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Good day, and welcome to the Barratt Trading Update. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. David Thomas, CEO. Please go ahead.
Thank you, and good morning, everyone. Happy new year. Today, as you know, we're issuing our trading update for the 6 months ended the 31st of December. As usual, Jessica is with me. Running through the highlights. We've delivered another strong first half performance, strong both operationally and financially. Our completions were up by 2% at 7,324. Our sales rate has been consistent, in line with a strong comparative last year. Forward sales are healthy and total nearly GBP 2.4 billion, up 2%. And we ended the half year with net cash of GBP 165 million. So if I can just give you a little bit more detail on the numbers. Net private reservations per active outlet were in line at 0.68. We launched 93 developments in the period, and we operated from an average of 376 outlets over the period. Average selling prices on completions were up by 5.9% for private and 6.5% in total, seeing benefits in terms of both mix and also some underlying price inflation. We see that the land market remains very attractive, and we have as a result approved over 13,200 plots of land during the period. And we continue to expect to approve more than 20,000 plots for FY '18 as a whole. As we previously stated, we target a land bank of around 4.5 years for owned and controlled.So looking forward, we remain very positive on outlook. We had a strong first half, and we're confident we'll deliver a good operational and financial performance for FY '18. We're very proud of the quality of our homes and our high level of customer service, and we remain focused on these as we continue to help address the housing shortage.As Barratt celebrates its 60th anniversary in 2018, we are very pleased to say we have built over 450,000 homes across England, Scotland and Wales since 1958. We remain focused on driving operational improvements through the business as well as delivering modest growth in wholly-owned completions. In summary, the business is performing well, and we are operating in a supportive market environment. Jessica and I will now be happy to take any questions.
[Operator Instructions] We will now take our first question from Aynsley Lammin from Canaccord.
Just 2 from me, please. Wondered if you could comment a bit more on the sales rates, just in terms of the kind of recent trends you've seen. And would you still be expecting the kind of normal seasonal bounce during the spring selling season, I know it's early stages, but I just wondered what your thoughts were there? And then secondly, I think you talked about approving over 20,000 plots of land purchases this year. Just wondered, as you look at that and the working capital movements you expect, what you're kind of sort of expecting for the net cash position to look like at the end of June '18?
Okay. Aynsley, so I think I'll just have a stab at both of them, actually. I mean, first of all, in terms of sales rates, I mean, I think a key feature of our announcements in September, November and again this morning has been that we've seen very consistent sales rates year-on-year. So at each reporting event, we've been pretty much bang in line with the prior year rates. So I think we're very comfortable with where we are in terms of sales rates coming through the first half. In terms of the second half, I mean, historically, our second half sales rates have tended to see a tick-up on the first half, so we clearly expect that to continue. And in terms of trends, I mean, I don't think we're going to get into the sort of granular level of, well, last week our sales were like this. But I think the reality is that these are very, very strong sales rates. We're seeing good footfall and strong customer demand, so I think it sets us up well for the second half and, indeed, calendar '18. In terms of the cash position and sort of working capital, the reality is we're still where Jessica guided to back in September to say that we expect cash spend on land around about GBP 1 billion. And we would expect our cash position at the year-end will be around about GBP 500 million, which is in line with how we've guided previously. The only additional thing would be that in the first half of the year, our cash spend on land has been slightly above GBP 600 million, so more cash spend in the first half than 50-50 on the GBP 1 billion.
Our next question comes from Will Jones from Redburn.
Just a couple from me, please, if I could. Just on land, firstly, when we look at the implied plot cost of your land buying in the first half, I think it's about GBP 48,000. And I think the average for last year was GBP 52,000 or so. Now is there anything we can read in that further from that lower plot cost? Or is it just again mix effects and variations around infrastructure requirements and the other stuff in the mix there? Or are you getting kind of better margins year-on-year, I guess? And then the second one was really around the P&L margins in 2018. Perhaps you could just help us, when we think about the first half profits, obviously, if I look at gross margin last year, it was 20.7% in the first half and 19.6%, I think, in the second. And obviously, London plays its part in affecting that. But for the first half of this year, would you advise us to kind of be keying more off where you were in the first half of last year or the second half or the full year? Just it has been quite lumpy, I think, from half to half in the past.
