Earnings Call: H1 2020

Mar 25, 2020

Good morning, and welcome to Belway's Half Year Results. The presentation will take a slightly different form today, owing to COVID-nineteen. Keith will still present the balance sheet and a financial summary, and I will provide an update on operational matters, but there will be a shortened Q and A at the end to allow us to attend to pressing matters within the business. Firstly, our strategy for dealing with COVID-nineteen. The level of uncertainty is clearly unprecedented. The only relevant comparison that we have in recent times is the financial collapse of 2008. And certainly, there are similarities in how we manage the business today to those used in the last recession. And whilst I have no more idea than anyone else as to how long this pandemic will last, It is certainly my intention to prepare the business for the worst scenario, and I expect a prolonged period of disruption. But I also have an eye on the future. Any strong business should also be preparing for the aftermath. Providing the opportunity to invest and grow again with more normal times return just as we did back in 2008. Now firstly, conservation of cash In the past 2 weeks, our approach has been to target whips spend and labor resource, on sold homes or park complete units. Land Spend has been suspended and it is worth noting that we only have a short tail on land creditors of circa 275,000,000. Our plans for divisional expansion have also been suspended, and we have postponed the interim dividend. A key priority is the safety and support for our staff. Our group office and divisional offices were all closed on Tuesday, 24th March. Our sales offices are also closed, but can be contacted by telephone. Our building sites have started to close in a safe and orderly fashion, and this process will be complete by noon on Friday, 27th March. Across the group, we have around 250 people in self isolation, albeit this number changes daily. And I have to say the response from our teams all across the UK has been quite extraordinary. And we are supporting the staff in every way we can, whether that is through flexible working or supporting families with full pay who have childcare responsibilities. Now I also want to talk about current trading in my introduction as it will give you some idea as to how the market is unfolding. Sales in the 1st 6 weeks since the 1st February were up by 7%. In week 7, which was weekend in 15th March, reservations were largely in line with our expectations but we had noticed the start of a decline in visitor numbers. Week 8, however, which was last week visitor numbers were down by 50% to 60%. The cancellation rate had more than doubled to 30%. And net reservations were down by around 40%. I would expect that decline to accelerate in the weeks ahead, and we are very much managing the business and cash around that scenario. Now I want to hand over to Keith who will take you through our balance sheet and finances. Keith? Thank you, Jason. As you would expect, I will keep today's presentation brief, focusing initially on the balance sheet before giving you an overview of the half year results. The balance sheet is strong, clear, and transparent, with net assets of over 1,000,000,000. At the 31st January, we had net cash of £5,000,000, an ungeared position. Land creditors that this amount outstanding on unconditional land contracts were relatively low at 1,000,000. Taken land creditors and cash together, adjusted gearing was just 9%. We are operating comfortably within our bank covenants with adjusted gearing, net asset value, and interest cover or substantially within their permitted limits. The threat to liquidity throughout the whole economy is one that we take very seriously, and I would therefore like to explain our position. We have committed bank facilities at 1,000,000 and good long term relationships with 3 supportive UK banks. As I speak today and in collaboration with our banks, these facilities are fully drawn, thereby provide uncertainty of funding over the coming weeks. Our pipeline of forward sales is strong with an order book of GBP 1,500,000,000 at the end of March. 62% of the plots in this order book are contracted. We are mindful that competition's be severely delayed over the coming months due to possible restrictions in an on-site activity. There could feasibly be a lockdown scenario where we are unable to collect cash receipts, but historic obligations still fall due. We are therefore controlling all WIP and land expenditure for the foreseeable future as Jason has already outlined. Beyond land and WIP spend, our monthly running costs are low at around £15,000,000 per month. In summary, cash is our priority, and for the foreseeable future, we will manage the business with that mindset. In that regard, the board will adopt a cautious and responsible attitude towards dividend payments. Naturally approaching the coming months with a reduced risk appetite. Accordingly, in order to preserve liquidity, the decision to pay an interim dividend has been postponed until later in the calendar year. This does not change the group's ability to continue paying dividends over the medium term beyond this period of unprecedented and heightened uncertainty. It is instead a prudent approach intended to preserve