Morning, welcome to the Taylor Wimpey plc trading update call. Today's conference will be hosted by Taylor Wimpey Chief Executive, Pete Redfern, and Group Finance Director, Chris Carney, followed by a Q&A. At this time, I would like to turn the conference over to Pete Redfern, Chief Executive. Please go ahead, sir.
Thank you. Good morning, everybody, thank you for joining us. As usual, just a few opening comments to give you a flavor of what I think are the main elements of the statement, and then we'll open up for questions. Just so you know, Chris and I are in different venues, so we'll have to sort of be clear over the phone who's taking which bits of which questions. Overall, I think if I spend the most time on the market, which is probably where people are most interested in terms of the short term, in 2018, you can see a very stable environment still. I'm sure the number that you will have picked out most is the sales rate in the second half of 2018, which is about 8.5% ahead of 2017. That shows you that the market is fine.
I think it shows you that we have the right sites in the right places, and we've been working hard to make sure product and positioning and pricing and everything else is in the right place. I think we're very pleased with that performance in the context of the wider market, which is more flat. I think you can see from our statement, won't surprise you from others comments, South East, generally quieter, but not massively different. I think generally overall a pretty stable market. Overall pricing in that market, roughly flat with April-May, and the pricing in the order book flats probably up marginally from April-May just because of the follow-through of previous increases. In the market today, very little movement either way. Those sort of sales rates have not been achieved with material incentives or anything like that.
I'm talking about net pricing with all incentives in view. Obviously, 2019 is reasonably hard to call. We're not looking at it feeling deeply worried, but it's felt, and we said this before, that you should be sensibly cautious with all the wider uncertainty. I think, going into 2019 with as strong an order book as possible has probably been our most important target for 2018, and those strong sales rates are sort of testimony to that. I think we've always felt that in more uncertain markets, that's when a longer order book really pays off, and making sure that we've kept the focus on that has been at the forefront of our minds. Probably the slight disappointment in the numbers is the outlook's slightly down. The single biggest reason for that is planning.
It felt cheap to me just to put planning down there, because as ever with these things, there's always a long list of things. It's always easy to turn around and blame just planning. This is a more general sort of issue. If you look at those high sales rates, inevitably high sales rates tends to mean you close out slightly quicker, and that's also a factor. I think just generally once you have planning, as we've said many times, getting sites open through pre-commencement conditions in the early stages of infrastructure takes longer than you would like. We do expect outlets to increase during 2019.
I would say, and it goes back to our strategy conversations in April and May, there is undoubtedly some element of our sales rate outperformance that is down to that strategy, and we do see that as being a balancing position with the outlet numbers. Whilst we see growth, we also see the potential for us to manage sales rates in a different way to historically and maybe how others view it, that gives us a balance. I still would not want you to be too focused on an outlet number as being the only driver of volumes in the market. The land environment has remained benign.
I would say, actually, we haven't put it in black and white terms in the statement because it's sort of anecdotal, but I would say generally land environment is even easier than we have seen over the last couple of years. I think we definitely see less competition from land promoters and some sales from land promoters, sort of existing stocks competing in the strategic land environment. We have pushed up our returns on our hurdle rates, just with a view of the overall environment and because of the land that's available. As we look ahead at the next 18 months to two years, we see a very good supply of large sites coming through our strategic land bank, which give us quite a lot of choices. A combination of those two things has led us to push hurdle rates up a little more.
I'll come back to outlook and margins and impacts of that and timing towards the end. I think just touching briefly on politics, first of all, obviously the Help to Buy decision, whilst we're all nervous about the withdrawal of Help to Buy on some levels, our view is a 4.5 year view of how long the incentive will last gives us the opportunity to form our own plans for, to a certain extent, the mortgage market to adjust, and probably most importantly, it allows for us to factor into our planning decisions and our land acquisitions. That has been one factor in our view of pushing up longer-term hurdle rates.
