Good morning, and welcome to our half year results. A brief introduction from me. Keith will present the results and the balance sheet, then I'll provide an update, morning, Alistair, on operational matters. Firstly, the highlights for the half year. Just to give you some numbers, record volumes at 5,007 units, operating profit up to GBP 320 million. Our interim dividends up by 5% to GBP 0.504. Our return on capital employed also remained high at 24.2%. Other key points to note, we're pleased to report that we've maintained our HBF five-star rating for 2018. All of our land is in place for FY 2020. We're making excellent progress with our Artisan house types, having been plotted across some 53 developments. Most importantly, we can still deliver further growth from our existing operational structure of 22 divisions.
Turning to the market, demand remains robust despite the ongoing political uncertainty. The market is still very much a first-time buyer or second-mover focused, that's probably a product of the incentives at that end of the market, by that I mean Help to Buy and SDLT VAT benefits. London still remains a key part of our business, but the London market to us is very much focused on the greater London boroughs or the affordable commuter belt. Notably, house price inflation is no longer a margin enhancer to the business. We've opened nine new businesses since 2013, creating a structure of 22 operating divisions, generating a capacity of around 13,000 homes. Three of our competitors are all delivering 15,000 homes or more, demonstrating the potential for further increased volumes, assuming, of course, the market remains favorable.
Our strong customer and operational abilities, coupled with our experience of opening new divisions, puts us in a good place to exploit any growth opportunities. However, I would hasten to add that we would never pursue growth to the detriment of our operational ability, or in fact, to our return on capital employed. In addition to our growth strategy, our strategic priorities are designed to create value through both capital and dividend growth for our shareholders. Just to remind you of those key objectives. Driving down costs, strengthening the brand, appointing the right people, and maintaining a flexible capital structure. Both Keith and I will return to those themes throughout the presentation, but first for our results. Keith.
Okay. Thanks, Jason. Good morning, everybody. I'll take you through the results, balance sheet, and cash flow in the usual manner. A 5.6% increase in volume, together with a 6.5% rise in the average selling price, which rose to just under GBP 294,000, resulted in housing revenue rising by almost 13% to one and a half billion GBP. This is 2.6 times higher than the level achieved in the pre-recession peak of January 2008, which evidences the rapid rate of growth we've achieved. Other revenue remained broadly flat at GBP 17 million, mainly comprises the usual receipt from the disposal of freehold reversionary interests on apartment schemes, that was GBP 14 million in the period. Given the evolving legislative outlook, there's no certainty as to whether there'll be a further ground rent portfolio disposal beyond FY 2020.
Gross profit rose by GBP 33 million to GBP 378 million, the prior half year figure has been restated to exclude losses arising on part exchange properties as required by IFRS 15. You can see that they're now shown separately on the line below. Operating profit rose by 8.7% to GBP 320 million, and the operating margin was 21.5%. A strong trading performance resulted in PBT rising by 8.7% to GBP 314 million, with earnings per share rising by 8.3% to GBP 2.075. The growth in volume was driven by both private and social completions, for the full year, I expect that all of the growth achieved will arise from additional social units, which reflects build progress on sites. This should then be followed by strong growth in private completions in H1 of FY 2020.
Just as a reminder, there was particularly strong growth in private completions in the prior financial year, during which the number of social homes also fell by 1.6%. We sold 253 homes using our Ashberry brand, which now accounts for 5% of output and is equivalent to a mature division's worth of additional units that we were able to sell with no real change in the overhead. In addition to completions on fully owned sites, our share of output from joint ventures was 25 units, depending upon build programs, this should increase further in summer 2020. Naturally, Help to Buy continues to be an important selling incentive, that accounted for 36% of completions in the period. The private average selling price rose by 5.9%, or almost GBP 19,000, to GBP 334,000.
Nine Elms, which I'll analyze separately on the next slide, accounted for GBP 13,000 of this increase. In addition, the rise has been influenced by investment in desirable, yet affordable locations across the country where demand is strongest and sales proceeds are therefore a little higher. That said, our exposure at the upper end of the market is limited, only 5% of homes sold were over the current Help to Buy threshold of GBP 600,000. This is likely to reduce going forward, reflecting the current composition of the land bank, which I'll outline later, but also our current land buying criteria. Overall, the average selling price rose by 6.5% to GBP 294,000, notwithstanding the expected increase in the proportion of social homes, I still expect that the full-year average selling price will be just over GBP 290,000.
London is still important to Bellway, it represented only 10% of completions, our average selling price in the capital, if you take out Nine Elms, was GBP 396,000. This is affordable in the context of the London market, we're still seeing that consumer demand is robust at this price point. Nine Elms, as I just mentioned, performed well. It achieved 125 completions at an average selling price of GBP 829,000, with units from that site generating 7% of housing revenue. Overall, there remains a balanced 50/50 split between homes sold in the north and the south of the country, not only does this avoid a concentration of risk in any particular locality, our national structure also provides good opportunity for further incremental expansion in areas of strong demand.
