Redrow plc (RDW) Earnings Call Transcript & Summary

Oh, Anastasia, was the question where do we think we'll be before March on completions? I mean we are...

Yes. So basically, what percentage of completions will not be legible from March to...

They are about the cap. Yes. So the answer is around about half of our Help to Buy legal completions are above the cap, and they're all in the North. We have virtually no legal completion South of the Midlands -- from the Midland South that they are [Technical Difficulty] so it's all in the North. And back to Matthew's point, actually, when you look at -- there is part of the reason we're not worried about that is back to our first-time buyer percentage has gone up in the last couple of years. It's particularly gone up recently. We're now -- it's around 60% first-time buyer compared to being down towards 50% of that Help to Buy was first-time buyer, if you go back 2 or 3 years ago. So clearly, in the South, we're getting more and more first-time buyers buy the plot. And if you go to the North where we are selling with an average selling price above the cap, to be honest with you, the Wales analogy is absolutely spot on. If you look at the locations where we are not the Sandbach, [ Macksville ], Woodford, we are not worried that we're going to be unable to sell in those locations one iota.

We now have a question from Gavin Jago of Barclays.

Just a couple from me, if I could please, just around London planning, as a reference in this morning's presentation about planning delays. Just wondering if you could elaborate on that a bit more, whether it's resource related or anything to do with just concerns about the white paper coming through? And then the second one is just on, I guess, the ad for this year on land plots within the owned land bank. Just back to you, Matthew. Do you think you'd be net addition to that -- the number of land over this year given where we're sitting today?

Yes. Okay. Well, I could pick those up. I mean, the planning delays is partly due to COVID. We are seeing a bit of an issue with regards to that. Planning Committee is getting their heads around what we're going to do in terms of making sure that we will have the site. But I mean, planning has always been an issue. We welcome the white paper and anything that will speed planning up will be a benefit to us. I mean, we -- I mean, we've got a site at the moment which was an allocated site. They've gone to commission an outline. It's not the one that we own but it's one we're contracting. We're contracting to it at the moment. And the committee have picked it out on the basis it's overdevelopment. Now there was only a few -- it was only less than a year ago, and they allocated it. So we still have examples of where Planning Committee just don't make any sense in terms of what they do. So you end up with planning delays, which are incredibly disappointing for what we do. And they just don't make any sense. So it's incredibly frustrating for us as a business to join -- plan for a business when we are faced with the planning system. So where we do welcome the white paper, anything that will speed up the system will be something that we've got to applause. So really, we've got to see what happens with that but it is early days, and obviously, they're out for consultation at the moment. In terms of the plots owned or land, we are targeting to purchase more. Obviously, that we will complete. And yes, we would expect the land bank to increase by probably 1,000 or 1,200 plots above what we complete. So yes, we are in a net gain from our land bank.

We now have Andy Murphy of Panmure Gordon.

I've got 3. First of all, given the changes you were talking about in terms of more working from home and that kind of social change. I was wondering whether your Heritage Collection is kind of future-proof for that or whether you're having to consider sort of redesigning the offering to take care of that? And if so, what's the impact on the cost for yourselves? Secondly, interesting this here, you talk about The Wildlife Trusts and the targeting on Nature, Rewilding and Flourishing Legacies. I was just wondering whether you could give us a little bit of color around what sort of output targets you're thinking about on those 3 buckets and what the impacts on costs are there? And then, finally, Barbara, could you just repeat what you said about the gross margin? I didn't write it down quickly enough.

Should I start with the last one? Got to be 2 for acquisition really. So I think we've given guidance that our gross margin for 2021 will be somewhere between 20% to 21%. But we do expect it to increase from there on in. And at the moment, I mean, our best guess, and we'll obviously, refine it as we go forward, is 100 basis point increase per annum thereafter. So that's where we are at the moment.

