The Berkeley Group Holdings plc (BKG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. A warm welcome to Berkeley's Full Year Results Presentation for the Year Ended the 30th of April 2020. I'm Tony Pidgley, Chairman of the Berkeley Group. Following my introductory remarks, I will hand over to our Finance Director, Richard Stearn, to run through the financial results for the year. Rob Perrins, Berkeley's Chief Exec, will then update on our strategy and operational performance. These are excellent results from Berkeley in what are, of course, highly challenging and uncertain times. 6 months ago, we were concerned with the uncertainty from the U.K. political backdrop and Brexit. This has improved to some extent by the decisive general election result, and 2020 have begun with improved momentum and optimism, something for everybody to believe in. COVID-19 is a different and completely unprecedented challenge that has stopped this momentum in its tracks and, indeed, our country. The health and safety and well-being of our people, customers, our supplier chain has been our first priority. And we've quickly adapted our work in practices in line with government and industry guidance. In a very short time, this crisis has dramatically changed our economy, our society, our everyday lives of our people. We've seen a fantastic response from our frontline public services, and the U.K. government has taken unprecedented steps to support business. We are seeing a rapid shakeout of the economy with the resilience of sectors and individual companies being cruelly exposed. Berkeley, however, is well set to withstand and respond to this, an unprecedented challenge. And our strategy is designed for what is by nature a highly cyclical business. Our financial strength and experienced management team have enabled us to make a considered response to COVID-19. We have not furloughed our staff nor have we used any other forms of emergency government funding to support us or our people. Our autonomous structure and entrepreneurial spirit gives us real flexibility and means we can adapt quickly and perform in the new operating environment. I have been immensely proud of the way our people have responded. And this reflects the culture and values of Berkeley. I'd like to thank each and every one of them and all our partners for their resilience in these difficult and challenging times. As we look to the future, it's important that we reflect on our industry and work with government to ensure we emerge stronger, work in partnership and collaboration to the benefit of the people. For the homebuilding sector, this is an opportunity to put people at the heart of our thinking and become sustainable placemakers and community builders. This means simply embracing communities, engagement, net diversity (sic) [ biodiversity ] gain; creating inclusive, welcoming and [ tenure-growing ] communities; delivering national space standards and quality outsized space for everybody to be part of that community; enabling zero-carbon living by 2030; investing in innovation, such as our own precise manufactured homes from our own factory. There's also a role for government. Housing construction can lead economical recovery, and I very much hope that we will see this and our Prime Minister will lead from the front: a review of SDLT, an extension of the current Help to Buy scheme, an easing of planning red tape and Section 106 conditions, a review of CIL and continued investment by the government in affordable housing. And so to conclude, we have a housing crisis and many other issues to solve as a society. Our role in this is to create fantastic homes, strengthen our communities, improve the lives of those living in our communities, better places for people of all generations. This is our Berkeley's part of the solution: to build the much-needed homes in London, the Southeast that will lead to a fair society that this country needs and deserves. Thank you very much. And I will now hand over to our Group Finance Director, Richard.

Thank you, Tony, and good morning, everyone. I will take you through the results today, beginning with a summary and touching on the drivers of revenue and profitability before looking in more detail at the income statement, cash flow and balance sheet, finishing with the landholdings. Beginning then with a summary of performance for the year. We have delivered GBP 503.7 million of pretax profit, down 35% from GBP 775.2 million last time, broadly in line with the guidance given this time last year. This is ahead of the adjusted guidance provided in our COVID-19 update on the 27th of March and reflects good performance on completions over the subsequent 5 weeks. Prior to the COVID-19 lockdown, we were on track to meet the prevailing consensus, which had increased over the course of the year to approximately GBP 550 million. Earnings per share for the year is down 32.5% to 324.9p. This is slightly less than the decrease in pretax profits due to share buybacks in the year. The operating margin is 24.5%, which compares to 26% in the prior year. And the pretax return on equity was 16.6%, slightly ahead of the 15% long-term baseline. Looking now at the financial position of the company. Shareholders' funds, or net assets, are now GBP 3.1 billion, with net asset value per share up 7.2% to GBP 24.72, enhanced by the purchase of 3.5 million shares in the year. Shares in issue have reduced from GBP 128.6 million at the start of the year to GBP 125.5 million at the 30th of April 2020. Net cash is GBP 1,138.9 million, GBP 163.9 million up from GBP 975 million at the