Moving on to the operating profit bridge, you can see that the rise in average selling price has been the main driver for growth, but the increase in volume was also important, and that added a further GBP 19 million. The chart shows that GBP 14 million of this was from growth in our seven newer divisions, which we've opened since August 2013. The profit arising on the disposal of ground rents was GBP 10 million and added over 40 basis points to the H1 gross margin. As just mentioned, Nine Elms made a significant contribution to revenue in the half year. Whilst London as a whole achieves similar returns to elsewhere in the group, Nine Elms has an expected gross margin in excess of 30%.
There'll therefore be a reducing benefit to the overall gross margin as this site trades out in the first half of FY 2020. Looking at the Halifax House Price Index and BCIS Cost Index over the past few years, it's easy to see how house price inflation has benefited the results of all house builders. However, as long as the extra revenue from house price gains continues to offset increases in build costs, the longer-term prospect is for the gross margin to moderate to around 24%, i.e. the level at which we're contracting land. Bellway is operationally strong, however, we are focusing on a number of cost control initiatives in order to help protect the margin in the future. In relation to the administrative overhead, cost increases reflect investment in new staff and new divisions in order to achieve future growth.
The demand, hence cost of employing skilled staff remains high, but the absorption rate remains unchanged at 3.7%. The ability to absorb increases in overhead effectively is in part due to the improvement in average selling price, but it also reflects the growing maturity of some of our newer divisions. We will be investing again in the year ahead in a cautious and disciplined manner. Overall, operating profit rose by 8.7% to GBP 320 million, and the operating margin, as I said, was 21.5%. For the full year, we expect to achieve an operating margin at around a similar level, thereafter, we expect further gradual moderation as the benefits of HPI continue to diminish. I've included the balance sheet for reference, the investment in joint ventures includes our sites at Fradley and Ponton Road in Battersea.
Moving on to more material items, you can see that the total amount invested in land has risen to GBP 2 billion with some GBP 1.7 billion of this relating to the near 28,000 plots, which have the benefit of an implementable detailed planning permission. The additions to the top tier of the land bank have a plot cost of almost GBP 60,000 and an average selling price of around GBP 275,000. The overall average plot cost of this section of the land bank is just under GBP 62,000. The average selling price is approaching GBP 290,000. This is a reasonable guide as to the expected average selling price in FY 2020. Our exposure to particularly high-value units is low and reducing. Only 4% of plots with DPP have an average selling price above the Help to Buy threshold of GBP 600,000.
Similarly, only 8% of plots are priced over GBP 500,000. Our pipeline of owned and controlled land, where DPP is generally expected within the next three years, has risen to 14,700 plots. Taken together with the DPP land, this provides a land bank length of 4.2 years. In addition, our strategic land holdings have risen to 8,100 plots, as usual, I stress that this includes only those that are allocated in local plans or the subject of current planning applications. The investment in construction-based work in progress has been a major driver for growth, and it has risen to over GBP 1.2 billion, but as a proportion of annualized housing revenue, it remains very similar at 42%.
As a generalization, construction stages are slightly more progressed than they were this time last year, commensurate with the growth plans for the business, which are, of course, subject to continuing market demand. The amount invested in part exchange properties is closely monitored but has risen to GBP 42 million. Whilst this is an increase year on year, the balance has reduced from the GBP 47 million, which we reported in July 2018. The group's financed by retained earnings, bank debt, and land creditors, and we're significantly cash generative. We've produced GBP 270 million from operations before incremental investment into land and construction-based WIP. It's this continued investment that's allowed us to increase housing revenue by a multiple of 2.6 times since the pre-recession peak, which I mentioned earlier.
After paying down land creditors by GBP 71 million and investing in land and site-based construction to achieve growth, the cash generated from operations was GBP 57 million. Overall, after paying the dividend, tax, interest, and other minor items, we ended the period with modest net bank debt of GBP 27 million. This represented gearing of under 1%. Inclusive of land creditors, which have reduced to just GBP 295 million, gearing was just 12%. Should the rate of revenue growth reduce over a sustained period, there will be less requirement to invest in land and work in progress, and hence, inevitably, more capital would be available for return to shareholders. On that, the interim dividend will rise by 5% to GBP 0.504 per share, which is slightly lower than the rate of growth in earnings. I note that this year, earnings growth is going to be skewed towards H1.
Without inferring anything too precise mathematically, I still expect that the group will declare roughly one-third of the total dividend at the half year. For the full year, I expect we'll broadly maintain a dividend cover of around three times earnings, but this decision will be made in October when assessing the future capital requirements to achieve ongoing growth. Our approach to growth requires an ongoing focus on return on capital employed, and this has remained high at 24.2%. Post-tax return on equity was also high at 19.4%, notwithstanding our lowly geared balance sheet. Over the past three years, revenue has risen by over 30%, and earnings have increased by over 40%. In addition, the growth in NAV and dividend over the same period represents an annualized accounting return of 23% per annum.
Going forward, we still see long-term potential for ongoing volume growth, but as a company, Bellway also remains agile. We are able to respond to changes in market conditions or to new land opportunities, but always with the overriding objective of making the right long-term decisions for shareholders. Jason.
