Crest Nicholson Holdings PLC

LSE:CRST

Earnings Call Transcript 2022-Q2

[Operator]

Hello, and welcome to today's Crest Nicholson plc Interim Results 2022 Conference Call. My name is Bailey, and I will be your moderator for today's call. [Operator Instructions]

I would now like to pass the conference over to our host, Peter Truscott, Chief Executive of Crest Nicholson plc.

Peter, please go ahead.

[Peter Truscott, executive]

Thank you, and good morning, ladies and gentlemen, and welcome to Crest Nicholson's half year results presentation for the period to April 2022. I'm Peter Truscott, Group Chief Executive, and I'm being joined here this morning by Duncan Cooper, Group Finance Director.

So let me start with this morning's agenda. I'll begin with a brief summary of the half year just completed before handing over to Duncan, who will provide a comprehensive financial review. I will then return and give you an overview of the current market as well as a strategy update and some thoughts on the outlook ahead for the company. As usual, there will be plenty of time set aside at the end of the presentation for your questions.

So firstly, a summary of what has been a very strong first half of trading for Crest Nicholson. When the leadership team came together in 2019, our aim was to restore Crest Nicholson to its rightful position of being a leading U.K. house builder, with a proposition for investors of strong, stable and consistent returns; and to rebuild margins to industry normal levels of 18% to 20%.

In previous periods, we've been able to demonstrate good progress against these goals, and this period continues the theme with an excellent financial and operational performance. Our key financial metrics, in the form of margin and return on capital employed, have shown strong progress and with visibility around further improvements to come. Our already robust balance sheet has once again been strengthened. Duncan will of course provide the granularity on all of this in his section that follows.

Pleasingly, we have maintained our valued 5-star customer service status, which I'm delighted to report as this is a key part of our strategy to 2026. Geographical expansion in Yorkshire and East Anglia is well on track, again, a little more on this later.

In previous periods, we've set out ambitious environmental strategy, ensuring that as we grow, we do so responsible and sustainable way. Today, we go further. We announced our new science-based targets.

And finally, before I hand over to Duncan, having delivered a strong financial performance in the first half, we are sufficiently confident in our prospects to announce upgraded earnings guidance today for our full year. All in all, a terrific first time for Crest Nicholson and plenty of reasons for optimism ahead.

Now I'll hand over to Duncan.

[Duncan Cooper, executive]

Thanks, Peter. Good morning, everyone. Good -- nice to be doing our results presentation in person again. [ Especially ] when you're announcing an upgrade in earnings, but we'll come on to that later.

So starting with the income statement for the half. Revenue of GBP 364.3 million, up 12.3% on prior year; and adjusted gross profit up to GBP 77.5 million, up 22.4% on prior year. That's a rate accretion of 180 bps, and I'll come on to giving a little more detail about our margin recovery progress versus those Capital Market Day targets we set out in October last year in a future slide.

Admin expenses of GBP 20.7 million, and they remain tightly controlled. Again, as we committed back in October, we are starting to incur costs now for the new divisions, but this is on a judicious basis and can be scaled sensibly going forward. And remember, in the prior half comparative was the GBP 2.5 million JRS repayment which we had received in full year '20. Below that is a GBP 2.3 million impairment loss relating to the London Chest Hospital; and GBP 105 million exceptional charge for combustible materials, GBP 82.6 million net of tax. And again, I'll comment to both of those items, again, in a bit more detail later on.

That leads down to a loss after tax GBP 42.2 million with an effective tax rate of 19.6%, which reflects a prorated impact of a 4% residential property developer tax, along with the 19% statutory rate. And over time, we will of course see the effective tax rate increase in line with the full year effect of our PDT and the increases that are coming in the statutory rate.

Finally, we are pleased to announce an interim dividend of 5.5p per share, in line with our dividend policy of 2.5x cover, and a strong improvement in return on capital employed with ROCE up to 18.3% for the half.

Moving on to the sales metrics slide next, then. And we continue to experience robust demand and good trading conditions. We operated from 58 outlets, which is in line with prior year. And I'll let Peter talk a little more detail about the planning and regulatory environment, which does remain challenging as we seek to grow this number going forward.

Our SPOW rate was 0.72, up slightly on prior year. And the pleasing element of this performance is the consistent execution we're now delivering across all divisions in the group, which wasn't the case when we arrived back in the business in 2019, but it does clearly bode well for geographical expansion, of course, as we prove to ourselves that we can implement and maintain consistent, replicable operational standards and processes for sales and marketing across all of the group.

Total home completions of 1,096, up just under 8% on prior year and average selling prices up across all tenures. The private sales, that number continues to experience opposing forces.

On the one hand, we have good levels of sales price inflation, that's offset by the shifting composition of what we sell and where. And new house types are generally at more affordable price points, and in locations which support this pricing.

For the number including bulk and given its weighting in the mix, you can see the increase for bulk deals was significantly higher. And that's a specific reflection of 2 bulk deals which were completed in the half for Old Vinyl, Hays; and Brightwells Yard, Farnham. Both schemes being high-value units in urban or suburban Southeast England.

Finally, as we look forward to the second half, we carry with us a very healthy forward order book: 2,891 units, GBP 814.9 million GDV, which gives us over 96% coverage of full year '22 revenue.

On to the next slide then, and the GBP 105 million charge related to combustible all materials. Back on fifth of April this year, we announced we had signed the government's building safety pledge, and that would necessitate a further charge in the range of GBP 80 million to GBP 120 million. Today, we can confirm that charge is GBP 105 million.

It comprises a further GBP 70.3 million for buildings contained within the Building Safety Fund, the BSF, which we will have to fund if the remediation works are complete or extensively complete, or take on the projected cost of remediation and perform the work ourselves.

The balancing element relates to buildings we had already identified as requiring a review. And for these buildings, we have seen some examples of increased scope of works following further investigation. But the overwhelming driver is the requirement within the pledge to increase the look-back to 30 years, which of course brings more buildings formally into scope.

The detailed calculation of the provision, including its expected utilization, is detailed in Note 12 of the accounts. And what I would say is that forecasting the exact timing of these cash flows is difficult and unpredictable and in part dependent on how or when DLUHC wished to close out these commitments. And that will be finalized obviously in the full drafting that's taking place. However, our best estimate is that we expect these works will be complete within a 3- to 5-year time period.

