Barratt Redrow plc (BTRW) Earnings Call Transcript & Summary

Hello, and welcome to the Barratt Developments Interim Results 2021 Conference Call. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to your host, David Thomas, Group Chief Executive, to begin today's call. Thank you.

Thank you, Jessica, and good morning, everyone, and welcome to our interim results presentation. As usual, I will start with an overview of our performance, and then revisit our medium-term targets. Steven will then take you through our operational performance. Jessica will cover our financial performance and I will then return to review the industry fundamentals, sustainability and finally, current trading and outlook. So turning first to Slide 3. Clearly, our first priority throughout this period has been the health and safety of our employees, subcontractors and customers. Our industry-leading and also British Safety Council-accredited COVID-secure policies have ensured that we have achieved both continue to build and the confidence of our employees and subcontractors. We recognize that there are clearly continuing economic uncertainties. But equally, we recognize that the housing market fundamentals remain attractive. Our results rely on our ability to deliver excellence in build. And it is, therefore, pleasing to report a 9.2% increase in our first half completions to a new record level for the group. And just as importantly, we have not just maintained, but we have further improved our industry-leading position in terms of both build quality and customer service. The housing market during the period has clearly been very resilient, and our first half delivery is testament to the strength, determination and focus of all of our team. With the benefit of our disciplined operating framework, the size of actions over the past 12 months and our tight control of working capital, we have ended the half with GBP 1.1 billion of net cash. I'm also delighted to announce the reinstatement of our interim dividend, with the interim dividend of 7.5p, which will be paid in May. Our dividend policy is very clear at 2.5x cover. Looking now at Slide 4, which details our medium-term operational targets and our progress in the half year, our first target remains us rebuilding completion volumes. We have deliberately maintained our infrastructure and capacity to build up to 20,000 completions. In the first half, the group has worked incredibly hard to make the most of what has clearly been strong consumer demand. We are now very confident to be able to grow wholly-owned completions by around 30% in FY '21 to deliver between 15,250 and 15,750 homes. Our second target is delivering margin improvement. Here, the recovery in our construction activity is key, along with a tight control of material and labor costs and the leverage around our relatively fixed operating costs, which Jessica will cover in a little more detail. Our adjusted gross margin improved by 80 basis points on the first half of fiscal year to 23.8%. Finally, our rolling 12 months return on capital employed is improving through both profit recovery and our tight control of working capital. These operational targets are clearly the priority for our team. Thank you. And I will now hand over to Steven.