Let me talk about the social change. I think the one thing I've always said before I came to CEO is that we're very much focused on the sales rate. What we don't really work out on the average price times by the sales rate. So if you think of our average turnover for a sale, we're probably one of the best-selling housebuilders out there, if not the bestselling housebuilder. And that's partly because of our products, but -- fully because of our products. We have a fantastic product that people want to buy. Now if you took the social changes as to what's happening at the moment, it is clear huge changes in terms of how people are working. I'm sure everybody's starting setting new offices now or even set at homes, change the way you work. And even if the pandemic finish tomorrow, I think it was adjusted to the way the world works. And in the sense that you may work less from home -- sorry, more from home, less commuting. So less commuting tends to give you more money in terms of disposable income. And working from home, you probably need some more space. So you can see how the Heritage Collection fits perfectly into what people are aspiring to. And the fact that they're going to spend a hell of a lot more time at home, you can see how that's -- is a big win for them, but the fact that they can spend more time at home with family. Now we are looking -- the great thing about us is that we don't design our houses within an inch of the life to make sure that you can squeeze a double bed into each of the rooms. We give space. So what that affords us is the fact that we can redesign internally as an extra or as a standard, without really adjusting too much in terms of the bedroom sizes to include for home offices and the like. And we have -- I've been on-site recently, and I've been speaking to many of our sales team. And that is really coming forward that people are wanting home offices. Personally, I work from home one day a week and it's fine sitting on the kitchen table. But what you do 5 days a week? You need to get yourself away. So ultimately, you can see what's happening with the market. And really, you're seeing sort of an economic shift as to where people are. So not only that, you're seeing also people -- if they were doing 5 travels a week, they are doing 1 travel a week. They are prepared to live further away from where they were still bases. So you can see how that will expand across the country. So personally, I think the Heritage Collection fits absolutely spot on to what we -- what the country requires at the moment and what people really want. So I have absolutely no problem that we're thinking we've really hit something that will make a big difference to what purchases require.

Andy, I'll pick up the one on The Wildlife Trusts initiative, really. It's probably worth saying that we've been working with The Wildlife Trusts now for a couple of years or so. Of course, what you need to put this into context with is that the environmental bill requires a net biodiversity gain on development, and that's coming through the planning system. So to be quite frank, we're trying to be proactive with it rather than reactive. We don't want to be dragged to have to do things. We're looking at the best solutions to make sure that we've got net gain. We also think that picking up perhaps on some of Matthew's points, social change, people are looking to be closer to nature. They're looking to be -- to have more -- access to more space. So I think it's part of our strategy to meet what is emerging regulation, really, but to try and use it as alongside the branding that we've got for the Heritage product. In term you mentioned costs, I think achieving net biodiversity gain does vary quite a lot from site to site. I run it clear. It's more difficult to achieve on a brownfield site than it is on an agricultural site that has been farmed for years and years and years. So it's quite difficult to be specific about the costs. But ultimately, of course, it gets taken into account at the land appraisal stage. So hopefully, that gives you the answer you're looking for.

We now have Glynis Johnson of Jefferies.

No, I'm going to be easy on you today, easy on you today. One very easy one and one -- the easy one is dividend policy. You talked about returning to dividend 2021. Can you remind us or let us know what the policy is going to be? And then secondly in terms of technology, you talked previously about the moves you've made in technology. And we can see that, that can bring particularly strength in terms of quality and being able to track the progress to build. But can you just talk to us about where you think the new advantages come from your technology? Is it about building better? Is it about building faster? Is it about selling more consistently through times of disruption? Or are there other elements that actually make it a big ASP for you?

Well, in terms of dividend policy, I can confirm, I mean, at the Board meeting yesterday that our dividend policy remains unchanged at 3x cover. What I would say is we are keen to reintroduce dividends as fast as possible. And therefore, we may well be in a position to pay an interim dividend given market conditions and given we'll be cash positive in December. I think it's true to say that the dividend, if do pay well, the policy may not be fully compliant in 2021. I think the Board will look at where the market conditions are come February or what the level of demand has been for the period post the end of the stamp duty holiday and what we do in terms of land buying and the land market. So whether it tends to being marginally a higher level of cover in the '21, it's really a bold decision to be made in February. But in terms of the overall long-term policy, the 3x cover hasn't changed, Glynis.

