Taylor Wimpey plc (LON:TW)
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Trading Update
Nov 13, 2019
Good morning, and welcome to the Taylor Wimpey Plc Trading Update Call. Today's conference call will be hosted by Taylor Wimpey, Chief Executive Pete Redfern And Group Finance Director, Chris Carney and be followed by a question and answer. And I would now like to turn the conference over to Peter Redfern, Chief Executive. Please go ahead, sir.
Thank you. Good morning everybody. Thanks. Thanks for joining us. I'll apologize advance because I've got a bit of a cold.
So if I start coughing halfway through it and have to stop, you'll understand why. I'll give you an overview of current trading and the statement first of all. I'll touch on some of the strategic areas that we've been focusing on, which I think are important, and perhaps go into a little more detail than at this stage of the year, on some of those moving parts. Because I think it's an interesting time. I think you see sort of differentiation in the sector.
And I think obviously see an uncertain external environment. So it's worth exploring a little bit more. You will understand, I'm sure it's also a difficult environment in which to give longer term forward guidance and it's also a trading update. So happy to talk about where we see the moving parts. But with the general election only a few weeks away, a particularly unusual time.
I'll focus on the market first, obviously, the main priority of a trading update, but touch on the cost environment, land buying conditions, and then move on to those those strategic programs. Standing back and looking at the housing market in 2019 from a broad perspective, I think still very fair to say an amazing degree of resilience given the market backdrop. The usual factors, things I won't repeat like low interest rates, and good lending, how to buy, how to create an environment where prices and volumes remain broadly stable. But I do think it gets more interesting when you look geographically and log sort of a closer periods of time. I think you can see in our statements and you've perhaps heard sort of in probably slightly more negative Churchill 1 or 2 peers, London and the Southeast remain softer, particularly high price points.
I think sort of I wouldn't want to be a London focused development moment. I think it is particularly sort of tough if you haven't got choices across the UK as a whole. I do think though, and it has colored our comments in the statement that actually the noise and the pressure in London and the out east in the market was that it's worst a few weeks ago. If you think of the political rhetoric commentary and uncertainty in September early October, it was that it's greatest. And actually, I think that the environment has settled again a bit more recently.
And that leads to the comment our comments in the statement, which are actually slightly more benign than you've seen elsewhere. I do think relatively in that period of resource and price pressure in that part of the market, not huge, But sort of, I guess, a sort of more difficult local market backdrop, you can see why it's put pressure on, as I say, a very London centric sort of developer. Think elsewhere, the markets remain pretty steady. Small rises or falls, depending very much on local conditions, individual sites, their quality where the competition sit. I will come back to this, but we do continue to challenge ourselves on whether we're operating at the optimum balance of rate and price.
We think we are. But as you see, the incident statement is not a kind of one way street, and we're certainly, as we look at 2020, going to keep challenging that and sort of it will depend on the market environment as to what we think the right balance will be. On build costs, you can see quite strongly, I think, in the statement, we've seen the period of increased pressure that we saw in quarter 1 quarter 2Es. That started to be true in the summer, but in a fairly small way, But I think, and again, I will point back to the period of uncertainty in September and October, but here in a positive way, I think we have seen since then early over the last few weeks a much more material shift, in both labor and materials as pressure is eased. It's not the time of year when we do lots of material related deals, but the sort of signs for 2020 price pressure on materials are quite a lot soft than they were.
I think personally it's too early to call a number, to call a forecast, but definitely the environment is different to what we saw 6 months ago and also sort of more benign than we saw, sort of 12 months ago. And for the first time, we've also seen some softening on forward rates on labor. And again, it's early days, it's particular trades, but it's the kind of trades, particularly ground workers, where you tend to see the first sign of a slight change in conditions. And I think if you look at what was happening in the R and M sector in September and October, what's happening in general construction market, which are softer than house building, has been, you can see why you get sort of a general easing of pressure. And we did not see in the buildup to the sort of potential of a no deal Brexit in October, the same kind of stocking pressures that we saw earlier in the year, sort of as supply chain built up.
And so as we look at January, I think the risk of seeing that again is lower than we were to say perhaps 6 months ago. I think we stand by our 4% to 5% cost inflation for this year, but reducing into next. But as I say, I think early to put a number on it. On land. I think there's less new to say, but it's worth reiterating overall market more or less in line with the recent past.
You do see some localized changes in bidding behavior, but I wouldn't say that's more or less aggressive. I think you see more companies really testing and challenging whether they've got their land buy strategies right at a local level. So you start to see more bids going in from local businesses that then get walked back more generally. A high price that perhaps doesn't make it all the way to the final land deal. So you see a little bit of apparent pressure, but actually when you get to the sort of final deal, the land price has been pretty stable.
And as you can see from our statement, sort of our land buying this year will be broadly neutral as it will replace more or less what we use. I think earlier in the year, we could have seen that growing to build sort of potential growth in outlet numbers for next year. With the uncertainty in the second half of the year, politically, we felt that neutral is the right balance, exact numbers, we own exact cash balance, will depend on timing of land sort of deals around the year end itself, but broadly a neutral position. Onto our trading against that sort of general market backdrop, As you can see, the sales rate has remained very strong for the year, 19% ahead of last year. And if you strip out bulk sales, and I'll touch on a couple of specific shorter term ones, quite small, but I think important sort of from a signal point of view, actually the underlying sales rate is about 18% ahead of last year.
So it really is ordinary sales to private customers that is driving that difference. But short term box sales are small, but central London folks And that sort of slight balance of slightly more volume, slightly more slightly less margin comes a little bit from clearing out small amounts stock, but at relatively high price points from Central London sites, which you think given there's continued uncertainty in the London market is the right place to be. That leaves us with a central London business that has 3 large sites with a long time to burn with very solid margins, 2 of which are joint venture deals and all of which we feel give a pretty solid underpinned for that business. So it lets us be in the land market, but not feel we need to do anything. Sort of particularly risky to stay in the London sort of business into the medium term.
Just touching on other sales metrics, really nothing to say. Other things like appointment bookings, cancellation rates remain solid. Overall, this leaves us with a record order book, and I think uncertainty for general election, uncertainty of sort of new year Brexit, that's a very good place to be of 10,400 units. The growth in that is heavily weighted towards private sales. So it's not artificially inflated by a change in affordable housing.
