gross profit per home sold. Overheads increased by just under GBP 2,000 per home sold. And that GBP 46.1 million were just under 20% higher than the prior year, driven by our volume growth and our continued investment in the operational platform, in particular, in Ops/Build, IT, Customer Care and Health and Safety. So as a result, we delivered a record performance in Gleeson Homes. Operating profit, up 37% to GBP 51.2 million. Operating margin of 120 basis points to 15.3%. And once again, just to remind you, against pre-COVID full year, that's an increase of 70% in Gleeson Homes operating profit. As a result of that strong performance and our working capital discipline, return on capital employed also increased significantly by 540 basis points to a very strong 28.2%. Gleeson Land had a very strong result for the year. The business sold 6 sites, generating GBP 13.8 million of gross profit. Whilst this was 2 sites fewer than the 8 sites we sold in the prior year, half of those 6 sites were sites sold under option arrangements rather than promotion arrangements. Those option arrangements mean that we generate more revenue or at least record more revenue, which is why you see the revenue number is higher. But they are often and certainly the case this year that they are more profitable than traditional promotion agreements. So we had a robust performance with profit unchanged at GBP 11.1 million. Return on capital employed in Gleeson Land was also strong, 26.3%. And whilst it was -- that's slightly lower than the prior year, that is as a result of there being slightly higher net receivables on the Gleeson Land balance sheet at the year-end. Turning to the balance sheet. Inventories increased by just under GBP 47 million during the year, driven by a GBP 49 million increase in Gleeson Homes, partly offset by a GBP 2 million reduction in inventory in Gleeson Land. On Gleeson Homes, you will notice that the build work per site has increased to GBP 1.8 million. I had previously guided -- a year ago, I guided, expect that to increased quite significantly. It was quite deflated at the end of last year, and that has been the case. That reflects a higher investment, the higher build cost and additional WIP on our build sites. Land WIP also increased, reflecting we owned more plots, but they're also that the cost of land is increasing a little. Land creditors [ usual spot ] increased to GBP 10.7 million, and as a proportion of land assets, they remain at a very modest and sensible level of 10.7%. We continue on most sites that we acquired to pay for the land on completion. Both divisions generated strong cash flow during the year, resulting in cash flow from operating activities of GBP 19.9 million. I did mention back in February that we would see greater investment in the home -- in Homes working capital, in particular, on build WIP, and this is what we saw. Nevertheless, operating cash conversion, so that operating profit to operating cash flow, was pretty solid in Gleeson Homes at 28%, and in Gleeson Land, at 85%. And remember, last year's cash flow had benefited from the carryover from the shutdown of the previous year in Q4 2020. Turning to dividends. We are recommending a final dividend of 12p per share, bringing the total dividend for the year to 18p. Dividend will therefore be covered by earnings 3.3x or 4.3x, [ pretty exceptional ]. To remind you of our capital allocation policy, whilst opportunities are there for us to accelerate growth through additional investment, we will maintain a dividend cover ratio of between 3x and 5x, and to reiterate that our final dividend, we expect to continue to be 2/3 of the full year dividend. Now let me turn to sustainability. As you know, we are a highly sustainable developer. Gleeson Homes is fully aligned with United Nations Sustainable Development Goal 11, that is sustainable cities and communities. The very first target of which is safe and affordable housing for everyone. Well, that is what we do, building homes, changing lives. And as James mentioned earlier, a young couple on the National Living Wage can afford to buy a home on any one of Gleeson Homes development sites. A couple of point -- further points. We are now fully disclosing enhanced disclosures under SASB and TCFD for those fellow nerds out there who really understand what that means. And I am pleased to report a further reduction in our carbon emissions of 9% in the year. That puts us on track to achieve our 3-year target of reducing CO2 emissions by 30% to 1.75 tonnes for every home that we sell. We're well on track for that. I set -- we set 4 targets a year ago. Progress on those targets is very positive. We've achieved 3, and we are on track for the fourth being the carbon emissions target. Health and safety, you'll notice that our RIDDORs are significantly down, and our AIIR rate is 55 per 100,000. That places us one of the safest housebuilders. That's as a result of the significant investment we've made in health and safety over the last 18 months in the business. Employee engagement again improved, and our customer recommendation score increased slightly to 90.7%, placing us as a 5-star equivalent housebuilder. We set new targets. Once again, starting with health and safety. Employee engagement, customer satisfaction, we will maintain our upper quartile and quiet frankly, we're really anticipating that it'll be upper decile. And of course, our 3-year target is now 1.75 tonnes. And I have no doubt when we achieve that in 2023, we will set an additional target for maybe 1 or 3 years beyond that. Now finally, back to carbon emissions. The embedded carbon in each home that we build is 45 tonnes. That is higher than I had estimated last year, and that as a result of working very closely with our suppliers and our subcontractors to identify all of the embedded carbon in their materials and all of their activities, including those activities on site. 45 tonnes. We will be setting a pathway this year to reducing those emissions, and -- but we've already made a start. So we are -- we have been trialing concrete bricks, and we actually built 52 homes in the year using concrete brick, and our customers, very happy with those homes. We are rolling out eco cabins on every one of our new development sites. We now have the latest model forklift truck on all of our sites, the T5 model. We are rolling out the use of hydro-treated vegetable oil, the HVO fuel for all of our generators and forklift trucks on our site, where it's available and where the price is sensible. But HVO fuel is significantly less -- emits significantly less CO2 than white diesel. And we have recruited a new -- our first Group Sustainability Manager. Chap's name is Matt Gibb. He comes to us from Marshall. So he really understands the embedded carbon in construction materials. So I believe we are and continue -- and will continue to be the most sustainable housebuilder. Thank you, and I'll hand you back to James.