Thank you, Keith. I mentioned earlier in my introduction that we'd opened nine new offices since 2013, with the newest divisions being Eastern Counties, based in Huntingdon, which opened for business on the 1st of February and will deliver completions for this year, this financial year. This is very much a traditional house building business delivering affordable family homes. Secondly, London Partnerships, which also opened for business on the 1st of February and will deliver completions for FY 2020. This is very much a different model. This is based on joint ventures, regeneration, and housing association type sites. Our first two sites commenced, or we anticipate they'll commence construction in the summer of this year. We've got an additional site with Peabody Group, where we expect to receive planning permission in the autumn of this year.
In addition, we have a further three sites with heads of terms agreed. Now, my intention with Partnerships is to maintain a London focus. That's where I see greater opportunity, a higher ASP, and most importantly, it's where I have the skill set, the people to manage such schemes. Our growth as a company is being driven from these new businesses, and I still see opportunity to grow the structure beyond 22 offices. I still believe there are a couple of areas in the U.K. where we don't have a strong presence. That said, I'm ever mindful of the change in political winds. I'm also mindful of the change of rules of the Help to Buy scheme in 2021. Despite this caution, I still believe we've got a strong model to open new divisions. We've done it nine times already. We're bloody good at it.
We can do it on an efficient basis, and critically, it enables me to increase the number of outlets throughout the business. Across the summer, Keith and I will give further thought to divisional expansion, after we've seen how the market is performing. In addition to growth through divisional expansion, we're also growing through continued land investment. Our strategy on land acquisition is centered around four or five key areas. It's based on affordable locations, it's based on medium-sized outlets, Artisan house types, an average unit size of around 1,000 sq ft, and a gross intake margin of 24%. We believe, with this approach, we'll be best placed to mitigate any impact on sales rates following the introduction of the new rules with Help to Buy in 2021.
In the first half, we've contracted on 6,000 plots, which is slightly less than this period last year. This reflects a period of caution early in the new year, where we paused to see the strength of the spring selling season. Notably, we've got a further 6,400 plots agreed with heads of terms. Our strat land department is also continuing to making good progress, with 10 options already contracted and a further 15 sites agreed with heads of terms. In addition, during the first half, we have secured planning permission on 579 plots in the strategic land bank, which are now converted into our owned and controlled land bank. Our land position is strong, with all plots in place to meet next year's forecast. Turning now to our second strategic objective, driving down costs.
In the past six months, there's little to suggest that the pricing environment has changed. We still experience price inflation of around 3%. We're driving down costs in the business through a number of key initiatives. Our new Group Head of Procurement is making excellent progress in rationalizing group deals. To give you an example, through standardization of our product and commitment to volume, we have renegotiated terms with our suppliers for drainage, radiators, and boilers. Those alone have generated savings of GBP 750,000 per year. Our savings are not just focused on materials. We've also renegotiated our electricity supply contracts for temporary buildings and offices throughout the U.K. This has generated savings of around GBP 300,000. Together, these two items total GBP 1 million of procurement savings per annum.
The introduction of our standard house type range, the Artisan Collection, has given us the platform to improve our buying power and is fundamental to making the group more efficient. To just give you a few numbers, 53 sites are in the planning system. Our first units are already under construction. 500 unit completions are expected in FY 2020. Over 2,000 completions are expected in FY 2021. Our range has been extended to 43 individual house types, and we anticipate savings of GBP 2,000 per plot for each Artisan home. In addition, the COINS accounting and valuation system that we've implemented is now in 6 of our divisions and is now gathering momentum. In May of this year, we also plan to roll out a new group-wide cost initiative, not based on build cost savings, but also based on site-based overheads.
I'll give you a little bit more detail of our ambitions and targets in the autumn. All of these measures, procurement, Artisan, COINS, and standardization in aggregate, will help mitigate margin pressure in the years ahead. Moving on to people. For me, recruitment and retention of people still represents the biggest challenge and continues to be the biggest impediment of driving volumes across the industry. We are acutely aware of the importance of developing people, of training people, and delivering succession through our organization. From our existing 22 managing directors, 14 of those have been promoted from within. We have a strong record and culture of bringing people through our business, and not just at MD level. Our new site manager training scheme will be launched in the early summer and will help to develop up to 50 site managers across the U.K. each year.
We also have a record number of apprentices and trainees across the group, now totaling 187. Our final strategic objective is strengthening the brand. The key to improving the reputation of housebuilders is strengthening the customer journey and delivering a consistently high quality of home. At Bellway, we're proud to report that we've maintained our five-star rating for the third year in succession, as measured by our purchasers, with over 92% of those saying they would recommend Bellway. We still have room for improvement. We collectively work as a group to share best practice, particularly in our young divisions, to educate them in the importance of being a customer-focused business. Our new website is also providing a much improved platform and is generating increased traffic of around 15%.
Finally, the Bellway London brand is also now adopted across all London divisions and is working well to create a uniform corporate identity. Turning now to trading. As mentioned previously, HPI is at modest levels and just about offsetting cost inflation. In the period, reservations were up 2.8%, with average outlets up also to 262, albeit they were skewed to the latter half of H1. Cancellation rates nudged up to 13%, principally due to customer sentiment around Brexit. Our strongest performing divisions in the group were Scotland, Liverpool, Manchester, Milton Keynes, and Essex, demonstrating quite a wide geographical spread. We've made a strong start to the second half. Our private reservations in the first six weeks since the 1st of February are up by 4.4%.