Good morning, and thank you, David. I'd now like to take you through the operational aspects of the business, starting with sales on Slide 6. We've produced an excellent recovery, delivering a sales rate for the 6 months of 0.77 net private reservations per outlet per week, 11.6% ahead of the 0.69 rate generated in the first half of the previous year. Our total average sales outlets, as you can see, are lower by 8% at 342, reflecting the disruption created by the initial lockdown. Looking forward, we see our new site launches supporting a stable average sales outlet position through the second half of the year, in line with the first half average. Turning now to completions on Slide 7, for the half year, we achieved a strong lift in completions to 9,077 homes, including joint ventures. Completion growth of 9.2% on the prior half year reflected 3 factors. Firstly, the benefit of the elevated level of work-in-progress carried into the year, along with the forward sales position, both created by the initial national lockdown. Second has been the strength of the underlying market for our homes, as seen on the previous slide. And thirdly, the way our site employees and subcontractors have delivered a superb rebuild of our construction activity. This has ensured we have delivered homes ready for legal completion, with the quality and service standards we demand and our customers expect. On pricing, our wholly owned average sales price improved by 1.3%. Our private average selling price improved by 2.4%, reflecting low single-digit underlying price inflation and minor regional mix changes. The 9.2% decline in the affordable average selling price reflected a lower proportion of affordable London homes in the mix. The affordable average selling price is also a good guide for the year as a whole, reflecting the mix of anticipated completions in the second half. Now taking a look at the profile of our homebuyers on Slide 8. The completion profile has moved quite markedly from the first half of last year. There are 2 material changes to highlight. Firstly, reflecting the strength of the secondhand market, the use of part exchange has fallen quite materially. And secondly, Help to Buy based completions have grown from 34% to 44% of our completions in the first half. This increase reflects the added impetus for existing homeowners looking to use Help to Buy ahead of the tapering changes and increased first-time buyer demand for Help to Buy, given the greater restrictions on high loan-to-value lending and the more elevated interest rates or non-Help to Buy mortgages, and this is something David will come back to later in his presentation. Now on Slide 9, a look at our progress around construction, and to help, I hope, in understanding the very different shape of half 1 and half 2 completions in FY '21. Today, there are around 18,000 trades working on our sites, a superb rebuild from the standing start created by the initial lockdown. Through this mobilization, all executed with accredited COVID-19 safety protocols in place, we have successfully rebuilt our construction activity to build an average of 298 homes each week in the first half. I'd highlight, too, that the increasing use of our standard house types has added simplicity and repeatability in the build process, helping build efficiency. This standardization has also helped us deliver build quality, where we continue to rank first amongst the housebuilding majors on the NHBC inspections on reportable items, and build on responsible items, both of which have also improved across the calendar year. Now turning to the chart. In a typical or normal first half, we would build more homes than we would complete. This you can see, with respect to H1 FY '20 completions and build activity, where we added 818 home equivalents to work in progress. But as you can see from the chart, in the first half, we actually built 7,758 homes but completed 9,077, with 1,319 completions unlocked from work in progress. This reflected the benefit of the elevated work in progress we had at the start of the year as well as our drive to ensure we met customer commitments on the timing of their home completion. Looking to the second half of the year. We are looking to further improve our weekly construction equivalents to firstly meet our completion guidance; and secondly, put in place a solid work in progress position to support completion growth beyond FY '21. Turning now to Slide 10, the key ingredients in delivering a successful development remain unchanged, attractive house types and a great site layout design. And we continually learn and improve through feedback from both customers, our salespeople and our site construction teams. This focus on improvement is a core part of our strategy to increase efficiency, profitability and customer satisfaction. The lockdown in our period out of the land market was not surprisingly, therefore, seized by our divisional and central planning and design teams to apply a razor-like focus to and accelerate change across our existing land bank, refining both our house types and our site designs. This process also allowed our people to reappraise the optimal use of our larger sites. Most notably around the use of both the Barratt and David Wilson brands to balance site duration and maximize our capacity to both build and sell across the group. The process has been a comprehensive one, yielding additional sales outlets, improved site layouts and street scenes and widen our range of lower price points, recognizing the market changes ahead with Help to Buy. Every change has either added sales value or reduced build cost, supporting our drive to enhance our operating margin looking forward. Out of this process, too, we will now also operate group-wide 2 ongoing enhancements. First, a site layout review panel. Here, our divisional and the central design teams working together will not only ensure we maximize selling square footage, but also create the most desirable places to live. Second, we have also adopted a new sales price metrics guide. We use this sales price metric to help management to optimize sales prices on all standard product. It provides a guide for pricing by ensuring product and brand differentials are correctly reflected relative to a market-based price. It is a useful tool to help optimize our sales prices, particularly when used in conjunction with rigorous analysis of the local market. These 2 enhancements, along with our plot