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. I would now like to turn the conference over to Pete Redfern, Chief Executive. Please go ahead, sir.
Thank you. Good morning, everybody. Thanks for joining us. I'll apologize in 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 usual at this stage of the year on some of those moving parts, because I think it's an interesting time. I think you see differentiation in the sector, and I think obviously you 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.
Happy to talk about where we see the moving parts. With the general election only a few weeks away, it's 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 strategic programs. Standing back and looking at the housing market in 2019 from a broad perspective, I think it's still very fair to say, an amazing degree of resilience given the market backdrop. Usual factors, things I won't repeat, like low interest rates and good lending, Help to Buy, help to create an environment where prices and volumes remain broadly stable. I do think it gets more interesting when you look geographically and look at closer periods of time.
I think you can see in our statement, and you perhaps heard in probably slightly more negative terms from one or two peers, London and the Southeast remain softer, particularly higher price points. I wouldn't want to be a London focused developer at the moment. I think it is particularly tough if you haven't got choices across the U.K. 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 Southeast in the market was at its worst a few weeks ago. If you think of the political rhetoric, commentary, and uncertainty in September and early October, it was at its greatest. Actually, I think that the environment has settled again a bit more recently.
That leads to our comments in the statement, which are actually perhaps slightly more benign than you've seen elsewhere. I do think relatively in that period, we saw some price pressure in that part of the market. Not huge, but against a more difficult local market backdrop, you can see why it's put pressure on, as I say, a very London-centric developer. I think elsewhere, the markets remain pretty steady. Small rises or falls, depending very much on local conditions, individual size, their quality, where the competition sits. I will come back to this, 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 hints in the statement, it's not a one-way street, and we're certainly, as we look at 2020, going to keep challenging that and 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 one and quarter two ease. That started to be true in the summer, but in a fairly small way. I think, and again, I would point back to the period of uncertainty in September and October, but here in a positive way. I think we have seen since then, and particularly over the last few weeks, a much more material shift in both labor and materials as pressure has eased.
It's not the time of year when we do lots of material related deals, but the signs for 2020 price pressure on materials are quite a lot softer 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 six months ago and also more benign than we saw 12 months ago. For the first time, we've also seen some softening on forward rates on labor. 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.
I think if you look at what was happening in the R&M sector in September and October, what's happening in the more general construction market, which are softer than house building has been, you can see why you get a general easing of pressure. We did not see in the build up to the potential of a no-deal Brexit in October, the same kind of stocking pressures that we saw earlier in the year as the supply chain built up. So as we look at January, I think that the risk of seeing that again is lower than we would have said perhaps six months ago. I think we stand by our 4%-5% cost inflation for this year, but reducing into next. 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 the 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 buying strategies right at a local level. 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. You see a little bit of apparent pressure, but actually, when you get to the final deal, the land price actually has been pretty stable.
As you can see from our statement, our land buying this year will be broadly neutral, as in we'll replace more or less what we use. I think earlier in the year, we could have seen that growing to build 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 and exact cash balance will depend on timing of land deals around the year end itself, but broadly a neutral position. On to our trading against that general market backdrop. As you can see, the sales rate has remained very strong through the year, 19% ahead of last year. If you strip out bulk sales, I'll touch on a couple of specific shorter term ones, quite small, but I think important from a signal point of view.
Actually, the underlying sales rate is about 18% ahead of last year. It really is ordinary sales to private customers that is driving that difference. Those shorter bulk sales are small, but Central London focused, and that slight balance of slightly more volume, slightly less margin comes a little bit from clearing out small amounts of stock, but at relatively high price points from Central London sites, which we think given the continued uncertainty in the London market, is the right place to be. That leaves us with the Central London business that has three large sites with a long time to run, with very solid margins, two of which are joint venture deals, and all of which we feel give a pretty solid underpin for that business.
It lets us be in the land market, but not feel we need to do anything particularly risky to stay in the London 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, the general election, uncertainty 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. It's not artificially inflated by a change in affordable housing. Again, it's driven by those high sales rates, 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 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. I think I stand by, we'll tell you what we see when we see it, and we won't lose too much sleep over whether other people are saying exactly the same thing at the same time. We are also challenging ourselves. I think there are areas in our controllable costs where we can push out some inefficiencies. We've done a lot of things with the business over the course of the last two to three years, lots of new investments.
