Taylor Wimpey plc (TW) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the Taylor Wimpey trading update. My name is Naudia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Jennie Daly, CEO, to begin. Jennie, please go ahead.

Thank you, Naudia. So good morning, everyone, and I think it's still acceptable to say Happy New Year, and thank you for joining Chris and I this morning. So you've already seen our trading statement, so I'll take you through the headlines and then update you on what we saw in the market at the back end of 2022 before opening up for questions. I'm pleased to say that in a more uncertain and challenging market, the business performed well and we expect to report an operating profit in line with consensus and a strong margin performance, benefiting from our focus on driving price in the year and our commitment to improve cost discipline across the business. As you'll recall, in November, we guided to group completions broadly in line with 2021, which we have delivered. It's worth reiterating that this incorporates slightly lower U.K. private completions and a bit more from Spain and JVs. However, given the market backdrop, we're very pleased with this. As you know, by the second half, we were very cautious on the land market, both reflecting the strength of our land positions and what we saw as unattractive pricing given market conditions. This has resulted in significantly reduced land commitments in recent months, and we ended the year with a similar number of land approvals to the half year and a landbank that has reduced slightly to 83,000. This is clearly a choice which we made but one we think is right given the market conditions. And as you'll have seen from the statement, this has supported our year-end cash position but will, of course, have some impact on outlet openings in 2023. One of our key strengths is our landbank, and I'm more focused than ever on ensuring we drive value from this strong position. Despite the challenging planning environment, I'm delighted that we've delivered an increase in outlets as guided. We see these additional outlets offering more locations and customer choice as an important benefit coming into the year with lower sales rates. It's fair to say there's a lot happening around planning in the those final weeks of 2022. I'm not going to repeat it here, but you'll see our thoughts and concerns arising from the current planning changes in this morning's statement. So just taking you back to May, in my first update, I talked about our having a very clear focus on operational excellence and efficiency. This focus has positioned us well as we face into a more uncertain environment. We've acted quickly to mitigate risk using all available levers, including a freeze on recruitment, significantly reduced land spend and increased management controls around spend and investments, including WIP releases. We've announced today as part of this operational focus and in light of market environment that we have entered into consultation with a number of our employees on a series of proposed changes. This includes proposed changes identified as part of our ongoing drive to increase operational efficiency as well as all of which, if implemented, would reduce our overheads to reflect market conditions. I think, importantly, none of these proposed changes would affect our existing market coverage, our ability to deliver volumes from our landbank or strategic pipeline or, importantly, to deliver a high-quality product and service to our customers. But they would ensure that we are leaner, better, more efficient and a more resilient business. Should the proposed changes go ahead post consultation, these would be expected to generate annualized savings in the region of GBP 20 million with costs to achieve circa GBP 8 million. So now turning to current trading. In terms of the market, since we last spoke with you on the 9th of November, there has been little underlying change, which probably won't come as too much of a surprise, having obviously been a quiet period in the run-up to Christmas, which is a trend seen every year and we're just a couple of weeks into January, but I thought that it would be helpful to give you some additional data points on net sales rates and cancellations. So as we updated you at the half year, sales for the first 4 weeks of the second half were 0.57, with a cancellation rate of 19%. Sales for the next 8 weeks up to the mini budget of 23rd of September were 0.55 with a cancellation rate of 23%. Our net sales for the 6 weeks post the mini budget up to our update on the 9th of November were 0.43 with a cancellation rate of 29%. And for the 8 weeks from the trading update to the end of the year, sales were 0.4 with a cancellation rate of 21%. We know that many of our customers are still keen and have a desire to move. We kicked off our new campaign, "Let us take care of it" on Boxing Day, which you can see on our website. Whilst it's a relatively short period, just to give you a bit of a flavor, while appointments booked via our website over Christmas were down year-on-year, total appointments were up overall. This was really the result of the very proactive efforts of our sales teams who directly booked more than twice as many appointments than last Christmas. We also saw an increase in walk-ins over Christmas as we stepped up our marketing efforts. Overall, though, you won't be surprised to hear me say that conversion, that interest is taking much longer. Looking at other lead indicators, website sessions are currently running pretty similar to this time last year. And within that, organic traffic is down by about 1/3, but we've driven an increase in paid media to make up the difference. Our customers are telling us unsurprisingly that the key factor in their decision-making continues to be the well-publicized cost of living challenges, mortgage rate rises and general economic outlook, all weighing on sentiment and feeding into increased caution from customers regarding ultimate commitment. We remain very confident in the quality of our locations under our product. So what is critical now is rough to say laser-focused on sales and to keep very close to our customers at all stages of the order book. As you know, we refreshed our sales training last year for selling in a more difficult market, and our teams remain focused on maximizing our leads and providing the best possible customer service. With the important spring selling season approaching, I believe our teams across the business are very well prepared. Now we are employing targeted incentives, and this has become a bigger feature across the market in the final quarter. But incentives, as I've said previously, are not a silver bullet. So we need to constantly assess the effective application of incentives and tightly control them so we're not giving away margin without the sales benefit. Another critical element, of course, is the mortgage market, where we continue to see a good appetite to land with the banks in good financial health. As you know, rates went up substantially in the third quarter, but with lenders having already factored in above peak based rate expectations, we continue to see mortgage rates reduce. So for example, the Halifax's 75% LTV 2-year fixed is now at 4.95 and it's 5-year fixed at 4.55 on the same basis. Moving on, we will, of course, update you on the Board's decision on dividend at the full year results on the 2nd of March, but it's worth reiterating our ordinary dividend policy here, which is to pay our 7.5% of net assets or at least GBP 250 million. This is deliberately designed to provide investors with visibility of a reliable dividend throughout the cycle. And as you know, our dividend policy has been stress-tested to withstand conditions beyond what we would consider a normal downturn. Despite the economic backdrop, long-term sustainability and value-add to the business remains a top priority for all of us at Taylor Wimpey. We have made excellent progress on our net zero transition plan and we have now submitted our net zero targets to the science-based target initiative for independent assessment. So to conclude, whilst current conditions are uncertain, we face into 2023 in a strong position with a very strong balance sheet, excellent landbank, an increased number of sites in high-quality locations and tight operational discipline throughout the business. We remain completely focused on this, ready and able to deal with whatever the market conditions we see, whilst remaining agile and alive to opportunities should they emerge. So hopefully, that's been helpful. And Chris and I are now happy to take your questions.

