Barratt Developments PLC (OTCPK:BTDPF) Q4 2019 Trading Update Conference Call July 10, 2019 3:30 AM ET
David Thomas - CEO
Jessica White - CFO
Conference Call Participants
Aynsley Lammin - Canaccord
Will Jones - Redburn
Chris Millington - Numis
John Fraser-Andrews - HSBC
Gregor Kuglitsch - UBS
Clyde Lewis - Peel Hunt
Ami Galla - Citi
Good day and welcome to the Barratt's Trading Update for the Year Ended 30th of June 2019 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to CEO, Mr. David Thomas. Please go ahead, sir.
Thank you. Good morning, everyone. Thanks for dialing in. As you know, we're announcing our trading update for the year-ended 30th of June. And as usual, I have Jessica with me.
I think, you can see that it's been a very strong year of performance, both operationally and financially. We're making good progress on margin initiatives and we had a very strong close to the year. We clearly remain very focused on driving operational efficiencies throughout the business. And I'm very pleased to see that margin improvement is coming through.
We expect pre-tax profit to be above market expectations at around £910 million. We remain industry leading in terms of quality and service. And as I said back in May, I'm very proud that we were awarded HBF 5 Star status for 10 years in a row, the only major housebuilder with this record.
And in June this year, our sites were awarded 84 NHBC Pride in the Job Awards, more than any other housebuilder for the 15th year in a row. Our build quality and customer service is an absolute commitment. And it is clearly becoming a big focus in the market. To recognize all of our employees’ dedication and hard work in this area, we are providing a share award for all of our employees this year.
So let's have a look at the headline numbers. The mortgage market has clearly remained very positive. We've seen good consumer demand. And therefore we've seen an increase in our completions to just over 73,850 homes. We have a strong reservation rate for the year at 0.7. And we’ve clearly let ourselves in a good position with a total forward order book up in the 20% at £2.6 billion.
In September last year, we announced our three medium term targets: To grow volume at 3% to 5% per annum in the medium term; To buy land at a minimum gross margin of 23%; And to maintain a high return on capital employed with a minimum of 25%. I'm pleased to say that we've made good progress against these medium term targets.
We’ve delivered underlying operating margin improvement of around 70 basis points this year, clearly mainly being driven by margin initiatives, such as our new housing range. Our pre-tax profit at £910 million is a strong performance and ahead of expectations.
On trading, our net private sales rate per active outlet was at a similar level for the previous year at 0.7 with average active sites at 379. During the year, we opened 163 sales outlets. Our average selling price on total completions was £274,000 with private sales ASP at $312,000. This is reflecting changes in mix, particularly with regard to our Central London business, partly offset by some underlying house price inflation.
We expect our operating margin to be around 18.9%, up from 17.7% last year. We see that the underlying margin improvement is 70 basis points. We continue to focus on improving this underlying margin with the benefits of our new land acquisition strategy and new house types now coming through strongly.
Our strategy to exit Central London is nearly complete, allowing us to focus on the strong growth opportunities in outer London. We've announced this morning that we’ve sold our 50% interest in the Aldgate Place joint venture. Following this, we will only have one remaining joint venture where we are actually selling in Central London and one wholly-owned site at Landmark Place with 18 units remaining to legally complete.
Our joint ventures overall delivered a better than expected profit of around £35 million, mainly due to profit generated from land sales and additional completions. By way of guidance on joint ventures, we expect joint venture profits for FY ‘20 to be around £25 million. If we look at the land market, we see that the overall land market conditions remain attractive. And we've identified some really excellent opportunities that all exceed our hurdle rates.
We approved for purchase around 18.5 thousand plots of operational land in the year. This reflects both the excellent opportunities we've seen, but also our future growth aspirations. We've reduced our land creditor position to 31% of land bank and this reduction is clearly in line with the guidance that Jessica has previously provided.
Our net cash balance was around £765 million, ahead of guidance reflecting strong trading, some joint venture related receipts and the timing of land payments. On build cost inflation, our expectations are unchanged and we expect build cost inflation to be in the range of 3% to 4% and we've expanded this guidance through to June ‘20.