Thank you, Stefan. So be fairly brief on a number of these slides. So a slide most of you are familiar with, but as a reminder, MJ Gleeson, 2 very distinct and autonomous businesses. Gleeson Homes delivering high-quality, low-cost homes across Midlands, Yorkshire and the North, delivering that across 9 regions. And then Gleeson Land, previously Gleeson Strategic Land, promoting land through planning on behalf of landowners across the south of England. And I'm going to go into those 2 businesses in a bit more detail. So turning to Gleeson Land. As you'll recall, we renamed the business last year and put in place new vision, mission and values to align it with what we've done across the rest of MJ Gleeson. But really important, I think, to show the world that the business is very much a part of MJ Gleeson, both in substance and look and feel. And indeed, the business remains core to MJ Gleeson. So Gleeson Land, it's a top 4 land promoter up there with Gallagher, Hallum and Gladman. And indeed, as a promoter, this is truly independent of our Homes business. Its independence is increasingly attractive to landowners as the market consolidates. Some 2 out of 5 large consented sites are promoted through planning by land promoters. And as housebuilders land banks get shorter and the market stronger, it is fueling the demand for the sites bought to the market by Gleeson Land. Gleeson Land has a really high planning success rate, although planning can take a very significant amount of time to get a site through the system. And indeed, it's not getting any easier in the short term. Land owners like working with Gleeson Land. They get the fullest assurance of getting full value by selling a site with planning consent in place and without bearing the risk and cost of taking it through planning themselves. And it's better than the alternative, which is selling to a developer without planning at much reduced value. Gleeson Land's independence, which I referenced earlier on the nature of the promotion agreements, mean that landowners know that Gleeson Land will always seek to operate in their interests with interest fully aligned and indeed, obtain best price for them. For the housebuilders that we sell to, they're able to acquire land, once it has planning, delivering much newer consented sites to support their increasingly short land banks without the uncertainty of how long it will take to get a site that they may have acquired without planning through the system. And indeed, all of the capital that ties up in unconsented sites. Gleeson Land is growing, although at a steady rate to Homes, and we're investing for growth, it's highly profitable, has full cash conversion, is capital light, and therefore, high return on capital. And indeed, the strong cash generation allows Gleeson as a group to be both a growth business driven by Homes and indeed, a dividend payer. Despite the planning system coming to a temporary halt following the COVID lockdown, things have picked back up and Gleeson Land pipeline is ripening. Planning remains congested. We've got 16 sites currently in for planning at the end of June compared to 15 last year and 7 the year before. Over 12 months to June 2022, we submitted 15 sites for planning, and again, that was compared to 10 the year before. 4 sites in the year received consent, again, compared to just 2 the year before following the lockdown of the planning system. And indeed, those numbers that we've got going through the planning system will start to bear fruit over the coming year and indeed, into the following years. We start the year with 3 sites consented, 2 sites in the sales process, the first of which completed during July, which will give quite a good underpinning to the first half for Gleeson Land. So in short, we've got plenty of sites coming through, being submitted and progressing through planning. There is a bit of a bottleneck, but we think that will become less of a constraint as we move forward. And indeed, with some modest investment, Gleeson Land does have growth potential, albeit quite modest growth relative to Gleeson Homes. And finally, in terms of the pipeline overview. 71 sites under optional promotion agreement, same as a year ago, slightly down in absolute numbers of plots at 20,000 plots. And in terms of consented sites, 3 compared to 6 last year. But the number that we have in planning, as you can see on the slide, is the 16 compared to 15, and the number of plots that covers us about 3,500, which I think increased from 3,000 last year. Turning to Gleeson Homes. I think our mission remains as important as ever. And despite some of the obvious challenges ahead, we do remain confident in our business model. It's a straightforward model, but not one -- there's any other listed housebuilder focuses on, i.e. building truly affordable quality homes where they're needed for the people that need them the most. The following slides, I'm going to take you through some of the reasons why we think that business model -- our business model has real resilience. And before I do, we -- one of the things we have been investing in is refreshed elevations for all of our homes. And you'll see a couple of them in the following slides, but that is on our artificial stone product on our Canal Walk site in Burnley. And talk about refreshed elevations, further one there, which is a rural elevation, at Saxon Grange in Boston and Lincolnshire. And there's a bit more in the appendices of the presentation, and I'm sure Mark will talk to you about those afterwards, if you so wish. So in terms of what we do, as I said, we build genuinely high-quality, low-cost homes, and we're able to do that by buying sites in areas of deprivation, often brownfield, sites where other housebuilders don't want to build or won't build and where there is pent-up demand for good quality new homes. 4 out of 5 Gleeson sites are in areas of regeneration. 