Vistry Group PLC (VTY) Earnings Call Transcript & Summary

Hello, and welcome to the Vistry Group partnerships update. My name is George. I'll be the coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'd like to turn the call over to your host today, Mr. Tim Lawlor, CFO, to begin today's conference. Please go ahead, sir.

Thanks, George. Good morning, everybody, and thanks for joining at relatively short notice this morning. I'm joined on the call by Stephen Teagle, who most of you will know, he is the CEO of our Countryside Partnerships business, and Stephen will provide more details on the deal in a moment. So you'll have seen that we've issued an RNS this morning. After a huge amount of work over the last few weeks and into the early hours, we closed the deal overnight, and we felt that it was important to announce as soon as possible. But of course, there's only so much information in detail we can put into an RNS itself, so we thought it'd be helpful to have a call this morning to enable you to hear a bit more detail and also to ask us some questions directly to ensure that you completely understand what it is that we've signed up. And we're very excited about the details of the deal and the progress that this demonstrates we've made. So Stephen in a minute will give some more details on the deal, grants and the appetite of investors for future work. But before we go there, maybe I'll just say a couple of words of overview, first of all. I think there are three points that I emphasize. The first is that this deal demonstrates significant strategic progress rapidly and in materiality. This is a big deal which we've done in a relatively short scope of time. When we announced our strategy back in September, we talked about migrating 8,500 units from our Housebuilding landbank into the partnerships model. And while that number exceed, we said, circa 8,500, we might conclude that we'll transfer more, but we've already, with this deal, concluded 30% or actually over 30% of those units into the partnerships model, so rapid progress. And the second point is around our counterparties. So one of the main challenges we got with our strategy was, are there people on the other side who are going to be able to make the investment to support the build-out of these affordable and PRS homes. And we hope that this deal and the size of this deal demonstrates that there are counterparties out there with the financial clout to back the strategy and to work with us to build out homes in difficult market conditions. And the third point is that this deal underpins our numbers. It underpins our FY '23 profit and cash guidance and derisks the remaining delivery. The cash that's coming in is significant, GBP 160 million, coming in before the end of the year for this deal that supports our capital allocation proposal. It strengthens our balance sheet and starts us on our path for the shareholder distributions. And finally, it gives us momentum into FY '24 by securing a significant amount of revenue for '24. It enables us to keep building at a time where others are having to put the brakes on the building program. So really important for us as a group. And maybe I'll hand over to Stephen there to give you a bit more detail and color on the deal itself.

