Barratt Developments PLC (OTCPK:BTDPF) Trading Update Call January 13, 2015 3:30 AM ET
David Thomas - CEO
Neil Cooper - CFO
Gregor Kuglitsch - UBS
Will Jones - Redburn
Charlie Campbell - Liberum
Kevin Cammack - Cenkos
Good day and welcome to the Barratt Analysts Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to David Thomas. Please go ahead.
Good morning, everyone and Happy New Year to you all. Today we are issuing our trading update for the six months ended the 31st of December. I am very pleased to have our CFO Neil Cooper here with me. Overall, we’ve seen an excellent first half performance. Completions are up by 9.4% at 7,626. Net private reservations per site per week were strong up 14%. Private ASP and completions is up 11% at 281,000, benefiting from both changes in mix and house price inflation and forward sales at half year now exceed 2 billion, up 20%.
We’re also very pleased with the operational performance of the business. We anticipate that first half completions goal will help me balance the profile of the business. Our quality is being maintained and remains industry leading. Land and build costs remain under control and we had a very good run on land approvals.
So let me give you some more details and color. First of all, sales rates have been strong throughout the period. The net private reservation rate per-site, per-week increased to 0.66 from 0.58 for the same period last year. Overall, we saw strong sales throughout the period in all regions of the country. Total completions including joint ventures were up 9.4% that’s a good first half performance. I am particularly pleased with the progress which is in line with the plans that we’ve previously outlined to smooth our completions and we have around 45% completions in the first half. Our guidance on full year volumes remains at 15,750 plus around 1,000 joint venture completions.
Average selling price on completions are up by 11% both for private and also total. Operationally, the business has dealt with the increases in completions very well and we have maintained a high quality of homes that we’re building. Our material supply chain has also performed well. The biggest pressure remains labor, but in line with previous guidance we continue to expect build cost for FY16 to increase by 3% to 4%.
Turning to the land market, we are continuing to secure outstanding opportunities that at least meet our minimum hurdle rates. We have accrued £559 million pounds of land during the period, that’s 54 sites and 10,967 plots. We continue to expect to approve 16,000 to 18,000 plots for the full year. In terms of the balance sheet, net cash was around 24 million compared with net debt of 134 million at the start [ph] of December 14. We expect the net cash balance as of June 16 of more than 150 million.
Finally moving on to outlook, we have delivered a strong first half performance in a good market. The forward order book has improved to 2 billion and this gives us a good position for the start of the second half. Operationally, we see that the business is in great shape. We remain confident in the execution of our strategy in the disciplined growth improvement of key financial metrics to the focus on efficiency and delivery of attractive cash returns.
So we are well positioned for farther progress and performance driving towards our 2017 targets of minimum gross margin of 20% and a minimum return on capital employed of 25%.
Neil and I will now be happy to take your questions.
Thank you [Operator Instructions]. We will now take our first question from Gregor Kuglitsch from UBS. Please go ahead.
Three questions please, the first one is on the completion guidance. I appreciate you’re not changing anything, arithmetically it implies you will be down in the second half year-on-year. Obviously with the order book as it stands, can we just understand whether there is perhaps a little bit of upside or whether you’re quite robust on that guidance please?
Second question is just an observation on the average site size of newly acquired land, which is I think stepped up reasonably significantly. Is there anything we can read into that, is that more conversion of strategic, are you seeing more opportunities or more value on higher or larger sites, any color there would be good. And then finally, you make the positive statement about the starter homes, some of your peers have comments it’s quite early to say. Can you give us your read of the situation and how you think it will impact your business? Thank you.
I think what I’ll do is, if I take two to three, so I’ll take the average site size in the starter homes and then Neil can you just confirm in terms of completion guidance. So in terms of the average starter site size, I mean, yes, absolutely like we’ve got a couple of sites that have come through the strategic pipeline in the period. The two sites are totaling about 2,500 plots. They will be clearly drawn down in manageable chunks so they won’t provide any straining on the return on capital or cash flow.
The historic average we’ve run it around 135, a bit above 135, when you adjust those out that’s around about 160 or 165. So a little bit higher but I don’t think it’s really signaling anything in terms of change of strategy with regard to the intake of sites. Bear in mind after adjusting for the two sites, it’s just a six month period. In terms of starter homes, I think we got prove this in the overall context and I appreciate you have views from the other house builders, but quickly in an overall context, I mean clearly the governments are very focused on housing, they’ve taking measures to underpin housing demands so for example the help to buying products [ph] that’s clearly providing a great product for the house builders and a very attractive customer offer.
