Redrow plc (RDW) Earnings Call Transcript & Summary

In the next 12 months, yes, getting to the 2022, well, it's nearly all our price inflation in excess to build cost inflation. I mean, what you got to understand here is that when you look at our 2021 revenue, close to 60% of our private revenue in 2021 came from the opening order book. So not much to it. And then about most of the balance came from reservations in the first half. So the amount of turnover in 2021 that came from reservations taken since house price inflation increased is very, very little. So since house inflation moved up, that's all in the closing order book, and that will all come through in 2022. So there's a little bit of volume impact. But -- and there's a little bit of mix. Obviously, I've just talked about the social. Because of the lower social and the lower mix, about 40 basis points of the improvement is mix. And then there's a bit that's volume. But nearly all of it is net HPI embedded in the order book. Yes. I mean, obviously, we've made assumptions on where we go, we build cost inflation, but we're fairly comfortable with those assumptions.

We'll now move to Dudley Shanley of Goodbody.

I just have one last left to have. It's to do with build cost inflation. Obviously, you mentioned that material inflation has been tough to deal with through FY '21. But I'm more thinking about what you're seeing in terms of labor inflation coming through for FY '22?

Yes. I think it's fair to say you split into 2, our build cost inflation. And we said over the year, we were circa 5%. I think it's fair to say that materials are probably coming to a peak now as our output will start matching demand going forward, and we've already seen that with timber. I think it's fair to say that labor is symptomatic of a very strong market. You have supply and demand. And from our point of view, we're happy that we'll get to a position where house price inflation will offset our build cost inflation, and we are still seeing that. So we don't have any concerns there.

Gavin Jago of Barclays, next question.

Another one on build supply, I'm afraid. I was just thinking about the messaging from you today, and I guess your other listed peers has been pretty consistent. There are pressures in the supply chain, but they're being pretty well managed. Just thinking about the strong relationship that you've got with your supply partners, what insights have you got from them about who isn't getting the materials that they need? I mean is it too simplistic to think about it being the larger highest builder and getting preferential treatment, the smaller builders and trades are struggling? Or are there any regional patterns we can talk about? Just a bit more or infill useful, please.

Again, I probably still to answer that one, Gavin, to be honest with you. I mean, we -- you probably have to have the supply is more than anything else. I mean, from our point of view, we are seeing interruptions in supply. But having said that, we do stock on site. We do keep the stock on sites, but that's been evened out. And we are happy with our build-out, which suggests that there is certainly no problems in terms of our onward build in terms of materials and labor. So I couldn't tell you how our suppliers prioritize what they do, but clearly, some of our suppliers, we've had 30 years relationship with, even longer, I think you're probably been talking as much as 40 years in some of our suppliers. So there's a very strong embedded position with our suppliers and our supply chain. So it's invaluable at these times, having that conversation. But in the same time, we're very supportive of them when it's not so good times. So they understand that. So quite -- I'd say that we've got very strong relationships. Like I couldn't tell you what they're doing in terms of prioritizing it, but we're clearly happy with the supply that we get and we continue to get it.

We now move to Clyde Lewis of Peel Hunt.

I think I've got four, if I may. Apologies. Well, I've given everybody else a chance to ask the good ones.

But I don't see any of that in that was for his presentation together with this -- four area, go ahead Clyde.

So regionally, obviously, London has been tough. Any noticeable patterns apart from London where you've noticed particularly strong or sort of slightly softer sort of markets? That was the first one. Second, in terms of land buying. I suppose, how is your focus shifting? I mean obviously, there's certainly a drive by the lower councils to release bigger parcels of land. Is that where you're still shifting in terms of the overall sites that you're acquiring? The third one was on customer preferences. How has that evolved? Are you seeing customers traveling from further afield to come to your site? Are they looking for bigger units on average? Are they looking to do more in terms of sort Redrow in terms of the extras that they can have, just sort of trying to sort of understand that side of it. And then the last one, I've got to ask around planning. Again, sort of what's happening in terms of, I suppose, sort of the various different authorities? Are they starting to staff up a little bit more and to try and clear the backlog that clearly crept in over sort of 2020 with COVID?