3 out of 5 sites are brownfield. All of our sites are located with good transport links, close to areas of employment. And really importantly, when we look at buying a site, we won't buy a site if we can't sell a home to that couple on the National Living Wage. That's the key point for us from the affordability. All of the Gleeson Homes are traditional homes that our customers want and aspire to, 2, 3, 4 bedroom homes, traditional brick and block construction, front and rear gardens and off-street parking right outside their front door. In terms of our customers, we always talk about our customers. They are at -- absolutely at the heart of our business. They are typically young, first-time buyers, driven by need to either leave the family home or wanting to get out of the rent trap, get out of renting expensive, often poor quality rented accommodation. Here is one of our customers, and there are a few more case studies in the back. A lady called Amber, 29, NHS clerk and the first-time buyer who bought a 2-bed Gleeson Home on our Linkswood Park site in Rotherham in April this year for just GBP 117,000. Prior to buying a home, she was living in a rented 1-bedroom flat, no outdoor space or parking with -- living with her ex partner, paying GBP 550 per month. So moving from that 1-bedroom flat to that 2-bedroom home, she is saving GBP 170 per month in rent, and that is an absolutely typical Gleeson bar. So just a reminder, who are they? Young first-time buyers, medium income of a joint household, GBP 44,000, single income around GBP 29,000. The low cost of our homes is the key to the affordability and low cost of ownership and indeed, allow that customer on the National Living Wage to quite readily save up for deposit, which can be a barrier for buyers buying a more expensive home. And 3 out of 4 of our first buyers -- our first-time buyers, 3 out of 5 are key workers and 75% are age under 35. Importantly, it's also about what we don't do, and again, you have seen this slide before. We don't sell flats. We don't sell to investors. We only sell to homeowners. We don't do part exchange. We don't build in city centers. We don't build apartments, and we don't sell lease hold. So in terms of our market, and again, I've talked about the significant market and how undersupplied of this. It is large and underserved. Those are typical decent customers. I've talked about it earlier, typically living at home, living in rented accommodation before they buy. In terms of our market, there's 1 million customers, 21- to 35-year-olds, living at home in the regions that we operate. There are 4 million people living in rented accommodation in the markets in which we sell and only 19% of newbuild homes target areas of regeneration, areas where we buy sites, and over 82% of our sites are built in areas of regeneration. And the figures are even more stark when you look at the price point. Any 1 in 25 homes sold under GBP 175,000 are newbuild homes compared to the rest of the newbuild market -- the rest of the housing market, where over 1 in 6 homes above GBP 175,000 are newbuild. Market is large, is underserved, and we are the only listed housebuilder who focuses solely on this part of the market. So our customers, why do they buy at Gleeson Home? You've heard me say it before. One of the things that always comes through loud and clear is that the affordability. Our homes truly are low-cost, truly affordable and high quality. Again, driven by need rather than a discretionary purchase in terms of the home mover market, and being a value-led proposition means we will always have customers for our homes. In a market where people are feeling more squeezed, we're a real -- really attractive proposition to those that need a home, including those who -- perhaps who would be looking at more expensive homes with other developers. But on affordability, brands are now looking in the areas where we operate, at our sites and our homes. Average newbuild home in the U.K., GBP 326,000. In terms of the regions where we operate, you'd expect it to be lower, but the average newbuild house in the markets where we sell, GBP 266,000. Our average house price nearly GBP 100,000 less than that. So substantially more affordable in the U.K. or the regional average, again, driven by the locations that we choose to buy sites and build in. In terms of that affordability, again, we've talked about that couple on the National Living Wage. Really important that despite the increases in house price inflation, Gleeson remains a truly affordable housebuilder. This chart on the right shows the top line, what a customer on the National Living Wage can afford. And that couple that I referred to earlier, can afford to buy a home up to GBP 175,000. The line below is the average house price for a 2-bedroom Gleeson home, and the average price of a 2-bedroom Gleeson home today is GBP 135,000. So it's like a GBP 40,000 affordability gap for a 2-bedroom home. But again, put that into context of our average sale price, GBP 167,000, we remain well in reach of that couple on the National Living Wage. Of course, customers to buy home, most cases, rely on a mortgage and just a few key statistics around the market. The mortgage market does remain healthy. Over 13,000 mortgage products available today. We've seen an increase in the numbers of higher loan-to-value mortgages as Help to Buy -- as we head towards the end of Help to Buy. And we've also seen the market respond with other products, which will help us as Help to Buy comes to end, including the government First Home scheme, Home Reach, which we've offered for some time, which is a part buy, part rent. We think of it as a 50% Help to Buy product. And indeed, deposit unlock, which is being used by some of the other housebuilders. Encouragingly, our average customer where they are buying already without Help to Buy and about over 50% of our current reservations are in this category. They typically have a 15% deposit and that gives them access to the 85% loan-to-value market. Clicker stopped moving because I was pressing the wrong button, that's why. Touched on energy efficiency earlier, and this is -- I think it's always been an issue for our customers. We've always talked about how energy efficient our homes are. Over 97% of our homes are energy or EPC rated B. But in the context of what that means today, Gleeson home is typically half the cost of heating and running than a typical home -- secondhand home of a similar size. And what does that mean for a customer where we've got energy builds going up to that GBP 2,500 cap that's been advanced by government for a typical lease customer. That average cost of heating their home and running their home is about GBP 1,800, and that's about GBP 1,300 on a sort of like-for-like basis lower than some of the housing stocks that they would have been coming out of. That links into the overall lower cost of ownership for the Gleeson Homes offers. And we've just broken that down into the running cost in terms of energy and the running cost in terms of rent versus mortgage. Key point on this slide is that there is still about 20% -- even with the increase in interest rates, increase in energy costs, there's still a 20% difference between buying and renting. And when we've been looking at what potential rises in interest rates, we think interest rates would need to go up another 1.75% before