Assessing this provision remains complex initiative. But reassuringly, we have only received further one in-scope project notification from a building owner since signing the pledge. At the same time, we continue to see new opportunities emerging to mitigate the overall financial commitment and are therefore confident that we are now past the peak of uncertainty that this issue has represented in previous updates.

On to the next slide. And as promised, an update on our margin recovery progress. Operating margin was 15% in the first half, well on the way to those 18% and 20% milestones we outlined at the Capital Markets Day back in October last year. And at the risk of sounding like a stuck record, I will repeat again. The biggest driver of this recovery is the passage of time, allowing us to deplete and recognize the poorer legacy schemes in the portfolio and replacing them with the new land plotted with the new house types.

In the first half, we completed and handed over Old Vinyl, Hayes. And in the second half, we'll do the same for Sherborne Wharf, Birmingham, both unprofitable schemes in this year's P&L. And as we have previously referred to, we still have an excellent scheme, albeit unprofitable, at Brightwells Yard, Farnham, which will unwind to the P&L through to full year '25.

The best justification I can offer you for moving away from these types of schemes into the standardized house types we now seek to build is the experience I see every time I visit sites.

In a volatile operating environment such as the past 2 years, where sourcing labor and materials can be challenging, is the site managers on those bespoke complex schemes that are finding an even bigger challenge than most. And you see that reflected in the delays to the build completion to Old Vinyl and Sherborne Wharf. That's not to say life is easy on the sites with the new house types, of course. But relatively speaking, it's a much easier task and thoroughly vindicates the decision we took back in 2020.

And with that logic in mind, that brings me to what was the last such asset in the portfolio, for which up until now, we have not identified or communicated an appropriate mitigation for. The London Chest Hospital carries many of these features, the regeneration of a legacy hospital in East London with complex build requirements, and which has been subject to judicial review on planning. It's actually an excellent site and location, it just doesn't fit with our strategy anymore, and again, was forecast to be unprofitable and dilutive for the group in the future.

We disposed of our 50% share in the joint venture to our joint venture partner on the sixth of May. And although the transaction finalized after the half year date, because that deal was so advanced, we marked the asset to market value and recognized a GBP 2.3 million loss on its disposal. That charge is recognized on its respective line on the face of the P&L but not in gross margin because it reflects an expected credit loss on the company loan arrangement with the joint venture. We will receive GBP 16 million cash contribution for this sale, 50% in October this year and the other 50% next year.

Aside from the build profile and risk not fitting our strategy, there's a strong capital efficiency rationale. We've been able to further strengthen the balance sheet, and in so doing, have also foregone a significant peak in forecast work in progress that would have arisen from the construction phase of this asset.

And finally, in assessing our progress on operating margin, as I've already alluded to, we're maintaining a tight grip on overheads. And so therefore, the summary message from me is our operating margin recovery is therefore well on track, and we're really pleased with the progress we're making.

On to the next slide then, and the balance sheet. And we continue to strengthen our financial position all the time. Net cash at the half was GBP 173.3 million and net debt and line creditors was GBP 6.6 million, down from GBP 48.1 million in prior year, with average net cash at GBP 98.6 million.

Incremental decisions like the London Chest Hospital follow progress on items, such as the Longcross Film Studio, in demonstrating we are looking at every element of our capital and cost allocation.

And to that end, I'm also pleased to announce that the group reached a swift resolution with the pension trustees following the most recent triennial valuation and will now contribute GBP 1.5 million cash contributions per year to the scheme following the previous schedule of payments of GBP 9 million per year. So for the purposes of your models, given this year is blended, assume GBP 3.4 million for pension cash out in full year '22 and GBP 1.5 million for full year '23. And I'd like to briefly thank the trustees for their constructive dialogue with us and their support on payment deferrals during COVID-19.

Against this backdrop, therefore, we have the resources to execute the plans we've laid out at the Capital Markets Day in October last year. We can meet our combustible materials obligations; fuel organic and inorganic growth, if the right-sized opportunity comes along; and continue to pay a healthy dividend at 2.5x cover.

On to the next slide then for another layer of detail on those cash movements. And I'll be brief on this. The impact on operating profit and the increase in the provision are extensively offset to the combustion materials charge, which also reduces the income tax paid in the first half as well. The increase in inventories reflects a higher year-on-year investment in land, as you would expect, and the pension contributions being lower as I've just covered.

My penultimate slide covers the usual land disclosure we give you. So 1,096 home completions in the half, but we also added 2,204 plots since the year end. Two of the largest sites for interest were 558 plots at Stefen Way, Daventry; and 500 plots at Charlotte Avenue, Bicester. But we saw good additions across all existing divisions.

The owned versus controlled split is 76.1% at the end of the half, broadly in line with prior year. And the GDV has grown since year-end due to the impact of sales price inflation and further replan effects being embedded. Assuming now of the changes, you can expect the JV plots number to reduce by 291 plots for year-end because of the London Chest Hospital disposal. Finally, we approved 1,543 plots for purchase in the first half and forecast gross margin of 26.8% after sales and marketing costs.

So to summarize before I hand back to Peter. A strong first half of trading as we carry a very healthy forward order book into H2. The net cash position gives us the flexibility to execute our plans, as we've outlined. And we're making good progress towards our 5-year financial targets, with both ROCE up to 18.3% and adjusted operating margin up to 15%. And if you have excluded the one-off impact of the London Chest Hospital in the half, that operating margin would have been 15.6%. So tangible progress now really starting to come through.

And finally, in recognition of the strong progress we are making on all fronts, the first half of trading and the forward order book. We're delighted to be increasing our earnings guidance today with full year '22 adjusted profit before tax expected to be in the range of GBP 135 million to GBP 140 million.

And with that, I'll hand back to Peter.

[Peter Truscott, executive]

Thanks, Duncan. Let me now provide you with some thoughts on current market conditions and an update on the early progress against our strategy to 2026 that we set out last quarter. Well, obviously, not a lot has been happening in the wider world since then, has it? Still all been pretty quiet and predictable. The last vestiges of COVID, energy, cost of living crisis, war in Ukraine, to think about. But the good news is that the housing market has remained very robust throughout this period.