Yes. Okay. I've got to remember all those. The first question. You can say the sub categories. Let's go. Well, we start with London -- London and patterns across the country. I mean we are happy with Colindale's performance. We're going to be there for a very long time. It's clearly performing as we expected it to do. We aren't seeing the same house price inflation that we are seeing across the rest of the country. I think if you talk about the rest of the country, we are seeing -- we're not seeing any pattern of any area being different from anywhere else really with the Northern as much as performing as much as the South, which interestingly where if you talk about Help to Buy the North really doesn't have Help to Buy in the South does. And so you are still seeing that the North being very strong even without Help to Buy. So no, there's no real pattern outside of London. Everything seems to be very, very similar. I think if you look at our land buying, I think if you divide the numbers bought by the number of plots, it averages about 200. There's clearly a couple of larger developments in there. Certainly, we've got Colindale across from that point of view. But there is bigger parcels available. I think you've truly known it's easier in the South than it is in the North to buy. I think we probably we need -- we probably -- we've got a desire to buy more in the North to maintain our production outlets where as you know we've got probably a lot more opportunities in the South, which is partly why we were opening our new office down in Croydon. We see opportunities down there. And our product sits very, very well in the South. So it's a strong product. It's a strong market for us, and we'll continue to look at maintaining our position where we are in the North and Central, but our growth will continue to be in the South. I think in customer preferences, I'll let Barbara talk about My Redrow, but in customer preferences, you're exactly right, Clyde, the world has changed. People are wanting different things. They are going from the 5-day commute to the 2-day commute, which means that they can go further away because they're not doing that daily commute. They are also saving money on the commute and they're working a lot more from home, which means that they need bigger houses. They want that extra office. I mean we've moved into home offices, home pods. So we're trying to adapt to a market that has completely changed. We think -- we think that strategy is going to be around for a long time, that people are going to be really reassessing what's important to them. I think I'll go to plan and then Barbara can come back to My Redrow. But planning land authorities. I think we probably see that it dips below 300,000 planning permissions this year, which is probably unexpected, So Not unexpected. I think we'll probably see a little bit less next year, as you know, the COVID effect that came forward. So clearly, from our point of view, it's -- the governments turn on what they're going to do with the white paper is very disappointing, but probably not unexpected as usual. I think it's very difficult for us to say that the governments sit there we talk about broken planning systems, but actually the answer to it, they've now scrape the attitude, but they need to do something else. Ultimately, we still desire -- from our point of view, we want local authorities and the government to give us clear guidance in terms of what's coming downstream when it's coming we've got a business here that we've got business in an industry that needs to -- could do more and could deliver more if we had clear guidance. But ultimately, we don't have 20,000 brick layers fast from the shelf. So we've got to plan for our business for a very long period -- long term. And therefore, planning is very important from that point of view. In terms of the immediate side, in terms of delivery, it's reasonable, but it's always unpredictable, which is a very difficult position for us to be in as a business. I can tell you which planning is going to take 6 months and which is going to take 3 months. And that's still the nature of the system, which just proves it's not right. So I think that answers everything. Do you want to pick up on My Redrow, Barbara?

Yes, of course, I can. I mean our My Redrow position was that pre pandemic, we've got to -- just over 20 million of extra on our legal completions. That dropped back in 2021 because of the pandemic and the apartments as well that we're in the turnover to 2021. So we were down at around about 18 million of extras for the on legal completions in 2021. But if you look at the extra reserved, i.e., paid for on reservations or opposed to legal completions, that figure is in excess of 25 million. If I look at the 2022 number that we're expecting, that it will be an absolute record of north of 30 million. And when you think about the fact that in 2022, we're selling some larger plots than 2021, where you've got more standard, I think that just reflects how much people are very keen to personalize their home, how much they're thinking about being there for a longer period of time and wanting something that's just right for them.

Perfect. Can I just have one more, I suppose, sort of just can't let John disappear. It's obviously very sad not to be doing this personally. But I just wanted to add to Will's comment earlier about, thanking him and wishing all the best because I've known John, good since I think it was the late '90s when you were -- became the CEO of Wilson Connolly when that was still listed. And then you sort of moved to Redrow in 2002 to head up that Eastern business. And you had a very, very interesting time through the Northeast, to say the least, when Steve came back, the fact that he made you Group MD, I think, was, I think, probably one of the biggest accolades you could get from a man who is demanding to say the least and also very successful and he spotted somebody who saw your vision -- saw his vision being -- coming through your thoughts and your plans and ideas. And obviously, the fact that you take over from him as Chairman, again another sort of -- a massive sort of recognition of how you do things. And I think you've obviously seen share price bounce around all over the place, the profits though have grown pretty steadily as a business and standing back to be non-exec, but also delaying the retirement through COVID, I think, again, just highlights the sort of person you are. And I've enjoyed our engagement over the 20-plus years that we've been talking. And I really do wish you all the best for the future.

