Redrow plc (RDW) Earnings Call Transcript & Summary

Okay. We're all here? Yes? Okay. Right. Well, thought -- I suspect, you've all seen the presentation. However, I thought it would be useful if we just remind ourselves of a few of the key slides before we head into Q&A. If we start with our financial overview. Clearly, we increased our profits by 17% to GBP 203 million, and this was achieved with an operating margin of 19.5% for the first 6 months, and we expect a similar margin for the second half. The value of our first half reservations was GBP 884 million, which is an increase of 6% on the same period last year. And as a result of our strong performance, I'm pleased to say the Board has declared interim dividends of 10p, which is up 67% from the previous year. If we go to the strategic overview on the slide. Clearly, what we've done is demonstrated the successful strategy of Redrow, with a product range, which absolutely perfectly meets people's needs and customers' needs at this precise moment. It's clear that customers desire for larger quality homes is going to be a long-term trend and supports our differentiated market position. And clearly, by evolving rather than revolutionizing our strategy, we've capitalized on strong market for our products and places, whilst continuing to invest to grow. We've made significant progress on areas of ESG, and we have an intention to set to our net-zero carbon by 2050. But our differentiated strategy means the group is well placed to continue its successful and profitable growth. So move on to the slide that was on the summary and the outlook. And just to go through that. In summary, by continuing to involve rather revolutionize our highly successful arts and craft style heritage collection, we've capitalized on strong demand, improved sales margins and continue to invest for growth. The group has returned to a normalized margin of full 12 months ahead of our previous guidance, and our digital transformation program means we're leading the industry in combining the best in-person and digital experiences for our customers. We are the first to offer a truly digital-led sales experience within our Customer Experience Suites, and we made great progress on ESG. Our strong balance sheet, forward order book and cash generation gives us an excellent platform going forward. And I'm confident that the business will deliver further progress in the second half, whilst delivering a strong financial and ESG performance, Redrow will continue to innovate to ensure we meet the needs of customers and stakeholders. So thank you. And I think it's now that myself and Barbara are happy to take any questions.

Aynsley Lammin from Investec. Just 2 for me. I wondered if you just give a bit more color and kind of view on the momentum in house price inflation? Are you still confident can push prices higher into spring selling season, just how strong it is and maybe with any regional comments? And then just secondly, on the kind of plan and -- you see in the planning challenges intensified, are they're getting worse? Just a bit more color and interested here what you see in there to get the land through?

Yes. Okay. Probably can pick both of those up. I think with regards to HPI, as you've seen, we said 8%. That's obviously not just house price inflation -- sorry, our average selling price has moved up by 8%, but that's clearly not just HPI, that's the location and product mix. I think it's fair to say we are continuing to see that, which will more than offset any build price inflation. I think if you look at the market and certainly the secondhand market availability out there is very, very low, and therefore, that's driving price inflation across the board. So we're confident that HPI will continue to grow over the short period. And I think as we are still seeing a strong -- very strong demand across all our outlets. So strong demand continues. It's making sure that we're capitalizing on the HPI. I think we talked about the planning system. I think it's fair to say the planning system is probably struggling and it's probably symptomatic of a very, very strong market. The planning departments -- so getting a hell of a lot of applications through, whether that's residential development or whether that's commercial, whether that's even extensions from general public, it's symptomatically a very, very strong market. And I think that delivered by the fact of people working for home and the private sector being very strong. We've commented there that we've probably seen a reducing number of planning offices in the local authorities. They're turning a little bit more to contractors to have to deal with it. But ultimately, what happens is it slows the system down. And that's what we're seeing. We've clearly got the resources to deal with it, and we've got the teams to deal with it, and we're working with them, but it's a slower process. It's not a case of having more problems, it's the case of just being delays really through the planning process. But as I said, I think, in the statement, ultimately, we've got to work on the -- it's not just us, you've got an SME market out there, and that SME market relies on a hell of a lot more than we do. We can ride through it. The SMEs have got to -- they're very reliant individually on that basis. And therefore, get -- having a strong SME market is important for us as well. And so therefore, it's very urgent that they get it sorted not just for us but for everybody to have a balanced market for everybody.

Ami Galla from Citi. Just 2 questions from me. The first one was on land. On the back of the strong HPI that we over the last 2 years, is there any shift in terms of your land strategy ahead? Are you changing your hurdle rates from here onwards? And really, what's happening on the land market, anything significant to point out? The second one was really on the cladding provisions that you've taken to date. Is there a scope in terms of the number of buildings that, that relates to?

