Redrow plc (RDW) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Redrow's Full Year Results Presentation. So -- but in first half, everyone at Redrow would like to express their deep sadness at the passing of Queen Elizabeth II, who dedicated her life to the service of our country. Our thoughts and condolences are with the Royal family as they grieve their immense loss. Moving on to today's presentation. I'm sure you don't need any introductions, but I'm Matthew Pratt, Group Chief Executive. And as you can see, Barbara, as ever our Group Finance Director. I'm very pleased to say that 2022's Redrow's underlying profits have returned to record levels we achieved in 2019 prior to COVID-19. At the same time, we have grown the business whilst continuing to evolve our successful strategy based on our market-leading Heritage Collection and prime locations. Redrow's disciplined approach in delivering its proven strategy and effectively managing both higher price and build cost inflation has underpinned these record results. We have improved customer experience, driven efficiency and pushed forward on improvements to our product range in part to incorporate our climate change objectives. So to start today's presentation with a summary of our record results. Turnover increased by 10% on 2021 to GBP 2.14 billion and was in excess of the pre-pandemic record set in 2019 of GBP 2.11 billion. Underlying profit before tax at GBP 410 million was up 31% year-on-year and just above the previous record set in 2019 of GBP 406 million. Underlying earnings per share has increased to 96p in 2022 from 92.3p in 2019. And our full year dividend per share has also increased to 32p compared to 30.5p in 2019. This is in addition to the previously announced GBP 100 million share buyback we began earlier in July. House price inflation was a major feature of the market, something we recognized very early. The average selling price of our house of our private reservations increased by 12% during the year, reflecting house price inflation, geography and product mix. Throughout the year, we effectively managed the balance between volume and price. Customers appreciate the value of our highly desirable products and places which are perfect for the market. During the financial year, we focused our land buying mainly on land replacement and some moderate growth, all at our normal average hurdle rates. At the same time, we maintained our disciplined cost control. Once again, we secured a 5-star NHBC customer recommendation rating, with a score of 94.5%. We have made excellent progress on our climate objectives and kicked started a number of projects to deliver our strategy. We signed the government's voluntary fire safety pledge and have set aside GBP 200 million provision to remediate any building in scope, regardless of the role we played in its construction. Trading for the first 10 weeks of current financial year have been positive despite macroeconomic uncertainties. Although the market is moderating, our homes and developments remain desirable and enable us to target both the new home and secondhand market. The value of private reservations was GBP 360 million compared with GBP 340 million for the first 10 weeks of 2022. The reservation value per outlet per week was GBP 296,000 compared to GBP 294,000 last year. So in summary, over the last few years, the market has been incredibly strong with elevated demand, partly resulting from people's changed priorities around working from home. We are now seeing a return to a more normal market where demand is moderating to historic levels. We capitalized on last year's strong market with our focus on house price inflation. This was possible because of our strong differentiated products, and these gains are now embedded in our forward order book. This provides the business with additional resilience to weather any potential deterioration in the macroeconomic picture. In this market environment, our Heritage Collection remains highly desirable. Our focus on innovative place-making paired with our premium detached homes keeps us well positioned to meet the requirements of our potential customers. The fundamentals of the market remain good. Interest rates, despite recent increases are at historically low levels. Mortgage availability is very good and employment levels are strong. We are well aware of the challenges of the increase in cost of living. It's clear our quality new homes will have a growing and additional point of differentiation from the secondhand market around energy efficiency. We had a strong start to the first 10 weeks trading of our new financial year. Our revenue per outlet continues to be market leading at levels of GBP 396,000 per outlet per week, demonstrating the desirability of our Heritage Collection. Our colleagues and partners strive every day to create quality homes and places for our customers, and I'd like to once again thank them for their dedication, hard work and support, which is so crucial in Redrow's ongoing success. The advantage derived from our people combined with our approach to evolve our proven strategy places Redrow in an excellent position to continue its strong progress. And with that, I will take some questions. Thank you.

Ami Galla from Citi. Just few questions from me. First one on your land strategy forward. Do we continue with the sort of land replacement -- on a land replacement basis going forward? And have you tweaked your hurdle rates at all in the current market? Also on planning, can you give us some update on how things stand and how much planning risk do we consider for the 2024 targets? And the second one really is on 2023 and the current forward sold position that you hold, which is quite high. Is the sort of opening of new sites a bottleneck to further beat to that sort of volume assumption -- that stands in FY '23 today, given the sort of strength of your order book position? And the last one really on the market, as we kind of think about the sort of stresses around affordability in this market, are you seeing any delays in completion of chains for home movers that could potentially delay them completing these purchases?