start of the year. This reflects a mix of factors, which I will look at later in the presentation. In terms of future visibility, we have cash due on forward sales covering the next 3 years of GBP 1.9 billion. This is slightly ahead of the last year-end. It reflects the normalization of our business profile following the post-financial crisis trading and delivery period and a good period of trading up to lockdown. This represents a very strong order book. Approximately 50% of these forward sales relate to 2020-'21, 40% to the following year and 10% thereafter. The estimated future gross profit in our landholdings has increased to GBP 6.4 billion, and I will look at this in more detail later. This slide highlights the key components of revenue and profitability. We have sold 2,723 homes at an average selling price of GBP 677,000 in the year. This compares to 3,698 homes at an average selling price of GBP 748,000 for last year. As always, the average selling price, or ASP, reflects the mix of properties delivered in the year. Volumes were anticipated to be around 20% lower this year than last. And COVID-19 has resulted in the additional reduction of around 5%. While difficult to forecast at this time, we anticipate volumes in FY '21 to be similar to FY '20, perhaps a little lower. ASP will be slightly higher due to the mix impact of the reprofiling of our sites in the current environment, with relatively more London homes being delivered compared to out of London than previously anticipated. In addition to the group numbers, 435 sales have come through the joint ventures in the year at an average selling price of GBP 723,000. This compares to 261 sales at an average price of GBP 475,000 in the prior year. The majority of homes sold this year were in St William, including the first 200 completions at Prince of Wales Drive in Battersea, and this is the reason for the increase in the average selling price. In terms of the contribution to profits from joint ventures, the contribution this year was ahead of guidance. And this means that next year's contribution will fall by around 1/3, increasing by approximately twofold in the following year. Taken together with the guidance on volumes and average selling price for the group, this means that profits for the coming year will be at similar levels to 2019-'20, but we are anticipating these to be weighted towards the second half of the year, approximately 1/3 to 2/3, due to the operational disruption around COVID-19. The long-term trajectory will see average selling price reduced towards the land bank level and volumes increase, with delivery increasingly focused around our regeneration sites and an increasing contribution from the St William sites. Turning now to the income statement performance for 2019-'20. Revenue decreased by 35.1% to GBP 1,920.4 million due principally to the anticipated production in residential volumes and average selling price as set out previously. Within the overall reduction, the prior year included GBP 160 million of revenue from commercial property disposals, which included the sale of the hotel at 250 City Road and 70,000 square feet of restaurants and bars at One Tower Bridge. At GBP 37 million, revenue from commercial property disposals in these results is back to a more normal level. Gross profit has reduced by 31.2% to GBP 637.4 million. This reduction is lower than the fall in revenue due to the gross margin being slightly higher this time at 33.2% compared to 31.3% last time. Gross margin does vary according to mix and was 34% for the second half of last year. Net finance costs remain low and represent imputed interest on creditors and normal costs associated with our banking facilities. As explained on the previous slide, the commencement of completions in St William has resulted in the increased contribution from joint ventures this year, with GBP 8.8 million last time, increased to GBP 33.3 million in these results. The effective tax rate for the year is 18.6% with no unusual items. This slide sets out the cash flows for the year, which resulted in an increase in net cash of GBP 164 million from GBP 975 million to GBP 1,139 million at the year-end. GBP 504 million has been generated from profits, with a net outflow of GBP 75 million from working capital. There are 3 important components in this working capital movement, all of which are dealt with on the next 3 slides. These are: GBP 440 million outflow from increased inventory; offset by a GBP 97 million increase in customer deposits; and a GBP 267.7 million increase in other working capital, largely represented by an increase in long-term land creditors. Joint ventures had a net inflow of GBP 112.9 million, primarily due to dividends received from the St Edward joint venture. During the year, we paid tax of GBP 89.8 million, acquired GBP 130.5 million of shares through buybacks, and we paid dividends of GBP 149.8 million. Looking forward, we anticipate investing a further net GBP 300 million into the balance sheet in FY '21 as we continue investing in our regeneration sites. I will not go through each line on the balance sheet, which is shown on this slide and shows net assets increasing by GBP 138 million to GBP 3.1 billion, as I will run through the 2 big numbers, inventories and creditors, in the next 2 slides. The only item I will highlight here is that reduction in noncurrent assets due to the dividends received from St Edward in the year. This slide analyzes the GBP 440 million increase in inventories in more detail. The overall land cost in the balance sheet has increased by GBP 226 