the cost of buying is the same as the cost of renting, assuming rental costs didn't go up in the meantime. But again, it gives us -- shows you why there was quite a degree of resilience and ability of our customers to weather some of that cost of living pressure that we're all seeing. And another way of looking at affordability in terms of a typical Gleeson customer, again, it goes back to the genuine affordability of our homes. Typical Gleeson customer is paying about 25% of their take-home pay in buying a home. That compares to 32% nationally. And it would take a 2% increase in interest rates for a Gleeson buyer to be spending that proportion of their income -- their take-home pay on buying a home. Again, a degree of just another way of looking at affordability. In terms of the industry backdrop, clearly, we're operating in a challenging environment. With regards to supply chain availability and inflation, we've certainly been able to manage the availability of subcontractors and materials, largely as part of our strong relationships with our supply chain. We haven't had a single site in the last 2.5 years where we've had to stop construction due to lack of subcontractors or materials. Inflation clearly remains a pressure. We're seeing some signs that may be beginning to ease in some materials, but we've been more than able to absorb those cost increases with the price increases that we've seen coming through our house price -- through the house price. About 14.7% or under 15% in terms of uplift, 11.8% underlying. Planning remains very congested. Talked about that as part of Gleeson Land. I do hope the new government revisits that. Again, been -- they've been talking about what they might do. I think that translates into action in terms of investing in the planning system, removing obstacles where they exist, finding blockages to things like neutrality and indeed, refining policies that can disproportion and inadversely impact development of brownfield such as biodiversity net gain. But despite all of those challenges, we do have a strong pipeline of sites coming through notwithstanding the challenging planning environment. Regards to building safety, I think we've talked about that. We've provided about GBP 12.9 million. We think that's a very full provision based on the very detailed work that we've done with consultants. In terms of demand, what we're seeing in terms of demand, again, why we remain confident about further profitable growth. Clearly, last year, we saw very strong demand and strong price increases. We don't expect to see that same level of price increase as we go forward. But we do see -- we are currently seeing strong levels of demand. The demand and sales that we're seeing in the last 8 weeks reflects what we saw over 12 months ago. Our reservation period remains really short. 34 days compared to 49 days a year ago. And as we came into this year, we came in with a relatively short forward order book. That was a deliberate policy as we were choosing to hold back sales last year as prices were increasing very rapidly and recognizing that very short time from release to reservation and then sale. We're now looking to build back up that forward order book, and you should expect to see that forward order book head towards that 40% mark or higher as we go through the year. In terms of our overall footprint, we opened 23 sites last year. A little bit lower than planned due to the planning congestion, but I think we will improve on that this year. During the year, we had, on average, 83 build sites, that was up from 78 the year before and 61 build sites. In terms of that pipeline, it is growing, remains strong, up slightly to 16,814 plots across 160 sites. We're currently operating on 7 build sites, and we have over 8.4 years at current sales rate in terms of our land bank. Average cost of block has gone up slightly as we've always said it would do, GBP 12,500 compared to GBP 10,700 last year. But importantly, we do continue to bid for and acquire sites at sensible prices. And I think 2, 3 final slides. Investment program, again, has been really key. It's been a consistent message over the last 3 years. We've just opened at the start of this year our 9th regional office, our 9th region covering West Yorkshire, which we talked about that went ahead as planned. And we're also looking at opening a tenth region as we go into the next financial year to cover the growth we're seeing in South or in Lincolnshire. We've also invested in refreshed house-type elevations. We've seen a little bit of that. We continue to invest in customer. We've got that 90% customer recommend score. I'd like to see that go up over time. That compares to a score that was closer to 75% 3 years ago. We're top decile in terms of that employee engagement, Stefan mentioned that. 3 years ago, we were in the third quartile. We've dramatically improved health and safety. That will continue to remain a focus. And in terms of -- and we're continuing to invest across the platform more generally to support that growth. So the growth -- sorry, the platform is in place. Hope you've seen we've got the pipeline of sites. We've got the regional footprint. We've got the people. We got the organizational structures, and indeed, we've got the systems to support continued growth of the business. Each of those 9 offices -- in time, hopefully, 10, over the medium term has the ability to deliver sort of 450 to 550 homes per annum. Our sales rate is increasing. That's something we've spoken about. Last year, it was just over 31, close to 32 homes per site per year. The year before that, it was 28.3. And we are continuing to increase the number of sites we're operating from, and at the end of this year, I would hope we'll be building on 90 sites. So in summary, we've delivered a record performance in FY '22. We're really proud of hitting that 2,000 homes target, despite the challenges in the last 2.5 years and the stoppages we had through COVID. We had a good start, strong start, in fact, to the current financial year. We see demand continuing in homes and for consented land. The affordability of our homes continues to attract customers, and we see that to be a real strength of our model and why I think we are more resilient than other housebuilders from that perspective. Land market remains good for the Gleeson Land, selling to those medium and large housebuilders with short land banks. And in short, we are well positioned to deliver further long-term growth, control growth and sustainable growth. Thank you, and we'll turn over to Q&A. Charlie, let's wait for microphone for those online, if you don't mind.