Again, it's driven by those high sales rates. Sort of, and you see the way the volumes are coming through into the business that we're able to get behind those high sales rates with high production rates as well. On costs and by extension margins, of course, we're aware that it's an area where you would reasonably question whether we're getting the balance quite right and whether sort of we're slightly lagging some of our competitors. I think you can see some of the comments about margin pressure and cost inflation that we talked about earlier in the year, coming through in other parts of the sector. And I think, yeah, I stand by.
We'll tell you what we see when we see it. And where there's too much sleep over whether other people are saying exactly the same thing. At the same time, but we are also challenging ourselves. I think there are areas in our controllable costs where we can push out some inefficiencies done a lot of things with the business over the course of the last 2 to 3 years, lots of new investments. I'll touch on a couple of those and we don't toward those investments back, we think they're the right thing, both for short term, but also more importantly for the long term.
But that does mean there's a lot going on in the business, and it means there's other areas where I we can target some savings over the course of the next 6 months. Just touching briefly on some of those investments, I point particularly to 6 40 apprentices. On year 1, an apprentice did not very much. In year 2, they did not very much. In year 3, they hit close to doing a full a full day's work, I think that that number of 650 underpins long term an investment that takes us to more than half of our bricklayers and join us coming from apprentices and being in Direct trade.
That's a very meaningful shift it's way ahead of where we've been. It's way ahead of where anybody else in the sector has been. Give you a sense of the level of cost investments in 2019 in that number, that's already in the guidance we're giving you, it's about GBP 10,000,000 incrementally to 2018. So it's material. And there's a few other areas where we're doing similar sorts of things.
But the industry faces a long term shortage in trades, and it faces a long term challenge in the quality and flexibility of those trades. And people talk about modern of construction. I'm slightly more interested in having a flexible sort of workforce that actually can adapt to different methods and then on the exact details of what the method of construction is. I think there's a lot of things there that are more appropriate for our results presentation and we'll come back to it then. But I would just lastly draw your attention to the distinction we're drawing on customer service between finishing quality, service, and communication is the thing that we've talked about a lot and others are also focused on, which drives things like the NHBC customer sort of 5 star rating.
But underlying build quality, which frankly has no impact on that rating, but is just as important long term for customer satisfaction, for our reputation, for our forward cost base and for delivering something to our customers that is right. And whilst we continue to focus on the first, actually in 2019, in the area we've been really focused on is that underlying build quality piece. We think the CQI measure that we've talked to you about before is the best measuring it. We now lead the industry in that. We start off in a good place, but we've gradually built on that.
That gives us the confidence that we can step up build rates to match those higher sales rates without compromising on that quality and storing up problems for the future. I think there will be a lot of pressure over the next few years on the industry on those sorts of issues and I think it puts in a strong place to deal with it. I'm not ignoring the fact that we're slightly slipped under the 5 star rating, but it is only part the story. And yes, we'll continue to focus on that, but we're focused on quite a broad range of measures. So looking forward, we remain in a strong position.
Strong balance sheet, slightly cautious on land spend, but a similar land bank at the end of the year to last year and 60% plus of that coming from Strategic land bank with 130,000 plots in that strategic pipeline going forward. Record order book and the step ups in build up team mean that we can manage that and still deliver strong customer service. Political environmental backdrop is uncertain. We see 2019 in line on profit, as I've touched on slightly different mix with slightly lower margins and to give you a clearest there on that, yes, we guided you to about 20. I think I would say at the moment, 19.6,19.7 is about the right sort of sort of level, but we're slightly more volume and unusual in a year, particularly with such an uncertain market to be stepping up volume.
As we look at 2020, sat here today, I expect us to target a slightly lower sales rate But just to be clear, that would still be an industry leading sales rate. I'm well ahead of that 2018 sales rate, so I'd still expect to start with a 9, but we don't want to be in a position where we're chasing something. We want to be able to focus on making sure we squeeze out the optimum pricing. And the optimum, sort of cost base. Sort of so we want to give ourselves the flex to do that properly next year and not be chasing something that isn't quite right.
But as we look at next year, it's a very uncertain environment, I say. There will be still some cost headwind going into it. A lot of things we can do within the business on squeezing out a bit more value to offset that.
No, I think that covers everything, probably worth moving on to questions.
Can we open up
And your first question comes from the line of Brijesh Shishshiya from HSBC. Your line is now open. Thank you.
Good morning, Peter and Chris. Two questions from my side. First, is an operating margin guidance. You're guiding to a 30 basis point year end reduction from the H1 What actually driving that? And one hand, you are saying the cost inflation is kind of eased off a bit in the second, in the recent weeks and you are again guiding for a higher volume growth than what you guided in H1.
So that my first. And second one, if you could elaborate a little bit on the pricing pressure, especially in London and Southeast region, is it more site specific or in more general, you are seeing it's just in high priced market or are you seeing some weakness in the what do you call a more mass volume region range around 400,000 to 600,000.
So can I just check on the first question? Was the specific question related to the operating margin that the change from half 1 to half 2.
It's more specific to the full year guidance of 20% coming down by 30 basis point, which you are kind of guiding now. It is more related to build cost inflation or slightly more cost price pressures what exactly driving that number down?
Okay. So on the pricing pressure in the Southeast, first of all, It is very much side by side and it is very much weighted towards larger sites. And it also, as I say, sort of, is probably few weeks old now. So I'd say right now, it's pretty flat. And it's actually more about, a few more incentives.
It's inevitably in the September, October period the AUC competitors sort of filling their order books for final year end numbers. So it tends to be a period of the year when there is a little bit more price you add to that, the political backdrop, and it's not hard to understand. It's not huge. If I have to put a number on it for London and the Southeast, would be 1% to 1.5% on average for that part of the market but heavily weighted to sort of, to higher price points and to Central London. On the operating margin, sort of look at the full year and the movement year on year, we talked about it quite a lot in both sort of April and in the half year.
So I'm really sort of just overviewing that because the movement since then has been small. I think there are 2 main areas. The first is seeing cost inflation where we haven't seen, material sales price inflation. And I would say that is order of back 1% of the movement, sort of we see cost inflation of, averaging sort of probably 4% for the year for a year on year impact. The softening in cost inflation over recent weeks has almost no impact 2019 at all because the dye is cast on that.
