Crest Nicholson Holdings PLC

LSE:CRST

Earnings Call Transcript 2018-Q1

[Operator]

Good morning and welcome to the Crest Nicholson Trading Update with Patrick Bergin and Robert Allen. I will now hand you over to Patrick Bergin to begin. Thank you.

[Patrick J. Bergin, CEO, COO & Director]

Good morning everyone, I'm Patrick here, I'm joined of course by Robert Allen, the Group Finance Director, and we're here to give you our trading update ahead of our half year results announcement on the 12th of June. Hopefully you will have it in front of you and had a chance to read, so what I thought I would do is go through it, just add a little bit of color and then we'll proceed with some Q&A. So just from a highlights point of view, clearly unit completions are up strongly, 17.6%, and this does include a strong contribution in the first half from PRS units, but pure open market units were up about 11% year-on-year.Open market ASPs which to avoid the distortion from PRS -- exclusive of PRS are up 5%, so reflecting the fact that we have been moving up ASP curves somewhat over the last couple of years. Land pipeline continues to evolve, as you can see, particularly on a strategic side. And forward sales for all years are up 6.3% in money terms and over the half year.So clearly what we delivered in this first half is a strong growth in revenues and housing unit numbers. And we've had to maintain a keen focus on return on capital ensuring that we sustain ourselves volumes in what has been for us a generally flat pricing environment. And as I've mentioned already we had a strong contribution to volumes in the first half from PRS and I'm not sure we'll have some questions on those data points later on. But our experience of generally flat pricing has meant against a backdrop of as you would anticipate some continue build cost inflation that our operating margins for the full year we now believe will be at around 18%, so the bottom of our sort of historic 18% to 20% guided range.Just in terms of overall volume, forward sales for the year '18 year including year-to-date completions are 11% ahead of the same period last year and we anticipate growth in reported revenues for the year to be over 15% as we continue to open sales outlets in the second half. So in summary we're doing what we need to do to maintain sales, which has meant being flexible on margins at times, particularly at higher price points.In terms of the open market average selling prices, that increase of 5% of course is primarily a mix function with changes in product and location. And this will -- is expected to represent a peak level for the business. Our -- given our experience at some of those higher-value schemes we've been revising our strategy to reinvest in areas with a lower prevailing ASP and indeed in the product mix with a lower ASP, but that will take some time to work through.Surprisingly sales rates is measured by sales per outlet week, reflects this change in product and location mix and therefore sales rates expressed as a sale per outlet week are lower at 0.72, lower than in prior years, but offset by higher outlet numbers and the growth in ASP.[indiscernible] I think most of our sales outlets have been performing well. Sales at higher price points have been more difficult to achieve and I think this really reflects the extent to which transactions at that level touch the second-hand market where activity has clearly been much more subdued and therefore chains are taking longer to complete, transactions are fewer. I think discretionary purchases are being more discrete and of course therefore to try and generate some urgency. And to ensure, excuse me, that we maintain volumes we have been needing to use more incentives, stamp duty paid and indeed some discounting in order to keep transactions flowing.Sales outlets are continuing to grow, 6% increase in the first half, and we have a number of further outlet openings in the second half of the year which will, as I say, support the uplift in activity through to the second half of the year and towards our 15% revenue growth.Half year net debt is modestly up on the prior year given that we have also invested in the new Midland division which is acquiring sites very successfully and will make positive contribution to our P&L this year.So I think in terms of outlook, as you can see, housing market volumes continues to be robust across the group's principal operating areas and the strong fundamentals that have underpinned the housing market for the last several years really remain in place with good employment, low interest rates, good access to mortgages. So by any historic standard this is still a very good market. What isn't as robust are those sales at higher price points and I think we have to expect that we will continue to see the impact of that slow secondhand market on sales at those values and hence we've concluded that price growth in the near term is likely to be restrained and margins consequently for the next year are expected to be at similar level to this year at 18%.Of course as a business we are continuing to explore opportunities to address our cost base and the overall efficiency of our operations to ensure that we do protect margins and also start to prepare ourselves for area of production constraints, particularly skills likely to emerge in the medium-term.Fundamentally Crest has a strong balance sheet, still buying land at very good margins, operating a disciplined business model to ensure that we are generating good returns to shareholders as well as making our contribution to the supply of housing. Hence, as we've said there, the Board remains confident that the business is well positioned to continue to deliver a strong operational and financial performance in the medium term.So with that summary I'm very happy to now handover to questions from the group. Thank you.