cash over the coming months and to ensure the long term health of the business. This is not a decision we have taken lightly, but ultimately, we feel that there's not a progress to return cash to shareholders and the present circumstances. The current uncertainty does not change our fundamental view of the business, which still envisages a long term opportunity for growth. Moving now onto the results. Housing revenue rose by 3.6 percent to over GBP 1,500,000,000 with this mainly driven by the 6.3 percent increase in volume. This was offset slightly by a modest reduction in the average selling price which fell to just under £287,000. Other revenue remained broadly flat at 1,000,000 and mainly comprises the usual receipt from the disposal of freehold interests on apartment schemes which was 1,000,000 in the period. As the legislative outlook evolves, this is unlikely to form a recurring source of income in the years ahead. Gross profit was million with the percent reduction from last year due to ongoing margin normalization is previously flagged. Operating profit was 1,000,000, and the operating margin was 19.3%. PBT was £292,000,000, with earnings per share reduced in by 6.3% to 194.4p. The growth in volume was mainly driven by additional social completions reflecting build progress on-site. A total of 275 homes were sold using our Asbury brand, accounting for 5% of completions, These sales were taken from 16 sites on which there is also an active presence on our core Bellware brand. Using dual outlets in this manner on a small number of larger developments has proven to be a successful method of increasing output an improving return on capital employed. Health Dubai was an important selling incentive, accounting for 33 percent of completions in the period, although in Scotland where the price cap is only GBP 200,000, the usage was low at only 10%. Despite this relatively small uptake, the market in Scotland was strong with our 2 divisions north of the border being amongst the best performer in the group. As an aside, if completions from 9 albums are excluded from both periods, the underlying average selling price rose by 2 modest changes in product and geographical mix, it is not indicative of underlying house price inflation. Geographically, we have a widespread and balanced exposure across the country. Now is roughly a fifty-fifty split of completions between the north and the south. We retain our presence in London, which represented 6% of completions, a continued reduction given that better opportunities can often be found elsewhere in the country. That said, demand continued to be strong in the more affordable outer zones where Bellway focuses its activities. We completed Twenty Apartments at our 9 Elm site which is now almost fully traded out at an average selling price of £761,000. This is a sizeable reduction the 125 completions last half year when the average selling price was £829,000. Our strongest performance has been achieved by those divisions offering affordably priced homes irrespective of geography, Accordingly divisions such as Manchester and the northwest, our 2 Scotland divisions, and Essex in Northern Home Counties are not geographically close, but have all performed well. Now looking at the operating profit bridge, As you can see, 9 elements made a significant contribution to profit last year with a gross margin in excess of 35%. The rest of the bars in the chart show the underlying movement in the period that is with 9 albums excluded from the analysis. Additional volume, as an effort, made the biggest contribution, earned £29,000,000 to operating profit. The underlying movement in the average selling price added GBP 6,000,000 to operate in profit. It's previously flagged the trade and margin continued to normalize as the historical benefit of house price inflation unwinds and build cost pressures remain across the wider industry. Jason will remind you of the progress in relation to our cost saving initiatives in a short while. Overall, operating profit was 1,000,000, and the operating margin was 19.3%. The total amount invested in the land has risen to 1,000,000,000 and now comprises 44,000 owned and controlled plots. Additions to the top tier of the land bank, I. E. Those which benefit from an implementable detailed plan permission had a plot cost of almost £56,000 and an average selling price of around £275,000 slightly lower than the average sound price achieved in the period. The intention of this land buying approach is to ensure that future sales outlets of our customers an affordable product with less reliance on Help to Buy. In terms of strategic land, we have 26,000 plots and continue to fund growth in this area of the business. In total, the owned and controlled land bank together with our investment in strategic land provides Belware with access to some 70,000 plots, a solid platform from which to move forward. We have made further investment in work in progress, which will help ensure that we maintain a good quality product. The amount invested in part exchange properties is closely monitored, but has risen to 1,000,000. With this incentive being used in 8% of completions. Once this is an increase year on year, the balance is only marginally up on the £50,000,000 reported at July 2019. The group is financed