It's about 2020 and beyond. The other main movement, I think year on year in the investments that we have made in underlying build quality, which is heavily weighted towards site management resource on-site. And on things like the apprentice program, which I touched on earlier. I think that's a short 1% sort of it's not quite which is published in that sort of territory if you add it all together. I think the difference between what we might have expected at the beginning of the year is that we haven't had any price offset against that, and we continue to see that higher build costs in place.
And the investments were investments we expected to make, but we didn't expect to have quite such environment in which to be making them.
Thank you. And your next question comes from the line of Ainsley Lammin from Canaccord. Your line is now open.
Thanks. Good morning. Just 2 from me. 1st of all, one that if you could comment a bit more generally on kind of any changes to incentives or part strange use in the second half? And secondly, just your comment on the land bank keeping broadly as it was at the end of 'eighteen, should we read from that, the average site numbers for 2020 at this point are kind of expected to be flat year on year with 2019?
Thanks.
Thank you particularly for the second question, Angie, because I meant to mention that one in my view comments and I forgot, yes, I think that's a fair sort of assumption going into the year. You know, we have waiting towards larger sites. So the outlook numbers and the site numbers are pretty resilient. But sort of with a flat land bank, we don't expect it to grow materially. So pretty much where we are at the moment.
I think on incentives and our total Simmiebe on part exchange apart from that shorter term piece in London and the Southeast were slightly more incentives sort of in kind of September and early October. I don't think any overall net change sort of in a more general sense, sort of I think as we go into next year, we will be pushing on price, but we don't know whether the market will allow it. I think we've sort of seen the flat pricing and we've sort of taken the sales rates, but we haven't had to incentivize in any meaningful way to get there. I think on part exchange, very small movements. I would say we'd probably use slightly more for concentrates on 1 or 2 businesses sort of in Midland's in the north with higher price points.
So just making sure we get liquidity. And if anything, see that easing off over the next 3 or 4 months, sort of rather than increasing. And the movements, if you look at it at a national level, I don't think you noted the difference. We don't expect to have a particularly meaningful profit exchange book at the end of the year or anything like that. It's not sort of relatively small changes as people look at local conditions, local sites.
Great. All very clear. Thanks very much.
No problem.
Thank you. And your next question comes from the line of Chris Millington from Numis. Your line is now open.
Good morning guys. Hi, Chris. Good morning.
Hi. Just a few if I may. Firstly, I just wonder if you could just comment about the move down in net cash year. I assume it's kind of a timing of land spend point, but would we expect a bit of a bounce back as we go into 2020? I understand a difficult one to call.
So that's the first one. 2nd one is I'm just wondering if you could just detail a little bit about what you're actually doing to improve the underlying build quality. I agree it's an important point for the sector, but just a bit more clarity there.
And the final one
is just really about the medium term margin target of the 21% to 22%. Now apologies. I was away at the interim, so maybe you touched on it then, but is this still a valid target going forward in the environment we're in or do we need to see somewhat more inflation to kind of get back to that level?
Okay. Thanks, Chris. I'll definitely give Chris the cash question. And actually though touch on the build quality and the cost. Chris, if there's anything you want to add then on that, please do specifically on the margin target.
On build quality, Chris, I think as I touched on, the main thing we're doing, the biggest change is to do with the amount of, resource we're putting on to sites. It's not just in the finishing area. It's giving our site managers the tools. And sometimes that can be we have a model where there an ordinary site, if there is such a thing, runs with a site manager and assistance site manager. And we're giving them more resource than that.
And that is to manage the quality piece is to actually properly do inspections and not to rely solely on spot inspections by the NHBC, which are fine when they happen, but are only ever going to pick up broad issues, but it's also about a balance of consistency across the business. So as I touched on in the statement, we've introduced a national build quality standard across all areas. Now that may seem very basic in most industries. That would be normal, but it's hard to express how much of a shift that is for an industry, which is based on local site conditions and local standards and expectations. So we don't just operate to the NHBC standards.
We operate to what have brought generally a slightly higher level of standard, but also as specification for foundations, our specification for fire stopping, how that's actually inspected, all have been rolled out with a standard format that's a absolute minimum level. And in most instances, actually a maximum level as well, because we've had, yes, if I look back, we have such a wide range of standards. It would be very hard to then go back and say, actually consistently, everything should sit at this level. And that, whereas I think the whole industry is started to think about that from a customer facing obvious what did the customer see when they walk through the door of the paperwork and are things finished? It's deeper than that.
And I think sort of the move of, build regulations that we'll see over the next 2 or 3 years will make those sorts of moves essential being able to deal with a combination of a new home bond new homes ombudsman who will have a standard build quality sort of set of expectations. And, sort of a changing environment on social media and a set of change build rates. I think it will be essential to have those of both resource levels and consistency on-site. And that we've been working on it for a while, but I think 2019 is where you've seen most of that particularly on-site resources change. I think we're touching on the cost side.
Some of the earlier investments we've made on the more customers facing side whilst we still think they're right, actually you can start to see the benefits of those and there's some efficiencies on numbers that we can get out of those still deliver that same service, but without, when you're catching up slightly as we were in that area 2 or 3 years ago, sort of actually you need slightly more resources to get over and then maybe a bit about unbilled quality in a couple of years' time. But right now, it's getting efficiency back into the service side of the process. And making sure we've got a level of quality that we can really rely on it, even if a customer won't know about it for 5 or 10 years. And then on the medium term margin target, it's entirely fair question. I mean, it's a trading update.
I'm not going to duck the question, but I'm not going to give you an absolute answer. We obviously have thought about it. What I would say is there is nothing we have seen over the course of the last 12 months, not the investments that I've talked about or land buying that would lead us to feel that it's the wrong target. It has always been in every guidance we've ever given, has been sort of based on broadly selling prices and cost offsetting each other. They've never relied on net inflation between the two.
But inevitably, if we saw a long term environment where selling prices, sort of were flat and costs continue to inflate materially, we would have to really question that guidance. But we have never felt nothing about the last year has, sort of changed this view. We've never felt that particularly likely environment to see. You can get it for a year, but you can already see cost pressures start to, sort of immediate rate. And one of the reasons is because selling prices are not so industry demand is more sort of questioning.