Thank you very much, Tim. Good morning, everyone. Thanks for lending time. So I'm going to reiterate some of the points Tim has made, amplifying some areas and then we'll move on to some questions. So the first thing to say is this is a portfolio partnership agreement, and it absolutely exemplifies our affordable and mixed tenure model. And the first thing to say is the sheer scale of it. So we think it's one of the largest residential investment transactions on record if you take out M&As and large-scale stock portfolio transfers between housing associations. It's extremely significant in terms of its scale of affordable delivery, but it's also significant for the single-family element that's being delivered through Leaf Living, where we think it's one of the largest single-family transactions on record by value and unit quantum. Now it's not the only portfolio deal that is out there, and I'll come on to that in a moment, but it is a very significant one in terms of scale. And that leads us -- that scale is what gives us four key elements, and I think it's worth reflecting on specific to this transaction. Firstly, it demonstrates our early success of our strategy, I'll come back to that; captures efficiencies and synergies, which you wouldn't get from a series of independent transactions, but you do get from [ one of the ] scale; absolutely, as Tim said, underlies the appetite and strengths of the purchasing -- the financial strength of the purchasing sector, and we can explore that; and then it uses our strategic assets to deliver, including our relationship with Homes England. So four really key aspects to that. So to just deal with that first, we've got early success of our strategy. So we're working with Sage and Leaf, our established partners. So that gives us a really good footing to go forward with. We've already got significant percentage of work with Sage and Leaf, constitutes about 10% of our existing output as an organization. So we're delivering PRS, and we're delivering affordable with Sage as well. So we have an established relationship, and that really helps us deliver our strategy quickly. This is sites that we own. There's over 70 sites. Even more of that 82 different phases, when you look at the phases across the sites, 81 phases, in fact, across those 70 sites, all of the sites have outlined planning. 230 of the sites are in for reserve matters, and we can see that being concluded fairly quickly. You can see the time line on that. So this is a strategy that -- this is an example of us implementing that strategy and starting to deliver quickly and with pace. And that pace is really important in terms of capturing the efficiencies and synergies within the business. So having folded the Housebuilding landbank in with the partnerships landbank in the way that Tim has explained, and you will be familiar with from the presentation in September, we've now got, bringing together on a single operational platform, the ability to build and to build in a way that is efficient. That efficiency, of course, is driving our input cost efficiency. So our conversations with our suppliers, and our conversations with our subcontractors, there have been headlines in the pressers of seeking 10% discount, all of that conversation is made much easier by us being able to point to absolutely we're going to be building on that site, here's evidence of delivery, and we're maintaining momentum across such a large spread of sites. That gives us confidence, and it gives our supply chain confidence when we're negotiating prices with them. So that's a key area of supporting our strategy and allows us to operate efficiently. We're also bringing together, on a portfolio basis, the way that we approach land and the way that we approach planning through a single operational platform, gives us additional efficiencies in terms of our overhead costs as well, and that's already being played out. So that's important. The underlying strength of the sector in terms of appetite to invest, I think, is really endorsed by this deal, but there are others. It's interesting this level and scale may be unique, but we are talking to three others at the moment around large portfolio deals, RPs and for-profits and traditionals who want to invest and get forward visibility of supply lines. And I think that's the key thing here, giving forward visibility to our partners is attractive to those partners, allows them to work with what they now recognize is the largest partnerships business in the country with a significant landbank and resources to deliver. And that is absolutely underlined by the approach that Sage and Leaf have taken and that we can see amongst others. So I think it shows that there is still very much a [ beating pulse ] within the sector looking to invest. There are a wide range of other deals that we're involved in, smaller deals at the moment. The confidence is out there to continue to invest even though we have seen headwinds impacting on traditional housing associations. They're still very keen to take part in delivery. And then the fourth area that's use of our strategic assets. So this deal is underpinned by our strategic partnering status with Homes England. So we're utilizing our grant within that program, and Sage is utilizing their grant within that program to get the first tranche of delivery underway. So that relationship with Homes England is very important. We've made -- we've given them visibility of this deal. So they're very aware of it. They can see the rates at which we are likely to deliver these homes, and they're very supportive of that. And indeed, the door is open for us to be bidding for additional grants we want to bring into this deal and into other deals as well. So that is a key strategic asset for us, as is big understanding of the market, which we feel also shows our ability to take the land assets that were in housebuilding, take our delivery across all of our operational businesses out to the market is very much helped by us having that knowledge. So the deal contains lots of characteristics of our other land-led deals. So it's very much focused on cash discipline. So we're receiving staged payments as we go through. The payment profile is designed to meet our expectations and with commitments. So we're expecting to get 20% to 30% on exchange and coming through in the cash. The cash profile of this is very good. Our first completions we expect in the early part of 2024 with the majority of delivery by the end of 2025, and the gross margin and the return on capital support our longer-term financial targets. So all of that is very positive. It all reflects the hurdle rates we apply on our smaller deals. And we've just, in the last week, concluded four of the deals in Warwickshire, Southport, Huntington, all evidence that there are -- there is interest in participating in deals on that basis. So this is the first of what we think will be a handful of large portfolio deals because that's the way that we can be efficient in delivering our strategy, and it's one that, I think, really does underscore the transition of our strategy towards partnerships model being both deliverable, there being clear demand for it, and it's been in the pole position in delivering into that marketplace. So I should pause there for questions I suspect, because, otherwise, I'll keep going for another 10 minutes. So I'll pause for questions. Thank you.

[Operator Instructions]

It's Marcus Cole from UBS. Three questions, please. Just on the margin, you're talking about in excess of 5%. I was just wondering if this includes the proportional overheads. The second one is just what does this mean for the '24 profit outlook? And the third one is what's been booked in terms of PBT for this year?

So I'll take all those three. The first one, yes, it does include proportional overheads. We are now moving away from needing to do this sort of overhead allocation for partnerships as a whole because everything is a partnerships business, and we'll be reporting single segment at the end of the year. In terms of guidance for '24, there are still too many moving parts for us to [ compete ] in terms of guidance of '24, but it doesn't change our overall outlook that we gave in September. This is part of the migration that we expected. And it's just a bigger deal being concluded slightly earlier than expected, but no change to our FY '24 position that we've previously guided to back in September. And in terms of the profitability of this, I think, Stephen has given a guide that roughly 20% to 30% is payable on exchange and the commencement of construction. So there's revenue recognition of around 20% of the deal in FY '23.

[Operator Instructions]

It's Will Jones from Redburn Atlantic. Just on the margin, would you be willing to give an equivalent gross? I see you say that 12% plus operating is in line with that, but perhaps maybe a little deeper on the gross. And then just to what extent, I guess, the delivery of either the gross or the operating relies on the build cost reductions that you're targeting from your suppliers at the moment? The second one was just in terms of how we should think about this with regards to its effect on the sales rate for the full year. Is it the 1,522 PRS that you'd count as private sales rate, so to speak? And if so, I think it might add 0.1 to 0.15 to your full year sales rate, back of the envelope numbers. And then the last one was just whether it had any influence on when you begin the buyback?

Okay. So first question is about margins. So I think what we're guiding to is targeting overheads of 5%, so gross margin, operating margin 5%, but maybe 5% to 6% as we generate the economies of scale and the synergies. So somewhere between 5% and 6% skewed on to the operating margin. Then in terms of the second piece, what was the second piece, the first part of the question, Will?

Yes. Just I guess the delivery of that margin, to what extent it relies on the achievement of the, I guess, up to 10% that you're targeting from suppliers?