by retained earnings bank debt, and land creditors. We are significantly cash generative producing 1,000,000 from operations after making increased investment into land, net of land creditors, and construction based Taxation payments were 1,000,000 more than double last year, following a 1 off change in legislation at accelerating the timing of quarterly payments. Overall, after paying the tax bill dividend interest and other minor items, we ended the period with net cash of GBP 5,000,000 and ungeared position. As you know, our business model requires upfront investment in both land and WIP. We therefore consume cost during a growth phase but generate cash in a steady state or if the business is required to contract. This model covered with a lowly geared balance sheet should ensure a continued long term resilience. Our approach to investment requires an ongoing focus on return on capital employed. This has remained high at 19.9% with the reduction mainly reflecting the normalization of the operator margin, while including land creditors, a long term source of debt, as part of the capital base. Return on capital employed was 18.2%. This is a strong overall level of return which reflects the quality of the group's land investments. Not withstanding the loaded geared balance sheet, post touch return on equity remained high at 16.1 percent. In summary, we have a lowly yield balance sheet which provides flexibility with resilience and strength. We will manage the business in order to preserve cash in this incredible period of uncertainty. We've enjoyed a good overall performance in the first half of the financial year and the business is in good health. And beyond the current international crisis, the long term industry fundamentals remains strong. Jason, over to you. Thank you, Keith. Starting with Land, we've had a successful first half with over 7000 blocks contracted and also some success with contracting larger sites. To give you some examples, Great Dumbo in Essex 464 Homes with an ASP of 364k and Carlington in Bedford, 592 Homes with an ASP of 303k. Both of these sites are purposely focused at the lower end or at mid market family homes, and importantly afford us the opportunity to dual outlet with our Ashbury Homes brand. The land market remained competitive, although we were still able to acquire land, an average intake margin of 23%. Going forward and certainly in the short term, land contracts are poised as we seek to conserve cash and maintain a robust balance sheet. Turning now to costs. Inflation is still a feature of the industry amounting to around 3% per year, but it's too soon to comment on what impact COVID-nineteen may have on our costs going forward, but we are making good progress on our cost saving initiatives. The key component to this is our artisan standard house type range, which is gathering real momentum. This year, we will deliver around 300 Artisan Completions, but with some significant numbers going forward. Over thirteen thousand homes, are at various stages of the planning process. 2200 Artisan Homes are forecast for FY 'twenty 1 and 3 1800 are forecast for FY 'twenty 2. And ultimately, we believe the Artisan collection will cover around 80% of our overall volume and generate savings of over £2000 per plot. And whilst talking about costs, it's also worth noting the impact of new building regulations increased to standards of Part L of the regulations is the first step These standards are designed to improve energy efficiency and also to encourage lower carbon heating solutions. Inevitably, there will be a cost associated with raising standards somewhere between £34,000 dependent upon which option the government adopt. Now I also want to talk about people. We've always had a strong culture of developing people through our business. I am particularly pleased that we appointed a further 38 graduates in January of this year around 50% of those were women and 50% men. I'm also pleased that we are on track to achieve our target of introducing 50 women into our construction departments following the successful launch of this program on the 1st January. I'm very much an advocate of giving young Our recruitment program is not exclusive to university graduates. I want young people from all backgrounds to be given a chance. And our new Bellway Academy is under construction and should be complete by the autumn of this year. The academy will enable us to develop bespoke training modules for site managers, apprentices and young people. Turning now to customer service. I'm very pleased to report that we expect to achieve our 5 star customer rating for the 4th consecutive year. And we also are proud to have achieved 42 pride in the job awards from the NHBC, but it doesn't just stop with a few awards. We have embarked upon a new customer first approach something I mentioned back in October. And whilst this is a year long project that needs to be rolled out across our 22 divisions, The purpose is quite simple. I want to improve in every area, raising the standard hire, particularly without after sales service. And despite the challenging environment that we now find ourselves in, it is very important that we keep that quality thread running through the business. Now if I could take a brief has been generally flat in the first