[Operator Instructions] And our first question today goes to Ami Galla of Citigroup.

I have a couple of questions. The first one, can you give us some color on the profile of buyers that you've seen in Q4, the sort of LTVs that you're using. And also some regional differences that you've seen in the market over the Q4. And the last one I had was just in terms of the price points that you're seeing the most difficult market conditions, if you could give us some more flavor around that.

Ami, yes, quite a bit in there. I mean from a buyer profile perspective, it's really hard for us to segment over that short period. I mean we've had probably about 35% of our completions over 2022 were to first-time buyers, about 40% to second-time buyers and a very low number to investors. So we haven't really seen that move significantly. And regional differences. I think in November, I said on a relative basis, the various regions were performing in terms of what you would expect. I think probably in some areas where there's a heavy reliance on first-time buyers and there was more significant help to buy, a little bit more, but nothing that I'd really want to call out there. And again, price point, really hard for me to unpick that at the moment. But clearly, the availability of high loan to values are affecting first-time buyers coming into the final quarter and I think that's a surprise for you.

And the next question goes to Aynsley Lammin of Investec.

Just I think I've got three actually. I wonder if, firstly, I may have missed this, but if you could give the private order book, what that was at the end of the year and why it was kind of down year-on-year. Secondly, just interested on any comments on kind of building materials, labor cost inflation, trends you'll see in there, what you'd expect for this year. And then thirdly, just on site numbers. Obviously, 232 average last year. What's your kind of view and tactics around sites looking at kind if the sales rate stays at 0.4 or 0.5, do you still be bringing on more sites to support volume? Or will you be more cautious given the kind of cash implication? Just interested to hear your thoughts around how you're managing that.

Yes. Okay. Could, Aynsley, you just repeat your second question for me, please?

Second one is just on build costs for the building materials and labor, what you're seeing trends, you expect, is there a bit more tension on kind of negotiations? Are you pushing back a bit more on building materials, et cetera? Just interested to hear your thoughts there.

Yes. Okay. Well, look, I'll cover the order book and I'll pass to Chris on the build costs . So on private order book, we've got -- let me just find it. Yes, 2,943 private order book. That's 45% down, Aynsley. Of that, 53% is exchange. So a decent exchange level. On outlets, we're not going to guide into 2023 on outlets. But in terms of bringing sites forward, there are very few instances where I would think it's a good decision not to bring a site forward. we are managing that really closely and we've got good management controls in place. Clearly, sort of infrastructure, the opening infrastructure cost is something for us to look at both at -- for the vast majority, we would continue to open sites even if sales rates were low. So Chris, on build cost.