Our order book, as at the 10th of March, is slightly lower at GBP 1.5 billion, but reflects strong housing growth of almost 13% in H1. We are now 90% sold for the current financial year. We remain on target to deliver record volumes this year, but our performance is largely limited to the number of homes we can build. We currently have capacity to build up to 500 extra homes for FY 2019. Needless to say, the rate of growth will be dependent upon the strength of the spring selling season. So far, I'm encouraged by our performance in H2. Beyond this year, we're well-positioned as a business. We're mindful of the uncertainty surrounding Brexit, the impending changes to Help to Buy, but I still think there's opportunity to deliver further managed and sustainable growth.
Our partnerships division has already made a promising start and should be a strong performer in the years ahead. Our 22 operating divisions across the country have capacity to deliver further growth. I would remind you, for 10 consecutive years, we have grown the business without any impact on the quality of our homes. Demand is robust at our price point, with our product largely aimed at the first-time buyer and second-mover market. In summary, the business is in good shape. With our cost mitigation measures, our land buying program, and our capacity for growth, we have a strong platform for the years ahead. Thank you. Keith and I are happy to take some questions. If we can start off with some financial ones to give me a chance to
Yeah, morning, sir. Gavin Jago, Peel Hunt. I will start off with a couple of financial ones. A couple for you, Keith, please. A bit of clarity on the ground rents. Did you say that it is going to probably end in FY 2020?
On ground rents, we are hopeful of getting a deal away next year, there is no certainty. Beyond FY 2020, I think the likelihood of those continues to reduce. Hopefully one next year, thereafter, who knows? There is a question mark.
The second one is just around PX. Obviously, it came down versus the full year.
Yeah.
What do you expect it to kind of move, which direction do you expect it to move by the full year this year?
It's really hard to predict the balance, but I suppose I'd say it's running at around 7% of completions, which is what it was last year. Our holding time is probably fairly consistent with what it was at the year end, at around about 15 weeks or so. I'm expecting a similar sort of balance between the GBP 40 million-GBP 50 million at the year end, but it's hard to be more precise.
Final one was just around kind of the focus on driving down costs. One of your bigger peers has had a strong track record of that, but more recently it's probably come back to bite them a bit, and I'm just wondering how confident you are that this kind of focus isn't going to impact your build quality and customer satisfaction.
That's a good question, Gavin. From my notes, I'm not changing specification. I'm not making our materials cheaper. I'm standardizing it and I'm getting savings from our commitment to volume, the standardization of our specification, and just making us more efficient with the standard house type range. If I'm building the same product, I've got the working drawings from Reading that will be the same in Yorkshire. I've got design savings, I've got build time savings, but none of it will impact our build quality, I promise you.
Thanks. Will Jones from Redburn. Three if I could, please, but I think two have a couple of parts. The first one just, I guess, exploring the recent trading picture. The political headlines are swinging from week to week, but when you look at particularly February and March, are you noticing any kind of differences on a week-by-week basis, or is it actually that plus four or so you referenced, is it fairly consistent? Then again, linked to that, I suppose, how are you seeing sequential pricing? I guess benchmarking it against, say, autumn. Are we pretty flat, would you say, across the piece, or still slightly rising maybe? The second one was just coming back to, again, one of your larger peers who clearly last week announced they would be doing a form of retention on-
I know who you're talking about.
On completion with regard to snagging issues. Is that something you've ever thought of, something you think you need to consider? Are they leading where the industry will follow, do you think, on that point? Then the last one was just around, you hinted that clearly the net cash is building this year and in all probability, beyond. Is there a level of net cash at which the decision around capital returns becomes too great to ignore? At that point, do you think you'll favor, if you do something extra, will it be just a changing of the ordinary cover, or would you consider it more in a special form, a bit like one of your more midsize peers did recently in the form of a B share?
You get all the good ones out first, Will, don't you? You do the two hard ones, I'll do the easy ones. I'll do sales rates and the retention. In terms of sales rates this year, whilst we're up 4.5%, Will, I'm not suggesting for a moment that the market's better this year than last year. I think it's just a product. Our sales performance has improved principally due to I've got more selling tools, I've got more outlets, and we're working harder at it. My feeling is we're working hard to deliver the same, but I've got more sales outlets to sell on, hence my improvement in sales rates. That will continue as a theme through the business, whether I drive outlets through the divisions or I open more divisions.
In terms of your third question on retention, Persimmon have got their own problems, and this is the way they're dealing with it. Persimmon are dealing with the government about their quality issues, as I understand, and about the use of Help to Buy. We don't have any dialogue in that regard with Bellway. I've got no intention of Certainly, our approach to moving someone in a home is to get it right first time, not move someone in and fix it later. Our approach will be maintain a five-star rating. What can we do to get those processes even better? We want the purchaser to be happy with their home on day one.