half. There were some green shoots as we started the calendar year, but I expect those to be quickly reversed. Owing to the onset of COVID-nineteen. During the period, private reservations were up by 11% Overall, reservations were up by 6% and average outlets increased to 274 an increase of 5 is marginally ahead, and that also reflects strong growth in the first half. And as I mentioned in my introduction, Sales in the 1st 6 weeks since 1st February were up by 7%, but that picture is changing quickly. And finally, outlook. Needless to say, the outlook is unclear, and it would be foolish of me to offer any guidance in that respect. What is important is the quality and strength of our balance sheet. And our focus across the next 4 months will be to maintain a robust and resilient balance sheet to ensure the group can manage a lengthy period of disruption, but I also have an eye on the future to ensure that we can respond when the time is right. Thank you. I will now hand you over to a moderator who will help facilitate the Q And A section. Thank you, to pose a question today. We take our first question today from Will Jones from Redburn. Please go ahead. Your line is open. Thanks and good morning and hope everyone is well. If you for me, please, the first, I don't think it was in the release or the presentation, but would you be willing to give us a kind of insight into the, balance sheet position today as opposed to, at the end of January, please. Second one was just, when we look at the, I think it's about $700,000,000 of short term trade creditors, on the balance sheet at the half year. Could you just help us splice and dice, though that that package is like between land, trade accruals, just how would you think about that and how that might unwind on a kind of monthly basis as opposed to just a very helpful overhead, guidance you gave earlier And then I guess the other one is whether clearly very early days, and that's where you can see that. I just wonder whether you had any intention to access any of the kind of government support schemes that have been put in place or will be put in place around wage support, which clearly might offer some alleviation of the overhead bill, as things unfold. Okay. Okay. Morning, Will. I'll I'll I'll I'll take that a show. In terms of the, the credit position on the balance sheet. I suppose if you look at the, the current liabilities, they're around 500,000,000 there with an additional, 200,000,000 or so of land creditors, which are due within, within a 12 month period, which takes it to a 700,000,000 Now, if you were to look at that half a £1,000,000,000, around half of that relates to what I would call normal trade creditors. So your site based, cost subcontractor suppliers, which is usually slightly elevated at the half year just because you have a surge in activity in the run up to January. And as we look today, that 250,000,000 figure is probably 100,000,000 or so or less. The balance of up 500,000,000 tends to relate to, liabilities, which don't necessarily relate to a cash outgoing. So for example, got something like a $120,000,000 or so advanced payments from housing associations in respective pre funded work in progress And we have some, what we call cost to complete provisions on sites, in relation to longer term obligations, which we will make good at some point, but the tail on those come in many cases be several years. So it's 250,000,000 of as well as real short term obligations, at the position of January. To talk about the balance sheet today, I think it's best if I try to explain where we are in terms of cash is maybe the easiest way to look at this. So as we opened up this morning, we had a net bank debt position of GBP 90,000,000. And just to remind you, that's in the context of having GBP 545,000,000 of committed bank facilities. If you look at what payments we've got to go out, over the coming months, well, what if you envisage a a very what I would hope is a downside scenario of having a slight lockdown until the end of the financial year. And assuming that scenario, you can't collect any cash at all from completions. Our committed payments on land are something like a 130 to £160,000,000 over that period. And as I said, the direct cost bill is probably sub 150 and probably closer to £130,000,000. So not not huge commitments there in the short term. And as I said in the speech, on month, you were in cost around about 15,000,000 per month. So you can see hopefully, in the disaster scenario where you're unable to collect a penny of cash we should still remain comfortably within headroom, over the next 4 months or so, in that in that particular instance, In terms of government schemes, look, we look at everything on on a what on a daily basis and things will evolve. At the moment, as I said, we've got committed facilities. We don't feel we need access to those. We'll clearly look at the rules in terms of, at work issue, might might be otherwise engaged over the next few months or so to see whether that will apply the bellway or not, at the moment, it's just a watch and brief on a daily basis, and we haven't made any, positive steps towards drawing any of those facilities down. Understood. Really helpful. Thank you. We now move on to a question from Clyde Lewis from Peel Hunt. Please