Okay. All right. Well, the cladding question might come up. Right. Let's talk about land strategy first, and then I'll probably cover off cladding and then Barb can probably cover where we sit in terms of ourselves. The land strategy, I mean the market is good out there. There's still availability. I think it's fair to say that we're maintaining our hurdle rates, certainly in the last 6 months. I think I would say to you, if I look back in the 12 months before them, which we did capitalize, we did buy a lot. We probably got higher margins at that point at a more reasonable margin. And I think you are seeing that drift down. But it's drifting down to what is our norm. So we're not unhappy with the market out there, plenty of availability. In terms of our strategy, we are continuing to grow our business, but we were more about quality delivery in terms of units than actually pushing the hell out of growth. And so I think the market is reasonable out there. We're quite happy. We're seeing it across the board. There's areas of very hot spots that it's -- you're able to take a little bit more reduced margin, but there's an areas where you're doing well. But we are taking a view in terms of what we buy. On top of what we bought, we've bought some -- a bit more speculative stuff, stuff that's allocated, and that doesn't go into our figures, and we've put some money out of that. And that gives us some enhanced margins. So we're quite happy that the balance is at our hurdle rates as to what we expect. So the land market is pretty good at the moment. I can't complain about it. We can get the sites we want. And clearly, what we want is Redrow sites, which is a slightly -- as we've got a differentiated product, it's really we want to be in those areas where people are more discerning in terms of the fact that they can afford that a little bit more for what is a quality product. So we just -- we're happy that we could buy Redrow sites in the right location. I think we go for cladding, I think in the first instance, what I would say with that is clearly stress where are most of those leaseholders and we share the government's opinion with regards to the fact of the leaseholders shouldn't really be part of the payment on this. They shouldn't really -- it's up to us and the industry and government to resolve where we sit. We've ultimately built a very small number of highrise. We've been always been a predominantly builder of detached homes. So we're limited in that in terms of exposure. I think what we're seeing with the government at the moment is this very, very early days. We've -- I mean it's been a month since got in position and sent his letters to us. And so we are doing -- there's a lot of work. I think it's very, very fluid situation in terms of what we're doing with that. I think, ultimately, you've also got to look back on some of the things that we do. The vast majority of these buildings we didn't build. We didn't have the -- interestingly, we didn't have the expertise at that time. when these buildings were built 20 years ago, we went to main contractors who have the expertise to build these buildings. And so from our point of view, we've got recourse for many of our buildings in terms of where we go back to. But clearly, it's -- we're trying to work with government for solutions. But I think the 1 thing I would say is that we urge the government in the sense that -- and they did right was about alternative solutions to some of these issues rather than going wholesale removal of cladding or fire safety issues, there is alternatives. And I think that's what we're trying to push, sprinkler systems, alarm systems. And if we can get those resolved quickly, they're the things that we can resolve quickly and make sure that these buildings are safe for everybody. And I think if we can explore that more with the government, we can deal with it and because the concern is going forward on a general principle is the fact that you've got a situation where getting hold of scaffolding to do all these buildings, getting all the contractors to do all this, it's going to take a long time, even if we know tomorrow, we want everything needed to get done, it's going to take a long time. And therefore, alternative solutions is really where we want to do. But -- and ultimately, when we look at some of the proposals we want, as Redrow, and as I've said, we've got a very limited number. We wanted to be fair proportion. Any position that we sit with government and any charges that they're going to levy against the industry, ultimately, it should be fairly proportionate to what we've done. And I've said we will predominantly build detached homes and we always have been. And therefore, from our point of view, we want to make sure that we're reasonable in terms of dealt with reasonably in that process. But clearly, we've set up teams to deal with that. So Barbara, do you want to just pick up on provisions and...

Yes. Okay. I mean, basically, where we stand at the moment is that on the work that we've done, we believe that there are about 18 developments that don't have a satisfactory EWS1 certification. Of those developments, we were prime principal contractor on 8 of them. And we provided -- these are the ones over 11 meters. And so we provided for those 8 developments. We clearly haven't provided for the others because we're not prime contractor on those sites. And so the legal responsibility lies elsewhere. And I'm sure, the management companies and leaseholders are looking at those people responsible for those buildings to recompense them.

