Redrow plc (RDW) Earnings Call Transcript & Summary

Yes. I mean we said that the private order book was 10% Help to Buy. So you -- I think your question was what do we think the ongoing level of Help to Buy is going to be after the 31st of March. And we are -- we were averaging around about 30% of value completions were Help to Buy. And now we think that will probably drop to around 15% of value completions.

Our next question comes from Jon Bell from Deutsche Bank.

I think I've got 3. First 2 are related, I guess. Just on the Future Homes Standard, looking ahead to 2025, what road map do you have from the government? And what uncertainties remain in terms of what the new standards will entail? The second question is a related one, I guess. Have you built or piloted a 0-carbon home? And the third one is just a little extra color, if you could, around the cancellation rate in the first half.

Okay. Well, I'll pick up Future Homes and the 0 carbon and Barbara can pick up the cancellation rate. In regards to future home standards, the Part L indication of what's under the Part L has just been published. This will happen on -- this will probably be introduced in June 2023. But clearly, it's June 2023 for properties that aren't started. So it probably won't really affect completions until very much in the back end of 2024. Now in terms of the reduction in carbon usage, [indiscernible] set down as to where it is. We're confident that we can deal with that. There is a cost associated to that, and we've clearly been including that within our land appraisals going forward. In terms of 2025, which will be the big change, 2025 when no fossil fuels are required, we are still working our way through that. We are putting an allowance in, which is, so to say, the best-educated guess in terms of how much we think that will cost us when we get to that point, and there's a few sites that really affect in 2026 I think to start affecting. But we're working with it, we expect nowhere we go from that. In terms of 0-carbon homes, we -- what we're doing at the moment is we're doing a trial of the home in one of our regions up in Yorkshire, where we're trying infrared heating. So we've taken the gas out. We've got 2 houses next door to each other, identical homes. One will have the gas heating, one will have no fossil fuels in it. We've got PVs on the roof and we've got battery storage. And we're going to put people in those homes, and we're going to monitor mainly the bills as to what happens with the bills. And we also want to understand the comfort level of those people. Because infrared heating is very different to that of the normal heating. And we want to make sure that customers who are going to be moving to these homes feel the same way in terms of moving around their home. So we are working towards it. But that's one of many alternatives that we can use. But battery storage will become probably one of the stronger things that people use, how they -- there'll be various changes, I think, in how we heat the homes with using electric. But clearly, we're trying to minimize the bills in regards to battery storage. So using the batteries at peak times and storing the batteries at offpeak times, I think, will be something that we'll be probably more focusing on going forward. So we're putting a lot of effort into that and trying to not just look at the costs associated by it, but look at the effect of our customers. I think Barbara on the cancellation rate?

Yes. So you're right, Jon, the cancellation rate was particularly elevated in the first half of the financial year. Really, that wasn't our clients. It was generally down the chain. The problems were around the 31st of March Stamp Duty Holiday and whether or not deals could be completed in time for that. Also, mortgage availability, which -- there was a period of time where mortgages of 90% and more, but particularly around 90% virtually went away. That -- those 2 problems have been resolved now in the sense that the orders we're taking now are for beyond the 31st of March. So Stamp Duty Holiday, it's gone. That's it. They're not going to get it nor is anybody down the chain. I mean with the delays on searches and everything else, your chances of completing anything in just 3 or 4 months now about -- at almost nil. And mortgage availability is now at 90%. There are now quite a few people offering that. And of course, rates are now starting to improve as well because they partly restricted the market through mortgage rates. So as a consequence of that, you'll see that the cancellation rate in the first 6 weeks actually dropped to 14%, which is only 1% above the same time last year. So we're virtually at normal levels of cancellation rates now. And I would suspect by June, we will be back at normal levels.

Our next question comes from Brijesh Siya from HSBC.

I have 2 questions. The first one is on the sales rate. In the new year, you talked about the sales rate being impacted by lower availability as with high comparable base. Would you be able to split that out and say how much was kind of depressed to us because you didn't have stocks to sell? And the second one is on the build cost. You guide 2% to 3%. Is there any impact on the labor market just because of Brexit? I understand you did say there's not much, but have you seen any movement in labor, especially?

Yes.

Yes. So, Brijesh, in terms of the sales rate, I mean, clearly, we don't actually have statistics on what sales we lose because we haven't got availability. We know that that's an issue, but -- obviously, in our discussions with our sales teams every week, but there isn't a specific amount we could put -- attach to that. I think what I would say is that whilst the sales rate at 0.67 is slightly down on last year when we had the [indiscernible], that 0.67 sales rate is identical to weeks 1 to 6 of the first half in the calendar year before that. So it really is a normal sales rate. So we are comfortable with that. So you can see, if we did have a bit more availability, we would have even better sales. So while I can't quantify, I think it's something to be very positive about and I think I'll let Matt to answer about build cost.