I'll touch on a couple of those. We don't want to walk those investments back. We think they're the right thing, both for the short term, but also more importantly for the long term. That does mean there's a lot going on in the business, and it means there's other areas where I think we can target some savings over the course of the next six months. Just touching briefly on some of those investments. I point particularly to 640 apprentices. In year one, an apprentice doesn't know very much. In year two, they don't know very much. In year three, they get close to doing a full day's work. I think that number of 650 underpins long-term, an investment that takes us to more than half of our bricklayers and joiners 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 million incrementally to 2018. It's material. 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. People talk about modern methods of construction. I'm slightly more interested in having a flexible workforce that actually can adapt to different methods than I am the exact details of what the method of construction is. I think there's a lot of things there that are more appropriate for a results presentation, and we'll come back to it then.
I would just lastly draw your attention to the distinction we're drawing on customer service between finishing quality, service and communication, which is the thing that we've talked about a lot and others are also focused on, which drives things like the NHBC customer five-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. Whilst we've continued to focus on the first, actually in 2019, the area we've been really focused on is that underlying build quality piece. We think the CQR measure that we've talked to you about before is the best way of measuring it. We now lead the industry in that. We started 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 us in a strong place to deal with it. I'm not ignoring the fact that we've slightly slipped under the five-star rating, but it is only part of the story. We'll continue to focus on that, but we're focused on quite a broad range of measures.
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%+ 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 capacity mean that we can manage that and still deliver strong customer service. Political and environmental backdrop is uncertain. We see 2019 in line on profit, as I've touched on slightly different mix with slightly lower margins and give you a clearer steer on that. We'd guided you to about 20. I think I would say at the moment 19.6, 19.7 is about the right sort of level, but with slightly more volume and unusual in a year, particularly with such an uncertain market to be stepping up volume.
As we look at 2020 here today, I expect us to target a slightly lower sales rate. Just to be clear, that would still be an industry-leading sales rate. I'm well ahead of our 2018 sales rate, so I'd still expect it to start with a nine. 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 cost base. We want to give ourselves the flex to do that properly next year and not be chasing something that isn't quite right. As we look at next year, it's a very uncertain environment, I say. There will be still some cost headwind going into it, but a lot of things we can do within the business on squeezing out a bit more value to offset that.
Chris, is there anything I've missed?
No, I think that covers everything. Probably worth moving on to questions.
Okay. Thank you. Can we open up the questions, please?
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, you will need to press star and one on your telephone keypad. Once again, if you wish to ask a question, you will need to press star and one on your telephone keypad. Your first question comes from the line of Brijesh Siya from HSBC. Your line is now open.
Thank you. Good morning, Pete and Chris. Two questions from my side. First one is on operating margin guidance. You're guiding to a 30 basis point year reduction from the H1 level. What actually driving that? On one hand, you are saying the cost inflation has kind of eased off a bit in the recent weeks, and you are again guiding for a higher volume growth than what you guided in H1. That's my first. 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, more mass volume range around GBP 400,000-GBP 600,000?
Sorry. Can I just check on the first question? Was the specific question relating to operating margin that the change from half one to half two?
It's more specific to the full year guidance of 20% coming down by 30 basis points, which you are kind of guiding now.
Okay.
It is more related to build cost inflation or slightly more price pressure. What exactly driving that number down?
Okay. On the pricing pressure in the Southeast, first of all, it is very much site by site, and it is very much weighted towards larger sites. It also, as I say, is probably a few weeks old now. I'd say right now it's pretty flat. It's actually more about a few more incentives. Inevitably, in the September, October period of the year, you see competitors filling their order books for final year-end numbers. It tends to be a period of the year when there is a little bit more price pressure. You add to that the political backdrop, it's not hard to understand. It's not huge.
If I had to put a number on it for London and the Southeast, it would be 1%- 1.5% on average for that part of the market, but heavily weighted to higher price points and to Central London. On the operating margin, and looking at the full year and the movement year-over-year, we talked about it quite a lot in both April and in the half year. I'm really just overviewing that because the movement since then have been small. I think there are two 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 magnitude 1% of the movement. We've seen cost inflation of averaging probably about 4% for a year-over-year impact.
The softening in cost inflation over recent weeks has almost no impact on 2019 at all because the die is cast on that. It's about 2020 and beyond. The other main movement, I think year-over-year is 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%. It's not quite as much as that, but it's 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 cost in place.
The investments were investments we expected to make, but we didn't expect to have quite such an environment in which to be making them.
Thank you.
Thank you. Your next question comes from the line of Aynsley Lammin from Canaccord. Your line is now open.