We have fixed price arrangements in place for materials for over 90% of our requirements up to December '19 and around 60% of our requirements through to June ‘20. We remain committed to our capital return policy. And we will announce in September the proposed full year ordinary dividend based on 2.5 times dividend cover.
As we’ve previously announced, the Board also proposes to pay special dividends of £175 million in November ‘19 and £175 million in November ‘20. We will be reporting again in September, where we will update everyone on current trading guidance for full year ‘20 and progress on our medium term targets.
Thank you. And Simon, I would now be happy to pass back to you for questions.
Thank you, sir. [Operator instructions]. And our first question comes from Aynsley Lammin from Canaccord. Please go ahead. Your line is open.
Just two for me please. First of all, I wondered if you just comment on the kind of pattern of trading you saw in your second half and particularly the last kind of couple of months did you see any difference in your sales rates. Any kind of degree of caution out in the market? Did you have to use incentives more, et cetera? And just wondered, the kind of land spend approved is down. Obviously the cash came in a bit higher. Should we read into that as a bit more caution from yourselves as you're going into kind of maybe a bit more an uncertain second half? And then secondly, just on the site numbers, I think you’ve good flat performance, average this year. Would you expect a similar kind of flat outcome for average site numbers at this point for FY 2020? Thanks.
Aynsley, hi, good morning. If I pick up the first part of the question, and Jessica will pick up in terms of site numbers. So, I mean, I think overall I see in terms of patterns of trading. I mean the one thing that we clearly do is we update the market on a very regular basis. So we gave current trading for the first half, obviously, and we give trading through February and trading through May. And I think what you see is that we came from a position where reservation rates in the first half of the year were down by 5% or 6%. And in overall terms we saw a substantial improved position in the second half of the financial year, resulting in the close position being 0.7 against 0.72. So, I think really the question, in fact, an improving trading position on a year-on-year basis.
In terms of incentives, and anything around that, we said previously that we've seen a little bit of a step-up in Part Exchange. So Part Exchange is our percentage of transactions moving from around about 9% up to around 11%. So, nothing dramatic. But nonetheless, some movement in terms of Part Exchange.
In terms of land spend, I mean I would say that we are on the front foot on land spend. So, I don't think we have concerns or meaning that we are backing off land spend. We gave guidance at the beginning of the year that we will be in the range of £18,000 to £23,000, and we ended up at the lower end of that range. But we still see that there's plenty of opportunity out there and we are therefore, on the front foot. We -- I touched on and in the statement we touched on the cash improvements, part of that being land spend. But that will just roll over into FY ‘20. And therefore, we would expect to recover that land spend position in FY ‘20. Jessica?
Yes, in terms of sites, so the average site number for FY ‘19 were consistent with the prior year at 379. Looking forward into FY ‘20, we previously said that our medium term volume target is 3% to 5%, and we’d expect to be at the lower end of that range in FY ‘20. The growth is going to come from three areas and it’s going to come from our new division in Cambridgeshire and our London -- outer London sites. We're not going to see an increase in site numbers there but they can deliver more volume as we’re going through trading. And thirdly, as we’ve said previously, our other divisions, increasing volume a little bit.
We're not expecting our sales rates will increase this year. So in order to deliver the volume uplift, we've got those three items, and some smooth growth in site numbers.
Great. Yes, if I just to come back once on the -- I mean June, obviously, construction PMI data a bit weaker, some of the macro and commentary you’ve heard from peers in the wider industry a bit. From what you just said, is it correct to assume, you've seen absolutely no change in confidence or trade in recent weeks. Is that fair?
Yes, that’s definitely fair in terms of recent weeks. And I think more broadly that as I’ve touched on, if you look at the first half through to December, I think we’ve seen a much better backdrop in the second half through to the end of June than we saw in the first half this December. So overall I see that as being fairly positive.
Our next question will come from Will Jones from Redburn. Please go ahead. Your line is open.