The forward lead indicators have been and remain strong and in line with seasonal trends. Similarly, sales rates have been robust and continue, again, to be in line with those same seasonal trends. This remains a good market in which to sell homes. And importantly, house price inflation continues to sufficiently cover build cost inflation and therefore to protect margins.

Of course, there have been operational challenges to overcome, and these remain. Material supply has been inconsistent, as it has; but to a lesser extent, labor supply. However, there are early signs of a greater degree of stability coming through now. Pricing has been inflationary due to these shortages, and some of this of course has been driven by the cost of energy which remains volatile.

The land market is interesting. I had initially thought that it would normalize this year with more land coming through, but that has been slow to happen. And actually, the speed of getting planning consents though, together with issues like nitrates and water quality, delaying sites in some areas has meant that it's still very tight. And of course, the demand for land remains strong. Everyone's working through outlets quite quickly and with the strong selling rates. So as you would imagine, overall, it's a pretty competitive environment for land.

That said, we're still picking up what we need to and at the right margins, as you will have seen from Duncan's slides. We're having to work very hard on this, though, really maximizing sites, leveraging our strong relationships.

Importantly, having a good strategic land portfolio takes a little pressure off the spot market, and this definitely does help us. We've also been really active in replenishing this. Another slide on this to come.

I've touched upon the planning and regulatory environment. To be honest, it's always been inconsistent and difficult to navigate in this country, and it's probably been a bit slower and even more inconsistent in the period post-COVID. But these difficulties are eventually overcome and it's certainly easy at the larger organizations such as ours when compared with, say, smaller house builders having to deal with them.

Despite all of these challenges that I've touched upon, here's the good thing: The long-term fundamentals for the housing market remained strong. There is a structural imbalance between supply and demand, and if anything, planning changes in the pipeline will do little to address this, in my view, certainly not in the short term and certainly not in our key markets in Southern England.

Mortgage availability is good with plenty of participants. Good pricing and increasing numbers of products aimed at the higher loan-to-value market. And despite what I've said about the upcoming changes to planning rules, it's still fair to say that there is strong political support for homebuilding in the U.K. Sadly, politicians have yet to be able to reconcile the need for new housing and their desire to deliver it with the short-term political difficulties in actually getting development through at a local level. At some point, they will have to overcome these barriers.

Now turning to our strategy for the period to 2026 that we set out last October. And to remind you of these, we have 2 main targets delivered over 2 periods, firstly to 2024 and then to 2026. By 2024, we're seeking to build volumes back to above 3,000 units with an operating margin of 18%. We're targeting return on capital employed in excess of 20%. These targets will be achieved by utilizing our existing business capacity, and the benefits of our operational efficiency and better land driving will help these margins to come through.

These improvements also continue to accrete margins to 2026, where we're targeting a 20% operating margin and a 25% return on capital employed. But the volume growth, as we expand to over 4,000 units annually, will largely come from 3 new divisions to be opened by the end of 2023.

Our dividend policy is consistent at 2.5x cover, and our Partnerships business will support our growth by contributing some of this extra volume as the market grows. Additionally, this activity also offers improved resilience for us during the cycle. We will maintain our balance sheet discipline throughout, and this includes holding our land creditor obligations below 30% of net assets. Overall, our strategy provides a strong earnings accretion from an enlarged group.

We are of course in the very early stages of our strategy period as we move from a position and period of business recovery to business expansion. So how are we doing so far?

Firstly, margin. As you will have seen, we are firmly on track towards our 18% to 20% target range. We're very pleased with where we are at this point in time. We have also seen a significant improvement in our return on capital employed, a key target for the group, with 18.3% now delivered. Our volumes have continued to grow in the period, up 7.8% against last year. We have a clear line of sight towards our first goal of 3,000-plus unit completions.

We've been very active in what is a tough land market, I've already referenced this. The land approvals highlighted last year have now come through to the short-term land portfolio, and we continue to approve more land than we deplete, and at significantly better margins. Our geographical expansion is now underway, and I'll come on to this in the next slide.

So let me start with Yorkshire. I'm absolutely delighted with where we've got to so far. We are now in our new office at Thorpe Park, Leeds. This space can be flexed as we grow, so it is intended to be our longer-term base.

Key leadership appointments have been made. Guv Evans, who joined from Bellway is leading the business, and further strongly experienced recruits with local knowledge have filled senior commercial and technical roles, Guy's background being land.

And most pleasingly of all, we have now approved the first 2 sites for purchase, both with planning consent. The first in the South Yorkshire Market and the second in East Riding. We expect these to commence construction in the first half of 2023. With East Anglia, we have chosen Bury St Edmunds as our office location and will have a number of our key team members in place during the second half of 2022. We have though been sourcing land already with 2 sites acquired, one in Norwich market and one in the Greater Ipswitch market.

And finally, as we've previously mentioned, if the right merger and acquisition opportunity presents itself, we remain open-minded to this route in order to accelerate our strategy. However, we'll always be about the right asset at the right price.

We continue to deliver 5-star customer service status for our customers as we roll out our new household range and embed standardized operating systems. We expect these high-quality -- these high levels of quality of Crest Nicholson is associated with to continue. Preparations are well advanced as we begin to adapt to the New Homes Quality Code being introduced later this year, and we are continuing to develop our aftercare capability so as to deliver this more consistently, too. Overall, service and quality are very important to us and will remain a focus.

As I've previously explained, our partnerships and strategic land unit, led by Kieran Daya, has 3 main areas of focus and expertise: Bulk sales to the affordable sector and PRS markets; strategic land promotion; and managing key relationships, including with entities such as Homes England, the Defense Infrastructure Organisation, and financial institutions, Aviva would be one such example.

In previous period, I've highlighted successes around bulk sales to the PRS market. And as you've seen, a number of these have come through to completions in the period. And we continue to progress more of these.

Today though, I want to provide a little bit more color around strategic land. The aim of investing in strategic land is to control and secure land that in the future is likely to be granted planning consent, but doesn't have a consent at the time that we acquire an interest. This represents a capital-efficient way to access the land market.

