Earnings Transcript for BWY.L - Q4 Fiscal Year 2023

Jason Honeyman: Good morning, and welcome to Bellway's Full Year Results. As always, I'm sure you will have a keen interest in autumn trading, but first, a few key points from last year. We've delivered a very credible performance in a particularly difficult trading environment. Housing completions at 10,945 homes. We're only just behind last year's record output. And underlying PBT at £533 million, down on last year, but still a solid performance, bearing in mind, inflationary pressures. The dividend was maintained at a £1.40, and combined with our £100 million share buyback, we've committed to return a total of £270 million to our shareholders. And, notably, our balance sheet remains strong with over £250 -- £230 million of net cash at the 31st of July. Now understandably, trading conditions have been significantly impacted by rising interest rates. And in FY '23, you may recall that our approach was to protect the balance sheet and lean upon our operational strengths. And we achieved that by unwinding the order book to collect cash, accelerating the delivery of affordable homes to underpin construction demand, and working our land bank to encourage outlet growth for the years ahead. Looking forward into 2024, our focus will be on preserving the business and positioning the group for recovery. Make no mistake, FY '24 will be tough. High mortgage rates, cost of living pressures, and a general election that often dampens demand. That said, there is room for optimism and potential for green shoots in 2025. Inflation may well be under control. Mortgage rates may well moderate. And a new administration or government could bring a fresh impetus to the economy. And add all that to the strong underlying demand that exists for new homes, and we could see order books and volumes start to improve. And Bellway is well placed to capitalize on better trading conditions