Thanks. Morning. Just two from me. First of all, wondered if you could comment a bit more generally on kind of any changes to incentives or part exchange use in the second half. Secondly, just your comment on the land bank keeping broadly as it was at the end of 2018. 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.
Yeah. Thank you particularly for the second question, Aynsley, because I meant to mention that one in my overview comments and I forgot. Yeah, I think that's a fair assumption going into. You know we are weighting towards larger sites, so the outlet numbers and the site numbers are pretty resilient. With a flat land bank, we don't expect it to grow materially. Pretty much where we are at the moment. I think on incentives, and I'll touch specifically on part exchange. Apart from that shorter term piece in London and the Southeast, we're slightly more incentives sort of in September and early October. I don't think any overall net change, sort of in a more general sense. 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 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, but concentrated on one or two businesses sort of in Midlands and the North with higher price points. Just making sure we get liquidity, and if anything, see that easing off over the next three or four months, sort of rather than increasing. The movements, if you looked at it at a national level, I don't think you'd notice the difference. We don't expect to have a particularly meaningful part exchange book at the end of the year or anything like that. It's relatively small changes as people look at local conditions, local sites.
Great. All very clear. Thank you very much.
No problem.
Thank you. Your next question comes from the line of Chris Millington from Numis. Your line is now open.
Good morning, guys.
Hi, Chris. Morning.
Hi. Just a few if I may. Firstly, I just wonder if you could just comment about the move down in net cash this 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 it's quite a difficult one to call. That's the first one. Second one is I just wonder 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. The final one is just really about the medium-term margin target of the 2021 to 2022. Apologies, I was away at the interim, so maybe you touched on it then.
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. Actually, though, I'll touch on the build quality and the cost. Chris, if there's anything you want to add then on that, please do so similarly 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 onto sites. It's not just in the finishing area. It's giving our site managers the tools. Sometimes that can be. We have a model where an ordinary site, if there is such a thing, runs with a site manager and assistant site manager. We're giving them more resource than that. 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. It's also about a balance of consistency across the business. As I touched on in the statement, we've introduced a national build quality standard across all areas. That may seem very basic. In most industries, that would be normal. 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. We don't just operate to the NHBC standards. We operate to what are broad, generally a slightly higher level of standard, but also our 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. In most instances, actually a maximum level as well.
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." Whereas I think the whole industry has started to think about that from a customer-facing obvious, what does the customer see when they walk through the door, the paintwork and are things finished? It's deeper than that. I think, sort of the move of build regulations that we'll see over the next two or three years will make those sorts of moves essential. Being able to deal with a combination of a 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 the set of changed build regs.
I think it will be essential to have those sorts of both resource levels and consistency on site. We've been working on it for a while, but I think 2019 is where you've seen most of that investment, particularly on-site resources change. I think, worth touching on the cost side, some of the earlier investments we've made on the more customer-facing side, whilst we still think they are 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 to still deliver that same service. When you're catching up slightly, as we were in that area two or three years ago, sort of actually you need slightly more resource to get over the hump. There may be a bit of that on build quality in a couple of years' time.
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 five or 10 years.
Got you.
On the medium-term margin target, it's an entirely fair question. It is 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 based on broadly selling prices and cost offsetting each other. They've never relied on net inflation between the two. Inevitably, if we saw a long-term environment where selling prices were flat and costs continued to inflate materially, then we would have to really question that guidance.
We have never felt, and nothing about the last year has changed this view. We've never felt that's a particularly likely environment to see. You can get it for a year, but you can already see cost pressures start to ameliorate. One of the reasons is because selling prices are not so strong, so industry demand is more questioning. 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 with the business, and we need to get back to a little bit more simplicity. We've got an area where we've not seen any selling price inflation and we've seen the tail end of cost inflation.
As I say, I'm not going to sit here today and tell you, "Here's the bridge. This is the year we get there." That's a debate for prelims and through the course of 2020. I don't think, and I would tell you if I did, and I think I'll give Chris the chance to comment as well. I don't think we've seen anything that says, "No, that's just not the right guidance. That's just wrong now." I don't think the world has changed that much. We said we expected to see two or three years where things will be choppy. Choppy means there'll be good periods and weaker periods, and I don't think my view on that has changed. Chris, specifically on cash, but do feel free to comment.
Well, just following on from that, I think it's worth bearing in mind that last year we were well within that range between 21% and 22%, and that was off contribution margins that were between 25% and 26%. 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 margins more like 27%. There's nothing, as Pete says, that leads us to believe, as long as those house price inflation and build cost inflation offset over the medium term, that target shouldn't be achievable. On the cash, obviously, there's a lot of completions 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.