Yes. So we're assuming that we've made really good progress with that as you talked about in the trading update a couple of weeks ago. So all the guidance that we give prospectively is assuming those deals are banked. So it forms part of this as if we deliver that under Housebuilding as well. And as Stephen said, these sort of deals are crucial -- have been crucial in securing those discounts because effectively, what we're doing is providing a discount in order to secure revenue and get capital upfront. Some of the discussion with the supply chain has been that they are prepared to offer a greater discount to Vistry to do deals with us because of the security of service or security of demand that we are offering to them.

And, Will, you're right in respect of the contribution to sales rate. So we will -- that does -- although it's disaggregated, you will see that showing and coming through in our overall sales rate.

Okay. And then second question, and I was furiously scribbling the questions one and two [indiscernible] scribble down number three, so go on, Will.

It's just that whether it influences the timing of the buyback commencement that you talked about. But I think your year-end was the latest.

No, it doesn't just provide more security for our year-end cash position, but it doesn't change our position that we're going to start before the end of the year.

[Operator Instructions]

This is Clyde Lewis from Peel Hunt. I've got three, I think. Just around the mix of what you've got within PRS versus affordable. Is this the sort of likely split that we're going to see? Or is it just happens to be what Leaf wanted, what Sage wanted? So I'd just be interesting to hear about how you've come to that sort of mix. Or was it very much representative of what was going to be available on those 70 sites in particular? With regards to those 70 sites, does it change the thinking around the other private sales that you, obviously, will still have to do on those sites? So the first one A and B, I suppose. Question two was around the funding side of it. Obviously, this is U.S. money out of Blackstone. Do you see particularly strong sort of funding levels out of the U.S.? And maybe if you can comment a little bit about the U.K. sort of outlook, I suppose, in terms of sort of funding. And maybe lastly, whilst we've got Stephen, do you see any sizable deals coming through with some of the bigger local authorities over the, I suppose, the next couple of years?

Okay, Clyde, shall I jump in and try and unpack that and then Tim can come in? So on your first one, in terms of the mix, Clyde, that is, as you can see, broadly 50-50 between PRS single family and affordable. And that's not untypical for our sites. So we often talk about triple tenure sites, 1/3 outright sale, 1/3 being affordable and 1/3 being PRS, so obviously, the affordable and PRS being similar in scale. So that's not unusual. In terms of the context of this deal, we've tried to play pretty smart by putting the PRS homes on sites where we've already committed a significant amount of affordable rather than putting more affordable on those sites. So there is a local approach to individual sites in terms of the mix. And obviously, that's also reflected in the yields that we can achieve. So they're taking that into account. But generally speaking, that sort of balance works for us. So a 50-50 investment play in this way absolutely aligns with our triple tenure model. So it may work very well, and we can tweak that on to individual sites in different ways. Second related point to that is, what [indiscernible] mean for your -- for the private sales? Well, as I said, we're pretty familiar now with what's needed to make triple tenure work. We think about the way that we lay out our sites. We've got an awful lot of blind tenure delivery. So don't forget these units will be a blind tenure. So you'll draw a parcel and not know whether it's outright sale affordable or PRS. And we are very conscious that when we select our PRS partners, the way in which they manage those homes and the public realm around them is really important. And I think you can see that you're talking about Sigma or Leaf, you visit those schemes, you can see the quality of management is very good, and that helps and supports our sales strategy. So that is definitely part of the mix. In terms of American and U.K. investment, Tim might come back in on that, but all I can say is that two of the three others that we're talking to about portfolio deals are using U.K.-based money. So I think there is an appetite for investment from those U.K. asset-matching institutional investment and funds coming from across the states as well. And then in terms of local authorities, yes, we work with over 30 local authorities now. We're talking to them about doing more things. I was actually on a phone call with one on Friday, talking about three sites that they've got and how they're going to get some brownfield grant funding into them to bring them forward with us. So I do expect to see more deals with local authorities. Sizable fields is a bit more questionable. They've obviously got scale in London. I think what we'd like to do is see more schemes that are on multiple sites owned by local authorities, and that would definitely give us scale. And of course, we've got examples of that around the country, Cornwall, Gateshead, Warwickshire that we point to, to try and encourage local authorities to go down that route. Tim, do you want to come in on...

No, I think you've covered that. The only thing I'd say is that we are geographically agnostic about where the funding comes from as we are geographically agnostic about where our investors come from. We are open for any country to invest in our business.

[Operator Instructions] It appears we have no further questions at this time. Mr. Lawlor, I would like to turn the call back over to you for any additional or closing remarks. Thank you.

Okay. Thanks, George. Thanks, again, for joining the call. Hopefully, that was helpful. If you have any further questions, Susie will be delighted to receive any follow-up questions after this, so please drop her a line. And hopefully, the success of this deal has come through, and it's been our pleasure to be able to announce something as positive as this given some of the gloom being announced elsewhere in our market. So thanks, again, and see you soon. Bye for now.

Thank you very much. Ladies and gentlemen, that will conclude today's presentation. You may now disconnect.