In terms of pricing, it's been fairly consistent. Where we are able to achieve price increases, it's led locally, so it's about the site and a strong area where you've got good affordable product on it. That hasn't really changed. Even though the market was perhaps a little slower in December time, the pricing dynamics remained fairly consistent. We're not seeing a gathering momentum in pricing, if that's what you were alluding to. On the cash position, whilst we are guiding to a positive net cash balance at the end of this year, probably in excess of GBP 150 million, there are still working capital requirements throughout the year, I still expect us to have an average debt position of the order of GBP 190 million throughout this current financial year, which is very similar to what it was in the previous financial year.
You have to look at the peaks and troughs throughout the reporting period before you make those sorts of decisions. Future ideas on dividend. Look, as long as we continue to grow, we still see that as a really good use of our capital, and you can see the compounding effect that has on NAV and dividend year in, year out. That's first and foremost what we'd like to do. If we see the rate of growth is likely to moderate, then of course we'd come back and have a look at dividend options and we'll report then once we've had a proper discussion internally on that.
Sorry, just to clarify on that week-by-week trading point, is it all fairly consistent, would you say, at the moment, or are there other ups and downs?
Nothing's changed in the week since, we're still up 4.5%. It wasn't a flash in the pan, Will, if that's what you're asking. It's continued as a thing.
Thank you. Gregor Kuglitsch from UBS. A few questions. The first one is just to come back on the margins. You're obviously saying growth is anticipated to kind of gravitate back towards 24, which is what you're procuring at. I guess overhead is close to 3.5, 4. The ground rents may drop away. Maybe that's 50 basis points plus. Are you suggesting that kind of as we think about the next few years, you kind of land towards 20% operating margin? Is that the kind of battle plan, obviously assuming the markets are kind of stable? That's question one. Question two, could you just remind us how much is left in Nine Elms so we can model out in terms of gross development value? Because obviously that'll be a distortive picture both on top line and profits.
Finally, on the partnership, could you just give us the sort of broad economics of that? Is it different to the existing business from a margin perspective and perhaps it's offsetting on a return perspective? Just to get a sense how the economics work and how they will flow through into the business over time.
In terms of the margin, look, I think you're right. Over a period of time, I don't particularly want to commit to what that period of time is, but it would make sense to us that the growth moderates around 24, and that the operating moderates to around 20%-ish. You're always going to have a plus or minus depending on site mix and trading conditions and all those sorts of things. That's entirely consistent with what we've said for a number of years, and it doesn't compromise our ability to invest and still make pretty good returns from those investments. In the next financial year, just to give you a flavor in terms of what we think the rate of moderation could be, it might be something similar to what's already happened in H1 this year, but it is very early stages.
Just to give you a feel for the speed of which that might happen. On Nine Elms, we're in a very strong position. We've got around 120 left to complete on that scheme, at a similar average selling price to what I reported in H1. Of those 120 left to complete, as we sit today, there's less than 20 to sell, and those completions will happen in H2 and towards the start of H1 in the next financial year.
Should I do the
Partnerships
I'll do the partnerships. I think the simple answer to your question is yes, the returns will be less. It's always difficult to be specific, purely and simply because every site is different. Of the schemes we've got so far running through that particular P&L, one of them is just a build contract with an RSL, which will attract a lower margin. Another one is a site that we jointly acquired with an RSL on the open market, so that will attract what we perceive to be a normal margin, around 24%. It's very much a mixed bag, and we look at every site individually, in terms of location, sales risk, build risk, what the division are capable of doing.
I think in the main, yes, I'd expect them to have lower returns, because they're going to have a few more build contracts earning gross margins of teens, as opposed to in the 20s.
Thank you.
Morning. Glynis Johnson, Jefferies. Three, if I may. The first one, hopefully, is very straightforward. In terms of the current trading, I wonder if you can just put that in a per site basis. You talk about the number of outlets that you're selling from. I'm just wondering if it's flat, if you look at the actual number of outlets. In terms of London, I'm just wondering if you can put some color on the London land market. Are you seeing the viability of London land coming back to levels which is more interesting now? Is it really that you see the future being within partnerships because that's the only place where the numbers will necessarily work?
Lastly, just in terms of the Artisan housing types, you talked about you'd moved the number of housing types up, and I'm just wondering what was the basis of that? We're seeing standardization being talked about a lot. Was it the customer push, that they wanted more variety? Was it in terms of the economics of build? Was it in terms of the planning? Just a little bit more detail.
Okay.
Should I do the sites?
Yeah.
In the first six weeks of H2, overall resis are around 4.5% up. Average sites in that period are probably around 8% up, Glynis. That's consistent with elsewhere in the market. It is perhaps a lower per site sales rate. I think our point is you've got the ability to open those sites and grow the gross reservations at the top line, which is what you're seeing coming through. I would just also add on to that, as we suggested at the trading update, those new site openings are also seeing an increased private availability. You're seeing a consistent increase in the private reservations at the start of H2 as well, which should bode well as we go into the next financial year.