[Operator]

[Operator Instructions] And the first question comes from the line of Aynsley Lammin from Canaccord.

[Aynsley Lammin, Analyst]

Couple of questions, please. Just on the -- obviously the higher end is slower but just wonder how confident you are that doesn't kind of ripple in to the lower end, price points below GBP 0.5 million, just wondered if you're still seeing house price inflation there and what your view was on how contained that slower kind of high-end market was. And then secondly just on the average site numbers, I wondered what your kind of view was in terms of what the average would be for FY '18 versus FY '17 and any comment on how you feel confident to reach the GBP 1.4 billion of revenue targets for FY '19?

[Patrick J. Bergin, CEO, COO & Director]

Okay, well, I'll -- I'll sort of give you my feelings about pricing and Robert can tell us a bit about the average site numbers and revenue. So I think what we're seeing with pricing is that the market below GBP 600,000, which of course is the Help to Buy threshold, continues to be pretty robust with good pricing tension because this is a -- this is great deal for purchasers. And clearly at that end of the market you've got fewer discretionary purchases, got more people starting out, more people maybe moving to accommodate a growing family. And we are still seeing pricing gains. Our particular -- although it is probably fair to say also that of course those gains are starting to ripple a bit further upcountry or indeed further out of the immediate suburbs of London. So our new Midlands division is getting good, very good pricing. We're seeing places like Milton Keynes are very strong. Ashford and Kent is strong, so little -- I think pricing naturally does tend to ripple out because of competitive affordability clearly is can be better in some of those locations which have not already had strong pricing uplift. So across the portfolio at that end of the market I think we're seeing -- we're not seeing a consequence from the top end. The top end is so partially -- it's not necessarily absolute pricing although in places it is, it's also about our need to incentivize people to transact and because it a more discretionary market and frankly a more [indiscernible] market in places, then we're having to give people incentives. Obviously stamp duty once you're over GBP 1 million is a bit higher than it was, and stamp duty is a fairly commonly used incentive but of course at very low levels, amounts -- to small amount of money. Once you're over GBP 1 million it's rather chunkier. So I think we're looking at frankly sort of a fairly to speed market below helped by still very strong, still good pricing. As you then grade up towards GBP 1 million which we had probably 20%, 25% of our revenue for this year at that level then it starts to fade. And as I say, clearly has borne down our margins at top end. Robert if you'll just comment on average site numbers and the GBP 1.4 billion?

[Robert Allen, Group Finance Director & Director]

Yes, I think average site numbers for this year I think we've got a number so site openings through the course of the next couple of months, 3 or 4 opening this month. And I think we're consistent and on track with our guidance previously which is kind of 57, 58 average per year. In terms of the GBP 1.4 billion I think we're -- I think the guidance that I'll give there is we'll see where consensus is. So I think consensus is GBP 1.36 billion. And I think we've -- we'll be, as a guide, I think we'll be broadly comfortable with the GBP 1.36 billion, obviously maybe a little bit for the lack of pricing that we're seeing at the moment, so maybe couple of percent off that that is kind of good guide to the middle brand where we're -- where we'd expect to hit for 2019.

[Operator]

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

[William Jones]

Few from me, please. The first just perhaps if we could understand the evolution of the forward sales. I think at the AGM they were 15% including completions to date, that was late March, and I think we're at 11% today which seems quite big change for, under a 2-month period. Perhaps you can just draw out the last couple of months within that. And again just what gives you the confidence there so that you can grow at 20% plus I guess from here forward to get to 15 or more for the full year revenues? And then the second really was just of the 52 sites can you just help us to quantify how many of those would be ones where you're having this issue around incentives or pricing just to understand as a proportion of mix what your exposure is there. And then I guess behind the margin assumption for 2019 are broadly flat. Are you assuming the same on prices like next year to this year or what's to say if prices remain flat and build cost will rise but actually margins might now go down a bit again in '19 or '18?