Keith Adey: Okay. Thanks, Jason. Good morning, everybody. So, I will start with housing revenue, which moderated to £3.4 billion. And as Jason has already mentioned, it was underpinned by close to record volume output. And as I said out this time last year, construction programs were intentionally weighted towards more social homes, which resulted in the completion of an additional 700 affordable units. And this has helped to support total volume output in a much slower market. And it's because of that higher proportion of social homes, which represented 25% of total output that the overall average selling price reduced modestly to £310,000. In the year ahead, construction programs will remain weighted towards social housing, as we seek to re-deploy site labor and again prioritize cash recovery, while private demand remains weak. I, therefore, very broadly expect that we will complete around 2,200 social homes in FY '24, and this could represent around 30% of total output. But to be clear, this is 30% of a much lower total volume figure, and the range of outcomes is wider than usual, but completions will nevertheless reduce because of the depressed private sales rate, as Jason will soon outline. This further increase in the proportion of social homes and the continued targeted use of incentives also mean that the average selling price will moderate again in FY '24 perhaps to around £295,000 based on current trading experience. The underlying operating margin was 16%, and the operating profit was £544 million with the 17% reduction compared to last year, mainly driven by a decline in the underlying gross margin. This came in at 20.2%, as higher incentive use, build cost inflation, and extended site durations caused by the slower sales rate, all contributed to a reduction from the prior year. The administrative expense increased to £142 million, mainly driven by inflation and wage pressures, and this also had a 40 basis points dampened impact on the underlying operating margin. In the year ahead, margin guidance will evolve as a clearer picture develops with regards to trading conditions. There will, however, be material downward pressure, and this will be driven by a lower volume output and reduced average selling price, which will mean that we will not recover administrative and selling overheads as efficiently. There will be a full year of incentive use. So, in FY '23, the average incentive on completions was around 2% or 3%, but over more recent months, incentive use on reservations has nudged to 4% given elevated mortgage rates. Build costs -- or build cost increases rather are moderating, and our site based forecasts now capture the previous 12 months' worth of increases, during which time inflation approached around about 10%. What we do expect further, albeit more gentle rises in the year ahead. And lastly, sites will take longer to trade out. So, slower sales rates mean that developments will all bear additional recurrent monthly site overhead costs, and these can easily be around £50,000 per month. The bars in the chart are deliberately not precise as there is an element of uncertainty with regards to each of the variables. But at this stage, our best estimate is that the underlying operating margin will decline by at least 600 basis points in FY '24. At the same time, the business has taken a number of steps to mitigate the full extent of margin decline and to provide a platform for its long-term recovery. For example, we are reviewing site overhead requirements and are restricting these overtime on subcontract day works, and amongst other initiatives, we are driving down costs introducing new subcontractors and re-tendering orders given the reduction in construction demand. With respect to the overhead, we made a considered and difficult decision to close 2 divisions. And we are also nearing the nearing the conclusion of a group-wide workforce planning exercise. This will mean that overheads in FY '24 will be no higher than the £142 million incurred in FY '23, despite ongoing inflationary pressures and upward wage growth. Crucially, our divisional closes do not materially affects the long-term growth capacity of the business, and they are designed to be reversible, should there be a positive change in market outlook. As previously guided, there was a small loss from joint ventures of £1 million, and this loss will increase to around £4 million in FY '24 as we come to the end of an active site and bear the initial upfront costs on a 1,200 units longer-term scheme at Cherry Hinton in Cambridge. The underlying interest charge was lower than expected, principally because we benefited from higher interest rates on our cost balance throughout the year. And in FY '24, I currently expect the underlying interest cost to be broadly similar at around £10 million. Finally, as a reminder, last year's standard corporation tax rate of 25% will rise to 29% in FY '24 as we bear a full year cost of the higher corporate tax rates. In relation to building safety and our obligations into the Self-Remediation Terms, we have set aside an additional £13 million in the second half of the year as an adjusting item. And this includes an H2 interest charge of £8 million in line with previous guidance and a small true-up charge of £5 million through cost of sales as we go through a now established process of refining cost estimates. The result is a total charge for the year of £19 million, which you may recall is stated after the benefit of a £50 million recovery, which was recognized in H1. Cash expenditure was £33 million, and expect this to more than double in FY '24 as we progress through more schemes. And as a separate issue, we have also set aside an amount of £31 million because of an isolated non-recurring design issue at a high-rise London scheme built 12 years ago. A third-party undertook the design work, and we've so far not found any related issues elsewhere on the limited number of schemes designed by the same consultant. Ultimately, we believe the costs should be recoverable, but there is, of course, a legal process to go through first, and this might take several years. And so, as yet, no asset has been recognized on the balance sheet. Moving on to the balance sheet. And as you know, we restricted land buying activity last autumn. And as a consequence, our total owned and controlled land bank has reduced to around 55,000 plots. Planning is still frustratingly slow, but our front-footed investment following COVID is slowly beginning to deliver results. And this means that the number of plots in our pipeline has reduced to just over 21,000 homes as sites eventually obtain planning permission. At the same time, the successful conversion of plots from the pipeline to the DPP tier has meant that we've been able to replace plots sold through housing sales and hold the DPP land bank at a healthy 32,000 units. This has been achieved despite our limited land buying activity and the difficult planning regime. Our strong position will serve as well for outlet openings in the year ahead. We also continue our focus on longer-term