So sort of I don't think anything we've seen changes that. We've got some investments that we've made that aren't yet paying off. We've got some efficiencies that I think we can squeeze out because we've been doing a lot of things to the business and we need to get a little bit more simplicity. And we've got a sort of an area where we've not seen any selling price inflation and we've seen the tail end of cost inflation. But as I say, I'm not going to sit here today and tell you, here's the bridge.
This is the year we get, that's the debate for prelims and sort of through the course of 2020. I don't think, and I would tell you if I did, and I think, you know, I'll give Chris the chance to comment as well. And I think we've seen anything that says, no, that's just not the right guidance. That's just that's just wrong now. I don't think the world has changed that much.
We said we expect it to see 2 or 3 years where things will be choppy. Choppy means there'll be good periods and we periods. And I don't think my view on that has changed. So, Chris, does everything match, but do feel free to comment on.
We'll just follow on on from that. I think it's worth bearing in mind that last year, we were well within that range between 21% 22% and that was of contribution margins that were between 25% 26%. And obviously, you've seen in
the data that we disclosed at the half
year that since around about 2016, we've been acquiring land at, at margins more like 27%. So there's nothing, as Pete says, that sort of leads us to believe that as long as those house price inflation and bill cost inflation offset over the medium term that that that target shouldn't be achieved for. On the cash, obviously, there's a lot of completion still to happen between now and the year end. And a number of land opportunities which are in progress and could crystallize either side of the year end depending on how they proceed. And whilst GBP 500,000,000 remains our guidance, I would see slightly more risk of over performing on that than underperforming.
The only thing to flag for 2020, which I don't think will be a surprise is obviously there's a slightly new Rajim in terms of corporation tax payments. So we will have 6 quarterly payments So that's 2 more than normal in 2020, and that adds up to about GBP 70,000,000.
Got it. That's very thorough. Thank you, gentlemen.
No problem, Chris. Thank you.
And your next question comes from the line of Gavin Jagro from Peel Hunt. Your line is now open.
Hi Gavin. Yes, just a couple
for me, please. The first one just following from Chris's kind of point out, just around the build costs and HPI just kind of rolling the clock back, I guess, to when the last time we did have a prolonged period of, I guess, flat to down house prices. Just remind us, Pete, kind of, how typically or how long it was taken before, I guess, the build cost moved into flat to negative territory just to get a sense of what that lag might be. And then the second one is just around that kind of focus on the customer quality of kind of we've quizzed a couple of others kind of in the space about not just the would you recommend, this particular house book, but what the 9 month survey kind of shows? I'm just wondering if you'd be happy to share with us the differential between your kind of rating 8 weeks versus 9 months is given that focus on quarter you've been talking about?
Yes, I think on the, build cost house price inflation relationship historically, I'll answer answer the question. I think because the environment we're looking at is slightly different, I don't think it's necessarily quite the same degree or necessarily quite the same timing. So I think an by that, I mean, the degree is probably less, the timing is probably quicker. So if you look at a major housing market downturn. I'd say in that environment, it probably takes sort of 6 months before you see a meaningful change in prices and that means it's sort of 12 months before you see that coming through the P and L in a meaningful way.
I actually think in this environment, it's slightly quicker, sort of because it's not such big movements. And, we're looking at an environment. And at the end of the day, there are no guarantees, but our expectation is not for a major housing downturn, it's for a period where there's sort of affordability pressure on prices. So prices sort of remain sort of a best in line with underlying inflation and wage inflation, sort of and actually in that environment, the build cost movements you've seen are we've moved to an environment in very short term, where we're still seeing inflationary pressure on build costs, but it's just a lot less than it was sort of 6 months ago. That can quite quickly because literally it can be how that particular vendor feels about sort of their order book in the very short term.
So I think we're talking about 2% to 3% movements either way, not that 10% to 15% sort of savings of build costs that we saw in a major downturn. So I think that can therefore happen more quickly. I think it can impact on 2020. I think what is too early to call is putting a number on that. I think we feel a lot of confidence 19.
But is that 1% to 2% or is that flat sort of reason by the back end of next year rather some net savings to make we don't know at the moment. And I think sort of that will depend on general election, Brexit, overall confidence in R and M and other parts of the construction sector as well as in house building. So it is early to call, but I think we could see P and L impacts in the second half of next year. There's no doubt. But it does take time.
Thank you. And just on the customer satisfaction, Gavin, the the half year and the full year, we actually disclosed those numbers in our KPI. So, at the half year, the 8 week $89,000,000 and the 9 month was $77,000,000. I don't have the up to date numbers, but I don't have the other.
Yes. And that would be fairly normal spread. And yes, Chris is right. We disclosed them because we think that they're a useful part of the basket customer service measures to talk about as well. I would say they start to, but don't actually they're not long term enough to cover some of the build quality things we're talking about.
They cover more than the impression on moving in, which is what the survey that everybody is very focused comes in. So I think it's worth looking at, but sort of they don't sort of look at underlying build quality is quite the way we're talking about. So that I think at the end of the day, it's easy for us and for you to focus on a very small number of we get that. And we're not trying to say how you should look at 6 or 7 things. I'm just stressing the point that don't base all of your views on one and one measure alone.
Sure. All right. Thanks very much.
Thank you. Next question comes from the line of John Bell from Deutsche Bank. Your line is now open.
Good morning, Pete. Good morning, Chris. I've got a few actually. First one is on, the bolt sales. Could you tell us which London schemes you did those out and how many units there were?
And maybe you could also isolate the margin effect there as well. It doesn't sound like it's a big number given your previous comments, but just be interested to know. And then the second one really is around If we take a step back from your business, you've got very high sales rate. We can see some of the pressure on outlet numbers and we can see some of the pressure on margins. How can we be sure that you're not trading price from volume for margin here?
Yes,
okay. So on the Frog sale, I'm not I'm I don't want to go into specifics, and it's actually what I'm saying. It's actually what I'm saying. It doesn't feel right. It's not that I'm simply sensitive from a comedy point of view, but you know, there's specific deals with specific people.
We're talking about sort of about 70 units just to give you a sense of scale. And I'm happy to talk about the margin effect, the total impact of Central London bulk sales on margins about 0.2 percent. So it gives you a sense and that's heavily weighted towards the second half. It's why I'd say that the sort of main movement between the first half and the second half. It's not enormous.