[Patrick J. Bergin, CEO, COO & Director]

Yes, sure. I mean the forwards sales point certainly as we're running into the AGM [indiscernible] described here. As a sector actually there's been a few difficult weeks probably weather related. And we were anticipating that we would see a much stronger April. And frankly our April was disappointing from a transactions point of view. Now some of that, and it's not a -- it's not entirely good reason, but it's probably reality is that we have our teams very -- because of the issues that people have had with trying to get train to complete and hope they have sales pipeline together running into the half year, we've probably seen a bit of a dip on that. We've actually made a good start to May, which is encouraging. Nothing really [indiscernible] probably best to update that when we get to June in now sort of 4 weeks’ time. We'll have a good sort of good picture. But the arithmetic of the second half, well, is very much about the additional outlet openings, the particular mix that we have. So whether it's more apartments, more lower price. So it is a -- it's a forecast clearly that we've looked through that we have a level of confidence. And we'll see where we are in a month's time. I think on the pricing, I probably just guide you back to what I was just saying to Aynsley which is about 25% of our revenue, clearly fewer outlets, but about 25% of our revenue is about 600,000. And that's really the -- there's a bit of a taper into higher values there. In terms of actual product, GBP 1 million for example it's up 5%, but clearly has a weighted average impact. And then I think on margins, I'll let Robert --

[Robert Allen, Group Finance Director & Director]

[Indiscernible] co couple of things. I think there are signs across some of the geographies that will cause [indiscernible] maybe abating a bit. We're getting pretty competitive letting to some places. I'm not sure that's going to be a huge movement into '19. I think pricing environment, as Patrick said, we see is broadly the same. I think couple of things before we shifting, so that 25% that Patrick talked about above the GBP 600,000 mark, that will start to moderate into '19 but it will be, we'll have a greater proportion of the portfolio in the price point that we're actually seeing some positive contribution, so that will be a benefit. The other thing that we've done is we've pushed up hurdle rates in across the business in the last 12 months by 1% for buying in that margin and obviously that takes a bit of time to feed through, but if that comes through that will be -- that will help to offset some of the continued build cost inflation. I guess the final thing is we'll be out of central London. And that would also have a beneficial impact on our margins.

[Operator]

The next question comes from the line of John Bell from Barclays.

[Jonathan Matthew Bell, Director]

Just one from me really on, I think you referred to incentives, I wonder whether you could just comment on part exchange, whether that's something you've been using more or less or how about shaping up?

[Patrick J. Bergin, CEO, COO & Director]

And we do use it, we are using it a bit more. But actually it's still worth -- remains actually a fairly modest part of our balance sheet. So probably historically we would have had 15 million to 20 million of part exchange stock. We might have something like 30 now. But that's really a function of just moving up the ASP curve. But we also make -- we make a lot of use of schemes such as the smooth move where really it's -- we're supporting a vendor in selling their own home before they transact with us. So it's a modest increase, but it's -- but not really meaningful.

[Operator]

The next question comes from the line of Miguel Borrega from UBS.

[Miguel Nabeiro Ensinas Serra Borrega]

I've got a few questions on the guidance for the 18% margin. Can you give us little bit more color on where the 200 basis points margin decline will come from? If I'm not mistaken overheads will be around 6% of sales. So is the underlying growth margin coming down to 23% from 25% last year and is it purely on costs inflation, more cost inflation than expected? You also mentioned some discount. And maybe the case where you're growing too fast at this point of the cycle and therefore maybe pushing your supply chain too hard? And then the last question just if you could comment on where your intake margins are now on new land, is it still 26%?

[Robert Allen, Group Finance Director & Director]

So do you want me to take this, Patrick?

[Patrick J. Bergin, CEO, COO & Director]

I'll say the comments, I'm just getting too fast though, no one has ever accused of me that. I mean I think that -- the reality with this is a production environment with pricing tension in it, I think there's no getting away from that. And our experience on cost inflation is actually very similar to that of the peers. So I don't think, of course government tariffs are going too slow, we are growing volumes at a decent clip. But a large, as I mentioned, PRS has been a significant contributor to volume growth in the first half but volume growth is generally sort of single digit percentage because actually it's hard to go too fast. There is a constrained market, it generates some cost inflation. But our experience has been the same as everybody else's really. In terms of the margins Robert I'll let you take that one.