sites, having bolstered our strategic land bank to some 44,000 plots. And this includes the benefit of a small corporate acquisition in October 2022, which should ultimately bring forward an additional 6,000 plots. This approach to securing longer-term interests will provide long-term outlet growth, it will offer more opportunity to overcome a difficult planning environment, and it will provide potential margin enhancement for a modest initial capital outlay and help to drive an improvement in return on capital employed. Our construction-based work in progress balance has increased to almost £1.9 billion, with the rise in part driven by build cost inflation over the past year or so of up to 10%, as I said earlier. In addition, we have maintained early-stage construction programs in line with the assumptions which we made when we bought the sites as part of a carefully considered approach to investment. And the reason for that is two-fold. Firstly, it's to help ensure that we are well placed to deliver our outlet opening program in the year ahead. And secondly, it's to complete foundations in advance of the 2023 building regulation change, which was the basis upon which the sites were bought. And we've done this on smaller and medium-sized developments to make it easier for site teams to manage construction programs, which would otherwise have been complicated by two sets of rules and designs. In the year ahead, WIP turn will reduce as whenever there's a material reduction in volume. WIP doesn't move down proportionally, or at least it doesn't initially. And this is because even in a slower market, infrastructure investments in roads and sewers and pavements, for example, in respective section 106 obligations still need to be made to progress sites. And also in the slower market, customers expect a choice of homes, and they are often much more reluctant to commit to purchase at earlier stages of build. So, reflecting this, build rates are currently faster than sales rates. And while we will be building fewer homes and subcontract order values will be smaller, there will be a controlled buildup of stock on some sites. This means, there will be a temporary reduction in balance sheet efficiency before we start to recover, hopefully, in FY '25. The last time reservations fell so significantly was in 2009, and then again, for a shorter period following the onset of COVID. We've had plenty of dress rehearsals, and our approach to managing the business is supported by our strong balance sheet. In that regard, we ended the year with net cash of £232 million, the average month-end cash balance was £192 million, land creditors were low at £369 million, and adjusted gearing, inclusive of land creditors, was only 4%. Preserving a strong balance sheet is first and foremost our priority in FY '24, given the macro and housing risks, which are still all weighing heavily on the share price. Our balance sheet resilience will allow us to hold our margin disciplines, and it will also put us in a good position to invest and outperform in the event of a market recovery as we did in 2010 and beyond. And although we will restrict land spend again in FY '24, there will always be some requirement to invest in compelling opportunities. The consequences of not buying land year after year lead the structural damage to the business from which it can take years to recover despite what the spreadsheet might otherwise say. Our cautious, but forward-looking approach, means we can retain financial resilience throughout FY '24 while preserving value and ensuring that the long-term health of the business is not compromised. As previously guided for FY '23, we are proposing to maintain the final dividend at £0.95 per share, and this means a total dividend of £1.40, and a full year dividend cover of 2.3 times underlying earnings. In FY '24, we very broadly expect a similar dividend cover perhaps around 2.5 times underlying earnings, in line with the dividend strategy we set out this time last year. Given the pressure on volume and margin, this will lead to a material reduction in the payout, but it does establish a firm platform for which we can build a recovery in FY '25. Beyond the dividend, we are nearing completion of the £100 million share buyback, which we announced in March this year. And we also remain acutely aware of the value opportunity presented by returning additional cash through a further buyback. In that vein, we'll continue to review cash requirements throughout the year in light of how trading progresses. To summarize, our capital allocation policy is to protect the balance sheet, invest cautiously in high-return land to preserve long-term value, maintain a dividend cover of around 2.5 times underlying earnings, and then return any excess cash to shareholders. With regards to our carbon reduction strategy, we've once again reduced our scope 1 and 2 emissions this year by a further 10%. And we've achieved this by using renewable energy in our offices, we've rolled out biodiesel using generators on our sites, and we've also launched a low emission green car scheme. We're now over 75% of the way to achieving our target of reducing scope 1 and 2 emissions by 46%. And I'm delighted to say that this sets a positive and engaging tone with colleagues across the business. The more difficult and, to be fair, more meaningful challenge is meeting our target to reduce scope 3 emissions by 55%. But given the nature of our products, I don't really expect a reduction in scope 3 carbon output until beyond FY '25, i.e., after the implementation of the Future Homes Standard, but we are still setting a strong foundation to complete this work. So, many of you joined us at Salford University earlier this year where we continue to progress our research project. We are trialing air source heat pumps on at least one site in every division. We are aiming to complete exploratory meetings with our top 50 suppliers by the end of next year, the search for joint sustainability solutions. And as Jason will outline, we are expanding the use of timber frame across the group. And not only should this lead to build efficiencies, but it will also help to reduce embodied carbon, which is beyond the requirements or beyond the regulatory of the Future Homes Standard. I'll summarize with guidance for the year ahead. Volume will reduce, but it will be underpinned by around 2,200 social completions. The average selling price is likely to be around £295,000, and the administrative expense is likely to be similar to last year. We will remain financially resilient, but we'll also be highly disciplined and invest cautiously in land and secure the long-term future of the business. The dividend cover is likely to be around 2.5 times underlying earnings, and we will consider further shareholder returns if supported by trading conditions. Bellway is a long-term business, and we are used to the ups and downs of that housing market. When market conditions do inevitably improve, that way we'll emerge strong, energized, and ready to grow again. I'll now pass you back over to Jason.