They’ve taken steps in terms of supply, so the unlocking of government land and the [indiscernible] of land to the market which we see as being very effective. And they’ve also taken steps in terms of supply in relation to unlocking the planning system. I think in terms of the governments thoughts on tenure then they’re clearly keen on ownership and they’ve set out a strategy that says 200,000 starter homes and 135,000 shared ownership properties all sitting under the affordable housing category.
So I think from our point of view we got to be positive about that, positive in terms of the government focus on housing and positive in terms of them setting a target with regard to housing supply. In terms of starter homes specifically it’s not a tenure or cash bid [ph] that we are familiar with. The legislation is going to take certainly six months to get to and publish and we think it’s too early to comment in terms of any specific effect in relation to the market. But what we see has been generally positive. Neil do you want to couple of minutes?
I mean there is not much to say than what we’ve said in our statement this morning Greg, which [indiscernible] continuing to target 16,750 of which a 1,000 would be JV.
Okay, but I mean is it -- is there an offset risk reward if you were a betting man or perhaps you’re not?
Used to be a betting men but I am not [multiple speakers].
Okay, fine. Thank you.
We’ll have to see, we’ll have to see
Okay, understood. Thank you.
Thank you. We are now taking the next question from Will Jones from Redburn. Please go ahead.
I think I’ve got three as well please. First just around helping us with the first half estimates, I think the last few years you’ve averaged a gross margin about -- on average about 3 percentage points low in the first half and in the second should we think of a similar shape again this time and if so can you just help us understand why you’re seeing such quite big trends [ph] when we look at I think other numbers in the sector and linked to that as well there has been quite a skew first half, second half and I know the hedge is well, so if any assistance ahead of February on those fronts would be helpful? Thank you.
The second I guess on the land side of things, you’ve done quite a bit in the first half. Except those two big sites have contributed I think over two thirds of your targets done for the year. Is that a background against which you can step back and be more selective and maybe push your hurdles a little bit higher for the second half of the year?
And then the last one, it’s just actually around joint ventures and if we look at the order book obviously and it was there in November as well but now I think there is about 16% drop year-on-year in the volumes in the order book. I appreciated price is still up against that but should we be thinking that maybe the 2016 is the high point for JV profits or do you think it can still be another cost [indiscernible] number again next year? Thanks.
Well, I think what I’ll do Will, if I back on those -- I mean in terms of the sort of estimates, I think the short answer is that we will clearly give you all the numbers in February. I think we’ve tried to stay away from giving everything in January because it sort of negates the whole February announcement. But in terms of the gross margin I mean we have as you say over the last few years in large part because of our higher level of London delivery, we’ve seen the higher gross margin in the second half of the year. And we would still expect to see a higher gross margin in the second half of the year but the step up will definitely be more muted.
I think that’s for two main reasons; first of all, the degree of change that’s taking place in terms of the switch from old lines to new lines is clearly becoming more muted and secondly, if you looked at our growth during the first half of the year we stepped up the private delivery in London from round about 380 completions to round about 480 completions. So we’ve seen quite a big step up in volume in London in the first half of the year on a year-on-year basis.
In terms of the position on the admin overhead, I mean our guidance for the year is 145 million so we’ve given that guidance and you’re absolutely right, we’d still expect a significant skew in terms first-half second half, so we’re coming off of first-half number last year a shade of above 50 million and so we perhaps expect that to be stepping up by around 10%. And obviously we’ll get final numbers in February.
In terms of lines, I think it’s a question of power so meaning we did move up our harbor rates, we said -- we didn’t publish any information but we did say that we’ve moved up our harbor rates in September 14 and that was really in response to the fact that we saw that there was some very-very good land opportunities and we wanted to limit supply and make sure we were getting the best opportunities.
We see that from where we are at the half year we had a couple of large sites as we touched on the [indiscernible] coming through from the strategic land bank, but we clearly have scope to go beyond 18,000 but we’re holding the guidance of ’16 to 18,000 and we’ll just look at the opportunities that come through in the second half of the year.
In terms of JVs again I mean I think we’ve always said on JVs that ’16 and ’17 given the current joint venture profile that ’16 and ’17 will be the bigger years of delivery. So, we’re guiding current year at 60 million of delivery coming off our prior year of 45 million and I think we’d expect something similar in terms ’17. So I think we would still see ’17 as being a strong year for joint venture delivery.
Thank you. We will now take our next question from [indiscernible] from Canaccord. Please go ahead.