Okay, Will. Yes, so I think I'll -- let me start off in terms of the land spend, and then Jessica can just talk in terms of gross margin. But first of all, in terms of land spend, I mean, I don't think there's anything that can particularly be read into GBP 48,000 compared to GBP 52,000 because I think, inevitably, there's just always going to be some mix effect in relation to that, i.e., we can't say, well, the cost of land is down by 10%. I think that the broader point which you touched on is that, first of all, when you look at where we're buying land, so in the regional market and Zone 3 to 6 in London, we definitely feel that there are a lot of really good opportunities out there. And we are being able to intake land at levels that exceeds our minimum hurdle rates. So a subtle change in language. We previously talked about meet or exceed. And I think we are now comfortable that we are always exceeding that 20% gross margin and 25% return on capital employed. I think we recognize we've got to be selective about the land that we intake. And we would expect the intake in the second half of the year to be down on the 13,200 plots in the first half. But overall, we will be slightly ahead of that 20,000 for the year. Jessica, just in terms of gross margin?
Yes. I mean, in terms of gross margin, we're not giving any guidance in terms of margin or profit today. Clearly, it's just a trading statement, and we'll be back very shortly in February with the margin numbers and the profit numbers. What I would add is we set out in September very clearly what we're focused on in terms of margin and the margin levers we're pulling, and we remain focused upon those.
Okay. And I guess probably linked to that, if I just think about London completions, are you expecting a similar profile first half, second half to last year? Is it more even this year? So I guess that has implications to margin, coming at it a different way.
Yes, I mean, I think that the London completion profile last year, I mean, overall, we obviously saw a [ reduction ] in overall completions last year in terms of London compared to the prior year. Overall, we would expect to see some further reduction in London completions in the current year compared to last year. The delivery profile in unit terms, I think, will be fairly similar. And I think in terms of margin, we've set out, as Jessica touched on, we set out that we're seeking to improve margin, whether that be on a year-on-year basis or half-year-on-half-year basis. But clearly, any improvements, when you look at consensus, any improvements in margin will obviously be modest.
Our next question comes from Chris Millington from Numis.
Just 2 quick ones from me, please. One is just about average debt in H1, if you could comment on that? And the second one is really just about the average sales price move in the first half. I think you were guiding to kind of a broadly flattish profile for the full year, by memory, but there was obviously quite a significant move in the first half. And the slight reduction in the order book doesn't seem to kind of get you to the kind of a flat profile. So just wondered if you could just kind of comment around that point.
Okay. Well, Jessica will obviously talk about the sort of average net debt position in the first half of the year. In terms of ASP, I mean, as you know, Chris, historically, what we've tended to do is not give any detailed guidance on ASP. We more tended to look at the ASP in the land bank. And we published an ASP in the land bank as at June '17, that total ASP private and affordable was just a little above GBP 265,000. Now I think there's always going to be some mix effect in terms of the way that, that is delivered. And then there is clearly going to be an improvement to the extent that there is underlying inflation. So we have seen some underlying inflation in the first half of the year, which is clearly helping in terms of ASP. But we're not looking for anything dramatically different on a year-on-year basis, so we're coming off an ASP last year of GBP 275,000. We would expect to see a little bit of underlying inflation and a little bit of mix. But we don't have the significant mix benefits that we've had previously as we've transitioned, for example, from flats to houses and more large family houses. I mean, I think that mix shift is really behind us.
Yes. So in terms of the net debt position for the first half, we operated actually with a net cash position for the first half of around GBP 100 million. Looking at the full year, I'd expect net -- to be at a broadly neutral net cap to net debt position over the period. That will have absolutely no impact in terms of interest cost because clearly, we have nonutilization fees and product placement to note. So we still have the guidance of GBP 50 million total interest, of which GBP 15 million is cash for the full year.
[Operator Instructions] Our next question comes from Gregor Kuglitsch from UBS.
I've just got one question. Can you give us your view on the potential extension of Help to Buy timing? Obviously, we've had the announcement late last year about funding out to 2021, that's my understanding. Can you give us your view of what you think we need to see and what you think the milestones are in the next 6 months or so before we get a decision for the period of longer term?