Whilst GBP 500 million remains our guidance, I would see slightly more risk of over-performing on that than under-performing. The only thing to flag for 2020, which I don't think will be a surprise, is obviously there's a slightly new regime in terms of corporation tax payments. We will have six quarterly payments, so that's two more than normal, in 2020. That adds up to about GBP 70 million.
Got you. That's very thorough. Thank you, gentlemen.
No problem, Chris.
Thank you. Your next question comes from the line of Gavin Jago from Peel Hunt. Your line is now open.
Morning, gents.
Hi, Gavin.
Yeah, just a couple from me, please. The first one, just following from Chris' point, actually, just around the build costs and HPI. Just rolling the clock back, I guess, to when the last time we did have a prolonged period of flat to down house prices. Can you just remind us, Pete, of how typically or how long it was taking before the build cost moved into flat to negative territory, just to get a sense of what that lag might be? Then the second one is just around that focus on the customer quality. We've quizzed a couple of others in the space about not just the would you recommend this particular house build? But what the nine-month survey shows.
I'm just wondering if you'd be happy to share with us what the differential between your rating at eight weeks versus nine months is, given that focus on quality you've been talking about.
Yeah. I think on the build cost to house price inflation relationship historically, I'll 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. By that, I mean the degree is probably less, but the timing is probably quicker. If you look at a major housing market downturn, I'd say in that environment, it probably takes six months before you see a meaningful change in prices. That means it's 12 months before you see that coming through the P&L in a meaningful way. I actually think in this environment, it's slightly quicker because it's not such big movements. 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 affordability pressure on prices. Prices remain at best in line with underlying inflation and wage inflation. Actually, in that environment, the build cost movements you've seen are we've moved to an environment in the very short term where we're still seeing inflationary pressure on build costs, but it's just a lot less than it was six months ago. That can happen quite quickly because literally it can be how that particular vendor feels about their order book in the very short term. I think we're talking about 2%-3% movements either way, not the 10%-15% sort of savings of build cost that we saw in a major downturn. 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 that it's lower than 2020 and probably lower than we thought-- Sorry, lower than 2019 and probably lower than we thought going into 2019. Is that 1%-2% or is that flat? Sort of reason by the back end of next year are there some net savings to make? We don't know at the moment. I think sort of that will depend on general election, Brexit, overall confidence in R&M and other parts of the construction sector, as well as in house building. It is early to call, but I think we could see P&L impacts in the second half of next year. There's no doubt.
Okay.
It does take time.
Thank you.
Just on the customer satisfaction, Gavin, at the half year and the full year, we actually disclosed those numbers in our KPIs. At the half year, the eight-week was 89 and the nine-month was 77. I don't have the up-to-date numbers.
I don't.
They're not. Yeah. That would be a fairly normal spread. Chris is right. We disclose them because we think that they're a useful part of the basket of customer service measures to talk about as well. I would say they start to, but they're not long-term enough to cover some of the build quality things we're talking about. They cover more than the initial impression on moving in, which is what the survey that everybody is very focused comes in. I think it's worth looking at. They don't look at underlying build quality quite the way we're talking about. 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 measures.
We get that, and we're not trying to say, "Oh, you should look at six or seven things." I'm just stressing the point that don't base all of your views on one measure alone.
Sure. All right. Thanks very much.
Thank you. Next question comes on the line of John Bell from Deutsche Bank . Your line is now open.
Yeah, morning, Pete. Morning, Chris. I've got a few, actually. First one is on the bulk sales. Could you tell us which London schemes you did those at 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. 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 for volume for margin here?
Yeah. Okay. On the bulk sale, I don't want to go into specifics on exactly what site because it doesn't feel right. Not that I'm particularly sensitive from a company point of view, they're specific deals with specific people. We're talking about 70 units, just to give you a sense of scale. I'm happy to talk about the margin effect. The total impact of central London bulk sales on margin is about 0.2%. It gives you a sense, and that's heavily weighted towards the second half. It's why I'd say that's the main movement between the first half and the second half. It's not enormous. I think you would understand the logic of clearing stock. They are not, I would say, though, on our three larger longer-term sites like Mount Pleasant and Clapham.
You can probably work it out, but it just doesn't quite feel right to be so specific when it's individual sales. I think how can you be sure that we're not trading sort of volume for price? There's always a balance, John. I don't think we'd ever say to you I think everybody in the sector is. It's just what that trade is exactly and where it sits. I would say, if you said there is a 1% trade-off, and 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? I would argue that's a pretty balanced judgment.