I think you would understand that the logic of clearing stock. They are not, I would say, though, on our 3 larger sort of longer term sites like Mount Pleasant, sort of in Clapham. So probably work it out, but it just doesn't quite feel right to be so specific when it's with individual sales. I think how can you be sure that we're not trading sort of volume price there's always a balance, John. So I don't think we'd ever say to you, we're not.
I think everybody in the sector is just what that trade is exactly and where it sits. And I would say sort of if you said there is a 1% trade And I'm not I'm absolutely sure there isn't a 1% net trade off on price, but a 1% trade off on cost invested in build capacity. And price for sales rates that are 18% better. Is that a trade off we should take in this environment or not? And I would argue that's a pretty balanced judgment.
If there was a 3% trade off, we'd absolutely not be doing it because I think sort of we still think the high margin business is generally a better quality business. But there is a balance to take there. As I go into next year and it's why you see the flag in there, I'd like to push that balance or at least have a choice to push that balance a little bit more towards price and volume, but we've just been through budget reviews with 24 businesses. And some of them we said, no, we don't want you to do that volume. We think you'd have to give up too much and you'd be stretching that site and you haven't got the stocks of land to replace it.
Some of them we said, no, that balance feels about right. We've heard slightly towards taking volume out of what they would choose to do rather than putting it in. But there is always a trade off and it would be wrong to imply that there wasn't the trade off is just not very big. And we are testing it. So we will go into next year on the 1st January, increasing our prices, and we will see what happens in the marketplace.
And we will test those high sales rates against sort of that balance. So it's the question is not are we trading volume for price because everybody does time, it is the trade off the right one at the moment in this environment for the mix of sites we've got and for the large sites that we've got And I think it is, but you can take from the comments that have been statement that it's borderline. And as I go into next year, I want the choice to switch it back the other way a bit but not a lot.
Yes. Could I ask one additional question as well just on the margin outlook for next year? I know that there are some moving parts that we're not sure of yet, so build cost inflation, house price inflation. If they take those off the table, What about the impact of some of these legacy London schemes dropping out of the mix? Is there a positive benefit going into 2020 from that moving part in isolation?
Yes, I mean, John, you'll know that I've touched on this a couple of times over the course of the year. And, and yes, at this point in time, and assuming that London pricing stays exactly sort of where we think it's at the moment, then that shift in for the Central London business. It's probably about 40 bps year on year.
Okay. Thank you. Thanks, James. No problem.
Thank you. And your next question comes from the line of Amy Kala from Your line is now open.
Just two questions for me. The first one is if you could talk a bit more about are there any further investments in costs that we should be thinking about when we look into 2020? And the second one really is on Help Dubai. Have you seen any shifts in the demand or sentiment for Help to Buy in the last 6 months? And to what extent the customer mix also has shifted across the different customer base that you see?
So I think there hasn't been any meaningful change in how to buy the percentage and that the split geographically and sort of across products is broadly the same. And I don't think I could point to any meaningful shift in the the sort of customer base nor I think are we expecting any meaningful shift in product size and customer base as we look into 2020? Could you just repeat the first question? Sorry for that. Thank you.
My first question was just on the cost side. Are there further investments into 2020 when we look at you've touched upon the efficiency that you're expecting, but are there any further projects that you're looking into in terms of investment?
I think sort of, the simple answer is no. I think at the moment, we are sort of looking at making sure we bed in and really see through and hence the comments about focus on efficiency, the projects that we've already done. I think the one sort of thing I would just note is if you take for instance the apprentice piece, as I say, the cost in 2019 was about 1,000,000. I think if you look at a full year cost, that's current run rate, which is more or less what we expect for next year, that would be about 14% sort of so where we expect to take a bit of efficiency out of some of the sort of more process side of a piece that's a bit of an offset there, if you see what to mean. So I wouldn't flag any particularly new investments as well as to where we're just seeing through the things the visibility done.
Thank you.
Thank you. And your next question comes from the line of Andy Murphy from Whitman Howard. Your line is now open.
A couple of questions, if
I can. Just on thinking about politics and the forthcoming election, do you foresee any material changes should the conservative party retain power? And sort of same sort of question in the event that Labour was to come in, what's sort of changes to the housing policy, housing market, would you anticipate, potentially occurring there? And then secondly, just given what's happening in in the high street and, so the run- the rundown of the retail, real estate, whether that's throwing up any opportunities for you about investing in brownfield sites in central areas as opposed to perhaps more additional greenfield sites?
Yes, I think, on the elections, first of all, we're not you didn't have to speak a bit, but we haven't really touched on it. So I'll sort of I'll cover it as well. I don't think we expect to see any meaningful short term softness from the election itself. Forget the result much is your question and I'll come back to. But at the moment, we haven't seen sort of a, any material changing customer sentiment, if anything, I would say, in the last couple of weeks, sort of, as people have kind of stopped to think about it.
Actually, it's got a bit better rather than a bit worse simply because people have got us to focus on, if you see what to mean, that moves the political can a bit further down the road. So sort of this thing about, oh, will sales rate sort of massively soften or A, we're coming into a period of the year when it's part of the year when they would anyway and B, they never tend to an election and we haven't seen a different pattern. I think, and I've been through, and I don't remember, to be honest, whether it's 4 or 5, but a decent number of elections in this job. And to me, I'll characterize where we are at the moment, pre manifesto, as the point of maximum promise and minimum deliverability. So if you talk in any general election, what each party had sort of promised and done and assume that it was actually implemented, you'd either be extremely pleased or extremely scared.
And both of them in reality, nearly always turn out have been massively overstated. I think you will see inevitably through the manifest process policy promises narrowing a bit. And then in reality, I think we will have 6 months, whoever wins. And even longer, probably if any kind of coalition or hung parliament where the focus is not on policy initiatives. The focus is on, Brexit uncertainty and how you tackle it decisions in a sort of a new and different different world.
So I think it would be actually be wrong to get too excited for this election in particular about different policy business. Then going on to the individual parties, I think to a certain extent, the conservative policies around housing are more or less steady as steady as she goes. I think there are some things on build rigs that I think will happen in terms of tightening up build rigs in the process, which regardless of the yeah, sort of which party is in power, and we've sort of already touched on those. But on the more economic side of housing, I don't see a big change. I hope you see, for the new conservative government, more investment in affordable housing because I think it's necessary for the long term health of housing in a more general sense, but I lack confidence in that.