I think more broadly on politics, the focus for the last few weeks and inevitably the next few months is likely to be away from specific sectoral policy, which is probably from our sector's point of view not such a bad thing. I think the land environment continues to improve. The planning changes continue to be positive. That gives us a good environment in which to pursue our strategy overall. Coming on to forward guidance, we've been very explicit in the statement that 2019 volumes we expect to be flat. That's not a particularly meaningful change. I don't think we ever expected much growth in 2019 as we came to the end of our previous strategy. We might have expected 1%-2% growth, but not much more than that.
I think as we look at 2020 and 2021, particularly as we see those strategic sites coming through, hopefully, a post-Brexit kind of bounce in the market. Even without that, we have the potential for growth coming from our land banks that we see coming through. That's more meaningful growth than we've seen during 2018 and 2019, which are always going to be for us, relatively flat in volume terms. I think looking at where the balance of cost and price sits, we haven't, and we wouldn't normally give you cost guidance into 2019. We've touched on in the statement saying 3%-4% since 2018 as still being a pretty reliable number. I would say on costs, the risk is probably on the positive side going into 2019.
I'm not going to put a number on it quite yet, but hopefully a little bit better than that 3%-4%. On selling prices, I think at the moment our kind of base case is pretty flat. As we come out of the year and aren't pushing the order book quite so hard, there is potential, but I think the sensible position at the moment is to see pricing as overall flat. I think the underlying prices, the mix of effective prices for us going into 2019 are probably 1%-2% up from mix and regional changes, but not very much. The margin impact, yes, of a pricing flat, than the net impact on underlying average selling price is about 1%-2%.
I think as we look longer term, we do see potential for margin improvement from the quality of the land purchases over the last couple of years, but coming in sort of 2020 and certainly 2021 rather than in 2019. Chris, was there anything you would like to add?
No. Nothing to that, Pete.
Good. We could open up for questions, please.
Thank you. You wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. We shall now take our first question from Aynsley Lammin from Canaccord. Please go ahead.
Hi, morning. On the, I guess, bit of clarification, you've said a lot, on 2019, reading into what you just said, are we right to assume a little bit of margin pressure? At this point, when you look at consensus PBT, kind of flat at best for 2019. Is that what you're saying? I think consensus PBT for FY 2018 is about GBP 860 million. Secondly, maybe a bit more color on the comments around that you've seen a bit more caution. You could talk regionally, what does that mean in terms of prices being chipped away at a bit in London, South East? Is there a particular price point? Is it GBP 600,000 where you're seeing that caution? A bit more color there would be helpful. Thanks.
I think on the first comment, I think that's pretty fair. A little bit of margin pressure, but I really wouldn't overplay it. Obviously, if you've still got some cost inflation, probably a bit less than 3%-4%, and flat selling prices except for the kind of carry through price inflation, that results in a little bit of pressure. Is it 0.5%? It's in that sort of order. I think if you do the math on what we talked about on costs and selling prices, you probably say it's a little bit more. I think we're still then benefiting from the high margin land purchases of late 2016 through to 2018 starting to give us a boost, which gets a bit stronger in 2020, 2021. That offsets what is more of a shorter term pressure.
Yes and no, a little bit of margin pressure, but fairly small. Then color on the market. I'm happy to talk about it. It's quite hard to talk about the sort of, if I call it in the marketplace, again, at the sales rate that's 8% up. Actually, if you looked at most of the statistics, if you looked at cancellation rates, and even if you look at things like conversion times, they all look fine. It's more about the conversations with individual customers, sort of slight changes in the mix of customers. Overall price is flat, but that might be bit of gain somewhere, a bit of incentive somewhere else to keep things moving along. There isn't one sort of overall pattern.
I would say generally you are seeing some more softness in higher price points and therefore particularly in London and the South East still. Not a new trend, but sort of still that same trend. I wouldn't say it's dramatically different. I think this sense of London and the South East is really tough and everywhere else is really easy completely overstates what we're seeing. We're having to really focus to get the sales rates that we're getting. I risk you reading that as we're having to reduce prices, hence the sort of firmness that no prices are flat. We're having to make sure that we've got our salespeople on song, the products and the positioning of each site really in the right place. It's been a relatively easy sales environment for quite a number of years, and we've been very conscious throughout 2018.