Jason Honeyman: Thank you, Keith. I will start with trading. In FY '23, trading was tough, volatile, mortgage rates led to significant swings in reservations, and probably best explained through the first slide. While the market was already slowing in 2022, the September budget, coupled with this summer's increase in interest rates had a notable effect on trading. Overall, FY '23 delivered a private sales rate of 0.46 per outlet compared to 0.7 in the previous year. Cancellation rates averaged 18%, and largely driven by broken property chains and affordability constraints. And affordability is, of course, a key driver in overall housing demand. And now we've moved away from that period of low interest rates, we have started to see some clear trading patterns emerge. And if I could refer you to the chart, understandably, there's a strong correlation between mortgage rates and reservation rates. And you can see the periods of softer trading when interest rates rise to around 6%. Looking ahead, I would suggest that if we have hit peak interest rates, then the narrative or the discussion will quickly turn to how and when they will fall, offering some encouragement to our customers. And interestingly, and I'll return to this point later, as the cost of borrowing fell to around 4% at the early part of 2023, that level supported a sales rate of 0.6 per outlet. Now for current trading. In the first nine weeks since the 1st of August, we have achieved a private sales rate of 0.41 per outlet. And that includes a small contribution from a PRS sale, so a net 0.38. There has been little meaningful change in trading between August and September, which is unusual, but reflective of those elevated mortgage rates. And in recent weeks, with inflation falling, this has fed through to lower borrowing costs. And today, you can enjoy a five-year fixed rate mortgage for around 5%, assuming you've got a good deposit. And notably, with those lower borrowing costs starting to feed through, week nine has been our strongest week for private sales, delivering a rate of 0.45 per outlet. And I'm sure, like me, you won't get carried away with one or two weeks of data, but it does demonstrate the strong underlying demand that exists for new homes. Incentives are higher at around 4%. And while house prices have largely held firm, we do see some softening of prices where we have apartments moving to stock or where we seek to support broken property chains. We are around 70% sold for the current year. Our order book at the 1st of October is 4,600 homes, and over 70% of that order book is already contracted. So, volumes for FY '24 will largely depend upon mortgage rates and demand. We will target 7,500 homes, assuming we can achieve a private sales rate similar to last year. And on that basis, importantly, that will also allow us to gently build the order book for FY '25. And that brings me on to positioning the group for recovery. And as I mentioned in my introduction, 2025 feels like the earliest point that we can expect or plan for recovery. And as a business, we are in a good space. We have outlet growth and plan to open up to 80 new outlets during the year. We have a healthy WIP position, providing a good platform for growth, and a land bank that has strengthened in recent years and supports our longer-term growth ambitions. So importantly, if you can see inflation and mortgage rates continuing to moderate over the next 12 months, then we will be in a good position to capture that pickup in demand. And remember, if we can achieve that private sales rate of 0.6 per outlet that I mentioned earlier, then Bellway can deliver 10,000 homes per year because we've got the outlets and we've got the land. Turning now to production. Build cost inflation in FY '23 averaged around 9% or 10%. It feels more difficult to predict the next 12 months. Build cost inflation is falling. Order books are reducing and workload has dropped off. Our subcontractors and suppliers are now looking for new orders, and I would hope that inflation will be more modest in '24 and certainly below 5%. And as Keith suggested, I also want to mention our thoughts and intentions on timber frame construction, the benefits of which are well established, lower embodied carbon and less reliance on concrete blocks, quicker build rates, improving return on capital employed. And with timber costs now returning to more normal levels, you may remember when timber costs spiked during the pandemic by up to 70%. Today, timber costs are broadly similar to traditional build, providing, of course, that you can deliver at scale. Last year, we sold over 1,200 homes with timber frame, and we have now extended that footprint from two to five trading divisions, predominantly in Scotland and the North of England and designed to capture 25% of our overall production, and of course, based upon our Artisan standard house type range. Moving on to land. The market is quiet. In the period, we contracted on 4,700 plots and canceled around 900 plots. So, we may cancel a few more as we continually reassess site viabilities in the coming months. We still have the appetite for new land, but it's limited and must be on attractive or credible terms. Planning still remains the problem, and there has been no improvement since I last reported. We seem to spend a disproportionate amount of time and money on planning processes. And clearly, that frustrates development for all industry players. But most of all, it puts SMEs a significant financial disadvantage. To address this issue, we need a comprehensive longer-term approach to planning, not sticking plasters or the occasional soundbite. Planning departments need to be adequately resourced and working from the office, remove the political uncertainty that encourages local authorities into indecision or more often no decision. We need to reinstate housing targets, reclassify poor quality land that sits within the green belt and unlock those sites held up by water and neutrality rules. Despite these challenges, you can see from our land bank table that our consented land, and this is important, is maintained at 32,000 plots despite not having bought any land. And our strategic land has grown by some 60% in the last two to three years to 44,000 plots. And both are products of our front-footed approach to land investment over two years ago in the early phase of the pandemic. Our land holdings now provide Bellway with a very strong footing to deliver our longer-term growth ambitions. And now to touch on Better with Bellway. The efforts through our customer-first program have led to Bellway being awarded the HBF's 5-star rating for the seventh consecutive year despite a tough operational environment. Our eight-week satisfaction survey did fall slightly to 91%, and that's largely down to pressures in the supply chain caused by delayed completion dates and extended response times for minor snagging items. There are clearly some areas where we can do better. And this year, with lower volumes, provides the perfect opportunity to reinforce those customer service disciplines across the group. That said, our construction quality has improved with our NHBC CQR score, its highest point at 88%, that's construction quality review. And we've also had another strong year with NHBC Pride in the Job Awards with 34 of our site managers winning this industry quality award. [indiscernible] is delivering good service and good quality homes to our customers, energy efficiency is also a key component of future homes. And as Keith mentioned, many of you visited Energy House at Salford University earlier this year. And I'm pleased to report that we've just won major projects of the year at the National Sustainability Awards. And building upon this success, we have now partnered with one of the U.K.'s largest renewable energy suppliers, Octopus Energy to trial Zero Bills on a new development. And this will be developed through a combination of green technologies, PV panels, air source heat pumps and home batteries and zero bills will be guaranteed for the first five years. And we hope to have our first homes complete by the end of 2024. And finally, outlook. FY '24 will be tough. We will retain a sharp focus on resilience and cost control. We will target 7,500 homes, assuming we can repeat last year's private sales rate. We will open 80 new outlets in the year, delivering both outlet growth and also help support their order book for FY '25. Our healthy land and WIP position provides a very strong footing for the years ahead. As a business, we are well placed, well managed and scalable, so can quickly benefit from a pickup in future demand. Thank you. Keith and I are happy to take questions.