Gavin Jago of Barclays. Just a few from me, please. The first one is just on the future home standard and I guess how you're working with the supply chain at the moment just in advance of that, not just for the, I guess, the 2025 at the interim stage as well? You mentioned the secondhand market, and I just be interested in your views on what you've seen through -- in the secondhand market over the last 12 months? I think there's kind of less liquidity now, but what you see is healthy for sales for Redrow in terms of more liquidity in the secondhand market or less? It has to be a tipping point somewhere. And then just a quick one on the Southern division, just how that's going in terms of your early land purchases and, I guess, timing of ramp up there?

Yes. Okay. Well, the [indiscernible] I think we spoke about before. We know the interim steps in '23 and '25. We're working for many suppliers. We've got 2 test homes at the moment. We've got 1 in Yorkshire and we've got 1 in South Wales and working with Mitsubishi with regards to the air source heat pumps. There's other alternatives that we're working with. All the sites that we've bought, we've put an allowance in to deal with the new future home standard, so it's not like it's going to come as an additional cost to us. I think what we're very keen on doing is understanding how it works for a customer. There's a cost associated with this, but actually you know your customers are moving in very different mindset to dealing with these products. And therefore, that's why we want to do the trials more than anything else. Heat pumps well used throughout -- I mean, not in this country as much as other countries. But ultimately, getting the data from customers about how much it costs is important so that we can relay that when people move in, so that they understand there's no surprises, but also things like noise and things like that, we want them to understand that so that if we have to deal with upfrontly, get some acoustic sound prevention to make sure that it's dealt with from that point of view. So we're working on that one and the Yorkshire is the same one as a gas-free home. But the future homes that's where we're happy that we put allowance and we're happy that -- by still will work well within that allowance. And so I mean often I've spoken about the figures before. Secondhand market, yes, I think that's driving, in many ways, the newbuild market because of availability and I think it's a self-fulfilling prophecy that people don't put their house on the market until they find something they like, if everybody does that, ultimately, you'll get a dry up of products available. So that's driving a hell of a lot of this demand for people that people are coming around homes without having their house on the market. So ultimately, we like to see liquidity in the secondhand market. But I think everybody at the moment believes that we can sell their house very quickly, and therefore, it doesn't get on. But ultimately, we are a second-time mover or onward mover or a housebuilder. But having our homes available, which we are available, allows people then to put their own on the market. And as usual, we don't do any part exchange. And now we haven't done any part exchange for a couple of years now. We never have to do part exchange. And so from that point of view, our experience in the secondhand market is anecdotal because as I said, we don't sell anything. I think with regards to the Southern division, do you want to pick up on where we are with the Southern division?

Yes. I mean we've got the team in place now. We're starting to bid on land for that division, started doing that probably about a few months ago. And there are a number of sites that they will take on in July from our existing divisions in Southern counties and 1 in Southeast. So we're well on track with that. It will -- clearly, because it's taken over a number of sites, it will definitely contribute in '23, but we're also buying the land for '24 and '25 now.

Jon Bell from Deutsche Bank. I've got 2, actually. The first one is just on the bulk deal. Could you give us a bit more color there? And the second one is that you've raised your guidance for 2024 and I think previously, Barbara, you referred to 2024 as the year that cash starts to get a bit heavy, potentially. How should we be thinking about scope for some kind of additional return either in 2024 or maybe even earlier?

Can you pick both of those?

Yes, I'll pick both of those up. Yes. So the bulk deal it's not huge. The reason why we commented on it was simply because we didn't want you to think our sales reservation rate in the first 5 weeks of the new financial year was totally representative. So the revenue from that bulk deal is around about GBP 26 million, it's about 66 units. So you can see really where that's coming from. So literally it was just to avoid a distortion because it's such a short 5-week period that we are reporting on. Guidance. What was the question of guidance...

You've raised guidance about cash.

Cash. Yes. Right. So if we talk about cash for then. Well, basically, our guidance for cash for 2022 is a bit less than it was. So we said we thought we'd be sort of around about GBP 200 million, GBP 200 million-plus. Since we gave out that guidance, I guess a couple of things. One is we've acquired some shares for the -- for our own EBT for our employee share scheme. So that's taken north of GBP 20 million of cash. And in addition to that, in line with our philosophy of trying to get ahead of the game, in addition to current land buying, which we've been doing, we have acquired, as you'll see, if you look at the back of the pack quite a few plots of land without planning where we've actually acquired the sites. And these are particularly good sites in good locations, a bit like we did with Woodford, if you remember going back and we're reaping the benefits of that from Woodford. So we've taken the opportunity to do that, and that means our guidance for 2022 now is that our cash balance will be probably around GBP 150 million to GBP 170 million. So going forward, that cash balance will build. But I think it's fair to say it definitely won't be -- if we can continue to be as successful as we have been, we certainly won't be cash-heavy until certainly before 2024 and maybe even a bit after 2024. So I think our philosophy of saying to you and to shareholders that we would like to retain the cash for when these very good opportunities come along, even if there's a longer time scale to them so far is bearing fruit, and we're very happy with what we've been able to buy.