profitability model, ensure our divisional businesses consider every option in designing the most efficient plotting and house type mix across our sites. On Slide 11, an example of our house type refinement. The Kingsley house type is a popular, 4-bedroom detached room and part of the Barratt core range with the old floor plan shown on the left. We've identified the opportunity to increase the accommodation from 2 to 3 double bedrooms. This has been achieved by increasing the weight of the front gable projection by just 225 millimeters, or put simply an additional brick. There is no increase in the overall footprint, and therefore, no impact on layout efficiency. As you can see on the right, this has created an additional third double bedroom without compromising bedroom 1, and created optimal use of internal space. Depending on regional location, this additional bed space has created between GBP 7000 and GBP 10,000 of additional revenue with a minimal increase in build cost and the revised house type is proving very popular across the country. This is just one example that highlights our internal space planning has been used to enhance the space, home buyers' desire and value, but at minimal additional cost. I've talked before about other changes, notably roof pitches. Here, too, we continue to redesign and refine across our house types. There are a number of areas where we are also continually working with our suppliers to either reduce costs, notably in areas like drainage technology or further enhance internal space, for example, through changes in heating technology. This is a continuous process. But over the past year, there has been a relentless push to really interrogate and optimize our house types, our site layouts and place making to ensure we have homes customers will aspire to own. Turning now to management market changes around Help to Buy on Slide 12. I think it's worth stating from the outset that this is something we've been planning for and critically,factoring into our land ban decisions since August 2017, more than a year before the changes were formally announced with the October 2018 budget. As a result, since late summer 2017, our land buying assumptions have all incorporated both lower forecast sales rates and increased sales incentive levels to ensure our targets around minimum gross margin and return on capital employed are not compromised. We've also deliberately targeted our land buying, notably where regional price caps are more challenging to our sites where a far greater proportion of our homes fall below the price limits. As part of our detailed land bank review, we've also introduced additional 3-bedroom house type options to both the Barratt and David Wilson ranges, bringing a greater range of homes inside the Help to Buy price caps. This leads me on to our land bank in Slide 13. Our land banking plot terms has, as anticipated, reduced on the same point last year, but remained strong at over 75,500 earned and controlled plots and 5.9 years of supply. Reflected the site-by-site land bank optimization and replotting our replanning success discussed earlier, we are particularly pleased to have grown the land bank plots with detailed planning concepts. Over 85% of our owned land bank are just over 55,000 plots of detailed consent some 2,150 plots ahead of the position a year ago. Given the disruption created by the national lockdown and our suspension of land buying through to early August, new land approvals in the half year were limited to 5,635 plots across 35 sites. We are, however, now seeing a very good range of land buying opportunities coming to the market, and have a good pipeline of offers accepted on additional sites looking to the second half and beyond. We expect to approve between 14,000 and 16,000 plots to purchase in the full year. The familiar chart looking at land cost and planning consents is in the appendices. But planning consents continue to renew ahead of house building activity, and land prices have remained broadly stable, despite the period of uncertainty over the last year. To date, we have not seen any significant distressed land opportunities. The availability of land and limited land price inflation continue to support our charter land bank model, to which we remain firmly committed as we seek to maximize return on capital employed. Over the medium term, we intend to return to our targeted operating framework of 3.5 years of owned and 1 year of controlled land, through a combination of completion growth and disciplined and selective land spend. Turning to build costs in Slide 14. As you are aware, we continuously monitor and manage our supply chain to support the delivery and quality of our homes. Our centralized procurement team manages more than 90% of our build materials from foundation level to finishing trades across our standard house types. On materials, we have experienced very limited inflationary pressure in the first half with timber, the most notable building material, where global pricing has impacted our material costs. We have fixed price agreements in place for almost all of our materials to June 2021 and 37% for the calendar year to December '21. Labor cost inflation has also been limited, reflecting the changed economic backdrop and for subcontractors, the desire to secure workload visibility from well organized developers with a record for prompt payment. This puts us in a strong position looking forward, given our growth plans and our reputation on both site safety and prompt payment. We continue to expect build cost inflation of between 1% and 2% in FY '21, in line with our previous guidance. And now to summarize in Slide 15, above everything is our continued focus on the health and safety of our employees, subcontractors and customers. We have delivered an excellent performance in the half year in terms of both our sales performance and the recovery in site-based construction. We are confident in our ability to build to both our completion guidance, and the level of work in progress is a strong platform for further growth in FY '22. We remain committed to delivering and continuously improving our industry-leading quality and customer service. And finally, we seize the opportunity over the last year to thoroughly review and optimize our land bank, further refine our house types, and in doing so, we have improved our product offering to drive sales as the market evolves in 2021. Thank you, and I'll now hand over to Jessica.