If it was a 3% trade-off, we'd absolutely not be doing it, because I think, sort of we still think a high margin business is generally a better quality business. There is a balance to take there. As I go into next year, it's why you see the flagging there, I'd like to push that balance or at least have the choice to push that balance a little bit more towards price than volume. 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. On some of them, we said, "No, that balance feels about right." We've erred slightly towards taking volume out of what they would choose to do rather than putting it in. There is always a trade-off, and it would be wrong to imply that there wasn't. The trade-off's just not very big. We are testing it. We will go into next year on the 1st of January increasing our prices, and we will see what happens in the marketplace. We will test those high sales rates against sort of that balance. The question is not are we trading volume for price because everybody does all the 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. I think it is, but you can take from the comments that are in the statement that it's borderline. As I go into next year, I want the choice to switch it back the other way a bit, but not a lot.
Okay. 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 we 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?
Yeah. John, you'll know that I've touched on this a couple of times over the course of the year. Yes, at this point in time, and assuming that London pricing stays exactly where we think it's at at the moment, then that shift in the central London business is probably about 40 basis points year-on-year.
Yeah. Okay. Thank you. Thanks, James.
No problem.
Thank you. Your next question comes from the line of Ami Galla from Citi. Your line is now open.
Thank you, guys. Just two questions from 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? The second one really is on Help to Buy. Have you seen any shift in the demand or sentiment for Help to Buy in the last six months? To what extent the customer mix also has shifted across the different customer base that you see?
I think there hasn't been any meaningful change in Help to Buy. The percentages and the split geographically and sort of across products is broadly the same. I don't think I could point to any meaningful shift in 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.
My first question was just on the cost side, are there further investments into 2020? You've touched upon the efficiencies that you're expecting, but are there any further projects that you're looking into in terms of investment?
I think the simple answer is no. I think at the moment we are 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 thing I would just note is if you take, for instance, the Apprentice piece, as I say, the cost in 2019 was about GBP 10 million. I think if you look at a full year cost at the current run rate, which is more or less what we expect for next year, that would be about GBP 14. Where we expect to take a bit of efficiency out of some of the more process side of piece, there's a bit of an offset there, if you see what I mean.
I wouldn't flag any particularly new investments as what to do, where we're just seeing through the things that we've already done.
Thank you.
Thank you. Your next question comes from the line of Andy Murphy with Whitman Howard. Your line is now open.
Thank you. Good morning, Pete. Good morning, Chris.
Good morning, Andy.
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? The same sort of question, in the event that Labour was to come in, what sort of changes to the housing policy, housing market would you anticipate potentially occur in there? Secondly, just given what's happening in the High Street and the rundown of the retail real estate, whether that's throwing up any opportunities for you to think about investing in brownfield sites in central areas as opposed to perhaps more traditional greenfield sites.
I think on the election, first of all, you didn't ask this piece of it, but we haven't really touched on it, so 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 of the election, which is your question, and I'll come back to. At the moment, we haven't seen any material change in customer sentiment. If anything, I would say in the last couple of weeks, as people have started to think about the election, it's got a bit better rather than a bit worse, simply because people have got something else to focus on, if you see what I mean, that moves the political can a bit further down the road. This thing about, will sales rates massively soften?
Well, A, we're coming into a period of the year where it's part of the year when they would anyway, and B, they never tend to in 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 four or five, but a decent number of elections in this job. To me, I will characterize where we are at the moment, pre-manifesto, as the point of maximum promise and minimum deliverability. If you took in any general election what each party had promised and done and assumed that it was actually implemented, you'd either be extremely pleased or extremely scared, and both of them, in reality, nearly always turn out to have been massively overstated. I think you will see inevitably through the manifesto process, policy promises narrow in a bit.
In reality, I think we will have six months, whoever wins, and even longer, probably if it's any kind of coalition or hung parliament, where the focus is not on policy initiatives, the focus is on Brexit uncertainty and how you take political decisions in a new and different world. I think it would actually be wrong to get too excited for this election in particular about different policy pieces. Going on to the individual parties, I think to a certain extent, the Conservative policies around housing are more or less steady as she goes. I think there are some things on build regs that I think will happen in terms of tightening up build regs in the process, which regardless of which party is in power, and we've already touched on those. On the more economic side of housing, I don't see a big change.