I think a labor majority as opposed to a labor led coalition or hung parliament is probably the hardest one to actually call because you have got sort of some very strong promises. As I say, I think some of those will change and develop as sort of time goes on. But it is the hardest one. And it does make you nervous because there are things in there you think sort of that is a very untested set of directions. I think there's a long way to go before we should be seeing that's our primary risk.
I think on the high street, Yes and no. I think that if you talk if you picture the high street, we generally picture small sites and just don't work for our model. But I don't think that, that's sort of changes, yes, that there is an underlying interest as a sort of land use changes. And we absolutely continue to be interested in brownfield. Sites and having sort of they just need to be big enough for us to be able to run our model.
We've gone it is not that they have to be 300 units, but 20, 25 unit size do not work for us. We sort of have been there before in the past. And actually, you look back at the value generate. And it isn't significant enough. They need to be scale sites of 100 units or more for us to be interested.
Absolutely interested in brownfield sites and changing in land use.
Thank you. And your next question comes from the line of Gregor Kuglitsch from UBS. Your line is now open.
Thanks for taking my question. I guess, I just want to come back to the margin trajectory. I appreciate comment on the midterm, but this year obviously is a down year in the neighborhood of 200 bps. How come confident are you that you can be stable next year? I appreciate there's lots of variables up, down, obviously some tailwinds, some headwinds.
But want to sort of explore your confidence there. And then on cash, again, you flagged the additional tax, which I think is widely known, but just to confirm, were you suggesting cash will draw down be stable next year? Or I didn't catch what the sort of bottom line message was? Obviously, considering the fact that you're committing to EUR 610,000,000 of dividend payments. Thank you.
I'll let Chris pick up the cash question. On confidence in margin for next year, I think I'm not trying to give you, sort of false confidence struggle. We haven't given a strong margin stiffer next year because there are too many moving parts. We expect that it's still to be some cost headwind. We don't know what the selling price environment will be like.
You should take the signal that our focus will wait slightly more to sort of margin on the basis of price, particularly rather than volume, but it's slightly more. We want to be in a position, you know, strong order book and all of of the levers where we can make the most of the market that's there, but it would be sort of artificial to say, we think there is margin pressure across the sector think you haven't seen the end of that for the sector generally. We think that's materialized over the last 6 months. And we told you that was likely 6 months ago. So I really mean what I say.
It's not the right time to give you strong guidance. I'm not trying to give you an artificial confidence, but I'm trying to of explain to you is what the moving parts are, what we're doing about it and that we're in control of that. And there are choices that we make and there are things that we also can't do much about like the external, yes, out price environment. Got it. Thank you.
Yes. And on the cash, Gregor, I wasn't really so tell you whether it was going to be up or down because obviously, as we all know, it massively depends on the amount of land invest But you're quite right, there's GBP 610,000,000 of dividends. There's the extra seven 1,000,000 in terms of tax payments. And obviously, we've still got, the 2 exceptional provisions of unwinding. And we'd expect that to be in the region of EUR 50,000,000 of cash for next year.
So they're all things to just take into account, but the biggest single, sort of, lever and decision that we'll have to make next year is on land spend and it's too early to make that call.
Tom Collins from Berenberg. Your line is now open. Just
more of a, I guess, a conceptual question around kind of the decision to kind of trade for margin and volume. What confidence, I guess, have you got that in stepping back on the sales rate, you'll actually be able to achieve high prices without
seeing a material reduction
in your
in your volumes and leave yourself kind of
broadly in a more positive, kind of, pound note profit contribution position
I mean, I just kind
of given from coming from the view that I think most people would think that build is kind of generally a price taker in the market given the relatively small percentage of the overall market that it represents?
To be honest, Dan, I congratulate you, because the first person I can remember on one of these courses, ask one question I was so readily waiting to note down the second or third question. I was waiting for it. I think in a way your question is And it is an interesting one, but it's actually almost exactly the same as John's, earlier phrased in the opposite way. And in a sense, my answer is the same, it's always both. There is always a trade off and that's why we have that confidence.
What we've been doing through the year and what we're always doing to some degree is permanently testing that balance, side by side, business by business, and across the board. And sort of having, and our biggest challenge on sales rate this year was not sales or price. So that's why I say the trade up on that, our biggest challenge, and we knew this would be the case, the thing we were trying to test, and we feel we've proven. And internally, you can see a real shift in confidence of people is that you can get the build right behind those sales rates. Because if you could sell at that rate, but can't build, then you end up with an order book that grows to a point where it's a pointless year sort of size, you need to be able to follow it up.
And so that's been what we've really been testing, but we will continue to test that balance of price. And it will depend on the environment, sort of if it's a very weak housing market, which is not what we've seen this year, we've seen a kind of stable year with a bit of softness housing market this this is a very then suddenly becomes significantly more price sensitive and that balance shifts. And so and it's different on every side. So I think when what we see at the moment and where we see a bit of price pressure and just take sort of a little bit off the volume, the lack of those sort of central London kind of bulk sales, those sorts of things, giving me the confidence that next year we can go into it with just edging the balance back the other way. It will depend on the environment.
It always does. And so it's the same question. It's what we do. It's what we do with our business. Business, what our business units do day in, day out when they release and whether they decide whether to accept a particular offer or put a particular incentive on-site.
We can do lots of little things that just change that balance. Our sales execs will go into next year with just a slightly different way of incentive on price versus volume. With our management teams, they'll have a margin measure in their, sort of annual incentive scheme. And the guidance we've already given them is just to wedge that well. A bit.
And it's, you know, at the end of the day, big shifts are rarely right. But it would depend on the environment as to both what we think is the right balance and how much we can push it a bit more towards price. What we want to do and why we put it in the statement and why we're talking about it is make it clear to you that we are not trying to on a volume driven business sort of where price of margin doesn't matter. We never were, but we thought it was necessary to be explicit on that and actually showing that we can sort of tweak it both ways and take what we think is the right strategic decision in different environments with a different mix of land. It gives us a strength as a business just assuming that sales rates can only ever be 0.7, I think, is very limiting when, you have the mix of large sites that I think are natural for larger house builders in the current land supply.