Three if I could, please. First, just exploring the new house type range and its rollouts. I think you gave us good guidance today in terms of its share of group volumes through to June ‘19. Could you help us with how important it will be as a percentage, or in volume terms when we think about June ‘20, and ideally as well June ‘21 as that grows? I guess secondly just touching on pricing and not big movements here, of course. But can you just give us a bit more color on how you saw your like-for-like pricing evolve through the year on a reservation basis rather than completions, and again, maybe a first half, second half split on that would be great?
And then the last one is really just picking up from the land bank length, which I think is 3.9 years on owned basis at the end of the year. Previously you’ve talked about 3.5. You were at 3.5 a couple of years ago. Is that kind of step up, a timing issue, a change of strategy with bigger sites in there? You probably referred back to 18,000 to 22,000 approvals this year. But just in terms of land bank lengths, anything change you’re thinking on that? Thanks.
Okay. Will, hi. I mean if I just try to talk through those, I mean, I think in terms of the new house type range, we altered the house types in 2016. And we clearly then started a process of rollout for both Barratt and David Wilson. And at February and again in September we’ll give the kind of granular detail of how many sites we’ve got with the new house types on. But I think the backdrop is that as we move through 2021 and ‘22, the sort of penetration of those new house types should be complete. So we will have very, very few sites where we got planning consent with an old house type where we've not been able to switch. I mean we will have some but very few. And therefore it will be across -- clearly almost 100% of the portfolio but it will take another couple of years for us to achieve that.
In terms of pricing, I mean our overall pricing improvement in terms of underlying house price inflation is a low single-digit. So, we’ve clearly seen a backdrop. If you look over the last few years, where underlying house price inflation has reduced, perhaps coming from national levels that were running at 6% and to national levels that are running at low single-digit. And I think we would be at fairly good proxy for that market.
In terms of land bank length, I mean, definitely no change in strategy. We said 3.5 years of land bank and around about one year of conditional contracts. And we still see that that’s what we're aiming at. But we have seen really good opportunities in the marketplace. And we've -- over the last three years we’ve brought in nearly 60,000 plots. So clearly ahead of the rate of use. And that's resulted in some increase. But I think we still see that medium-term position at around 3.5 years as being what we're aiming now.
It appears the participant asking that last question, line has disconnected. So we'll move on to our next question. Our next question comes from Chris Millington from Numis. Please go ahead. Your line is open.
I've got 3, if I can, Dave, please. First one is just really, I just wonder if you could give us approximately the kind of revenue value of kind of non-housing revenue, the commercial and the land sales. It looks like it's quite a big number this year, and obviously, you do make reference to it in the statements? That's the first one. Second one is just really around the ASP and how it's kind of progressed over the next year or so. I see the social order book is very strong, so I don't know if there's going to be some sort of mix impact between private and social next year? And the final one is just really on build rates and just wondering how you're faring. It's obviously been quite a wet June. I don't know if that's put you behind track or not, but just some comment there would be helpful.
Chris, Hi, good morning. Chris, hopefully, you're going to stay on for the answers as well.
I'll try my very best, yes. I'm on a fixed line, so hopefully.
Yes, okay. Right. So if I touch on build rates and Jessica will pick in terms of non-housing revenue and just on the ASPs. So I think in terms of build rates, we'll just try and get a look about color around it, Chris. But when you look at build I mean we clearly in FY '18, we had some really massive challenges on build. And I'm sure the industry was in a very similar position. I think we -- the snow that we saw in February, March really, really set us back. And I think it set us back both in terms of build for closing FY '18 but it also set us back in terms of build for starting FY '19.
But if you look at the weather generally since April '18 through to June '19, I would say we've got 13 or 14 months of really, really good weather for building. So we've got a lot to build on the ground and we're very comfortable with the position that we have given the backdrop that we want to continue to grow the business. So yes, I understand that in some ways the weather -- a fair bit of rain, but not really to the extent that it would be disrupting build schedules for us. So I really feel we're in a good position and we just really have fingers crossed as ever for a mild winter.