I hope you see with 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. I lack confidence in that. I think, a Labour majority as opposed to a Labour-led coalition or hung parliament is probably the hardest one to actually call, because you have got some very strong promises. As I say, I think some of those will change and develop as time goes on. It is the hardest one. It does make you nervous because there are things in there you think that is a very untested set of directions. I think there's a long way to go before we should be saying that's our primary risk.
I think on the high street, yes and no. I think that if you picture the high street, we generally picture small sites that just don't work for our model. I don't think that changes that there is an underlying interest as land use changes. We absolutely continue to be interested in brownfield sites. They just need to be big enough for us to be able to run our model. It is not that they have to be 300 units, but 20, 25 unit sites do not work for us. We sort of have been there before in the past, and actually you look back at the value generated 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.
Great. Okay. Thank you very much.
Thank you. Your next question comes from the line of Gregor Kuglitsch from UBS. Your line is now open.
Hi. Thanks for taking my question. I guess I just want to come back to the margin trajectory. I appreciate the comment on the midterm, this year obviously is a down year in the neighborhood of 200 basis points. How 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. On cash, again, you flagged the additional tax, which I think is widely known. Just to confirm, were you suggesting cash will draw down, be stable next year? I didn't quite catch what the sort of bottom line message was. Obviously, considering the fact that you're committing to GBP 610 million of dividend payments. Thank you.
Yeah. 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 false confidence, Gregor. We haven't given a strong margin steer for next year because there are too many moving parts. We expect there'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 weight slightly more to margin on the basis of price, particularly, rather than volume. It's slightly more. We want to be in a position, strong order book and all of those other levers where we can make the most of the market that's there. It would be artificial to say, we think there is margin pressure across the sector. We think you haven't seen the end of that for the sector generally.
We think that's materialized over the last six months, and we told you that was likely six months ago. 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. What I am trying to explain to you is what the moving parts are, what we're doing about it, and that we're in control of that. There are choices that we make, and there are things that we also can't do much about, like the external house price environment.
Got it. Thank you.
On the cash, Gregor, I wasn't really telling you whether it was going to be up or down because obviously, as we all know, it massively depends on the amount of land investment. You're quite right, there's GBP 610 million of dividends. There's the extra GBP 70 million in terms of tax payments. Obviously we've still got the two exceptional provisions unwinding, and we'd expect that to be in the region of GBP 50 million of cash for next year. They're all things to just take into account. 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.
Thank you.
Thank you. Your next question comes on the line of Sam Cullen from Berenberg. Your line is now open.
Thanks. Yeah. Morning, everyone.
Morning.
Just more of a, I guess a conceptual question around the decision to trade for margin over volume. What confidence, I guess, have you got that in stepping back on the sales rate, you will actually be able to achieve higher prices without seeing a material reduction in your volumes and leave yourself broadly in a more positive pound note profit contribution position? I mean just coming from the view that I think most people would think that new build is kind of generally a price taker in the market, given the relatively small % of the overall market that it represents.
To be honest, Sam, I congratulate you because you're the first person I can remember on one of these calls who's asked one question, and 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.
Yeah
Phrased in the opposite way. 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, site by site, business by business, and across the board. Our biggest challenge on sales rate this year was not sales or price. That's why I say the trade-off 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.
If you can 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 exercise. You need to be able to follow it up. That's been what we've really been testing. We will continue to test that balance of price. It will depend on the environment. 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 year. If it's a very weak housing market, then suddenly it becomes significantly more price sensitive, and that balance shifts. It's different on every side.
I think what we see at the moment and where we see a bit of price pressure and just take a little bit off the volume, the lack of those sort of Central London kind of bulk sales, those sorts of things, give 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. It's the same question. It's what we do. It's what we do with our business units, and it's 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 weighting incentive on price versus volume. Will our management teams, they'll have a margin measure in their annual incentive scheme. The guidance we've already given them is just to edge that way a little bit. At the end of the day, big shifts are rarely right. 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 become a volume-driven business, sort of where price and margin doesn't matter.
We never were. 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, that just assuming that sales rates can only ever be 0.7, I think is very limiting when you have the mix of large size that I think are natural for larger housebuilders 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.
If we can go into next year and if the market's broadly similar, just tweak it the other way and talk to you about that, you'll understand how we can play that balance.
Okay, thanks very much.
Thank you. Your next question comes from the line of John Messenger from Redburn Europe. Your line is now open.
Hi. Morning, Pete and Chris.