It's Charlie Campbell at Liberum. Just 2 questions, I suppose. So Help to Buy coming to an end. You've said that there are other things that will replace that. Others in the industry have talked about Help to Buy basically sort of enabling people to buy bigger houses than they otherwise would have done. So just wonder if that's something you think will happen, and therefore, whether you need to change the mix of product going forward, whether you've already done that just to think through that. And then secondly, you've talked about -- clearly, people have affordability issues, cost of living and so on. So you might start to see people trading down, you said. Are you seeing any evidence of that happening already? And has that become part of your sort of marketing? Do you sort of cast the net a bit wider going forward?

So 2 things. I think the first is, if you remember that chart where we showed the sort of average 2 bed and the couple on the National Living Wage, now those -- that affordability was a 5-year and sort of 90% mortgage without Help to Buy. That's already showing the real affordability of our homes even for a couple on National Living Wage without Help to Buy. And certainly, when we did some work a year ago, actually 85% of our customer really needed Help to Buy to help them buy a home. But as i said, that couple without Help to Buy, buy that home up to GBP 175,000. Our average, GBP 167,000. It's why I think we can be reasonably confident that, that will not stop the demand for our homes. Now that genuine affordability is a real, real strength of Gleeson compared to the rest of the sector. I think second part of that is, are we seeing -- I avoid -- it's the wrong term to say trading down, Charlie. But no, customers who want to look at more expensive areas, they will look at areas where we built. Yes, we've seen some evidence of that. Proportion of first-time buyers have come down just fractionally. We are launching a program that will focus back on the first-time buyers, specifically as we want to sort of retain that market rather than sell to those that might be selling their home. There is some evidence of it. We've also seen interestingly a slightly high proportion of people in retirement actually trading down. And I think that's a trend we might see. Historically, people reaching retirement in oversized houses for emotional reasons as much as anything else don't like selling homes, but actually with the cost of living squeeze, where energy costs are going, again, I think we'll see that shift. It's why I think people buy our home buy them because they need to, and they buy them because they are truly affordable. And I said that, that is the core strength of the Gleeson model. Lots of hands. I think I saw Aynsley first, so go on. Need a microphone.