Okay. Just to pick up in terms of the other revenue spend, Chris. So other revenues this year was around £65 million. So that's much higher than it has been in previous years and definitely higher than I would expect on a go forward basis. In terms of average selling price, the average selling price for FY ‘19 was £274,000 as you know. We've seen the mix change that we've previously signaled come through in terms of Central London. So just to put some more color on that, the London private ASP has reduced from £810,000 last year to £629,000 this year.
In terms of looking forward, the key reference point is that the average selling price in the land bank at the end of the half year, that was £275,000. And we've only diverged from that in recent years because of Central London. It’s part of the mix. But now that we're through that, that becomes a very good and strong reference point.
We'll now take our next question from John Fraser Andrews from HSBC. Please go ahead. Your line is open.
Hi. Good morning, David and Jessica. Three questions from me please. The first one, David, you open with the comment on build quality becoming a bigger issue in the sector. Perhaps you could update us as to any evolution of an industry ombudsman or any other changes that you see and how Barratt plays to those? The second question, perhaps I could just push you a little bit more on the house price inflation that was asked earlier. Did that continue into the second half, and were there any regional differences? And finally, on build cost inflation, unchanged guidance. And you've provided some helpful percentages of material secured. But do you consider yourselves to be truly Brexit-proof on materials, supplies and labor for that matter, in the event of a no-deal Brexit? Thank you.
Okay, fine. Well, John, I'm going to sort of just have a run of all three of those. And know that Jessica will prod me if I'm getting out of line on house price inflation. But look, just first of all in terms of build quality and the ombudsman, I mean, I think quite simply that there has been some widely publicized issues for the industry with regard to build quality. And the government has been very clear that housing ombudsman is going to be appointed. The industry, right by the HBF has been working very closely with government to look at what is the best way to do that, whether it’d be through a voluntary ombudsman or a statutory ombudsman. And the government are back consulting on that again, we, in terms of Barratt have been very consistent with regard to the position that we welcome the appointment of an ombudsman. I think that company should not expect that the customer issues are being referred to an ombudsman. Clearly the obligation is on the company to resolve the issues prior to that happening. And the ombudsman will not pick up any complaints from a customer until the company's own procedures and their own customer complaint processes have been exhausted. So we are keen an ombudsman is appointed and I've walked to the HBF on that basis and have made our position with regard to that clear to government. And nonetheless, and then I think that we need to recognize that an ombudsman is not coming quickly and what all companies do, and we're really trying to be leading on this just to make sure that we are building good quality homes, and where if things do go wrong which inevitably they do, that we get them rectified as quickly as possible.
In terms of house price inflation, I mean, really, I mean kind of two things and I'd be happy to have more of a discussion offline, but two things really. I would generally point to the national stats. First of all, whilst there will be some anomalies. I mean, I think if you're looking at Halifax data, and you're looking at the regional splits, we are not going to be seeing anything greatly different to that, other than any changes in Central London. We've clearly got a very, very limited exposure to any changes in Central London. I don’t think if you look at first half, second half for us in terms of our completion delivery or our reservation position, that you would call out anything different from the national stats and therefore areas like Milton Keynes, house prices, their trends and inflation has been strong, areas like Central London or some of London pricings have been weaker. So yes, I think that will be the best answer in relation to that. And so Jessica, you do want to pick up build cost inflation?
Yes, I mean, in terms of build cost inflation, it was 3% to 4% last year. We've obviously extended that today through to the end of June. We've made good progress as you would expect in terms of fixed price contracts this year. In terms of, just to give a little bit more color on that, we have seen obviously inflation in terms of bricks side has been relatively flat as well by bricks manufacturer. And in terms of Barratt specifically, we have seen some inflation on plaster and plumbing products that have come off the back of the three year fixed price deal. And against that we have not seen any inflation at all on items like appliances or electrical components. And therefore we would very much consider that 3%, 4% is that right number going forward.