[Robert Allen, Group Finance Director & Director]

Yes, I think we'll give a you bit more color at the results on the 12th of June, but I think the important thing is we guided to 19% of the full year results. And I think the only change that we're seeing to that at this stage is we had experienced 1% across the portfolio, price inflation in the previous financial year and having kind of got through a chunk of, well, half-way through this year. We're seeing that as flat and we'd expected in January that the prices would continue as they have in the previous year. First at 1% coming through.

[Patrick J. Bergin, CEO, COO & Director]

On the margins, Miguel, we obviously -- Robert just referred to the fact we've actually pushed our intake margins up in the last year which will start to flow through from next year in terms of that mitigation for some of the build cost movements. And of course our strategic land that we also bring through at higher margin will offer an increasing contribution. So there are some [indiscernible] in the pipeline even if we're not delivering pricing growth per se that will mitigate against the pressure from build cost inflation.

[Operator]

The next question comes from the line of Gavin Jago from Peel Hunt.

[Gavin Jago, Analyst]

Just a couple from me [indiscernible] please. The first one is just on the [indiscernible] revenue for this year. Could you give us any guidance as to where kind of land sales, any commercial sales is going to be in the mix, if you think -- are they going to be kind of higher than last year in absolute terms or in percentage terms. And then, Patrick, I think you said you're going to maybe give a little bit more color on where PRS has been playing a role this year and the outlook for that. Could you kind of flush that out a bit, please?

[Patrick J. Bergin, CEO, COO & Director]

Okay, [ actually ] I'm on first. So PRS, we've sort of said historically first of all that we can do maybe up to 250, 300 a year, but it tends to be lumpy. And we will be doing about 300 [ plus ]. We've done just over 200 in the first half, so it has been a bit lumpy. Last year was not the similar figure but clearly the bias was to the second half. So that's broadly as per, as advertised.

[Robert Allen, Group Finance Director & Director]

And I think on that, land and commercial combined last year was little bit over GBP 70 million. Will be there or thereabout at a similar level for this year.

[Operator]

The next question comes from the line of Clyde Lewis from Peel Hunt.

[Clyde Lewis, Analyst]

Patrick, in terms of the sort of shift that you talked about where you're looking for lower ASP sites, is that very much tertiary sites, I suppose sort of a shift geographically further away from the southeast, or is it a sort of -- also a combination of sort of small units. And if it's the latter what does that sort of imply what you might have to do in terms of sort of redesigning some of your standard house types. That was the first one. And the second one I had was strategic land. Can you just sort of update us as to sort of what sort of pull-through you had in the first half and how the pipeline looks for the second half of the year.

[Patrick J. Bergin, CEO, COO & Director]

Sure. I mean the products and location mix point is, it's frankly a complicated one. But it is very fair to say that in making our investment decisions, I mean first of all you got Midlands growing and Chiltern growing. That will naturally bring, if you like, the ASP down that -- across the piece, if you like. And we have been shying away from anything over GBP 1 million because we have [indiscernible] in the market, but we just don't see the velocity. So in place it's where you have product at that price. We don't experience necessarily a lot of price resistance, but we don't see a lot of transactions. So we've been sort of scaling back on that. If you look at our core, we are all bringing through as it happens a new core housing range, but it's not really that we are -- we already -- we have a housing range today that goes from sort of small 2-beds up to large 5-beds and we'll be using fewer large 5-beds and more small 2-beds. And we've got a new core housing range that will also be introducing progressively from this year, but still covers the whole spectrum of requirements. So I think it's an evolution, not revolution because clearly it takes a while for this to work through. We already have the product designs to apply, but I think it's just recognizing that as a volume house builder. We would need and wish to sustain volume and there are certain price points where that's becoming increasingly difficult. So you will see that come through. In terms of strategic land, I mean we have had -- the conversion of large scale schemes across -- it can be a little bit lumpy. We've had resolutions grant on Ipswich which I think we may have previously reported. We got some planning committees coming up on some fairly significant schemes in Bristol, so we'd be looking certainly by the end of the year, I think we'll see some further strong call-through from that pipeline.