Yes, of course, Gregor. Just -- I mean, first of all, I think just to put the Help to Buy in context, I mean, I know that everyone is aware that Help to Buy launched back in 2013, and it was originally scheduled to run through until 2016. And the government made a decision initially to extend to 2020 and then to 2021. I think the extension decision was very much made on the backdrop of how successful Help to Buy had been in terms of proposition for the customer that really allowed the customer demand to be enabled. So clearly, Help to Buy has been hugely positive for housing volumes and building homes. What we have said to government and clearly, the industry has said to government is that we are operating with quite extended lead times. So thinking about committing on land to go through planning, to get on-site that typically, we could be looking at periods of 5 or 6 years from that initial commitment to actually completing on the average site. And therefore, the sooner that the industry receives confirmation about the intentions beyond 2021, the better. When you look at what the government have said, I think that they have said that they recognized that there is some need to make statements for the period beyond 2021. And we would hope that, that would happen reasonably soon, certainly over the next 3 to 6 months. I think the other point to know is that Help to Buy very much has cross-party support. So the Labour Party had said in their manifesto that they would run it through until 2027, albeit with some modifications, and more recently have said that they would perhaps look at household income restriction as one of those modifications. So I think the political backdrop does seem to recognize that an extension would be beneficial in terms of housing volumes.
Our next question comes from Charlie Campbell from Liberum.
A couple of questions from me, really, I suppose as much as 3. Just wondered if you might say something about labor availability and how you manage that process through this year? Anything to say on London trends at all? And thirdly, just on the Letwin inquiry, whether -- how you see that some -- that inquiry progressing and what you think the sort of likely outturn of that might be?
Okay. Charlie, I'm just going to run through those 3 questions myself. So first of all, in terms of labor availability, I would say that it's broadly an unchanged position. So we know that the availability of securing labor and labor inflation is clearly one of the key challenges that's been facing the industry over the last 2 or 3 years. If you look at it over the last 3 months, 6 months, 12 months, I think it's largely an unchanged position. We are being able to secure labor. The cost of labor is rising. But the rates of labor inflation, at say 5% or 6%, are not different to where we were 12 months ago or 18 months ago. So no real change there. In terms of London market, again, if you go back over calendar '17, I would say no real change, that product at lower price points is selling very well. There's very strong demand at lower price points, and that's clearly a big positive and in large part reflects our focus on land buying in Zones 3 to 6 rather than the inner zones. In the inner zones, as we said during calendar '17, the rates of sale have been slower than we'd seen in calendar '15 or '16, but rates of sale are largely unchanged. And for those Central developments, we just continue to look at the balance between private sales and whether there's any opportunity in relation to bulk sales. And as you know, we've undertaken a couple of bulk sales in the Central London properties over the last 12 months. In terms of the Letwin inquiry, I mean, clearly, Barratt, as you would expect, the other large housebuilders, the HBF and some of the smaller housebuilders are directly involved in the inquiry. I mean, it's very early days. There's only been one meeting, and the terms of reference are not finalized. But it looks to me as though it's going to be a comprehensive review of the market in England, so looking at London and also looking at regional marketplaces across the country, and I think really trying to understand what the challenges or restrictions are in terms of output on a per-site basis. And inevitably, they're going to look at large smart sites and small sites.
Right. And do we know the timetable of this? Sorry, I ought to know probably.
I don't think there is a definitive timetable. I mean, I would expect that the bulk of the inquiry will be completed in the first 6 months of the year.
Our next question comes from Clyde Lewis from Peel Hunt.
Just a couple of ones. I think some of the other guys have obviously asked some bits. But just on sort of overall build cost. I mean, obviously, you covered the labor issues there, David. But would you sort of still have overall cost, build cost running in the sort of 3% to 4%, so materials sort of, I suppose, sort of 2% to 3% within that? One on land creditors. Should we be expecting land creditor percentage of the gross land bank to be broadly unchanged this year, so again, a sort of increase in the absolute amount? And the last one I had really was, what's happening to incentives at the moment?
