Good morning, and welcome to the MJ Gleeson conference call. Today's call is being recorded. I will now hand over to your host, Graham Prothero, Chief Executive Officer. Please go ahead.
Good morning. This is Graham Prothero, Chief Exec of MJ Gleeson, and I'm joined by Stefan Allanson, CFO. You'll have seen the announcement this morning, and I thought it would be useful to briefly summarize it before taking your questions. Given some improvements in the mortgage market, we're cautiously optimistic about recovery and demand through the Spring selling season. You'll have noted that we entered the second half of the financial year with a forward order book of 586 plots against 319 units this time last year. Net reservation rates during the first half were 0.41 per site per week, against 0.36 per site per week over the comparable period. We remain confident about volume targets for the year.
They do assume some pickup in the current rate of sale and the successful conclusion of some further multi-unit sales, in respect of which we're negotiating with a number of interested parties. We have incurred some additional costs in respect to the number of older sites, which, alongside the cumulative impact of current market conditions, are expected to result in gross margins falling below market expectations by circa 1.5%-2%. The issues are individually non-material, but cumulatively have this impact. They started to come to light following the organizational restructuring and management changes that I implemented last year. I'm satisfied that we've now got a good grasp in respect of these 10 or so older sites. The guidance we've given is necessarily an estimate, and, and it does include estimates for some costs yet to be finalized.
A quick reminder that Gleeson Land completed the sale of one site during the period, and we've recently commenced marketing a further four sites. That concludes the summary. Thanks very much for listening, and Stefan and I would now be happy to take your questions.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question on today's call, please signal by pressing star one on your telephone keypad. That is star one for your questions today. And our first question comes from Aynsley Lammin from Investec. Please go ahead.
Hi, morning, Graham. Morning, Stefan. Just a couple from me. Obviously, on the... Well, I guess the kind of consensus PBT is around GBP 33 million for the full year. And just looking at the volume targets, I mean, I've got 6% growth in for the full year. You say you're still kind of on track for your targets. Just wondered if you confirm what you're now expecting for volumes for the full year, what that implies for the sales rate pickup, and how confident you are of that. And then on the gross margins, you know, 1.5%-2% down. I mean, if I just play that through the model, it looks like a kind of, you know, 15%-20% downgrade to consensus PBT for FY 2024.
Just wondered if you could comment on, on that comment, really, and give some context around PBT for the full year consensus? Thanks.
Yeah, yeah. Yeah, so, so I think the consensus gross margin is 26.1%. We have, we're saying, look, the gross margin is going to be 1.5%-2% lower than that consensus. So if, if you were to take the top end of that range, let's say 2%, then we're looking at, six and a half to seven million pounds lower gross profit this year. And if you, if you trickle that all the way through P&L to a lower group PBT, you would therefore be looking at a group PBT, 6.5 million-7 million lower than the current consensus, which is, as you say, GBP 33 million. I think it's actually GBP 32.6 million is the current consensus.
So I think that's a reasonable scale of expectation for FY 2024.
Great. You'd expect that, I mean, is that gross margin one-off those problems next year, you'd expect to kind of revert back 1.5%-2% higher, or is it more permanent than that?
So the impact of the reasons why the margin is lower at 1.5%-2% lower is principally the additional costs we experienced on sites, older sites nearing completion. But there's also the continued really tough environment with net selling prices being flat over the last 16 months. Slower sales, extended periods, all of that is combining really to— We expect that therefore, that at lower margin will continue into next year. But perhaps not quite as low next year as this year, but, in a similar ballpark....
And what I would say on the those lower volume and lower profit is that reduction kind of brings us in line with where the rest of the sector has been reduced to. So if you compare the rest of the sector in 2022 to where the expectations are for the current year and next year, this this guidance now probably brings us in line with the kind of reduction you'd see in our spend. So we're not really out of line with the sector, which what I would say.
Okay. And the volume, what's your target now, FY 2024?
Well, the consensus there is, I believe it's 1,925. We're not guiding for 1,885? No, for FY 2025. 2025, I think 2024. So we're not guiding any different to that. So.
For 2024, the volume?
Well, consensus is 1,810. That seems like pretty sensible, you know, 1,800, 1,810. That consensus seems pretty sensible to us.
Great. That's very helpful. Thank you.
Thanks, Aynsley.
We're now moving on to our next questioner, which is Adrian Kearsey from Panmure. Please go ahead.
Morning, guys. I have a few from here, a few from me, if I may. Within that 1,810 units for 2024, how many are you looking to get from those bulk deals? And is there any margin, gross margin, impact there from so on that particular volume? And then perhaps if we take. You talked about some of the gross margin headwinds in the current years coming from the restructuring of the regional network. And so that's sort of, I mean, indicate that that's a sort of temporary aspect or, you know, that may fall over a bit to next year.