Aynsley, when we reported the half year results in August, I said that the prevailing annualized build cost inflation had increased to 9% to 10%. And if I look back 12 months from today, that 9% to 10% range remains pretty accurate. Where build cost inflation goes from here is a lot harder to sort of pin down. Some of the sort of unknown factors include the impact on Scandinavian timber pricing due to the absence of supply from Russia and Belarus. You've also got what happens to U.K. energy cost with the end of government support and how we unpick that given some generally opaque supplier hedging policies, although, obviously, gas pricing is significantly down on the highs of last year. And then you've got wider wage inflation, which I think is still to fully flow through for some materials. But clearly, we should see some easing in subcontractor wage inflation. Subcontractor availability increases. And currently, there are anecdotal localized examples of that but nothing that statistically consistent across the business that I would want to point to. And obviously, we'll expect to update you further on that when we get to March.

And the next question goes to Marcus Cole of UBS.

I think I've got three questions as well. I was just wondering if you could give the gist of the fixed cost in the business as you think about operational leverage. And then the second one, I was just wondering what incentives you're currently doing in terms of percentage of sales. And then lastly, I was just wondering what the land creditor unwind is this year. I think previously you said 350, but I just wanted to double check that.

Okay. I'll take the incentives question, Marcus, and then I'll pass over to Chris on the fixed costs and land creditor unwind. I mean I'd said previously that we're very controlled and targeted on incentives and that very much sort of remains our focus. Incentive use generally has been quite low. I think the average incentive for 2022 was around 2.3%. That was actually lower than our incentives for 2021. So you can see how strongly we were pushing price at the start of the year. They have picked up towards the end of the year. And we're continuing to really play them on a tactical basis.

Yes. Marcus, as this is just a trading update, I'm not going to go into any detail, but for very broad brush purposes, it wouldn't be far wrong to assume about GBP 300 million of fixed costs in total with about 1/4 of those sitting in gross margin, which are things like [ shareholder ] depreciation, salespeople maintenance costs. And the balance then would sit in admin expenses. In terms of land creditors, they peaked back in June at GBP 844 million. And as expected, due to the reduction in land buying in the second half, there are more than GBP 100 million less than at the -- at that peak. And -- so really, you talk about GBP 720 million to GBP 730 million, and approximately half of that balance will be due within 1 year.

And our next question goes to Will Jones of Redburn.

I'll try three if it's okay as well. First, just coming back to the sales rate, I think, in Q4, that 0.4 number, which looks somewhat firmer than a couple of peer numbers reported this week. I'm just checking if there's anything we need to be aware of there around potential use of bulk sales? Or is it a fairly clean figure? And would you highlight any great shift through the quarter above and beyond normal seasonality? The second story you explored in that last few weeks and months as well. Just thank you for the data around customer leads, appointment and websites. But if you're looking at the year-on-year picture, you've been giving us that same shape, if you like, in November and October, was it different year-on-year at Christmas? Or is it more or less as you were? And then the last which is a technical one, but when we think about the -- obviously, a big drop in the private volumes in the order book compared to relative stability on affordable, how should we think about the percentage of the volume is likely in affordable this year? Will it step up or will actually track the private, do you think?

Okay. I mean first of all, on sales rate, that final reporting period at 0.4, our teams worked really hard for that. Our sites are in really good shape. We've ensured that our website, our development websites and plot details are up to date. So it really stressed quite strong effort right across the business to deliver that. You're looking at bulk sales, I mean, overall in the year, nothing really to call out, relatively low numbers. It is fair to say, well, that there will be bulk sales in that final reporting period. And I don't have the number to unpick it, so it's less than 0.4, but it would be more, I think, than 0.3, if that's helpful. I mean again, on customer leads, I don't have the breakdown today for sort of October, November. We've continued to see really strong early leads, we did and I think I said in November has started to see a drop-off in appointments at other sales centers through the normal period until late autumn that we would expect to see a tail off, but really reinforce the very pleasing level of activity that we've seen alongside our Christmas and sort of Boxing Day campaign. Just on private volumes and affordable, Chris, do you -- [start up] for me?

Yes. So obviously, the affordable mix was 21% in 2022. I mean I would have expected in sort of normal sort of market conditions for it to be around the 21%, 22% level. I think to some extent the outcome is going to be a function of private sales in 2023. So it might edge up a little bit if private sales are weaker. You might be talking in the range, 22% to 24%, depending on the strength of those private sales. But it's not like you can just completely switch to affordable because in the vast majority of cases [shortage] around the sites. So yes, you could see an increase, but it's not going to be a massive increase in mix.