Okay. Going on to technology, Glynis, I think we are probably the most advanced housebuilder out there with regards to technology and let's face it, now it's making us better and faster in way we get measured, gets done, which is clearly what we are all about. Now in terms of the things that we use, if you look at our guys on [indiscernible] guys before about iPads and the farther our guys go down the street, we can see the issue. They put it on the iPad, and it gives us some data as to the constant issues that we're receiving, which subcontractors aren't performing. So there's huge advantages to that for both our subcontractors and ourselves. Not only that is socially distance. They do it all via e-mail, and they can see that the works that are happening. So there's actually massive advantages to us as a business to make sure that, that does happen. So it gives us huge advantages. Now in terms of our trades can now see what work they have to do before they go on site, our site managers can understand and control it better. So that's given us a great advantage. Now in terms of things like snagging, as I said, we do measure everything that we do. And as I said, we can give you facts to show that we are 99% now snag-free. Now the great thing for our customers is that when they come to do home demonstration, they are given one RI pass and they can go around the house. They photograph what works need revaluing. And that then goes to the subcontractor. The subcontractor then photograph the repair and send it back to us. So you can see how customers are really, really appreciating it. Not only that, when our customer service managers go out and see works that need doing, when the guy turns up a week later to do the repair, he's got photograph of exactly where he's going with. The customers gets a bit of confidence that they are, again, having to explain what we're doing. So it's given us huge advantages. With regards to -- on our customer side, works in terms of our appointment system, our online walk-throughs, were all huge advantages towards the downtime where people could really have a look at what we're doing as a builder. They could walk around the homes. So it's giving us, as I said -- it's giving us better information. I think really everything that is now measured, we can really close those gaps to make sure that we're better than everything that we possibly do.

Does it make this faster?

Yes, faster and better.

We now have Marcus Cole from Liberum.

I've got 3 questions, if I may. First of all, if you talk about the strategy towards the regions, when should we expect the next outlet or division to be opened? And when would this be? The second question is, do you envisage outlet openings being easier with the new planning reforms coming through? And then, finally, could you give the percentage of the order book that's contracted?

Matthew, do you want to deal with the recent strategy and when we -- the opportunities for geographical expansion and when that might be?

Yes. I mean, clearly, with London -- with our exit from London, clearly, the region has to pick up on that -- the moving down from London. So our regions are expected to make with all this increase in what they're doing in terms of volume. Now in reality, we expect that -- we can achieve that without any problem whatsoever. So we aren't too much of an issue with regards to that. So the overall -- to get a single-digit increase in the business, we need obviously a toe within the region. But having said that, as I said to you before, our new Heritage Collection is something that's really standing out at the moment. So we don't see any problem with that. In terms of strategy, in terms of regions, we're probably not looking for another reason till 2023. Probably we don't really need within 2023, but we'll probably open it for '23 for some production in '24 but we will be focusing on the Southern area rather than anywhere else. We certainly think there's opportunities around still outside of the M25, and that commuter belt into London as clearly people are exiting from the center. So really, that's what we see as an opportunity. Outlet openings I think it's probably a bit early to say as to whether the planning reforms will give us any opportunity for outlet openings. I mean it's still in consultation, but what they're talking about is very positive. And as I said, anything that can help us speed things up will be greatly appreciated.

I'll just add to that, Marcus. I will be very surprised if the white paper goes through in its current form. I suspect there's going to be a lot of resistance. I mean the principal zoning and removing the burden of getting reserve matters and clearing lots of conditions will be very welcome. And it's something we've been -- we've harped on about for a long, long time. But being the cynic that I am, I suspect it's going to be watered down quite a bit. But anyway. I'll leave Barbara to pick up on the order book.

Yes. In terms of the order book, just over 65% of the order book -- the current order book is exchanged, contracted, as you would say.

We now have a question from Clyde Lewis of Peel Hunt.

Three, if I may. One was on, I suppose, weather. With the industry and you guys are sort of obviously going to be building probably a bit more in the balance of this year and probably over the sort of Christmas and New Year period as well for various different reasons. But how much does that concern you as a business? I mean, if we get a cold snap or a really wet snap, does that cause problems for you guys? That was the first one. The second one was on, I suppose, sort of post lockdown. How have you seen the sale of sort of extras and sort of -- I suppose, sort of top-ups, so sort of extra sort of products that you've been selling before and you've been pushing through quite well and was hoping to being quite profitable? And the third one, I suppose, was on government. And obviously, the white paper we've sort of touched on already. But how is the government sort of interacting with you and the industry about sort of volumes and sort of output levels? What are they sort of talking to you about at the moment?

Right. Well, I think Matthew is probably the weather forecaster amongst us. So he can probably tell you what the implications might be and where we are on that. And then I think Barbara can probably pick up the sale of extras. And if you like, I'll pick up where we are with government. Matthew?

