Bellway p.l.c.

Well, good morning. Thank you for joining us. A reasonable or better turnout than we'd hoped, so thank you. And welcome to Bellway's half-year results. As always, I'm sure there'll be keen interest in current trading and outlook. But first, I'll draw your attention to a few key highlights. Housing completions were slightly ahead of last year with a new record volume of just under 5,700 homes. And notwithstanding current inflationary pressures, underlying PBT was down by less than 5% at £312 million. Interim dividend is maintained at 45 pence per share. And reflecting our responsible approach to capital allocation, we've announced a share buyback programme of £100 million. Market conditions in the first six months have been challenging. And given that backdrop, we've focused our attention on cash generation and cost control, unwinding the order book, accelerating the delivery of affordable homes and closely managing our cost base to help mitigate inflation. And it's these actions that have led to a strong first half performance. Now, despite a more modest sales rate, particularly through that autumn period. The order book is still strong. and the business remains in a healthy shape. We have got depth to our land bank, scope to increase, outlet numbers, cash in the bank, a strong track record on delivery, and the ability to promptly return to growth when the time is right. And it's with that confidence in the business we can return excess cash to our shareholders through buyback and Keith will better articulate our capital allocation strategy but as usual our approach is a very balanced one now for our first half results with Keith good morning all so the financial performance for the first half year was solid and it was driven by this strong order book

it has helped us to deliver record volume and a record average selling price. And as already mentioned by Jason, underlying profit before tax was £312 million, which is a slight reduction compared to last half year's peak, with this driven by margin pressures. Jason also mentioned in his introduction our priorities to build out the order book, and to accelerate the production of social housing plots. And because of this plan, and despite the weaker trading conditions, housing revenue still rose by 1.6% to over £1.8 billion. And this was achieved even though production constraints were still evident across the sector, particularly at the start of the period. In addition, this approach has resulted in social housing completions rising to 21% of total volume. The ongoing re-phasing of construction programmes means that the trend towards affordable housing will gather pace and it will therefore represent more than 25% of volume output for the full year. And that higher weight in the social homes will also dilute the FY23 average selling price which as I said last October is likely to be around £300,000. While the market has been challenging, demand in certain parts of the country has been stronger than others. For example, our Manchester, Northern Home Counties and East Midlands divisions have all shown resilience, benefiting from their offering of affordably priced homes in high demand areas. Our second brand, Ashbury, grew to 11% of completions and it is proven to be valuable in a slower market where planning still constrains new outlet openings. Where appropriate, Ashbury allows us to offer two selling outlets on larger sites and this provides greater choice to customers and helps to stimulate sales rates. Completions in London reduced slightly to 6% of the total, and this reflects lower land investment in earlier years when we sought to move away from higher density London schemes, given lower demand, affordability constraints and their dependency on help to buy. Underlying gross profit was close to last half year at £389 million and there was an 80 basis points reduction in the gross margin to 21.5%. The prices achieved on completions in the period largely reflect those included in the order book at the start of the year. But going forward, we expect an increased use of sales incentives And in addition, build costs are still rising. The combination of these factors means that there will be ongoing gross margin compression for the remainder of this financial year and further pressure into FY24. The administrative expense increased to £71 million in part a reflection of the additional costs of our recently established building safety division. There are also inflationary challenges with upward pressure on employer-related costs given the continued demand for skilled resources. We're keen to preserve the integrity of our divisional structure so that we don't damage our longer-term prospects and to ensure that we are well prepared in the event of a market recovery. But at the same time, we're keeping a keen focus on cost control and in that regard there has been a moratorium on new recruitment we have commenced a workforce planning program and the payout on employee incentive schemes which can form a large component of remuneration in the household and sector is likely to be lower than last year and as a result of these actions i now expect the full year administrative expense to be around 145 million pounds which is below previous guidance of over £150 million. After considering overheads, the first half underlying operating margin was 17.6%, and this will moderate for the full year given the predicted reduction in gross margin. In addition, the administrative overheads will not be absorbed as efficiently due to the higher rating of housing revenue in the first half. It's too early and uncertain to guide to an