John-
Can I just. Sorry, apologies. It's two rather than one. One of them is following on from the last one, really, in that just the danger, obviously, sitting outside is we're looking at averages. When you think about that step-up in sales rate, Pete, two things, really. One, behind the averages, particularly for site numbers, is there a challenge here in some of the smaller or subaverage sites? Is there a sharper fallout of kind of completed sites next year? 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. 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% hike in what you need to be building at on sites, again, on the average, must have created challenges? Is that something that, again, you're feeling pretty comfortable and confident that 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 first six months in terms of being built out and completed. Just whatever your feel is really around those aspects.
Then the second one was just a year ago, one of the ingredients in your build cost inflation was the fact that you'd 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 we just have an idea of your materials? Are some of those on two-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 up? 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&L next year.
Yeah. Okay. I'm going to charitably call that 1A, 1B, and 1C, John.
Fair enough.
I reckon there were three in there. I don't mind three questions. I was just genuinely listening for Sam's next one. 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 that therefore that then gets commensurately harder in 2020? Is that a different way of phrasing the same question?
That's a much better way.
Yeah, sorry, I didn't mean to say it was better, but that's slipped out, didn't it?
No.
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 budget reviews with individual businesses, there's definitely one or two businesses inevitably that don't have the larger sites, and that therefore shouldn't be adopting that sort of model, and that you have to say, "No, no, not you guys. You need to trade through those sites." That's built into our views of sales rates. That was true in 2019 as well. I don't think that we have traded through a short-term opportunity to increase sales rates on larger sites. You can see that inherently in just the overall land bank numbers and the land bank structure, if you see what I mean.
You could still have it at a local level, it would be hard for that to be true systemically because our average site size is larger. Your underlying driving behind that is absolutely right. It varies a lot from site to site, and it should. What we're learning and coaching our businesses on is when it's a good thing to do and it can be done right, and when it can't. If you haven't got on that site a long forward land bank or in a particular business level where that business is shorter of land, then absolutely they shouldn't be racing through it at a pace. That balance between price and volume should absolutely change, and it does. No, I don't think we've traded through an opportunity and then got a problem to deal with. I think on the build, you're absolutely right.
As I say, it's the bit that we were least sure about coming into the year is can you deliver on build? I have to say, our businesses lacked that confidence certainly 18 months ago. I think through the second half of 2018, that confidence started to build. We've used the CQR measure as being our best independent view of build quality, and it's been really encouraging that that has ticked up even as we've been stepping up rates, and we can see those rates stepping up consistently. 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. That's what we've promised our businesses, that we're not just going to ask you to increase production by 20%, but expect you to do it with the same team that was struggling to keep the quality right at the level you were operating at before. We've led with the resources slightly to make sure that we can manage it. I think particularly if you look at the NHBC Would You Recommend score, I think it would be fair to say our low point was December 2018. That was as we have been stepping up the build. It wasn't about quality. Actually, the quality measures in those scores remained very strong, and that CQR measure. There's no doubt we were getting our timing lined up then.
We had more people moving in in December 2018 who had expected to move in earlier, and that does impact on the score. There's no doubt that that's part of that adjustment. It's not huge. Just to put it into perspective, we will probably be in this customer care year to October, a four-star builder, but at about 89.5% rather than 90%, 90.5%. You're talking about very small movements, and it's that December timing, I think, is the meaningful shift year on year. Actually, as long as we're getting the quality right and the finish right, I think we have to live with that shift a little bit. Now our teams have got that communication better. You can see that coming back.
It gives them challenges, but I think we're pretty confident that those challenges have been dealt with properly rather than just race through it and focus on delivering it. 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. Also then on order book, I don't think it changes the quality of the order book in any sense. 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.
I think what we're trying to do is not say, "Well, the easy thing to do is just have a shorter order book," because that causes all sorts of other problems. The better thing to do is get better at managing your build timings. As I've talked about before, get more process orientated, think about sites as more of a production line and a factory, but that takes the resources to do it properly. It's not free, but we feel we've got that balance about right. 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. It's quite a big strategic shift. Going on to the second question on build cost inflation, there are some two-year deals.
You can see given the cost environment we see today, that's good and bad if you see what I mean. Do we want to be going back and renegotiating things in a slightly more benign environment? Would we rather have prices that are fixed? I'd say probably slightly more than half are the two years. Probably just over half will be renegotiated this year, to give you a sense. We'll probably, I am sure, when we're sat down in February, talk you through how we see that in a lot more detail because I think we'll have a pretty good feel for it then.
Got you. Sorry, that CQR that you talk about, Pete, is there an industry benchmark or what is the industry target? Is it a score out of five?