Just two from me, if I could. Firstly just on trade-in, very early days obviously, but wondering if you could comment on the momentum into this year and early visit to rates et cetera, particularly London have you seen a jump up in cancelation rates, anything relating to the spend due to changes coming in particularly from investors and it’s applied to that changes. And then secondly just on the ASP and government for the full year, should we expect an ASP similar to the first half? I think you previously spoken about 253-255 type ASP in the order book, so just the interest in guidance from ASPs for the full year? Thanks.
So if I talk about trading and I will just talk for a few moments and completely dock that question and then we’ll talk about ASP guidance. I mean in terms of trading, I mean as you said it yourself it’s our [indiscernible] 13th of January and I think it would be wrong to comment on terms of any specifics on trading. So I think the best thing would be we’re not seeing any big change in terms of trade impacts and then -- and clearly the trade impact since we’ve seen in the first six months on a year-on-year basis are very strong. So I think that’s all it is.
And would just kick off specifically on the point with regard to stamp duty so clearly we see that there have been a number of measures that the government have taken in relation to the housing market. And the vast majority of those measures have been very positive for the house builders. I think the focus of government is probably to encourage more homeownership and some of the negatives that come into the market in terms of the changes to stamp duty and how that affects prices at the higher end in terms of the original stamp duty changes, the more [indiscernible] in terms of private investors and residential property and most recently the 3% are clearly negatives in terms of the buy to via investor.
But the terms of that if you look in London at the 40% Help to Buy that is now been confirmed as launching on the 1st of February. And we’ve seen the 40% Help to Buy will clearly be a positive. So our view would be that overall we’re probably in a situation given our product mix I mean bear in mind in the first half of the year our average selling price in London was £450,000. So we see these changes probably being a net positive but not actually a big net positive for overall and net positive in terms of our London business. Neil do you want to just?
Well, I don’t think there is much more to say, I can say on the ASP other than that we’ve got a couple of data points to work with, obviously what we brought into the year in the land bank averaged 250 to 253 and what we delivered in H1 marginally higher than that of 264. So in the absence of lowering inflation there is reasonable numbers to be planning around.
So not much more mix improvement in the ASP going forward?
It’s difficult to speak to given its [indiscernible] and it does depend on what size we take that completions off. But the broad massive number is suggesting around that low to mid 250s and certainly I don’t see any material shift H1 to H2 that will change that.
Thank you. We will now take our next question from Charlie Campbell from Liberum. Please go ahead.
I suppose its two questions really, so first of all just to get back on the -- we’ve just been seeing about Help to Buy in London. I mean clearly London is just sort of just selling off planned market I guess and mortgages have six months short life. So, just I just wonder how you get around that in terms of the Help to Buy scheme and does that mean you changed the emphasis and sell a bit less of plan? And then the second question was on labor, you said that was where the pressures were just wondering if you could just give us a bit more color on that what you’ve see in labor costs inflation in the first half and what you would expect that for the full year? Thank you.
In terms of Help to Buy, I mean first of all you’re absolutely right that selling forward clearly is relevant in relation to Help to Buy. So, I think when you look London and the participation of Help to Buy it’s across the whole portfolio we’re running at around 30% participation in terms of Help to Buy then clearly in London levels of participation are low. And the two drivers for that, while there is probably three drivers in truth, one is forward selling and the Help to Buy products is essentially limited to a six month period. The second reason is clearly price points because Help to Buy will only go up to £600,000 and I think the half of the Florida region is just more of a general affluence in the market and less of need in terms of Help to Buy support.
So, when we look at the 40% Help to Buy, I think relative to some of our peers we are definitely not a company that is selling as far forward. So we have product availability where we have sites like [indiscernible] for example, West London for example, we absolutely have price point, we have product availability on a six month horizon that will come in below £600,000 price point. So, we would expect that Help to Buy 40% will result in incremental sales. But as I said we’re not calling as a big advantage or a big positive but we’re certainly calling it as a positive.
And then on labor cost side?
So labor cost, we’ve said overall 3% to 4% I mean I think there is two very different things happening, so first of all we said in November that we felt that the pressure on labor in terms of inflation is moderating. And we’re still saying that, I think there is less pressure, so we’re not seeing escalation that we’ve seen on labor cost if you went back six months ago or 12 months ago.
The second thing is that if anything on the tenures [ph] we’re seeing again a reduction in the pressures on the field because of what’s happening in terms of oil prices that flow through into energy and that flow through into transport. So particularly regarding for example bricks and locks, for example regarding window solutions and so on.
But labor will definitely be at the higher end. I mean we’ve said previously that perhaps we’re running 5% to 6% on labor, I mean if you look at the stats coming through ONX [ph] then construction industry labor cost inflation circling somewhere 5% to 7%. But again some alleviation on where it will be.