Right. So lot of them to answer to. Well, it covers them all in there. Right, let's start with [Indiscernible]. Barbara, do you want to pick up -- you probably want to pick up outlets for '24, did you want to pick up that one?

Yes.

Let's just plan it out very briefly, mention planning. Let me start around strategy, I think I said in the presentation as far as we are concerned at the moment, we bought a hell of a lot of land in 2021, which is now insulated as going forward in terms of our land bank. Now we expect to work on the basis of land replacement, so with probably a moderate element of growth going forward. So that's what our plan is going forward with regards to land. With regards to planning manually, we get planning, but it's incredibly slow, you know, incredibly slow. And it's disappointing to see that many of these sites are slow despite the fact that we're having little objections too. I mean it's just an overview. It continues to be over bureaucratic. And there is clearly a shortage of planning offices out there to deal with. And from our point of view, we request the government would move to address this situation because it's not just housing industry that relies on planning. It's everything else. And clearly, if we can get that moving, it will help the economy. With regards to markets, I think it's fair to say we've seen 2 years of an extremely strong market. I think that's the one thing to point out. We have multiple buyers for every single one of our plots. But I will stress that at the moment, we are seeing what we would consider a normal market. We're always going to get back to this point where a normal market was going to return. But ultimately, you've got to look at what we've got out there in terms of the underlying fundamentals of the business. We've got great sites. We continue to have great sites, because we require it to get those purchases. We want to be -- buy houses more aesthetically pleasing. So we've got to be in great areas where you've got more discerning customers. The mortgage market continues to be incredibly strong and incredibly competitive. You can still get 95% mortgage on the first time -- on new builds now with Halifax and the likes. But you got to remember that our products with regards to our customers are normally onward movers. So most of them will come with deposits anyway, with large deposits. So that's pretty strong from those point of view. Ultimately, there's underlying supply of homes across the U.K. still, and that continues. And the one thing we've always got to remember with regards to the market -- the new housing markets, we're tied to the employment market, particularly. And ultimately, what you've seen in employment is very, very strong and continues to be, do so. So overall -- the other thing I'll point out in ours is, we have a resilient cash buyer market. 33% of our sales last year with cash, cash buyers, which I imagine outstrips the majority. Many of them are downsized as cash from sales. So that is very strong. But the other thing I would say about the market generally is energy efficiency, will start coming to its own, because we've seen the costs now coming out with regards to energy going forward. The savings you can make by buying new home is significant, and therefore, that will underpin the market for a long time. And then on top of that, we got a massive order book. So that was probably picture of the market. I mean, so affordability is probably less. Delays in completion of chains, we're not particularly seeing it. There is some delays out there relating to conveyances, but it's all because everyone's busy. It's just a slight slowing, but nothing very known, to be honest with you. I think the sold point, do you want to pick up on the that?

Yes. So basically as I think people are aware, we forward sold more than we normally would be. I think that's fair to say with the record order book and everything else. There is a sort of specific reason for that in that the social element of our order book is significantly higher this year than it was last year. It's up from 35% in '21 to 44% in '22. So that's really the main part of the reason in terms of the order booking. The volume, the number of private units is actually down. And we've said before that our aim with private units is not to sell too far forward, because you've got HPI coming along, so you don't want to sell too far forward or otherwise you've got no HPI on what you've sold and you've got build cost inflation on what you've sold. So we've been specifically trying to control that as have others. So that's the reason for the forward sold position being quite so strong. I've talked to people, a lot of that comes through in the 2023 turnover. So our 2023 volumes, 22% of our volume in 2022 -- sorry to use 2, 22s -- was social. In 2023, we expect that number to go up to 25% of our volume. So most of the volume growth that the group will see in 2023 will come from social. There'll be very little from the private. In terms of outlets, I think the situation on outlets is that we averaged in 2022, the sort of number of outlets that we expected at the start of the year. In 2023, we're targeting an average of 120. We actually opened 2023, the financial year with 123 outlets, but we have got quite a lot of closures coming along. And we've got new openings, but those new openings really don't come through till towards the end of financial 2023 and into 2024. So I think we'll end 2023 with just over 120 outlets, with an average of 120. And then in 2024, we clearly need to open a lot of outlets to get to the 134 average. So we understand that. But although the planning process is slow -- it's very, very slow because we've got the land, the planning is happening and our anticipation is, even with the slow process, that we'll open a lot more outlets in the first half of 2024 financial than we've done in the past. In the last few years, our outlet opening has been predominantly in the last quarter of the financial year. Hence, the average is being what they are. But this year, it's certainly in 2024 based on where we are with the land -- we already own this land. And a lot of it is already in the planning process. It's just it's taken an ultimate length of time to get it through. So not -- I don't think -- I'm not saying it's easy, but at least we have the land and it's in the process now. And we think even on current time scales, we can get there.