We're making sure all the old disciplines are in place, and people are really sharp. It's important. I think for us, if we look internally, we see that as being the biggest change from the first half of 2018 to the second half, if you see what I mean, is that actually a lot of the work we were doing early on in the year just to get people really sharply focused is paying off rather than that it reflects the underlying market.
Great. Thanks very much, Pete.
Thanks.
We will now be taking the next question from Gavin Jago from Peel Hunt. Please go ahead.
Yeah. Morning, gents. Just a couple from me, please. First one is just around kind of the mix within the forward order book, just in terms of private versus affordable. Is there any kind of real change in there? Just if you could give us an update on your build catch-up from earlier in the year. Obviously, you had some delays. Where are you and how confident are you in terms of that catch-up at this stage?
Yeah, I think on the sort of build catch-up, as we said in September, the weather delays kind of largely caught up over the summer. Feel reasonably comfortable with where that sits. In terms of mix shift in the order book, there is a slight shift towards affordable, which was particularly low at the end of 2018, if you remember. It was sort of a recent year low, but the balance hasn't particularly shifted in a significant way.
Okay, I see. Thank you.
I think probably the one though which does affect the average selling prices, it's been a trend for the last 18 months, nothing new, but our Central London business is coming to the end of its sites that were bought before the market started to change, and the newer sites that we bought, like Mount Pleasant, are now selling and selling well. Won't replace the order book, the mix of Central London and the order book is lower. The contribution we expect from Central London in 2019 is less, but that's what we would have expected six to eight months ago, it's not new. That definitely just changes the mix of selling price in the order book slightly.
Okay. That's great. Thank you.
As a reminder to ask a question, please press star one on your telephone keypad. We will now take our next question from Gregor Kuglitsch from UBS. Please go ahead.
Hi. Thanks for taking my question. My question is just, can I push you a little bit on the hurdle rate comment on the land? If you can kind of give us a sense what you've increased by recently, and I guess specifically, I think you were alluding to the fact that you're kind of integrating the end of Help to Buy. I obviously appreciate that's now five years or so out, but be interested to know how you think about the impact of Help to Buy on the margins and therefore, as a result, how you think about bidding for new land as we sit here today. Thank you.
I'm happy to answer both parts of the question, but I'd exercise caution on the first one because we're seeing a set of land environment conditions where there's probably more caution from the wider land market than we see in sales and customers. We're making sure that we take the maximum advantage of that and pushing it a bit harder. As I have said before, I wouldn't necessarily see those margins as being sustainable land purchase margins than the right point in time. That's probably 1%-2% higher than we were looking at three to four months ago. In the 22+ range. I think in terms of the impact of Help to Buy, we obviously can see the impact. I'm sure you've asked others about what impact we think the regional caps have.
I think probably about 15% of our Help to Buy sales would be impacted by those regional caps, but I think we would feel reasonably comfortable that those 15% were the 15% that were more likely to be able to happen without Help to Buy anyway. It's more about at that level and in terms of the two-year extension, I think it's more about making sure that you have the right product focused on the right parts of the market if you're assuming customers are going to use Help to Buy in those two years.
I think we feel that two-year extension is a real two-year extension and the impact of the caps, apart from on the odd high value site in some of the regions with lower caps, where there's other choices that you can take anyway, but the impact of the price caps is very manageable. I think what is interesting is the kind of longer term piece, the four and a half years out. We've always argued that Help to Buy shouldn't be around forever, so we can't really complain when it's not around forever. I think some of the things we were talking about back in April and May, we've now got time to really look at.
We've got a real timescale on the end of Help to Buy and making sure that we adjust our product mix, make sure the sites that we buy that are heavily Help to Buy dependent at the moment, that go out past then, that we've reflected that either in product or in pricing. I think the particular areas where I think we need to be careful are not the least expensive products or the most expensive products. It's the mid ground where people are tending to be buying further up in the market, a bigger home or a better location than they would otherwise have afforded. I think those are the ones we need to be careful of. We have pushed up hurdle rates specifically in those areas and on those sorts of products.