Thank you, Steven, and good morning, everyone. As David and Steven have said, we delivered an excellent first half with a rapid rebuild of completions and performance. So let's look at our headline numbers on Slide 17. Our revenue was GBP 2.5 billion. This was up 10.1% on last year, driven by completion volumes and a small increase in total average selling price. Adjusted gross margin benefited from our strong completion recovery at 23.8% and and we delivered an adjusted gross profit of GBP 593 million. As we highlighted at our full year results, the first half profit was reduced by the voluntary repayment of CJRS grant income and costs from Legacy properties. We, therefore, delivered an operating profit of GBP 422.9 million at a margin of 17%. Profit before tax was GBP 430.2 million, GBP 7.2 million higher than last year. We closed the half year with an excellent net cash position of GBP 1.1 billion, reflecting strong operating cash generation, a reversal of elevated brought forward working capital, and the absence of a FY '20 dividend payment. ROCE was 17.8%. This is a rolling 12-month metric and has therefore been impacted by COVID-19. We reduced second half FY '20 profitability and the high June 2020 capital employed position. I will now take you through our cost structure on Slide '18. After land and build costs, each home delivers a contribution to all other costs and profit of around 32%. The chart shows our contribution per completion over the past 2.5 years. You will see that it has been consistent over this period. Adjusted gross margin has been impacted by the leverage around operating costs. This was shown in the second half of FY '20 with reduced volume and then positively in the first half, while completion levels delivered incremental fixed cost efficiency. Based on our full year guidance, with wholly owned completions in the second half expected to be between 19% and 25% lower than the first half, our second half is expected to see some reversal of the cost efficiency we experienced in the half year. The cost structure highlights how important completion growth is in our drive to achieve our minimum 23% gross margin hurdle rate. The chart on Slide 19 breaks out components of our operating margin movement year-on-year. As I outlined last year, before the 80 basis points of Legacy property costs, our underlying operating margin was 19.4% in the first half of FY '20. This year, we've seen a 90 basis point improvement in adjusted operating margin. Firstly, our margin initiatives, which Steven highlighted earlier, continue to drive underlying improvement, the 60 basis point benefit from our regional business, from both new sites and our product range, including the continued refinement of our house types. Site extension costs reduced margin by 80 basis points. As explained in September, site durations have been extended, primarily due to the temporary closure and a period of reduced productivity post the first national lockdown. Inflation benefited margin by 100 basis points, as low single-digit house price inflation was offset by limited build cost inflation. There was also an increase of 50 basis points from mix and other items, including the benefit from our exit from Central London last year. Administrative expenses reduced margin by 40 basis points, reflecting additional costs accrued in respect of performance incentive schemes as well as reduced sundry income. As a result, we delivered a first half adjusted operating margin of 20.3%. Adjusted items reduced operating margin by 330 basis points to 17%. Turning to adjusted items on Slide 20. As announced in July, the Board decided to return the GBP 26 million of CJRS grant income received during the first national lockdown. This was shown as adjusted income last year. And this year, the repayment is shown as an adjusted cost. We also incurred GBP 51 million of net costs in relation to Legacy properties, as previously announced, and to put GBP 56.3 million of operating costs, offset by a GBP 5.3 million credit in relation to joint ventures. The operating charge includes GBP 52.1 million in relation to Cityscape.and the associated review where, in accordance with our commitment to put our customers first, we are covering the cost of all remedial works. Additionally, with evolving government advice on fire safety for multi-store buildings, we're working with building owners and management companies. It was a net charge of GBP 4.2 million in the half year for a small number of developments where we have a legal liability or where relevant build issues have been identified. In total, adjusted items for the half year was GBP 77 million. Our clear, well embedded operating framework is detailed on Slide 21. This underpins our balance sheet strength which has been a fundamental to our resilience over the turbulent last 12 months. We have further strengthened our balance sheet in the half year. We closed the half year above our operating framework on land bank buying with 5 years owned land, reflecting the impact of the first national lockdown on completions. We will bring this back in line with our framework of around 3.5 years through increasing completions and selective land replacement over the next couple of years. Having reset our target on line creditors in September to 15% to 25% of the owned land bank, we achieved this with land creditors equating to 21.2% of the owned land bank at the half year. We closed the half year with an excellent net cash position of GBP 1.1 billion and operated with average net cash of GBP 548 million over the period. The combination of our strong cash flow performance and the pause until August 2020 on land acquisition, resulted in total net in debt in a surplus of GBP 506 million at the 31st of December. I will now take you through some of the detail of our balance sheet on Slide 22. Our gross land bank has decreased by GBP 200 million and land creditors by GBP 230 million as a result of pausing land buying and the inevitable time delay between restarting and land still completion. The opening WIP balance for the half year was GBP 220 million higher than the June 2019 position. And as highlighted by our completion numbers, we have worked hard to trade through this balance. Reflecting the completion performance, our December WIP balance was GBP 201 million lower than last year. This reduction is a key reason for our guidance that we will deliver less completions in the second half relative to those delivered in the first half, a reversal of our usual completions profile. Other working capital net liabilities were higher than the prior year and included a GBP 58 million reduction in Part Exchange, which accounts for just 6% of completions, half that seen last year. The movement in other assets and liabilities reflects the full volume of our defined benefit scheme in the second half of FY '20. Net assets at 31st of December were GBP 5.2 billion, in advance of almost GBP 356 million over the 12 months. Moving on to our cash flow on Slide 23. This clearly shows the strength of our operating cash generation and the reversal of the elevated working capital investments held at the start of the year. I will take you through some of the detail. We made net cash interest and tax payments of GBP 77.4 million. This was down GBP 102 million on last year, reflecting the fact that we paid 4 quarterly installments in the first half of FY '20 due to the government's change in corporation tax payment regime. The cash release on WIP mentioned earlier, and the reduction in Part Exchange properties held on our balance sheet have in combination led to a cash inflow of GBP 272 million. Land spend for the half year was down GBP 130 million on the prior year at GBP 320 million. As a point of guidance, we continue to expect land spend in FY '21 to be around GBP 850 million. Net cash inflow was GBP 799 million for the half year. Now some areas of guidance for FY '21 are covered on Slide 24. As we updated last month, we expected to deliver between 15,250 and 15,750 wholly owned completions. Alongside this, we continue to expect around 650 completions from our joint ventures. We now expect administrative expenses to be around GBP 200 million, slightly higher than the previous guidance due to increased performance-related incentive costs. Our interest cost guidance is unchanged at around GBP 30 million. Our year-end net cash position is now anticipated to be around GBP 700 million to GBP 750 million, with an average net cash position of around GBP 700 million during the year. Now to summarize on Slide 25, we delivered a strong performance in the first half with improved underlying margins and a further strengthened balance sheet. Our balance sheet strength and the recovery in both our operational and financial performance in the half underpin our dividend resumption. We are well positioned for the future. Thank you, and I will now hand over to David.