Thank you [Operator Instructions]. We will now take the next question from Kevin Cammack from Cenkos. Please go ahead.
Just focusing a little bit on the size of the order book and trying to maybe relate it to a little bit to the movements in ASP. And the first thing since it’d be helpful if you could have a stagger where you’re splitting that 11% ASP movement between mix and inflation. And I am just wondering to what degree that forward sold figure is about as optimal as it could be for the size of the group? And whether tactically you’re looking at the business slightly differently today? And I guess part of the answer to that if it’s available is to highlight how much of the forward sale stretches beyond the current year?
Let me just try and answer that for you Kevin. I mean we’ve put in the appendices, so just referring to the appendix on the rulings, we’ve given a breakdown of forward sales prior to affordable and joint ventures. Now, I would generally say that when you look at joint venture forward sales I don’t think you can read too much into joint venture forward sales on the basis that we’ve got a limited number of joint ventures in total now learned about 15. They tend to be relatively large, predominantly in London and therefore the way the forward order book moves will be clearly entirely dependent on where we are on any particular development from a build perspective.
I think the key number really to look out and the degree to which we’re appropriately forward sold is to look at private forward sales. So, what we’re saying is coincidently that private forward sales are up by 20% in line with the overall forward sales being up by 20%. And we’ve got nearly 3,700 plots in forward sales. Now, the vast majority of those are for delivery in the second half of the year. So, we’re going to leave perhaps 300 or something going forward from that point. So it’s predominantly about FY16 and then delivery into FY16.
I think at FY15, at June 15 we said that we felt we were in about the right place in terms of forward sales and it is a balance. The balance for us is partly to do with pricing if you’re in a rising price environment you don’t necessarily want to be too forward sold. But it’s also to do with completion delivery and flattening the profile so if we want to deliver completions through July, August, September, or through January, February, March, we have to have a reason to doing a forward sales. And perhaps it’s been something like 25% forward sold is where we’d like to be and it may go a bit higher than that I think in the current market is unlikely to go below that.
Can I just ask one other then again this is not focused specifically on you but more of a general question. The remarks that are being made about the land market, the high end, the larger very attractive opportunities that the whole industry still seems to be talking about. Could you give any flavor as to -- I know it’s difficult for an exact like-to-for like replacement of land et cetera. But on a nominal basis, would you hazard a guess as to what the change in land has been in the last 12 and 24 months?
I don’t think Kevin, certainly not on the call, I could give you figures in terms of specific i.e. it was this, it’s now this. What I would say is that if you look at the tracking that was on through various sources, but I think the land agents so [indiscernible] and so on, there are industries that are published looking at average land prices in terms of regional prices, London prices and so on.
And I think what those industries would say is that for some period of time the land prices in London have been moving out of London with house prices i.e. the market is very hot and the land prices are high relative to house prices and that has clearly being largely driven by land prices in the zone one and we’ve obviously said historically that, investing in zone one certainly in the last 12 to 18 months has been very challenging relative to any new maintaining hurdles and so on.
I think if you look at the regional market what that would say over the last two or three years is that land prices have moved in line with house prices and I’ve certainly seen, I’ve -- proportionately they’ve stayed and lined up, therefore harbor is a convenient thing and I started seeing some commentary around land prices in the last six months that actually land prices in the regional market are falling i.e. they are now out of line with house prices and therefore the land market and the potential to get expanded margins is even greater in the regional market. In terms of that supply demand imbalance I hope these land prices be softening. I think it’s just the late reflection of the amount of land that has been drawn from strategic land banks relative to the amount of land that has been purchased in the open market.
In view of that are you not tempted to increase I mean you appear to be sticking with your budgeted spend on land this year. Are you not tempted to dig deeper into the pocket?
Well, I think we certainly have done that I mean albeit we had a couple of strategic sites come through, but at the end of the day its still land and they’re in very attractive locations. So we have done that to the extent that we’re [indiscernible] 11,000 plots in the first half. Now we’re holding the guidance presently for the full year between ’16 and ’18, but clearly we’ll have a look at that in February, I mean we approve land every week. So when we get the results in February we’ll again publish the numbers and we’ll have another look at whether we think the intake will run beyond 18,000.
As there are no further questions in the queue, I would now like to turn the call back to David Thomas for any additional or closing remarks.
Well, look I would just like to first of all thank everyone for dialing in. Thanks for the questions. Hopefully you will see that we feel that we are well positioned for the second half and well positioned in terms of our targets for FY17. Thank you very much.
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