I think over the course of the next few months, we'll really be working out what that means for product positioning strategy four or five years out. I don't think now is the right time to talk about it, but whether it's through the prelims or the half year, probably a bit of both, I'm happy to give you our views in a bit more detail.
Thank you.
As a final reminder to ask a question, please press star one on your telephone keypad. We'll pause for a moment to allow everyone to signal. We will now take our next question from Jon Bell from Barclays. Your line is open. Please go ahead.
Morning, Pete. Morning, Chris. A couple from me.
Morning, Jon.
Firstly, I think you just hinted that Mount Pleasant sales have been progressing quite well. Just wondering whether you could give us some extra color around that one. Secondly, apologies if I missed this, I was slightly late dialing into the call, on your 2019 volume guidance being broadly flat, is that the result of the open site numbers that you're currently operating at? Are you building in a degree of caution about how the start of the next calendar year takes off?
I sort of decided even before you asked the question, Jon, that if I possibly could, I should get Chris to answer it because we sat in different places. Chris, are you happy to take the Mount Pleasant one and maybe talk about the 2019 volumes as well?
Absolutely. We started on site, I think back at the end of July at Mount Pleasant, and we launched in September. We've seen really a very pleasing start, both in terms of the volume of sales and also the pricing. I think one of the previous questions touched on the overall number of sales that we have at different price bands. Even with that good start at Mount Pleasant, we're still only talking that 3% of our sales, either in the first half or in the preceding period, have been around 3% or above GBP 600,000. In terms of Mount Pleasant, we're really, really pleased with where we are with that. In terms of the volumes, I think we've approached the view for next year based on current market conditions.
It's pretty difficult to take a view of all the politics at the moment and what that might bring. It's purely based on the dynamics of both the order book and the outlets and the sales rate that we think we will drive in the current environment.
Yep. Okay. Thank you.
We will take our next question from Ami Galla from Citi. Please go ahead.
Thank you. Just two questions from me. One, I just wanted to understand a bit around the underlying run rate on inflation. To what extent, and I think that's reflective of the overall market, but if you can give a bit more regional color across your side of the sort of inflation that you've seen in the sales that you've taken in the autumn selling season. As well as just a follow-up on the inflation aspect is, have you seen lenders push back on pricing over the last two to three months? Has there been more caution in their lending practices that you've experienced? Thank you.
Yeah. I think from selling price inflation, I think we've been reasonably clear on the overall piece. Over the last two months, there's been negligible net price inflation. Prices are very flat, and that reflects small ups and small downs, not big regional differences. There'll always be variations in there, but they're not huge. I think on lenders, no, I don't think we're seeing any pattern of either greater valuation issues or changes in lenders' rates that are on offer or more caution kind of creeping in through the back door with lenders. I think lenders are in the same place, and I think that's a combination of lenders wanting and needing mortgage volumes in a flat secondhand market, new build being sort of the place where those mortgage volumes are available.
I think a genuine view that lending on U.K. houses is still a good place to be for most lenders. I think that makes it feel reasonably sustainable, but it's a mix of both of those. Yeah, flat pricing and no air of caution, particularly from lenders.
Thank you.
We will now take our next question from Andy Murphy from Merrill Lynch. Your line is open. Please go ahead.
Morning, Peter. Morning, Chris.
Hi.
Can you just perhaps just give us a bit of a flavor around the sales rates? You've obviously kind of given us the overall sales rates. Can you strip out of that the private sales rates for the year to date and Q3, please?
Yeah. No, I'm pausing slightly because I don't have the split in front of me. I can tell you that sort of overall trend is similar if you look at private sales rates. I don't know if you have them to hand, Chris.
The private sales rates for the year to date across all three divisions are remarkably consistent compared to the same periods last year. I think at the half year, the southern two divisions were running slightly behind what were very strong comparables. Which means that if the year to date is sort of now falling back in line, that tells you that the period since the half year, those two southern divisions have sort of caught up, which is obviously very pleasing. Q3 specifically, that's the picture. There's been very solid trading across all three divisions.