Thank you, Jessica. As Jessica and Steven have both very clearly highlighted in our presentations, we feel that we have a strong investment proposition which I will outline on Slide 27. As you know, we aim to operate with one of the shortest land banks in the industry. This improves our return on capital employed and reduces our longer-term exposure. Critically, though, we have a very operational ready-to-use land bank and a good relationship between the size of our land bank and the number of outlets. As Steven highlighted, the quality of our land bank, our site layouts and our house types gives us a great deal of confidence that there is further value to be delivered. We have a resilient balance sheet, and we are clearly naturally cash generative. Our operating framework, developed and steadily improved over the last 10 years, has clearly delivered for our stakeholders in this unprecedented period. We have a strong and highly experienced build and sales team who operate to exacting standards and are relentlessly focused on the detail to drive efficiency and continuously improve our margin. Our quality and service performance is absolutely key to the strength of our business. And as I've said before, it is our license to operate in communities throughout the country. Our broad geographic spread gives us a diversified business that creates a balanced market exposure. Finally, we aim to lead the industry on sustainability because we understand how important this is, both for our operations and our stakeholders, both now and in the future. These differentiators put us in a very strong position to grow volumes, deliver margin improvement and generate attractive cash retirements. Now looking at the market on Slide 28, 2020 has demonstrated the strong fundamentals of the market. There is strong demand for new homes across the country, evidenced both before and since the initial national lockdown ended. The government has a target of building 300,000 homes per annum to address years of undersupply, and government housing policy remains very supportive. As Steven outlined, the land market remains attractive, with a greater range of land buying opportunities now coming to the market. The recent 1 month extension of the Help to Buy build completion deadline is clearly welcome. And the tapering to the scheme from the 1st of April is, as Steven outlined, something we have been planning for, for over 3 years. Mortgage interest rates do remain attractive and affordable in a longer-term context, but this is an area that we are carefully monitoring and which I will turn to next. Looking at the mortgage environment in more detail in Slide 29. Here is a chart, which you've seen before, showing the proportion of average income spent on monthly mortgage interest and repayments. The affordability of mortgages still remains good, with mortgage costs as a proportion of earnings still usefully below the long-run average. The qualification hurdles for mortgages, however, remain more challenging, as they have done since the onset of the pandemic. There remains an absence of any return to 95% lending on new build homes by any of the mainstream lenders, and only one at mainstream lender has moved its LTV limit back to 90% since the onset of the pandemic. Mortgage providers have pushed mortgage rates higher to, firstly, control new mortgage demand, given the capacity challenges faced by the banks in light of the COVID impact on both their existing customers, their employees and clearly new customers. But secondly, this is also -- reflects a greater perceived lending risk due to increased uncertainty. Mortgage lenders' appetite to lend, particularly with the removal of access to Help to Buy for existing homeowners, will be key in the months ahead and is something we will continue to monitor. Absent an increase in LTV lending levels, Help to Buy is likely to become the only way into whole ownership for many first-time buyers. Turning now to Slide 30, our overriding focus in the near-term is rebuilding our volumes, our margin and our return on capital employed. But our longer-term priorities remain. We published our vision 6 years ago: to lead the future of housebuilding by putting customers at the heart of everything we do. This defined our culture, our actions and the way we do business. Our vision remains underpinned by 4 strategic priorities. We passionately believe that we need to put the customer first, to build a responsive and resilient business for the long term. We also have to build great places, communities that we are proud to build and where people are proud to live. We aim to lead construction, striving for excellence and embracing modern methods of construction, and investing in our people is clearly vital. We must deploy successful strategies for both recruitment and retention, which will help us to meet the long-term skills challenge faced by the entire construction industry. We aim to be the leading national sustainable housebuilder go. Supporting our vision, our priorities and our principles enables us to deliver excellent financial and operational performance, and also build a resilient and sustainable business, creating long-term value for all of our stakeholders. Now to touch on our progress around sustainability on Slide 31. The we have a clear ambition to be the leading national sustainable housebuilder. We have to deliver this through how we operate and how we drive our performance. And then also, we have to ensure that we are transparent in how we disclose our progress. We have made excellent progress with our CDP performance, improving our stores across all 3 disclosure areas and moving into the leadership level on climate disclosure. Secondly, we highlighted at the full year results last September, our new targets around reducing our carbon emissions, and these have now been approved by the science-based targets initiative. Looking ahead, we have a clear road map and plan to deliver our ambitions. We have a strong solution for the future delivery of zero-carbon homes at scale. And we continue to drive to achieve net gains for biodiversity. Clearly, this is the right thing to do. It will strengthen our consumer proposition, and it will make our business better and more resilient for the long term. Highlighted here on Slide 32, are some of the key areas where we are engaging with stakeholders to ensure both ourselves and the wider industry can deliver the long-term changes needed. We are working with our supply chain partners, both around new technologies and product development, but also to ensure that they, too, are developing across the wider sustainability agenda. We continue our active engagement with government as we push for a clearer road map to allow our design teams, procurement specialists and our supply chain partners, to develop and deliver the solutions and skills the housebuilding industry will need to adopt over the coming years. We are educating our teams to ensure we all understand that we have a significant role to play in protecting our environment, both through our individual behavior and through our -- the way our business must adapt as we move forward. Now to bring you up-to-date on current trading, summarized in Slide 33. We see that it has been an excellent start to our second half, when you put it in the context of the wider economic uncertainties around us and the limited availability of unsold homes for delivery in the first quarter. Our private sales rate per outlet, per week, through January has been 0.77, 7% below the equivalent period last year. But this, as you all remember, was a particularly strong trading period, reflecting the post-election bore spends. Relative to the start of 2019, our sales rate since the first of January is 4% better, which is clearly strong against a more normal trading period. Coupled with lower outlet numbers, this results in a net private reservation rate per week of 264, 10% below the prior year, and 7% below the 2019 trading period. Our forward sales position, including joint ventures, remains very strong at just over GBP 3.4 billion, 13% ahead of this point last year. And finally, as touched on by Steven, I would just like to reiterate that we expect to maintain a stable sales output position through the second half and we clearly have an ambition to grow our sales outlets as we move forward. Turning to Slide 34 to conclude, thanks to the efforts of our team, we have delivered an excellent first half performance, driving both build recovery, completions and also improving our adjusted gross and operating margins. We continue to manage the risks around COVID, with health and safety remaining an overriding priority. Whilst we recognize that there are clear economic uncertainties, the housing market fundamentals remain attractive. We are also in an excellent financial position with net cash unused facilities, and we closed the half year with a stronger balance sheet than anyone could have expected 6 months ago. Our operational and financial strength create a platform for us to build the high-quality sustainable homes the country needs, support and create employment to help the communities we operate in and to deliver operationally for all of our stakeholders. And we will continue to push in terms of our medium-term targets. on margin, volume and return on capital employed. Thank you. And I will now hand back to Jessica, the conference coordinator, and we will be very happy to take your questions. Thank you.