Okay, fine. If I pick up in terms of build cost and incentives, and Jessica will talk about land creditors. I mean, in terms of build cost, I mean, the short answer is we're expecting to June '18 to be in line with the guidance of 3% to 4%. We'll obviously continue to have a look at the year to June '19. But I think the reality for the year to June '19 at this point in time is probably closer to 4% than to 3%, but still in that range of 3% to 4%. The principal drivers you touched on is some increase in material inflation rather than increase in labor inflation. In terms of incentives, then year-on-year incentives would be very consistent, so we're not seeing any increase or any particular need to increase incentives. The only area that we've seen a pickup in incentives over the last 12-plus months would be in relation to Central London, so things like some stamp duty being paid, or stamp duty or weighted incentives in Central London has probably become more of a feature of the market in the last 12 months.
Okay. And on land creditors?
Okay. So on land creditors, as you know, we had land creditors at 37% of the owned land bank at the end of June, and they will be at a similar level at the 31st of December. Looking forward, we continue to expect that they'll be 30% to 35% of the owned land bank at the end of June, in line with our operating framework.
Our next question comes from Kevin Cammack from Cenkos.
I'm just after, I suppose, slightly deeper thoughts on 2 of the issues which are partially being touched on. First of all, on land, you obviously had this quite significant increase in approval rate in the first half. And the message you've given is that inference that the tone is stronger in terms of the exceeding your hurdle rates that you can get. I just want to know why -- what therefore is there that sort of stops you doing more than 20,000 plots? I mean, if in the first 6 months, it's been easy enough to get these and actually get them on a slightly better margin appraisal, why doesn't -- why aren't there another 13,000 coming through? And maybe the answer is that in the first half, you had a much higher rate of conversion from strategic or there were some regions that you were expressly looking to build the forward position. I don't know. But just sort of just more generally, any deeper thoughts as to why, in particular, you've had this sudden spurt of buying? And second one really is around the forward sold position. At the AGM, you reported -- I mean, let's ignore the absolute numbers in a way because they constantly change through the year. But in percentage terms at the AGM, you were talking about forward sold position up 8.4%, and it's now up 2%. But your sales ratio, per site per week appears to have been remarkably constant. Is it simply a function of you having a higher rate of completion in this first 6 months, which is sort of pulling the forward sale ratio down quicker? Or is there anything else potentially happening in that equation?
Yes. Okay, Kevin, fine. Well, if I just talk about the land bank, and then Jessica will talk through in terms of forward sales. I mean, Jessica will touch on it, but the only thing I would say on the forward sales is I think, looking at the position in November to the position this morning, I think it's important to look at both volume, i.e., the units forward sold and also value and also the distinction in terms of wholly-owned and joint ventures. But Jessica will touch on that. So in terms of the land market, I mean, Kevin, I think overall, we'd say that the land market is very positive. We're seeing lots of opportunities. And I think you need to put it in the context that post the referendum, so July, August '16, we had a very definite pause in the market. So we were really out of the market, and some of our peers were out of the market for at least a couple of months. And despite that, in the year to June '17, we approved a little over 18,000 plots. So on a pro rata basis for the 12 months, we were well ahead of the 20,000 run rate. And then we come into FY '18 with guidance right from the beginning that we would exceed 20,000 plots. So I think we're definitely on the front foot in terms of land acquisition. But on the other hand, I think there's got to be constraint. We recognize that, ultimately, the approvals will flow through into cash spend, which flows through into either indebtedness or land creditors. And we want to ensure that we stick to our operating framework in terms of land bank land, in terms of land creditors and so on. So given that our completion levels are 17,000 to 18,000, to be intaking in excess of 20,000 we think is fine. It's on the front foot, and we're getting plenty of good opportunities.
Okay. So on the...
Sorry, just -- can I just have one rider to that?
Of course, yes, yes.
There's no inference, therefore, at all that you think land prices may actually get more expensive in the coming 2 years or harder to buy in the coming 2 years?
No, I don't think...
There's not been a positive policy in the last rolling 12 months to sort of systematically increase the amount of land because you fear that the price may move away from you 2 years down the track.