Usually, this is via an option arrangement, sometimes also by outright purchase. The company then promotes the land through the planning process, through the planning system. And when consent is obtained, it has the exclusive right to acquire the land at a discount to open market value, typically 10% to 20%. Kieran has now assembled a strong and experienced team to manage our existing portfolio and to also seek out new opportunities.

In the period, we've seen tangible progress through the planning system on a number of our assets with allocations confirmed in respect of 2 sites in the Brentwood market, and further planning stages reach towards this status for a large site in the Tunbridge market in Kent, and a similar size site now identified for development in Bury St Edmunds in Suffolk. Four new strategic sites have been approved in the period, which will form the next generation and replace those that are currently coming through to planning. Obviously, it will take some time for these to come to fruition. We're really pleased with the very demonstrable progress that Kieran and his team have also made in relation to strategic land.

As we've consistently stated, we take our responsibilities around climate change and the environment very seriously. That's why we set ourselves challenging targets in this area for the period to 2025. We set out to reduce our Scope 1 and 2 carbon intensity by 25%, reduce waste by 15% and utilize 100% of our electricity from renewable sources by this date. These targets are now well embedded and subject to strong governance and a link to remuneration throughout the organization.

Good progress was made against these targets last year and progress continued in the period, but we recognize that we must do more, we must go further. Therefore, I'm setting out today our new science-based targets for the group. We have transitioned to net zero by 2045; and from our 2019 base, reduce our Scope 1 and 2 emissions by 60% by 2030; and finally, reduce our Scope 3 emissions by 55% in the same period.

You'll see there a photograph of a environmentally friendly battery-operated forklift truck. No doubt, you will see that photograph quite a lot in upcoming presentations. But I think it does demonstrate, at a practical level, some of the things that we're doing. And I can assure you, that is a JCB. It's real. It's not a photograph of [ tumble ] toy.

And my final slide before we move on to Q&A summarizes the key points from this morning's presentations and provides an outlook as we move forward. So as a summary, we've again produced a strong operational and financial performance in the period. Our aim is to produce strong and consistent results. And again, we've achieved this. More clarity is being provided on fire safety and remediation and how it will impact the company. We are now as a sector, and certainly as an organization, at the point where we can start to draw a line under this issue and move forwards from it.

I'm delighted that the momentum delivered in the first half has enabled us to now upgrade our earnings forecast for 2022 to a range of GBP 135 million to GBP 140 million. And the visibility that we have with our order book offers us confidence to underpin these expectations. Over 96% of our sales for the new upgraded profit forecasts are now secured.

As we turn to the outlook, that order book also provides confidence not only for 2022, but also for beyond. Order book security is one of the reasons why we participate in the PRS market. It enables for better business planning.

Our margin rebuild, a cornerstone of our strategy, is very much on track. An operating margin of 15% in half 1 and also a return on capital employed of 18.3%, both significantly improved on the equivalent position a year ago, but also against full year 2021.

And with our geographical expansion making immediate headway, we are well on track with our wider 5-year targets.

The business really is now in great shape as we look ahead. So all in all, I'm very pleased with our performance in the period, and I'd like to thank all of my colleagues who have helped to deliver this result.

At that point, I will move on to Q&A. How we'll do this, I'll take questions from the room first. And once we've exhausted those, then we'll go through to the phone. And if I may ask Jenny to adjudicate the order of question based on the hands up.

[Jenny Matthews, executive]

Can I ask you just to project your voice as well, so it's heard on the webcast.

Chris Millington, Numis?

[Chris Millington, analyst]

A couple if I can, please. Firstly, you mentioned about the difficult planning environment. Can you just give us a feel as to what visibility is there over outlets and detailed planning for '23? It does feel like it's more the '23 phenomenon there.

Duncan, you mentioned about some cost mitigation on the fire safety side of things. I just wondered if you could elaborate on that.

And then the final one is just really a checking query on Help to Buy usage and where that's [ being run ]?

[Peter Truscott, executive]

Okay. So if I take the first and third, and Duncan, middle one. We're not giving specific guidance on outlets, but I'll just give you a sense of the planning position.

It's been difficult, of course, forever. And I'd say it's just become more difficult period on period over the last few years. And certainly, since COVID, a number of factors are at play here. I think that, with local authorities utilizing work from home, I think that's slowed down a little bit. I mean, seeing a gradual improvement, but it's not just planning departments, it's all of the other regulatory approvals that are needed. And increasingly, we're seeing things bob along, nitrates, phosphates, water neutrality, just starting to impact.

But we find ways to mitigate that. We have got a specific number of outlets, SPOW rates are good, the market is strong, and we're able to buy land to replenish them. It is -- the planning system is a barrier to entry for some. And I think the existing incumbents find a way of managing our way around it. But it is difficult. But of course, we're confident about our ability to continue to have the outlets that we need for our strategy period, as I've set out today.

Duncan, just on fire safety?

[Duncan Cooper, executive]

Yes. I mean, a range, Chris, to be honest, without giving any specific guidance per se. But as, no doubt, some of our peers will have commented when asked them as well. We are in dialogue and recognizing it. It is, to some extent, a commercially sensitive, confidential conversation with HMRC around the VAT assumption around, particularly if we take on properties that either we've had on our own books to start, to remediating those; but also those in the Building Safety Fund and our ability to recover VAT on those.

If we take them on to our own books, we think that's recoverable, but having a conversation on that. But also, the work has already been done and conducted, and we re-charged that cost from HMRC. There's a -- sorry, from the government. There's a judgment to be made on that as well. I won't comment too much more on that, but there's clearly a large sum associated with that.

We continue to have line of sight of a number of substantial recoveries with large, enduring subcontractors that I anticipate will be around and be trading for some time to come. Again, I part from [ on those ] because they're confidential. But again, seeing grown up, mature reactions to the challenges we face, and they can work with us and put those right.

We're starting to see some examples of some contingency on supplies we baked into some of the some of the buildings we've had passed over from government, albeit very early days in respect to that. Where we would think that the -- our assessment of that cost is lower. And we'll also start to see some pragmatic solutions. And what I mean by pragmatic solutions is that there's more and more focus and energy goes across the sector into remediating these issues, lock, stock. It's unsurprisingly driving innovation and creativity into manufacturers to come up with alternative solutions.