I think in hurdle rates is where we are continuing to buy land, our historic average hurdle rates as well.

Yes.

Aynsley Lammin from Investec. Just 2 I think. First of all, what was the pure HPI for FY '22? And are you still seeing HPI come through over the kind of last couple of months? And then secondly, just maybe a bit more color on recent trading for the last couple of months. In terms of cancellation rates, are they still running around the 19%? Have you seen any increase in those? And is there anything kind of regionally or product wise to talk of, different trends across the country?

Sure. Yes, I mean it's very, very difficult to say what the pure HPI figure is for 2022. We know that the average selling price is up double-digits. You'll have seen that and the same is true of reservations. However, there are significant mix effects in that, in particular, for example, in terms of outlets, the reduction in outlets that we've had has been predominantly in the north. So our volume of reservations in the north is down year-on-year by a fair junk, whereas you've got a small reduction in volume in the South. So that mix effect is having an impact. Secondly, as you know, we've been moving more and more towards better locations and a better mix of property, and that's also having an effect. So as I say, it's quite difficult to distinguish what's mix from what's pure HPI. But if I had to have a guess, I would say it's high single-digits is pure HPI and then there's a whole chunk on top of that, which may be, I don't know, 3% or 4% due to mix.

Okay. With regards to recent trade, I think you've seen the figures. We were 0.61 in the first 10 weeks. I think it's fair to say that it still remains pretty strong out there. Bearing in mind our average selling price, I think we're probably towards the top end amongst the developers have reported. Ultimately, we still do have minimal stock out there as well, so people tend to be buying at the early stage of homes and committed to do that. So with regards to trading, we're pretty happy that -- as I said, it's back to a normalized market. Sales are out there, business still coming in -- we're pretty confident.

The cancellation rate?

Cancellation rate hasn't changed. Remains the same as last year.

Will Jones from Redburn, 3 please. The first, just on the movement in the Heritage ASP, which I think in the end was about GBP 4.37 million through the P&L last year. Just from here forward mix effects that we need to think around against that base, please? Second one is on outlets and whether you'd be willing to share the number of new openings that, A, you achieved last year and the number you need for '23 and '24? And then lastly, just around build cost, that 10% comment, was that June-to-June as opposed to averaging the P&L? And what's your best guess for June-to-June this year?

Okay. Obviously, build cost you can do?

Yes.

Moving on Heritage and outlets, it's same question. I mean build cost we said its 10% and actually June-to-June. I think going forward we expect it to continue to go -- to be increased. We don't expect it to level off. I think we've seen in the last couple of -- the year was an interesting year in terms of build costs. We didn't probably expect it to be as high as it was certainly in the half year. But there's 2 things that happened, commodities in the first half of the year, prices increased in the second half of year was all about energy. Interest in the first half was very much about lack of supply as well. But what we are seeing in the second half was actually we are getting an increased supply and it's becoming less of an issue. So we do -- we intend to offset the other, but energy would depend where we are with energy, but we are expecting to see some continuity in the past price inflation. But clearly, we've been working with many of our subcontractors and suppliers for a very long time. And so that always helps us. And ultimately, the other thing I would say is, Redrow is an incredibly standardized business in terms of the fact that our Heritage Collection is welcoming, well planning authorities in most locations. And therefore, the products that we tend to buy, we can buy in bulk as well.

Yes, in terms of Heritage, I mean, we've got an -- well, the heritage ASP looks specifically at Heritage, it's GBP 433 million. If you look at private homes, excluding apartments, it's GBP 437 million. So if you build a bespoke in, it's about that. In 2023, I would expect that to be slightly higher and the reason for that being that when you look at the outlets opened in 2022, the biggest element of outlet opening in 2022 was in the Central region. And the ASPs in the Central region are higher than in the North. So I would expect to see the ASP move in terms of heritage slightly higher over 2023. I think the blended ASP will also move up because that increase in ASP in the private will more than compensate for the higher social. So I think the ASP will move up by perhaps a couple of percent overall in terms of blended. And in terms of build cost -- sorry, in terms of outlets, I mean the outlets in 2023, we're probably looking at about 20 new outlets in '23. And in 2024, we're clearly looking at something more like 30. So it is a big step up as you -- as I made the point earlier. And in terms of build cost inflation, yes, the 10% is year-on-year as we speak. And we -- our projection or our expectation for the current financial year is around about 7% for '23, FY '23 June-to-June.