Build cost. I mean we're not seeing any major impacts. I mean clearly, you've got so many reports with regards to the likes of Cambridge going open. That's mainly because of the international market more than anything else. But we're not seeing any particular issue with regards certainly on materials. In labor, again, we're not really seeing any particular problems with regards to Brexit. We are seeing -- labor at the moment is impacted slightly on the back of the fact of people -- so advice was clearly, you can't go to a building site if you have to self-isolate or you've got the kids at home and things like that. So we're probably more impacted immediately on the back of COVID than anything else. But as I said, it's not anything material. But in terms of Brexit, no, we're not seeing any impact.

And can I come back on the cladding part? Just a clarification. When you talk about 6 sites, is that all you have where you needed some kind of certification? And does that include all the sites which you are currently building as well?

No. In fact, if you talk about the certification EWS1 Form, that's required on any building above 18 meters. And of course, more recently, we've constructed a lot of buildings in London over 18 meters, but we have got the EWS1 Forms in place on those. So the issue stems back mainly to our legacy sites, which, as I say, we've got these half a dozen where we've had the EWS1 Forms not been issued. And further investigations were needed into the cladding and fire stopping and the likes. And it's those schemes that we've now been dealing with over the past couple of years or so. So yes, we're pretty content that it's a legacy matter principally relating to these half a dozen sites built by main contractors anywhere between 10 and 20 years ago.

Our next question comes from Aynsley Lammin from Canaccord Genuity.

Not many left actually. Just first of all, on the dividend, obviously, reinstates at the interim level, just if you could remind us of your policy going forward for the full year. I think it was a progressive kind of 3x cover, but any reminder on that. And then just on the previous question, I think your Brexit kind of questions more relates to the labor market. We've heard a few rumblings around kind of port issues, container rates, et cetera, just impacting some of the materials or products coming in. Have you seen or expect to see anything in that context?

Well, I'll let Barbara answer the dividend issue, but it's very quick on the Brexit one. No, we're not. We are seeing a little bit of -- I mean, I think you've got few materials with a few spikes in them, a few issues with COVID in the Italian appliance factories. But ultimately, no, we're not seeing any imports. I mean the great thing about housebuilding, it relies heavily on the U.K. manufacturing. It doesn't rely heavily on imports from abroad. I'll let Barbara answer the dividend question.

Yes. I mean...

Just on that, though, Aynsley, we did -- I think we have covered this before. We do -- we carry a sensitivity sheet on this with all of our suppliers, where we constantly update with them where they sit with Brexit and of course, a lot of them made alternative arrangements to come -- to get materials in from non-EU countries, and that's been unaffected.

Okay. So I think in terms of dividend, our policy remains unchanged at 3x cover that was set a few years ago. I think as far as 2021 is concerned, based on the consensus, we could probably pay marginally more than 6p. But given market uncertainty and our spending in the land market, we paid the interim that we have, and we'll review that when we get to September. So yes, we're happy with the dividend, but we -- but the cover policy hasn't changed.

Our next question comes from Marcus Cole from Liberum.

Just a couple of sort of final questions, if I may. The first is just can you add any color to sort of the strength of the order book? How far forward are you selling? And are you able to push any prices? And then just what size land bank you're comfortable operating within the future as you look to grow?

Yes. I mean in terms of order book, we're selling well beyond -- the key thing here is we're selling well beyond that March date. And it's not costing us to sell beyond that March date. But we are selling into next year as well now. We're 95% sold for this year. And clearly, anything else on top of that is going to be into next year and we continue to sell well. So we are selling well beyond those periods. I mean in terms of land bank, look, I'd look to have a lot shorter land bank, but these is always going to be an issue with us. We try to keep our full 4 years at least as our target. If we can get to a point where the planning becomes a lot more easier and a lot more reliable, well, we can bring that down. But at the moment, we'll maintain our level of about 4 years.

Our next question comes from Clyde Lewis from Peel Hunt.

I think I've got a few, if I may. One was on sort of delays. I mean you've covered some of the issues on delays. But could you say a little bit about where things are on the planning side and local councils, in particular, I suppose, getting sites through planning and obviously not just outlined, but getting the details done and whether that has sort of got back to more normal levels? And the other one sort of on delays, I suppose, or build rates was, where do you think your current sort of construction levels are relative to, say, a 2019 base? Are you back at 100% on that level? And the other one I had really was around sort of product differentiation. And you've obviously sort of pushed more in terms of the family orientation and the bigger units over the last sort of 12, 18 months, I suppose. It's been coming for a while. But have you noticed a particular difference in terms of the sales rate between that product and the smaller units?