So without boring you with too much details and going to the presentation today, to whether we can inject silicon into the cavity walls to act as a fire barrier, which is far less invasive, and being able to do it, again, entirely to the satisfaction of the fire engineer or the fire officers signing off. There is something -- or thereabouts sort of render catching around window frames can often be as well be addressed by simply installing a metal sheath now around the outside, far less expensive than tearing all of the round rock in the external walls.

So there are signs of pragmatic, less intrusive solutions being developed, which is in the interest of residents and stakeholders, is less disruptive and less changeable, too. So there are a number of mitigations starting to come through.

[Peter Truscott, executive]

Just on the third question on Help to Buy. I haven't got the number off the top of my head. Duncan might. Maybe [ Tom ].

[Duncan Cooper, executive]

[ Between. ]

[Peter Truscott, executive]

It's almost becoming a nonissue, really. There are very few properties that we've still got left to sell with Help to Buy, and that's certainly not having an impact on -- or any discernible impact that we've noticed on the SPOW rate. It's just becoming a nonissue. And increasingly, we're getting traction with deposit unlock.

[Chris Millington, analyst]

Can I just have a quick follow-up just on the -- on the [ outlets ]. Would you expect them to advance into '23 versus '22? Or are you not willing to go that far?

[Peter Truscott, executive]

I wouldn't be specific about the inflection point. But yes, clearly, as our strategy period advances and our volumes grow, we would expect to see growth in outlets at the same time, yes. Yes, it won't be all about sales, right?

[Jenny Matthews, executive]

Next question we have is Jon Bell from Deutsche Bank.

[Jonathan Bell, analyst]

I've got 2. The first one really is just to expand on the M&A point. Should we be thinking about that as part of the geographic expansion route? Or is there a kind of vertical integration angle potentially there?

And the second one. Peter, you've just alluded to this, but deposit unlock. Any color you can give us? How much that's being used by buyers? Feedback on how it's working? Would be helpful.

[Peter Truscott, executive]

Yes, sure. First one, so the first answer, it's more about geographical expansion. It's always going to be about if the right asset was available at the right price. It will be complementary to the organic growth. It's a way of getting to the strategic look that we want faster, if the right opportunity came available.

On the deposit unlock, I mean, it's tapering up from a very low level. But increasingly, as Help to Buy isn't available because we either don't have a product or the time scales don't work, we're getting traction with deposit unlock. And I think we would expect to see better pricing from the mortgage market as well as time goes on.

[Jenny Matthews, executive]

We've a question from Will Jones, Redburn.

[William Jones, analyst]

I have 3. if I could. First, just if you could help us with what's changed in your thinking on the revised guidance for 2022.

And the next, second, is the where you see net cash [ broadly ] at the end of the year. And if you can give us broad steer on how that part might evolve as you go invest in the [ BTA ] over the years after.

And then the last one is a general one around strategy and what flexibility you always retain, I suppose, around the expansion plans, what we consider a macro uncertainty to leading rates. Would you need to pull back on the [ take, if the ] world changes over the next year or so?

[Peter Truscott, executive]

Sure. I'll ask Duncan to do the first 2 and then I'll pick up on the wider one.

[Duncan Cooper, executive]

Yes. I mean, in terms of what's changed, well, I mean, the simple, uncomplicated answer is we're looking at where we are in the forward order book and looking at where we are on the progress that we've made in the first half. We think it's the right thing to do to set that guidance for the end of the year. So we've got good momentum, strong confidence. And yes, there are some -- as Peter's alluded to, some clouds out there. But I think it's -- we've set it at a level that we think is the right thing to do and reflects our best view of our internal forecast. Not much more to add, really.

I think on the net cash position, really difficult to forecast with certainty, and predicated on that BSF funding element, which is obviously of the GBP 85 million total, a further GBP 70 million for the end of the year, the proportion of those buildings that we take on to remediate ourselves versus the proportion that is effectively writing a check to the government, is difficult to -- we're in the process of having that conversation. And that is a spectrum between 0 to GBP 85 million. And in so deciding that, then whatever you come up with in terms of the government remediation piece, when is that check called for in terms of does an invoice coming over in the next 2 weeks? Or does it come over in 6 months?

Now my sense is that the amount of cash we have forecast going out for the end of the year in our own view, our own internal forecast, is circa -- is probably around circa GBP 65 million. I don't think that degree of cash will go out in relation to those buildings between the end of the year. I could be wrong. But we're certainly set for it if it does.

And in relation to the land piece as well. We've obviously have greater visibility on that. But again, also that is, as Peter alluded to, uncertain.

So just trying to be helpful, I would expect the net cash position at the end of the year to be as good, if not better, than it is for the half year. But as I say, it is quite -- there's just some big swing factors in there in relation to particularly combustible materials.

[Peter Truscott, executive]

Okay. Just on that third one. I mean, I think the strategy that we've got is the right one for the long term. But I also recognize that there's potentially volatility in any market over some period of time. There are always going to be headwinds and tailwinds. But it's the right strategy, particularly with the planning focus becoming more constrained over time in the South and freeing up in the North. So I think having a wide geographical footprint makes absolute sense for us.

I think the pace of that growth is always going to be determined to some extent by market conditions because we want to ensure that we buy land at the right margins. And if the market is particularly strong, land buying is particularly tight, we're not going to compromise our margins. And that would entail perhaps growth at the sort of pace that we're already envisaged. In the event that the market becomes more difficult, in some ways, that is an opportunity to take advantage of some of that short-term dislocation do perhaps grow even faster, to access the land market at the right time.

So I think it's the right strategy, but we're always going to have some flexibility around pace, depending on what the market conditions could be like at any particular time.

[Jenny Matthews, executive]

Next, we have Glynis from Jefferies.

[Glynis Johnson, analyst]

The first is in terms of land buy. You talked about working hard to navigate. What does that actually mean? What are you assuming in terms of pricing? Are you putting less contingency in? How are you working hard? Or with strategic land, you had the big bulky strategic land cut which we did in the first half. But what should we assume as the cadence going forward? Because it's clearly very lumpy. I'm just wondering, is that kind of a profile is what we should expect.