It is a score out of five.
I'm looking at half year pack. Yeah.
It is a score out of five. Oh, sorry. It is a score out of six. It is an industry standard, not everybody in the industry publishes it. We can see, without names on it, where we sit in a league table of our peers. We know our relative performance as well as our year-on-year relative performance. Some don't publish it at all. One or two don't use it, so there's a cost to actually having the assessments done. Most do use it now, but not many publish it. You always have to be very careful. We pushed quite hard a few years ago to get more focus and more attention on the NHBC customer survey. We're not going away from that, and we're certainly not going away from it just because our scores were at 89.5 rather than 90.5.
It is important to understand there is a broader piece. If you look at some of the regulatory pieces, if you look at some of the things that people get challenged with reputation in the press or on social media, actually, it is often things that would never, ever have appeared within that five-star rating because it is so short-term. It tells you how people feel when they move in. That is an important thing to understand, but it isn't the whole story.
Great. Thanks very much.
No problem.
Thank you. 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 GBP 50 million of cash outs for exceptionals. Can I double-check, is that including the pension top up or is that about the cash outs for the provisions that you've taken for cladding and leasehold? The second one is just clarifying something that you said, Pete. I just want to make sure I understood it properly. We obviously only see the 12 months rolling of the HBF rating. Did you say in October you anticipate being four star? I'm conscious the October is what's published in March or the actual star rating. I just want to make sure I understood what you said.
Yeah, I'll pick up that one and then Chris can pick up the cash one. Yeah, 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. As I say, we're at 89 point something at the moment, and it's not impossible. I think our last two months scores at the moment are both 92 point something. Actually statistically at this point, we probably will, annoyingly, be just under 90 rather than just over 90.
Yeah. On the cash, Glynis, yeah, the GBP 50 million related to the leasehold and cladding provision unwind expected sort of cash flows in 2020. You're quite right. The pension contributions will continue at GBP 40 million 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.
Cool. Thank you very much.
Thank you. Your next question comes from the line of John Fraser-Andrews from HSBC. Your line is now open.
Morning, gents. Two for me as well, please. The first one, if you could provide some color, Pete, on the 1%-1.5% price reduction that you're citing in London and the Southeast. Is this across your whole product in London and the Southeast, or is it the higher parts? You mentioned that it's got better in recent weeks compared to September up to mid-October, I think you said. Have now year-on-year, has that price reduction gone? That's the first one. The second is on volume. Reservation sales rate up 20%, outlets down 8% so far this year. When are we going to see the impact of that on your volumes? I 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. Thank you.
On the price, John, in London and the Southeast, I think it's a bit of both. I think if you took out London and Southeast Division, then the net price movement isn't as big as 1%-1.5% average across that. That's probably more of a London comment, but it's also slightly bigger than that on an odd individual site because it is, as we touched on, quite focused. I was just going to give you a sense of the broad movement. If you talk about it as 1%-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 and particularly Central London, and I don't think this is about, I think prices are lower now than they were three or four months ago. The pressure has reduced, but prices are at a slightly lower level after that pressure. I think we're into more stability again, but I think London has seen that sort of pressure in the short term. I think in terms of volume guidance, I think it's sort of there for 2019 already. We were fairly 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. Are we up 4% this year, give or take, Chris?
It's in that sort of range.
Yeah.
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 margin over volume relative to this year. Also take my comments that we expect sales rates still, all things being equal in the market, to be 0.9 something. 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 shift that balance. 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. The Southeast has been better than the 1%-1.5% contraction, I'm assuming, from what you said.
Yeah. To be honest, I wouldn't normally give you a price guidance on an individual market. I just think it's enough of a moving part to want to try to. Apologies if it's less clear. What I'm trying to just avoid is somebody extrapolating that sort of price guidance to the whole of the Southeast, because that would be an exaggeration. It would also be oversimplification to say it's just London. There's a softness around the Southeast generally that is more marked in London. If you were trying to work it out mathematically and you looked at our London business of, give or take 900 units of our business, then 1%-1.5% reasonable guidance against that.
Okay, thank you.
That concludes our Q&A session for today. I will now hand over back to Pete Redfern for his closing remarks.
Thank you for joining us, and thank 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 one, because the temptation to ask more is always great. I think it's been good to get into a lot of the detail around the choices that we're taking and the decisions in the business. 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 much.
Thank you for joining the Taylor Wimpey PLC trading update call. This call has been recorded and will be available to listen on demand on Taylor Wimpey's website later today. Thank you. You will now disconnect.