But when you look more positively in terms of how that regional restructuring has taken place, are you seeing any benefits from, you know, the prospects of new sites in areas such as Liverpool?
Okay, let me try and remember this. So the
The build, the building.
The split of the units for 2024, for FY 2024, I can't call that here. Now, it'd be foolish, really, Adrian, for me to say what that's going to be. As I say, there are two elements that will drive our final outturn for 2024. One of those is the extent of any pickup that we see, the extent and the durability of the seasonal spring pickup. There will be one, but we don't know, as I say, how the quantum of it or the durability of it. And then the selections that we make on the bulk sales.
As I say, we have a number of those that we're negotiating with several interested parties, and we will make that commitment, and that will obviously be naturally affected by what we see the open market doing. So lots to play for over the next six months, which will determine that split. So I'm not gonna make a call on that this morning. You asked about the restructure and the gross margin headwinds.
Yeah, I think what we're saying is: Look, you've got, you've got a number of older sites, which for various reasons, we, there are costs to be, to rectify the consequence of some fairly aggressive interpretation of planning conditions, shall we say, and some poorly, poorly planned site management, and newer teams. The, the new teams that we, we put in place over the last 12 months have surfaced some issues in a couple of regions in particular. We're pretty confident, we know where they are and what needs to be done, but there's no getting away from it. It, those, those costs have and have hurt our margin, will hurt our margin this year.
And some of those sites will continue into next year, and so the impacts will continue to be seen. But look, we're on top of it. You could say if in a better market, and if we were, you know, if we were flying and prices were rising, we might have been able to cover this. We do carry contingencies. But of course, we're in a market where bulk sales create a discount or require a discount. Incentives eat away at margins. There's very little price strengthening, and therefore we've got nowhere really to go in order to hide or absorb these additional hits, which are, if you like.
All of those other characteristics, everybody else in the market is suffering, but we've got these additional costs as well, and which we've got really nowhere to go with them. They're gonna impact the margin.
Okay. Do you mind if I ask one more question, if I may? Just on-
Yeah.
The Gleeson Land, you talk about marketing, currently marketing four sites. We've seen elsewhere in the sector, stronger interest coming through from smaller and mid-size house builders rather than the large quoted house builders. Are you finding that's the case, or has there been a change in the market dynamic there?
Yeah, fascinating, and your intel is absolutely right, again. So when we're going to market, we are seeing, I would say, the bids are at a similar are of a similar number to what we normally, what we would normally expect, and at a strong level. But the people making up that list has changed. So where we might have expected to see, you know, all of the majors falling over themselves to be at the top of the list, what you're typically seeing now is perhaps one or two of them, with the some privates and some mid-size you taking the opportunity to get themselves on the list, and get to the top of that list.
Fascinating dynamic, and obviously, a good one for Gleeson Land.
Yeah. Thank you.
Thank you, and up next, we have Andy Murphy from Edison. Please go ahead.
Good morning, Graham, Stefan.
Good morning.
Just a couple, maybe four, maybe three questions, if I may. Just first of all, going back to those land sales, I was just wondering, what's the criteria for selecting which piece of land that you put up for sale? That's the first question. Secondly, on the debt side, you talk about a reversal of the increase in net debt from a cash position. Just remind us what sort of longer-term net debt and net cash targets for the business. And then finally, given what's happened to the interest rates at the moment, I've seen that, you know, there's some 5-year fixed, for example, coming down below 4%, in the market.
I'm just wondering whether, as interest rates have been talked about in the news, have been coming down, whether you've seen any pickup in interest from buyers yet?
Okay, well, I'll do take the first and third of those, Andy, thank you, and then I'll ask Stefan to talk to you about debt. So the land sales, don't forget, so this is Gleeson Land. So really their selection is at the point whereby we take the site on as a site that we would promote. So, this isn't Gleeson, this isn't Gleeson Homes disposing of land. This is Gleeson Land. And, once, so as I say, that decision is made at the outset. We don't take on anything.
We take on a small proportion of the sites that we're shown, and then we will put in all our efforts over the next, whatever it is, three, five, 10 years, to promote that site, and then that site will be brought forward for sale once we procure the planning permission. Just on interest rates, I think we're a little early. The very initial intelligence is that we're seeing that the buyers are not massively increased in numbers, but increased in quality. So we're seeing some pretty engaged conversations on site, both between Christmas and the New Year and since. But that really is very early.