[Operator Instructions] And we do currently have a couple of questions in the queue. Your first question comes from the line of Aynsley Lammin from Canaccord.

A couple of questions for me, please. So first of all, I just wondering if you could give a bit more color on recent sales rates. Are you seeing good demand for kind of completions post the 1st of April period? Are there any regional differences? And is pricing still generally remaining firm? And then secondly, obviously, you've spoken quite strongly about the margins and the financial metrics all getting back to, kind of normal levels over the medium term. And just wondered what your thoughts were on special dividends. Is that still an inherent part of the strategy going forward? Or is that something that you don't really want to return to as you had paid before?

So I'll cover both of those, and then I'll pass to Steven who might want to give a little bit more color, just in terms of regional trends. But I mean just to say overall, in terms of current trading, I mean, it is a relatively short period. January, as you know, is also not one of our busiest months, so I think we've got to put it in context. But when you look at the comparison, whether it be to 2020 or to 2019, I think it's a good set of numbers in terms of current trading. No question that, in terms of reservations, we're seeing good trends for reservations clearly up to March, but suffering from product availability and good trends post March as well. And I'll pass to Steven in a moment just to provide a little more color. In terms of dividends, I mean, I think our policy is very clear. I mean Jessica covered it, and I covered it. We have a policy of ordinary dividends at 2.5x cover. Clearly, we will look at our overall position in terms of indebtedness. But at this point in time, we are just pleased to be recommencing and delivering our ordinary dividend.

Yes. And -- yes, just a bit more color. As David said, we've been very encouraged by the sales rate so far this calendar year. We are selling well, and a lot of the sales we take in are beyond the first quarter of the calendar year. So we're very positive about that. In terms of the regional situation, fairly consistent demand across the entirety of the U.K. probably marginally strongest in Northern Scotland, but we're very, very pleased with the sales rate nationally. We're seeing good demand and we're producing good results.

And just are you able to push prices ahead at all, given the kind of low product availability and good demand?

Yes. Every release, we look at pricing and look to increase upwards on every sales release we review, take into account actually plot premiums and locations in the previous sales rates.

The next question comes from the line of Arnaud Lehmann from Bank of America.