Q - Unidentified Analyst: [indiscernible] A few I got. Look, there's been a lot in the presentation around your ability to ramp up if the market improves. I know you talked about land and new WIP. Now how quick could you go from 7,500 to 10,000 units in a practical situation if the market is there for you? I'll do one at a time. I think that's easy.

Jason Honeyman: If I do the first one, Keith. Listen, it's a little bit of guesswork, crystal ball gazing, Chris. But I would suggest our first half is going to be dented by -- sorry, the second half of '24 is the first part of our financial year in '25. So, I don't think you're going to get improved sales rate till calendar year '25. So, I would suggest that you'll be moving towards those numbers in '26. That's how it feels like to me. Because you've got the impact of a general election in the autumn selling season probably. Does that make sense, Chris?

Unidentified Analyst: It does. So, kind of a two-year ramp-up if the market improves?

Jason Honeyman: Yes.

Unidentified Analyst: Understood. Next one is just around interaction with government and kind of what you're hearing there. Is there any prospect for anything in autumn?

Jason Honeyman: Well, I was talking about this earlier, and I'm not sure there's many goodies in the November budget for obvious reasons. There may be some support to help first-time buyers of deposits, Chris, because that is a smaller part of the housing ladder and probably perceived to be less inflationary. But I would expect next year to be the year when the politicians start talking specifically about what they're going to do for housing, not this November.

Unidentified Analyst: That's helpful, Jason. And then just one on the affordable housing market. You're shifting a bit more to affordable at the moment. And what's the help for the housing association sector and beyond for this product at the moment?

Keith Adey: Well, I mean, there is still demand. I guess the forecast that we put out there in terms if affordable, is underpinned by known contracts. So, there isn't too much risk around that from a sales perspective. But we do see the odd site where it's more difficult to get the values that you were hoping to get in terms of acquisition from their own funding challenges, particularly when they're looking to do things such as deal with damp and remediate their backlog of properties. So, demand still works for us, but it's a bit more subdued and you have the isolated incidents where it's as strong as you'd like it to be and perhaps the office are falling away.

Jason Honeyman: I mean I think that's a really good question, Chris. It's a political one, too, because the industry, not just Bellway, have got capacity in the system now to deliver more affordable homes. But you need a political response because I don't think that the RPs or the RSLs have got the intention or the financial muscle to fund much of it. So, I think it will be interesting to see what the Labour Party and the Conservative Party say next year.

Unidentified Analyst: That's helpful. Thank you.

Ami Galla: Ami Galla from Citi. Just a few questions for me. First one on trading. In current trading, were there any regional differences between the North and the South? And even in terms of the incentives that you have to offer in the market, is there a material difference between the two regions as you see?

Jason Honeyman: Yeah. I think nationally, what we've found is the Southwest and the Southeast have been quieter than the rest of the U.K. And I would suggest that the Southwest always gets a bit sleepy Ami in a quieter market. And if you listen to my pickup in the sales rate in week nine and beyond, most of that lift has happened in the Southeast. The Southeast is very sensitive to interest rates as much because there's lots of noise around it, but the ASP is quite high. So that little pickup in our sales rate is mostly driven by the Southeast of England.

Ami Galla: The other question was just on the land market. I acknowledge that you're essentially saying it's a quiet market here. But in terms of the selective opportunities that you are looking at and targeting, what sort of hurdle rates are you looking at, given the uncertainty that we are operating with?

Jason Honeyman: Well, I'm only buying a handful. So, whatever I do is not going to move the dial. Simon, who helps me on land on, he called me yesterday morning with a medium-sized -- normal trading margin. But within that contract, I've got a walk-away clause, so it's almost an option. So, I would do that deal because I can just say no, if I want to. If I'm physically going to commit to a site, then we'd want high 20%-s margin, just to give us a little bit of comfort, if there's some compression on revenues or incentives grow higher through '24 that we've got a bit of comfort in the margin. So that's the sort of approach we take.

Keith Adey: You probably had about a third of the contracts you entered into last year had those walkaway clauses in. So, there's more optionality over there, you're getting better terms.

Ami Galla: Okay. And my last question just was on build. Given you're talking about increasing your usage of timber frame, in terms of the time to build, is there any difference between the traditional way that you've been building versus timber frame?

Jason Honeyman: Yes. There's -- and I can hear John to my ears here, but timber frame is considerably quicker than traditional construction, but you don't always want to build quicker at the moment. So, it's a balance at the moment. So if you're in Sleepy Southwest or Sleepy Lincolnshire, timber frame might not be the answer because it's slightly more expensive and building homes quicker may not be the answer because you heard Keith, Ami, suggest build rates are a little faster than sales rate. So, you've got to be careful where you apply it. But it's a longer-term solution for us as opposed to just a short-term fix on return on capital employed.

Keith Adey: If you look in a more normal market, and we look at our divisions, our two Scottish divisions have always been temper frame, and they would routinely have a WIP turn closer to 3 times, whereas elsewhere in the business, it might be 2.3 times, 2.4 times, that sort of averages. So that maybe gives you a flavor of the difference between the two methods of construction.

Ami Galla: Thank you.

Marcus Cole: Hi. Marcus Cole with UBS. I'll go one as well. Just on the forward indicators, I wondering if there's anything you could say there, given your comments around week nine being stronger?