[Clyde Lewis, Analyst]

And as a percentage sort of the -- I suppose the completed unit is going through the revenue line, where is that likely to be do you think sort of as for this year and next year in terms of sort of strategic land versus nonstrategic land?

[Patrick J. Bergin, CEO, COO & Director]

Strategically sourced land over the last few years has been in, little up of 20% and we aspire to see it up in the sort of towards the mid-30s.

[Clyde Lewis, Analyst]

Okay, so that [indiscernible] is factored into your flat margins as well for next year?

[Patrick J. Bergin, CEO, COO & Director]

Yes, exactly, right.

[Operator]

The next question comes from the line of Kevin Cammack from [ Turnkey ].

[Kevin Malcolm Cammack, Building and Construction Analyst]

I've just got 3 questions, I think, around the topic everyone is talking around. First of all, just in relation to the short-term pipeline, the 59 plot, could you -- I mean very broad terms identify --

[Patrick J. Bergin, CEO, COO & Director]

Sorry, just to be clear, Kevin, that's revenue, that 59.

[Kevin Malcolm Cammack, Building and Construction Analyst]

Sorry, yes, the -- I beg your pardon, yes, the [ GDB ] [indiscernible]. Can you just identify broadly what percentage of that is coming out of -- I would guess the line you've drawn is GBP 600,000, but if you take GBP 600,000 and then another category as GBP 1 million plus, can you give us a rough idea of what fits in that short-term GDB?

[Patrick J. Bergin, CEO, COO & Director]

Yes, so we -- broadly there is about 90 -- by plot counts it's about 90% the sub-GBP 600,000. And then about 3% was over GBP 1 million. These are numbers that we looked at the -- at January. And obviously by revenue it's, the waiting is -- as I've indicated, probably if you take the whole, everything above GBP 600,000, it's 20%, 25%.

[Kevin Malcolm Cammack, Building and Construction Analyst]

And can you -- I mean is there any prospect that or indeed intent that you would seek to change some of that through replanning, et cetera, or is that just it is what it is and you'll work that through?

[Patrick J. Bergin, CEO, COO & Director]

I think it's more the latter. I mean, we have -- there are examples of where we've replanned things. And I think it's really reflective of -- it's a very location-specific challenge. So in the large, primarily we will trade through it and we will take a trim on margin in order to sustain the return on capital. Very occasionally we do replan for that sort of in the sense of ordinary course of business.

[Kevin Malcolm Cammack, Building and Construction Analyst]

Secondly just on the PRS, can you give an indication of in terms of margin impact, is that neutral, is it lower, is -- I mean is that -- had something to do with the movement or not?

[Patrick J. Bergin, CEO, COO & Director]

No, the model with PRS is that where we've designed purpose-built PRS then it's not EBIT dilutive. I mean, it's clearly a lower gross margin, but it's broadly sort of EBIT level. And again drives a strong return on capital. So as we said before, the reason, our model for PRS is to ensure that we're not cannibalizing current sales and just drag forward where we've got development that would otherwise sit out in many years hence. If we can sort of monetize that development profit early then it drives a sort of a stronger return on capital position without damaging the overall margin.

[Kevin Malcolm Cammack, Building and Construction Analyst]

So basic dilutive growth, no impact operating.

[Patrick J. Bergin, CEO, COO & Director]

Correct.

[Kevin Malcolm Cammack, Building and Construction Analyst]

And the last one just to sort of bring it, I suppose, much more down to practical level. If we took, say, I'm trying to think, well I'll suppose Longcross would be an obvious one, if you took Longcross what -- to achieve your sales rate or if that's been the policy to try and keep the sales rate at a level you have budgeted rather than let that slide in whole price, can you just give us some sense of what the completion price has been against your plan or budget?