go ahead. Again, best wishes to both you and all the teams, a couple of finally, sort of following a little bit on the back of sort of Will's questions, but Can you maybe sort of, sort of talk us through some of the mechanics in terms of sort of when you get payments from them and just sort of understanding if, again, you will get any, sort of figures from them before the end of the financial year. Also, if you can just let us know where what's sort of level of finished units you're likely to have, you know, either now or sort of, again, but, you know, next week or 2, And the third one was on sort of, I suppose, other payments you might have to make to the government in terms of tax tax, PAYE, presumably you thought those, but just wanted to sort of check on that. Oh, okay. Well, look, in terms of, HA payments, I mean, clearly, we are they we have an assumption, in our normal cash flows, in that disaster scenario that I just outlined before we've made no assumption on collecting money. So typically those amounts will be paid when you meet certain build stages in a contract. Now we've already taken action and to our divisions spoken to all housing associations where we've got the amounts due within the next couple of months, at the moment, we're not aware of, any issues, but obviously collecting that cash is dependent on Midland Build completion stages. So we're fully expecting some of that lowest cost receipts to go back. But we'll, you know, obviously that that's already factored into that scenario I mentioned. In terms of tax, our next tax payment on account is due in April. Look, there are 2 elements to that. Firstly, it's self assessment. I've got no pension idea in terms of what earnings will be in this Julier. So, let me just say they are likely to be less than what we previously thought So your first lever is to pull is to have a lower expectation in your in your profit forecast for the year. And then the second lever is if we still think an amount is due is to go down discussions in terms of deferring payments. Now, that's not something that we necessarily need to do But if we get into a position where you really are in a prolonged light lockdown, then we would be communicating with HMIC about deferral, but we're not at that stage at Clyde. Well, if I just take the 1 on units, we've got units available for completion, in both March April for the early weeks that are already built and complete. So it would be highly unlikely that we collect no revenue in go against those units. But it is possible that some of those purchases or customers are either a unable to complete at, this point in time or need more time. So we're managing those on sort of a case by case basis, but I would expect us to be able to collect cash in the short term but part complete units towards the end of April in the early May, we cannot complete on. Mean, have you got an online ability to complete things, obviously, without customers interacting on a personal basis with your staff at all or not? Yeah. We're all set up for for for home working now, but there's there's always a problem, Clyde. We think we can do it. And then you know, the Scotland closed land registry down on yesterday, so we couldn't do that. So we're sort of tackling the problems day by day, but there's a real Will and, energy in the business to overcome the problems as we as we face them day by day. And I thought your question on affordable housing was a good one because often, when we're in difficult markets, sometimes you do the opposite and start accelerating affordable. Or the delivery of affordable housing for the program. So that's something we're looking at at the moment as well. Yeah. I mean, I read somewhere that the government is advising sort of public sector bodies. And I'm sure A. K. Sort of come under that to not stop any payments. So I'm just sort of wondering whether Yes, obviously, your build programs are probably not going to be able to keep up. I'm just wondering whether you might still sort of continue to get the cash as if they were being built on a normal basis? I think you're right, Clyde, but the, not every housing association has got a strong balance sheet. So we're we're aware that we, you know, we could start those works quickly as, as if and when or as and when we get back to work, but we're just a bit mindful of, which, registered provider we're dealing with just to look at do they have the means to pay in the ability to take hand over the units? Yes, we take our next question from Aynsley Lammin from Canaccord. Please go ahead. Alright. Good morning guys. And just a couple from me actually. Just firstly on the dividend interested to hear, why you just postponed that as opposed to cancel it? Like lots of others. And just wondered, when in the kind of terms of the facilities with the banks, are there kind of terms within the conditions that you have to suspend or postpone dividends if the covenant's tested every quarter. So if you weren't going to get revenue, for example, for 2 months and you've reached it and they waived some of the covenants, how much kind of pressure are the banks putting on you to after cancel or postpone dividends? And then just second on the land vendors and land creditors, just wondered how much kind of scope there is to negotiate terms with