If I do London land market first, I'm still a big fan of London, Glynis. Where I don't see value or opportunity is where you've got a high London land cost, a high density scheme which attracts quite a big WIP commitment, and then at the end of it, I'm getting an ordinary sales rate. For me to commit GBP 50 million, GBP 60 million, GBP 70 million, GBP 80 million into a site and then sell one a week is not very appealing for me at the moment. My appetite for London is very much in places like Hornchurch or Bexleyheath, where I can get medium density schemes that are more affordable, fall within the Help to Buy bracket more often than not. There's a bigger pool of people trying to buy them, so my sales rates are higher. I think London to me just moved really.
We've gone from the central points and moved out to the fringes, really. It's a very good question on house types, because I ask the same question when we're doing the design. I said, "How the bloody hell did it get to 43?" I wanted it neat and tidy and keep it around 30 or early 30s. The reason it's extended to 43 is purely and simply because of building regulations across the country and us ensuring that some of the house types are disabled compliant, Lifetime Homes compliant, and meet various standards across the group. We've had to introduce two and a half story and some three story units into it.
I would say that the majority of the use of our standard house type range will probably be in 30-odd house types, we've had to bolt on some extra ones so we can do the odd bungalow, that we can do a disabled compliant unit, and someone hasn't got to keep designing up those units. That's the reason for it.
Thank you. Morning. Chris Millington from Numis. I just wanted to ask my first question, just really on the quantum of incentives. If you can just roll into that, has there been any change in that slightly higher cancellation rate you saw in the first half? That's the first one. Next one's really just on, again, on the new house type. Is there going to be any plotting benefit? This is something we hear from a lot of other people as they bring out new house types. The final one really is just, with this GBP 2,000 saving you're looking to make off the new house type, are you going to try and roll that into a higher gross margin on your land intake, or is it you're just going to stick with 24%, and this just makes you a bit more competitive in the market?
I'll do it. Incentives are running probably at around 3% of our gross release prices. I'll just caveat that in that it's a soft figure because every division will have slightly different release prices and what counts as an incentive.
As Keith.
That was probably around 2%-2.5% if you went back 12 months. A slight nudge up, but that's within any net inflation figures we report, we take that into consideration. The cancellation rate, look, we reported that because there was a little bit more uncertainty in the wider economy, our cancellation rates had nudged up from 11%-13%. If anything, we've seen that moderate a little now, and it's probably running at a year-to-date figure at around 12%. Whether it continues, who knows? It's certainly not getting any worse, and it doesn't feel like it's likely to get worse based on current trading in the start of H2.
In terms of the plotting benefit, if I was to be honest with you, Chris, Simon sits on the land meetings with me when we buy all the land. Sometimes I'm getting divisions saying, "Yes, we're getting more plots and higher density." Sometimes we're getting divisions saying, "It's about flat," because they were already efficient in the first place. I think it's the newer divisions, or the divisions that are not used to building houses, some of the London type divisions, that are getting more benefit than a traditional house builder in, say, Leicester. I can't give you a specific answer, some are getting benefit, and some are saying it's just the same as what we was doing in the first place.
In terms of your intake margin, that's a fair point, Keith and I have labored over the answer to this, in terms of do you up to 24% or 25% so you get the embedded benefits of it, or do we charge them for using our house type range? I think where we are today, we're going to do a bit of both, because we don't want to make them uncompetitive. You must understand, I haven't got all the cost data yet, because I've only put the foundations in. I think what we're going to do is charge them for my design surface into the group. When you use the Artisan range, you pay me for the design as opposed to paying an external consultant. Then we might nudge up the headline operating margin a fraction.
It's an art, though, rather than a science.
Yeah.
Our intention is, look, we want to buy land at better margins, and these sorts of efforts we're putting towards efficiencies.
should help contribute towards that. It's not a precise figure where we can say it will do this. It's just a direction of travel.
It's easy for me to say, "Yeah, this is better plotting, and it's going to make more money." I know that's probably the stock answer you get from many. The truth is, when you've got a lot of divisions across the U.K., some are going to get a big benefit, and some are going to say, "Well, it's the same, but it looks different.
Too early to put a % on your models just yet.
Good point.
Thank you.
John Fraser-Andrews, HSBC. Two for me, please. The comment, Jason, about the caution on the larger sites on land purchase, does that extend to the 6,400 plots agreed? Are you sort of sitting out at the moment and watching the market in these Brexit weeks, if we can call them that, before you commit to this land purchase? Secondly, can you talk about the land market generally, pricing? I think availability's very strong, but has there been any pricing movement in the year so far? If you can put some regional flavor on that would be great. Thank you.
In terms of larger sites, John, it'd be easy for me to blame Brexit for everything, but the reason we paused in terms of buying land earlier on in the year was to see the strength of the spring selling market, because as you know, that's the busy part of our whole year. If volumes were flat, that may have affected our land investment. We're pleasantly surprised of the strength of the selling market, so we've carried on investing. I do want to buy larger sites, and I will do, but they're going to be a handful of big sites per year as opposed to lots of them. I need big sites to grow the volume, but my ambition is to drive the number of outlets through the group, for 2 reasons. 1, it delivers me more sales.