[Patrick J. Bergin, CEO, COO & Director]

I mean, again it's very location -- it's very sort of development-specific, so -- and it is -- somewhere like Longcross pricing has actually been very good, it is proceedability that has been the issue. So I think the places where we have been trimming prices the most have been of course the residual Central London and actually probably the next best example is Cambridge where fierce competition and [indiscernible] very strong pricing have compelled us to keep turning stock into a difficult pricing environment. So we have been, there have been discounting there. But elsewhere it is very, there is a triangulation between availability demand and other tensions. So -- and I think what gives us of course again some sort of comfort is that we have faced into some of our most difficult developments taken the action we think we need to take and hence in our guidance today is that we are continuing to hit the top line. We recognize that there has been an impact at the margin level which we have acknowledged but we are confident that overall that our revised forecasts are robust.

[Operator]

The next question comes from the line of Mark Howson from HSBC.

[Mark Douglas Howson, Analyst]

First question, can you give us what the figure is for, in percentages as a percentage of sales and how that compares year-over-year, have you got that figure?

[Patrick J. Bergin, CEO, COO & Director]

Well, we can give you just the -- the headlines, given it's only a trading update today, Mark, I think we'll -- you will see in the impact in the margin, I mean I think you've just got to work it off that, yes.

[Mark Douglas Howson, Analyst]

And can you just -- I was a bit late getting into the call at the start, there was a bit of a queue to get in, the overall selling price including PRS can you just talk us through that how that changes year-on-year?

[Patrick J. Bergin, CEO, COO & Director]

I think barring the comments on flat pricing this year and likely into the next that we are seeing at the moment across the portfolio, I think our guidance from the January full-year results kind of still stands trimmed a little bit. So we'd expect an increase in trim by mix from last year into this year into '18. '18 as a year being a bit of peak and then it is coming off probably a couple of percent overall in terms of aggregate ASP that is total housing including affordable into '19 and further trimming down a little bit into 2020.

[Mark Douglas Howson, Analyst]

But can you just spell out what the price including PRS was in the first half, what it was this time last year?

[Patrick J. Bergin, CEO, COO & Director]

I think probably, Mark, we'll come back to all this detail at the results presentation, if that's okay.

[Operator]

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

[William Jones]

I just had one follow-up if I could please and maybe it is more an issue for the results than today, but I guess on the issue of shareholder returns you've got your stated dividend policy outlet but when you think about where the share price is now against forward NAV and where you are still ultimately developing, generating margins and returns today and where you are buying land in the future what stage would you give any thoughts of potentially buying back your shares either I guess as part replacement of the cash dividend potentially or even incremental to that. I appreciate probably most of your focus is operational but might be a question you'll start to go after.

[Patrick J. Bergin, CEO, COO & Director]

I mean, it is fair to say, Will, that there has been a, it is a question that gets periodically asked and clearly we are seeing some of that, examples of that in the market. But we have adopted a cover model which we think works very well. And I think the board are not currently focusing on anything else. We are focusing, as you say, on maintaining the operation, the operational performance and we will just need to look at -- nothing is ever off the table but it is not on the table.

[Operator]

We have a follow-up question now from the line of Clyde Lewis from Peel Hunt.

[Clyde Lewis, Analyst]

Apologies guys, one for Robert I think, just in terms of the site numbers can I just double-check, I think 52 in the first half, you're still talking 57, 58 for the full year average, is that right, or you're talking 57, 58 for the second half average?

[Robert Allen, Group Finance Director & Director]

Full-year average.

[Clyde Lewis, Analyst]

Full-year average. So we're up at 63, 64 for the full year -- for the second half as an average then?

[Robert Allen, Group Finance Director & Director]

Yes, maybe a bit lower than that [indiscernible].

[Operator]

[Operator Instructions] Okay. We have no further questions coming through, so Patrick I will hand the call back to you.

[Patrick J. Bergin, CEO, COO & Director]

Okay, well thank you very much everyone for joining, and I think we've had a good full examination of our trading updates and we are continuing to grow volumes. We still have a very high level of confidence in the quality of the market. It is disappointing to be reporting a margin trim but nonetheless it's sort of really all other elements of the business are proceedings sort of as expected and as we would hope and we look forward to giving you a fuller update when we see you on 12th of June. So thank you for joining and good-bye.

[Operator]

So thank you for joining today's conference. You may now replace your handsets. Thank you.