Clyde, well, thank you for making me feel so old. Yes, and thank you very much for the kind words. It's -- I think all careers over a spell, which mine has lasted well over 40 years and nearly 20 years at Redrow would always have its ups and downs. I mean, but I can have it at the end. It's been fantastic. And I think what I'm really pleased about is the business has got through the pandemic very well. It's in good shape. And I have the comfort of knowing that it's in safe hands with Matthew and Barbara. So thanks for your words.

We now move on to Gregor Kuglitsch from UBS.

A few questions, if I may, and maybe a little bit detailed, but I'll ask a minute. Could you just remind us your hurdle rate. You sort of mentioned you're a bit above and not perhaps paring back a little bit in terms of the sort of get gross margin hurdle rate that you tend to go for and how you've baked in, I suppose, the increased expected costs around parcel, et cetera as we sort of think about a couple of years out. So that would be the first question. The second question is, I think in your pre-recorded call, which I listened to this morning, you're kind of guiding for WIP turn, I believe, correct me if I'm wrong, of, I think, 40% to 50% of sales. I think that's what you're saying. I kind of know that there's a little bit definitional changes year-over-year. So if you could just elaborate a little bit what's going on there? And maybe relating to that, and maybe this is the question around the return profile. I think you're talking about 22% return by FY '24. But overall, your target is 25%. So I guess the question is what's kind of missing I guess is the asset turn somewhere. So if you could elaborate how we close that gap to reach your overall target of 25%. And then maybe thanks for the sort of detail on the sort of mix impact this year. I guess what I was interested in is the sort of -- appreciate it's a moving number with HPI, but the ASP and the order -- sorry, in the land bank and as things kind of settle down, you're exiting London, the social mix is probably going to normalize, can you just give us a sense how we should think about the ASP profile as we kind of go a few years out? Appreciating that, obviously, HPI growth can change that. And then maybe final small question is the new divisions. What's the associated OpEx with that, that I'm guessing you have to think for.

Thank you, Greg. That was the longest 2 question of all time. I think that will if I put some sub category into that. I'll hand over to -- I'll do a part out. I think the rest of it unfortunately gets to Barbara. I think if we look at parcel, we're probably stepping stone in 2023 and 2024 -- '25. Until we go to the fall. We still got to know the exact details of it. We have been working hard as to what the solution is. We've put a cost allocation in which we think will give us the interim place in 2023. And we've got a position where we think, again, we've been putting interim figures in for 2025. And we're confident that what we can achieve in 2023. We feel that we might be able to bring our source heat pumps a bit earlier in 2023, but there's a cost associated with that, and we're happy that the figures that we've put in going forward for both those years are well within what we expect. So it's going to be an interesting time, as we said. We're still waiting details from government. We have covered it off going forward in our build costs. And we're confident as we learn more and more about as to what we expected to deliver, we're more confident that we can get within the figures that we expected.

Right. In terms of hurdle rates, then obviously, given that we targeted in '24 to get to 19.5% operate. And then clearly, you're looking at around about 24.5% to 25% growth. So that's a normal hurdle rate. And I would imagine it's a very similar hurdle rate to all the people, to be honest, in the industry. Matthew has covered the cost of parcel. In terms of WIP turn, yes, I mean we are targeting to get the WIP turn. It was high, very high in June. It was relatively high in June '20 -- sorry, relatively high in June '21 because we had a lot of completions because our year-end was the 27th of June. And of course, the stamp duty, I think case will end in the 30th of June, we did have quite a few legal completions dropping into those last few days, which obviously was actually WIP at year-end. But our target is to bring that WIP down, also the WIP to be flat in the current year with the growth in turnover. And that's a bringing turnover down per -- WIP down per outlet. But also the big thing is reducing the WIP tied up in London as we complete the build-out schemes, because we've got 2 build-out schemes in addition to Colindale, and that they disappear off the scene that clearly will help our WIP turn. In terms of how we get the ROCE from '22 to '25, I think at the moment -- the reason '22 in 2024 is build of the Southern division on top of the ongoing growth of the business. And as I said, even with that, we still generate a decent amount of cash. Once Southern division is operating at a normal level. So we've got steady state growth and the Southern division operates at a normal level, then we should be getting to 25%. And looking at where we think things are going, that could be 25% or 26%. So I don't think we're a long way -- by 2024, we're not a long way off getting to 20% to 25%, because it flips quite quickly once Southern is in a steady state of business. In terms of mix and what that means, as I said, the social dropped to about 9.5% of turnover from 11% in 2022. Now once you get past 2022, it goes back to 11% of turnover and it stays at 11% turnover. So your ASP will flatten off going forward from that. And therefore, basically, when you look at the ASP in the land bank, that's exactly what we're assuming. You know we don't build any HPI in any of our numbers. So we are assuming that from 2023 onwards, we're seeing a flat blended ASP. And that's what's in the land bank as the real ASP still it happens.