Yeah. Sorry, Andy, Chris gave me a chance to think. I didn't give you the obvious answer because I wanted to check it so I didn't give you a view and then feel really stupid. Those are private sales rates in the statement. The 0.81 is the private sales rate.
Right. Okay.
For the others. If you look at affordable sales rates, they would, A, be higher, and I think I'd be reasonably confident because I know the affordable order book was a reasonable low point this time last year and is in a better place now. The difference will be greater. Okay, cool. Thanks very much.
We will now take our next question from Kevin Cammack from Cenkos. Your line is open. Please go ahead.
Morning, guys. Can I just follow up.
Hi, Kevin.
Morning. Follow up the sales rate thing. Obviously, in the statement you're pointing to 0.77 achieved in the second half, 9% growth, and a fantastic number really. Essentially, you're selling off pretty much the same site. You're not really dual branding. If anything, the underlying market backdrop has been sort of similar, maybe a touch tougher in certain areas. You've said today that the average selling price is broadly unchanged. I'm just sort of wondering, how you've managed to get that increase in sales rate through the second half and whether we should take that as more indicative of what you can achieve through 2019.
Kevin, I think it's a fair question. I've tried to answer it. I understand that the answer isn't easy and black and white. If you go back to May and our strategy launch, in a sense, this is another what we were saying, that we believed that with the mix of sites that we had coming through, if we really thought about our delivery pipeline from a construction point of view and opened up our own people's eyes to what could be done, from a sales point of view, rather than people seeing it as tied to some historic norm in a very different environment, with very different quality of sites and locations and with very different levels of local competition, then there was meaningful upside per site on those larger sites on sales rates.
In a sense, that's one of the key components that you see here, and probably the biggest one in terms of the difference year on year. We could see it at that point already in some of our businesses, in particularly the South West and Midlands regions. We spent some time really analyzing it, trying to work out whether that was site specific, how replicative it was, what we could assume as being reasonable norms going forward.
If we dealt with those historic limitations on the construction side, I think what you see in the sales rates and what Chris and I have seen over the last week or so in terms of our own businesses volume forecast going into 2021, is a growing belief that actually that can be done, not on every site, because some sites have real local absorption issues, but in a more general sense. Some of it is very specific work on sales skills and sales tools. Some of it is making sure that what have been historic build limitations are reduced at least, so that we're able to sell to a greater capacity. Here we've said for years that our main limitation on sales rate has been our ability to build on our product. We've not solved all those problems overnight. We wouldn't pretend that we have.
There is a significant component coming through in these sales rates and in our views of particularly 2020 and 2021. I think 2019 is difficult partly because we're in a transitional year. We would definitely expect sales rates to be higher, given what we're doing than we would have done if we'd have been trundling along with our previous strategy. Exactly where the base level will be is quite difficult to call because of the market, so that makes us a bit more cautious. I think as we go into 2020 and 2021, we have the potential for outlets to be building and those higher sales rates, so it makes it a little bit easier for us to be confident. I know that doesn't quite answer your question, but it does relate it very much back to what we were saying in May.
The biggest limitation we've seen over the last few years has been how we planned out our sites and how we set things up to be able to access the market that's there. What you see in this is us changing that and making sure that the sales skills and the sales processes are as nimble as they possibly could be to make the most of the opportunities that are there.
Right. To be clear, from your perspective, there has been no change in the incentives that you've given either to your own sales people or indeed to the customers.
No. That's absolutely true. I think it's absolutely categorically true in every case in terms of our own people. I think with customers, you win some here, you lose some there, that's always the case. No overall change.
Yeah. Okay. Thanks very much, Pete.
No problem.
Unfortunately, we have now run out of time for questions. I will now hand the call back to Pete Redfern for his closing remarks.
Thank you, and thanks everybody for the time today. Clearly an interesting year at the moment. Very pleased with 2018 sales performance, particularly. I think the goal that we set out to go into next year with the best order book we can and with a strong balance sheet and strong land positions, we're well on track for. Look forward to catching up again early on in 2019.
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.