Jason Honeyman: All I can say, Marcus, is that it hasn't been one week, that week nine lift in the sales rate, which is really from 0.38 to 0.45 has carried through into October. So, we're comforted by that. Do I see it improving in the running to Christmas? Not really. You need something else to happen to interest rates to see that pick up. But it probably does enable us to be a little bit more confident about output guidance this year in terms of what we suggested.

Keith Adey: And I'll just maybe add sort of -- I mean, these are always soft figures, but our website hits it if you can recover whether we're 25% down last year, they may be 15% down or so now. So it's beginning to go in the right direction. You've had strong or relatively strong weeks 9, 10, 11 in terms of sales and our cancellation rate where it was 18% last year, it's trending around 15% or so now. So, you've got a little bit of positivity there around those things.

Marcus Cole: Thanks. And then just on the outlets, you gave the gross opening number. Where do you think the average will be for '24?

Keith Adey: Well, how long is [a piece of string] (ph). We think we might close on around 250. So that will give you an average of 3-point average of 2, 4, 5-ish.

Jason Honeyman: I think the important point there, Marcus, too, is that we can grow outlets probably this year and next without buying any land. That's quite a powerful important message in terms of delivery.

Marcus Cole: And the final one is just on land creditors, I see in the appendix, it's £270 million outflow for this year. Where do you think roughly given your comments around land spend probably close to the year?

Keith Adey: What we'll close the year at, right?

Marcus Cole: Yeah.

Keith Adey: Well, entirely depends on what land contracts we enter into, but my guess would be about £350 million-ish that sort of level by the end of the financial year.

Marcus Cole: Okay. thank you.

Clyde Lewis: Clyde Lewis at Peel Hunt. I think I've got three. Again, I'll do them one at a time. Just thinking about product mix and given where we are in the market, are you reviewing or thinking about product mix in terms of how you might have to tweak one way or the other over the next couple of years?

Jason Honeyman: Not really, Clyde, only because I'm quite confident in our sort of affordable energy-efficient homes piece, that's what our market wants. The only tweak to mix is to monitor that exposure to apartments. For a few years now, whether it's leasehold campaigns or pressure on apartment prices, we find apartments are a little bit more sensitive. So, we will manage the amount of apartments that go through the system, but we will continue our two, three, four, five bed mix because we think that's quite successful.

Clyde Lewis: Okay, thank you. Second one was on the subbies' response. I mean, you're not the only ones obviously going to asking for lower prices. How are they reacting? Are they starting to reflect the fact that the market volume is clearly a lot lower? And presumably, you're starting with the ground workers and going through the trades. But are you getting much joy, I suppose?

Jason Honeyman: It's a good question. And I like the fact that you're smiling while you answer it. But the subcontractors as much as I love them, they don't look too far forward. So, as you've seen this summer, you've seen Bellway, Barratt and Redrow finish year-ends with quite four figures like ours. And then workloads sort of cliff edged and they've only sort of come to terms to the fact that workload has dropped off all of a sudden. So, I would suggest that in the Southeast where sales rates are lower, workload has dropped off quicker, you're going to get better prices because new orders are going to be thinner on the ground. And you may recall, Clyde, that there was a big spike in build cost inflation in the South London and the Southeast. So, you might get some correction there. You might even get deflation in London and the Southeast as you move forward into '24. Whereas if I went to the northwest of England, where sales rates are more robust and workload has held up for more, we're fighting to get that back on budget. So, it's like the sales rates, it's very geography led at the moment. But the suppliers are all sort of coming to hill sort of thing and all working towards reduced prices.

Clyde Lewis: Thank you. Last one was on going back to land, I suppose. And historically at this point in previous cycles, you would start -- we would start to or see lower land prices, but it doesn't feel as if it's coming through. What's your take on why that's not happening yet?

Jason Honeyman: Yes, I don't see a correction. We see the old deals got better value. I just don't see that sales have fallen off the edge of a cliff. As I've mentioned, house prices are largely holding firm. People are not overexposed to debt. So, there doesn't seem to be a correction in land prices, but that may well change as you move in to '24. The interesting bit Clyde is not particularly land prices, it's the planning system. So, if the planning system continues to strangle the amount of land that's available for development, that will keep land prices high. So that's my worry. And everyone -- do you remember when people were all competing on the same prices 10 years ago and gross margins were 18 -- you're smiling again, 18% to 20%? Well, I hope we don't end up in that space.

Clyde Lewis: Thank you.

Aynsley Lammin: Thanks. Aynsley Lammin from Investec. I think I've got two as well, please. Just on the mortgage market, any more color there in terms of availability, down valuations, how cautious the kind of lenders are at the moment? And then secondly, just on the overheads. So, obviously, expect those to be maintained. Is that just because you feel our sales rates will go back to the 0.6 and actually that level of overheads is absorbable that sales rate? I mean, what kind of would make you cut the overheads and cost a bit more? Thanks.