Second one in terms of working capital. [ Would like to check after reduces ] of the bigger ebbs and flows. How should we forecast it actually? Should just take a number of outlets and assume a, what, GBP 6 million working capital per outlet? Is it managed exactly that we can forecast it that way?

Thirdly, at you SPOW, your sales rate per outlet, per week. It's below peers. I'm wondering, is there something structural in that? Is that because of the bulk? Is it something that you can [ bust ] more than you can get growth [ without using ] the outlet cash? If you don't have that big call, what helps to give you cash? When you buy back shares, [ given the trade up? ].

And one last one in the bulk. The [ sales rate ] because of what went through the bulk this half year. What should we -- can you remind us of selling price with bulk going forward? In terms of what's in the land bank? How we should forecast that?

And also how that fits in your margin target? Forgive me, this is my back of memory. The margin target of 20%. What are you assuming for that bulk within that? And therefore, what you have to be doing in the private side to be able to get to your 20% target?

[Peter Truscott, executive]

I'll answer those in reverse, and I'll ask Duncan just pick up the one on the cash allocation.

Just on margin around bulk. To remind you that the strategy is that we'll do approximately 15% to 20% of our volume with bulk. The sort of pricing that we're seeing on that would be a discount, typically 5% to 7.5%, something like that. That's presales marketing cost, where there is a saving. So there is a small dilutive effect, but that is inbuilt in that margin target. So the 18% to 20% is after the impact of the proportion of bulk sales. So that's how you should be thinking about that.

I mean, just on the SPOW rate. I mean, obviously, there is always going to be some elements of volatility, depending on the number of all deals done in any period. But the sort of number that you're seeing now around that 0.6 is what we would think is around the optimum for our average selling price, our business. And the ability to take the margin versus volume, if you like, there's always a trade-off between the quantum and the margin and pricing. And we think that, that's about the right level, around 30 private sales per site per year.

So I'll just let Duncan pick up on cash, and then I'll answer the questions around the...

[Duncan Cooper, executive]

So if we start, I think it was about -- if you think about the what we have to do, what we have no choice on, with the GBP 146 million. The first rock in the jar is GBP 146 million of combustible material obligations we've got to settle over the next period of time.

If you look around then beyond that, what we have choices to do, I mean, we, as you'd expect, continue to review in the current market, given where our share price is, all capital allocation options and decisions. And my view would be empirically not just in this sector, but more broadly, where you see businesses deploying a one-off use of capital in relation to a buyback.

Evidentially, there isn't a lot of evidence from my perspective that, that, in the share price reaction, necessarily reflects a recognition and enduring creation of value on the part of shareholders. And indeed, you've then -- you've partied with our capital and you can't use it for something else.

So I think if we were to do something in that space hypothetically, we'd want to do something on a more enduring and recurring basis, which I think you do see as the evidence of you're getting value creation out of that. And that clearly needs to be set against the plan we've laid out for growth.

And as you'd expect us -- expect me to say, and because it's true, we have set that against our own internal growth agenda. And I think the value creation from doing that is more accretive and more valuable. But we will continue to keep that under review, as you'd expect. And I think that's probably all I to say on the cash book, to be honest.

[Peter Truscott, executive]

Yes, okay. I mean, on outlets. I'm trying to be really helpful here. Outlets are almost impossible to predict, and if anything, they always go backwards as opposed to forwards. And often, when they go backwards, that's when the market is quite strong, so you get the SPOW rate so it doesn't matter to that extent. But also, it comes back to the sort of land that you buy and whether or not it ends up in one outlet, whether you double-head a larger site, whether you do part of that site as a bulk deal in a period, therefore it doesn't count as an outlet, or whether you don't and you can get to. So it is actually quite difficult.

But the trajectory of outlets will be upwards as we move through that period to 2024 and 2026. But I really would find it difficult to be very accurate about predicting exactly what that will look like as a profile when you compare it to the other constituents of the volume.

I mean, on strategic land and the land that we've bought and how the pricing works, what we mean by working harder on this is that we really have to maximize sites, and probably more so at the earlier part of the land buying, and need to put more work into it now. Whereas, I suppose in a softer market, there's always a little bit left, you can do some of that work afterwards and continue to replan and accrete market. Some of that has to go in a lot earlier to create the value in the first place.

We've got very competitive build costs, comparable to where we were and certainly comparable to I think the best in the industry now. Efficient household range, which plots well. We've got key relationships with land sellers. And importantly, with a business of our size, it's actually a lot easier to get quick decision-making through the organization. And also just in terms of some of the way you look at land in a softer market, you might be able to get sites additional and detailed planning. You might be able to pay for them over a period of time.

In a tougher market like now, it's more likely happen to buy on the outlying consent. And sometimes, you're having to put more money up front. With the balance sheet that we have and our competitors, that becomes quite normal. But that's what we mean by having to work harder, but it's not margin that is being compromised.

And the constituent mix between strategic and nonstrategic. As you imply, it's always going to be a little bit lumpy, but you see there are a couple of sites that we have named-checked in there, that both of those would be open-market sites, not the strategic sites. But because of the mix that we've got, about half of our land is strategic and half short term, there is always going to be a relatively decent mix of strategic land coming through, but it will be lumpy. But certainly, I think you would expect to see something in the 25% to 33% of the land, over a period, being strategically sourced.

[Duncan Cooper, executive]

On your final one, on your working capital question. So that has a big release and unlock effect. [ The long interest ] just coming out in '25, '26. Don't forget, we've still got Sherborne Wharf in H2 for this year. We've got Farnham still into next year.

But just trying to be helpful, and as a proxy, I think we can -- you probably can start moving towards a greater linear assumption around that as we move into Clean Air -- definitely into Clean Air from '24 onwards.

[Peter Truscott, executive]

Bigger sites that are more infrastructure-intensive in the early stages, and then settle down. And they're not all going to be sort of 100-unit sites fully serviced from day 1.

[Jenny Matthews, executive]

I think Aynsley is next. Aynsley from Investec.

[Aynsley Lammin, analyst]

Yes, and just 3 from me. Just wondered if you could give a bit more color, maybe if I can get a bit more around what your company spent on labor and material inflation. Are you becoming less of more confident that continues to be offset by HPI?