Aynsley Lammin from Investec. Just 3, I think. First of all, on built cost inflation. I think it was 8% FY '23. What's your expectations for FY '23 underlying that kind of profit growth guidance? And secondly, on the [ Cladon ], what's the kind of phasing of the cash outflows? When do you expect that work to be completed? And then just interested -- obviously, lots of share buybacks in the sector. Your stock now sits in quiet a bit below book value. What's your thoughts around that? I assume that's a good return at the moment for some capital allocation?

So I'm going to pick up the building safety. I'm going to ask Stefan to deal with inflation and share buybacks. Look, I think on the building safety, I think we've made a fairly full provision around that. I would anticipate the sort of spend to be going out probably -- or the core part of any spend to be going out over sort of 12 to 36 months sort of time frame. But in reality, I'd imagine we'd be holding some level of provision out for 5 years. I think it's a fairly full provision. So I wouldn't hope that, that would all guide in cash spend ultimately. Stefan, do you want to pick up inflation and share buybacks?

Yes. I mean I'm low to forecast inflation. The devil speak not his name, but we're pretty confident that we can manage the build cost inflation that will be coming through. We managed it pretty well in the last 12 months, and we're quite confident that we can continue to. We have in our valuations in our site cost forecasts. We have quite significant contingency built in. So I'm loathed to say, we're comfortable with the possible inflation outlook over the next 12 months, but I'm afraid, I'm not going to give you an inflation forecast, if I can dodge that one. Share buybacks, I can be a little clearer. We continue to see the opportunity to accelerate growth in the business. And there are very few other housebuilders, certainly no listed housebuilders, operating in this part of the market, which is the most resilient part of the housebuilding market. And we would rather invest our cash in sites and build WIP so that we can accelerate growth in the business. So we -- our capital allocation policy will always remain under review, but at the moment, we have no plans for share buyback.

You want to pass your microphone over your left or right shoulder, I think -- yes.

Adrian Kearsey, Panmure Gordon. Apologies, if on Slide 8, you talk through what I'm about to ask. But there's a change in bed mix, more bed -- 3 beds than 2 this year. Where do you see the sort of future trends going in terms of bed mix? In terms of sites are waiting for planning and we talked about sort of delays, what sort of quantum of delays are you seeing? And when you look at that 16 sites waiting for planning, are there any particular councils that are still closed, and actually, you see sort of particular problems within that 16? And then finally, on the affordability, the gap between what's affordable for a couple on the living wage and your average selling price for a 2-bed. It was -- the gap was 23% in '17, and it was 23% in '22. Are you sort of -- is that a gap that you sort of like to maintain? Or is it just coincidence that the percentage stays the same?

So I think I'll start with the last. I don't think it is a coincidence necessarily that -- and I think if you look back over a period of time, when you look at our 2 bed or our average sale price, it actually have quite a close correlation between National Living Wage and house price inflation more generally actually for the market. You may recall -- actually, we've shown a slide previously where Gleeson has underperformed the market in that in terms of our house price inflation. And actually, if you look at that curve, it does show a slight narrowing of the gap. Ultimately, what should we be doing? We should be selling all of our homes for what they're worth in the market. It's the areas that we build in that drives that lower price. But that's why we have that red line. We will always buy sites where that couple on National Living Wage can buy a home, and that's why I think that gap will be maintained. In terms of planning, look, probably a couple of statistics. I mean if I take sort of Gleeson Homes, we've seen planning timelines move out from 8 or 9 months to 17 months. It's sort of almost doubled. There are no, whether it's Gleeson Land or Gleeson Homes, planners that are sort of closed for business. We have got some challenges up in the Tees Valley region, for instance, around neutrality where planners are sort of holding back on sort of granting permission to when that's resolved for us as a Homes business, that is manageable. It's frustrating, but it's absolutely manageable. In terms of Gleeson Land and those 16 sites, ultimately, I think we will get -- we have a high success rate, 90% plus. I think we will get the vast majority of those ultimately through. What we're seeing is a very high proportion of we're having to appeal. That's because the planning system is congested. They don't come through in the right sort of time frames, but again, we've had a very strong track record on winning those appeals. So congested, but nothing that's sort of giving me concern as to why a significant proportion will just stall for the very, very long term. And on mix, Stefan, I'm going to hand that over to you. So I actually teed you up first on that, but you knew it was coming.

