Bellway p.l.c.

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 140 pence 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 230 million of net cash at the 31st of July. Now, understandably, trading conditions have been significantly impacted by rising interest rates. And in FY23, you may recall that our approach was to protect the balance sheet and lean markets. upon our operational strength 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, FY24 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 capitalise on better trading conditions. A healthy WIP position, providing a good platform for growth, increasing outlet numbers to encourage sales demand, and greater strength and depth to our land bank. I will discuss strategy and operations later in the presentation. But first, for our results with Keith.

Okay, thanks, Jason. Good morning, everybody. So I will start with housing revenue, which moderated to £3.4 billion. As Jason's already mentioned, it was underpinned by close to record volume output. As I set out this time last year, construction programmes were intentionally weighted towards more social homes, which resulted in the completion of an additional 700 affordable units. This has helped to support total volume output in a much slower market. 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 programmes will remain weighted towards social housing as we seek to redeploy site labour and again prioritise cash recovery while private demand remains weak. I therefore very broadly expect that we will complete around 2,200 social homes in FY24, 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 FY24, 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 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 dampening 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 FY23, the average incentive on completions was around 2% or 3%. But over more recent months, incentive use on reservations has nudged up 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%. But 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 bear additional recurring 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, my best estimate is that the underlying operating margin will decline by at least 600 basis points in FY24. 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 the use of overtime and 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 two divisions. and we are also nearing the conclusion of a group-wide workforce planning exercise. This will mean that overheads in FY24 will be no higher than the £142 million incurred in FY23, despite ongoing inflationary pressures and upward wage growth. Crucially, our divisional closures do not materially affect 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 FY24 as we come to the end of an active site and bear the initial upfront costs on a 1,200 unit longer term scheme at Cherry Hinton in Cambridgeshire. The underlying interest charge was lower than expected, principally because we benefited from higher interest rates on our cash balance throughout the year. And in FY24, I currently expect the underlying interest cost to be broadly similar at around £10 million. Finally, as you remember, last year's standard corporation tax rate of 25% will rise to 29% in FY24 as we bear a full year cost of the higher corporate tax rates. In relation to building safety and our obligations under 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 recognised in H1. Cash expenditure was £33 million, and I expect this to more than double in FY24 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 cost 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 recognised 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 port 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 programmes 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 twofold. Firstly, it's to help ensure that we are well placed to deliver our outlet opening programme 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 programmes, 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 payments, for example, in respective Section 106 obligations still need to be made to progress sites. And also in a 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 build up of stock on some sites. This means there will be a temporary reduction in balance sheet efficiency before we start to recover, hopefully in FY25. 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%. And preserving a strong balance sheet is first and foremost our priority in FY24, 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 FY24, there will always be some requirement to invest in compelling opportunities. The consequences of not buying land year after year lead to 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 FY24 while preserving value and ensuring that the long-term health of the business is not compromised. As previously guided for FY23, we are proposing to maintain the final dividend at 95 pence per share, and this means a total dividend of 140 pence and a full year dividend cover of 2.3 times underlying earnings. In FY24, 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 from which we can build a recovery in FY25. 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 summarise, 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 two and a half 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 one and two emissions this year by a further 10%. And we've achieved this by using renewable energy in our offices. We've rolled out biodiesel to use in 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 if reducing scope one and two 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 product, I don't really expect a reduction in Scope 3 carbon output until beyond FY25, i.e. after the implementation of the future home 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-sourced 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 to 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 requirements of the Future Home Standard. I'll summarise 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 will also be highly disciplined and invest cautiously in land and WIP to secure the long-term future of the business. The dividend cover is likely to be around two and a half times underlying earnings, and we will consider further shareholder returns if supported by trading conditions. Bellware is a long-term business and we are used to the ups and downs of the housing market. When market conditions do inevitably improve, Bellware will emerge strong, energised and ready to grow again. I'll now pass you back over to Jason.

Thank you, Keith. I will start with trading. In FY23, 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 markets. trading overall fy23 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 trade. 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, 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 FY24 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 FY25. 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 position. that are 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. Bill cost inflation in FY23 averaged around 9 or 10%. It feels more difficult to predict the next 12 months. Bill 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 cancelled 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 at a significant financial disadvantage. To address this issue, we need a comprehensive, longer-term approach to planning, not sticking plasters or the occasional sound bite. 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 greenbelt and unlock those sites held up by water and nutrient 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. 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 programme have led to Bellway being awarded the HBF's five-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 at 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. And as well as 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 Project of the Year at the National Sustainability Awards. And building upon this success, we have now partnered with one of the UK'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. FY24 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 that order book for FY25. A healthy land and WIPP position provides a very strong footing for the years ahead. As a business, we are well-placed, well-managed and scalable, so we can quickly benefit from a pick-up in future demand. Thank you, Keith and Al. Happy to take questions.