And secondly, just on PRS, given obviously interest rates is going up, build cost inflation. Is that market just become a little bit more nervous? And have some of the big commercial projects that you're targeting, you'd get into maybe delay or postpone projects, are you seeing anything around the PRS side?

And then lastly, just on the building safety levy. Just if you could update us on your thoughts of the timing of when that won't get imposed? Any changes around how much it might be? Anything you've heard that we might not have heard?

[Peter Truscott, executive]

Okay. I'll try and pick up those and then ask Duncan to add to anything that I say.

And on labor and materials, it's always quite lumpy, as you can imagine. I think materials have been more inflationary than labor and certainly more inconsistent across products. And as you would imagine, those that have an energy constituent more volatile than others. Overall, 6% to 8% sort of range, I would say, in the basket that we will see with our cost base.

Labor, I think, is actually quite elastic. They're price takers. And I would have said, it's probably the lower proportion of that on labor, perhaps the higher on materials. Overall, 6% to 8%.

I'm less concerned about the quantity of labor in the longer term because I think that the constraints in the planning system are going to mean that the expected expansion of overall housebuilding to 300,000 a year is, frankly, for the birds. I don't see that any time soon. So that real squeeze on labor that people were expecting over the next few years, I'm not sure it will happen. Increasingly, there is a proportion of off-site manufacturer which is having a effect on the market. So I think labor can be managed, materials will always be a little bit volatile there.

PRS. The demand side is still very strong. No shortage of people knocking on our door and existing partners looking to do repeat business. And pricing is still strong. I mean, obviously, we need to make sure that when we do these deals, we're mitigating against cost inflation. Actually, we're having some very sensible discussions with the counterparties on how that might look to make sure that we're protected on that because, of course, that is the obvious risk.

On the levy. We don't know any more than you've heard. I still fundamentally believe that we, as a sector, have done our share. I think we stepped up to the plate with the government's ask on buildings going back 30 years. And the idea of us having to go further and pay for other people's buildings completed by investors, foreign domiciled homebuilders, I'm not sure that, that is fair or reasonable. But we haven't heard in any more.

[Jenny Matthews, executive]

Rajesh with JPM.

[Rajesh Patki, analyst]

Yes. I have got 2. On the intake margins, I think you provided a number. Where does that leave the margin of the overall land bank? I guess we'll start from there.

And [ OpEx ], think you've provided some indications at the Capital Markets Day. Could you put a number to it for '22 and '23?

[Duncan Cooper, executive]

Yes. I mean on the -- let me take it. Margin on short-term land, blended 26.7% on the short term. From a stat land, 29%.

On the OpEx, to be honest, I would not give you any more detailed guidance at this stage as to where it goes to because I just think it's is too far out when we do so -- to do so at the prelims. But I think this sort of sensible base now we've done, what, 2 years of whether it was question marks around the ability of the business to run on a more efficient, more finely pegged percent of cost to sales, operating cost base versus our peer group.

And then when you take those costs out, there's understandable questions and challenges around, does it start to disrupt things or is it sustainable? I think we've proven that we can operate at this level of central overhead at the moment.

And there's relatively minimal cost, as you can reasonably assume, in there for the new division stuff at the moment. But just make some sensible assumptions both on inflation from this point forward for the central overhead. And then just the incremental costs that you're capable of working out in terms of putting in the new divisions as we grow and from that point forward. But we are -- as I said, we're running a sensible, lean overhead cost structure that's working well.

At a very high level, if you think in terms of the input margins of 26%, 27% gross, that sort of range, we would want to see our overhead percentage in the 5s, and there's a bit of dilution from a proportion of bulk. So see how you end up at 20%.

[Jenny Matthews, executive]

Charlie, Liberum.

[Charlie Campbell, analyst]

A couple of questions for me. One detail on sort of your big picture. I just wondered if you could split the forward orders between '22 and beyond, be very helpful.

And just sort of a big picture question. Just you've been in the industry a long time. Just wondering how likely you think it is that house prices go down next year.

[Peter Truscott, executive]

I'm happy to pick up that one, I just ask -- the first one is no, Charlie. I'll try and say it politely. No. But I'll leave to you to do the second one.

[Duncan Cooper, executive]

Yes. I mean, obviously, there's a lot of commentary around on what people's expectations are. I think pricing is really about pressure. And we think the last time, there was a significant change in house prices downwards, 2008, 2009. There was a lot of pressure. Individual homeowners were subject to repossessions, and housebuilders had very weak balance sheet. Those 2 factors are not the same now.

Housebuilders have not got weak balance sheet, but very strong. So they're more likely to hold on to price. And similarly, with individual buyers, individual householders, there isn't the same pressure with a strong labor market and stress-tested mortgage availability, a much lower propensity from the mortgage market to repossess rather than look at other options first. So I don't think that pressure to buy and sell property is going to be there any time soon.

You also look at the supply side, I think this is really important. The planning system is not delivering a lot of new homes coming through. There isn't intense competition and demand in many locations. The secondhand market tends to cog up quite quickly when people sit on their hands. So the much more likely impact would be a loss of liquidity first. And then I think what happens is that confidence returns so we then don't see a crash in prices.

And we actually saw that as a dynamic for ourselves in 2020 with the COVID crisis because pretty much everybody from an economic position was looking to say, "Well, house prices must crash as a result of all of this, technically speaking." The Bank of England, I think, were looking at 16%, 17%.

But the reality, as what I've stated, is exactly what played out. People sat on their hands for a short while, then sort of worked out that it's not going to crash, so we better go and participate again. Because if you need a house, there aren't many available, and that's the price.

So I think I am firmly in the camp of soft landing for the market, but probably liquidity going a bit first. And perhaps a softening -- certainly a softening of house price inflation before it consolidates and sales moving forwards again.

[Jenny Matthews, executive]

Your next question, John from HSBC.

[John Fraser-Andrews, analyst]

I'll have 3, please. The first one is on the admin costs in the first half came in flat on an underlying basis, which was quite an achievement considering you're taking on new division costs. Is it that savings are still coming through from the self-improvement programs over the last couple of years? Is that the factor?