No, I would say that's definitely not the case. I mean, the reality is that if you look at the introduction of the planning policy in 2012, since the planning policy was introduced and revised planning policy in 2012, there is a lot of land that is held by, in particular, land traders where they don't have delivery capabilities. So ultimately, the housebuilding activity has to come from housebuilders. And therefore, we see that there is still a lot of land held by the land traders that won't come through to the market over the next 2 or 3 years. So we see that plenty of supply from that side of the equation. And also, when you look at the large housebuilders and ourselves being no exception, we have significant strategic land interest which will come through to the market over the next 2, 3, 5 years. So I think we see plenty of land supply in the medium term. So it's much more of us just trying to balance land intake rather than we're trying to see off one thing or the other.
Yes. So in terms of the forward order book, Kevin, I'd start by saying it's a very strong position itself, best position to the 31st of December. Now if we look at it on a plots basis, total plots, including joint ventures, are up by 4%. Now the joint ventures, there's only 12 sites within the joint ventures, so clearly, that's dependent upon where those joint ventures are with regards to build and sale. On a wholly-owned basis, the plots are up 3%, of which private plots are up by 4%. So clearly, in terms of a plots basis, the plot numbers are up, which is in line with what we're expecting for the year in terms of modest volume growth. In terms of the ASP within the private element of the forward order book, that has reduced slightly year-on-year, which is because there are more regional plots within that part of the forward order book.
Okay. So the moving number has more been the price than the volume?
Yes. I mean, as I said, the volume in terms of private plots is up 4% year-on-year. The volume of wholly-owned plots is up by 3% year-on-year.
[Operator Instructions] We will now take our next question from Andy Murphy from Bank of America Merrill Lynch.
Just wanted to go back on the labor cost inflation issue. I was quite surprised by the level of 5% to 6%. You're saying that, that level of 5% to 6% has been consistent for a while. It seems to be higher than I had in my mind. Is there anything unusual in that figure? Is it reflecting sort of higher rates on your exposure to London? And just really, a few more thoughts about how that -- how you think that might pan out over the next 12 months, if you can just flesh out for me, that would be great.
Andy, I don't think that's really different to what we've seen. I mean, if you go back and look at the environment, say, over the last 2 or 3 years, when you look at the combination of labor and materials, and clearly, every company is going to be in a slightly different place, so I can only comment on Barratt. But if you look at the combination of labor and materials, we've seen a very, very benign environment in terms of material price inflation really up until calendar '17. So therefore, the combination of labor and materials has been more about materials at 0. And certainly, in probably calendar '15, materials negative in terms of inflation, i.e., net reductions, but blended with labor has given us an overall inflation number, and we were originally running at 2% to 3%, and we're now running at 3% to 4% on an overall basis. So when you look at bricklayers, roof tilers, something like 5% to 6% overall, that would be the kind of rates we'd see coming through. Bricklayers and roof tilers at higher percentages than 5% or 6% if you backtrack over the last few years. So no, I don't think there's anything different there. I mean, London inflation for labor I think typically has been a bit higher than the average. Perhaps inflation in the north of England has been a bit lower than the average. But that overall 5% to 6% is probably good in terms of subcontract labor, clearly.
And just a follow-up. Given those relatively higher figures you're talking about there, does that encourage the business or encourage you to look more at alternative methods, more timber and steel frame than you're currently doing? Or is that not such an issue when you're thinking about labor cost?
It's certainly a factor, and I think it's both about availability and inflation. I think if you look at the square footage of housing that the industry is delivering, we will definitely be delivering square footage of housing at equivalent levels to where we were in 2007. And overall, we're building far more houses than we were building back in 2007. So the reality is that availability is a challenge in terms of bricklayers and roof tilers. Inflation is an overall challenge. And hence, we have been doing a lot with regard to more timber frame in our business in England and also more alternate methods like steel frame, large-format block, both of which we've undertaken extensive trials, i.e., building dozens of units, not trialing on single units but trialing across whole sites in relation to steel frame and large-format block. And that's going to be an ongoing process over the next 2 or 3 years to try to mitigate our dependency in terms of those labor channels.
There are no further questions from the phone. [Operator Instructions] As there are no further questions, I'll turn the call back to your host for any additional or closing remarks.
Okay, thank you. So just thanks to everyone for dialing in. We'll also be back in February with the full half year results, and we'll provide further guidance at that time in terms of the full year. But thank you very much.
That will conclude today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.