I mean, this is really the, it's this week is the sort of first week that I think we get a good indication of whether any sort of pickup. So that really is tentative intel, but it's absolutely up to the minute, if you like, Andy. And I'll pass you over to Stefan to talk about the debt.
Thanks, Graham. Hi, Andy. And I would say on the wider mortgage market, rate and availability and affordability, actually, affordability has improved enormously with increases in earnings, particularly at the lower end of the earnings range. So you know, we've seen National Living Wage increase 10%, the Real Living Wage increase 10%. Earnings are actually quite strong at the low end. It might not be so good at the higher end of, dare I say, in the range that maybe people on this call are on. You know, have increased perhaps not quite to 10%. But, affordability therefore is pretty good. So, earnings have been increasing.
Prices have been flat across the sector, and I won't be just overall across the sector for the last 16 months, and mortgage rates are now actually quite full. So if you're a buyer looking at a Gleeson home, you're going to be,
L ooking at mortgage costs that are perhaps 30% lower than the cost of renting. Of course, and the other thing, rental costs have gone up enormously. So the environment should be very positive for house builders. But it comes back to confidence, and that's what we need to see coming through in spring 2024. But just to get on to your other question about debt and cash target. So we don't want to fund our business with debt, so we're not aiming to end each year with significant amounts of debt. We had said back in September and then repeated in November, that we would expect to end each year with a very small amount of net cash.
We may end up this year, perhaps with a very small amount of net debt, but we're not going to be deviating hugely from that target of being broadly net neutral on a net debt cash basis.
Okay, brilliant. Thanks for your time.
Thank you. Our next question comes from Harry Goad, from Berenberg. Please go ahead.
Yeah. Hi, morning, Graham and Stefan, thanks for taking my question.
Hi, Harry.
Most of them have been addressed already, but in interest, can you talk a bit about build cost inflation and whether you're yet at the point where you're seeing some benefits of that sort of moving from the big inflation of, let's say, the last year to maybe some deflation possibly in some trade and subcontractors this year?
I think we're pretty much, Harry, in line with what we've guided before. So we are anticipating that overall build costs, the build costs should be kind of down about 3%-4% this year. And that is very much weighted towards subcontractors, you know, material pressures continuing.
Fantastic. Thank you.
Thank you. Our next question comes from Clyde Lewis, from Peel Hunt. Please go ahead.
Morning, both. Again, bit like Harry-
Hi.
Morning, I think, but most of the questions have been asked, but one which I'd love to hear a little bit more about is sort of what's been happening around recent pricing trends. I mean, clearly, you know, some of the headline indices from Halifax, et cetera, haven't been that bad. Have you actually started to see a slightly firmer picture in terms of sort of pricing and incentives over the last couple of months? And it'd be useful to get a bit of a view as to how the new year has started, even though we're only a week and a bit into it.
Yeah, interesting question, Clyde. The market is geographically uneven, as you know, but it's also uneven even within the North and even within certain of our regions. And so I would characterize this as still not principally a problem of price. And what that translates to is, whilst we are accepting, you know, that we're having to provide incentives, those are not ripping our hearts out. You know, they're still manageable. And on certain sites, we're actually still putting prices up. And we've looked at, we're looking very carefully, I mean, this is the sort of market where, you know, it rewards hard work. So we are being extremely granular about our pricing strategy, you know, site by site and plot by plot.
I would say that pricing is still pretty robust, and we are selling. Where we're putting prices up, we're continuing to sell. So, you know, these are, you know, we're talking in price increases of the order of kind of 2%-3%. And, you know, this is not the post-COVID stick 5%-10% on it, but it is interesting. What it tells you is that, on... And this is not one or two sites, this is a good proportion of the sites, you put on 2%-3%, and the market will pay that.
And so a very interesting dynamic out in the market, and I can exactly see why you know, the Halifax and the Nationwide have had to perhaps eat their words of a year ago and accept that pricing has remained firm.
Thank you, Graham. And the start to the new year, in terms of sort of visitors and people clicking on the website?
Yeah, I mean, really, minimal evidence, as you obviously know, Clyde. But, as I've said just now, I think we are seeing not massively increased activity, but better quality of activity is what I would how I'd characterize it. But it really needs kind of the next two or three weeks to tell us how January plays out. And, you know, we'll update you much more on that when we speak in February. Yeah, if you like the intel that I'm getting back when I talk to the sites and the MDs is that probably not a massive increase in numbers, but a better quality, a more engaged level of buyer, which is not untypical.
You know, following the holiday, people make those decisions, and they actually say, "Right, I want to get on with this now.
Okay, perfect. Thank you.