Secondly, I think it will be a good insulator for when the new Help to Buy rules come in in 2021, because I want more selling tools and more selling outlets. I hope that answers your question. In terms of any changes in the land market. There's a little bit of opportunistic land buying and prices being changed into the back end of last year, 2018, where people were still keen to sell, and developers like me were saying, "Well, I'm not sure if I want to buy, but I might do if you give me a decent price." That situation's changed a little bit in the new year when the market start to realize that the selling rates are similar to last year. The land market has settled down. I don't see there's any material change in the land market at the moment.
A couple of questions from me. Sorry, it's Kevin Cammack at Cenkos. One of your key priorities that you mentioned was supporting the brand. I just wonder if you can talk a little bit about the role of Ashberry within this and does this have a sort of ceiling on how big it can be? Does Artisan cover that? Just the sense of where you think that business going forward, is it actually growing faster than the group or will it only grow with the group? Secondly, in relation to the obviously pretty strong hint that there are still new divisions that the business can open. When we look at it today, are you currently buying land with a view to supporting those new divisions, for the future?
In the longer run or the sort of maybe the medium term, if you were to, for every new division you tack on from 22, is there any sense you feel that the average size of delivery of each site actually comes backwards? In other words, if your optimum division was 700 let's say, if you had 28 divisions, would that optimum size be 650? Do you still see yourself in a position where divisional growth equals the same multiplier growth? If that makes sense.
Do you want to do the I thought you'd do brand and Ashberry. Do you want to do that?
Yeah. Ashberry is almost out with the main Bellway brand, and we talk about strengthening the brand in London and improving our website and five star and all those sorts of things, is to give people confidence to buy. Ashberry's always going to be a small part of the business, and its purpose is entirely to increase output on some of our larger sites. It dawned upon us several years ago, look, if you have a big site and you're sharing it with a Barratt or a Wimpey or whoever, those larger sites tend to justify a higher sales rate by having more outlets. We thought, look, we don't want to increase our exposure to big sites, but where we do have them, let's try and maximize the returns and get the cash in a little bit more quickly. It's proven very successful in doing that.
Because that's its purpose, its natural limit is never going to be much more than where it currently is at around about 5% of output, because you're never going to have that many sites that lend itself to it. Does that answer your question?
Good.
What's the-
What's the smallest site that you're currently producing the product on?
God.
Across the board, I don't know.
Can we come back on that?
Well, I'm only trying to put something.
Yeah
wrap something around.
You buy a handful.
You only use it on the larger sites. Well, I mean, is that what?
Of Ashberry?
Of Ashberry, yeah.
Oh, sorry.
It's 500 plus?
You'd be a good 200 and 250 plus before we'd start thinking about.
Okay
Ashberry.
I think, Kevin, just answering your other questions, in many ways answering them both at the same time, if you looked at a 600 unit model in our business, which is fair to say is a reasonably sort of optimal size, we've got about 10 divisions out of 22 that deliver 600 units or more across the group. They might deliver anywhere between 600, 900. There's clearly potential to grow in some of the younger guys. Kevin, I would caveat, some of these younger divisions, I wouldn't invest too much land until they grow up and mature. I'd keep them at 350 or 400 because they're more junior. The management teams are more junior. Similarly, I talk about earlier, Kevin, the Huntingdon division. I never see that growing to 650 units.
I think there'll be a saturation point between Peterborough and Cambridge, it will run at around 400, 450. They're what I call small to medium sized divisions. In terms of am I buying land for the two new divisions that I've alluded to, the way I do it, I don't want to give all my secrets away, when I've got a division that may be at 750 units and I want to start another division somewhere near it, I'll say to them, "Look, guys, I know I've capped your land investment, I'm going to let you run a little bit, I want to pinch some of your land maybe in a year's time.
I want to pinch some of your staff, yeah, and I'm going to seed my new division with the fruits of your labor, and that will kick off my new division. I'd probably just let the reins go a little bit in the bigger guys and get them to buy some more land. If I change my mind in the autumn and say I don't want to buy it anymore. I don't want to open those up new divisions anymore. I'll just leave the land within those divisions. Is there an optimum size, Kevin? It's probably, in terms of the size of the company, I look at the bigger guys. If I opened up two more divisions, it takes me to 24. TW are at 25. Barratt are at 27. Persimmon are 31.
That gets to a point, would I be brave enough to start opening up in the more peripheral areas? Probably not. You'll get into capacity at that point, once you've grown each division up to a reasonable size.
Just one sort of final question to that. If you take the sort of above-average output per division majors, what would you need to do to actually get towards those levels of output? Or is it something deliberate that you don't demand of your divisions to achieve that?
It's-
In a sense, what you're saying.
Yeah
You could go to the same sort of number of divisions as Barratt or Taylor Wimpey or whatever, but almost by definition, you're still going to be 2,000 or something completions behind them. Is there something about how Bellway runs its division that is never going to sort of push the boundaries of
Yeah
become more competitive?