Keith Adey: So, the mortgage market is generally supportive in terms of the appetite from the banks wanting to lend. But obviously, the affordability criteria is a bit stretched in certain instances, which has resulted in the reduction of the available product. But if you speak to issue with the banks, they seem to be keen to land, and the issuance or the recurrence of down valuations is very, very rare. No uptick in that whatsoever. We are seeing a trend towards 30-year plus mortgages did to ease on the affordability. And again, the feedback we get is probably the majority of mortgages now in that category, i.e., 30-year plus. But generally supportive and wanting to help, but it is just that affordability hurdle rate to get over. What would we do on the overhead? Look, it's a prolonged -- the reason why we're holding the overhead is we're hopeful that there will be this recovery in the market. You had 12 on a subdued sales, we believe we've got the WIP in place to recover the land in place to recover. We've also got the people in place to recover. But if you have another 12 months of subdued sales and you will continue to look at that. But at this stage, there are no firm plans to do anything extra.

Jason Honeyman: I mean we have closed two operating divisions, Aynsley. And I think that's enough. It's hard work growing the infrastructure, if you can remember from '08. And next year is almost holding year, it's a preserving year to see what happens, I think.

Glynis Johnson: Glynis Johnson, Jefferies. I got a few. I'll go one by one. Hopefully, they're very straightforward. You talked about subcontractors that sort of cliff of work that's sort of -- not work that they saw at the beginning of your financial year. When do you actually see that coming through in terms of the P&L? Is -- do you literally fix for delivery second half of this year calendar over the summer? I'm assuming there's a six-month lag.

Keith Adey: Well, in terms of how do you fix...

Glynis Johnson: Well, you're talking about subcontract rates effectively falling off in the summer. When do you see that come through in the P&L?

Keith Adey: I mean, it's distorted. You never see it. You generally have your orders left for the next six months or so. But then in addition to us, which is the bit which is in is hard to explain. It's all site best valuations, in site-based valuations, you might have two, three, sometimes four years left on your site. So, the benefit of any reduction in costs you get, gets spread over the lifetime over the duration of the site. If you were in a theoretical scenario to start seeing costs going down, then it's going to be H2 when you start to see that benefit, but then it gets spread beyond H2. I hope that sort of makes sense.

Glynis Johnson: H2, your financial year?

Keith Adey: Yes.

Glynis Johnson: Second question. What is the feedback from the customers? What's stopping them transacting? Is it the affordability that it's just -- they feel it's too high? Is that they can't get the work? Is it they're just sitting on the hands and waiting?

Jason Honeyman: Well, there's a little bit of everything. I mean, our RCs, regional chairs, are here today, but the most common thing we have is -- there's two things. It's affordability, but it's broken property change that causes the raft of cancellations, Glynis. So, where you've got someone in a chain, someone's got a problem somewhere. So that tends to be the biggest issue.

Glynis Johnson: Okay. Third question. Page 34, you show the ASP per square foot. There was actually a really good increase in 2023. How much of that was what was booked effectively before the downturn? How much of that is Artisan? How much is that site by site?

Keith Adey: I knew -- this is why I don't like putting these things in [indiscernible]. Look, I'm going to give the cop out answer. A lot of that's driven by mix. I don't think you can over engineer it to say there's a lot of different things in there. The mix change is what's driving that primarily.

Glynis Johnson: Will we see a mix change, 2024, excluding the social?

Keith Adey: In FY '24, I think you will see that private average selling price come down, and that's for two reasons. One, it's partly the incentive piece, which we've already talked about. And two, you might recall a couple of years ago when Help-to-Buy was coming at the end, we always said, we're buying all of this land with these affordability constraints in mind. So, we were deliberately buying some smaller-sized products and you're starting to see that come through in FY '24 as well. So that will help pull up or that will result in that ASP coming down a bit as well.

Glynis Johnson: Just two more. One, the increase in plots that you showed was obviously very impressive since 2019, but what have your site numbers done in terms of the actual number of outlets that sit within those land banks? Have they seen a similar 40% plus increase?

Keith Adey: Well, our average site size has probably trended up over the period as well. So, I haven't got the top of my head the 2019 site numbers were 240 at the moment in terms of active sites. And I'd say our average site size is trending around 170, 180 units now, and it's probably a little bit smaller a few years ago, you're probably sort of 160-ish.

Glynis Johnson: Okay. And the last one, and this is really just trying to square the circle. You talked about cautious investment and high-return land. But then you also talk about the land market not really giving you high return land. What is the most important? Is it that you need to buy land for '26 delivery, and therefore, you will compromise margins if it's not available? Or is it that margin is the most important and therefore, you will compromise your delivery in '26?