[Operator Instructions] We will now move to Ami Galla of Citigroup.

Just two questions from me. The first one was really on PRS. I was wondering if you could give us some color as to how do you see the outlook for PRS projects going forward? And can you remind us what is the level of PRS within the current order book? And the second is on incentive. I appreciate that you have a very strong forward sold position. And even though the sales rates are quite normal, you are -- the build is the more challenging part of the picture. But as you think about the next few years, can you remind us what is the normal level of incentive that your business operates with? And what's budgeted within the sort of assumptions of the sort of land deals that you have taken forward?

Okay. On PRS then, just to remember to give you the field. As we said in the presentation, PRS was 8% of private revenue in 2021. So that's GBP 140 million. Going forward from that, what's -- there's only 1 PRS deals in existence, which is in the order book. That's the GBP 120 million deal we did for Colindale, which was announced at the time it was done. And 2/3 of that will legally complete in the current financial year and 1/3 will be in the next financial year. So there's nothing else in the order book, and that's how it will play it out.

Okay. Incentives. Well, ordinarily, we probably to a couple of percent we do. We don't really do very much. I think supply and demand at the moment, and we're trying to keep that a lot lower than that at the moment. So ultimately, 2% is probably our long-term target, what we tend to work through. And we're probably working to below that at the moment, as you can well imagine, with what is a strong market.

And just one follow-up. In terms of the overheads in the business as the Southern division picks up scale, should we expect the overhead of the business to also move in line with the sort of growth in the divisional growth that you're seeing?

Yes, there's a normal element to this. So first of all, I didn't comment [Indiscernible], the cost of a new division is around GBP 7 million to GBP 8 million in total, including its share of insurance costs and things like that. So the issue with overheads is that the 2021 overheads that we've got are still below a normal level for that year because we have the additional lockdowns, with everything has been on Zoom. And we have not incurred the traveling expenses that we expected to incur et cetera, et cetera. And certain payroll elements have not happened. And so I think you need to start looking at 2022 and 2023 from a higher number than 93. And when I've spoken to people, you can't just have 2.5% of the 93 number or 3% of the 93 number. I think, we're going to see overheads in 2022 be, I think, north of GBP 100 million, but how much north is difficult to say, but let's say between -- let's say between 100 and 105. And that's a combination of correct. Again, in a normal rate plus inflation plus Southern plus our investment that's going on at the moment, that ongoing investment, which Matthew talked about in the presentation, around about digitization, the continuing digitization of the business, the customer experience suites that we're doing. This is -- but this investment is all to bring about improved productivity as we go forward. So it will -- I think, we will have a bit of a bump in the road in '22 on overhead. And then I think you'll have a bit of a step-up in '23, as Southern is fully on board. And we've got the office costs and everything else. And then I think from then on, you will just get inflationary increases.

We will now move on to our final question from Rajesh Patki of JPMorgan.

Yes. Hope you can hear me well. I've got two, please. First one, just on the 2024 targets. You expect about 10% or so growth in the top line versus 2022 level with around 20% increase in the outlet. So just wanted to confirm if there is a mix effect on ASPs there that you're looking at. Or will the growth in the outlet numbers have a more sort of sustained growth on the top line beyond 2024. And secondly, I don't know if you want to say anything on this, but can you make any comment in relation to the takeover speculations in the media?

I'll do the last one now if you want. So no, we don't speculate any takeover speculation in the media. Do you want to do 2024 targets?

Yes. I mean the situation is the time to go from 1 to turn into the other. But the fundamental thing is we're assuming a lower sales rate going forward than we obviously have had in the last financial year. And we do -- we will need to rebuild the order book to a degree because our order book will come down significantly in '22 and '23. So there will be an element of rebuilding the order book with fundamentally a lower sales rates, back to a normal sales rate.

There are no further questions, so I would like to hand back to the management team.

Okay. Thanks, everybody. As we said, we've got great set of results. The company is in a great position. And we're looking forward to future trading in 2022. Finally, I'd like to thank John for his long service, 20 years in the business, and wish him well for the future and also welcome on board Richard Akers who will be joining us as our new Chairman. With that, I'd like to thank you all for attending today's Q&A presentation. Thank you very much.