We want the tools to know that we can operate those in different ways depending on the environment and the build capacity and quality to back it up as well. So you can go into next year. And if the market's probably similar, just tweak it the other way and talk to you about that, you'll understand how we can play that balance.
Ahead. Thanks very much.
Thank you. And your next question comes from the line of John Messenger from Redburn Europe. Your line is now open.
2 rather than 1. Just on the one of them is falling on from the last one, really. And just the danger obviously sitting outside is we're looking at average. Is, but when you think about that step up in sales rate, Pete, 2 things really. 1, behind the average is particularly for site numbers, is there a challenge here in some of the smaller or sub average sites?
Is there a sharper fallout of kind of completed sites next year. So just one issue just in terms of that against the context of kind of flat land buying this year just to come back on it? And then the second one was your point about build. Clearly, is there some kind of measure you look at in terms of stage of completed units that gives you confidence that going through a kind of an 18 percentage hike in what you need to be building out on sites. Again, on the average, must have created challenges.
Is that something that, again, you're feeling pretty comfortable and confident that order book for next year, stripping out a bit of London and maybe some longer term completions in it. That is all, I guess, stuff that should cycle through in the 1st 6 months in terms of being built out and completed. So just whatever your feel is really around those And then the second one was just a year ago, one of the ingredients in your build cost inflation was the fact that you had some pretty good deals in the past, and I think some slightly longer term supply arrangements. When we sit here and take a view about cost inflation next year, can you just have an idea of your materials are some of those on 2 year deals, or is everything kind of up for review going into next year in terms of material costs and what you might have to sign out, where you have, is it half of your materials that you'll be renegotiating or is it all of them? Just have an idea of what you could actually do to help the P and next year.
Yes. Okay. And I'm going to, I'm going to tear it to be called that 1A1B and 1C, John. I reckon in there, but I don't mind three questions. I was just genuinely listening to Sam's next one.
So is there a challenge in smaller and subaverage sites in a sense, have we traded through the opportunity to get those higher sales rates during 2019 and therefore that then gets commensurately harder in 2020 Is that a better is that a different way of phrasing? That's a
much better way.
Yes, sorry. I didn't mean to say it was better, but that's Yes. No, I don't think there is. I think it's a very valid question because I think there could be that. And as I say, you go to sort of budget reviews of individual businesses, the 17, 1 or 2 businesses inevitably that don't have the larger sites and that therefore shouldn't be adopting that sort of model.
And you have to say, no, no, no, not you guys, you need to sort of trade through those sites. That's built into sort of our views of sales rates, but that was true in 2019 as well. So I don't think that we have traded through a short term opportunity to increase sales rates on larger sites. And then we get to the end of you can see that inherently in just the overall land bank numbers and the land bank structure, if you give it to me. You could still you could still still have it at a local level but it will be hard for that to be true systemically because our average size is larger.
I mean, your underlying driver behind that is absolutely really right. It varies a lot from side to side and it should what we're sort of learning and coaching our businesses on is when it's a good thing to do and it can be done right and when aren't because if you haven't got on that site sort of a long forward land sort of bank or in a particular business level where that business is shorter of land, and absolutely, they shouldn't be racing through it at a pace. And that balance between price and volume should should absolutely change and it does. But no, I don't think we've sort of trading through an opportunity and then got a problem to deal with I think on the build, you're absolutely right. Sort of, as I say, it's the bit that we were least sure about coming into the year is can you deliver on build.
And I have to say, our businesses lack that confidence. Certainly 18 months ago, I think through the second half of twenty eighteen, that confidence started to build. We've used the CQR measures being our best independent view of build quality. And it's been really encouraging that that has sort of ticked up even as we've been stepping up rates, and we can see those rates stepping up consistently. And we've looked quite closely at making sure that happens on the right sites in the right way.
It has cost us because we've made sure we've put the resources in. And that's what we promised our businesses that we're not just going to ask you to increase production by, 20%, but expect you to deal with the same team that was struggling to keep the quality right sort of at the level you're operating at before. So we've led with the resources slightly to make sure that we can manage it. I think I think particularly if you look at the, yeah, NHBC, would you recommend SCOR? I think it would be fair to say with a low point December 2018.
And that was as we have been stepping up the build. And it wasn't about quality. Actually, quality measures in those scores remain very strong in that CQR measure. But there's no doubt we were getting our timing lined up then. So we have more people moving in in December.
2018 are expected to move in earlier, and that does impact on the score. So there's no doubt that that's part of that adjustment. It's not huge. And just to put it in perspective, we will probably be in this, sort of customer care year to October. A four star builder, but at about 89.5% rather than, yes, than 90, 90.5%.
So you're talking about very small movements. And if that December time think is that it's a meaningful shift year on year. And actually, as long as we're getting the quality right and the finish right, think we have to live with that sort of shift a little bit. And now sort of our teams have got that communication better. You can see that that sort of coming back.
And so it gives them challenges, but I think we're pretty confident that those challenges have been dealt with properly rather than just sort of rate through it and focus on delivering it. And it's the same. You can tell the way we're talking about it. It's something we spend a lot of time talking about and analyzing and trying to make sure we get that balance right. And also then on order book, I am therefore I don't think it changes the quality of the order book in any sense.
Sort of into I think you've seen a lot of people, across the sector. And I understand this because in the short term, it's true. A long order book makes it harder to manage customer service because you are less certain about the delivery time when you take the reservation. That's the single biggest shift. And I think what we're trying to do is not say, well, the easy thing to do is just have a short of order book because that causes all sorts of other problems.
The better thing to do is get better at managing sort of your build timings. And as I've talked about before, get more processes orientated, think about sites as more of a production line. A factory, but that takes the resources to do it properly. And so, you know, it's not free, but we feel we've got that balance about right. And through the next couple of years, we'll test it and tweak it and try and optimize it and get a bit of the cost back out of it and make it as efficient as possible.
But it's quite a big strategic shift. And then going on to the second question on build cost inflation, there are some 2 year deals. You can see given the cost environment we see today, that's sort of good and bad. If you see what's the main, do we want to be going back and renegotiating things in a slightly more benign environment or would we rather have sort of prices that are fixed? I'd say sort of probably slightly more than half of the sort of 2 years.