I think John when you look at Brexit, I mean we -- clearly like everyone else, we've had a couple of rehearsals for this. And we have in terms of our overall supply about 10% of materials are coming directly into UK as fully assembled materials, for example white goods. And then we have about 30% including that 10% which is coming in as components. So when we look at fully assembled supply, just white goods as an example, I mean our goods are coming in from Europe. Clearly some cases, goods are coming in from China, not from Europe, depending on the materials. The vendor has a real incentive to have sufficient stocks in the UK. So we have not arranged excess stocks in the UK. We didn't arrange that position at the end of March. We won’t arrange that position for the end of October. But nonetheless, the vendors are arranging that position, and there are extra stocks coming in. And that’s been widely documented in terms of the GDP positioning for the UK. Lots of stock is being brought ahead of March, and I'm sure there will be lots of stock again being brought ahead of October.
Our next question comes from Gregor Kuglitsch from UBS. Please go ahead, your line is open.
So just coming back on the sort of the margin and gross profit discussion, I think if I work through you’re kind of calling out I think £35 million of profit essentially as one-off with the 50 bps that you talked about in the sort of wholly owned business and then £10 million in JV. I just want to understand is that the way you think about it? Or to put it differently, your margin I think excluding the one-off is like 18.4 to start with, last year to the 70 bps improvements. So I guess the question is, do you think you can sustain that pace? Or is that too early to call or perhaps a little bit too aggressive? That's probably the most -- the big question. Then a couple of small ones. So just could you give a little bit more detail around the acquisition you did the other day, the timber frame business? And then finally, how much money or cash did you actually get out of the JV so we can reconcile that the cash flow? I think you mentioned that there was a sort of normally high receipt and I guess Aldgate plays a role in that. Although I did look in the balance sheet something about £9 million carrying value or something like that. I don’t know if that’s particularly material but kind of if you summarize that would be helpful? Thanks.
Gregor, good morning. So on questions, if I talk about Oregon, and Jessica can talk through about margin and cash on the JVs. So just in terms of Oregon, I mean, we’ve said previously, and we've talked on our presentations previously to say that we have been trialing alternative methods of production. So timber frame, light-gauge steel frame and large format block. The only thing that we said is that it is a relatively immature supply chain in relation to all three formats of production. And we made a decision that given the strength of our business in Scotland in relation to timber frame, where all of our residential units are produced using timber frame, and that we're increasing production of timber frame in England, that we want to secure supply of timber frame for the Group. And we clearly looked at whether we would set that up ourselves or whether we do it through acquisition. And we felt that through acquisition, the key thing is that we were getting an existing business with our very experienced management team. And therefore, we announced the acquisition of Oregon recently. We see that there's a lot of scope for us to develop that business with the Oregon management team, both in terms of more automation, but also in terms of being able to produce other components for housing from that or from a similar factory. So that I think is positive in terms of that format of production. We continue to look at production with large format block, but there is no supply chain in the UK and we are importing from Germany. And we also continue to look at production with light-gauge steel frame, but probably, light-gauge steel frame from our perspective be more about apartments than about houses. So that's the backdrop. Jessica?
Okay. So just to walk through in terms of margin, we’ve made good progress on margin this year. So we closed out last year at 17.7% operating margin, and we've delivered a underlying margin improvement of 70 basis points coming through from our margin initiative. So the key reference point there being 18.4%, which is our underlying margin. In terms of one-off items, it was 50 basis points, as you highlighted, Gregor, in terms of one-offs. So that came from two areas, the legacy commercial disposal that we did back in H1, and reversal of inventory provisions. And we've had a similar reversal in H2 to that we had in H1. And that relates to four specific sites, three of which are now fully traded through and one which is almost traded through.
If we look at margin on that going forward basis, and we're acquiring land at 23% gross margin, around 3.5% differential in terms of admin costs. So that gives you a position of 19.5% that we will get to. So it's going to take us time to get there because it takes time for the sites to come through and come through into trading. So that's clearly going to be over a number of years.
Separately, just to pick up in terms of the joint venture line because you asked on the one-offs in the joint venture line. We've had around £10 million of additional profit on the joint venture line this year. That comes from disposal of a site which is for employment uses and another site sale. So that very much won't repeat as we go forward, and I'd be expecting it to revert to a more normal £25 million in terms of joint venture process.