My first question is on the number of outlets. Are you saying that the outlets number is going to remain stable in the second half? I mean is there a reason for that? I mean you seem to have the demand environment that would support an increase, and I guess now you've digested the COVID-19 disruption to a large extent. That's my first question. Secondly, have you seen any disruption from Brexit in terms of material supply or anything like that so far? I appreciate we're only 1 month into it. And lastly, on the cost of legacy properties, I guess the challenge are in line with expectations. Are you expecting any further provisions into the second half? Or you think the process now is more or less completed?

Okay. Well, I'll just act as comp here. So I think Jessica will pick up about legacy properties and charges. And Steven, I know, will be very happy to cover in terms of both outlets and materials in the context of Brexit. So Steven, over to you.

Yes. In terms of outlook -- so I think what we have to bear in mind is when we opened up back in May, June time, our top priority was to bring in the completions with effectively sold, and we made sure we prioritize those units in progress to bring through to completion to give the customer journey we needed. So there was a slight delay in terms of starting upon the newest sites. As I said, all the focus went into delivering units in progress. In terms of site numbers, we see H2 has been broadly stable and as planned. And in terms of site numbers going into '22 and '23, we'd expect those to increase based on some of the work we were doing during the lockdown period, obviously, bringing in new sites. We've looked at some of the site splits between Barratt and David Wilson on the larger developments, and brought in more developments from that. So we'll expect to see the benefits of that work coming through into '22 and '23. In terms of materials, so far, so good. It's taken a lot of management time to make sure it all comes through. But things have actually being delivered well for us. We are aware of problems with roof tiles, internal dollars, white goods, but none of those have really impacted us. The key thing for us was we made sure and now making sure we've had a 3-month buffer stock in readiness for Brexit. And we've made sure that all our suppliers of our delivery dates for all our materials, right out until June '21. As I say, it's key that we've kept our suppliers informed with our plans and programs. And I think another initiative we've worked with on our suppliers is rather than bringing other materials in from overseas through certain parts, [ Felix ] so in particular, we worked with our suppliers, and we're able to sort of manage to move some of the materials around other parts, particularly on the East Coast. So far, we've had no particular supply issues. It's taken a lot of management time to make sure it comes through smoothly, but working fine at the moment. Back to Jessica, I think.

Right. Thanks, Steven.

Thank you, Steven. So just picking up an on legacy property costs. So in the first half of the year, we had legacy costs of GBP 51 million, and that has 2 component parts. That has Cityscapes being the main part of that, and the review there is substantially complete. And we provided for the costs of all works, but clearly, as works progress, the cost could change. In terms of ongoing fire safety government reviews where we took a charge of GBP 4 million in the first half of the year, which is a small number of development. The ongoing changes in the regulatory or legislative environment may continue to change. Everything that we're aware of at the half year has provided. But I think we've got to recognize that the safety position continues to evolve, and we'll continue to do so over the next 12 to 24 months. So it may be possible for future costs to arise.

The next question comes from the line of Emily Biddulph from Crédit Suisse.

I've got 3, please, all on margin. On Slide 19 on the margin bridge, you still got 80 basis points year-on-year of site extension costs. If I remember right, your full year results, that was from assuming that I think sites took 6 months longer to build-out. Is there sort of upside to that assumption at some point? Or sort of how should we think about that? Is that sort of still what -- obviously, it's what you think it's reasonable at the moment, but is a sort of scope for ongoing upside if we sort of get back to normal building in the second half of the year. In terms of the net inflation gain of 100 basis points. Presumably, as we think into the second half of the year, like you should think about price cost being at least as positive at this point. Presumably, we shouldn't sort of think about that coming back. And then on Steven's point, just finally on the replotting, like presumably with yet to see all of the benefits of that. Should we continue to think that you can sort of drive further gross margin gains as those benefits sort of see through remaining sites and you sort of continue to standardize. So potentially, sort of we could see gross margin move up into H2, but presumably into next year as well?

Emily I -- thank you. So just in terms of the questions, I mean, I think if Jessica picks up the first question in terms of site extension costs and also the net inflation costs which come from, as you said, Slide 19, if I pick up initially, I mean, Steven provided a little bit of detail regarding what we're doing in terms of replotting. I think in terms of future margin, we would just say that -- look, we've said that our published hurdle rate is we're buying land at a minimum gross margin of 23%. We're clearly delivering gross margin at or above that level, and we see that as being the ongoing benchmark for the business. Now Steven and the team are clearly driving a lot of improvement but we've also got to recognize that there are going to be some headwinds in terms of costs. I mean that's inevitably going to be the case. So that improvement is not resulting at this stage and it's amending our our overriding guidance in terms of land intake at 23%. Jessica, would you like to pick up the other 2? Thanks.