I think what I would say, it gives me the capacity and the platform to keep growing a business. Once I've got that divisional structure in place, I can still carry on growing a division per annum and maintaining the build quality. I think an impediment, and I referred to it in the presentation, is people. I've only got so many star MDs that can deliver 900 units out of an office. I feel if I put that burden and pressure and said to a young management team, "I want 650 units out of you," I'm going to suffer in terms of quality, and I'm not prepared to make those sacrifices. If and when we open up more offices, yes, you're right, we're going to have quite a strong operational structure. It's going to give me four or five years of growth through that operational structure.
I'm quite comfortable with that.
John Bell at Barclays. I think I've got three. You've mentioned a couple of areas of the U.K. that might be available for you to go into. Could you be a bit more specific? Second, planning regime in London, keen for your thoughts on that. Finally, any material shortages that are presenting at present?
In terms of the locations, John, if I could just hold you to the autumn because it affects people in our business. I think Keith and I want to get through the spring selling season, otherwise people will think there's a big apply for jobs that don't exist sort of thing. Planning in London. The only disappointment about planning in London is how fast the planning applications come through. There's a dearth of affordable housing in London. There's lots of talk of delivering faster planning permissions, but the reality hasn't changed any. I think that's a little bit of a disappointment. What was the third?
Material shortages.
Not really. On material shortages, we haven't really come across any particular issues over and above what we've all complained about for probably six, seven years now. It's having strategies in place to make sure that you've got the right amount of stuff on site and working with those in the supply chain, nothing untoward, John.
I think the good thing on materials is where we'd have brick supply problems across a number of divisions, now Persimmon have opened up their factory and make their own concrete bricks. I'd probably say, John, I've got two divisions grumbling about brick supply, so it's less of a problem for me operationally.
Thank you.
Ami Galla from Citi. Just one question from me. On the London Partnership business, I was wondering if you could tell us how quickly is that business scalable? In terms of your ambition from that business, do you have a sort of target of what % of your mix would that eventually represent on a mature level?
London Partnerships will take a little bit longer to bring together, just because of the nature of the sort of sites you look to acquire, the longer term, the more complex agreements. It will take a few years before it gets up to capacity. As we said earlier, it will start to deliver completions in the back half of next financial year. It's not going to be a lot more than a couple of handfuls in the next financial year. In terms of the size, we look at it as being another division, so it's one of our 22. It's a bit like Kevin's question there, how many can a division deliver? I don't see why a division in that region can't do 600, 700, but it is just one division out of 22.
Thank you.
Did you ask, Ami, whether it's scalable?
How quickly, it was.
Yeah. I suppose I'm going to keep it in London for the time being, so I wouldn't let it drift any further than that.
The reason for that, there's so much demand for affordably priced homes down here, but it's worthwhile putting all that effort in because the price point justifies it. We all talk about having a fantastic return on capital, but if the price point is close to nothing, then it's a return on nothing, so you need to have those high-value units coming through for it to be worthwhile to justify the extra effort.
Thanks. It's Charlie Campbell at Liberum. Just a couple of questions, and they're both quite short. Noticed in the appendix that the proportion of flats has just crept up. It's nothing at the moment, but is that the beginning of a trend as sort of affordability's got more stretched across the country, or just a mix issue and therefore nothing to think about? Secondly, I suppose as the spring season's matured, is there anything to say about mortgage availability? Are we a bit clear about what banks are doing this year, and any material change to mortgage availability in this year compared to last year?
Flats is entirely mix. I think it's about 25%. Remember, we were at 50% when we were building in city centers. We're never going to go to that level again. I think sort of 30% below feels an appropriate sort of balance, and it's nothing more than mix in there. Mortgage availability, no changes for us. It's still the main lenders who are providing the vast majority of our mortgages. I know we all read about higher LTV products coming in, but it's the challenger banks, it's the small local banks and building societies, and it's a tiny proportion of anything in our business. We're relying on the likes of Halifax, NatWest and everybody else, to provide the vast majority of the product for our customers.
Hello. Robert Eason from Goodbody. Just one or two. In your presentation or in answer to a question, you indicated that cancellation rates are probably creeped down to 12% recently. Is there any regional differences in that in terms of what you're seeing in terms of that cancellation shift down? I know it's only a touch down. In the actual release this morning, you talk about early indications of some subcontract trades, rates coming down. Can you be a bit more specific of what areas you're seeing that on?
There's nothing of note on the cancellation rates in any particular region. It's just an aggregate figure, and there's no one region which stands out of having a different trend. Nothing to read into that. On the subcontract trades, what we're finding is, look, there's still upward pressure on subcontract costs, but if you time it right in a particular locality, if you tender for your groundworks order at the same time as Barratt and Wimpey and everybody else, you'll pay a little bit more. But if you time it right and somebody's just closed a site down the road and is perhaps not delivering as much output, then you can get a good price, and prices aren't increasing. I think that's what we're trying to allude to is it's not necessarily up, up as it was a couple of years ago.
There's some times when it'll be flat.
Is that all done? Just to close, thank you very much. We're here for a while after the meeting if you want to talk. Just to introduce you a few people, if you haven't met them. We've got our Chairman here, Paul Hampden-Smith, who's just sitting at the back next to Phil Hope, our Group Financial Controller, and most of you know Simon, whose job title's so long I won't attempt it. We're all welcome to have a chat with us after the meeting. Thank you.