them? Are they being munable given the quite exceptional situation? Thanks. Look, the position on the dividend, it's fast moving world at the moment, the priority is absolutely to preserve costs and the long term resilience of the business. Whether we will pay an interim dividend in the quantum, all I can say, is, will will will evolve over the coming weeks and months, and it depends on the length and the severity of any downturn which arises. So, I suppose it's it's just a watching brief, we can't commit to anything either way. If we can't and if the markets strong and obviously we'd like to return some cash flows. It wouldn't be responsible to do that at this point in time. And in terms of the the bank's position, there isn't a restriction on paying, an external dividend from Norway. That's not what's driving our decision. Our covenants are tested every 6 months unless you get to a position where you're in default of your covenants, then we can pay, any sensible dividend, which we see is being appropriate. We're nowhere close to being in default of any of our covenants. So we're in a robust position in terms of banks and we continue to have their support. I'll I'll do land, Ainsley. Sir, certainly everyone that we've spoken to today, and I I think the mood of the nation is really one of the inflexible, supportive cooperative, so so far so good with, land creditors or land owners But, you know, being a realist, we're only in day 2 of lockdown and maybe that, language will change when we're in week 6. So we we we really do take it day by day, but so far, I think everyone's been as cooperative and as flexible as possible. That we're dealing with. Thank you. We now move on to Amy Gala from Citi. Please go ahead. Your line is open. Thanks, guys. Just a few questions from me as well. I was wondering on joint ventures. Is there any investment commitments that you see in the business in addition to the sort of numbers that you've already given. And and and broadly in terms of the sort of customer interactions that you've had over the last 2 weeks. Can you give us some color as to in terms of the cancellations that you've seen and the step up in that? Is that more a concern about this level of house prices, or is this more a concern of their capacity to get mortgages in place? Well, I'll take the first one on on joint ventures. We have 1, or we have or 3 joint ventures, but only one of any substance, and there isn't any commitment, to continue, investment and work in progress should we decide that it's not a to do so. So there isn't any tale of liabilities there that we're that we're committed to. On on Salz, Amy, We've we've only got 1 week, really, to report on, the drop in sales. So it's a very, it's very difficult to make judgments, but we had, 74 cancellations last week. Normally, we'd run around, you know, 25 to 30. The extra cancellations were in part to many things but all associated with COVID 19 and it was changed their mind as a result. Nervous that house prices, may change. Or nervous about their job position. I can't give you any more detail on that until I get, you know, 2, 3, 4 weeks of, of detail. Thank you. We take a question from Bria Saya from HSBC. Please go ahead. Your line is open. Hi, thank you. I have two questions. First one is on coming back to your last answer. Can you give a flavor? Do you think there would be a natural impact on pricing because of the demand weakness, especially in the next 3 months. Do you have any and if you can elaborate it more what you think about it. And second one is on the site closure. Can you tell us what kind of cost would you be incurring to close the site and how quickly you can bring back those sites and offices in operation after these things get over and you come back to full capacity. Thank you. Okay. In terms of pricing bridge, the, it it's too early to tell to tell when I've only got 1 week of statistics. That the house builders are generally underpinned by 2 key issues. One's called interest rates, which we expect to remain low in the cerebral future, and the second is employment levels. So if through the market employment levels remain relatively robust, I would expect prices to hold. But if you start to see, a hike in employment levels, then that tends to put pressure on house prices going forward. In terms of your question for sites closed, It's quite easy for me to close down sites. Normally, it takes 2 or 3 days on the bigger complicated ones because we've got heavy plant and machinery, but you're right to think about opening up sites again. It does take longer. The key issue we've got in starting sites again is not particularly, getting the labor back to site. It's the supply chain and the supply chain, will take a while to be able to, you know, open up again because you've got merchants that have closed. You've got delivery problems. You've also got what I call the loo roll effects with some materials where some people have stockpiled uh-uh materials on sites, because of the potential delays to deliveries. So it's opening up that supply chain will be our quickly developers that are able to start back on-site in earnest. Okay, understood. Thank you. Thank you. That concludes today's call. Ladies and gentlemen, thank you for your participation today. You may now disconnect.