Thanks, David. Thank you very much for your question. So if you review the site extension, yes, we saw an 80 basis point impact on the margin in the first half of the year, which is consistent with what we experienced in the second half of last year, and that relates to an average duration of around 6 months. And we're at -- on track with our build progress, as Steven outlined. And clearly, if we can deliver better than a 6 month extension, because that could deliver some upside against that number. But you have to remember there has already been a period of disruption from the lockdown and then the rebuild as we came out of that. And in terms of net inflation, so obviously the balance but the sales price inflation and a cost in position, we continue to expect build cost inflation to be 1% to 2% this year, as Steven outlined. In terms of pricing, we're not seeing any substantial changes in terms of the pricing that we experienced in the first half of the year.

Our next question comes from the line of Gavin Jago from Barclays.

Just a couple for me, if I could, please. The first one is just coming back to these build costs. I wonder if you could give a bit more clarity if you could do on maybe expectations beyond the end of FY '21. I think you've got just over 1/3 of the materials, kind of I guess, booked in for the year. But beyond that would be useful. And then just thinking about your planning, I guess, for the current Help to Buy, 3 years in the making, what are you planning for life beyond Help to Buy in FY '23? And I guess any wider comments around government support for the sector would be useful.

Gavin, if I pick up the second question, Gavin, and Steven will pick up the first question. But just to -- so in terms of us planning for the future, I think we've been quite cautious in terms of our approach with regard to Help to Buy. As Steven outlined, we made assumptions going back more than 3 years ago that we would see changes to the scheme. I mean they were being trailed at the time, and we're subsequently announced in 2018. And therefore, reasonably cautious assumptions in terms of land acquisition opportunities. When we look forward in terms of 2023, I mean our assumption and what I continually say for the business is we've got to take the position out of red. So help by will stop in 2023 and there will be no more government support beyond that point, and that is how we are planning the business. We still see that there is going to be strong underlying demand, but we would recognize that the bank's loan-to-values would need to expand to provide some nutrition for the removal of Help to Buy, so more lending at a 90% or 95% level. The industry, back in 2012, introduced a mortgage indemnity solution and the industry will again look at a mortgage indemnity solution. It was successfully launched in 2012, and we see no reason why it could not be successfully launched in 2023. Now having said all of that, I think we have to recognize that the government have made some very clear statements pre-Christmas that they would like to put in place some higher loan-to-value mortgage solution for the longer term, but we will just need to see how that unfolds. Steven?

Yes. Gavin, in terms of build cost inflation, as a whole, as I've said, we're looking at 1% to 2% for FY '21, which is in line with the guidance we issued in September. In terms of materials, again, as I've said, around about -- well, 99% of our materials are now fixed for H2 and 37% are fixed for H1 of FY '22, those deals beyond June and yet due. The only commodity we have seen any real pressure is on timber pricing. And timber -- we've seen timber increase is around about 20% for homegrown timber and 30% increase for imported timber. A lot of that is down to the U.S. influence where they've been purchasing European timber. The timbering parters are indicating to us that, that policy may change with the change of government in the U.S. and therefore, European timber is expected to come back going forward. So it's too early to call FY '22. A lot of it will depend on timber. And as I say, that's currently up in the air, the timber pricing. But one thing for certain, we've got strong leverage due to our central procurement and -- which works well. In terms of labor element of costs, I think I'd normally be saying we've had pressure on brick layer rates. But we monitor every site we're operating on, and in the last 6 months, the labor element for brick layering has increased by something like 0.1%. So it's absolutely minimal in terms of brick laying rates, which normally sort of drive up our labor costs. The only area we're getting pressure on in terms of labor is ground worker trade, but that's manageable. And of course, we need to bear in mind that the wage increase for the industry, which was due in July 2020, was initially deferred until January '21, and that has now been further deferred until July '21. So there's been no wage increase from the joint working council until July '21. So things are pretty stable. It's timber where the pricing pressures are and we're constantly monitoring that. I hope that helps you.

The next question comes from the line of Will Jones from Redburn.

Three from me, if I could as well please. Just coming back Help to Buy, obviously, in the first half of the year, it got up over 50%, I think, of your private sales for obvious reasons around the end of the year, price scheme. Could you give us a feel as to roughly what share that's been since January? I appreciate it's a small period. And then just more generally on that, how you expect your Scottish business to handle the end of Help to Buy? I think it's coming later this week there. The second one was just around actually the cost of land. I think in your appendices, it looks like you've added land at close to GBP 32,000 a plot in the first half, which looks pretty low. Is there a mix issue in there? It would just be good to get some color on that. And then the last one was just around mix effects on the private selling price going forward. Obviously, the ASPs moved up. And I think in the order book, it's around 335 for private. Yes, I think looking at your land bank guidance, you'd need to believe in a lower private average selling price to get to the group average, including affordable. So should we expect the private average selling price to maybe vary a little bit into FY '22 from a mix perspective?