I knew it's coming. So we've seen a slight change in the mix over the last year with slightly -- fewer 4-beds and slightly more 2-beds. So it's slightly fewer 2 beds as well and a reasonably significantly more 3-bed. So about 5 years ago, we made a decision to change the standard mix on new site planning applications that we submitted, and that would see slightly increased proportion of 4 beds and a slightly reduced proportion of 2 beds, but still with a core 3 beds of about 65%. What we're seeing coming through and what we'll see come through over the next 3 to 4 years is that, that mix will settle down to about a 20% 2 bed mix; 65%, 3 bed; and a 15%, 4 bed. Now it's not going to be a smooth transition, it all depends on specific sites, but expect to see that come through. So in other words, slightly enriching of the number of -- the average number of beds, but it's quite a small change.

Who wants to -- yes. Adrian, pass the microphone forward, 1 row. Sorry, it was taken off you.

Clyde Lewis at Peel Hunt. I think I've got 3, if I may. You mentioned Gladman, obviously, in relation to your strategic land business. Has the change in ownership changed the dynamic in the strategic land market or maybe better or worse for your business? One I suspect for Stefan around working capital, just in terms of what you've got to do on that front? Do you think you're now at a normal level in terms of the working capital situations? First half, second half split. I suspect, looking at land, we may be a bit back-end weighted, but maybe I'm wrong. And I suspect homes feels like it's a bit first half weighted. I mean 2,000, call me suspicious. 2000 seems like a very round number. Whether there were a few delays held back for the year-end, so just to ask you on that. And then the last one was around, I suppose, bigger sites. All the other housebuilders are just constantly talking about bigger sites being easier to meet hurdle rates. It's not necessarily suits your style or your business model, but what do you think about bigger sites versus the ones that you're currently buying?

Perfect. So look, start our project is an order actually or more as an order. Gladman, look, I think it goes back to what -- I think the real strength of Gleeson Land is, it's truly independent of Gleeson Homes. There's no confusion in agents or landowners minds as to whether or not our interests aligned with landowners through those promotion agreements through the fact that we don't sell any of those sites into Gleeson Homes. I think that is really clear. We operate in the best interest of the landowner. We absolutely have a strong track record of both planning, but achieving best value. I have to say, keeping that business independent, I think, has to be increasing strength as the market consolidates. So I think I'll answer it that way rather than saying, how about you've seen this sort of shift change yet. Second part, I think that 50-50 split. No, I think you will still see sort of a stronger second half versus the first half. I would say, we sort of landed the 2,000 very elegantly sort of absolutely on the points where we wanted to be. We certainly were not holding, let's say, lots of homes back. We want to get happy customers into homes rather than defer or manage a number to suit. Third part, bigger sites. Yes, bigger sites are much easier. But it goes back to doing what we do. It's not easy. And we -- our average site size is about 110, 120. We will buy sites from sort of 50 up to -- maybe 300 plus. There are sites we're looking at that are bigger than that where we may choose to sell a proportion off to another builder. And I think as we grow, you will see that site size just nudge up, but actually the reality, what's our strength. Our strength is seeking out those smaller, more difficult brownfield sites in areas where simply other housebuilders don't fear to trade, don't want to trade. And that's part of the, if you like, the strength of our model. It is easier. That's why the rest of the market does it, and that's why we are more unique in the market and the only has focus list that focuses solely on this end on the market. Working capital, Stefan, I will hand over to you definitely.

So I think working capital per site -- build WIP per site, I expect that to continue to increase certainly by inflation, but with an inflation plus. So we want to invest on our sites. We're confident about investing because we know the customers are there. So I'd expect it to increase from the GBP 1.81 million per site we had at the end of this year to -- well, inflation plus investment. So I said, a year ago, expected to start stepping up significantly from the GBP 1.5-odd million that we had at June '21. I think we're kind of part of the way there -- a good part of the way there, so expect it to be inflation plus.

James, do you want to...

Yes. James Tetley from Singer. Two questions for me. One, on the outlook for pricing. You've talked before about not coming up against down valuations, and you thought that might change as you push pricing further on, and you're starting to come up against some down valuations from mortgage lenders at all. And then secondly, on planning. I don't know if this is wishful thinking, but I thought you seemed a bit more optimistic when you're talking about land, about congestion easing compared to last set of results and wondered if there's anything behind them.

So start with the last, actually. I think am I more optimistic about things changing in the short term around planning? No, I'm not sure I am. I think the only thing that gives me a little bit more confidence is, look, as planning slowed or if that stopped and then slowed, the fact is, we had less in the planning system. So coupled with that slowdown, it was really hard work, getting anything through. What we've now got, whether it's -- let's talk about Homes or Land, there's a much larger number of sites stacked up in the planning system. So therefore, although slow, we still got stuff coming through, but at a pace that I would say we are comfortable with. I think if things ease, that will be a bonus, but I don't actually see things easing in the near term. I'd love to be wrong on that, but I think being realistic, I think that's probably where we are. The down valuations point. We've talked about in the context of, look, I would like to see more down valuations because I'll tell us why I'm beginning to hit the market levels for our prices. I would say, actually, we're still not really seeing any substantive number of down valuations. We get the 1 or 2 sites. We've seen that perhaps out in the Northwest, where we've driven the prices. The most significantly where we will have seen literally, probably a handful, probably can't on one hand. So I think that's one level. Well, I think that it's a positive and that gives me some comfort that there is still yet more to push that. And indeed, as house prices soften, and it's been like -- I think if you look at our rate of house price inflation relative to what other housebuilders report, we are substantially well ahead. And I think as things slow, we will still maintain that additional level of growth over and above the rest of the sector. Stefan, on the other question out for pricing. I have a view, but I think it's safer if you answer.