Yes. In terms of weather, Clyde, I mean, it's looking quite nice here at Castle Donington at the moment, sun shining. But ultimately, it's -- I think we -- I would say we've got a hell of a long week out in play at the moment. So in terms of certainly this year, I can't see any issue whatsoever. I mean, to be honest with you, we are working incredibly hard to get as much as we can prior to the March and stamp duty threshold date -- stamp duty date. So we are well on. We're inside a hell of a lot of these properties as well. So we won't be seeing any issue with that. We are well organized on site on that basis.

Okay. So in terms of extras, extras are year-on-year marginally down. The predominant reason for that is selling stock plots, Clyde. So if you look at the actual trend of extra sales, it has moved nicely upwards over time as we've had fewer and fewer stock plots and people had more and more opportunity to buy in-built extras, which are obviously better for us and better for them because we make more money on them and customers like them, obviously, because they're very difficult to retrofit. So very happy with the situation with extras given the profile of the plot.

And then if I just pick up the last one, which is about, I think, government and particularly discussions that we might have with government. I would probably have to say that our engagement with government, from an industry perspective, has not been as strong in recent months as it was leading up to the pandemic. And that is probably to do with the pandemic, social distancing and everything else, so -- which is a bit disappointing because I do think that we are at a critical time. And I think it's -- I mean we welcome the extension to the practical completion date for Help to Buy. But I mean it took a long time for the industry to seem to get a point across the government and the need to do it and the fact that the impact was negligible upon them really. So that was a little bit disappointing. I mean, they're still sticking with a high-volume target, but I'll go back to some of the things you said about worry about stamp duty, worry about where the mortgage market is. And I think government at the moment, I think, are probably looking at sales numbers coming through and thinking that everything is absolutely fantastic. But I think the job of any business and of government is to think ahead. And they have to look at what's coming over the hill, really. And there's some things that you could get a little bit concerned about. So I think government ought to be engaging a bit more with the industry at the moment.

The final question we have from the phone lines comes from Arnaud Lehmann from Bank of America.

Just a couple on my side. Firstly, just a follow-up on the margin outlook. I mean you sound quite confident that eventually you can go back to 100% productivity or close to 100% on the building side, and you would expect some sort of ramp-up effect, I guess. But let's say, on a steady-state basis, once you are back to 100%, what do you think the impact on margins could be if a project was 22% gross margin in the past? Do you think you can also on a similar project stay at 22%? Or you think structurally because of the measures on the site, it's going to be a bit lower? That's my first question. My second question, also a follow-up on net debt and cash flows. Net debt, I think, GBP 126 million at the end of the fiscal year and you are giving a target to be cash positive, I guess, by June next year. What is the philosophy, I guess, behind being cash positive? Is it -- do you want Redrow to be kind of cultural in net cash? Or are you just being a little bit cautious in the short-term because of all the macro uncertainty?

Okay. Barbara?

Okay. Well, in terms of the margin, we will see margins being slightly lower. And that's why we've given the guidance that we have. We do expect it to continue to improve. But obviously, with a smaller business there, we will see those margins being smaller. I mean, obviously, we do get eventually back to 23%, but it takes us some time. And I think that's exactly what will happen. And there's no point of saying we'll do it any faster than we believe is possible. If we do then that's great news, and we'll let you know when we think we're going to do it. In terms of going cash positive by the end of June, the fundamental reason for that is that our WIP was so high at the end of 2020. So we will -- we expect our WIP to be significantly lower at the end of 2021. Our land will actually be higher, as Matthew has already said, and our land creditors will be roughly the same. So the outcome of all of that lot is -- and obviously, we'll have a reasonable level of creditors. Our creditors will probably be a bit lower because of the lower WIP level. So all that generates you cash. Now -- so that's why we go cash positive. Now thereafter where do you want to be? Well, we are targeting to ultimately return to a 25% return on capital. So we don't want to be stacked with loads of cash on the balance sheet. But I think until we have a degree of certainty over the marketplace, we should be, say, knowing what the government's position is and strategy is and policies are, then I think being in a position of a small cash balance is not a bad thing.

[Operator Instructions] We have had no further questions registered at this time. So we will hand back over to you.

All right. Well, thank you very much for your questions. I hope we've answered them fully for you. And sorry, we're having to do this over a conference call, a little bit tight for us. But hopefully, we all look forward to seeing you in the flesh so to speak in the near future. So thanks very much.