Just in terms of cash -- picking up on your question on cash, so we closed the year with a cash position of £765 million which is higher than our guidance of £650 million. The key piece in that is the land spend was lower than we were expecting, simply just due to the timing of land acquisition. So we spent £60 million less there. We spent around £940 million on land versus £1 billion that we were expecting. That will clearly reverse as we come through into FY '20.
Just when you’re looking at the FY '20 cash position, I'll just point to two additional items. Firstly, this year, we will pay six quarters with the tax rather than four quarters because the quarterly tax payments regime changes. So there is a change in that. And we're continuing to progress in terms of land creditor reduction. So we’ve obviously set out a revised operating framework last year. We've made good progress in terms of land creditors this year moving from 34% of our land bank to 31%. And clearly we're looking to move to 25% to 30% over the medium-term. And I would expect in the FY '20 a similar level of step-down to that we've seen this year.
Our next question comes from Clyde Lewis from Peel Hunt. Please go ahead. Your line is open.
I think I've just got two, if I may. One, could you just update us, David, on sort of Help to Buy usage and whether you've seen any sort of change in patterns at all over the last sort of four to six months? And the second I had really was on sort of mortgages and sort of down valuations or any sort of changes in the way the mortgage providers are thinking about product and particularly, I suppose, in relation to Help to Buy as well?
Clyde, hi, good morning. I think, first of all in terms of mortgages, so I think we've seen a trend, I don't think there's any recent change in the way the mortgage companies are looking at things. I think we've just seen a trend over the last few years, what is unchanged is that the mortgage companies have become more and more interested in the new build market. And therefore, we've seen a broadening of the lending base within the new build marketplace. And I think that will continue. We’ve probably seeing some more sluggish trends in the second hand market, and that has encouraged more of them to have offers in place in respect of new build.
So, I think we've been pretty consistent. I'm sure our peers have been pretty consistent in saying there is good availability of mortgages in the market and they're attractively priced for consumers, particularly when combined with Help to Buy. I think on Help to Buy when you look at the usage trends, we gave some detail back in February I know and it's very consistent whether you're looking at it in London, or whether you're looking at it in the regional business, the trends are very consistent.
What I would expect to see as we move forward and into calendar '20 will be some increase in terms of second homeowners, because there will clearly be more publicity about the fact that from March ‘21 the scheme will not be available to second homeowners, and it will only be available to first time buyers. So you would assume that that will increase some of the participation as people will try to use the scheme ahead of its expiry in March '21.
[Operator Instructions]. Our next question comes from Ami Galla from Citi. Please go ahead. Your line is open.
Just two questions from me. First one was really on the overhead. If you could give us some color as to what is the level of admin expenses that you have recorded for 2019? And do we expect a step-up from that level? And connected to that, if you could give us some color on the freehold reversionary income that was booked in '19 and what should we expect on that into FY '20? And the second one I had was on the timber frame acquisition. I mean if you could give us some numbers around what is the capacity of that facility. And to what extent is the current utilization, what is the level of current utilization in that? Thank you.
So if I pick up on timber frame and Jessica will talk about overheads and freehold reversions. In terms of timber frame, as I've outlined the rationale for the acquisition, so just broadly, and we clearly are going to be spending time looking at this, but broadly utilization presently is for about 2,000 frames per annum. And we see that the capacity is going to be at least double that. So that's -- obviously key to us is ability to expand into the existing facilities and then going forward the potential to open new facilities or further expand the existing facilities. So that's probably a key part of the strategy.
Okay. Good. Thanks. And on overall overhead Ami. So in FY ‘18 our net administrative overhead were £146 million. That contains £55 million of other income. This year, our other income level has dropped to less than half of that. And so clearly, our administrative expenses have increased. And freehold reversionary income has reduced from around £25 million last year to around £4 million this year. And going forward, we would expect that to tend to zero. Underlying administrative expenses, we control very tightly and those are increasing in line with inflation.
It appears there are no further questions in queue. And at this time, I would like to turn the conference back over to our hosts for any additional or closing remarks.
Simon, thank you. Okay. Thanks very much to everyone for dialing in. Hopefully you've seen there’s been a very strong year in terms of both operational and financial progress. Thank you.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.