operating margin for FY24, but the trend for margin compression will continue and this will be more pronounced because of lower volume output. That said, whilst there is likely to be near-term margin compression, we should not be too downbeat when looking out over the medium term. In that vein, mortgage rates have stabilised Inflation is forecast to moderate. Employment levels are high. And wage rises are in part offsetting rising living costs. All this means that new homes remain affordable in a historical context. And coupled with structural underlying demand, there is a strong foundation for medium-term margin recovery once this period of uncertainty passes. Moving on, joint venture profit was very modest in H1 but for the full year it is likely to be a small loss. The underlying interest cost remained in line with last half year at £6 million and for the full year I now expect an underlying net finance cost of around £13 million and this is lower than previously expected mainly because of higher interest rates on cash deposits. The effective tax rate was 24.8%, and it should be close to this for the full year, before rising to just below 29% in FY24. As you know, we signed the government's building safety pledge in April last year, and following this, we have recently signed the binding self-remediation terms contract. The consequences of not doing so would eventually include a future prohibition on new planning consents and the withholding of building control approvals. While some of the terms of the SRT are onerous, particularly in terms of the reporting requirements, fundamentally and importantly, it does not change our financial liability. And on a positive note, the SRT clarifies the required standard of remediation, or at least it does on paper, but the practical interpretation of these standards by the wider industry will no doubt continue to evolve over the coming years. Aside from the SRT and in the usual manner, we've updated our cost estimates in relation to building safety. This has resulted in an adjusting charge of £6 million in the income statement. The charge includes a £3 million adjusting finance expense, which relates to the unwinding of the discount on the provision. And because of higher gilt rates, this will increase to around £11 million for the full year. The remaining charge also of £3 million is recognised through cost of sales and it is stated net and therefore after the benefit of £50 million of recoveries. These relate to one-off settlements across several sites which we have been working on for several years. Offsetting this is an expense of £53 million where we've taken the opportunity to prudently revise cost estimates on existing schemes. And we've also considered a widening scope of works beyond just the external envelope. The requirement for building owners to undertake regular fire risk assessments should mean that fewer new issues are likely to be discovered in the future. Importantly, our provision also includes an allowance for as yet undiscovered problems. As ever, our approach is prudent, it's considered, and our focus is to get on with the remediation works. balance sheets included for reference i'll talk through the most material items and as you know we curtailed land buying activity back in autumn but our total owned and controlled land bank remains similar in size to this time last year at around 58 000 plots planning is still frustratingly slow but the proportion of plots with detailed planning permission is gradually beginning to increase And at the same time, we continue our focus on longer term strategic plots, securing interests for a modest initial capital outlay. Land prices are then generally agreed based on market conditions at the time of acquisition, which can be some years down the line. Overall, our land bank is strong and it comprises some 100,000 plots. And this means we can remain very selective proceeding only with contracts that offer compelling financial returns. In terms of work in progress, the balance has increased to £1.6 billion, in part reflecting a greater weighting of plots towards later build stages. But in addition, we've also invested in site infrastructure and limited early stage foundation work in preparation for site openings later this calendar year. We will retain strong control of work in progress to ensure continued balance sheet resilience. Our investment in part exchange properties is still low at only £11 million. And part exchange has to be used carefully as it can be costly and it also ties up capital. That said, we have significant balance sheet capacity to invest more in PX and this will help overcome some of the problems we face in chains which can be a cause of a delay and in some instances cancellations. Our cash position remains very strong. We ended the period with net cash of £293 million and the average month end cash position over the past six months was close to this at £253 million. This demonstrates the strength of the group throughout the period and I also expect that we will remain in an average cash position throughout age two despite the lower year-on-year sales rates and the share buyback programme. Land creditors remained low at £372 million and adjusted gearing inclusive of land creditors was only 2%. Our balance sheet provides resilience, strategic flexibility, capacity to invest in land and the ability to return cash to shareholders. And in that regard, we are maintaining the interim dividend at 45 pence per share. And subject to market conditions and shareholder approval, we also expect to maintain the final dividend in line with last year at 95 pence per share. We've