We're probably sort of just over half will be renegotiated this year, to give you a sense, and we'll probably I am sure when we're sort of sat down in February to walk you through how we see that in a lot more detail because I think we'll have a pretty good feel for it then.
Sorry, that's a CQR that you talk about, Pete, is there an industry benchmark or what is the industry today? Because I'm and is it a score out 5.
It is a score of 0.5 year pack. Yes. It is a score of 5. It is a score of 6. It is a half year sorry, it is an industry standard, but not everybody in the industry publishes it.
So we can see without names on it, where we sit in a league table of our peers, so we we know our relative performance as well as our year on year relative performance. Some don't publish it at all. 1 or 2 don't use it, so they don't that there's a cost to actually having the assessments done and wanted to most do use it now, but not many publish it. And it's I would always have to be very careful people. We pushed, quite hard a few years ago to get more focus and more attention on the NHBC customer survey.
And when we're not going away from that and we not getting away from it just because our sort of scores were at 89.5% rather than 90.5%. But sort of it is important to understand there is a broader piece. And if you look at some of the regulatory pieces, if you look at some of the things that people get get challenged with your reputation in the press or on social media, actually it's often things that would never ever have appeared on, that in within that 5 star race because it's so shorter. It tells you how people feel when they move in. That's an important thing to understand, but it isn't the whole story.
Thank you. And your next question comes from the line of Glynis Johnson from Jefferies. Your line is now open.
Good morning gents. I have to apologize for my voice and my coughing as well. So hopefully you can still understand me. Two questions, if I may. The first one, just in terms of the reference of the 1,000,000 of cash outs for exceptionals.
Can I double check, is that including the pension top up or is that about the cash rates for the provisions that you've taken for planning and leasehold? And then the second one is just clarifying something you said Pete I just want to make sure I understood it properly. We obviously only see the 12 month rolling of the HBF rating. Did you say in October, you anticipate being 4 I'm conscious the October is what's published in March with the actual star rating. So I just want to make sure I understood what you said.
Yes, I mean, I'll pick up that one and then, you know, so Chris can pick up the cash one. That is pretty much what I said. It is a 12 month piece. We haven't got full results, but you can see, and statistically, there aren't too many to come in. I say, we're at 80 9 point something at the moment.
And it's not impossible. I think our last 2 months scores at the moment are sort of about 92 point something. But actually statistically at this point, we probably will, annoyingly be just under 91,000,000 just over 90,000,000.
Yes. And on the cash in this year, the GBP 50,000,000 related to the Leasington Cladding, provision unwind ex sort of cash flows in 2020. And you're quite right, the pension the pension contributions will continue, but 1,000,000 per annum up to the end of 2020, the triennial valuation, the date is at the end of 2019, but obviously it takes a number of months to finalize that valuation and then agree the new funding basis.
Thank you very much.
Thank you. And your next question comes from
the line of John Fraser and from Andres from HSBC. Your line is now open.
Good morning gents. 2 for me as well, please. The first one if you could provide some color, Pete, on the 1% to 1.5% price reduction that you're citing in London Southeast, is this across your whole product in London
Southeast, or is
it the higher parts. And you mentioned that it's got better in recent weeks compared to September up to mid October, I think you said. So have now year on year, is that price reduction gone? So that's the first one. The second is on volume, reservation sales rate up 20%, outlets down 8% so far this year.
So when are we going to see the impact of that on your volumes? See you've cited higher volume than half one guidance, perhaps you could give a little bit of color on volume growth this year and next year?
So on sort of the price, John, in sort of London And Southeast, I think It's a bit of both. So I think if you took out London And Southeast division, then the net price movement isn't as big as 1% to 1.5% average across that as more of a London comment, but it's also slightly bigger than that on the Nailed individual site because it is, as we touched on, quite focused, So I was just going to give you a sense of the broad movement. So if you took that as 1% to 1.5% on average on London sites, that will probably be a reasonable sort of estimate. Has that now gone? I think that pressure has reduced, but I do think if you look at London Central London.
And I don't think this is sort of, about, I think, prices are lower now than they were 3 or 4 months ago. So the pressure has reduced, but prices are at a slightly lower level, after that pressure. So I think sort of we're into more stability again, but I think London has seen that pressure in the short term. I think in terms of volume guidance, I think it's sort of there for 2019 already. I mean, we were clear on our guidance earlier in the year where I don't think we've been specific today, but we're probably talking about roughly 1% more volume than we were sort of at the half year give or take.
Sort of so, are we up sort of 4% this year, give or take, Chris? It's in that sort of range. I think it is early for next year, outlet numbers are stable. We have a strong order book. You take, I think, the messaging on just a slight shift in balance towards focusing on sort of margin, sort of over volume relative to this year.
They also take my comments, so we expect sales rates still, all things being equal in the market, it's 3.9 something. So you shouldn't expect to see volume growth next year unless the market is meaningfully better than that earlier in the year enough for us to ship that balance. So flattish, I think, is where we sit today, but it's early for us to guide with a general election and brexit that's in front of us.
Thanks for that. Just a quick supplementary on that, price fall. So Southeast has been better than the 1% to 1.5% contraction, I'm assuming, from what you said?
Yes, it's to be honest, it's more. And, you know, sort of I would normally give you a price guidance on an individual market, I just think, is an enough of a moving part one to try to. So apologies if it's less clear. What I'm trying to just avoid is, is somebody extrapolating that sort of price guidance to the whole of the southeast because an exaggeration, but it would also be oversimplification. So it's just London.
There's a sort of there's a softness around the Southeast generally that is more marked in London. So if you were trying to work it out mathematically and you looked at our London business of us, give or take 900 units of our business, then 1 to 1.5% reasonable guidance against that. Okay. Thank you.
Session for today. I will now hand over back to Pete Redburn for his closing remarks.
Thank you for joining us, and thanks you for lots of questions. I just want to make clear. I don't object to having more than one question from anybody. I was just particularly impressed that Sam managed to keep it to me because the temptation to ask more is always great. But, I think sort of been good to get into a lot of the detail around the choices that we're taking and the decisions in the business.
And it's going to be an interesting few weeks with a general election, but looking forward to testing what we can do in 2020. Thank you very
Thank you for joining the Taylor Wimpecialcedrating Update Call. This call has been recorded and will be available to listen on demand on Taylor's website later today. Thank you.