Thank you. As a reminder, that is star one to ask a question today. Up next, we take Sam Cullen from Peel Hunt. Please go ahead.
Hi, Sam.
Good morning. I've just got one, possible one. It's a little bit kind of backward-looking. Just in terms of the, this today's statement versus the prior one at the AGM kind of seven weeks ago, what, what changed in the past seven weeks? Is it the issues you've seen on those older sites getting worse, or you've started to draw a line under them and, and get at them quicker than you perhaps were? Or is it, or is it a, a recovery in the, in the newer sites, in the sales rate, some of those newer sites not being as, as rapid as, as you might have thought six, seven weeks ago? Just trying to... You touched on it, I guess, in, in I'd say tenth question, but just trying to gauge where you are on those two extremes.
Yeah, thanks, Sam. Fair question. So what changed? Nothing, nothing changed, let's be clear. So what if you, if you think of the nature of these items, they are individually non-material, but they aggregate to a significant number, as we've disclosed, you know, impact of 0.5%-2% on the margin. So we've known about these sites with these characteristics for many months. And kind of not in my nature to come in as a new chief exec and start wanting to blame everything in the past. And you'll note that I haven't used the word legacy because I always think that's a cop-out.
But so this arises on one site, you find it on another site, and you find something similar on another site, or the new management team that we put in place finds these features. And although individually non-material, over time, the cumulative effect is material. Now, in a normal market, obviously, we would go through sites, we would have a contingency in our cost expectations for those sites. You get a bit of bailout from increasing selling prices and a bit of good luck here and there, and you wear the odd overspend. That happens, that's part of life. But in the current market, we have, you know, contingencies used up.
The other aspects of this market that we've already discussed, the bulk discounts, the incentives, et cetera, use up any slack that you have in your margin. So it just seems sensible when we have this other element, which is really, as I say, it is kind of historic. You know, typically, I think I may have already given the example on the call, but if someone has entered the site and quite aggressively decided, and I'm going, you know, I'm going back several years, made the decision to implement planning conditions to fulfill them in a way that is not in line with what the planners requested.
You take the example of a sound bund on a particular site, whereby the decision was made, well, we can get the same effect with a cheaper solution. When you discover, not just months, but years into that site, that actually, no, the planners are not gonna accept that solution. And not only are they not gonna accept it, they want it ripped out, and they want their solution put in. Suddenly, you're staring down the barrel of the thick end of GBP 500,000 rework on that site. And if you've got several... One example of that, you can wear it.
If you've got several examples of that, then it starts to become a number that you think, "Well, hang on, we're, that is something which I think we should disclose." Otherwise, you're gonna be looking at us and saying, "Your margin, your margin is sagging, and, you know, why should you be sagging any more than anyone else?" And so that's the reason for just sharing this other element, which, as I say, I think we've got a pretty good grasp of it now. Our teams are getting on top of it. It will take us, this year and a bit of next year to work this stuff through, but I'm pretty confident, that we've, we know what needs, where...
We know what needs to be done, we know which the sites are, and we just need to tidy that up. So hopefully, Sam, that gives you a little bit more color. And the reason, so at what point, it isn't really, oh, you discovered this between the AGM and now. It's at what point, you make the decision that, look, this is now cumulatively a material number, which we should help people by disclosing that and saying, "Look, this is a significant element of what's depressing the margin." And of course, it's at the end of the period when you start to pull together your accounts for, in this case, the half year, that you do that analysis more carefully. You're obviously not doing that on a month-by-month basis.
So, that's why this turns up in a half-year trading update, rather than just an AGM update when you wouldn't typically be doing the more granular work on your margins. Does that give you a bit more color, Sam, on-
Yeah, very helpful.
What it is and why now?
Yeah, very helpful. Thank you.
Thank you. As there are currently no further questions, I would like to hand the call back over to you, Graham, for any additional or closing remarks.
Great. Thank you very much. Well, ladies and gents, thanks very much for attending the call. Hopefully, we've made clear the reason why, obviously, this, it, it's not a huge number we're discussing here, but day and age, we felt that it was important that we didn't sit on that information. So apologies for surprising you with the early update this morning. But always disappointing to have news like that to get out. But it's not a disaster, and as I say, very much all to play for in the second half. So we will look forward to giving you a better update in February.
Let's all hope that when we talk to you in February, we're talking about a decent uplift in the spring selling market. I think we're seeing some of you later in the week, so I will look forward to catching up with you on, I believe that's Thursday. Many thanks for your time, and have a good day.
Thank you.
Thank you. Thank you for joining today's call, ladies and gentlemen. You may now disconnect.