previously said that we expect the dividend cover to reduce to around 2.5 times underlying earnings by July 2024, and I still think this remains a sensible long-term target. In addition, if there is a year-on-year reduction in earnings in FY23 and in FY24, our balance sheet provides the scope to temporarily reduce cover below 2.5 times. Further to the dividend, and as already mentioned, we are today announcing a £100 million share buyback programme with an initial £50 million tranche to commence imminently. The rationale is that volume is likely to reduce next year and our land bank is strong. And in this context, we believe we have surplus capital, which will generate more value if it is returned to shareholders. Our capital allocation strategy is a balanced one. Maintain a healthy dividend, maintain the ability to selectively invest in land and complement that approach with a share buyback. Briefly, you will recall that carbon reduction is a cornerstone of our Better with Bellway sustainability strategy. And in respect of our Scope 3 targets, we continue to work with the supply chain to look at alternative building materials. We are also undertaking several research and development projects, including trial sites, and in order to design and test solutions to reduce regulated Scope 3 emissions in line with the requirements of the future home standard. Jason will discuss progress in relation to the building regulations, but the flagship of these research projects is Energy House 2 at the University of Salford. Here we have constructed a Belway feature home inside a temperature-controlled chamber which can mimic environmental conditions experienced by 95% of the world's population. We are testing the energy and the carbon efficiency of a range of technologies, including air source heat pumps, infrared panels, mechanical heat recovery and enhancements to the fabric of the building. It can get quite technical, but it is an interesting project and we will look forward to welcoming many of you to our Energy House project in May in conjunction with our research partners later this year. So to summarise today's financial part of the presentation, we're still on track to deliver around 11,000 homes this year at an overall average selling price of around £300,000. There will be a further moderation in the underlying operating margin from the 17.6% achieved in the first half. We've maintained the interim dividend and we're also returning £100 million of surplus capital to shareholders through a buyback programme. And finally, our balance sheet is solid. It provides continued resilience, strategic flexibility and the capacity to invest in land when the timing is right. I'll now pass you back over to Jason.

Thanks, Keith. I'll start with trading. The trading period from the 1st of August through to January is probably best described through the first slide. In the first nine weeks, private reservations were lower than the previous year by 27% as mortgage rates had already started to rise and we felt the first effects of the September budget. The subsequent three months through Private reservations fell by 60%, and then you can start to see the recovery building in January. Overall in the period, total reservations were down by a third, with private reservations down by 44%. Cancellations averaged 20% in the first half, but since the 1st of February, that has reduced to around 15%. Now, before I go on to current trading, I just want to take a quick look at the mortgage market. Interest rates or the mortgage market has now started to settle with 75% LTV rates now at least 1% lower than their peak last year and those with bigger deposits can readily access a five-year fixed rate now at below 4%. However, if you look at the 95% LTV rates, product availability is still modest. And with the end of Help to Buy, there's clearly a gap in mortgage finance for first-time buyers. That said, underlying demand is healthy. Customers are adapting to the new mortgage rates and trading is certainly growing. improving. And with regard to current trading, in the first six weeks since the 1st of February, there's been a gradual week-on-week improvement in private reservations. Our average private sales rate in that period was 135 homes per week, still down by 40%, but that's measured against a very strong comparator period. And usually, as you know, we report sales in absolute numbers as opposed to a rate per outlet. But to give you some context, and this is important, our most recent selling weeks in March have consistently delivered a rate per outlet of 0.6%. House price inflation has all but disappeared, and whilst we've seen very little pressure on list or house prices, the cost of selling incentives has grown from just over 1% to around 3%, and higher on some targeted sites. The order book is understandably different. lower at around 5,800 homes but still strong with a value of 1.6 billion and notably we are 95 sold for the current year turning now to land you you may recall our appetite and strategy for land investment back in the summer of 2020 was always to uh grow outlet numbers to mitigate the loss of help to buy that approach is still as important as ever as we now navigate a softer selling environment and that environment may very well continue through to the next general election and outlet openings are are always difficult to forecast but even more so with the current planning system although we do expect outlet numbers to increase in the summer of this year, and that will help support sales volumes in softer training conditions. Now, if I could refer you to the land bank chart, our owned