million, meaning that new land acquired exceeded the cost of land used in production in the year. The cost incurred in the year includes the cost of new sites acquired unconditionally. Within this is the acquisition of Camden Goods Yard from Morrisons in the second half of the year; the cost of sites previously acquired conditionally that have become unconditional in the year and moved on to the balance sheet, including the Stephenson Street site in East London. And the final element is planning-related costs incurred in the year, such as the Community Infrastructure Levy and Section 106 costs. The second big movement is in build work in progress. This has increased by GBP 210 million as new build investment has exceeded the build cost expense this investment was anticipated as we develop out our new regeneration sites and, as I just mentioned on the previous slide, is expected to continue into the coming year. Completed stock has remained stable at GBP 140 million, and it includes 244 residential units across some 29 developments. Moving on to the next slide. Creditors have increased by GBP 375 million in the year. There are 2 main reasons for this: firstly, a GBP 97 million increase in customer deposits as new reservations exceeded the revenue taken to the income statement in the year, reflecting good sales and the normalization of our trading profile; secondly, a GBP 280 million increase in land creditors. The majority of this is long term, with the 2 largest new land creditors being in respect of Stephenson Street and Camden Goods Yard. GBP 109 million of the land creditors' balance is due for payment in the next 12 months. Moving on towards financing. The group facilities remain at GBP 750 million, consisting of a drawn GBP 300 million term loan and a GBP 450 million revolving credit facility. Through these facilities, we have certainty of financing out until November 2023. At the year-end, Berkeley was ungeared with net cash of GBP 1.1 billion and total available liquidity of GBP 1.9 billion taking into account these bank facilities. During the second half of the year, the group's St William joint venture refinanced its bank facilities, increasing these from GBP 150 million to GBP 360 million for a new 3-year term with 2 1-year extension options. Finally, this slide summarizes our landholdings at the 30th of April 2020. Estimated future gross margin has increased to GBP 6.4 billion compared to GBP 6.2 billion last year with plot numbers increased to 58,413 from 54,955. After taking account of plots taken to sales in the year, we've added a net 3,458 plots to the land bank. This is through the addition of 6 sites in the year, new planning and optimization of existing planning consents and market reassessments. After accounting for the GBP 743 million of gross profit taken to sales, approximately GBP 922 million of gross profit has been added to the landholdings. Approximately half of this relates to the new sites acquired and the other half to optimization and reappraisal. Thank you very much, and I will now hand over to Rob Perrins.

Thank you, Richard, and good morning. I am Rob Perrins, Chief Executive of the Berkeley Group. Before looking at Berkeley's performance and strategy, I'd like to summarize our immediate operational response to COVID-19. Our first priority has been to ensure the health and safety and well-being of employees, supply chain and customers. We at Berkeley are very aware that COVID-19 is the first -- is, first and foremost, a human tragedy but one that will also have profound economic consequences, and this places a significant responsibility on all companies. We acted quickly to adapt our site working practices, which enabled us to maintain a level of production across all of our sites, always adhering to guidance from government, Public Health England and the Construction Leadership Council. Initially, production levels fell to around 40%, but we are now back up to around 80% of normal production capacity. This is thanks to the experience and expertise of our construction and health and safety teams. Actual production was also impacted by material shortage as much of the supply chain shut down, which has now largely reversed. Today's 20% reduction from full capacity is due to amended site operating procedures, which requires social distancing and additional monitoring. Our marketing suites were closed from the 24th of March, and we can quickly transition to the use of technology to support sales and completions. We reopened our marketing suites on the 16th of May for appointments with clear policies to ensure social distancing is enforced. Our office-based employees moved quickly and seamlessly to remote working, aided by our resilient information technology infrastructure. We have now adapted our offices, undertaking the necessary risk assessments to provide safe working environment to those who need to be in the office, so we can operate a more balanced hybrid model. Finally, I can confirm that Berkeley has not taken advantage of the government's furlough scheme or participated in the COVID Corporate Financing Facility, choosing instead to address the challenge presented by COVID-19 from its own resources. Turning to Berkeley's results announcement. I would like to focus today on the strong position that Berkeley is in and the transition we have been undertaking over the last 5 years, moving from the Central London sites acquired in the financial crisis to building a unique development business, which tackled some of the most complex sites in London and the Southeast. Richard has clearly set out the financial