Quite possibly. So we have talked previously about closing the gap. This is the historical price gap that we had on Gleeson Homes. We're still closing that gap. So we have perhaps a bit more confidence in our ability to continue to increase prices. I'm going to fall short of forecasting selling price increases, but just reiterate that as the National Living Wage increases, the ability of our customers to buy increases. The very, very significant difference in selling price between our selling prices and the average selling price of all of the newbuild homes in the North and Midlands, which are 59% higher than our selling prices, gives me confidence. So I hope that's enough to give you confidence, but I'm afraid I'm not going to give you a forecast.

And indeed, the current reservations compared to what we've been forecasting has been very strong. But again, it goes on a strong start, but I'm not going to guide too much further than that, I think, at this point.

It's Joe George from Berenberg. Just 2 for me, please. And firstly, on the homes margin improvement. Could you just talk us through the main drivers of this improvement, specifically on the OpEx end, please? And then secondly, on the attitude to land purchases through FY '23, and could you just talk us through your attitude here? And if any changes, then what are the assumptions driving this, please?

So I'll let you do, Stefan, in a minute the margin point. I think, listen, on land, at the moment, no plan to do anything differently. We will clearly track what the market does. We are quite a lot less sensitive at one level to land values and perhaps, a large PLCs who have a significant amount of working capital tied up on the balance sheet. Our average cost of plot GBP 12,500 at large PLC, GBP 50,000 to GPB 100,000, yes, its substantially bigger.

And on margin, I mean, the increase in selling price contributed significantly. That allowed us to cover our build cost increases. Most significant part of it, of course, was inflation, which we saw in the 12 months at around about 8%, slightly more on materials, slightly less on labor. That allowed us to cover those -- that 11.8% selling price increase allowed us to cover those build cost increases and tick up gross margin by 50 basis points. But conversely, on overheads, that selling price increase, which was above inflationary increase, allowed our increased overhead costs to be more easily absorbed. So those 2 gross margin increase of 50 basis points and about a 70 basis point reduction in overheads contributed the 120 basis point increase in operating margins.

[ Harry Godis ] also from Berenberg. Can you talk a little bit about your medium-term growth strategy you were talking about? I think it was opening 1 new business unit and maybe thinking of 1 beyond that. But you also talked about the capacity to 500 units per business unit, and I guess roughly, you're probably at 200 to 250. I guess, first of all, what's actually the maturity of the individual business? Is it because some of them are actually close to that 500 number that you're looking to open new divisions?

So -- yes, so in terms of where we've created another office, there tend to be office splits where -- so that was South and West Yorkshire. It was operating at over 500 homes a year. So therefore, we split it into 2 offices to cover the region. Again, when we open in -- assuming we open in sort of Lincolnshire, that would be around our East Midlands office, so reaching capacity. It's partly capacity. It's partly also sort of geographic stretch. It's covering a very large patch, and it makes sense to have an office to cover that region. Look, you look at most house, though some have larger operating regions. We just think 450, 550 is what a mature office would look like over a period of time. But beyond that, I'm not going to put a timeframe on that or anything else like that. That will be for my CEO designate to set out in the due course.

And just the supplementary, do you feel there's sufficient land opportunities or the type of land you want to be acquiring in the regions you're currently in to run -- I appreciate as many as out, but you're running at 500 units a year over the medium term in each of those businesses.

Absolutely is what I'm going to say. Very much so, yes.

Yes. I mean we -- just to add to that. We have a number of regions where we are actually quite significantly missing opportunities. We've analyzed the market for consented land in the areas of deprivation, areas of regeneration and brownfield site. And there's really, really significant opportunity in a number of our regions. So the growth that we can achieve is, actually, we don't need to grow contiguously into new areas. We can achieve it in our existing regions. There's a lot more growth there to be had.

We have a lot of questions today, which is always good. Have we got any online that we need to cover? That's helpful. Any final questions in the room? In which case, thank you all for coming today. I'm sorry, it took a little bit longer than we were anticipating, but I hope that was helpful and look forward to perhaps chatting somebody afterwards. Thank you.