June-to-June.

Yes, June-to-June.

Charlie Campbell, Liberum. Just a couple of questions. Sorry to go back to the market, but just wondering if you're hearing or seeing any change on the ground, people getting maybe a bit more cautious? And also a related point, whether you would expect -- I mean, people have talked about seasonality coming back, normal markets. We probably anticipate a pickup in sales rates through the autumn. Is that kind of a realistic expectation? And then the second question on energy efficiency. Just wondering if you've benchmarked a Redrow home against a kind of comparable secondhand home, existing home, just to see what the saving is? I guess that's become more material these days, so.

Yes. Okay, with the market -- as I said, we used to have multiple buyers. We probably now running back to a normalized market and we are generally back to a normalized market. So I'm not seeing anything different from that. Bearing in mind, we're still making people commit from the foundation. We've got no stock out there, and we're still selling. So with the 0.61 is pretty top end for the industry. So I can't -- the market, I'm quite happy with. It's normalized. It's where it's been. I think people have short memories from -- before COVID, I think, is the issue. So we're quite happy with that. Energy efficiency, I mean, there's plenty of stats out there to work out. I think [ Jack ] has even put a note out there suggesting, talking about GBP 4,000 to GBP 5,000 for a new property compared to an old property. So the opportunity for people to move forward. I think it'll become a differentiator for the energy if it continues to be at the price as it is. Then, you know, buying a new home will have a specific advantage. We've always known for selling advantage. But now this is -- it's off the scale in terms of advantage to buy a new home in term for the energy efficiency. So I think from our point of view, the cost of making an old home into a new one, you're talking GBP 12,000, GBP 15,000 right on B grade. But we're looking for the Air Source Heat Pumps. There is a transitional period at the moment. We may well move to Air Source Heat Pumps a bit earlier than many of those, and we can -- we factor that into our costs, mainly because we like the aesthetics of our homes and we'll be using those in advantage. We've done -- we have done some trials. We've trialed a couple of houses, exact same houses, one with a gas boiler, one with electric gas source heat pumps, the gas boiler, effectively. Interestingly, the cost was the same in the end. What has happened is the Air Source Heat Pumps being obviously 300% efficient, whereas a gas boiler is 83% efficient. So it was drawing 1/3 less energy required to do in the Air Source Heat Pump, but the problem is here at the moment that gas is 1/3 of the cost per therm of an electric therm. So -- but ultimately, we are seeing -- and that's data that we've captured as we go forward. So we're seeing that on a like-for-like basis. But clearly again, second-hand markets, it's a completely different ball game. But gas and electric side-by-side, they're costing about the same with an Air Source Heat Pump at the moment is what we are looking at. So it's -- the trials are looking pretty good at the moment while we can use. I think the one thing we've got to be careful of is our industry is not just the fact of putting these energy efficiencies, those dealing with the customer and making sure that actually -- partly we're doing these trials is to understand what the customer point of view is and how they work with them because we don't want people coming back to us. We want them to fully understand how they work. So we're trialing them out for how they work with sound, how they come on. I think it's a different approach, but its different approach to these Air Source Heat Pumps. You can't turn them on instantly and expect it to be hot in your home. You got to plan for it in advance. So we're working on with what we're going to do with customers really and making sure they're well aware of the new technology going forward.

So can I just push or the autumn point. I mean, you would expect the sales rate to pick up in autumn, is that your expectation?

Yes. I mean I was in the Board, wasn't I? I mean, we have seen incredible seasonality this year, and it has been a strong year for holidays. So we do expect to see an uplift in the autumn market.

I think all the people will be reporting in October, we'll be reporting with the AGM in November. And I think that's when we'll have a really clear picture of what's happened in the autumn.

Glynis Johnson, Jefferies. I've got a few, but hopefully they're very short, but get your pens ready. The land market, is there is any nuance in the most recent weeks? Are you seeing some land that's previously gone to a competitor come back on the market? Green mortgages, is the value of that energy saving, is there anymore talks in the banks about maybe factoring that in? Reasons for cancellations, I don't know if you track them, but are you seeing affordability come in at all in terms of people's reasonings, extras, how big can they go? And then cladding, how much of your cladding provision is to cover what's in the fund and how much is for what you will, third-party remediate, i.e., how much are you going to have to pay VAT on and how much -- well, you have to pay VAT on?

Do directions and cladding, and I'll do the other 3.

Yes.

Is that right?