Yes.

Glynis Johnson, Jefferies. Three, if I may? Firstly, just on that land. Obviously, strategic land does tend to be lumpy. But can you give us any kind of guidance about what we should be anticipating in terms of some of that strategic line coming through in terms of your own land buying going forward, particularly given that reference to having bought plots, right. Second of all, in terms of your full year '24 targets, can you just talk through what changed in terms of your confidence? Is it the land buying? Is it the delivery in terms of build? Is it the house price inflation driving the margin capture? What's driven that confidence? And then lastly, just in terms of build cost inflation, can you just give us a little bit more color what's moving up, what's moving up stronger, what might be coming back down, just any of the moving parts?

Yes, you do -- yes, go on. You do full year 2024.

Yes. Yes, fine. I mean in terms of forward land pull-through, it's normally 30%. I'd like to think as we go towards '24, '25, that number will go up towards 40%. As you get -- as you know, Glynis, it is long piece. So it's just -- we've got -- we have got some decent sites, north of 300 plots, some even bigger than that, which we hope we're going to bring through over the next sort of 3 to 6 years. So that's the sort of time scale we're talking about. In terms of the 2024 target, in terms of revenue, the situation -- the upgrade in the revenue is around as much HPI and mix and extras than it is about volumes. There's a little bit of volume, but really that's where it is, and mix. We're doing significantly less 2.5 or 3 story than we used to do. So that pound per square foot that we're getting is going up very nicely in the larger properties and that obviously is flowing through into the margin. So you're getting a higher revenue and that's why the margin guidance is 19.5% to 20%. So we're getting a little bit on the gross and obviously, we're getting some operational gearing at the overhead level. So we don't know where it's going to sit in that at this stage. Obviously, it's far too early to say. But at least we've got that confidence now that we should deliver at least 19.5% and going towards the 20%. [indiscernible] cost.

[indiscernible] cost inflation. We're guiding to about 6% for the year, which is, I think, we think it's reasonable. I think we have seen quite a sharp shock in terms of many of the material prices going up. We don't expect that to continue at that level. I think you've seen a large correction, which has dealt with energy prices and haulage prices. And I think they've got on top of those issues now. I think subcontractors will always be under strain. But we've been here before. This operating in this market is not unusual for us. We've been in very hot markets. I think we took a decision a long time ago with regards to new when we came back from the pandemic. We saw the order book from every house builder, and we saw the fact of what the sales rate was in. So at that point, we took a view that we needed to make sure our materials are well advanced. And that's sort of written it out for us for a long period. But we're managing it well. I think you've got 2 issues with build costs. You've got build costs and supply. The supply is there, build cost deals, we're pretty happy that we don't going to see any significant uplifts from what we've said, which is 6%, and it will always be more than offset by HPI.

Will Jones from Redburn. Three as well, please. First one, just around the gross margin in the first half. I think it's just above 24%. Just wondering if you could help us with what you think the contribution on price versus cost was to the change. And then whether on other stuff, did you have any -- was it an assistance or hindrance, I guess, lower affordable content, but equally, you had the PRS sale that's quite...

[indiscernible] It is lower PRS and more reportable and more HPI than build costs. There we go. Answered.

[indiscernible]

Yes. One that you don't know the answer to, please.

And the price cost component within it, best guess?

Well, we can't split it. But because of the mix, the product mix and the extra in there. But yes, I'd say it's probably more -- well, no, it's difficult -- it's just so difficult to break down, but there's definitely more price than costs. And there's no question about that, but splitting it because of the complexity [indiscernible] arise very difficult to do.

Yes. The second one is just a general update, I suppose, on build speed and production. And since we last spoke how your availability per site is improving again in comparison to the comments we've heard around the secondhand market. And the last ones relearn capacity and where you think with the latest divisional network, the group capacity is and outside of Southern, which divisions would you hire to us as being suboptimal in the output at the moment?