Jason Honeyman: I'm in a good -- listen, good question, but I've got a good answer. I'm in such a healthy place for land. I don't need to make that decision until next spring, probably next summer, Glynis. So I don't need to buy land that delivers until '26. So, I don't need to show my hand really until next summer, maybe next spring, that sort of thing. So, I'll sit and watch before I decide.

Keith Adey: I think to say all these things as well, there's a balance to it. And the mindset in the business isn't its growth at all costs where the market supported. We want to have that it has to be profitable growth, I guess, is the thread to it all.

Alastair Stewart: Alastair Stewart from Progressive Equity Research. A couple of questions, both political. First, the impression I've got from you guys and pretty much all of the house builders is you're very happy with engagement with labor, specifically citing Kier Starmer, Rachel Reeves and Lisa Nandy. Angela Rayner's and Andy's position, and she certainly sounds more focused on affordable housing and frankly, her rhetoric a bit more aggressive at the tone about the house builders. Will that change anything in your mind? So that's kind of first question. And second question is, on elections likely in about 12 months, historically, what impact has that had time-wise in buyers sitting on their hands or not, as the case may be? But also in terms of the planning system, is it likely to go into further in the same way this time?

Jason Honeyman: Well, I'll take the first one, Alistair. I mean you're right to suggest. I mean, not all of the noise or the comments coming out of the Labour Party seem to us to be supportive. And with regard to Angela Rayner's comments on social housing, that provides us with an opportunity for partnership. You can't deliver it all through contractors. We have very close relations with RPs and RSLs. So, we will expand our approach to partnership housing. And we've always been closely aligned with affordable housing providers because our ASP is on the medium to low side. So, we see that as a benefit coming forward. I would go back to an early comment, how are you going to fund it? Some of the RPs haven't got any ambition to do any delivery at the moment, Alistair, because they're consumed by moldy walls and fire issues and protecting the balance sheet. So there's a structural issue in there to overcome. And sorry, your second was...

Alastair Stewart: Well, the second part of the first one was the rhetoric, it's a bit back to house builder bashing, which was less -- was that just for the Labour Party conference. So that's just tie up on that. And then the second question was the election. Is there a slowdown in sales rates in the run-up? I think I remember that in the -- ahead of 2019, but also in terms of [indiscernible] building controls and so on.

Jason Honeyman: Well, I'm not sure [indiscernible] can make planning any worse, but I get your point. The two biggest issues in planning world are not enough people, yes, and the political interference. So, local authorities sit behind the political interference and either don't make a decision or make no decision, it goes to appeal. So, something you think you can do in six months, sometimes takes two years. So, I think as soon as you get past the general election, that will unlock that side of planning. But it will take a good period of time to adequately resource the planning departments. Do I expect sales rates to slow down? Yes, I do, because generally, the public will be nervous of change, and I understand that. So, we normally find that on the run into a general election, people defer a decision to the other side. And let's guess that the election will be in the autumn. That hurts us as a business because it's in one of our best-selling seasons. I think the last one was at Christmas, and we had one previous to that to June, have been so many leadership things. So, I think that's an issue for house builders. I think previously, if you could remember back to the last general election, we had a thing called the Boris Bounce. I don't think we're going to have a bounce, but I do think you'll get on the other side and you're going to start to see some recovery. That's what we see.

John Fraser-Andrews: It's John Fraser-Andrews, HSBC. Two, please. First, on the admin, Keith, the flat expectation, what are you factoring in for staff labor costs there, the offset to the cuts? Is the first one. And staff wage inflation, please. And the second, Jason, you referred to suppliers starting to play ball in the build cost, you're 5%. What are you factoring in for materials within that sort of 5% max build cost inflation for the year? And how is that panning out those discussions? We've obviously seen some well-publicized timber reductions last week. And what's playing out in terms of the big items? Thank you.

Keith Adey: So, nearly all of our staff benefited from at least a 5% rise. But the average rise was probably at least another percent on top of that. So, there was a minimum threshold, and then there was a top-up on top of that. On the workforce planning exercise in the divisional closures, the consultation period has only recently ended. So that means the people who unfortunately are leaving the business, won't be doing so in any great number until November. So, you don't have a full year of the savings in there. So that hopefully helps you reconcile those numbers, John. 1st of August is gone.

Jason Honeyman: John, I think on build cost inflation, it's always a bit of a guesswork because we're in this sort of transition period. But with suppliers, we are negotiating with them now. And certainly, it's easier with suppliers to get discounts or better prices. It's the labor market, John, that there's still a bit of pressure on wages. Whilst we might have seen some benefits in London and the Southeast, we're not seeing wages come off in the Midlands or the northwest of England at the moment. So there's -- the pressure on prices is probably being driven by the labor line, not the material line. But I'd imagine when I sit here in a year's time, you're really going to see the numbers coming back. Because there's always that correlation is there between revenue in. All done? Thank you very much indeed for your time. Thank you very much.