performance of the group along with a very strong cash position, and I would like to highlight the following: Our pretax profit of GBP 504 million exceeded our initial expectations going to lockdown which were GBP 475 million. This is in line with the guidance at the start of the year, which was for profit to fall by 1/3, completing the return to more normal levels. We have invested in the balance sheet as we bring forward our new regeneration sites. An additional GBP 210 million has gone into work in progress, and we are forecasting further net investment in these sites over the next 2 years. COVID-19 has highlighted the need for business resilience and financial strength, and we ended the year with net cash of GBP 1.1 billion, forward sales of GBP 1.9 billion, an exceptionally strong position. This financial strength combined with the group's uniquely long-term business model and expertise mean we are well placed to deliver and optimize the GBP 6.4 billion of estimated gross margin in the land bank. We now have 26 significant development opportunities in London and the Southeast, which I'd like to look at in more detail on the next slide. These 26 regeneration sites shown on this slide are sites, which others do not have the resources, expertise or risk appetite to undertake at scale, provide extensive opportunity to add value over the cycle. As Richard has said, these sites are highly capital intensive, particularly in the early stages of remediation, servicing and creating the initial sense of place. As the last slide set out, these sites are the foundation of our long-term purpose and strategy, and our commitment to our stakeholders. Berkeley's purpose is to build homes, strengthen communities and improve people's lives, using our commercial success to make valuable and enduring contribution to society, the economy and the natural world. As we continue to invest in our unique operating model, our holistic approach to placemaking, putting people, nature, connectivity and the health and well-being of the wider community at the core, will be even more important in the post-COVID-19 world. Underpinned by this model and our financial strength, Berkeley continues to target a cumulative pretax return on equity of at least 15% over the cycle, broadly equivalent to a GBP 500 million pretax profit per annum. This provides the confidence to reaffirm our commitment to annual shareholder returns of GBP 280 million per annum. The previously proposed GBP 455 million return of surplus capital has been deferred for up to 2 years. This will now be delivered either through enhanced shareholder returns or invested in incremental land investment or a combination of the 2. This recognizes the current volatility from COVID-19 and the potential to acquire incremental land interest should opportunities arise. During the period of deferral, the company will provide clear visibility of the surplus capital by retaining it on the balance sheet. I would now like to look at the sales performance in the market. Going into lockdown, Berkeley was experiencing a stable trading environment with sentiment having been buoyed by the decisive U.K. elections results in December. As a consequence, sales for the 12-month period have been some 10% ahead of the prior year. Pricing remained firm throughout the year, and we have secured prices above our business plan levels, broadly covering cost increases. The split of our customers remained broadly 50-50 between owner-occupiers and investors, with overseas customers accounting for the majority of investors. Sales in April and May reflected the impact of the lockdown and were around 50% of normal levels with pricing stable, a good result given the impact on the home-buying process. We have seen an encouraging increase in activity as the economy gradually reopens, but it's too early to determine where demand will settle over the coming months. To really kickstart the economy and enable the [ feel-good effect ] to return, we need to see demand-side stimulus from government, including the reduction in stamp duty, an extension of Help to Buy, longer mortgage offer periods and investment in truly affordable homes. Looking forward, the fundamentals remain strong with undersupply and low interest rates, and this remains a good time to buy in London or in the Southeast for those who have a deposit, particularly when compared to the cost of renting. Now looking at land and planning. Berkeley continues to appraise a number of new land opportunities. We have bought 6 new sites, comprising around 4,500 new homes. This includes a site on the Old Kent Road in Southwark for around 1,300 homes, where we have completed a challenging land assembly through unconditional acquisitions; a site in Brentford for around 1,900 homes, which is also a land assembly of 2 conditional purchases via the St Edward joint venture; a site in Camden for around 650 homes, where we'll also be reproviding a Morrisons store; and outside London, a site in Tonbridge, Kent; and sites in Brighton and Worthing in Sussex within the St William joint venture. Our focus in London continues to be getting our controlled sites into production. And now when I turn to planning, we have secured planning consents on 8 sites in the year. And we have obtained 55 revisions and amendments on other sites. We had a refusal in the year on our Hertford site in St William, and we managed to secure a consent by appeal shortly before the year-end. While we have had notable successes in boroughs who want to see new housing, in the main, planning is taking even longer, is very expensive and