and controlled land bank is slightly ahead at 58,000 plots and represents around five years of supply. And you can see from the slide where we were front-footed with investment back in FY21, during that early phase of the pandemic. And this resulted in our owned and controlled land bank growing by 18%. Today, we only invest where we see compelling land opportunities. And that strength of land bank allows us to be very selective. In the past six months, we've contracted on a further 2,400 plots, of which about half of those have walk-away clauses. And by that, I mean it's at Bellway's discretion whether we complete on the acquisition. Now, where our appetite is greater is within strategic land. We've continued to invest in our strat land teams and also made a further corporate acquisition of a strat land company which holds 52 sites and around 6,000 plots. And interestingly, over the past two years, you will have seen the strategic tier of our land bank grow by 50% to 42,000 plots, providing Bellway with a solid footing for longer-term growth. Now turning to production. Bill cost inflation was approaching 10% in the first half. And whilst costs are now coming down, they're not falling fast enough. Inflationary pressures are still stubborn in parts. Some suppliers and subcontractors are still willing to offer us discounts for visibility of workload into 23 and 24 and some of extended fixed price periods. However, cost increases for plasterboard, for roof tiles, for windows are all still persistent with suppliers demanding increases of up to 10%. We are certainly in a transition period of falling cost, but it's a little slower than I'd hoped. And with regard to the availability of labour and materials, after two years of strong demand, those pressures have started to ease, and I don't envisage any production problems in the short term. Now, given the stubborn inflation repressions, we continue to look for further efficiencies to mitigate margin pressures. Our artisan standard house type range is now going through its first review in order to accommodate the interim building regs in June of this year, and we're taking the opportunity to value engineer some design elements following the experience we've gained across the past two to three years. Items such as ground drainage, proprietary retaining wall systems, and better roof designs to accommodate new PV panels. Artisan is now plotted on 95% of all planning applications and will account for over 40% of completions this year. And Keith's already mentioned Energy House, but out in the field, we've got numerous trial sites across the UK to meet future home standards and determine which products are both practical and cost-effective for both our customers and their site teams. Operationally, the last six months have been challenging, principally because of gaps in the supply chain. And as those pressures start to abate, the focus for our teams is clear. Build teams are charged with closely controlling WIP, and accelerating the delivery of affordable homes. Commercial teams are faced with the challenge of driving down costs. Land teams are focused on planning to drive outlet growth. And our sales teams are being retrained not only to rediscover the art of selling, but also to be conversant with incentive campaigns and the new building regulations. And just one final point, once Keefe's outlined our approach to admin savings, I am keen to preserve the long-term health of the business and I still plan to continue with our young persons intake programme in September of this year. It's worth just spending a few minutes on customer first, our better with Bellway approach. We've again been recognised as a five-star home builder for the seventh consecutive year. But as I mentioned earlier, it's been a tough six months. and our eight-week survey score has moderated from a high of 94% and that's a product of extended build periods and pressures from the supply chain. We have a range of initiatives underway for the year ahead and one that we recently launched is our Meet the Builder approach adjacent to all of our future show homes will be a partly constructive view house where customers will be able to see the internal workings of a house to gain an insight into the build process and ask questions to our site teams. And the slide shows a typical example from our East Midlands division. In addition to meet the builder days, we're also providing customers with information on sustainability, energy saving benefits and a guide to anticipated running costs in our new homes. And all these measures are designed to underpin confidence in the quality of a Bellway home. Now, before I finish off with outlook, I just wanted to mention the CMA housing market study. The scope is quite far reaching and goes beyond the perennial investigations into land banking. The study is designed to better understand industry practices such as land acquisition, build out rates and the sales environment. The results are planned for early 2024 and I would hope that the findings will highlight the challenges faced by both small and large house builders and will have a positive effect on future housing policy. And finally, Outlook. We're 95% sold, so you can expect a volume of around 11,000 homes. In October, at our prelims, we'll be in a better place to offer guidance for FY24, though it's clear that volume output will be notably lower than 23%. And given the strength of our balance sheet, we plan to maintain our dividend for the full year whilst retaining the ability to re-enter the land market when the timing is right. Thank you. Keith and I are now happy to take questions.