And perhaps on the same theme, how much juice is still to come from new house types to be on the 75% this year? How high can that number go and help margins in '23, '24? So that's the first area of questions, if I may.

The second is on the new divisions. And the volume targets that you've got is 600 per division still the right sort of level for the 5 core divisions, kind of the 2 new divisions get out to that level. Is that the target for them? And how much will division -- the third new division play in the 4,200 target?

And then finally, on the management team having parted company with the Chief Operating Officer. Perhaps, Peter, you could just set out how the team is operating in a new world.

[Peter Truscott, executive]

Yes, sure. So let me pick up some of those, and I'll ask Duncan to pick up on the admin costs and how we see that.

House types, I think we set out a target of 80%. I think 80%, 85% is a sensible range to be looking at. I think we'll get to the 80% fairly quickly. We're working very hard on that. That's certainly helping us in terms of the operational efficiency.

On the new divisions and the existing ones as far as capacity is concerned, I think 650 is probably the right capacity that we should be thinking of in terms of the existing divisions. It will never be exactly 5 doing exactly 650. It will range from, I don't know, 600 to even 700 in a particularly good year, but 650 is a sort of sensible proxy. And certainly, the new divisions, in time, should be capable of doing exactly the same, but it will take time.

In terms of the third division, yes, the 4,200 target for 2026 would include having a third division open at some point in the full year 2023, or at least calendar year 2023.

And on the management side. As you will probably recall, when I joined the business in 2019, along with Duncan and Tom, we had an awful lot to do. My main focus was on the strategy, Duncan's balance sheet. Tom going on with the operational efficiency and running a lot of the detailed side of the business and getting there and doing that rapidly and doing a really good job.

I mean, it just was a natural point in time that both Tom and we recognized that, that job was largely over, and that I have more time and capacity to get involved more so in the day-to-day operation. And with an organization of our scale, it wasn't really necessary to have both a CEO and the COO overlapping to some extent.

So it was a very sensible conversation that was mutual at that time. And the management team will be operating slightly differently going forward as a result of all that.

[Duncan Cooper, executive]

And just on the admin expenses, John, there's nothing particularly I'd draw out. There's undoubtedly some further annualization of that rolling over when you're trying to do a half year '21 to half year '22 comparative. But equally, I wouldn't seek to mislead anyone by saying there's another load of low-hanging fruit or more costs that to come out of that. And as I said, there's a relatively small element in there associated with the new divisions, which will grow, and the admin cost in total will start to grow inevitably, which we've said previously.

[Jenny Matthews, executive]

Finally, we have Sam from Peel Hunt. Thanks for waiting.

[Samuel Cullen, analyst]

So I got 3. Firstly should be really straightforward there basically, just a clarification. On the land buying, are you moving your hurdle rates up from last, given the uncertainty?

And second question is on the margin target. I mean, as we put it, [ HPR could still ] cost assumptions within that? Are you assuming that they net each other off on that journey to 18%, 20%?

[Peter Truscott, executive]

That's an easy one. Yes.

[Samuel Cullen, analyst]

And then the last one is, I appreciate the range and an estimate, but a 3- to 5-year time frame to the buyback, the coming provisions [ flowing at kind of half ] as long as [ somewhat appears ]. Just interested to your reasoning around this. It really seems to be kind of particularly optimistic, very aggressive in terms of the logistics of the work being done in that time period. Would be interested in your thoughts about it.

[Peter Truscott, executive]

Okay. Well, Duncan will pick up the third one. I'll answer the second.

And just on the hurdle rates. No, we're not increasing hurdle rates nor are we decreasing them. We've got what we think are very sensible range which align with our strategy. So that's where we are on those.

So just on the price side...

[Duncan Cooper, executive]

Yes, I mean, no. It's part aspiration and expectations. So I'm not sure I'll put it out here if it takes us 10 years to fix this stuff. I think the shareholders and our customers, all the effective stakeholders, will determine they get someone else going on it.

Look, let's be really clear. We want this set in the right way. We want this provision, this job, as quickly as possible. We're trying to mobilize -- and I'm sure that's the case for all of our peers because this is clearly a very sensitive area. And the ideal notion that we're sending a message to people that says we're coming to help and we'll be with you in a decade's time, I don't think sits brilliantly in the public court of opinion.

So we're doing everything we can to try and mobilize and put resources behind it internally to get going on this. My expectation is the pace will now start to pick up because there's a coordinated effect from both government and from us. There are some limitations and challenges in getting stuff through the pipe and getting signed off and so forth.

But -- and I hear your challenge back around 3, but I think 3 to 5 feels right. I think if we're -- if you're positioning over a longer period, it might be the cynic in me, just because we're trying to somewhat underplay the cash-out piece. I'm not in that place. I'd like to write a check and get this sorted tomorrow if we could because that's the right thing to do. And it's also frankly the way we should all be approaching this matter.

[Peter Truscott, executive]

And I agree entirely Duncan.

[Samuel Cullen, analyst]

And just a follow-up. Is there a [ inflation price ] assumption within that?

[Duncan Cooper, executive]

So if you go to the note, there is a -- we put a long-run build cost inflation assessment into the provision. We've also given the materiality of the provision, discount the provision as well. So we're comparing apples with apples in terms of the assumption of the long-run term rate, build cost inflation in there and also discounting it for the time value of money as well. It's in the note in the accounts.

[Jenny Matthews, executive]

Okay. Any more questions in the room? No. Can we pass it on to the phone questions, if any?

[Operator]

[Operator Instructions]

[Jenny Matthews, executive]

We have no people in the room, that's why.

[Operator]

We have no questions registered.

[Peter Truscott, executive]

Okay.

[Jenny Matthews, executive]

Peter. Yes, we'll just pass it on to Peter to close out the presentation.

[Peter Truscott, executive]

Okay. So thank you very much for those who have attended both in the room today and also online, and for your interest in Crest Nicholson. Of course, if there are any further questions that you would like to ask post the meeting, then feel free to reach out to Jenny.

So thank you very much again for your time this morning. And thank you, Bailey, for hosting.

[Jenny Matthews, executive]

Thank you.

[Duncan Cooper, executive]

Thank you.