increasingly bureaucratic. As we emerge from COVID-19, the planning systems need to be reviewed, both in terms of its cost and complexity. We would abolish sale for sites over 100 units and focus Section 106 obligations on delivering benefits for the local community. In terms of build costs, increases continued at around 4% until the end of 2019. From the beginning of the calendar year, build costs have remained level. As the U.K. emerges will lockdown, we expect further deflationary pressure on the costs in the short-term due to lower activity levels. Looking further afield, we will continue to work with our supply chain to mitigate the risks of any material shortage in the event of a second wave of COVID-19 or should a trade agreement not be secured with the EU by the end of the year. These do both remain important risks that cannot be discounted and which cannot be totally mitigated. We have maintained around 11,000 people working across our 70 sites in production during the year, with a total 32,000 U.K. direct and indirect jobs supported across the economy by Berkeley. Turning to our modular factory. The year has seen good progress in the development of our provision -- precision manufacturing facility in Ebbsfleet. The machinery is now ordered to enable production of the first prototypes to begin next year. This slide shows the status of our 98 development sites, of which 45 are in London and 53 in the Southeast and Birmingham. We have completed 6 sites and removed a conditional site in St Edward and acquired 6 new sites in the year. This leads to the reduction in number of sites from 99 at the start of the year to 98 now. The sites in production have increased by net 1 to 70, with 7 sites started and 6 sites mentioned above completing. Of the 16 owned sites not yet in construction, 12 have at least a resolution to grant planning permission, which significantly reduces the balance sheet risk in our landholdings. Of the 12 conditionally contracted sites, 3 now have at least a resolution to grant planning. We are targeting 10 new site starts in the coming year, but this is dependent upon market conditions. The next 2 slides are the map setting out the locations of all of our sites. I will not dwell on these save to note that 6 new sites added in the year are marked with asterisks. This slide is our London sites, and I'll leave it up for a short time to enable you to review it. This slide shows our sites outside London. And again, I will leave it up for a short time to enable you to review. Turning briefly to our joint ventures. St Edward is our joint venture with M&G, and it currently comprises 5,300 homes. This is an increase of 1,600 homes in the year largely due to the inclusion of the 1,900 homes at the new site in Brentford in London, which is conditional on planning. During the year, the site at Wallingford was moved into production. St William is our joint venture with National Grid comprising some 10,900 homes, which is up from 9,800 a year ago. It has been a good year for St William. It is now a profitable company with 8 sites in production. We also obtained planning for 2,800 homes at Poplar and 350 homes at Hertford. Consistent with the previous guidance, we anticipate St William to be materially earnings enhancing by '23, '24. So lastly, I conclude with a summary of our guidance. It is very difficult to forecast in these volatile times with the nature and complexity of prevailing macro risks. We will always prioritize protecting the balance sheet ahead of annual profits. And financial strength is, therefore, of paramount importance. We do have GBP 1.1 billion of net cash. We have forward sales of GBP 1.86 billion, and we do have unrivaled landholdings. In 2021, we are looking to deliver similar profits to 2019-2020, but these will be weighted towards the second half when we expect to deliver 2/3 of this year's profits. Looking forward, we continue to target a cumulative pretax return on equity of 15% for the 6-year period ending 30th of April 2025. This broadly equates to GBP 500 million pretax profit per annum. We are looking to selectively add to our landholdings and are targeting the estimated future gross margin in the landholdings to grow to GBP 7.5 billion by 2025. Turning to shareholder returns. We remain committed to our GBP 280 million annual shareholder return program, which we are able to make through either dividends or share buybacks. This now equates to GBP 2.23 per share following the acquisition of 14.6 million shares for GBP 515 million at an average price of GBP 35.25 since December 2016. Of the next GBP 140 million, which is committed to be paid by the 30th of September 2020, GBP 6 million has already been returned through share buybacks. We also remain committed to delivering value to shareholders from the previously identified surplus capital of GBP 455 million. We have deferred the return of this by up to 2 years and provided the flexibility for this to be utilized either through enhanced cash returns to shareholders or investment in incremental land interest should opportunities arise to enhance shareholder value over the cycle. We do see the potential of such incremental land investments due to the macro uncertainty of volatility. And this incremental land investment will be defined as cash paid on land interest over and above the cost of land used in the income statement from the 1st of May 2020. The surplus capital remain on the balance sheet until it is used for either enhanced cash returns or incremental land investments. I do thank you very much for your time and very much for listening.