Okay. A few there, Clyde, as usual. Thank you very much for all that. With regards to outlets and planning, planning is always -- unfortunately, it really is a lottery with regards to whether your planning application is going to go through smoothly and quickly or not. This is the problem we find. I mean I got planning last week from the site. It took 51 weeks in planning and it was not a controversial scheme at all. Yet you get many of them through in the period in the 13 weeks. So it's still down to local authorities and how good they are and what they're dealing with. So there is no tangible reason as to why some are delayed and some aren't. So there's a huge -- continues to be a huge frustration with it, to get these through. I mean they're asking for more and more from us. Every time we put a planning application in, there seems to be more consultation, more issues. Now we've got other issues coming, like the likes of nitrates and things like that, which come out of the woodwork. So it's certainly not getting easier. It's certainly getting harder. And I think, unfortunately, I can never tell you exactly which one will be the quick one and which one will be the slow one. So it's still tough to get planning through. And it hasn't been helped by the fact that many people having to work from home and the likes. So there's still issues around that. With regards to construction levels, we are down on construction levels, which we were hoping to get them back. When we first came back, we were at a reasonable level, and we expected that COVID was -- as people settled into the style of COVID, working a bit more remotely, that they could -- we would increase them. But what we've noticed more probably in the third lockdown than anything else is the fact that our workforce is -- probably been more affected this time around with the likes of people who are shielding, people who are self-isolated, people who've got kids at home. That's the new one. People -- if you're in a partnership with somebody who has to go the office or works in a hospital or something like that or nurse or anything, you know which one is going to end up staying at home. So we are seeing a lot more of the workforce having to stay home, which is having an effect. So that is somewhat of a problem. We are hoping as the vaccine gets rolled out, we will get that better as we go forward. In terms of product differentiation, we tend to -- our homes are -- I'd like to think that we've probably got the right home for the right -- exactly the right time at the moment. People want exactly what we've got. We tend to build a 4-bedroom detached home with a bit of space around it, well designed. So it's not just the home itself. It's what we put around it as well and how we do the environment around it. So I think that's paying dividends for us realistically, as people are shifting around the country as to what they got. We are seeing people move further afield than they ever have done before, which is probably to be expected as people do less and less of the daily commute now. It's turning into -- even if the pandemic was over tomorrow, it'd probably turn into a weekly commute rather than a daily commute. So I'm confident that we can sell very well. And we had a lot more availability, and we could drive things more. I think if we'd sell out -- the sales rate will be up even further.

And one last one from me. I mean just in terms of the sort of the land that you're looking at in terms of, I suppose, size of the sites and the geographical location. Have you changed much in terms of sort of what you're currently looking for?

Well, I think a Redrow site is always a Redrow site. We've got to be in a low case. And our products, as you know, it's more I'd say desirable, more esthetically pleasing and therefore, people got to -- there's a cost associated with that. And therefore, people need to pay towards that. And therefore, you've got to have some element of discerning. You can't be somebody who's absolutely stretching themselves to buy a home. They can't afford to be that more discerning on what they buy. So we tend to always have to buy sites where we know there's an opportunity for people to pay more money. So a good area in a reasonable town is always a good area. So we are concentrating on the south of the U.K. That's a big area for us because the average selling price is a lot higher there. And therefore, the sales price can be easily changed -- booked in comparison to some of the other areas. But our northern areas, we'll probably try and move a little bit bigger in some of the houses because affordability is less of a problem compared to that in the south. So we are quite happy at the moment that the land that we're buying is in areas where we can get our premium for our products and people will best pay for. So we're happy with the land market at the moment there. We can work effectively within it.

[Operator Instructions] We have another question registered from Arnaud Lehmann from BAML.

It's Arnaud Lehmann from Bank of America. Just one follow-up question from me. Could you, please, elaborate a little bit on your customer base? I mean it's clear that the hospitality sector has been hurt by COVID-19, although that didn't seem to impact at all demand environment for you guys. With Brexit coming, maybe having an impact on the manufacturing sector over time due -- and the end of furlough possibly in the next few months. Would you expect, well, firstly, at the macro level, risk of rising unemployment? And if it's more coming from the manufacturing side of the economy, would you expect more of a negative impact on your potential customer base?

Yes. Thanks for the question -- I mean thanks for the question. Look, our customer base is, it's -- you've got to look at what's been affected in the economy, which is entertainment, tourism, areas of that. And many of our customers are second-time movers. They have an element of deposit, and they have an element of equity within their home. So our customer base is pretty strong. These same people tend to have reasonable disposable incomes. And that disposable income at the moment is not being used because holidays are not available and restaurants aren't available and things like that. So you've got a sense of the economy, which is people that we aim for, which is second-time movers who have an element of disposable income that's not being used at the moment. So you can see why people want to head towards a better home and a better way to live. So it's playing to Redrow's skill set and advantage as to what we do, that people are really upgrading to a Redrow home. So I think with -- our customer base has really not been affected at this precise moment. In terms of Brexit with rising unemployment, I think when we reopen the economy, we'll see from that. But again, the unemployment side tends to be more into a different customer set than our own. It's -- the other thing is there's a lot of young people, which is why I'm putting in my statement the fact that we are very, very keen to ensure that young people have that opportunity. And therefore, we purposely went out and took 32 graduates on a assignment, graduates are getting employment and employed 19 new people across our business to do our degree course and kept our trainee levels at 330 trainees across the business. So we find it very important as a business ourselves. But clearly, we feel sorry for those that have been affected. But Brexit, I mean, my view is that we will -- I think Brexit has happened and the business will continue to be very strong.

Ladies and gentlemen, this concludes today's Q&A session. Matthew, I hand back to you.

Thanks very much, everybody, for all your questions. Clearly, you know where we sit. We've got some great advantages of the business. We got a product that's absolutely spot on for this market. And clearly, you've got a U.K. that's changing its priorities, and we're clearly there to support that. Okay. Thanks very much.